When preparing a business for sale, owners often tell us about personal expenses paid through the business. These might include family travel, private vehicle costs or other spending that a new owner would not need to continue.
Removing these costs from the earnings calculation can help show what the business could earn under new ownership. But it can also raise questions about whether the right tax was paid.
What is an add-back?
An add-back is an adjustment used to show the business’s underlying earnings. It removes a cost that is not expected to continue after the sale.
For example, a business reports EBITDA of $700,000. The owner identifies $150,000 of personal expenses that will stop after the sale. If the buyer accepts those adjustments, the adjusted EBITDA becomes $850,000.
At a valuation of four times EBITDA, that difference could add $600,000 to the estimated sale price.
However, adding an expense back for valuation purposes does not fix an incorrect tax return.
Personal expenses are not automatically tax evasion
A business may pay an owner’s personal expenses and still account for them correctly. The accountant may have excluded them from tax deductions or dealt with them under the relevant tax rules.
The concern is where personal spending has deliberately been described as a business expense to avoid tax.
For example, an owner tells the buyer that a family holiday was recorded as business travel to reduce the company’s tax bill. That explanation could give the buyer’s accountant a reason to suspect tax evasion. They would need to consider the records and actual tax treatment.
Could the accountant have to report it?
Yes, in some circumstances.
From 1 July 2026, Australia’s anti-money laundering rules expanded to cover certain services provided by accountants and other advisers. This can include due diligence for the purchase or sale of a controlling interest in a company.
If the work is covered by those rules and the accountant has reasonable grounds to suspect that information is relevant to tax evasion, a report to AUSTRAC is required. AUSTRAC is Australia’s financial intelligence agency. The accountant does not need proof that an offence occurred.
This does not mean every personal expense must be reported. It depends on the evidence and the work the accountant is doing. Separate professional rules and tax-agent duties may also apply.
Does the sale structure matter?
If the buyer purchases the company’s shares, past tax problems stay with the company. The buyer may ask for those problems to be fixed, extra protection in the contract or part of the sale price to be held back.
If the buyer purchases only the business assets, past company income-tax debts generally stay with the seller’s company, subject to the contract and applicable law.
The accountant’s reporting obligations still need to be checked. An asset sale does not automatically fall under the AML rule for transferring control of a company, but other work on the deal may be covered.
What should owners do before selling?
Ask your accountant to review the personal expenses paid through the business and confirm how they were treated for tax. If there are errors, get advice on correcting them.
You should also be able to support each add-back with records and explain why the expense will stop after the sale.
Telling a buyer about hidden expenses does not correct the position with the ATO. Addressing the issue early can help you understand the cost and avoid problems during the sale process.
Prepare your business before going to market
At Magellan Business Sales, we help owners prepare their businesses for sale. Through MBS Advisory, our exit advisory coaching helps create more profitable, valuable and saleable businesses.
If you are thinking about selling in the next few years, contact Scott Ker for a confidential discussion about your business and what you can do now to prepare.