Buying or selling a business? The new purchase price allocation rules you need to know.
If you are planning on buying or selling a business this year, you need to be aware of the new tax rules that are intended to come into effect on 1 July 2021. These new rules will impact the way parties to a transaction allocate the purchase price between business assets and will need to be considered and addressed in the negotiation and documentation of your transaction terms.
When buying or selling a business, the manner in which the purchase price is allocated between business assets will have different tax consequences for each of the buyer and seller. In order to maximise their own tax positions, some buyers and sellers have avoided agreeing an asset allocation in the documentation and instead have been allocating different prices to the same business asset in their tax returns. The aim of the new purchase price allocation rules is to prevent buyers and sellers adopting mis-matched allocations which, according to the IRD, are detrimental to New Zealand’s tax base.
The new rules can be found in the Taxation (Annual Rates for 2020-2021, Feasibility Expenditure and Remedial Matters) Bill. Whilst it was intended that the new rules would apply to agreements signed on or after 1 April 2021, this date has recently been moved to 1 July 2021 (and we note here that the Bill is still yet to receive royal assent, although we expect it to be enacted in its current form). Therefore the new rules will apply to agreements entered on or after 1 July 2021 and apply to asset sale transactions over $1 million. The new rules will not apply to the sale of shares.
Under the new rules, parties to a business sale can agree a purchase price allocation at any time before the first tax return for the transaction is filed. Ideally, the parties should agree the allocation in the sale and purchase agreement. If agreement is reached, the parties must follow this allocation in their tax returns. A failure to reach agreement means the seller may unilaterally allocate the purchase price to the various business assets and notify the buyer and the IRD of this breakdown. Only if the seller fails to do this within the prescribed time period, does the buyer have the option to then set the allocation.
In order to avoid getting into a situation where the seller has the option to determine the purchase price allocation, we recommend that you ensure that the purchase price allocation is negotiated along with the other terms of the transaction (including price). You should seek tax and legal advice before entering into any negotiations and ensure you understand the tax and legal consequences of any proposed allocation.
If you have any questions regarding the above, then please do not hesitate to get in touch.