If you are intending on buying or selling a business, legislation that came into effect on 1 July 2021 will impact the process in which parties allocate the purchase price. It is important to be aware of the new purchase price allocation rules as it can have material consequences on the expected tax outcome of your business sale or purchase. The intention of the change is to put an end to the mismatched allocations whereby parties generally seek to minimise their tax liabilities and maximise their tax advantages. Parties should seek legal and tax advice before entering into an arrangement in order to understand and be satisfied with the consequences of any suggested price allocation. We are here to provide you with the advice you need to ensure you are making the right decision when it comes to your financial and tax planning.
Currently vendors and purchasers independently use different values for tax purposes. The new rules are not as simple as they sound. Binding agreements entered into on or after 1 July 2021 will be subject to additional information disclosure to the IRD. Carelessness on following the new rules could result in significant ramifications. The rules will apply to the sale of more than one type/class of assets whereby the classes of purchased property have a total consideration price of more than $1m. If the contract only includes residential land (including buildings) and chattels, total consideration should be more than $7.5m.
A few scenarios can play out depending on whether the vendor and purchaser agreed on the price allocation in the contract. If there is an agreed allocation in the contract, both parties are bound by the allocation which needs to be documented prior to the first tax return filed for that year. It is important to note that this overrides any unilateral allocation which might have been made in the meantime.
If no agreed allocation is stipulated in the contract, the vendor has three months after the change of ownership to notify the purchaser and CIR on a unilateral allocation. Both parties are then bound to those values for tax purposes. Chosen values need to be the greater of the relative market value or the tax carrying value.
If there is no agreed allocation in the contract and the vendor did not notify a unilateral allocation price, the purchaser has six months after the change of ownership to notify an allocation to the vendor and CIR. Again, the values need to be reflective of the relative market values.
The IRD can still apply its own allocation and challenge the values after an allocation has been made by either the vendor or the purchaser if they are not satisfied with the values. If no unilateral allocation is made by the purchaser within 6 months, the power passes to the CIR.
Should you find yourself in a position where your sale or purchase falls within this category, speak to us so that we can guide you through the process. Many circumstances may arise that would have a crucial impact on your business and long-term strategic objectives. What is the correct approach to take when the market value is less than the tax value? What will happen to deductions when the sale or purchase lapses over 2 financial periods and the notification is made in the second year? Friction may arise in the negotiation process. What would happen when one vendor has multiple purchasers, or the classification of assets vary on the assets being sold or purchased? Our team of advisors are experts in their field and our priority is to ensure you are guided and supported throughout your business growth and success.