Business sale agreements often provide for allocation of the purchase price between the various assets of the business – so much for goodwill, so much for stock, so much for fixed assets etc. Make sure that the allocation is both made and recorded correctly – not only does any imprecision risk litigation in the event of a dispute, but you could also face a substantial tax downside.
The buyer who lost an R82m tax deduction – don’t let it happen to you!
A recent Supreme Court of Appeal case illustrates the tax risk. The agreement of sale of a business had allocated the purchase price between six categories of asset, with specific maximum amounts to be allocated to “Immovable Property”, “Other Fixed Assets” and “Trademarks”. But no maximum amounts were specified for stock in trade or debtors, leading to doubt as to what had actually been agreed.
The purchaser then claimed a tax deduction of R103m. Its argument was that the stock had been acquired for “no consideration” and that therefore its opening tax value was deemed to be the “current market price” i.e. R103m. SARS however contended that the stock had in fact been acquired for a consideration of only R21m, which was accordingly its actual cost price to the purchaser, and therefore its “opening value” for tax purposes.
Both the Tax Court and the SCA ultimately agreed with SARS in its interpretation of the allocation provisions in the sales agreement, so the purchaser is down R82m in lost deductions.
Don’t let that happen to you – have the sale agreement professionally drawn to accurately reflect the agreed price allocation!
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