Inland Revenue releases new proposal for purchase price allocations
Inland Revenue wants buyers and sellers to file consistent tax returns based on agreed or determined purchase price allocations.
It is concerned that buyers and sellers are taking different positions on the value of the assets, in order to maximise their tax positions. This can create tax discrepancies and usually results in the Inland Revenue receiving less tax than it otherwise should.
There can often be tension between how a buyer and seller want to allocate the purchase price for specified assets. A seller generally wants to allocate a larger portion of the purchase price to items that are not taxable on the sale, such as goodwill or capital assets, with the aim of decreasing the amount of tax payable by the seller on the sale. A buyer will usually want to allocate more of the purchase price to items that will give rise to a deduction, such as trading stock and depreciable assets, with the aim of increasing the amount of depreciation that the buyer can claim following the purchase.
While it is best practice for the parties to agree on the allocation in the sale and purchase agreement and file their tax returns in accordance with the agreed allocations, this is not always the case.
The Inland Revenue’s proposed solution is set out in its Purchase price allocation: An officials issues paper, which is available here.
The starting point is that the buyer and seller should agree on the purchase price allocations for the specified assets. If they agree, both the buyer and seller must use the agreed allocations in their respective tax returns.
However, if the buyer and seller do not agree, the seller will be required to provide its allocation to the buyer and Inland Revenue within a specified timeframe (e.g. 3 months from the date of disposal). Both the buyer and the seller must use this allocation in their tax returns, with no ability for the buyer to challenge the allocation.
If the seller does not do this, the buyer must first make a request to the seller before it is entitled to provide its own allocation to the seller and Inland Revenue. Again, this would be the allocation that both parties must use, with no ability for the seller to challenge the allocation.
Inland Revenue will have the ability to dispute an allocation if it does not reflect market values, although we expect that it will not be practical for it to review and challenge every applicable tax return.
Buyers and sellers often have different views on the value of specific assets, and it is not always as straight forward as simply referring to the book value in the seller’s accounts. The proposal is intended to make the buyer and seller agree to an allocation and ensure that they file consistent returns. The seller may have more leverage in these negotiations, but we expect this to be more relevant in deals with tight timeframes, or in competitive bid processes, where the buyer is less able to insist that the parties agree the allocation (before it agrees to other aspects of the transaction).
The issues paper also considers whether there should be a requirement to act reasonably when determining an allocation (in the absence of agreement) and whether there should be an exclusion for low value transactions. This threshold is not known yet, but the paper refers to an example where the total amount allocated to deductible or depreciable items is less than $50,000.
Consultation on the proposal closes on 14 February 2020. Inland Revenue is aiming to put the proposal into effect from early 2021 through the introduction of a new tax bill in 2020.
Want to know more?
Please contact one of our Mergers and Acquisitions specialists.