As of 1 April 2021, new rules will govern the allocation of the purchase price for a business sale and purchase.
For context, the current rules allow vendors and purchasers to allocate different amounts of the purchase price to the same assets. This has left scope for exploitation, with each party being free to make allocations that minimise their tax liabilities.
Unsurprisingly, this has been viewed negatively by the IRD which has described the practice as “detrimental” to New Zealand’s tax base.
The new rules aim to close this loophole and will apply to all transactions with a purchase price of more than $1 million, or where the purchaser’s total allocation to taxable property is more than $100,000.
These new rules will require the parties to:
- agree upon a consistent allocation of the purchase price; and
- follow the agreed allocation through in their tax returns.
If the parties do not agree upon an allocation, the vendor is entitled to determine the allocation and must notify both the purchaser and the IRD of it within two months of the change of ownership of the assets. If the vendor does not make an allocation within two months of the change of ownership, the purchaser is entitled to determine the allocation and notify both the vendor and IRD.
In addition, the new rules arm the IRD with the ability to challenge any allocation that it does not believe reflects market values.
If you are considering buying or selling a business, we’d be happy to discuss these changes with you in more detail.