Q: Client bought a business as a going concern. Business purchase contract has no cost breakdown of assets and goodwill. Prior year financials from the previous owner has no balance sheet and depreciation schedule. The previous owner is no longer in contact. In this situation, can we accept the current market rate for each asset? if so, should we advise the client to get a professional valuation?
A: Answer from D’Omkara Team: Where a contract for sale of a business has no apportionment of the sale price against asset classes the taxpayer is required to make a reasonable apportionment of across the asset classes in the business. There is nothing prescriptive around how you do that, other than it must be reasonable and capable of substantiation. So the responsibility rests with the taxpayer. Your approach to this will depend somewhat on the asset classes acquired. So the first step is to identify all of the assets and put them into an asset class. If it was a fairly straight forward transaction and the asset classes turn out to be stock, plant & goodwill then from an ATO perspective you attach value to them in the hierarchy of their relativity to cash i.e in the scenario above you would likely attach cost price to stock, fair value to the plant and any residual value to goodwill. Where the value of the stock at cost and plant at Fair Value is equal to or exceeds the contract sale price then goodwill has no value. As to whether you need a specialist valuer for the stock and plant probably depends on the number (range) of items and how specialized they are or whether there is comparable information in the market. If the vendor has a depreciation schedule that may provide some assistance with the plant, however it still needs to be assessed to Fair Market Value. Materiality also comes into this. The larger the value of the transaction the more detail you are going to need. On the other hand if it is only a small transaction then a reasonable approach to apportionment would normally be accepted. Whatever you do important to document your process and how you arrived at the relevant asset class values. The information contained herein is provided on the understanding that it neither represents nor is intended to be advice or that the authors or distributor is engaged in rendering legal or professional advice. Whilst every care has been taken in its preparation no person should act specifically on the basis of the material contained herein. If assistance is required, professional advice should be obtained.
