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Allocating A ‘Fair Price’ To The Sale Of A Business

22 December 2009   (0 Comments)
Posted by: Author: Tim Desmond
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Allocating A ‘Fair Price’ To The Sale Of A Business

Get this wrong, and it could cost you on the tax front

In a recent case before the Tax Court in Cape Town, the issue of allocating a purchase price in the sale of a business was considered. The allocation of the purchase price for a business can, amongst other things, have significant tax implications for the parties. SARS therefore often takes an interest in how such allocations are made.

In this case, a regional radio station was acquired from the SABC, for a purchase price of R65 million. The bulk of the purchase price, namely R50 million, was allocated to trademarks and the name of the radio station. The taxpayer, being the acquirer of the radio station, claimed trademark allowances based on this allocation in each of its 1997 to 2001 years of assessment.

SARS disallowed the allowances claimed by the taxpayer, on various grounds. One of those grounds was based on the contention that the allocation of the purchase price was not "genuine”. SARS argued that the amount allocated to the trademarks and name had been unduly inflated in order to maximise the tax benefit. SARS placed much emphasis on the allocation not being based on an objective third party valuation and contended that it was not market related. The court found, firstly, that the relevant allowance was not based on market value, but rather on the expenditure actually incurred. It also found that a genuine allocation did not necessarily require a formal valuation exercise.

The court took a practical approach to the process of allocating purchase prices. It accepted that businessmen often base such allocations on their subjective opinions regarding value, rather than formal valuations by accountants. The taxpayer's representatives who dealt with the allocation had extensive experience in the radio industry. The court found that, despite the lack of reliance on formal valuations or  working papers, they reached a well-informed and carefully considered assessment of the assets being acquired. In light of the representative's experience, the court was prepared to give weight to their "intuitive” valuations.

SARS argued that a more formal approach to that set out above was required to substantiate the allocation. The court preferred the taxpayer's practical approach, which it regarded as according more with the realities of the market-place. There was also an attempt by SARS to allege that the allocation was a "sham” by the parties, intended to conceal the true substance of the transaction. The court found no evidence to support such an allegation.

Source: By Tim Desmond (Taxbreaks)



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