The term “stock” is mainly used to refer to the goods held by a business for sale. However, it can also refer to the following:

Consumables

This includes fuel and spare parts for plant and equipment, and the printed stationery of a business.

Raw materials

This includes stock, such as the paper held by a printing business. In the sale of a manufacturing business, raw materials may form a considerable component of the price.

Work in progress

This can include products in the course of manufacture. It can also include intangible products, such as an advertising agency’s partly completed artwork, or a solicitor’s work on an uncompleted probate application.

The contract should make it clear what is included in the term “stock”, and whether this is to include consumables, raw materials and work in progress.

In general, what a business pays to acquire its stock is a tax deduction, and what it receives for sale of stock is part of its taxable income. When stock is sold as part of a sale of business, it is taxed in the same way as if it had been sold in the ordinary course of business. This also applies to consumables, raw materials and work in progress. Capital gains tax (CGT) does not apply because stock is “otherwise assessable” within the meaning of s 118-20 of the Income Tax Assessment Act 1997 (Cth).

As income tax is generally higher than CGT, the vendor will try to minimize the value of the stock and increase the value of goodwill, which is subject to CGT.

The purchaser will try to do the opposite, as the purchaser receives an immediate tax deduction for purchasing the stock. However, the purchaser gains no deduction for purchasing goodwill, other than as a deduction from the capital gain it may eventually make on a subsequent sale of the business.

Where there is a sale of shares in a company conducting a business the stock automatically comes under the control of the new shareholder. However, the price to be paid for the shares will include an amount for the stock.

Accordingly, the same issues arise:

• determining what is stock;

• determining how the stock should be valued; and

• determining whether the company has good title to the stock.

Some of the stock of a business may have been purchased from a supplier under a contract containing a Romalpa clause also known as a retention of title clause. Under the Romalpa clause the supplier requires that title to the stock shall pass to the business owner only when the stock is paid for.

Businesses generally do not keep track of what stock is subject to such provisions. Accordingly, the mixture of assets making up the stock may well include items not owned by the vendor.

A search of the Personal Property Security Register should be conducted, to see if any retention of title claims are registered.

See General principles.

The unique challenge of dealing with stock included in a sale of business comes from the fact that it is constantly changing. Accordingly, a fixed figure for stock cannot generally be included in the contract. Rather, a stocktake needs to be conducted.

A contract for sale of business should clearly set out the manner of conducting a stock take including:

Ideally, the stock take should be conducted in time for the price to be determined, and included in the settlement figures. However, if a dispute arises, this may not be possible. In that event, there are several possibilities:

• delaying the settlement until after the dispute is resolved;

• delaying the payment until dispute is resolved; or

• setting money aside. This is usually the best alternative.

There are various ways to value stock. It could be valued at invoice price, wholesale price, retail price, or in some other way. To avoid any arguments, the contract should clearly state how the stock is to be valued.

Work in progress (WIP) generally has no value on the open market, until the work is completed. This applies both to manufactured products and to intangibles. This can lead to arguments about how the WIP is valued. As usual, the solution is to include a clear provision in the contract, stating how to determine the value of the WIP, such as an agreed hourly rate for the work expended on creating it.

A purchaser’s solicitor should insist that the purchaser is not required to pay for stock beyond what is needed to conduct the business. Accordingly, the contract should exclude:

• stock exceeding a total aggregate amount; and

• stock which is not good and saleable.

See Valuation.

Disputes over stock can easily arise in relation to:

• what is included in “stock”;

• whether the stock is “good and saleable”; and

• how the stock should be valued.

Clear provisions should be included in the contract for dispute resolution.

See Resolving disputes.