Often when you buy a business, the price you pay will be greater than the net tangible asset value of the business. The balance will represent goodwill, of which an element may be the names and trademarks which the business uses.
If these names and trademarks have a value it is important that this value is specified in the purchase agreement. This is because if you continue to use the names or trademarks you may be able to deduct their costs for tax purposes, over their useful lives.
Although the cost of acquiring a trade name or trademark would generally be regarded as being capital in nature, there is a section in the tax legislation that allows you to deduct this cost.
The legislation allows you to deduct the cost immediately if it is less than R3000 or, if it is more, over the expected life of the trademark or name, provided it is not longer than 25 years.
The costs of renewing a trademark or a patent would be deductible immediately for tax purposes.
This sounds very straight forward, but it's not that simple.
Firstly, if you have not specified the value of those items in the sale agreement it may be difficult to demonstrate that the value is reasonable to the South African Revenue Services (SARS).
Secondly, even if the value is specified, if SARS is not comfortable with the specified value it may ask you to demonstrate that the value is reasonable.
To ensure that you can do this it would be wise to get a valuation of such assets when you buy the business.
SARS is sensitive to the value attributed to trademarks and names even where the transaction is between third parties, because it knows that if the seller did not acquire the name or trademarks but developed their value, there will be no inclusion in the seller's taxable income as a result of the sale.
To demonstrate that trademarks and names have value it would be wise to register any which are not registered when you acquire them.
The benefit of being able to deduct the cost of names and trademarks can be substantial. Let's say you buy a business with a good brand name for R5 million. The net assets are worth R3 million and the balance relates to goodwill. After a formal valuation you establish that the name is worth R1,5 million, and as the registered trademark is renewable after 10 years, you decide that its reasonable life is 10 years. You will be able to deduct R150 000 a year against the income of the business. The value of the trademark and its useful life will determine the amount that can be written off.
One point you do need to be aware of, if you've suddenly thought it might be a good idea to sell the trademarks or names you've developed into another entity in your group, is that SARS is wise to such schemes. The legislation limits the deduction you can make in respect of the cost of acquiring a trademark or name to the cost to the seller (which may be nil) if the buyer and the seller are connected persons!