Two people can sign the same $600,000 deal and finish with very different tax bills. The difference usually hides in a schedule near the back of the contract that most people skim, where the price gets divided between stock, goodwill and plant. It looks like paperwork, yet it decides who gets deductions, who pays tax and how comfortable the deal feels a few years later.
An Australian business sale contract almost always needs this split, and it deserves more attention than it gets. Here’s how each piece works, why buyers and sellers want different things and how to land on numbers you can defend.
Why Does the Purchase Price Get Split at All?
A business isn’t one asset. It’s a bundle that might include stock on the shelves, equipment, a lease, a customer base, a brand and the reputation built over years. Each of those is treated differently for tax and sometimes for GST, so the contract needs to say how much of the price belongs to each. Without a clear allocation, both parties are left guessing, and the tax office won’t guess in your favour.
The three buckets you’ll see most often are stock (usually priced through stock at valuation), plant and equipment, and goodwill. Some deals add smaller lines for a restraint of trade, intellectual property or a leasehold fit out. The more clearly each is named and valued, the less room there is for argument later.
What Is Goodwill, and Why Do Sellers Like It?
Goodwill is the value of the business beyond its physical assets. It’s the loyal customers, the location, the reputation and the reliable income that a buyer is really paying for. In many small business sales it’s the largest part of the price, sometimes well over half.
Sellers tend to prefer a higher goodwill figure because goodwill is generally a capital gains tax asset. That can open the door to the small business CGT concessions, which include a 15 year exemption, a 50 per cent active asset reduction, a retirement exemption and a rollover. Eligibility depends on several conditions, such as turnover under $2 million or net assets under $6 million, so it’s never automatic. If you’re thinking about retirement or passing wealth on, a conversation about estate planning alongside the sale can be genuinely valuable.
What Counts as Plant and Equipment?
Plant covers the physical equipment used to run the business. Think coffee machines, ovens, shop fittings, tools, computers, vehicles and workshop machinery. For tax purposes these are usually depreciating assets, which means the owner claims deductions over time.
For the seller, plant brings a balancing adjustment. If it sells for more than its written down value, the extra is generally taxed as ordinary income rather than as a capital gain. Your last set of annual accounts is the place to find those written down values, so pull them out before you negotiate.
Where Does Stock at Valuation Fit In?
Stock is the simplest bucket because it’s tied to a physical count on the day. The contract sets the price for the business, and the stock gets added on top at cost based on the settlement day stocktake. For the seller, stock is trading stock, so the proceeds are generally treated as business income rather than a capital gain. For the buyer, the amount paid becomes the cost of trading stock they’ll sell on.
Because the amount moves with the count, it’s worth keeping stock separate from your goodwill and plant allocations in the contract. Lumping everything into one figure makes it hard to see what’s fixed and what’s variable. A clean schedule avoids that confusion.
How Does the Split Affect the Buyer?
Buyers usually want more of the price allocated to plant. Depreciating assets can be written off over their effective life, and depending on the instant asset write off threshold in force when you buy, some items may be deducted immediately. Goodwill works the other way, because it generally can’t be depreciated, and its cost only comes into play as part of the capital gains calculation when you eventually sell.
That’s the tension in nearly every negotiation. The seller leans toward goodwill, the buyer leans toward plant, and both have a tax reason for it. Neither side can simply pick the numbers they like.
Can You Just Choose the Numbers You Like?
No, and trying to is a good way to attract attention from the ATO. Allocations are expected to reflect reasonable market values. If a coffee machine worth $4,000 shows up in the contract at $40,000, the split won’t hold up well under review.
Here’s a simple illustration with made up figures. Imagine a $600,000 sale with $60,000 of stock through SAV, $90,000 for plant that has a written down value of $35,000, and $450,000 for goodwill. The seller would have about $55,000 of assessable income from the plant sale and a capital gain on the goodwill, while the buyer gets depreciation on the plant and a capital asset in the goodwill. Move $50,000 from one bucket to another, and the tax picture for both people changes noticeably.
How Can You Get the Split Right?
A few habits make a big difference:
- Get independent valuations for larger items of plant.
- Use the last set of accounts to check written down values.
- Agree the stock valuation method in writing.
- Keep the goodwill figure realistic given the profits of the business.
- Have both advisors review the schedule before exchange of contracts.
If you’d like to think about how the split fits into a broader plan, corporate tax planning is a good topic to explore first. And if you’re mapping out a purchase or an exit, strategic planning can help you see the sale as part of the bigger picture rather than a single event.
What to Take Away From the Split
The price is only the starting point. What really matters is how an Australian business sale contract divides that price between stock, goodwill and plant, because each bucket carries different tax consequences for both parties. Buyers lean toward plant, sellers lean toward goodwill, and a reasonable, well documented allocation keeps everyone out of trouble.
Before you sign, ask your accountant to model the split from both sides, since this is general information and not personal advice. A small change in the schedule can shift thousands of dollars. If your contract landed on your desk tomorrow, would you know which numbers in that schedule were negotiable?
Frequently Asked Question
How is the purchase price allocated in a business sale?
The contract usually divides the price between stock, plant and equipment, and goodwill. Some deals add smaller lines for a restraint of trade, intellectual property or a leasehold fit out. Each category is treated differently for tax and sometimes GST, so the schedule needs to be clear. A well documented allocation protects both the buyer and the seller if the tax office asks questions later.
What is goodwill in a business sale?
Goodwill is the value of the business beyond its physical assets. It reflects things like loyal customers, location, reputation and reliable income. In many small business sales it’s the largest part of the price, sometimes well over half. It’s what a buyer is really paying for when they take over a business that already works.
Is goodwill tax deductible for the buyer?
Generally, no. Goodwill usually can’t be depreciated, so the buyer doesn’t claim regular deductions for it. The cost only comes into play in the capital gains calculation when the buyer eventually sells the business. That’s one reason buyers often prefer more of the price allocated to plant.
What counts as plant and equipment in a business sale?
Plant covers the physical equipment used to run the business. Examples include coffee machines, ovens, shop fittings, tools, computers, vehicles and workshop machinery. For tax purposes these are usually depreciating assets, which means the owner claims deductions over time. Your last set of annual accounts shows their written down values.
Why do sellers prefer goodwill and buyers prefer plant?
Goodwill is generally a capital gains tax asset, which can open the door to the small business CGT concessions for the seller. Plant is depreciable, so the buyer can claim deductions over its effective life. If plant sells for more than its written down value, the seller’s extra is generally taxed as ordinary income. Each side has a tax reason to lean a different way, which is why the schedule gets negotiated.
Can buyers and sellers choose any price allocation they like?
No. Allocations are expected to reflect reasonable market values. If a coffee machine worth $4,000 appears in the contract at $40,000, the split won’t hold up well under review. Independent valuations for larger items and a goodwill figure that matches the business’s profits make the allocation easier to defend.
What are the small business CGT concessions when selling a business?
They include a 15 year exemption, a 50 per cent active asset reduction, a retirement exemption and a rollover. Eligibility depends on several conditions, such as turnover under $2 million or net assets under $6 million. They’re never automatic, so it’s worth checking your position with an accountant before the contract is signed. They can make a large difference to the tax on the goodwill.
How is stock treated in a business sale?
Stock is usually priced through stock at valuation, which means it’s counted at the settlement day stocktake and added on top of the price for the business. For the seller, stock is trading stock, so the proceeds are generally treated as business income rather than a capital gain. For the buyer, the amount paid becomes the cost of trading stock they’ll sell on. Keeping stock separate from goodwill and plant in the contract makes the schedule easier to read.
