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Tax Talk | Purchase price allocation

When a business sale and purchase occur, the allocation of the purchase price between assets acquired has tax consequences.  While there are general allocation rules, in some cases it is possible for vendors and purchasers to allocate different amounts to the same assets, often resulting in a tax benefit.

As a result, government proposes to insert new rules determining how purchase prices are to be allocated to business assets in order to ensure symmetry between purchasers and vendors.  The key proposals are:

  • If the parties agree an allocation, they must follow it in their tax returns;
  • If the parties do not agree an allocation, the vendor is entitled to determine the allocation and must notify both the purchaser and Inland Revenue of it within two months of the change of ownership of the assets;
  • If the vendor does not make an allocation within the two-month timeframe, the purchaser is entitled to determine the allocation, and notify both the vendor and Inland Revenue of it;
  • Inland Revenue may challenge an allocation if does not reflect market values;

These rules will only apply to transactions with a purchase price of more than $1 million, or where the purchaser’s total allocation to tax base property is more than $100,000

This amendment would apply to agreements for the disposal and acquisition of property entered into on or after 1 April 2021.