Tim Somerville, Founding Partner, Somerville Legal, Solicitors & Notaries
Geoff Rees, Director and Fiona Newton, Solicitor, JRT Partnership Pty Ltd (Vic)
Currently updated by Roger Wade, Director, WadeLegal (Qld)
Originally authored by Warren Wackerling, Senior Associate, Holman Webb (Qld)
Currently updated by Eric Ross-Adjie, Principal and Andrea Keri, Principal, Warren Syminton Ralph (WA)
Originally authored by Eric Ross-Adjie, Partner and Christopher Hall, Solicitor, Karp Steedman Ross-Adjie, Lawyers (WA)
Martin Lovell, Director, Laity Morrow (SA)
Tim Tierney, Principal, Tierney Law (Tas)
Currently updated by Lyn Bennett, Consultant, Minter Ellison (NT)
Originally authored by Leon Loganathan, Managing Partner; Emma Farnell, Lawyer, and Billy Tarrillo, Lawyer, Ward Keller Lawyers (NT)
Currently updated by Alice Tay, Partner, Meyer Vandenberg Lawyers (ACT)
Originally authored by Alice Tay, Partner and Eve Martin, Associate, Meyer Vandenberg Lawyers (ACT)
The subject matter of the sale or purchase of a business creates unique challenges, in that a "business" is not a legal entity or a clearly definable asset. Normally, when buying or selling an asset, such as land, chattels or intangibles, what is being bought or sold is obviously and clearly identified before the transaction begins. However, a business is made up of a collection of rights, obligations and assets, tangible and intangible. These can be hard to define and even harder to effectively transfer, so that the purchasers receive what they pay for. A business will usually include goodwill, which business owners regard as a valuable asset, though it is not property in a legal sense. The assets making up a business first need to be identified, then a determination must be made, and negotiated with the other side, as to how they are to be transferred to the purchaser, with the minimum lawful amount of tax, duty and ongoing risk for your client. Transactions structured for tax minimisation can attract the anti-avoidance provisions in Pt IVA of the Income Tax Assessment Act 1936 (Cth).
What is a business?
There is no clear definition of "business". The Australian taxation legislation is drafted in highly detailed and complex terms. However, the best a draftsperson could come up with was the following definition:
business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
This definition appears in s 995.1 of the Income Tax Assessment Act 1997 (Cth). The same definition is adopted by s 6 of the Income Tax Assessment Act 1936 (Cth). Section 195.1 of a New Tax System (Goods and Services Tax) Act 1999 (Cth) also adopts the same definition.
Of course, there is a vast body of judicial authority dealing with businesses. However, there is no single accepted definition, nor, could there be, as what constitutes a business will vary from one case to the next.
When dealing with the sale or purchase of a business, the “business” is treated as being everything required to earn income which the vendor has been enjoying. Of course, this will vary from business to business. Sometimes, the physical aspects of a business will be its essence. For example, in selling a service station or a hotel, the essential asset to be transferred will be the physical premises, whether the vendor’s rights are by way of ownership or lease.
See What is a business?
Buying shares in a company
One way to transfer control of a business to a purchaser is for the purchaser to buy the shares in the company which has been conducting the business.
Advantages to the vendor:
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Simplicity — Selling shares is much easier than transferring each of the individual assets making up a business.
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Tax — In most cases, the individual shareholders will be better off receiving their money as consideration for the sale of shares rather than having the consideration paid to the company. The money paid to the company may incur further taxation when it is then distributed out to the shareholders.
Disadvantages to the vendor:
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Warranties — The purchaser will require from the vendor shareholders extensive warranties as to the company, and indemnities for any undisclosed liability of the company. Should any liability of the company emerge in the future, this may result in the purchaser claiming indemnity from the vendor shareholders.
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Tax — A future tax audit could reveal liabilities going back to periods well before the completion of the sale.
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Workers Compensation — An audit by the workers compensation insurer may, similarly, reveal hidden liability for premiums pre-dating the sale.
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Liability claims — Claims for liability for example under customer warranties for goods and services provided by the business prior to the sale can be the subject of subsequent claims.
Advantages to the purchaser:
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Simplicity — A simple sale of shares is easier to accomplish than a transfer of individual assets.
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Duty — In New South Wales, Victoria, Tasmania, the ACT and South Australia, there is generally no duty on sales of shares or on sales of businesses. In Queensland, Western Australia and the Northern Territory, there is duty on the sale of businesses but no duty on the sale of shares. Accordingly, in those states, the purchaser saves stamp duty by purchasing shares in a company, rather than purchasing the business. In all states and territories, there may be duty on certain interests in landholders (entities whose assets include real property) and duty may apply where the shares being transferred have a land use entitlement.
Disadvantages to the purchaser:
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Liabilities — The purchaser is affected by any pre-existing liabilities of the company, which emerge after the sale, although these may be recovered to the extent of enforceability against the vendor shareholders under the warranties in the share sale agreements.
See Buying shares in a company.