Duty assessed on the sale of a business
Version Number: 1
Legislation: Stamp Duties Act 1923
Date Issued: 16 January 2015
Revenue Rulings do not have the force of law.
This Revenue Ruling discusses how duty is assessed with regards to the sale and purchase of a business.
Sections 60 and 60A of the Stamp Duties Act 1923
Under the Stamp Duties Act 1923 (the “Act”), duty is chargeable on the conveyance or transfer of property situated in South Australia.
Section 60A of the Act, entitled ‘Value of property conveyed or transferred’, outlines how the value of property transferred is to be determined for the purposes of calculating the amount of duty payable.
Sections 60A(1)(a) and 60A(2) of the Act provide that in the case of a conveyance on sale (i.e. a transfer of property for consideration), the value of the property transferred is the greater of the consideration for the sale or the market value of the property.
Section 60A(2) of the Act provides the Commissioner of State Taxation (the “Commissioner”) with a discretion to adopt the consideration for sale as being the value of the property conveyed or transferred unless it appears to the Commissioner that the consideration may be less than the market value of the property. If the consideration is less than the market value of the property, the Commissioner will calculate duty on the basis of the market value of the property.
When a business is sold as a going concern, the assets are conveyed or transferred to, and often liabilities are assumed by, the purchaser (noting that the vendor and purchaser may agree that certain assets will not be conveyed or transferred to, or liabilities assumed by, the purchaser).
The starting point for calculating duty on the sale of a business under Section 60A of the Act is determining both the ‘market value of the property’ and the ‘consideration for the sale’.
Value and consideration are different legal concepts. The amount of consideration for the conveyance or transfer of property may not always be the same as the market value of the property.
The terms ‘value’ and ‘market value’ do not have any general statutory definitions. William J in Abrahams v The Federal Commissioner of Taxation (1944) 70 CLR 23, 29 stated that “market value” is:
“the price which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not
anxious purchaser could reasonably expect to have to pay ... if the vendor and purchaser had got together and agreed on a price in friendly negotiation ...”
In most cases, provided the parties are dealing with each other at arm’s length, the consideration being paid or given will generally be accepted as representing the appropriate value of the business.
For the purposes of the Act, ‘consideration’ is not merely the monetary amount expressed as the purchase price in the parties’ agreement but also includes any other “money or value passing which moves the conveyance”: see Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152. The interpretation in Archibald Howie has been applied by the High Court of Australia in the subsequent cases of Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW)  HCA 22; 100 CLR 392; Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1961) HCA 35; 105 CLR 602; Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd (2005) HCA 3; 221 CLR 496; and Commissioner of State Revenue v Lend Lease Development Pty Ltd; Commissioner of State Revenue v Lend Lease IMT 2 [HP] Pty Ltd; Commissioner of State Revenue v Lend Lease Real Estate Investments Limited  HCA 51.
The question to ask here is what is the consideration paid or given by one party for the other party’s promise or what has “moved” the transaction. Here, the usual principles of evidence will apply and a determination of the facts will be made so that the consideration is objectively ascertained. As such, the consideration is not necessarily what the parties believe it is. Rather, it is what a reasonable observer would say it is if armed with all relevant knowledge of the parties’ transaction. The principal evidence of the consideration will usually be found in the terms of the parties’ agreement.
Liabilities generally form part of the consideration
Where a purchaser agrees to assume the liabilities of a vendor’s business, the amount or value of the liabilities assumed is added to and forms part of the consideration upon which duty is calculated. Conversely, where the purchaser does not assume the liabilities of the vendor’s business, with the vendor retaining the liabilities, these are not added to and do not form part of the consideration upon which duty is calculated.
The assumption of the business liabilities is itself a valuable promise and a promise that a purchaser is ordinarily under no compulsion to give. It is reasonable to assume that but for the promise to assume responsibility for the business liabilities, there would not have been any conveyance. The promise relieves the vendor of the necessity to meet the liabilities owed to a third party and, without such an assumption of liability by the purchaser, the vendor would have remained responsible for discharging these liabilities.
In addition, a purchaser may undertake to assume the liabilities of a business where the liabilities are substantially greater than the value of the assets of the business itself, for example, on the basis that the business as a going concern can trade out of difficulty, pay its liabilities and return a profit in the long term.
The conveyance or transfer of property subject to a mortgage, such as land, where the purchaser undertakes to perform the vendor’s obligations under the mortgage, is an assumption of a liability and the amount assumed, being the outstanding amount payable on the mortgage, is added to and forms part of the consideration upon which duty is calculated. Put differently, the consideration for a transfer of land subject to a mortgage is to be calculated as the sum of the purchase price for the land and the amount or value of the mortgage outstanding.
Liabilities: Employee entitlements
The assumption of employee entitlements (such as annual leave, long service leave and sick leave) is an assumption of a liability constituting consideration and is added to and forms part of the consideration upon which duty is calculated. This also applies to employee entitlements assumed by the purchaser as part of a statutory obligation, as the purchaser’s obligation only arises by virtue of the purchaser agreeing to employ the vendor’s employees, thereby relieving the vendor of the obligation to pay the employee entitlements remaining at settlement.
If the purchase price paid by the purchaser at settlement has been adjusted to take account of an amount already paid by the vendor that is attributable to a period of time after settlement, there will be no adjustment for duty purposes.
Adjustments at settlement
The Commissioner will review any positive or negative adjustments to the net amount of the purchase price paid at settlement for the sale and purchase of a business in order to ensure that any adjustment is reflected in an assessment. This involves analysing the components of any given purchase price, the liabilities assumed and any adjustments made to these at settlement in order to determine the true consideration for the property transferred.
In addition, where the total amount to be paid under the agreement cannot be ascertained at the time of the settlement of a sale of business, then the agreement will be initially assessed based on the ascertainable amount and the agreement will be reassessed once the final consideration moving the transaction is ascertainable.
Gross and net purchase prices
In order to determine the true consideration for assessing, the Commissioner will have regard to the particular business sale agreement and whether the stated purchase price is either a gross or net amount.
In all of the above examples, the consideration upon which duty is calculated is $100.
Face value of the liabilities
The Commissioner will calculate duty on the total liabilities assumed on the basis that the promise to assume responsibility for the liabilities is equivalent to the face value of the liabilities.
Goods and services tax
In accordance with Section 15A of the Act, the consideration upon which duty is calculated is the value of the property inclusive of any GST payable.
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