IMPORTANT – “SALE/PURCHASE PRICE ALLOCATION”
From 1 April 2021, a vendor and purchaser may need to include an allocation between LAND (Non-depreciable Property) and IMPROVEMENTS (Depreciable Property) within the sale and purchase agreement.
Depreciation rules are always changing and this rule requires you to agree to additional information within the Sale and Purchase Agreement. In its simplest form you will be required to agree on the allocation between LAND (non-depreciable property) and IMPROVEMENTS (Depreciable Property) within the agreement. The allocation will be used to determine the “closing book value” of improvements for the vendor and the corresponding “opening book value” of improvements for the purchaser.
Our Key Points to note
- Allocation for the sale of a property is only required to show an allocation between Non-Depreciable property (Land, and building structure for residential) and Depreciable property (Improvements) NOT a detailed list of individual depreciable items.
- A purchaser will be able to further split the “Depreciable Property Value”, agreed upon within the allocation, into the relevant IRD depreciation categories and IRD depreciation rates to accurately reflect the depreciation claimable during ownership.
- Any allocation must be based on relative market values for all the assets. Inland Revenue may challenge an allocation if it believes it does not reflect market values.
- If the seller chooses the allocation, it must allocate at least tax book value to depreciable property and values to other taxable property such that the seller recognises no loss on the sale.
- If the parties agree an allocation, they must follow it in their tax returns.
- If the parties cannot agree an allocation, the seller determines the allocation, and notifies both the buyer and Inland Revenue within 2 months of the change in ownership of the assets.
- If the seller does not make an allocation within the 2-month timeframe, the buyer must determine the allocation, and notify both the seller and Inland Revenue of it.
- The purchase price allocation rules will not apply to a transaction if the total purchase price is less than $1 million, or the buyer’s total allocation to depreciable property (Improvements) is less than $100,000.
NOTE: this is an overview of the changes ONLY. Please take direction on the specifics in relation to the eligability and specific rules in relation to your property from your Accountant.
The calculator below utilises the IRD formula to calulate the ALLOCATION between “LAND” and “DEPRECIABLE PROPERTY”.