It is important to clarify what items are being included in the sale of a property. The Contract of Sale will normally specify what moveable items (“fittings” or “chattels”) will remain with the property and if any fixed items (“fixtures”) will be removed from the property prior to the settlement.
Unfortunately the situation commonly arises where a property settles only for the buyer to find that some features have been removed from the property which they thought would remain with the home or land.
Fixtures and Fittings – What’s the difference?
A question arising in all conveyancing transactions is whether an item in the property is a fixture (which stays with the property on sale, unless the contract says otherwise) or a fitting (which is removed from the property on sale unless the contract says it is an inclusion and therefore stays with the property).
The difference between a fixture and a chattel is if the item is affixed to the land to any great extent, it is a fixture. If it is a freestanding movable item and rests on its own weight, it is presumed to be a chattel. If the buyer wants any chattels to remain with the property, they should be noted in the Contract. Similarly, if the seller wanted to remove any fixtures, they need to agree to this with the buyer and list it in the Contract.
Typically, there is a two-step test used to determine whether an object is a fixture of not:
Consider the degree of fixation.
Consider the intention relating to the fixation.
When determining if an item is a fixture or chattel, the surrounding circumstances of item must be examined. Factors that may be considered include:-
Whether or not the item can be removed without causing substantial damage to the property to which it is attached.
Whether the intention was for it to remain in position permanently or for an indefinite or substantial period.
Whether it has been fixed with the intention that it shall remain in position only for some temporary purpose.
Whether or not it is common practice for the item to be removed.
Fixtures are considered part of the property. They consist of the house itself, other structures, and parts of the house attached to or built into the house which are considered a permanent part of it. Fixtures need not be listed on a contract for sale as they are considered part of the property. A fixture is usually an item:
which is an integral part of the structure, or
the removal of which would cause damage to the structure (e.g. the bath tub, basin and toilet).
Examples of fixtures include:
Plants buried in the earth
Hot water systems
A garden shed which has been cemented in
A basketball hoop attached to the garage wall
A water tank resting on its own weight
Built in bookshelves
Inclusions/fittings are items which are not permanently attached to, or part of, the structures on the property. Only those inclusions listed on the contract legally stay with the property. Inclusions are things which might easily be removed without causing damage to the structure.
Examples of fittings include:
Pot plants and hanging baskets
Some pool and spa equipment
TV wall mounting brackets
air conditioners (excl portable a/c)
screen or security doors
insect screens on windows
garage door openers
swimming pool filtration equipment
automatic pool cleaners
Some items fall into a ‘grey area’ and may be considered as either a fixture or an inclusion.
Examples of these include:
Curtain rods & curtains
TV wall mounting brackets
When you are purchasing a property the safest way to ensure all items you want to be left at the property is to include them in the Contract of Sale prior to signing.
A dispute between parties regarding the fixtures and chattels when they have not been clearly outlined in the Contract is a common occurrence. The potential legal costs which could be incurred would typically outweigh the actual value of the item.
The simplest way to avoid any disputes regarding fixtures and chattels is, when in doubt, list on the front page of the contract:
items that could be deemed an inclusion; and/or
items that are excluded from the sale.
It’s a good idea to remove or replace any items to be excluded from the sale (e.g. specific light fittings or curtains which match a bedspread), before the property is marketed for sale. This ensures that a prospective purchaser isn’t put off by thinking they will have to immediately buy those items (e.g. new curtains for the bedroom).
Contact us for prompt,reliable and friendly advice and assistance if you plan to buy or sell property.
The Personal Property Securities Register (PPSR) is an official government register (i.e. a public noticeboard) of registered security interests in personal property.
Personal property can include goods, vehicles, intellectual property (such as copyright, trademarks, patents and design rights), bank accounts, private commercial licences, assigned rights, shares, bonds and other financial property. It excludes land, buildings and fixtures attached to the land.
Established in 2021, the PPSR replaced many state-based registers, such as the ASIC Register of Company Charges, REVS and other vehicle registers, to form one national register.
The PPSR is managed by the Registrar of Personal Property Securities. It is within the Australian Financial Security Authority (AFSA), which is an executive agency under the Attorney General’s portfolio. The Registrar determines what interests can be registered on the PPSR, when the PPSR is not available, and investigates misuse of the PPSR.
Registering interests on the PPSR
Registering an interest on the PPSR lets the world at large know that the registered party claims to have a security interest over the particular property.
A security interest is usually created when a secured party (such as a lender) takes an interest in the personal property of a grantor (such as a borrower), as security for a loan or other obligation. Security interests only arise when there is agreement between the grantor and the secured party. The security interest permits the secured party to take the personal property (collateral) if the secured obligation is not met (e.g. if a loan is not repaid).
Other parties can search the PPSR to determine what security interests (if any) exist over particular items of personal property. It is prudent to search the PPSR when buying property or a business or when extending credit. If someone is facing bankruptcy/insolvency, typically one of the first tasks is to search the PPSR for any registered interests against their personal property. This allows the trustee-in-bankruptcy to determine the order of priority in dealing with secured creditors.
The benefits of PPSR registration in protecting business interests
Registering interests on the PPSR is optional. However, if you have a security interest, you should register that interest on the PPSR to protect your priority as a secured party. Otherwise you risk losing your goods, your interest in the goods, or being left out-of-pocket, if for example the grantor is unable to honour their secured obligation (e.g. to repay an outstanding debt).
The PPSR allows businesses to search the register and readily assess risk before offering finance or extending credit against any personal property, other than land.
If you are considering lending someone money or considering whether to buy a business, contact us to discuss registering property on the PPSR as security for the debt or undertaking a search of the PPSR.
Equal Shared Parental Responsibility vs Equal Time
The term “equal shared parental responsibility” is often used in family law matters involving children. It is often confused with the term “equal time”.
Equal shared parental responsibility is not the same as equal time
There is a presumption in the Family Law Act 1975 (Cth) (the Act) (subject to some exceptions) that it is in a child’s best interests for their parents to have equal shared parental responsibility. Parental responsibility is defined as all of the duties, powers, responsibilities and authority which parents legally have in relation to their children. Significantly, this presumption relates solely to how parents make decisions for their children: it does not mean there is a presumption that children spend equal time with their parents.
What does equal shared parental responsibility mean in practice? Parents who share parental responsibility equally must make a genuine effort to consult each other about decisions involving long-term issues concerning a child’s care, welfare and development. This includes decisions relating to a child’s health, education, cultural upbringing and living arrangements, particularly when a change to those arrangements would make it more difficult for a child to spend time with a parent.
The presumption of equal shared parental responsibility can be rebutted (meaning there are circumstances where it does not apply). For example, if:-
there are reasonable grounds to believe that a parent (or a person living with a parent) has perpetrated child abuse or family violence, or
it would otherwise not be in the child’s best interests
then the court will not apply the presumption of equal shared parental responsibility and will allocate parental responsibility between parents as it deems appropriate.
There is no presumption that children must spend equal time with each parent
The Act does not provide that a child must spend equal time with each parent after their parents separate.
Even where parents have equal shared parental responsibility, an order will only be made for equal time if the court finds that it is in the child’s best interests and reasonably practicable. If the court finds that equal time is not appropriate or practicable, it must instead consider making an order that the child spend “substantial or significant time” with both parents.
In considering how much time a child should spend with each parent, the child’s best interests are the court’s paramount consideration. When determining what arrangements are in the child’s best interest, the court will take into consideration several factors including the following:
The benefit to the child of having a meaningful relationship with both parents;
The need to protect the child from physical and psychological harm resulting from being subject to or exposed to abuse, neglect or family violence;
Any views expressed by the child;
The nature of the relationship of the child with each of the parents and their respective families; and
The practical difficulty and expense of a child spending time with and communicating with a parent.
After separation, when emotions are heightened, confusing the presumption of equal shared parental responsibility with a presumption of equal time is understandable. However, the two concepts are not the same and have different legal meanings. Contact us if you are considering separating or have separated and have questions about parenting arrangements.
What’s the difference between Probate and Letters of Administration?
Probate and Letters of Administration are legal terms used in Wills and Estates Law to describe two situations that can occur with a deceased estate.
The executor named in the Will of the deceased applies to the Supreme Court of NSW (the Court) for Probate.
Once the Court has made a Grant of Probate, the executor can administer the estate. Administration of the estate includes gathering in the assets and paying the debts of the estate then distributing the remaining assets to the beneficiaries named in the Will. The executor also deals with any challenges to the Will, such as family provision claims or claims that the deceased’s Will is not valid.
Letters of Administration
Letters of Administration is an application made to the Court where:
the Will cannot be located; or
there is a Will but no executor named in the Will; or
the named executor has died or is unable to act.
When the Court grants Letters of Administration, the administrator it appoints deals with the estate in the same way as an executor (i.e. paying estate debts and administering the estate in accordance with either:
the Will, or
if there is no Will – the Laws of Intestacy.
The difference is therefore:-
Probate – the deceased left a valid Will with an executor who is able to act; or
Letters of Administration – the deceased left a valid Will with no executor, or an executor unable to act, or did not leave a Will.
The Court requires more information to determine an application for a grant of a Letter of Administration so it can take longer and be more expensive than an application for a grant of Probate.
Naming multiple Executors and/or a substitute Executor avoids the additional time and expense of applying for a grant of Letters of Administration.
Contact us now for expert legal advice on Wills and Estates Law.
The Supreme Court of NSW (The Court) issues a Letter of Administration to legally appoint an applicant as the administrator of a deceased estate. This type of grant is issued where the appointed executor is unavailable to take responsibility for the estate or when the deceased died partially or wholly intestate (i.e. having no will).
What is a Letter of Administration?
The Court can issue Letters of Administration for the estates of people who resided in or owned property in New South Wales. A Letter of Administration is most commonly granted when someone dies intestate. The grant authorises the applicant to assume responsibility for the assets and liabilities of the deceased estate. Asset holders such as government departments and banks will generally release assets to the administrator only after sighting a Letter of Administration.
Where the deceased has a valid will appointing an executor, a Letter of Administration is generally not required. However, when the nominated executors are unable or unwilling to act in the role, an application for a Letter of Administration with the Will Annexed must be made to appoint an administrator.
Who is eligible to apply for a Letter of Administration?
The Probate and Administration Act 1898 lists the categories people eligible to apply. The Court will issue a Letter of Administration to a competent adult who is a potential beneficiary or creditor of the estate (usually a close relative of the deceased such as a spouse or child).
A person living outside Australia cannot apply for a Letter of Administration. If the only eligible beneficiary lives overseas, they must appoint a solicitor to apply for a Letter of Administration in their stead.
If there are several eligible parties, they can either apply jointly, or one beneficiary can apply with the endorsement (by written affidavit) of any other beneficiaries. If the parties cannot agree who should apply for the grant, the Court will assess the merits of the competing claims. In this scenario, the Court generally makes the grant to the deceased’s closest living relative (e.g. their spouse or de facto partner or an adult child).
If assessment of the competing claims is likely to delay administration of the estate, the Court can appoint a special administrator temporarily pending the choice of an actual administrator. A special administrator is not a replacement for an administrator and has limited powers over the estate.
If no relative is willing to apply, the court can appoint the Trustee & Guardian, or accept an application from another interested party (e.g. an estate creditor).
What are an Administrator’s Duties?
The administrator is authorised to manage and protect the deceased estate according to either:
the deceased’s will; or
if the deceased died intestate, according to the laws of intestacy in NSW.
The administrator is responsible for collecting together and valuing the estate’s assets and discharging the estate’s debts. They lodge a final tax return for the deceased and establishes any discretionary trusts according to the will. They are responsible for protecting the estate (e.g. defending it from Court challenges).
How long will an application take to process?
An application may be filed with the Court up to six months after the deceased’s death. A late application may be accepted if:
the Court determines that there is a reasonable excuse for the delay, and
the parties agree to the appointment of the administrator.
The administration of the estate is usually completed within a year of the date of death. However, complexities in the administration, or unreasonable delay by the administrator, may cause delays. If the Court considers that the delay is unreasonable, it may replace the administrator.
An application for a Letter of Administration may take up to 4 months to process depending on how many cases the Court has when the application is filed.
Contact us for advice and assistance in applying for a Letter of Administration.
Death does not extinguish a deceased person’s debts. Creditors to whom the deceased is in debt can still pursue repayment from the Estate. The order in which the deceased’s assets can be used to pay debts is governed by rules. And other limitations exclude the use of certain asset types to repay debt.
Executor’s obligation to pay deceased’s debts
One responsibility of an Executor of a deceased Estate is to pay the deceased’s debts from the Estate assets before distributing the Estate assets to the beneficiaries named in the deceased’s Will, if there are sufficient assets do so. The Probate and Administration Act (NSW) (the Act) authorises an Executor to collect the deceased’s assets and use them to satisfy the Estate’s debts. Failure to fulfil that responsibility can expose the Executor to a personal liability to any unpaid creditors.
If there are insufficient assets in the Estate to meet all the Estate’s debts, the Estate is classed as insolvent. The Executor may have to advise creditors that the debts cannot be repaid and ask for the debts to be written off. However, creditors are not obliged to write off debts, and if they amount to $10,000 or more, the creditor may ask the Court to appoint a bankruptcy trustee to the Estate. The Executor is also entitled to ask the Court to appoint a bankruptcy trustee if they believe the Estate assets are insufficient to pay all the deceased’s debts.
Secured vs unsecured debts
A secured debt is fixed to one or more of the deceased’s assets (e.g. a home loan secured against the deceased’s home by a mortgage). An unsecured debt is not attached to any asset (e.g. a credit card debt). The Executor will generally pay secured debts before unsecured debts, as if a secured debt is not paid, the mortgagee will exercise their right to sell the property to recover the debt.
If a beneficiary is bequeathed an asset that secures a debt, they are receiving only the equity the deceased held in that asset. Provided there is no contrary intention expressed in the Will that the debt is to be paid from the deceased’s other assets, If the beneficiary wants to retain the asset they must take on the debt attached to the asset. They must either repay or refinance the secured debt before the asset will be transferred to them.
An Executor must use the deceased’s assets in accordance with the order prescribed by the Act when paying unsecured debts. All unsecured debts have equal standing so no unsecured debt can be paid in priority to any other unsecured debt.
Are any debts passed on to beneficiaries?
Beneficiaries are only held responsible for paying off the deceased’s debts if:
the debt was jointly incurred by the deceased and the beneficiary (i.e. the deceased and the beneficiary were co-borrowers and were both liable for the whole of the debt); or
the beneficiary personally guaranteed the deceased’s unsecured debt; or
the debt was secured against an asset owned by the beneficiary.
If the deceased’s assets are insufficient to pay out the deceased’s debts, beneficiaries will not be held liable for satisfying the debts of a deceased, including a HECS-HELP debt, credit card debts, taxes or home loans, unless one of the above situations applies.
Order in which assets are used to pay debts?
When paying the deceased’s debts the Executor must pay them in the following priority:
Secured debts from the assets securing them; then
Funeral expenses; then
Testamentary and administration expenses (e.g. legal costs in obtaining Probate); then
Where the Estate is solvent, the Act sets out the order in which assets should be applied to pay debts. If the Will contains specific gifts of money amounts, the Executor must first set that money aside from the Estate assets that have not specifically left to a beneficiary. The order of application of assets to pay debts is:
Assets undisposed of by the Will (e.g. lapsed or void gifts); then
Assets not specifically disposed of by the Will but included (by a specific or general description) in a residuary gift; then
Assets specifically appropriated for the payment of debts; then
Assets charged with, or disposed of by the Will (by a specific or general description) subject to a charge for the payment of debts; then
The fund, if any, retained to meet monetary gifts; then
Assets specifically disposed of by the Will, proportionably amongst them according to their value.
What assets can’t be used to discharge debts?
Assets that were owned by the deceased as joint tenant with another person (e.g. bank accounts, shares, real estate) will not form part of their Estate. They pass by way of survivorship to the surviving joint tenant/s.
If the deceased has Life Insurance or superannuation and has nominated a beneficiary to receive those assets on their death, they will be paid directly to the nominated beneficiary.
The above assets do not form part of the Estate and are not available to the Executor to pay the deceased’s debts.
If the deceased did not nominate anyone as the beneficiary of their life insurance or superannuation benefits, the Life Insurer or Superannuation Fund may pay the benefits to the Estate. In that event, the Executor can use the benefits to pay for the deceased’s funeral and the Estate’s testamentary and administration expenses. They cannot use them to pay any of the deceased’s other debts unless a provision of the Will specifically permits the benefits to be used for this purpose.
Contact us for assistance obtaining a grant of probate or administering a deceased estate.
Splitting assets held in a self-managed superannuation fund (SMSF) following the breakdown of a marriage or relationship and subsequent split of assets can be complex.
This article briefly summarises some key factors to consider when splitting a SMSF.
What is a Self-Managed Superannuation Fund (SMSF)?
A SMSF is a private superannuation trust fund that you manage and oversee including choosing investments and ensuring that the fund complies with superannuation and tax laws. A SMSF is established under a trust structure and its sole purpose is to provide its members with retirement benefits.
SMSFs commonly have diversified assets classes including shares, investment income, real property, and cash, to avoid the fund being exposed to the vagaries of a single asset class.
Considerations for splitting SMSFs
When considering a SMSF split in a family law separation, essential matters to keep in mind include:
Copies of the following documents will help you to better understand the SMSF:
the most recent up to date Trust Deed.
A Register of Complying Superannuation Funds (RoCS) Search (via the Australian Tax Office [ATO] website) – to ascertain whether the SMSF is registered as a complying fund.
The three most recent years financial statements, to:
augment your understanding of the nature of the SMSF’s assets and its financial position; and
show whether the SMSG has been audited and any areas of concern as to compliance.
It is vital to determine the value of the superannuation interests. Most SMSFs will have investments such as real property, cash or listed shares which are relatively straightforward to value. However, some SMSFs have assets such as collectables, antiques or units, valuation of which is more difficult.
A SMSF’s financial statements often document the values of its assets. However, the financial accounts are not always up to date, and their values are not always reliable. Reasons for this include:
The financial statements are usually prepared annually, and the values ascribed to the assets as at that date may be out of date;
Interest on dividends could have accumulated and taxation and other expenses could have been incurred since the financial statements were prepared;
The financial accounts may contain reserves, where some of the SMSF’s assets have not yet been allocated to its members;
There may be a dispute about the value of assets. For example, real estate values may not be market values. In that case, an expert valuer should value the real estate.
3. Tax Implications
There may be tax implications dependent on the nature of the assets to be split.
Non-complying funds potentially have tax liabilities and ATO penalties.
An asset may have latent Capital Gain Tax (CGT). For example, if the SMSF is forced to sell investments (i.e. shares or real property) to implement a cash transfer, then the SMSF will be subjected to CGT on any capital gains made. In certain situations, CGT rollover reliefs provisions may be available to reduce or eliminate CGT where assets are transferred between SMSFs in specie (meaning a transfer of assets in its actual form without selling the underlying asset).
Specialised tax advice will assist you to devise a strategy based on the taxation consequences of rolling out your interest into another SMSF or an industry regulated fund.
4. Membership and restructure of the SMSF
As a member of an SMSF, you are also a trustee with ongoing responsibilities. You must decide if you wish to remain in the SMSF, commence a new SMSF or open a different type of fund such as an accumulated regulated fund. The decision as to what is appropriate will vary from case to case.
Splitting a SMSF will typically require the fund to be restructured to comply with superannuation regulations and laws. Examples of restructures include:
a person cannot be a single trustee and member, so a corporate trustee may have to be established in place of members being trustees; or
a member spouse may resign as a director of a corporate trustee.
Types of Spitting Orders
A SMSF interest may be split in a financial agreement or by a court order.
There are generally two methods that a SMSF interest can be split – as a specific dollar amount (base amount) or as a percentage of the balance of the superannuation entitlements. A base amount payment is the most common method used, as it guarantees the amount that a non-member spouse will receive from the split, while a percentage split may be higher or lower than the estimated value of the interest, depending on the interest’s value when the fund’s Trustee gives effect to the Court Order. The circumstances of your matter and the current economic circumstances dictate which type of split is appropriate.
Once the superannuation interest becomes subject to a payment split, the non-member spouse generally has one of the following options in respect of the interest:
create a new interest in the same fund –– this option however may be precluded under the SMSF Trust Deed and is not recommended if the separation is acrimonious;
transfer or rollover the interests into another complying fund (including a new SMSF or an industry regulated superannuation fund). If the non- member spouse does not wish to set up another SMSF and there is insufficient cash to be rolled over into an accumulation fund, SMSF assets may have to be sold; or
if the non-member spouse has met conditions of release under superannuation laws – receive the amount as a lump-sum payment.
Once the non-member spouse has selected how the superannuation interest should be split, the SMSF trustee must generally give effect to that choice.
Superannuation splitting rules are complex, often requiring the advice of accountants, financial advisers and family lawyers working collaboratively to determine an optimal approach towards splitting superannuation.
Contact us today for expert advice on your SMSF and family law property settlement.
Due diligence is the process where a buyer of a business reviews and verifies the information the seller supplies about the business, usually before entering into a business sales contract. This could include examining the business’ records and inspecting its physical assets. Due diligence can uncover problems that can be costly or cause the business to fail. Examples include that equipment is not owned by the seller, and that important agreements cannot be transferred.. The due diligence process should include investigating:
who owns important assets (i.e. trade marks, software, licences);
the business’ ability to make a profit;
the condition of the equipment (i.e. computers, ovens, vehicles); and
whether there are any nearby businesses you will have to compete with.
This article provides an overview of the due diligence process required, and how to complete it.
Starting due diligence
When buying a business, you could undertake the due diligence work yourself. For more complex businesses, it is worth considering having a due diligence team with expertise in areas such as law and accounting to assist you. Your due diligence team should include professionals who can support you in assessing the commercial, financial and legal risks associated with your business purchase, including:
an accountant or financial advisor; and
your business advisor or broker.
A due diligence team will assist you by:
reviewing the business’ records;
giving you professional advice on the business’ viability and suitability; and
making you aware of any existing risks and liabilities.
The due diligence timeframe
Due diligence usually takes place before entering into the sale contract. Alternatively, a due diligence period can be included in the sale contract. The contract includes a clause that allows you to terminate the agreement if your due diligence uncovers something that could make it difficult for the business to succeed.
The due diligence process
1. Request documentation to review
You, or a member of your due diligence team (such as your lawyer or accountant), sends the seller a list of the types of business records you would like to inspect (e.g. product sale history, financial statements, equipment hire contracts, etc.). You can also ask the seller for permission to physically inspect key equipment and the premises.
2. Documentation is provided
The seller can provide you with that information in person, via email, or through a member of their own due diligence team (e.g. their lawyer). Or they can upload the information to a secure document sharing platform (like Dropbox or Google Drive) for you to access and download. This type of platform (often called a data room) can be accessed by the seller’s and the buyer’s due diligence teams.
3. Requests For Information (RFI) process
You can ask for additional documents from the seller and ask them questions about the information they provided (an ‘RFI’ [Requests For Information]) via a spreadsheet or Word document.
4. RFI responses provided
The seller submits responses to your questions. During this process, your due diligence team assesses and reports on:
any key concerns they have about the business; and
potential solutions or options you can raise with the seller to reduce risks associated with the purchase.
5. Due diligence reports prepared and assessed
Your due diligence team prepares reports to assist your decision whether to purchase the business.
6. Proceeding with the Purchase
You may decide that:
that the business’s value is such that you are willing to pay the asking price; or
you want to try to negotiate a reduced price based on your due diligence reports; or
the business is too risky and you will not proceed with the purchase.
When should I undertake due diligence?
The due diligence review process generally takes place before you enter into a formal sale of business contract. Otherwise, you risk paying for a business with broken or damaged equipment, expired or unsuitable contracts, unexpected financial issues, or premises with health and safety issues that you will have to rectify at great expense.
However, it is also possible to have a due diligence period clause included in the contract. This allows you to sign the contract and conduct your due diligence within a period of time (e.g. 10 business days) after signing. If you uncover something about the business you are unhappy with during this period, you can terminate the contract and walk away from the sale.
How long does due diligence take?
This depends on:
your timing for the sale;
how quickly the seller provides you with the requested information;
how long your due diligence team needs to prepare the relevant reports and discuss them with you;
the business’ complexity; and
how many records you want to review.
Consequently, the due diligence process can take anywhere from a week or two to several months. You should be flexible in your timing for the business purchase.
Confidentiality and non-compete
If the seller refuses to give you certain documents before you sign the contract, they may be worried about what you will do with the information. For example, they may be concerned that you will disclose it to third parties without their approval or use it to compete with their business. In this situation, you should ask the seller why they have not provided the requested documents.
If they are concerned about confidentiality, offer to first sign a non-disclosure or confidentiality agreement. If the sale of business contract includes a due diligence period, the contract should include confidentiality obligations to protect the seller’s information.
If the seller continues to refuse to provide you with certain documents, take it as a red flag. There may be issues with the business or documentation they do not want you to learn about.
What do I review?
You should investigate all business records, issues and assets that will help you decide whether proceed with the purchase. This will help:
uncover any issues you should be concerned about;
you to understand how the business has been operating recently; and
inform your decision on how to proceed with the purchase.
Including accumulated entitlements to annual leave or other employee benefits
To check how the products or services of the business perform (i.e. which product line is most valuable)
Profit and loss statement
This shows how much money or profit the business is making
To understand the revenue of the business and the tax required to be paid each year (on average)
The valuation of the business
This is how much the business is worth
Are there other similar businesses competing with yours?
Is it a declining industry?
What experience do you have in the industry?
Is it a busy area or are there any impending developments?
The condition of key assets
For example, computers, ovens, vehicles etc.
The contracts in place
Leases for the premises, supply contracts etc.
Whether they have valid contracts and are employed under the appropriate awards?
Corporate information about the seller
If they are a company, confirming who the directors are.
Who owns trade marks, software etc.
Compliance with laws and regulations
Confirm if appropriate licences are in place, such as liquor licences, food licences etc.
You should review some common legal documents. For example, documentation that confirms ownership of particular assets, and the seller’s contracts with third parties.
Contracts common to most businesses that you should review during due diligence include:
As these documents may be transferred to you if you purchase the business, it is important that their terms are agreeable to you. You should review the following clauses in these agreements.
liability exclusions and caps (i.e. if the seller does not deliver the goods/services on time, is there a maximum amount to which the clients can make a claim?);
payment terms (i.e. how does the seller get paid by clients and when?); and
handling of personal information (i.e. is the seller handling data in compliance with the Australian privacy laws (if relevant)?). assignment clauses (i.e. can the seller transfer the contract to you without the client’s consent?).
liability exclusions and caps (i.e. is there a maximum amount to which the seller can make a claim against the supplier if they do not deliver goods on time?);
payment terms (i.e. what kind of payment arrangement does the seller have with the supplier?);
assignment clauses (i.e. can the seller transfer the contract to you without the supplier’s consent?); and
services (i.e. what kind of services are to be provided and are these suitable?).
rent (amount and increases);
outgoings, or additional expenses associated with the premises (i.e. council rates, garbage collection costs, maintenance and repair costs, etc);
term of the Lease (i.e. can you renew your lease for another term at the end of the initial period? How long is left on the term?);
maintaining the premises (including whether there is a ‘make good obligation’ to leave the premises in the same condition as when you entered the lease);
permitted use (i.e. does the lease allow you to operate the type of business you want to operate);
guarantors (i.e. a requirement to personally guarantee the tenant’s obligations, such as the obligation to pay rent and maintain the premises in good repair); and
other licences required to operate the business (i.e. food premises licence, liquor licence).
type of employment (i.e. are the employees classed as permanent or casual?);
award (i.e. and ensuring that they are covered by the correct award);
entitlements (i.e. to annual leave, long service leave, personal leave and parental leave);
role and responsibilities (i.e. what is their job description?);
key employees (i.e are there any employees who are key for the continued operation of the business? Does the sale contract contain a condition that these employees must sign a new employment agreement with you prior to the completion of the sale?); and
salary (i.e. how much are they being paid?).
Many businesses have, by incorrectly applying award wages, underpaid their employees. This is not a problem you want to risk inheriting, especially if you plan to hire those employees to work in the business.
If the business has assets that you want to ensure the seller fully owns (so they can be transferred or assigned to you as part of the purchase), you should consider the following:
Key Business Assets
What to Consider
Trade marks, designs and patents
Are they registered and owned by the seller? A search of IP Australia will confirm ownership.
Is there a registered business name? A search of ASIC Connect will confirm ownership.
Does the seller have social media accounts, email addresses, websites that need to be transferred? Who owns these accounts?
Who owns marketing material?
Who owns the source code?
Equipment lease or hire to purchase
If a security interest in respect of equipment is listed on the PPSR, someone else may have a claim to that equipment if their arrangement with the seller is not fulfilled. The sale contract should state that the seller is transferring all equipment to you free of any other interests and that they own all equipment outright.
Title to equipment and physical assets
Does the seller have documents of title or payment receipts/invoices showing their purchase of key items?
For intellectual property registrations, the sale contract can:
state that the seller must pay all outstanding fees; and
contain an indemnity for outstanding fees. This allows you to recover the cost of these fees from the seller if you must pay them to maintain the relevant registrations.
How to reduce your risk
Buying a business involves risks. Whilst performing due diligence will help you make an informed decision about the business, it will not eliminate all risks. You can reduce the potential impact of these risks by asking the seller for at least some of the following:
1. Purchase Price Reduction
If you have uncovered issues with the business which may adversely affect it’s value (e.g. if the business’ financial statements reveal that it suffered a bigger loss than you initially thought), consider asking the seller to reduce the purchase price.
You can ask the seller to provide warranties for the business in the contract. Warranties are promises that the seller makes to you about certain facts relating to the business (e.g. there are no unpaid superannuation entitlements owed to any employees). If you purchase the business and then learn that this statement was untrue, then you will have a breach of contract claim against the seller and can claim compensation as a result (provided you can show that you suffered loss as a result of the seller’s breach).
These are contractual obligations that require the seller to reimburse you for a specific liability. Indemnities provide greater protection than warranties. An indemnity requires you to show that you have suffered a loss connected to the indemnity but does not require you to prove that a breach by the seller caused the loss. For example, the seller is involved in a dispute with one of their manufacturers. To protect yourself against potential loss from that dispute, you can request inclusion of an indemnity in the contract requiring the seller to reimburse you for any loss you may suffer in connection with that dispute.
Due diligence checklist
Assemble due diligence team;
Request documentation and information from the seller, including:
Financial documents; and
Request additional information as needed;
Prepare due diligence reports;
Assess information gathered and due diligence reports;
Decide whether to purchase the business;
Take steps to reduce your risk;
Negotiate purchase price;
Request warranties; and
How can we help?
We can assist you with the due diligence process so you are protected in your purchase of the business. If you have any questions, contact us on 0451118644 or 02 47593742.
This article outlines considerations during the stages of selling your business, from before the exchange of contracts to settlement, and any tax implications.
Selling Your Business
When selling your business, you will first need to decide if you are selling the company itself (and therefore, selling the shares in the company) or just selling the business and its assets. You will need to have the business valued by a business valuer. You must then decide on the price you are willing to sell the business for. If a buyer has not already approached you directly, you will then need to advertise the sale, either personally or through a broker.
A lawyer can only provide you with legal advice, not financial advice. If you require financial advice (e.g. how much you should value the business, whether it is the right time to sell the business), you should speak with a financial advisor.
Transfer of Ownership
If the ownership of a business is not effectively transferred to the purchasing party, this may later cause you legal difficulties. To make sure that you are transferring all ownership of the rights, responsibilities, liabilities and assets of your businesses, you must understand what these items are and that they are included in the Contract for the Sale and Purchase of Business 2021 (NSW).
Assets that you can transfer during a sale of business include:
goodwill and stock-in-trade;
contracts with suppliers;
licenses and permits that purchaser may need to conduct the business;
leasehold interests, if you are currently leasing a business premises which the purchaser may wish to use after the sale;
your intellectual property rights in the business name or logo; and
Before Exchanging Contracts
Usually, a standard contract for the sale of business is used for the sale of a business. This contract contains extensive clauses that cover all legal requirements under Australian law. However, as all businesses are different, you may need to add clauses or special conditions to your contract. Special conditions can be added to the end of the contract. These must be drafted properly to avoid any uncertainty or confusion. The purchaser will use this time to conduct preliminary searches, reviews and inspections of the business documents and premises to familiarise themselves with all the aspects of the purchase.
Exchange of Contracts
Following completion of all negotiations on the contract terms of the sale, you and the purchaser each sign an identical copy of the contract and exchange them. It is your responsibility to arrange for a time and place for exchange of contracts. After exchange, the contract is legally binding. The purchaser will usually give you a cheque for the deposit during exchange.
During this stage, you are required to fulfil the obligations outlined in the contract. There are standard obligations and there may be additional obligations in the special conditions that you must fulfil. Some standard obligations are:
completing all documents required to transfer ownership to the purchaser;
getting the landlord’s consent to transfer the lease to the purchaser;
discharging securities, mortgages or any other encumbrances held over your business; and
maintaining your company’s goodwill;
At settlement, you may need to exchange certain documents. You will have to provide the purchaser with documents passing ownership rights to them. The purchaser may give you bank cheques or deeds in return. For example, in the case of a share sale, you may give the purchasers:
a director resignation document;
an appointment of directors document;
approvals for share transfers;
share certificates; and
items listed in the second schedule.
In exchange, the purchasers may give you a:
bank cheque for the sale price of your business or the shares;
signed deed of guarantee by the purchasers; and
deed of guarantee if there is a lessor.
After settlement, the purchaser has to undertake tasks to ensure that they have full ownership of the business. Your lawyer has tasks to complete to ensure the cessation of your responsibility for assets transferred to the purchaser. These may include:
cancelling any licenses and insurance in your name relating to the business;
handing over any stock or inventory;
sending an order to the agent that the purchaser’s deposit is to be transferred to you;
giving the new owner a list of passwords to accounts;
ensuring you pay out staff leave entitlements for any staff the purchaser has not taken on;
finding out from your lawyer the settlement proceeds, and your lawyer’s costs;
transferring assets into the new owner’s name; and
passing on the business client list.
Taxes – Including CGT, GST and Other Costs
A major concern when selling a business is the tax implications the transaction may attract. You should consider any taxes that may apply, which may reduce the money you end up with after the sale. If you are registered for Goods and Services Tax (GST), you may be liable to pay GST. However, if you sell your business as a going concern, the sale may not attract GST. If your business is being sold as a going concern:
the purchaser is registered for GST; and
you will sell the business in return for payment; and
you are supplying everything to the purchaser so they can continue operating the business;
you have agreed with the purchaser that the sale is of a going concern; and
your intention is to carry on the business until you sell it to the purchaser.
If you sell your business and make a profit, the profit may be subject to Capital Gains Tax. This tax applies to any:
intangible assets (e.g. intellectual property);
business assets; and
There are tax concessions that may be available to you as a small business owner. The sale of your business may also be subject to transfer duty, which the purchaser must pay.
While selling a business can be very exciting, the process can also be rather tricky. It is a good idea to get legal assistance during this time so you are aware of all your risks, obligations and duties as the seller.
If you are considering buying a small business, there is a legal process after you shake hands which may take weeks or months to finalise.
Finance is often one of the biggest impediments to a buying a business so it’s prudent to apply for your business loan as soon as possible. Once you have located a business you want to buy, you should contact a lawyer and other professionals such as financial advisors, valuers and accountants, who can help you decide if the purchase would be a good investment.
The seller usually instructs their solicitor to draft the contract for sale which is forwarded to the buyer’s solicitor. Your solicitor and/or accountant can advise you in regards to:
The key elements being purchased, and whether it is necessary to purchase the business. There may be taxation or other financial reasons to only purchase the equipment used in the business, or have a licence granted to operate the business, or purchase the company that operates the business, rather than purchasing the whole business. All of these options will result in you operating a business but each is accompanied by different legal implications;
advice on the contract for sale our business;
Licensing or qualification requirements for your industry;
The type of entity to operate your business. Eg. sole trader, incorporated company, trust.
Contract Advice and Negotiation
We closely examine the contract for sale of business drafted by the seller’s solicitor. We advise you in regards to the terms of the contract and, if necessary, negotiate amendments with the seller’s solicitor to better suit your requirements. This process involves the consideration of aspects of the purchase which may have not as yet have arisen including:
Ensuring that the appropriate and complete equipment is listed as inclusions in the contract and that the description in the contract matches the equipment on site;
Ascertaining whether any of the equipment is subject to hire purchase arrangements, a finance charge, or a mortgage to ensure clear title on settlement;
Any training period to be provided by the sellers;
Treatment of any debt/creditors, unbilled fees, and work in progress up to the point of sale;
Whether a lease is to be assigned to you;
Whether you are re-employing existing employees; and
Whether registered intellectual property is to be transferred to you.
Between exchange and completion
Upon agreement being reached on the terms of the contract, it is signed and contracts are exchanged by the solicitors, making the agreement legally binding.
The agreement will specify the role of the parties between exchange and settlement (when you pay the balance of the purchase price). During this post exchange – pre settlement period you must attend to some or all of the following:
Finalise loan documentation (if the contract is not subject to finance loan documentation it must be finalised prior to the exchange of contracts);
Enter into employment contracts;
Obtain Public Liability Insurance, Worker’s Compensation and any other necessary insurance (such as plate glass);
Obtain bank guarantees in compliance with the terms of the lease (if any);
Obtain any required licenses or approvals;
Notify suppliers/clients of new ownership, ABN, and bank details.
The next step
We are experienced in acting for purchasers of businesses. If you are thinking about, or have already struck a deal to buy a business, contact us to support and guide you through the process.