3 Tax considerations when purchasing a business
As well as a lifestyle choice, the number one reason to purchase a business
is the intention of making money. All too often buyers neglect to put any
serious thought into downstream tax considerations, yet the easiest dollar
your business will ever make is the dollars you save. Plan the purchase so
as to minimise tax, particularly in the first year, when there may be
unknown constraints on cash flow and a need for additional working capital.
Here are what Peter considers to be the 3 key points to bear in mind:
The valuation split.
When you buy a business, some of the purchase price is immediately tax
deductible, some must be capitalised and depreciated over several years, and
some of the cost may not be deductible at all. How the purchase agreement
is worded will determine how the assets are valued for tax purposes, and how
much of the purchase price will be deductible.
As a business purchaser, you want the stock value and asset values to be as
high as possible, as these are deductible and depreciable. Conversely, it is
highly desirable to have the value of goodwill as low as possible, as there
is usually no deduction at all for goodwill. Obviously, if you are about to
sell a business, the opposite applies: inflate the value of goodwill and
minimise the value of stock and assets. This reduces the seller's tax
liability (as depreciation recovered on the sale of assets and sale of stock
are both taxable income).
Going concerns.
It is also important that the business be purchased as a going concern. This
allows GST to be zero-rated. A going concern means that you are purchasing a
business, not just the assets of that business. To be zero rated, both
parties need to be registered for GST. If you are selling a business, cover
yourself by having the sale and purchase agreement state 'plus GST if any".
This is one area where it really is worth consulting an experienced
chartered accountant before signing the agreement. Even if the business is
reasonably low priced, it is still money well spent.
Structure.
A company structure offers some degree of protection of personal liability,
and it is a structure that I almost always recommend business owners adopt.
But if you are purchasing a business that is currently in a company
structure (and you are buying the shares of that company), bear in mind that
you will likely lose any imputation credits or losses brought forward that
the company may possess.
Imputation credits are a credit the business receives from the IRD for any
tax it has paid. These credits can then be attached to profits distributed
by the company to its shareholders (dividends). Imputation credits prevent
the company profits being taxed twice: once at the company level and again
at the individual shareholders level. If by purchasing the business the
company ownership is not maintained to a level of 66% or more continuity,
then these credits are lost.
A similar situation applies with tax losses brought forward. Shareholding
must be maintained at a level of 49% or more continuity. If not, the losses
are lost.
Despite these factors, I still strongly recommend that if you purchase a
business that is not incorporated, then incorporate it yourself as soon as
possible. And apply to the IRD to have the company be a Loss Attributing
Qualifying Company (LAQC). Form a company at
www.companies.govt.nz. Then apply to become an LAQC, go to www.ird.govt.nz and
download a form IR436 'Qualifying company or loss attributing qualifying
company election'.
Peter Sibbald is a chartered accountant and author of 'Slash Your Taxes Now!
published by Reed Publishing. If you would like to buy Peter's book titled "Slash Your Taxes Now!" It is available online at nzbiz
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