These notes are derived from John H Fisher and Jason C Sprague, ‘Business Dealings’ (Practice Paper No CC202, College of Law, November 2015) [202.60]–[202.180], [202.190]–[202.280], [202.425]–[202.455], [202.490]–[202.510], [202.520].

Standard contract

  • NSW Law Society developed the standard ‘Agreement for Sale of Business’ in 1977.
  • Latest edition is 2015.
  • Specially drafted contracts are still relatively common.
  • Standard contract is generally suitable for sale and purchase of most small businesses.
  • Amendments can be made as appropriate.

Lawyers’ responsibilities when drafting a contract for sale of business

  • Receive clear instructions from the vendor.
  • Advise the vendor on the legal procedures involved in the sale.
  • Advise the vendor on the need for special conditions or variations.
  • Assess the vendor’s financial understanding and advise the client seek financial advice if necessary.
    • The client may need assistance from an accountant or financial adviser in relation to apportioning the purchase price and minimising capital gains tax.
  • Understand the need to secure the continuing obligations of the purchaser under guarantees, particularly if the purchaser is a company.

When to draft the agreement

  • The contract is not usually prepared until a purchaser is found.
  • The vendor’s lawyers prepares the agreement after receiving instructions from the vendor/vendor’s agent.
  • The draft contract is given to the purchaser’s lawyer and amendments are negotiated.
  • It is good practice practice to state that no legal obligations will arise until after exchange.

The agent

  • Businesses are often sold without the involvement of an agent or broker.
  • Purchasers may simply respond to an advertisement of the vendor.
  • Standard agency procedures will apply if an agent is involved.

The role of the purchaser’s lawyer

  • Upon receipt of the draft agreement the purchaser’s lawyer should check and note:
    • The legal entity of the vendor (company, sole trader, partnership, trust, etc).
    • Any special conditions imposed by the vendor.
    • Any amendments.
    • All other details relevant to the purchaser’s interest.
  • Fully inform the client as to the agreement and effect of any special conditions.
  • Also ask the purchaser:
    • Why they wish to purchase the business.
    • If they have had any discussions with the vendor that influenced their decision.
      • It is crucial to flush out any representations made by the vendor as to takings and profitably.
  • Enquire as to how the purchaser will pay for the business.
    • Advise on the implications of obtaining finance.
    • Also suggest independent financial advice be received.
  • Advise that duty will probably be payable, and approximately how much that would be.

Choice of entity for purchase

  • Purchaser’s lawyer should advise on the legal entity most appropriate for the purchase.
  • Major considerations are income tax, capital gains tax, duty, limiting liabilities, requirements of any financier and the nature of the business.
    • Choice is usually between:
      • Sole proprietor.
      • Partnership.
      • Corporation.
      • Trust.

Separate representation

  • Both vendor and purchaser should be separately represented unless self-represented.
  • Lawyers risk being negligent and guilty of professional misconduct when acting for both parties.

Caveat emptor

  • Purchaser’s lawyer must warn the purchaser that caveat emptor (‘let the buyer beware’) applies.
    • This is despite protections given in the Australian Consumer Law and other legislation.
  • Purchaser’s lawyer must make best efforts to protect the purchaser at every stage of the purchase.

Description of business

  • It is essential that the business being sold is accurately described in the agreement.
  • Agreement must specify precisely what assets are being sold.
  • Assets may comprise:
    • Goodwill.
    • Equipment.
    • Premises lease.
    • Intellectual property and business names.
    • Phone numbers, websites, email addresses and social media accounts.
    • Employees, know-how and customer lists.
    • Stock-in-trade and work-in-progress.
    • Debtors.
  • Equipment is usually fully detailed in an inventory attached to the contract.
  • The relevant tax depreciation will also be attached as a schedule.
  • Additional conditions may be required to accomodate other assets.
  • Any liabilities to be taken over must also be clearly set out.
  • The description is important to the purchaser as they must ensure they acquire business names and exposure afforded by the premises to preserve the goodwill of the business and gain full value for the purchase price.

Purchase price and its apportionment

  • Apportionment of the purchase price between various assets may affect the level of ad valorem duty to be paid.
    • Trading stock is not liable to duty.
    • Intellectual property may be liable to only nominal duty if created under Commonwealth legislation but not situated entirely in or predominantly associated with NSW.
    • The price to be apportioned for the plant and equipment on which the vendor has claimed depreciation is important; a vendor may be affected by price apportionment where the amount apportioned to the sale of depreciated equipment is greater or less than its last depreciated value.
    • Careful consideration must be given to the possible application of:
      • Income Tax Assessment Act 1997 (Cth) s 40.285 in relation to claimed depreciation.
      • Capital gains tax business concessions and the 50% CGT discount.
    • Careful consideration of standard contract clause 13 and the possible effects of GST legislation is required.
  • Generally parties acting at arm’s length are entitled to minimise the revenue impact on the transaction.
    • Confer with the vendor’s accountants before apportioning the price.


  • No definitive description of goodwill.
  • It is essentially the lifeblood of a business.
  • It is the drawcard that attracts customers to the business.
  • It is a type of intangible personal property: Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217.
  • It is usually sold with the business to which it is connected.
    • It probably cannot exist independently of the business.
    • It legally possible to sell goodwill or a portion of it independently from the business: West London Syndicate Ltd v IRC [1898] 2 QB 507.
    • This is particularly relevant where patronage depends on trademarks, trade names, packaging and other distinctive features of the business.
  • There is a distinction between ‘local’ and ‘personal’ goodwill.
    • Local goodwill is dependent on the physical location.
    • Personal goodwill dependents on the skills, personality and reputation of the proprietors and their ability to retain and attract customers.
    • Most professional practices will involve a significant component of personal goodwill.
  • Accounts will view the goodwill as the ‘premium value’ attributed to the business after deducting the value of its tangible assets.
    • Goodwill is the value of the business less the value of net tangible assets.
  • Goodwill is an essential component of the business from the purchaser’s perspective; it is essential to obtain and protect the goodwill.
    • Purchaser’s lawyer must ensure that the sale restricts the vendor’s ability to interfere with the goodwill.
    • At common law:
      • Unless the vendor has entered into a restraint of trade covenant it is not precluded from carrying on a similar business even in close proximity.
      • Vendors are allowed to advertise that they have set up or continued in business, but should not represent an ongoing connection with the business sold.
      • Vendors should not canvass the customers of the business and may be restrained by injunction.
      • Purchaser is entitled to use the vendor’s name in conducting the business, but must not represent that the vendor is the present owner.
    • Goodwill can be vested in the purchaser by
      • transferring to the purchaser all the assets and rights constituting goodwill, and
      • preventing the vendor by contract from interfering with or depreciating those rights.
  • The elements of goodwill will vary from business to business.
  • Factors which may be relevant and must be covered by the contract include:
    • The status of the name, whether registered or not, must be established.
    • The name, domain name, email addresses, key phone numbers and licences must be transferred.
    • Vendor can agree not to use a particular business name for a specified period.
    • Patents, trademarks, designs and other intellectual property should be included in the sale and transferred on completion.
    • Restraints of trade by the vendor or key personnel associated with the business must be created.
    • Tuition of the purchaser by the vendor before completion of the sale.
    • Introduction of the purchaser to customers and handing over customer lists on completion.
    • Maintaining goodwill between exchange and completion.
    • Transfer of contracts which allow continued use of the name (such as licences or franchises).
    • Securing employment of key employees after completion.

Plant, fittings and chattels

  • ‘Plant, fittings and chattels’ means all things, whether attached to the premises or moveables which are used in the operation of the business: Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 (Wilcox J).
  • The standard contract refers to them as ‘equipment’.
  • Plant may include common items such as copying and scanning machines, chairs, computers and specialised equipment.
  • Plant is distinguished from stock-in-trade; plant includes durable assets used in the conduct of a business, and stock-in-trade are consumables disposed of in the normal course of business.
  • Plant should not be confused with fixtures.

Vendor’s lawyer’s obligations

  • Obtain a full list of plant to be included in the sale from the vendor/vendor’s accountant.
    • Should be attached to the agreement.
    • Latest depreciation schedule is often attached to identify the plant and apportion the price being paid for the individual items.
  • Ascertain the nature of any encumbrances/security interests over the items of plant being sold.
    • Search the PPS Register to find registered security interests over any ‘personal property’ (defined broadly and includes plant).
  • Some items of plant may not be owned by the vendor, but are leased from a third party.
    • These must be paid out by the vendor or transferred to the purchaser on settlement.
      • They are usually paid out; transfers normally require consent of the lessor and appropriate documentation.
    • Leases are usually registered on the PPS Register, so searches should be made.

Purchaser’s lawyer’s obligations

  • Protect the purchaser when purchasing plant.
  • An inspection of the plant prior to exchange of contracts is recommended.
  • A special condition requiring that the plant is in working order and will be appropriately maintained could be included.
  • Ensure that the vendor has clear title to plant being sold.
  • Check whether plant is encumbered by lease agreements.
    • PPS Register can be searched for security interests.
    • National Personal Insolvency Index can be searched for bankrupts.
    • Bankruptcy proceedings can be searched for at the Federal Circuit Court and Federal Court.
    • Also look for causes, writs and orders.
  • A special condition can be added obliging the vendor to provide at settlement a formal release by each lender of any security interest.
  • Vendor is also required to provide documentation relating to the release of a perfected security interest: standard contract cl 35.4.1.
  • A special condition could be used to secure the vendor’s cooperation/assistance in transferring the business name.
    • Be sure the draft the condition with ‘and this clause shall not merge on completion’ so that it remains an ongoing obligation.


  • If fixtures are included in the sale, the purchaser’s lawyer must establish that the vendor has title and ability to pass title to the purchaser.
  • Fixtures form part of the land at law.
  • Fixtures generally belong to the lessor of the premises, not the business owner.
    • If they are the tenant’s fixtures they can be removed subject to any repairs if damage is caused.
  • Consider whether fixtures are:
    • Property of the landlord — does the landlord’s mortgagee have a land mortgage which is effective security over the fixtures?
    • Property of the tenant — if so, they may be personal property and there may be a security interest attached.
  • If a landlord has expressly agreed that tenant’s fixtures remain the property of the tenant despite being permanently affixed, the landlord is likely to have provided a similar acknowledgment to a lender who financed those fixtures.
    • A lender may have a registered security interest over the fixtures, so searches should be conducted.

Vendor selling freehold

  • Normal conveyancing procedures apply if the vendor is selling both business and freehold title.
    • No restriction on the right to sell fixtures.
    • Separate agreements for sale of land and sale of business will be needed.
      • It is usually necessary to insert special conditions in each referring to the other, and inter-dependent obligations.
  • A search of the PPS Register should be carried out to reveal security interests over any fixtures.
    • The interests will need to be discharged.
  • Any mortgage over the land will need to be discharged at settlement.

Leased premises

  • Where there’s a lease it is necessary to determine what items are the tenant’s fixtures, and if the vendor has power to sell them.
  • If the item has not been affixed to the premises it is a chattel which may be sold and title transferred by delivery.
  • If the item has been affixed to the premises for business purposes it likely belongs to the tenant, with some entitlement for removal.
  • The lease will indicate what rights exist between the landlord and tenant for removal of fixtures.

Leases and mortgages

  • The purchaser’s lawyer must exercise particular care where the freehold of leased business premises is subject to a mortgage.
  • It is importent to ensure the mortgagee of the freehold has consented to the lease or the transfer.


  • Stock-in-trade is current and circulating business assets (contrasted with plant, fittings and goodwill).
  • Assets that are not fixed are known as circulating assets.
  • Stock-in-trade includes goods available for sale and which generate the primary income of the business.
  • A key problem is determining what stock can be rejected by the purchaser.
    • Good quality stock-in-trade might be slow moving, out of date, or out of fashion.
    • It may not be commercially sensible for a purchaser to pay full value for items they cannot easily sell.
    • Stock cannot be adequately described as good, saleable or marketable.
    • A special condition must be drafted to cater for the circumstances of stock-in-trade.
  • If the purchaser is familiar with the industry it is prudent for them to inspect the stock-in-trade.
    • If they are not, this should be suggested by the lawyer.

Valuing stock-in-trade

  • Stock-in-trade is usually shown as an estimate which will be later valued to determine the actual price.
  • Payment for the stock will usually be required within seven days of completion.
  • Stocktake takes place on the day of completion to avoid disputes relating to removal.
  • Occasionally a sale proceeds where the value of stock-in-trade is included in the purchase price and accepted on its face.
    • It is useful to have a special condition to protect the purchaser from the vendor running down the stock-in-trade below a particular level.
  • Stock-in-trade can comprise a significant part of the overall business; an accurate valuation is important.
    • Value is normally determined by agreement between the parties.
    • If there is disagreement an independent valuer appointed by either party will determine the final price.
      • The valuation will be binding on both parties unless there has been an obvious error.
      • The valuer should have expertise in stock valuations within the industry.
  • Other items that need to be considered include raw materials, partly finished goods and work-in-progress.
    • A method of calculation should be agreed and specified in the agreement.
  • Vendors should be prevented by a suitable clause in the contract from
    • purchasing large amounts of stock prior to completion outside the normal course of business, and
    • selling stock at a discount between exchange of contracts and completion.

Completion date

  • The agreement will usually specify completion date and make it clear whether time is essential: see clause 19.
  • Circumstances may require time to be essential, and a specify date may be requested.
  • If completion is dependent on an external event it is hazardous to make time an essential condition.

New lease or transfer of an existing lease

  • Unless freehold is being purchased, security of tenure is vital.
  • This is particularly important where there is substantial goodwill associated with the location.
  • Ensure that the term of the lease is of sufficient duration and other terms are commercially acceptable.

Negotiation of a new lease

  • Existing leases may shortly expire or be unacceptable to the purchaser.
  • New leases will involve direct negotiations between purchaser and the lessor.
  • Negotiations might not be finalised before exchange of contracts.
    • In this case, ensure that the contract is made conditional on the landlord agreeing to grant a new lease on the required terms within a specific time after exchange.

Consideration of an existing lease

  • If an existing lease is acceptable, a transfer will be arranged.
  • Purchaser’s lawyer must obtain and check a copy of the lease and advise the purchaser on all important aspects.
    • Do so before exchange of the agreement.
    • Discuss all important, onerous and unusual conditions of the lease.
  • Contract should be made conditional on the landlord’s consent to the transfer of the lease: see standard contract cll 27, 29.
  • Attempt renegotiation of the terms if appropriate or necessary; landlords may be obliging where a request is reasonable and the purchaser a valuable tenant.
  • Search the title to ensure that:
    • The existing lease is registered.
    • There is not mortgage or caveat which may prevent the transfer of lease/grant of new lease.
      • Consent of any mortgagee would likely to be required for assignment.
  • If the lease is a sublease, also inspect the headlease for other conditions.
    • Consent of the head lessor will normally be required for a transfer of the sublease.

Liability of the vendor and purchaser on and after the transfer of lease

  • Liability of parties will be covered by the sale agreement and deed of assignment.
  • The contract should contain warranties by the vendor as follows:
    • The lease is valid and subsisting.
    • The vendor has observed the terms of the lease and will do so up until the date of completion.
    • The vendor is not in breach of the lease or that any breach has been waived or rectified.
    • There is no litigation (past or present) between the vendor and lessor concerning the lease.
    • The vendor has the right to use the premises for the purposes indicated in the lease.
    • There is no dispute concerning the use of the premises, rent review or right to exercise an option to renew.
    • These warranties cover the head lease (if applicable).
    • The vendor will obtain the consent of any mortgagee to an assignment of the lease.
  • The deed of assignment should deal with liability after the date of assignment.
    • The following matters are usually covered:
      • The parties will perform and indemnify the other in relation to the lease covenants up to (vendor) and after (purchaser) the date of completion.
      • The purchaser usually covenants with the lessor to perform the lease covenants after the date of completion.
  • Grant or transfer of a lease will usually require the consent of a mortgagee.
  • Leases registered over Torrens title land are not binding on the mortgagee without their written consent.
    • There are usually two consequences if a lease is granted without this consent:
      • The mortgagee may have a right to call up the debt.
      • The mortgagee may recover the possession of the premises.
  • Steps should be taken to immediately obtain consent to protect the purchaser.
  • Carefully read attached conditions and ensure consent covers the initial term and all further option terms.
  • Contract should be conditional on obtaining the mortgagee’s consent.

Deed of assignment on lease

  • Deed of assignment of a lease is imperative to bind all parties to the transfer and ensure all rights and obligations are fully understood.
  • Other matters which may be contained in the deed:
    • Adjustment of rent and outgoings.
    • Agreed amendments to the lease covenants.
    • Execution of a guarantee by any new guarantor of the income lessee.
  • It is usual for the vendor to pay the lessor’s and mortgagee’s legal costs on the assignment.
    • The purchaser will pay duty and registration fee on the transfer of lease.

Restrictions on vendor’s competition

  • Purchasers of goodwill will want to ensure that the full benefit is received.
  • The most common way is to restrain the vendor from competing with the business after sale.
  • Restraints need to be drafted carefully.
    • Must be reasonable in the interests of the vendor and purchaser.
    • Must be in the public interest.
    • Unnecessarily wide restraints may be unenforceable and even void.
  • Standard contract contains a restraint in clause 17 and Page 1.

Trade practices and public policy considerations

  • Restraints of Trade Act 1976 (NSW) s 4(1):
    • A restraint of trade is valid to the extent to which it is not against public policy.
    • Supreme Court may determine the validity of a restraint.
    • If the clause permits it may be ‘written down’ until it can be considered valid.
  • Restraint of trade can specify a range of restricted capacities, businesses, areas and periods.
    • The vendor or other restrained person will separately enter each restraint.
    • Restraints are severable; the court can determine that only certain parts of the restraint are unreasonable.
  • Unless a restraint of trade has the effect of substantial lessening of competition or is drawn in an unusually wide manner, it may be enforced despite the Competition and Consumer Act 2010 (Cth).

Key persons restrictions

  • A key person may be a principal or an employee of the business.
  • Key persons are usually not party to the sale agreement; restrictions affecting them must be contained in a separately executed document involving the persons.
  • A separate payment may be made to a key person as a consideration for giving the restraint.
    • These payments will usually be taxable as a capital gain resulting from an asset being created and disposed of at the time of execution.
  • If the key persons are employees and will be re-employed by the purchaser, an employment agreement should be executed preventing the employee using the confidential information of the employer.
    • It is not appropriate to restrain knowledge or experience acquired in the course of employment.
    • A valid restraint will relate to information confidential and vital to the employer, such as:
      • Secret formulae.
      • Special know-how.
      • Customer lists.
      • Price lists.
    • Warn purchasers that restraints might not be enforceable.

Vendors’ warranties and obligations

Managing the business as a going concern

  • Business sale agreements usually contain a provision to protect the goodwill of a business by requiring the vendor to run the business in the normal course up to the completion date.
  • A carefully drafted special condition will ensure that the vendor will not run down stock or hold any closing down sales.

Adjustment of employee expenses

  • Adjustments will be needed on settlement in relation to employees.
  • The continuity of employees’ services is deemed not to be affected.
  • Relevant items include annual leave, sick leave, long service leave, wages, superannuation and redundancy payments: see cll 18 and 34 of the standard contract.
  • The new employer must elect whether to recognise transferring employees’ previous accumulated entitlements.
  • Other adjustments (such as outstanding commission payable to employees) will be the subject of negotiation between the parties.

Holiday pay

  • Employees are entitled to four weeks paid annual leave if employed by a corporation or otherwise covered by the Fair Work Act: s 87.
  • Leave can be accumulated and the amount of holiday leave owing to the employee is calculated up until the date of settlement.
  • Generally an allowance is paid to the purchaser if the employee is continuing in the business because the purchaser is liable to pay a continuing employee all outstanding holiday pay.
  • All states other than Western Australia have referred their industrial relations powers to the Commonwealth so as to extent the Fair Work Act to all private sector employees in those states.
    • Each state has declared some employees will remain in the state system (essentially those integral to government administration).
    • Employees covered by the NSW system are entitled to four weeks’ leave on ordinary pay: Holidays Act 1944 (NSW).

Sick leave/personal leave

  • The Fair Work Act entitles full time employees to 10 days personal or carer’s leave each year.
  • The leave is cumulative.
  • A purchaser will require the vendor to adjust accumulated sick leave to the completion date.
  • Employees covered by the NSW system are entitled to one week per year, which can be accumulated for three years.

Long service leave

  • Employees who have been in continuous service in a business for at least five years are entitled to long service leave entitlements — essentially two months’ leave on ordinary pay after 10 years.
  • An employee has a pro rata entitlement to long service leave if their employment is terminated after five years continuous service either
    • by the employer by way of redundancy, or
    • by the employee as a result of a pressing domestic need.
  • On the sale of business, if the employees are being re-employed by the purchaser the vendor must make an adjustment in favour of the purchaser of an amount equal to the value of any long service leave entitlement of each of those employees.

Notices affecting the business

  • Business sale agreements should provide a mechanism to deal with a notice issued by a statutory authority prior to completion.
  • Clause 16 of the standard contract requires the vendor to comply with all work orders made on or before the contract date.
  • The purchaser should rely on its own searches and enquiries to establish if such notices have been issued.
  • If the purchaser has to comply with any work order (cl 16.2) where the compliance cost exceeds 10% of the purchase price, the purchaser has an option to rescind.
  • Clause 16 can be renegotiated, depending on the bargaining strength of the parties.
  • Ideally the contract should state that all notices issued prior to completion should be rectified by the vendor.
    • Alternatively the vendor could be made liable for notices issued as a result of their deliberate or negligent acts.

Lawful use of premises

  • Even if premises have been used to operate a business, this does not guarantee the use is legal.
  • The purchaser should require a warranty that the premises are lawfully used for the purposes of the business.
    • The vendor may respond that the purchaser should rely on its own enquiries.
  • It is good practice to obtain a planning certificate under Environmental Planning and Assessment Act 1979 (NSW) s 149 to ascertain the zoning of the land and ascertain that the business being conducted complies with regulations.
  • ‘Existing use’ rights may be enjoyed despite zoning regulations.

Clear and unencumbered title

  • Purchasers should receive clear title to all assets being sold unless there are other arrangements.
  • The purchaser should make searches and requisitions to ascertain that the title is clear and capable of being transferred in full and without encumbrance: see standard contract cll 10.1.2–10.1.3, 10.2.
  • Relevant searches of the PPS Register should be made.

Takings warranty

  • Vendors are reluctant to make warranties as to takings.
    • Takings during trial periods are difficult to predict and may not accurately reflect average takings, particularly with seasonal businesses.
    • Accurate prediction of future revenue is difficult to predict.
  • Purchasers should generally make their own investigations and obtain financial records for at least the last three years.
    • An accountant should assess the records and advise on the financial viability of the business.

Income tax considerations for the vendor

  • The lawyer acting for the vendor must work closely with the vendor’s accountant/financial adviser to ensure the transaction is structure to optimise the client’s financial and taxation position.

Depreciable property

  • A business owner will claim a tax deduction each year for depreciation of plant and equipment used in the business.
  • If the consideration received on the sale of the assets is less than their book value, the vendor is entitled to a tax deduction for the difference; if it is greater than the book value it is included in the vendor’s assessable income: Income Tax Assessment Act 1997 (Cth) sub div 40-D.
  • It is important that the price for these assets be stated in the agreement on an arm’s length basis.
    • If unstated or fictitious the tax office may assess the reasonable market value.
  • A vendor will wish for the agreement to clearly state that the price apportioned for the depreciable property is not greater than the current written down value.
    • A purchaser will be bound by the state value of depreciable items for its future depreciation.
  • Generally the price paid for the business is apportioned between goodwill and plant, with stock being a separately identified value at the time of purchase.
  • The value of goodwill and plant go into the cost base for capital gains tax.
  • Prima facie the apportionment should not affect the capital gain calculation.
  • The amount apportioned toward depreciable property or plant on the purchase price is important for other reasons.
  • The amount apportioned to plant will have depreciation charged against it as an expense and the written-down value will be significantly lower over time
  • The written down value of depreciable plant will be used as the cost base eventually, not its original apportioned value at the time of purchase.
    • Depreciation expense has generally been allowed as a tax deduction against assessable income throughout the life of the depreciable plant.
    • The amount of the depreciation expense is accumulated over time as an offsetting decrease in the value of the plant.
    • The written down value is the net result after deducting the total accumulated depreciation from the original value apportioned to plant.
    • The original apportionment to plant is reduced by the amount of the accumulated depreciation over time.
    • The apportionment between goodwill and plant at the time of purchase may affect the size of the capital gain after deducting the allowable cost base.
    • The lower written down value of depreciable plant will ‘inflate’ the taxable capital gain.
    • In principle this is still theoretically a tax neutral outcome as the taxpayer
      • has had the benefit of deductions on the depreciation expense each year,
      • has a lower income tax bill over time, and
      • cannot double dip by using the higher original plant cost as part of the cost base to calculate the taxable capital gain.
  • Apportionment to the value of plant must be done on a reasonable basis.
    • The NSW Office of State Revenue wants the proper value apportioned to plant for duty purposes.
    • The ATO wants proper value apportioned to plant because it is used to calculate deductible depreciation charges.
    • It is important that the purchaser does not notionally allocate as much as possible to goodwill to ensure a higher cost base later on for capital gains tax.

Intellectual property

  • If the vendor has purchased or developed an Australian patent, registered design or copyright and has written off their expenditure over the effective life of the intellectual property and claimed an income tax deduction, the price apportioned should not exceed the written off book value.

Trading stock

  • Trading stock is normally included in the sale of business assets, at the value determined on the date of completion.
  • Under the Income Tax Assessment Act 1997 (Cth) the vendor is deemed to have included in its assessable income an amount equal to the market value of the trading stock.
  • It will be in the vendor’s interests to minimise the price for the stock.


  • Work-in-progress of a tangible nature normally forms part of the trading stock and will be treated similarly.
  • If the business provides a service where work has been performed but not yet billed, the position is different:
    • If the value is taken into account in determining goodwill, then the price is of a capital nature.
      • The vendor will not be liable to pay tax on that component.
    • If the price is apportioned so an amount is paid for work-in-progress it will usually be assessable in the hands of the vendor as being a payment for work done up to the completion date.

Employee entitlements

  • Determine whether any payments made by a vendor to a purchaser on completion on account of employee entitlements are deductible in the hands of the vendor.
  • Where the payment is made to the employee it is deductible.
  • Where the payment is made to the purchaser for subsequent possible payment to an employee it may not be deductible.
  • This is especially relevant to long service leave where the employee may not be entitled to the payment at the date of completion, yet an allowance is made to the purchaser.

Capital gains tax considerations for the vendor

  • Assets acquired before 20 September 1984 are not normally subject to capital gains tax.
  • Since 21 September 1999 only 50% of a net capital gain is taxed in the hands of individuals and trusts.
    • This is the ‘CGT discount’: Income Tax Assessment Act s 115.5.
    • This applies only where the asset sold has been held for more than a year.
  • In some cases taxpayers who sell a business may also claim one or more of four ‘small business concessions’.
    • Main concession is the 50% active asset reduction.
      • The result is CGT payable on a maximum of 25% of the capital gain in a sale of business.
  • Under Tax Ruling 1999/16, if no separate amount is allocated in the contract to restraint of trade covenant, it will be treated as ancillary to the disposal of the goodwill of the business.
  • A lease is an asset for CGT purposes.
    • If the lease is transferred for a premium, the amount of the premium may be subject to CGT in the hands of the vendor.
  • The date the assets were acquired or disposed of under the contract is relevant to the revenue year in which the taxable capital gains arises, and the level of indexation for calculating the cost base (if applicable).
    • The relevant date is the date of contract, not the date of completion.
    • A vendor must consider this as they may need to pay capital gains tax before receiving the bulk of the purchase price.

Goods and services tax

  • Clause 13 of the standard contract deals with the application of GST to the transaction.
  • Basic GST concepts to be familiar with:
    • GST is payable if the sale is a taxable supply: GST Act s 9.5.
    • Supply is basically any form of supply whatsoever: s 9.10.
    • The taxable supply must - be for consideration, - be made in the course of furtherance of an enterprise that the supplier carries on, and - be connected with Australia, and the supplier must be registered or required to be registered.
    • A supply is not a taxable supply to the extent that it is GST-free or input taxed: s 9.5.
  • GST-free supply includes supply of a going concern (the business), education, and childcare.
  • Input taxed supply includes non-new residential premises (s 40.65), and residential rent.
  • For GST-free supply the supplier can usually claim a refund for any GST paid on acquisition made to enable to supply to be made.
  • No GST is payable for input taxed supply but the supplier cannot claim a refund for acquisitions made to enable the supply.

These notes are derived from John H Fisher and Jason C Sprague, ‘Business Dealings’ (Practice Paper No CC202, College of Law, November 2015) [202.295], [202.310]–[202.330], [202.340]–[202.375], [202.380]–[202.390].

Exchange of contracts

  • Agreements are signed and exchanged once parties are satisfied with the transaction.
  • Exchange normally takes place at the vendor’s lawyer’s offices.
  • At exchange the deposit cheque is handed over to the vendor’s lawyer or agent.
    • The deposit is held on trust until completion.
    • Authorisation to release the deposit is required from the purchaser on completion.
  • Upon exchange the contracts become legally binding.
    • Inform clients at the time instructions are received to proceed to exchange.


Vendor’s pre-settlement obligations

  • Perform all obligations contained in the agreement.
  • Typical obligations include:
    • Executing all necessary documents to allow full transfer of title.
    • Conducting the business normally and not adversely affecting the goodwill or value before settlement.
    • Discharging existing mortgages, security interests, charges and other encumbrances.
    • Obtaining consent to the transfer of lease.
    • Notifying staff of the sale and attending to staff terminations if required.
  • Failure to perform obligations may allow the purchaser to rescind.

Purchaser’s pre-settlement obligations

  • Purchaser will be bound by the terms after exchange.
  • The vendor may sue for breach of contract if the purchaser defaults in performance.
  • In serious cases the vendor may cancel the contract and keep the deposit as a forfeit.

Vendor’s representations and the Competition and Consumer Act

  • Purchaser can rely on the vendor’s contractual representations as to the business.
    • It is prudent for the vendor to include a clause specifically negating warranties and representations made during negotiations that are not repeated in the agreement.
  • Some statutory remedies cannot be excluded.
    • Remedies under Competition and Consumer Act 2010 (Cth) sch 2 — Australian Consumer Law s 18 for misleading statements or representations.


  • Tuition period is advisable for all purchasers, particularly those starting in an area of business for the first time.
  • On exchange of contracts parties should arrange to start tuition.
  • Tuition allows the purchaser to be introduced to clients and staff and understand the running of the business.
  • The contract normally sets the timing and duration.
  • The length of tuition is typically two weeks, but is negotiable.

Vendor’s assistance

  • Vendor’s assistance after settlement, and the length of assistance, will depend on the purchaser’s knowledge and the type of business.
  • Terms of assistance should be carefully negotiated.
    • Lengthy periods of assistance will require remuneration.
  • Vendors are not obliged to give assistance after sale of business.
    • Careful instructions should be obtained from the purchaser as to their needs.


  • Settlement should be performed with care.
  • The vendor usually nominates the place of settlement.
  • Ensure all relevant documents are signed, cheques drawn, and necessary parties will be present.

Takeover of existing agreements

  • All necessary consents to transfer existing agreements should be obtained before settlement.
  • It is good practice for the contract to provide that the vendor indemnifies the purchaser against claims relating to defaults by the vendor prior to completion.
    • The vendor will also want indemnification against defaults by the purchaser after completion.

Settlement agenda

  • Settlement agenda should be drawn up before settlement (but not strictly required).
  • Sets out what is to be handed over and avoids omissions/oversights that might delay or prevent settlement.
  • Settlement should not be completed if there are missing items unless satisfactory written undertakings are provided.
  • Extreme care must be taken when drafting or accepting such undertakings.

Rent adjustment

  • All income and outgoings must be adjusted between the parties to the date of settlement.
  • Adjustments should always be made unless special conditions say otherwise.
  • Rental adjustments are calculated when there is a lease being transferred.
    • If there is a new lease, all obligations under the existing lease must be met by the vendor.
  • If a lease is being transferred, the vendor should indemnify the purchaser against claims arising prior to completion.
  • The purchaser will indemnify the purchaser for any claims arising from a breach of the lease after settlement.
  • The deed of assignment of the lease normally covers these indemnifications.

Lease outgoing adjustments

  • There may be contributions by lessees which must be adjusted on settlement.
  • Outgoings are normally calculated on an area percentage basis and are set out in the schedule to the lease.
  • Landlord’s lawyer should confirm in writing the date to which rent and outgoings have been paid by the vendor before settlement.

Long service leave/holiday pay/wages

  • Clauses 31–34 of the 2015 standard contract apply to employees.
  • Generally it is the vendor’s responsibility to give written notice terminating non-transferring employees: cl 31.
  • Vendor is responsible to pay entitlements due to each terminating employee: cl 33.
  • If employees are transferring the purchaser must elect whether to recognise their service for the purpose of the Fair Work Act: cl 34.2.
    • If they elect to recognise the service, the vendor pays the entitlements set out in clause 33, except entitlements adjusted pursuant to clause 34.
      • Adjusted entitlements include an allowance to the purchaser for accrued annual leave and personal/carer’s leave.
    • If they elect not to recognise service (or do not make an election) the vendor must pay the entitlements set out in clause 33.
      • The vendor must allow the purchaser an amount equal to the nominal accrued long service entitlement in respect of transferring employees: cl 34.7.
      • The value of any long service leave entitlement is varied by using the adjustment table in the standard contract: cl 34.8.

Vendor’s finance

  • Vendor may have agreed to provide finance to the purchaser on terms contained in the sale agreement.
  • Terms may simply allow for the purchase price to be paid by instalments following completion (usually with interest).
  • Vendor will usually require security for any outstanding purchase price, usually:
    • A security interest over some or all assets of the business.
    • A personal guarantee by the directors of a purchasing company.
  • In these circumstances the purchaser must deliver to the vendor the duly executed security documents on completion.
    • If a security interest in personal property is granted the vendor’s lawyer must ensure that
      • the requirements of the Personal Property Securities Act are met, and
      • the security interest is promptly registered on the PPS Register.
    • Registration gains the benefit of priority and protection in the case of insolvency or bankruptcy of the purchaser.

Payments to outgoing mortgagees

  • If the business or its assets are not beneficially owned by the vendor or are the subject of security for loans to the vendor, ensure that title actually passes to the purchaser on settlement.
  • For assets under lease:
    • The balance outstanding must be paid by the vendor on completion.
    • The lessor must notify the PPS Register to release any registered security interest within the required timeframe.
      • An undertaking to do so must be provided to the purchaser.
  • For security interests over personal property:
    • Outstanding debt must be repaid.
    • Discharge of the security interest must be obtained on completion.
    • The secured party must notify the PPS Register within the required timeframe.
      • An undertaking to do so must be provided to the purchaser.
  • For security interests over company assets:
    • Outstanding balance must be paid to the secured party.
    • The secured party must notify the PPS Register within the required timeframe.
      • An undertaking to do so must be provided to the purchaser.


  • After settlement various tasks must be performed to ensure title legally vests in the purchaser.

Obligations for the vendor’s lawyer

  • Various tasks should be performed where appropriate.
  • Account to the vendor for the settlement proceeds less legal costs and disbursements.
  • If required: send the order to the business agent (obtained from purchaser on completion) for release of deposit to the vendor.
  • In the case of vendor finance: register the securities and advise as to loan instalments (due dates and amounts).
  • Cancel any insurance and licences held in the vendor’s name in connection with the business and request a refund of premiums.
  • Notify ASIC of changes affecting a vendor company by lodging appropriate forms within specified time limits.
  • If acting as agent for the vendor’s mortgagee or lender at settlement, account to the lender for funds paid to discharge secured debts and if appropriate advise the lender to promptly notify the PPS Register.

Obligations for the purchaser’s lawyer

  • Send settlement statement figures and final statement of account to purchasers.
  • Lodge the purchase contract and associated documents for stamping at the Office of State Revenue.
  • Lodge all statutory forms for transfer of licences with the various authorities.
  • Apply for a transfer of business name online on the ASIC National Business Names Register using the ‘consent to transfer number’ advised by the vendor at settlement.
  • Lodge the transfer of lease for registration at LPI and advise client in writing of the requirements relating to any option in the lease.
  • Send a copy of the stamped contract for sale to the purchasers to refer to their accountant to assist with preparation of business activity statements and tax returns.
  • Suggest to the purchasers that they make new wills to ensure continuity of the business.
  • If a new lease has been entered into a registered, send the stamped and registered new lease to the purchasers and provide advice as to options.
  • Advise the client to renew the registration of the business name when it expires.
  • Lodge any financing change statement provided at settlement confirming discharge of a registered security interest on the PPS Register.
    • Check the Register 10–14 days after the settlement to ensure registered security interests paid out at settlement have been removed.
  • Lodge all necessary forms with the ASIC within the required time if the purchaser is a company.

These notes are derived from Andrew Lang, ‘Commercial Leases’ (Practice Paper No P204, College of Law, July 2015) [P204.370]–[P204.375].

Transfer of lease

  • Lessees can transfer/assign a lease.
  • A transfer of lease without consent of the lessor may breach the lease.
  • A transfer of lease without consent of a mortgagee may breach the mortgage.
  • Leases are normally transferred as part of a sale of the lessee’s business, or their fixtures, fittings and chattels.
  • Transactions normally involve solicitors acting for:
    • The lessee (assignor).
    • The transferee (assignee).
    • The lessor.
    • Any mortgagee.
    • Possibly guarantors.
  • The assignee is entering into a new lease transaction on the terms of an existing leads.
  • If the lease is registered the lessee is the proprietor of the land under the Real Property Act and can transfer the lease under section 46.
  • If the lessor consents it will usually require a covenant by the transferee to perform and observe all the covenants and conditions of the lease.
    • Some convenants and conditions will automatically bind the assignee, but others might be argued to be personal to the original lessee.
  • When the transfer is lodged for registration there is no need to arrange the production of the lessor’s certificate of title or to lodge the lease with the transfer.
    • If a folio of the Register has been created for the leasehold interest, the lessee’s certificate of title must be lodged.

Assignor’s disclosure statement

  • If the assignment is in connection with the lease of a retail shop that will continue to be an ongoing business, the Retail Leases Act provides for the lessee to give an assignor’s disclosure statement to the proposed assignee and the lessor: Retail Leases Act s 41.
    • This is not obligatory — ‘may’ is used to be discretional.
  • There is a benefit — the assignor and guarantor will not be liable to pay the lessor any money payable by the assignee to the lessor: s 41A(1).
    • The benefit ceases if the assignor’s disclosure statement contains information that is materially false or misleading or incomplete: s 41A(2).
  • There is a prescribed form of disclosure statement: see Retail Leases Act sch 2A.

These notes are derived from John H Fisher and Jason C Sprague, ‘Business Dealings’ (Practice Paper No CC202, College of Law, November 2015) [202.185], [202.285]–[202.290].


  • The deposit is generally 10% of the purchase price (excluding the stock-in-trade figure).
  • If lower than 10%, the deposit should be high enough to show a commitment by the purchaser to purchase the business.
  • Deposits are normally paid in full on exchange of contracts; this can be varied.
    • It is usually paid by personal cheque to the vendor’s agent or lawyer.
    • Deposit is paid into a trust account, but may be invested to earn interest between exchange and completion.
    • If the deposit is invested, it should be clear where and how it is to be invested and how the interest should be shared.
  • It is best not to pay the deposit directly to the vendor in case the vendor defaults.

Purchaser’s pre-exchange searches

  • Results of pre-exchange searches are vital to adequately advise clients in deciding whether or not to proceed with the purchase.
  • Consider:
    • The nature of the business.
    • The assets to be sold.
    • The entity through which the vendor is operating.
    • The premises from which the business is conducted.
  • Vital pre-exchange searches are those which affect the decision to buy.
    • Matters relating to title and capacity can be carried out after exchange because the purchaser is protected by the general law and agreement.
    • It is best practice to do as many pre-exchange searches as possible.
  • The lawyer must use their professional judgment in determining which searches and enquiries should be made and at what stage.

Categories of searches

  • Searches of the vendor:
    • If a company — search ASIC records to make sure the negotiators have power to bind the company.
    • If a sole proprietor or partnership or if guarantees are being taken from directors of the vendor company — bankruptcy search against the people involved.
    • A causes, writs and orders search against the vendor.
  • Title searches:
    • Obtain a title search of the business premises to check if the lease is registered and for any conflicting lease, mortgage or caveat.
    • If there is a lease, obtain a certified copy from the vendor or LPI.
    • Check the business is approved under the local council’s zoning regulations.
      • Obtain a s 149 certificate to check the present zoning and permitted uses.
      • Obtain a copy of the development approval from the local council which approved the particular use by the business.
      • It is good practice to annex a copy of the development approval to the agreement for sale of business.
      • If an existing use right is relied upon by the vendor there may not be a formal development approval; advise the purchaser that a suitable warranty by the vendor that the use is permitted should be included in the contract.
  • Search the assets being sold:
    • Search the PPS Register for any registered security interests over the assets of the business being sold.
    • The vendor is obliged to do everything reasonable to enable the purchaser to ascertain the existence of security interests: 2015 standard contract cl 35.3.
    • Make searches of IP Australia if intellectual property is involved.
      • IP may also appear on in the PPS Register.
    • Identify domain names and email addresses, and determine who holds their registration.
    • Identify key phone numbers and licences that need to be transferred on sale.
    • If there is a business name to be sold, search the national business names register.
  • Other searches should be made as appropriate.

Inspection of books and records

  • Purchaser should inspect the books and financial records of a business.
  • The records will help ascertain the viability of the business and determine if the purchase price is justified.
  • Purchasers should have an accountant examine the books to ascertain its true financial position and viability.
    • Thorough analysis will often reveal debts which should be taken into consideration when negotiating the purchase price.
    • If there is a large cash component not reflected in the official records, this will make it difficult to obtain an accurate picture of the viability.
      • Insist on a vendor’s warranty as to actual takings in the agreement.