This content is from: New Zealand

New Zealand Inland Revenue proposes reforms to rules for purchase price allocation

Brendan Brown and Young-chan Jung of Russell McVeagh summarise the proposed measures that the Inland Revenue have put forward for allocating the purchase price in sales of property or business assets.

The New Zealand Inland Revenue is consulting on measures to require parties to a sale of real property or business assets to adopt in their income tax returns a consistent allocation of the purchase price to individual assets. The proposals result from Inland Revenue's concern that "[b]uyers and sellers in some transactions are adopting different allocations for tax purposes, almost always to the detriment of the Government's revenue base."

Inland Revenue's concern regarding current allocation practices

In a sale of real property or business assets, how the global purchase price is allocated to individual assets will affect the income tax consequences for the parties, since the transfer of different types of assets may have different tax consequences. That is particularly the case under New Zealand law, as New Zealand does not have a comprehensive tax on capital gains.

For example, the amount allocated to goodwill or (in many cases) land will usually be non-taxable to the vendor and non-deductible to the purchaser. In contrast, the amount allocated to debt instruments and inventory will be taxable to the vendor and deductible to the purchaser. The amount allocated to depreciable property (such as plant and equipment) will be taxable to the vendor (but only to the extent the proceeds recover depreciation previously claimed by the vendor) and form the depreciable cost base for the purchaser. 

Accordingly, when parties are negotiating an agreement for the sale and purchase of different types of assets, it is best practice to agree an allocation of the global purchase price to those different types of assets (and to agree to file tax returns on that basis). Inland Revenue's view, however, is that agreed allocations are "far from universal" and that "parties may prefer not to agree an allocation, on the basis that this gives them freedom to make their own assessments of value". 

Proposed measures 

Inland Revenue proposes that in all cases a vendor and purchaser will be required to use the same allocation of the total purchase price to different asset types, and this allocation must reflect the relative market values of the different assets. If the parties do not agree on an allocation, then the purchaser would be required to use the vendor's allocation when filing its tax return. In this case, there would also be a requirement for the vendor to disclose its allocation to the purchaser and Inland Revenue. If the vendor fails to provide an allocation within a specified time period, the purchaser would be permitted to make the allocation, which would be disclosed to, and required to be followed by, the vendor.

The proposal that (in cases where an allocation is not agreed in the documentation) one of the parties could have the power to specify an allocation (which would be binding on the other party) is controversial. Such a power arguably alters the relative bargaining positions of the parties to a commercial transaction, since the vendor would gain the benefit of that power in cases where, due to time pressures to get an agreement signed or a lack of awareness of the New Zealand tax requirements, the parties do not agree an allocation.  

Next steps and implementation

Inland Revenue has received submissions on its proposals which it is now considering. If the Government decides to proceed with the new rules, it is expected that legislation would be introduced to the House of Representatives during the next few months, and, if enacted, would likely take effect in early 2021.  

In the meantime, it would be prudent to assume that even under current law, Inland Revenue may dispute the tax treatment of transactions in which the vendor and purchaser have adopted inconsistent purchase price allocations. It is therefore important that parties to transactions involving the sale of real property or business assets agree an allocation in order to reduce the risk of dispute with Inland Revenue.  



Brendan Brown
T: +64 4 819 7748

Young-chan Jung

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