Understanding the tax implications of a practice sale is essential in determining the net proceeds you’ll take home. We frequently receive inquiries about the taxes payable on the purchase and sale of a business. 

Here, we address some of the common questions we encounter:

FAQ 1. Do buyers need to pay GST on the purchase of a practice?

Any business that is sold in Australia as a going concern, will be GST exempt. 

So, if you're buying a veterinary practice, how can you determine if the business qualifies as a "going concern"?

A business is considered a "going concern" if:

1. the business is being sold with everything necessary to continue its operations; AND
2. the seller continues running the business up until the day of sale

While it may seem like all dental practice sales would fit this definition, there are some common exceptions to be aware of:

1. The vendor may choose not to sell or licence the practice name to the purchaser. This usually happens when:
   1. The vendors practice name is the same as their own name; or
   2. They own another practice with the same brand
2. The vendor may retain equipment necessary for the operations of the practice post sale. 
3. Where the vendor owns the real estate and doesn’t have a lease agreement (with themselves) to assign to the purchaser. However, this is usually a straightforward fix.

If the business is not considered a going concern, the buyer will be required to pay GST on the purchase. While the buyer can typically claim GST back when they lodge their Business Activity Statement, it may take time and could potentially cause a temporary strain on cash flow.

FAQ 2. Do buyers need to pay stamp duty on the purchase of a practice?

If you’re planning to buy a business, we suggest consulting your accountant/tax advisor about whether stamp duty will apply. Stamp duty is a state-based tax and the regulations vary across states. For instance, QLD imposes stamp duty on transfer of business assets, while NSW and VIC generally do not, unless land or lease of land is part of the transaction. 

FAQ 3. How does allocation of the purchase price between equipment/ fit-out and goodwill affect the amount of tax I need to pay when I buy or sell my business?

A common area of contention in any business sale is how to allocate the purchase price between Goodwill and Equipment/ Fit-out. 

Purchasers often prefer to allocate more value to equipment/ fit-out, as as these assets can be depreciated after the sale, providing future tax benefits.

Conversely, vendors find it more tax-efficient to allocate a larger portion of the price to goodwill. 

In Australia, one solution that many use to avoid what could be a protracted and acrimonious apportionment negotiation is to leave the sale price unallocated in the contract.  This allows both the buyer and seller to allocate the amounts in their tax returns according to their own preferences.

While the purchaser’s allocation does not need to match the vendor’s allocation in the sale contract, both parties must be able to justify their respective allocations t based on the market values of the assets at the time of making the contract in an event of a tax review or audit by the tax office. 

FAQ 4. Do I need to pay Capital Gains Tax (CGT) on the sale of my practice? 

When you sell your business, the difference between what you paid for it and what you sell it for results in either a capital gain or loss.  If it's a capital gain, CGT is payable on that amount.

HOWEVER, the income tax legislation offers four generous small business CGT concessions, allowing business owners to reduce, defer or even eliminate some or all of the tax associated with a capital gain from an active asset used in a small business.

Naturally, the prospect of paying little to no CGT is appealing, but how do you determine if you're eligible for these concessions? Several factors can affect your eligibility, such as:

• The structure of the sale 
• The aggregated turnover of the business
• Your total net assets
• How long you’ve owned the business 
• Whether the sale is linked to retirement
• Your age
• Whether you plan to acquire a replacement asset (say another practice) or incur costs on making capital improvements to an existing asset 
• And more

Given the complexity and numerous variables involved, it’s crucial to seek expert tax advice from a qualified accountant well in advance of the sale. This will give you the best chance to take full advantage of the available CGT concessions.

Disclaimer: As always, given the unique nature of each business sale, it's essential to consult with a tax professional or accountant to get insights to your specific circumstances. The information provided in this article is intended for general informational purposes only and should not be considered as professional tax advice. While we strive to provide accurate and up-to-date information, tax laws and regulations are subject to change and may vary based on individual circumstances. Therefore, we recommend consulting with a qualified accountant or tax advisor to obtain advice tailored to your specific situation. The content in this article is not a substitute for personalized professional guidance.

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