In NSW on July 1 there was a significant change to the Stamp Duty rules relating to the transfer or sale of “Business Assets”.
For this particular ruling a business asset is not a physical asset such as machinery, a vehicle or a business tool. The less tangible "Business Assets" to which this ruling refers includes:
1. A business asset, being, at any relevant time:
a. The goodwill of a business, if the business supplied in NSW, or provided services in NSW, to a customer of the business; or
b. Intellectual property that has been used or exploited in NSW; or
c. A statutory licence or permission under a Commonwealth law if the rights under the licence or permission have been exercised in NSW;
2. A statutory licence or permission under a NSW law (for example a taxi licence or water access licence);
3. A gaming machine entitlement within the meaning of the Gaming Machines Act 2001.
What does this mean for an investor that is purchasing a business that has a mixture of the Business Assets listed above and a component of physical assets of the Plant and Equipment nature?
Well there is a need to allocate values to the individual components of the acquisition, which can be done either prior to settlement of the acquisition or afterwards. The key thing to consider here is: if values are identified within the contract of sale you are locked into using those figures for both the application of any stamp duty exemption, and also for depreciation claims for the plant and equipment.
Why is this important? Depending on circumstances, it can be more beneficial to attribute a greater proportion of the purchase price to Plant and Equipment, and a lesser value to Goodwill. Even though Stamp duty will be payable on Plant and Equipment, the benefits of claiming the depreciation on these same assets can be substantially greater than the savings made by making use of the Stamp Duty exemption on the Goodwill. This is particularly relevant to individual pieces of Plant and Equipment that are valued at less than $20,000, as these assets are eligible for immediate write-off under the Small Business immediate write-off rules. This would mean a 100% deduction for Plant and Equipment assets acquired in a company tax environment of 27.5% for the 2017 financial year. Engaging a professional Quantity Surveyor to value your Plant and Equipment assets will ensure accurate valuation and help to ensure ATO compliance.
The below table shows the different outcomes for the same business where value has been apportioned differently between Plant and Equipment and Goodwill. In the second scenario there has been greater value allocated against the Plant and Equipment.
*All Plant and Equipment items are individually valued at less than $20,000 excl. GST.
^Depreciation deductions are applied against 27.5% Small Business Tax Rate.
As you can see above, a shift of $50,000 in value from Goodwill to Plant and Equipment has derived a $12,000 improvement of the bottom line. A simple adjustment such as this can have significant results to the cash flow position of a new business acquisition in year 1, a critical period in the life cycle of a business. It is also important to note at this stage that an adjustment such as this may have CGT impact upon disposal of the business, if or when it is sold for a profit.
If you own an investment property, the best way to ensure your depreciation deductions have been maximised is to use a depreciation schedule prepared by Capital Claims Tax Depreciation. For an estimate of deductions you may be entitled to, or to have your current depreciation schedule reviewed free of charge, please don't hesitate to get in touch.