Closing the depreciation gap – Purchase price allocation on commercial property

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Are you thinking of buying or selling commercial property or a business? Recent tax changes mean the net value of the contract is no longer just about the total purchase price.

Vendors and purchasers are now required to have a consistent purchase price allocation between depreciable and non-depreciable items. This affects the net value of the agreement.

Previously vendors and purchasers had the ability to determine their own allocations between depreciable and non-depreciable items. Purchasers gained greater tax advantages by a higher allocation to depreciable items. Vendors were better off selling depreciable items at book value or lower. That created a depreciation gap where Inland Revenue was ultimately the loser.

New law has now come into force to close this gap. From 1 July 2021, the parties to an agreement are required to have consistent purchase price allocations and those allocations must be at market value. IRD also has the ability to challenge what the parties determine to be “market value”.

The new law applies to the sale of commercial property and the sale of businesses over a value of $1million. If the price is less than $1 million, the new law still applies if the purchaser’s total allocation to taxable property is more than $100,000.

It is critical that vendors and purchasers obtain tax advice on purchase price allocation before signing an agreement for sale and purchase of commercial property. Consequences otherwise could be significant.

So what happens if the parties do not agree?

  • If allocations are not agreed then the vendor will get the opportunity to determine the allocation in the first instance.
  • If the vendor fails to notify IRD within two months then the purchaser gets their chance.
  • If neither party makes an allocation within the required timeframes then the purchaser is deemed to have acquired the property for nil consideration and the vendor at market value. A less than ideal outcome!

It is important that you get the right advice at the beginning of the process and in every case at least before a contract is signed. It is crucial that you seek tax and legal advice at the early stages of your negotiations.

Please contact our team if you are thinking of buying or selling commercial property or a business.

Kimberly Knox
Kimberly Knox

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