New Requirements for Purchase Price Allocation from 1 July 2021
If you are planning to buy or sell a business this year, you need to be aware of the new purchase price allocation rules which come into effect on 1 July 2021. Previously, buyers and sellers of businesses have not needed to agree on allocated purchase prices between the assets. Each party allocates a purchase price that best suits them, which has a different tax consequence for each party, and concerns have been raised about this. The new rules impact how the parties will allocate the purchase price between assets.
When buying or selling a business, both parties allocate a purchase price between the assets. The allocation of the purchase price could have different tax implications for both parties. Sometimes, buyers and sellers won’t agree on asset allocation and will allocate different prices to minimise their own tax liabilities. The new rules are intended to prevent parties adopting different price allocations.
The new rules apply to transactions where the total purchase price is $1 million or more for a mixed supply or $7.5 million for residential real estate and associated chattels.
The new rules provide that:
- If the buyer and seller can agree an allocation, both must follow the allocation in their tax returns.
- If the buyer and seller do not agree an allocation, the seller may determine the allocation, and must notify both the buyer and the IRD of the allocations within three months of the change in ownership of the assets.
- If the seller fails to notify the buyer and IRD of the allocation within the two month time frame, the buyer may determine the allocation and must notify the seller and the IRD.
If Inland Revenue considers the allocation does not reflect market value or is otherwise inappropriate, they may challenge the allocation.
Note that it was originally intended for the new rules would come into effect on 1 April 2021, but they now apply to agreements signed on or after 1 July 2021.
Don’t get caught out by the new rules! In order to avoid this, you should seek tax and legal advice at the beginning of the process, before you enter into a binding agreement. Reaching an agreement on the purchase price allocation is important and should not be overlooked. Documenting this allocation in the Agreement for Sale and Purchase is recommended to avoid issues later. You may also consider getting an independent valuation of the key assets of the business to support the agreed allocations so that Inland Revenue is less likely to challenge the allocation used.
The above is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.