Gun Manufacturer Mike decides to sell his manufacturing business, Lock, Stock and Barrel. He sells his business to a friend. The business is sold for $2.1 m. made up of:
Guns $250,000
Ammunition $50,000
Plant & machinery $300,000
Land $1,000,000
Building 500,000
Total sale price $2,100,000
Mike’s accountant recommends that Mike may be able to minimise his tax exposure on the sale of the guns, ammunition and plant & machinery by attributing a larger portion of the arms-length value to the land. The figures in the sale and purchase agreement appeared as:
Guns $120,000
Ammunition $30,000
Plant & machinery $150,000
Land $1,300,000
Building 500,000
Total sale price $2,100,000
Is there any tax risk inherent in the advice provided by Mike’s accountant? Explain your reasoning.