Purchase price allocation tax changes, are you ready?

New changes to tax rules relating to the allocation of purchase price for mixed asset transactions, including commercial property, will be taking effect from 1 July 2021.

The change requires the vendor and purchaser to adopt the same allocations in their tax returns, to avoid loss of revenue to the IRD.

From 1 July 2021, IRD will require that, either:

• The vendor and purchaser agree an allocation before executing the Sale & Purchase Agreement, or before Settlement, or
• The vendor determines the Purchase Price Allocation and the purchaser must adopt it, or
• If the vendor does not notify a Purchase Price Allocation within three months of change of ownership, the purchaser, within a further three months, may determine the Purchase Price Allocation and the vendor must adopt it, or
• If neither the vendor or purchaser notifies a Purchase Price Allocation to the IRD within the stated timeframes, the IRD will be entitled to determine the allocation on the basis of Market Value
• Until an allocation is made, the purchaser will be treated as having no cost base in the assets acquired.

Potential advantage for vendors

In implementing these changes summarised above, IRD has created a potential advantage for commercial property vendors as these changes provide them the first right to allocate the purchase price. Astute purchasers may want to ensure that the tax allocation is agreed prior to committing to the transaction.

CBRE’s Building, Depreciation and Cost Consultancy team has significant track record in this field and is well placed to advise, assist and prepare Sale and Purchase Cost Allocations for all types of commercial property as our clients navigate their way through these changes.