Purchase price allocation rules
Just a reminder that the new purchase price allocation rules came into effect from July 1st 2021. Under the rules, the purchaser and the vendor have to use the same price allocation in their respective tax filing positions, and there is a set process to follow, which determines how the price allocation will be fixed.
The following classes of property require an allocation of a portion of the purchase price (where more than one type of property class is included in the transaction):
- trading stock other than timber or a right to take timber;
- timber or a right to take timber;
- depreciable property, other than buildings;
- buildings that are depreciable property;
- financial arrangements; and,
- purchased property for which the disposal does not give rise to assessable income for person A (the vendor) or deductions for person B (the purchaser).
The first rung of the price allocation ladder is for the parties themselves to agree and document prior to the first tax return in relation to the transaction being filed, the appropriate allocations. Both parties must then file according to the agreed allocation.
The second rung of the ladder is for the vendor to make a unilateral allocation within three months of the change of ownership of the property, and to notify such allocation to the purchaser and IR. Such unilateral allocation is then binding on both parties.
The third rung of the ladder is for the purchaser to make a unilateral allocation if the vendor fails to do so within the first three months, within the following three months (so by no later than six months post the change of ownership of the property), and to notify such allocation to the vendor and IR. Once again, this unilateral allocation is binding on both parties.
The final rung of the process ladder if no purchase price allocation is made within 6 months of the change of ownership of the property, is for IR to make the allocation and until this occurs, the purchaser is not entitled to claim any deductions in relation to the purchased property.
Unilateral allocations do not need to be made however, where either the total consideration for the purchased property is less than $1m, or where the only purchased property is residential land (including residential buildings) together with chattels, with a total purchase consideration of less than $7.5m.
IR can also challenge allocations, however, not where there is an allocation to an item of depreciable property with an original cost less than $10,000, the total amount allocated to the item and any identical items is less than $1 million, and the amount allocated to the item is no less than its tax book value and no greater than its original cost.
R&D tax incentive due date extensions
The Minister of Revenue has agreed to extend due dates for year one (2019–20 income year) and year two (2020–21 income year) R&D tax incentives, to give businesses more time to consider how the R&D tax incentive eligibility criteria applies to their activities and to make an application.
The due date extension to 31 August 2021 will be included in the next tax Bill for:
- year one (2019–20 income year) supplementary returns, and
- year two (2020–21 income year) general approvals and criteria and methodologies (CAM) approvals.
Covid-19 deductions IS finalised
IR has finalised IS 21/04 ‘Income tax and GST deductions for businesses disrupted by the Covid-19 pandemic’.
The IS concludes that for income tax purposes, provided that the general permission is still satisfied and none of the general limitations apply, a business that has either downscaled or ceased operating temporarily will still be able to claim its deductions, whereas this will not be the case where the business has ceased completely, even if there is a possibility that the business may restart again at some point in the future.
The same considerations apply in a GST context, with a taxpayer who is determined to have ceased their taxable activity likely to be required to deregister from GST, which can of course trigger output taxes payable in relation to assets held by the taxpayer at the date of cessation.
There are numerous examples in the IS to assist in explaining IR’s position.
This article from the ‘A Week in Review’ newsletter was originally published Monday 5th July 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me email@example.com.
If you would like to receive these updates directly to your mail inbox, you can subscribe by clicking here.