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Business Deal? Beware hidden traps in contracts when buying or selling |
A contract is initially rarely 'tax perfect', mainly because tax law often has little to do with commercial logic. |
Contact your solicitor if you are drafting a contract. As a minimum, before entering into any contract, purchasers should understand how a business handles its tax accounting. What is the availability of carry-forward losses? Is the business being tax audited, or are there any undetermined objections between it and the Tax Office? |
It is sometimes advisable to seek a Tax Office ruling on a matter before signing a contract, if delays do not make this impractical. A ruling would be useful, for example, when a vendor and purchaser want a sale to be exempt from GST under the going-concern exemption, but it is unclear whether an exemption would be allowed. |
In such a situation any GST liability will be the vendor's responsibility. It is all very well for a purchaser to warrant to make good any subsequently levied GST, but vendors are often, understandably, reluctant to rely on warranties. |
There are two main problems with warranties. A warranty is only as good as the person giving it - with both credit and enforcement risks. Second, the warranty might have insufficient scope. |
A warranty which simply says that a company's tax liabilities are 'as disclosed' is unlikely to be good enough (assuming that shares in a company are being purchased, rather than the business itself). One of the reasons that purchases of companies, rather than their assets, are so unpopular is because the purchaser is taking on any liabilities which attach to the company. |
Warranties should cover all GST, PAYG, stamp duty, fringe benefits tax and superannuation guarantee levy liabilities. They should also cover any interest and penalties which might be levied because of past inadequate tax payments. |
If a vendor gives a tax warranty, the vendor should never surrender rights to control tax disputes which might result in it incurring a liability. Rather, a sale agreement should contain a clause which states that if there is a dispute over a company's tax liability prior to the point of sale, the vendor has the right to dispute the assessment and cause the company to take whatever action is necessary, including court action, to dispute it. The agreement should say that the vendor should bear the costs of such a dispute. |
Dividend-stripping provisions in the tax legislation mean that if a person sells a company, and the purchaser subsequently strips it of its profits, the vendor, rather than the purchaser, might be assessed on the amount of profit taken out. So a vendor who proposes to sell a company which is rich with accumulated profits should require the purchaser to provide an indemnity against this. |
