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Buying a business or trust requires careful consideration of several issues. This article is a checklist highlighting common areas of due diligence involving tax considerations and information you need to review related to whether the acquisition is accomplished by buying assets or shares in a company or interest in a trust.

When you have your sights on acquiring an enterprise or a trust, you must perform due diligence to discover as much as you can about the target.

Here is a checklist of the most critical questions related to tax issues as well as the method of acquisition.

Targeted business is conducted through a company    
Have you conducted a company search to verify the vendor?
Are all ASIC compliance requirements up-to-date
Does the company have any overseas operations?
Financial health    
Have you obtained the company’s financial statements for the past four years? TIP: The financial statements should contain a breakdown of:

  • liabilities (including contingent liabilities);
  • inventory; and
  • accounts receivable and payable.
Have you obtained information on the business’ capital structure and, where possible, a current list of vested interests, such as shares, options, and warrants, as well as outstanding debt instruments?
Have you obtained an up-to-date copy of the business’ credit report?
Has there been a comparison between the business’ gross profits and the industry trends?
Have you reviewed financial projections and major business growth drivers for the next four years?
Tax considerations    
Have you obtained tax returns for the past four years, including supporting schedules and workpapers, such as capital allowance schedules, business activity statements, fringe benefits tax returns, and so forth? ALERT: You must review the duties of a director under the tax law. New directors risk a potential director penalty if they do not take action within 30 days of their appointment if the company has outstanding pay-as-you-go (PAYG) withholding or superannuation contribution amounts.
Have you obtained confirmation that all tax obligations such as income tax, GST, PAYG withholding, stamp duty and payroll tax are up-to-date and paid?
Are you familiar with the entity’s tax obligations?
Have you reviewed all correspondence with the Tax Office to determine if the business has any private tax rulings, tax elections, amended notices of assessment, or other communications that may apply?
Are you aware if the business is being audited by the Tax Office or if it has been audited in the past four years? If so, do you know the outcome?
Have you considered the stamp duty implications of the acquisition?
Have you considered whether the purchase will be a supply of a going concern, and thus GST-free? ALERT: Where a business is sold through an asset sale, the purchaser does not inherit any tax liabilities of the business. However, where a business is sold through the sale of units or shares, the purchaser inherits the tax liabilities of the business. Also, in those instances, the business sold will not qualify as a supply of a going concern and the purchase of the units or shares will be an input taxed financial supply.
Buying the business through an asset sale  
Has a fixed asset register been obtained detailing all the assets being sold? TIP: The register should outline the following information about the assets:

  • the original purchase price;
  • the purchase date;
  • the depreciation method used;
  • the depreciation rate used;
  • the effective life of the asset; and
  • the written-down value.
Have you checked the ownership and condition of the assets being sold? Are copies of instruction manuals available?
Where assets are leased, have you obtained copies of the leases? TIP: If you are taking over the existing leases, determine whether the leasing terms are reasonable.
Are the assets adequately insured until settlement of the purchase?
Has the purchase price been apportioned across the assets being purchased?
Buying a business through a sale of units or shares    
Have you obtained a listing of all current shareholders or unitholders?
If you are purchasing the business through the sale of units, has the trust made a family trust election (FTE)? ALERT: The existence of an FTE and interposed entity election (IEE) restricts who may receive a distribution from the trust or company, and to whom a trust may distribute any income derived. Generally, a trust will be denied a tax deduction for carried-forward losses or bad debts, unless certain tests are passed. Similarly, where the substantial shareholder of a company changes, the company can be denied a tax deduction for carried-forward losses or bad debts, unless the same business test is satisfied.

If you have other questions related to these aspects of due diligence consult with your adviser.

 

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