New rules which came into force on 1 July 2021 require vendors and purchasers of mixed assets to agree how they allocate the total purchase price to different types of assets for tax purposes. The new rules create a process whereby, if the parties fail to agree on an allocation before concluding the transaction, one party may unilaterally make an allocation or the IRD may make the allocation for them.
The government has enacted the Taxation (Annual Rates for 2020-2021, Feasibility Expenditure, and Remedial Matters) Act 2021 which now requires allocation consistency between parties. Previously, when the parties to a sale of business assets or commercial property filed their tax returns, each party would file the particulars of the sale with the purchase price allocated to different assets in order to each gain the best tax outcomes for themselves.
For example, when selling a business a vendor will want to allocate most of the purchase price to assets such as goodwill as this isn’t taxable, whereas a purchaser will want to allocate as much as possible to tax depreciable assets such as buildings or fixtures.
IRD identified this ‘mis-match’ as an issue which posed a “risk to the integrity of the tax base”* and now requires consistency in allocations between vendors and purchasers.
The New Rules
In short, the changes to the rules apply when a transaction is being conducted for a business or commercial assets where the total purchase price is $1 million or more (or $7.5 million or more if the only purchased asset is residential land and residential buildings/chattels). An overview of the process for allocating purchase price is as follows:
To ensure you don’t get caught out in a sale or purchase, you should conclude and document the negotiation of the purchase price allocation before finalising the transaction. If you need any advice as a vendor or purchaser of a property or business/commercial assets, get in touch with Hamish Douch, Principal (DDI 03 343 8387 / Hamish@mmlaw.co.nz) and the staff at Mortlock McCormack Law who can advise you.
*IRD Policy and Strategy, Tax policy report: Purchase price allocation, Consultation and recommendations for legislative reform, Ministerial, 11 March 2020