Going Concern Assets – Value Apportionment and Tax Depreciation

Despite the lingering presence of COVID-19 restrictions and lockdowns, the market for going concern assets remains relatively strong, albeit region-specific.

This is illustrated across several sectors including licensed hotels (especially those with gaming), accommodation facilities (including regional motels) and caravan parks where a strong institutional demand remains. This demand, in part, is being fuelled by an increased desire for domestic travel and F&B services, associated with low-interest rates and investors’ appetite for yield-based assets.

In purchasing a going concern asset, i.e. land, buildings and business, it is considered prudent to seek suitable valuation and taxation advice when preparing appropriate sale documentation. Normally, a sale of a going concern asset will involve multiple contracts detailing apportioned values between partial interests in the going concern purchase. Typically, this will include a Contract of Sale of the Real Estate and a Contract of Sale of the Business Component. (These two interests are commonly referred to as a Hypothetical Lessor’s/Freehold Interest and a Hypothetical Lessee’s/Leasehold Interest.)

Providing a suitable apportionment of value between these interests is part of the valuation process of a Going Concern asset and when instructed during the sale process will provide suitable guidance for accounting/taxation professionals to assess taxation and duty implications, whilst also satisfying State Revenue Office (State specific) requirements. If this contract/value apportionment is incorrectly assessed or is outside reasonable valuation parameters, tax/duty obligations may not be appropriately calculated, and in some cases, duties being overpaid.

Based upon individual state jurisdictions duty calculations may, for example, exclude items such as goodwill, chattels etc.

As a basic example of this, consider a motel going concern purchase for $2,000,000 walk-in, walk-out. Based upon our assessment of the overall going concern value of $2,000,000, the apportioned value between a hypothetical Lessor’s/Freehold Interest and hypothetical Lessee’s/Leasehold Interest is assessed based upon an adopted market rental and yields based upon sales of partial interests, and maybe illustrated as follows:

Notional Apportionment
Land and buildings,
(hypothetical Lessor’s Interest)
$1,500,000
Plant, furniture, equipment and Goodwill (hypothetical Lessee’s Interest)
$500,000
Total Going Concern Value
$2,000,000

In this example, and based upon varying State Revenue Office regulations, duty may only be calculated on $1,500,000, not the total $2,000,000 going concern purchase price.

(This type of valuation assessment is also utilised as a common tool in the Superannuation field when going concern properties are held in related entities i.e. SMSF owning the Freehold Interest, with a second entity owning the business component and a market rental being assessed between entities.)

In addition to the above, it is also prudent to consider further taxation implications when purchasing going concern properties, in terms of Tax Depreciation allowances on the plant, equipment and chattels, which can improve cash flow in the early years of operation.

In working with our Quantity Surveying partner, the following advice should be considered as part of any purchasing due diligence:

“When considering the purchase of a caravan park, motel, or other short-term accommodation property it is paramount to consider the tax deductions available through depreciation. When engaging a Quantity Surveyor to assess your property for depreciation entitlements it is important to share with them the included chattels etc. that came with the purchase under a plant/goodwill payment. These chattels could be specifically noted in the contract or sale, or not. Quantity Surveyors, who are also registered tax agents, can then accelerate the depreciation on all plant and equipment (chattels etc.) through what is known as a Division 40 deduction. Even if you have only purchased the business and not the freehold, you have still in most scenarios purchased significant assets and/or improvements that are entitled to a depreciation claim. Have you considered the sheets, cushions, mattresses, maintenance equipment, furniture etc.?

With the recent extension of the temporary full expensing of business assets announced by Treasurer Josh Frydenberg, all businesses with an aggregated turnover of less than $50M can claim depreciation on second-hand assets within the initial financial year of purchase – IN FULL! This could mean hundreds of thousands in tax deductions unlocked almost immediately upon settlement.”

Andrew Kemp
Director Valuations
— Albury-Wodonga
CPV
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