Business asset sales can involve a mixture of:
- taxable (revenue) assets like trading stock, accounts receivable, personal property bought for resale, or patents
- depreciable (capital) assets like plant or machinery
- non-taxable (capital) assets like business goodwill.
The buyer and the seller can choose how much of the sale amount belongs to each type of asset. This is called allocating the sale price. It affects the tax paid, and the tax benefits or profits received. Typically, a higher proportion of:
- taxable and depreciable assets will benefit the buyer as they can claim expenses and depreciation
- non-taxable assets will benefit the seller as this reduces their taxable income.
Where the buyer and seller agree on amounts allocated
Where the buyer and seller agree on how the sale price is allocated between taxable, depreciable and non-taxable assets then these values should be used for tax purposes.
The agreement should be made and documented before either the seller or buyer files their income tax return which includes the tax position for the sale. Neither party needs to notify us about the agreement unless requested.
If we consider the agreed amounts do not reflect the asset’s market value, we may allocate amounts using certain thresholds for low value depreciable assets.
From 1 July 2021, where 2 or more assets are sold, the buyer and seller should agree on the amount to allocate to each asset class based on market value.
Where buyer and seller do not agree on amounts allocated
Where the buyer and seller do not agree on amounts allocated and the total purchase price is $1 million or more, or where the only assets are residential land (including buildings and chattels) with a purchase price of $7.5 million or more the following rules apply.
Within 3 months of settlement of the transaction, the seller:
- may determine the amounts allocated
- must notify both the buyer and us of the amounts. The amounts cannot be less than the greater of the market value or the sellers tax book value for the assets.
If the seller does not determine and notify the amounts to the buyer and us within the 3-month timeframe, then within a further 3 months (within 6 months of settlement) the buyer:
- may determine the amounts allocated
- must notify both the seller and Inland Revenue the amounts. The amounts cannot be less than the market value for the assets.
Once a valid notification is made by either party the amounts must be used by both the buyer and seller for income tax purposes.
If the buyer does not make a notification within the further 3-month timeframe then:
- we may allocate amounts to each asset
- any tax deduction that the buyer is entitled to may be denied until the following years tax return.
Note – Where we allocate an amount to each asset we may use an allocation made by either the buyer or seller notified after the 3 or 6 months timeframes, or based on market value subject to certain thresholds for low value depreciable assets.
Notification can be made through myIR as a web message or in writing.
The notification should include the phrase “Purchase Price Allocation” in the subject line.
The following details are required in the notification:
- Both parties name, IR/GST number and contact details
- Date of agreement to the transaction
- Date of settlement
- Global/total price
- Price allocated to each class of property sold - 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 where disposal does not give rise to assessable income for the seller or a deduction for the purchaser.
- A statement that the amounts have been allocated in accordance with section GC 21.
You may wish to provide supporting documents such as the sale and purchase agreement and the notification provided to the other party.
Further detailed information is available in a special report published during April 2021 on our Tax Policy website.
Correcting the sale price allocation
If we find that the buyer and seller did not allocate the sale price in reasonably the same way in their income tax returns, or did not allocate it in line with market values or tax book values where required, then we are likely to:
- investigate the sale
- set our own allocation for tax purposes
- reassess any incorrect GST or income tax returns (whichever applies):
In the case of a disagreement between us and you, it’s your responsibility to prove that your sale price allocation is correct.
This can take a while and can lead to a tax bill for either side. It’s best to talk early with a tax professional to make sure you get the details of your sale right from the start.
Jesse sells his business ‘Capital Coffee Roastery’ to Connall for $200,000. It’s a sale made up of taxable and non-taxable assets.
The business is being sold as a going concern and meets the GST requirements, so the supply is zero-rated for GST – neither side pays nor receives GST on the sale.
Jesse and Connall work together along with their accountants and tax advisors to allocate the sale/purchase price to each type of asset. Based on market value, they both agree that the:
- coffee beans, bags, and other trading stock are worth $30,000 – these are taxable (revenue) assets
- factory and roasting equipment are worth $70,000 – these are depreciable (capital) assets
- business’s good reputation to its customers (goodwill) is agreed to be worth the remaining $100,000 – this is a non-taxable (capital) asset.
As the seller, Jesse must declare the $30,000 worth of taxable assets as income in his income tax return. He may also need to make an adjustment to account for the clawback of some of the $70,000 factory and roasting equipment that he previously claimed depreciation on.
As the buyer, Connall can claim $30,000 as an expense in his income tax return for the trading stock. He can also claim depreciation on the $70,000 factory and roasting equipment.
Neither Jesse nor Connall will declare income or claim expenses for the $100,000 allocated to business goodwill.