Purchase price allocation Information Sheet

Information Sheet Purchase price allocation Version 1 - April 2021 Purchase price allocation Important changes to the Income Tax Act 2007 relating to purchase price allocation come into force on 1 July 2021. New sections GC 20 and GC 21 affect the income tax treatment of vendors and purchasers of businesses and non-residential property sold for $1 million or more, and residential property sold for $7.5 million or more. The rules apply where not all the property is subject to the same income tax treatment for one or both parties (‘mixed supplies’). An example is a person acquiring commercial property for investment, where building and fixtures are depreciable, but the cost of the land is non-deductible. What agents need to know ƒ The new rules will require the parties to a sale to file their tax returns using the same allocation of the total purchase price to the following classes of purchased property: (i) trading stock, other than timber or a right to take timber; (ii) timber or a right to take timber; (iii) depreciable property, other than buildings; (iv) buildings that are depreciable property; (v) financial arrangements (eg trade receivables and deposits); and (vi) purchased property for which the disposal does not give rise to assessable income for the vendor or deductions for the purchaser (eg land and goodwill). So, for example, it will no longer be possible for the purchaser in a commercial property transaction to obtain its own valuation of the fit-out and depreciate it on that basis, while the vendor returns depreciation income based on a different allocation to fit-out. ƒ If the vendor and purchaser agree an allocation, they must follow it in their tax returns. Agents should encourage their clients to agree an allocation with the other party, as doing so is likely to result in the best commercial outcomes for both parties. ƒ If parties do not agree an allocation, and the transaction is at or above the $1 million (general) / $7.5 million (residential property) thresholds, the vendor can determine the allocation unilaterally by notifying its allocation to the Commissioner of Inland Revenue and the purchaser within three months of settlement. The notification can be either electronic or in writing. Both parties must follow the allocation in filing their tax returns. ƒ If the vendor does not notify an allocation with the three-month period, the allocation right is transferred to the purchaser. If the purchaser notifies its allocation to the vendor within six months of settlement, both parties must follow the allocation in their returns. The purchaser is not entitled to any deduction for the purchase price until it has notified an allocation to the Inland Revenue or been notified of a Commissioner allocation (more than six months after settlement). DISCLAIMER: The material and information contained herein is current at the date of publication but may change. It is for general information purposes only and is not intended to form professional legal advice. REINZ does not accept liability for any claim or other action that may arise directly or indirectly from the use of or reliance on the material and information provided herein. REINZ recommends you seek independent legal advice if you are unsure of your legal position.