Business Asset Sale & Disposal in Singapore: How Do They Work?
In carrying out its activities, businesses may wish to sell its assets to generate revenue or replace equipment or assets from time to time by selling or disposing of them. This is done through a business asset sale or business asset disposal, which this article will detail. It will cover:
- What is a business asset sale? How is it different from selling a business?
- Considerations when making an asset sale
- How to sell your business assets
- What is a business asset disposal?
- Why might a business wish to dispose of its assets?
- GST compliance for businesses making an asset sale/disposal
- Tax-deductible donations for disposal of assets
A business asset sale refers to selling any asset owned by your business. The assets would likely have been purchased using the business’ funds for use or sale by the business. It can include items such as:
- Office equipment
- Land, e.g. commercial property
- Intellectual property, e.g. patents.
This is different from a business sale where a share of the business itself is sold such that the buyer owns a portion of the entire business through shares. For a business asset sale, the business is selling specific things.
Crucially, a business sale can involve the buyer taking on the business’s existing liabilities (such as debts) as the buyer has a share in both the assets and liabilities of the business. Whereas for a business asset sale, the buyer simply takes the thing being sold.
Considerations When Making an Asset Sale
The most important consideration is the value of the asset and whether the business can utilise the asset. For example, a business which owns valuable property such as land could choose to use the land by developing it and leasing it out, or the business may choose to sell it to get cash.
Businesses generally should choose the course of action which is most profitable for them by balancing between how much the asset is valued at against how much revenue it might bring them in the future, before deciding to sell it.
Determining the value of the asset
A business determines the value of its asset by calculating how much the asset has depreciated from its original price. This is done by predicting how long the asset would last as well as its scrap value, and deducting a proportionate value from the price it was purchased at based on how long it has been used. An exception to this is land, which is an asset that does not depreciate.
For example, if a business purchases a computer at $1,000, expects it to last 2 years, and predicts its scrap value to be $100, then its value after 1 year would be $550 after accounting for straight-line depreciation, which is the simplest form of depreciation. It assumes that the asset depreciates linearly over its expected lifespan.
($1000-$100) x 1 year/2 years + $100 = $550
It may be the case that if the company tries to sell the asset, they could find a buyer willing to pay more than the value of the asset that they had initially calculated. If so, they would be able to make a financial gain or profit on the asset.
Some assets may also come with liabilities. For example, if a business wishes to sell a building which has existing tenants, the purchaser of the building will be liable to honour those existing tenancy contracts such as by keeping the building in good repair.
Such liabilities will also affect the value of the asset when it is sold, as the value of the liability may not have been accounted for in depreciation, but will affect how much a buyer is willing to pay for it.
Determining the value of an asset can be difficult given the range of different ways of calculating depreciation that can differ from asset to asset, as well as accounting for possible liabilities that attach to it. Businesses may wish to engage our accounting services to assist in this process.
How to Sell Your Business Assets
Most business assets can be sold with a normal sale and purchase contract. While this could simply be a verbal agreement, a written contract is advisable especially when selling more valuable assets or if the transaction is more complex, such as where cash may not be paid upfront or if the asset has liabilities attached.
Not only that, but the sale of certain types of assets may also require the contract to be written for it to be legally valid. For example, a sale of land or immovable property must be evidenced in writing.
Given that the drafting of a contract may require legal expertise, you may wish to engage a lawyer who can help you with that.
Even if the contract itself is not written down, the business will likely still need to record the sale of the asset internally as it will affect key business figures such as cashflow, net income, revenue and its asset tracking.
There may also be tax implications that need to be reported (see below).
Who could the buyers be?
The business can sell its assets to anyone but there are restrictions on selling assets to directors of the business itself due to conflicts of interest which arise. This is because it is in the director’s personal interest as a buyer to purchase the asset at as low a price as possible, while as a director of the company he has a duty to sell the asset at the highest price possible. These interests are at odds and form a conflict.
In making a business asset sale to directors and individuals or other businesses closely related to them, it is critical that the shareholders consent to the sale and that the sale is at a fair price. Otherwise the director may be liable for a breach of his directors’ duties.
What is a Business Asset Disposal?
When a business disposes of a business asset, it gets rid of the asset without receiving any money or other consideration for it. This often involves throwing away the asset, giving it away for free or donating it to a charity.
Why Might a Business Wish to Dispose of Its Assets?
A business is likely to dispose of an asset if the asset is no longer usable to the business and cannot be sold for a significant value, or if it decides to donate the asset.
GST Compliance For Businesses Making an Asset Sale/Disposal
GST compliance for asset sales
When selling a business asset, if the business has an annual turnover of $1 million or more and is therefore registered for GST, it needs to pay the Inland Revenue Authority of Singapore (IRAS) 8% GST output tax based on how much money (or equivalent consideration) the business received for making the sale. This output tax is the 8% GST that is collected for the supply of goods and services in Singapore.
The business does not need to pay the 8% GST output tax to IRAS in the following situations:
- If the asset was sold overseas and exported; or
- The asset sold was residential property, digital payment tokens, or an investment precious metal.
GST compliance for asset disposal
Output tax for asset disposal only needs to be paid if the business had claimed for input tax from IRAS when they made the purchase. Input tax refers to GST that was paid when the business first acquired its assets and can only be claimed by GST-registered businesses.
A business will need to pay output tax to IRAS even if it disposes of its assets if:
- The business is GST-registered and claimed input tax for that asset; or
- The asset still has a value of $200 or more.
For example, if a GST-registered clothing retailer bought or imported its stock, input tax at 7% GST would have been paid at that point of purchase. The retailer may then claim the value of this input tax from IRAS. There are then 3 possible situations relating to output tax:
- If the clothes are sold to customers, the business will need to pay output tax to IRAS based on the value of the sale.
- If the stock is defective and has no value, the retailer may dispose of it without paying output tax to IRAS.
- If the retailer wishes to dispose of old stock which could not be sold, it would need to calculate the depreciation of the asset and pay IRAS output tax based on the depreciated value (if this depreciated value is $200 or more) when it disposes of the asset.
Tax-Deductible Donations for Disposal of Assets
Disposing of an asset by giving it away to a registered charity is only tax-deductible if the asset is land, buildings, or shares in a public company. If so, the applicable tax deduction is 250% of the value of the asset. This amount is deducted from the total taxable income of the business.
The business still needs to account for output tax even on tax-deductible donated assets.
Businesses are generally free to sell or dispose of their assets to the public however they wish provided they comply with tax regulations and avoid conflicts of interest. When doing so, businesses should also keep in mind the accounting or business-related considerations listed above.
Determining the value of the asset and GST obligations for input tax claims and output tax payable can nonetheless be complicated for businesses. It may be advisable to enlist the help of a qualified tax advisor, such as through our corporate services.
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