A price made of parts.
The price of a business is rarely one undifferentiated number. It is made up of goodwill, plant and equipment, stock, work in progress, sometimes debtors, intellectual property and licences, and often a restraint on the seller, and the way the contract apportions the price across those components drives the tax outcome for both parties.
Why the two sides pull apart.
A seller usually wants more of the price on goodwill, because goodwill can attract the capital gains concessions, and less on plant and equipment, where receiving more than the written-down value is taxed as ordinary income. A buyer usually wants the reverse, because they can claim depreciation on plant and equipment but not on goodwill. The edges add their own complications. A restraint on the seller is treated as a separate asset, and loading value onto it can cost the seller a concession, because a restraint cannot attract the general discount that goodwill can. Intellectual property with a written-down value is taxed to the extent the price exceeds it, and is outside the capital gains rules. Trading stock and work in progress have their own treatment, and buyers usually avoid taking on debtors because they cannot deduct bad debts, often agreeing to collect them for the seller on a commission instead. Where the sale includes land and buildings, two interdependent contracts are used and the building may be valued separately again.
Why silence invites the ATO.
If the parties agree the apportionment and record it in the contract, and the sale is at arm's length, both can rely on it and calculate their positions with confidence. If they leave it out and each works it out separately with their accountant, the figures will differ and both tend to adopt the position that suits them, usually at the ATO's expense. That invites the ATO to review the transaction and substitute its own apportionment, with adjustments and penalties possible for both sides. Our business sale and purchase service sets the apportionment in the contract, working with your accountant.
Leaving apportionment out of the contract does not avoid the problem, it just lets the ATO decide, and it can adopt either party's figures or its own. Putting a value on a restraint can also quietly cost the seller a concession, so goodwill and the restraint are considered together.
Law referenced: Income Tax Assessment Act 1997; Commissioner of Taxation v Murry.