As we all know, New Zealand is a country with a very low threshold for starting a business. You can set up a company with low cost, but operating a business well is not an easy work. For start-up, buying a ready-made business may be a good choice. Especially under Covid-19, due to the decline in revenue, the selling price of a business has fallen, which makes buying and selling businesses quite active in New Zealand market.
A business can be sold in the form of assets, or in the form of shares, but each form has its own pros and cons, and there are different tax treatments. This article is mainly about selling business in the form of assets.
First of all, all or part of the business can be traded as assets, but you need to understand what kind of impact each asset will have on income tax.
Under normal circumstances, if the assets sold are used in the daily business activities, then: As a buyer, you can treat the expenditure as a deductible expense; As a seller, you need to treat this income as taxable income.
For example, Company A sells its trading stock and receivables to Company B. Then Company A needs to pay income tax on the profit, and Company B can record these related expenditures as tax-deductible expenses.
Secondly, the assets of the sold business can be divided into the following:
- Taxable Assets, such as inventory, accounts receivable, and patents
- Depreciable Assets, such as equipment
- Non-taxable Assets, such as goodwill
Basically, when the business is sold, we can see that the selling price of the business is allocated to Trading Stock, Tangible Assets and Intangible Assets in the contract. In fact, these are similar with the three kinds of assets we mentioned above.
In addition, buyers and sellers can decide to distribute the selling price of the business into different assets according to the value. The distribution ratio will directly affect the taxation of buyers and sellers.
In general, if the value of Taxable Assets and Depreciable Assets account for most of the selling price, it is good for the buyer, because these related expenses can be used to deduct income; If the value of Non-taxable Assets accounts for most of the selling price, it is good for the seller because it can reduce the seller’s tax income.
However, starting from 1 July 2021, the new rule of price distribution will implement. This rule will not only apply to the sale of business, but also the sale of commercial properties and forestry land. The distribution rule states that if more than two assets are traded in a transaction, then the buyer and seller must obtain a unified recognition of the market value of each asset and use the same distribution ratio to account for. If IRD finds that the buyer and seller do not follow the rule, they will conduct business transactions:
- Tax review
- Allocate the value of assets in accordance with the distribution ratio provided by IRD
- Adjust GST or Income Tax
In order to avoid the above situation, you shall distribute the price of assets according to the correct proportion. If you are not sure how to distribute, please seek professional advice to avoid unnecessary penalties.
