From the 1st July 2021, vendors and purchasers need to allocate the purchase price between the different types of asset classes under the agreement for tax purposes.
The requirement to allocate the purchase price for tax purposes applies to the following transactions:
a. Sale and purchase of commercial property where the purchase price is over $1,000,000.00;
b. Sale and purchase of a business where the purchaser price is over $1,000,000.00; and
c. Sale and purchase of residential property where the purchase price is over $7,500,000.00.
The purchase price allocation must be based on market value and allocated between the following assets:
a. Non-depreciable;
b. Depreciable; and
c. Revenue account property.
In most commercial property sale and purchases the purchase price will be allocated across the land (non-depreciable), the building (depreciable) and the fit-out (depreciable).
The vendor and purchaser when filing their income tax returns must adopt consistent purchase price allocations. For this reason, the best approach is for the purchase price allocation to be agreed upon by the purchaser and vendor at the time the sale and purchase agreement is entered into and it should be recorded in the agreement so there is no dispute going forward.
If an agreement is not reached prior to the sale and purchase agreement being signed or prior to settlement, then the following procedure applies:
a. Firstly, the vendor determines the purchase price allocation and notifies the purchaser and IRD within two months of settlement;
b. Secondly, if the vendor does not determine it, then the purchaser may determine the purchase price allocation;
c. Thirdly, if neither party determines the allocation, then the vendor is treated as disposing of the property at market value and the purchaser treated as acquiring it for nil consideration.
How the purchase price is allocated between the different assets will affect each parties’ tax liability or tax savings and could be detrimental to both or either of the parties and result in one party having to pay significant tax, therefore the agreement on purchase price allocation is paramount.
It is important to ensure that you get advice from your accountant prior to entering into the sale and purchase agreement so you be aware of the tax implications for you as result of how the purchase price is allocated. If you don’t get advice at the outset, then you could be looking at a significant tax bill as a vendor or could lose out on potential tax savings in the future as Purchaser.
