Income tax Dates
You must document the purchase price allocation of an asset sale if the buyer and seller agree on it.
Agreeing on purchase price allocation
The buyer and seller may agree on how the purchase price is allocated to 2 or more asset classes. They must record the agreed purchase price allocation in writing before either of them files an income tax return which includes the transaction.
Both buyer and seller must use the asset class values for income tax purposes when they file their returns.
Any agreed allocation must reflect the relative market value of the assets being sold. The buyer and seller can agree to change an allocation before either of them files an affected income tax return. After either the buyer or the seller has filed an affected return, they cannot agree between themselves to change the allocation. We retain the power to adjust the allocation under the purchase price allocation rules.
Neither the buyer nor the seller needs to notify us of the agreed allocation unless requested. If we do request it, you will need to notify us of this agreement.
Example
An example to help you understand selling business assets.
Jesse sells his business ‘Capital Coffee Roastery’ to Connall for $2m. The sale includes assets with different tax treatments, meaning the purchase price allocation rules must be considered.
The business is sold as a going concern and meets the requirements for GST zero-rating. No GST is charged on the sale.
Jesse and Connall work with their accountants and tax advisors to determine the relative market value of each asset class. They agree that:
- coffee beans, bags, and other stock are worth $300,000 - these are trading stock
- factory and roasting equipment are worth $700,000 - these are depreciable property
- the business’s reputation and customer relationships (goodwill) are worth the remaining $1m - this is non-taxable or non-deductible property.
They record the agreed allocation in the sale and purchase agreement.
When completing his income tax return, Jesse must return the $300,000 allocated to trading stock as income. He may also need to return depreciation recovered on some or all of the $700,000 factory and roasting equipment.
Connall can use the $300,000 allocated to trading stock as the cost of that trading stock and claim an expense when the finished products are sold. He can also claim depreciation expense on the $700,000 allocated to the factory and roasting equipment, subject to the normal depreciation rules.
Neither Jesse nor Connall will return income or claim expenses for the $1m allocated to goodwill.