A Tax Bill (The Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill) containing a number of important changes was introduced to Parliament on 4 June 2020 to consider and approve. The following changes as included in the Bill:
- Allocation of purchase price when buying and selling a business;
- A tightening of the land rules for those that habitually buy and sell land;
- Improved deductibility of feasibility expenditure.
There are a number of other inclusions that made it to the Bill. As expected, there’s nothing yet on the tax loss carry forward rule changes including on the proposed introduction of a “same or similar” business test.
There are no real surprises, all is largely as anticipated.
Bumper Tax Bill
A Tax Bill containing a number of previously consulted upon changes was introduced to Parliament on 4 June 2020. As a Bill, it’s not yet law - this discussion serves to provide you with information in advance of enactment.
Allocation of purchase price
This issue has been a particular headache for the Commissioner, as parties to the sale of assets have effectively been able to adopt differing approaches in allocating purchase price. This proposed amendment seeks to prevent this and provide symmetry of treatment for vendor and purchaser.
Two parties have entered into an agreement to sell and acquire the assets of a business. The purchase price is agreed to be $1m, and the assets include goodwill, depreciable property, trading stock, land and buildings (confirmed not subject to any land taxing provisions). The vendor and purchaser have not allocated the purchase price between the asset classes.
In such situations, there is a natural tension between vendor and purchaser in relation to the allocation of purchase price. It is logical to assume that in most cases, the vendor will want to allocate the purchase price to non-taxable items (such as goodwill and land), with the purchaser adopting a conflicting position; seeking to allocate the purchase price to assets that will give rise to tax deduction (trading stock, depreciable property).
Clearly, if the vendor and purchaser follow their specific objectives and apply different purchase price allocations, the tax base suffers.
The Bill introduces the following to ensure symmetrical treatment:
- If the sale and purchase agreement agrees an allocation, both vendor and purchaser must adhere to that allocation;
- If allocation is not agreed, the vendor can determine the allocation and notify both purchaser and Commissioner within two months of change of ownership. The allocation must ensure that amounts are allocated to taxable property, such that no additional loss arises on the sale of that property (for example, trading stock, depreciable property);
- If the vendor does not allocate within two months, the purchaser is then entitled to determine allocation (and notify the vendor and Commissioner).
The Commissioner remains entitled to challenge an allocation if she is of the view that it is not reflective of market value. A de minimis threshold applies, and these allocation rules will not apply if the total purchase price is less than $1m, or the purchaser’s total allocation to taxable property is less than $100,000.
We suspect that in the majority of cases the vendor and purchaser will want to agree an allocation within the sale and purchase agreement to avoid control passing to one party or the other and to mitigate the need to remember further engagement with the other party and the Commissioner.
Tightening of land rules
Do not be fooled into necessarily thinking that your “house is your castle” and cannot taxed. The same sentiment applies to property used as your main business premises.
The land taxing provisions are widely drafted and (by way of example) will tax property that was acquired for an intention or purpose of sale.
However, exclusions apply for a person’s main residence and business premises, providing the person does not have a regular pattern of buying and selling their main residence/business premises and relying on the exclusion.
The Bill proposes to tighten the rules regarding “regular pattern” and will expand the rules such that it focusses on a group of persons, rather than a single person (i.e. you cannot seek to break a pattern by using different entities to buy and sell a main home).
The rules are also considered to apply too narrowly, such that the exclusion would be dismissed only if there is a similarity between the transactions. For example, the exclusion would not apply to a pattern of buying bare land, building the main home, living in it and selling. This is contrasted to a person who buys a residential home, then purchases bare land (builds, lives and sells) and subsequently acquires a further property which is renovated, lived in and sold; in this case the exclusion would apply, because the activities are not sufficiently similar to create the pattern.
The Bill confirms and amends such that the focus is placed on the regularity of transactions, irrespective of what was done on or to the land while held.
It is important to note that the establishment of a “regular pattern” does not necessarily mean the land is taxable. It must first be established that the land was acquired with an intention or purpose of resale. From experience, we have seen Inland Revenue seek to challenge that a disposal of land was taxable on the basis a regular pattern was visible. This approach cannot be legislatively successful and the Bill confirms this point.
Deductibility of feasibility expenditure
This is very much a grey area of tax law. A fine line exists between expenditure that is deductible as feasibility expenditure and that which goes beyond (and either is deductible as part of depreciable property over time, or not at all and “blackhole” expenditure).
This proposed change refers to “blackhole” expenditure and provides taxpayer certainty to permit a deduction for expenditure that is incurred in completing, creating or acquiring property if:
- The property is depreciable property or revenue account property (being property, that if sold, would result in taxable income); and
- Progress on the property is abandoned (and not completed, created or acquired); and
- Legislation does not permit a deduction elsewhere.
In this case, the deduction can be spread over five years from the income year of abandonment.
As a compliance cost measure an immediate deduction is permitted for expenditure incurred in completing, creating or acquiring property that is:
- Depreciable property or revenue account property; and
- Legislation does not permit a deduction elsewhere.
The catch here is that this deduction is to be limited to $10,000. From our perspective, if $10,000 is good for an immediate deduction for these purposes, why not extend it to low value assets (where the cap is $5,000)?
If you require further information please contact your local BDO advisor