If you are looking to buy a business or sell your business in 2021, you will need to be familiar with the new purchase price allocation rules. To date, there has been no requirement for buyers and sellers to agree on an allocated purchase price between assets when buying/selling a business. This has meant that parties have been allocating a purchase price to the assets which best minimises their tax liabilities and maximises their tax advantages, as different purchase price allocations have different tax consequences for each of the parties.
A recent proposal from IRD will see agreement on purchase price allocation between buyers and sellers become a requirement as of 1 July 2021. The new rules are being introduced as a way of eliminating “mis-matched” purchase price allocations which the IRD considers is detrimental to the “Government’s revenue base
”. The rules were originally to apply from 1 April 2021 but the rules will now become effective as of 1 July 2021 (subject to the Taxation (Annual Rates for 2020-2021, Feasibility Expenditure and Remedial Matters) Bill receiving royal assent).
The rules at a glance
It is intended that the rules will apply to “mixed supply” transactions with a total purchase price of more than $1million or, $7.5million in the case of residential real estate. A “mixed supply” transaction is where there is a single sale and purchase transaction which is a mix of taxable and non-taxable property. Share sales are not captured by the rules.
Don’t get caught out
- Where a seller and a buyer reach agreement on the purchase price allocation, each party must follow the agreed allocation in its respective tax returns.
- Where the parties fail to reach agreement on the purchase price allocation, the right to allocation is left with the seller, who is obligated to notify the IRD and the buyer of the allocations within the specified timeframe from the date of the change of ownership (i.e. the settlement or completion date).
- In the event the seller does not notify the IRD and the buyer of the allocation within the specified timeframe, the buyer is then entitled to set the allocation and is obligated to notify the IRD and the seller.
It is important that reaching agreement on the purchase price allocation is not overlooked by the parties in the course of a transaction. Agreeing this in the transaction documents will mean that you avoid it becoming an issue down the line or potentially risk having the purchase price allocation set unilaterally.
We recommend seeking tax and legal advice at the outset of the transaction (and before any negotiation/entry into documents) to ensure that the parties are on the same page in terms of purchase price allocation.