After undergoing over a year of consultation, the purchase price allocation legislation is now in effect. At a high-level, the purpose of the legislation is to ensure vendors and purchasers allocate consistent prices to business assets for tax purposes when selling and buying assets.
For a vendor, the prices allocated will determine the extent to which taxable income might arise. For a purchaser, the purchase price allocation will determine the future tax profile of the items acquired, such as the depreciable cost base of fixed assets and the amount of the deduction for trading stock. Prior to the legislation being introduced, parties could sometimes adopt different amounts giving rise to inconsistent treatment and loss of tax revenue to the government.
When introduced as draft in June 2020, the intended application date was for sale and purchase agreements entered into (conditional or unconditional) from 1 April 2021. However, due to the amount of time taken to consult on the draft legislation, the effective date was extended to 1 July 2021. This allowed more time for advisors and taxpayers to upskill themselves on the new rules, and to allow the Auckland District Law Society (ADSL) and Real Estate Institute of New Zealand to update their template sale and purchase forms.
Another change between the draft and final legislation was the introduction of a de minimis threshold for residential land – the rules do not apply to residential land and chattels where the total consideration is less than $7.5m. The draft legislation included no such provision, but during the consultation period it was acknowledged that the tax treatment of residential property (e.g. 0% depreciation rate for residential buildings) means there is much less scope for revenue manipulation than other transactions.
There are now three template ADLS addenda available for the sale and purchase of real estate, the sale and purchase of a business, and for real estate sales by tender to incorporate the purchase price allocation legislation. Such addenda are available for use and set out further terms and schedules addressing purchase price allocation to be attached to and form part of sale and purchase agreements entered into on or after 1 July 2021. However, they are not considered practicable for the sale of real estate by auction and mortgagee sale agreements.
The object of each addendum is for the parties to mutually agree a purchase price allocation before filing their respective tax returns. It also precludes either party from notifying an allocation to Inland Revenue without first agreeing it with the other party. The legislation otherwise gives the vendor the right to unilaterally determine a purchase price allocation that would bind the purchaser; hence the addendum provisions prescribe a more balanced process for the parties to reach mutual agreement, with the provision to obtain expert determination if need be.
In the Finance and Expenditure Committee’s final report, they recommend the new regime be kept under review, and for the Minister of Revenue to consider in the first twelve months whether the rules are working as intended and without unduly increasing the burden on taxpayers, with any necessary adjustments to be proposed promptly. Hence, we will watch this space to see if any significant amendments are made!