The New Zealand Inland Revenue has released an Officials' Issues Paper on Purchase Price Allocation setting out its proposals to ensure that parties to a business sale or property sale agree to, and adopt for tax purposes, a consistent allocation of the purchase price to the various assets (for example, land, buildings, fixed assets and trading stock).
The current position in New Zealand is that, for tax purposes, there is a tension between a buyer and a seller as to how the overall purchase price is allocated to the various assets on a business sale or a property sale. A seller generally wants to allocate the purchase price to items that are not taxable or immediately taxable such as goodwill or capital assets. Whereas a buyer generally wants to allocate the purchase price to items that will give rise to an immediate tax deduction or earlier tax deduction, such as trading stock and depreciable assets with a short depreciable life. There are additional considerations that can apply for certain types of businesses (such as forestry) and for parties with different tax profiles. There are existing rules requiring trading stock to be valued by reference to market value but there is no overall rule requiring the allocation of the purchase price to the various assets. While it is generally best practice for the parties to agree to the allocation of the purchase price in the legal agreements, this will often not be agreed or can be difficult, particularly if deal timelines are tight.
Inland Revenue are concerned that buyers and sellers are adopting different allocations of the purchase price in their tax returns, so as to maximise their tax positions and which results in less tax being paid overall. In addition, Inland Revenue are concerned that buyers and sellers can obtain inconsistent valuations from separate valuers to support their position.
Inland Revenue are looking to consult on possible changes to resolve these concerns but their preferred approach appears to be a requirement that a buyer and a seller use the same allocations for tax purposes, with an ability for Inland Revenue to override the parties' allocations if they do not reflect market values. The Officials' Issues paper suggests that the allocation could be achieved through a hierarchy of rules. First, where the buyer and the seller agree on an allocation, they must file their tax returns on that basis. Second, if the parties do not agree, the buyer will be required to use the seller's allocation in their tax return. Third, if the seller does not provide their allocation, then the buyer may use their own allocation.
Inland Revenue expect to introduce changes, following consultation, in a tax Bill in the first half of next year. Any changes are not likely to apply until 2021.
DLA Piper will be making a submission on the Officials' Issues Paper, including suggestions to ensure that the proposals do not slow down deals and for a sensible de minimis for low value transactions to which any new rules should not apply. Please get in contact if you have any questions or points to raise in a submission.
A copy of the issues paper can be found here.
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