THE latest round of changes to State Government taxes could lead to a significant shift in the way businesses are bought and sold.
The Business Tax Review (Assessment) Bill (No 2) passed by parliament late last month substantially widened the definition of business assets that are subject to stamp duty.
These changes, combined with the removal of stamp duty on unlisted securities, mean that buying a company will be relatively more attractive compared with buying the underlying assets of the company.
Business advisers emphasise that stamp duty is just one factor to be considered when a business sale or acquisition is being planned.
Nevertheless, the tax changes could significantly affect the way transactions are structured.
The changes to stamp duty are part of a larger package of tax reforms being progressively introduced by the State Government.
Other measures include the abolition of stamp duty on cheques, leases and life insurance policies.
Earlier reforms, which took effect from July 1, included changes to payroll tax and land tax.
Deacons tax partner Michael Frampton said that, presently, conveyance duty applied to chattels (i.e. moveable goods and merchandise) only when they were sold in conjunction with land.
When the latest changes take effect, probably from January 1 next year, conveyance duty will apply to chattels sold with any type of dutiable property.
Conveyance duty will also apply to intellectual property such as trademarks, patents and copy-rights transferred in conjunction with a business.
Mr Frampton said chattels often comprised a large part of the value of a business.
He gave the hypothetical example of a business that sold for $1 million and included dutiable assets of $750,000.
The purchaser of the business would have to pay about $40,000 stamp duty (based on a sliding scale up to 6.3 per cent) once the new rules take effect.
If they chose instead to buy the company, they would benefit from the abolition of stamp duty (currently levied at 0.06 per cent) on unlisted securities.
Instead of paying $6,000 stamp duty on the purchase, they would pay nothing.
Mr Frampton said many people were reluctant to buy a company (rather than its assets) because they acquired not just its assets but may also inherit hidden tax or legal liabilities.
He suggested that business purchasers put more focus on a thorough due diligence review of the target company.
“You need to ask if its worth spending, say, $10,000 on a thorough due diligence if it means you can save $40,000 on stamp duty,” Mr Frampton said.
Ernst & Young director tax services Celia Searle agreed that the tax reform measures could result in significant increases in stamp duty payable.
“We are recommending to our clients who are considering purchasing a business that they execute a sales agreement prior to January 1 2004,” Ms Searle said.
Deacons partner corporate and commercial, Derek La Ferla, agreed the stamp duty changes could be a material factor for people buying or selling a business.
“But you need to look at the totality of the deal, not just stamp duty but all the tax implications, as well as the risks,” he said.
Mr La Ferla said he had observed a greater willingness by investors to buy companies rather than buying the underlying business assets.
“You need to ensure the due diligence and the documentation are more rigorous. A lot of people are more willing to do that now,” he said. “They have tailor-made warranties and indemnities to protect themselves against any risks.”
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