new purchase price allocation rules, asset price allocations, sale of assets

Buying or selling a business or a commercial property? There are new purchase price allocation rules you should be aware of.

When land and buildings or a business is being sold, allocation of the purchase price between the business assets can result in different tax implications for the buyer and seller. In some situations, it has been observed that different prices have been allocated to the same assets in order to benefit from differing tax treatments by the two parties. However, the IRD is now introducing new rules to put a stop to these potential discrepancies and in some instances the IRD must be notified of the price allocations applied to each asset.

From 1st July 2021 new rules require both parties to the sale and purchase of two or more assets to allocate the same amounts for each asset – generally based on market value. I.e. the disposal value of an asset by the vendor must agree with the purchase price of that asset for the purchaser. Therefore the contract should state the prices.

These new rules will apply to businesses and commercial properties with a sale price over $1m or where the sale price of residential land exceeds $7.5m. The rules will not apply to the sale of shares.

If you are buying or selling a business or commercial property, contact us at the beginning of the negotiation phase. We can apply the tax rules to assist you when you negotiate the values to apply to each asset. There are deadlines that apply for the notification to be made to the IRD and it is not sufficient to wait until the year-end tax return is filed.