Chapter 1 – Introduction
1.1 Most sales of a business are mixed supplies, meaning they involve a mixture of revenue account property (for example, trading stock), depreciable property (for example, plant or machinery) and capital account property (for example, goodwill).[1] Another common example of a mixed supply is a sale of commercial property, which involves depreciable fit-out as well as non-depreciable land and buildings.
1.2 This issues paper discusses policy proposals to address income tax problems relating to mixed supplies where:
- two or more types of property are supplied in a single transaction; and
- the tax treatment of those types of property is not the same, for one or both of the parties.
1.3 One tax issue that arises is how to allocate the agreed purchase price among the assets transferred in a mixed supply. This allocation usually has little or no commercial significance but can have a material impact on the parties’ tax obligations. Accordingly, it is not appropriate for the parties to determine the allocation without reference to market values.
1.4 In most cases, the Income Tax Act 2007 already explicitly requires the amount allocated to taxable assets in a mixed supply to be determined on the basis of market values. However, with the exception of the rules for trading stock, these rules do not explicitly require the seller and buyer to adopt the same allocation, that is, there is no general consistency requirement.
1.5 In many mixed supply transactions, the parties agree on an allocation which is based on market values and follow it in their tax returns. This is best practice, and the proposals in this issues paper are intended to encourage it. However, the Commissioner of Inland Revenue is aware of other practices which are not desirable, but which are difficult to deal with under the current provisions.
1.6 Buyers and sellers in some transactions are adopting different allocations for tax purposes, almost always to the detriment of the Government’s revenue base. Sometimes these differences are based on different views of market values, where the parties have not agreed on an allocation.[2] Sometimes, one party files its tax return on the basis of an allocation explicitly agreed between the parties, while the other files on a different basis because the agreed allocation does not in its view represent market value.
1.7 In some cases, the parties agree to and both adopt an allocation which in the Commissioner’s view is not based on market value. The parties may then take the position that the Commissioner has no power to challenge the allocation, because it has been agreed between arm’s length parties, or because there is no explicit market value rule for a buyer of depreciable property.
1.8 Officials consider that:
- in all cases allocations should be based on relative market values,[3] and the Commissioner must have the power to adjust an allocation (whether or not agreed) that is not so based. Officials believe that this is already the law, but for a purchaser of depreciable property, it could usefully be clarified;
- in a transaction which is a mixed supply for both parties, the parties should adopt the same allocation when filing their tax returns, and the Commissioner should be able to easily determine whether or not they have done so.
1.9 This issues paper:
- explains in more detail why the allocation of the price in a mixed supply is important for tax purposes;
- summarises the current law;
- explains the issues arising in practice under the current law; and
- proposes some solutions to those issues.
1.10 Feedback on the proposed solutions is invited, including any modifications to the proposals or solutions which may be preferable.
Summary of proposals
1.11 To increase taxpayer certainty, prevent vendors and purchasers from engaging in allocation practices that reduce tax revenue, and to minimise administrative costs, officials suggest the following rules for transactions where both vendor and purchaser treat the transaction as a mixed supply:
- that in all cases the vendor and purchaser be required to use the same allocation of the total purchase price to the different types of property;
- that this be achieved by a hierarchy of rules – if the parties:
- agree on an allocation, both must file their returns using that allocation;
- do not agree on an allocation, then:
- the purchaser must use the vendor’s allocation when filing its tax return. In this case, there would be a requirement for the vendor to disclose their allocation to the purchaser and the Commissioner within a specified period, for example, within three months of when the assets are treated for tax purposes as disposed of by the vendor;
- if the vendor fails to provide an allocation, the purchaser may make the allocation, in which case that allocation would be provided to the vendor and the Commissioner and would be required to be adopted by the vendor;
- that allocations must be based on relative market values, except possibly in the case of a non-agreed allocation to depreciable property, where depreciated cost or possibly original cost could be adopted instead;
- it may be appropriate to have a de minimis for these suggested changes.
1.12 It is expected that any amendments arising from these proposals will be included in a tax bill to be introduced in the first half of 2020.
How to make a submission
1.13 Submissions are invited on the proposals in this discussion document.
1.14 The closing date for submissions is 14 February 2020.
1.15 Submissions can be made:
- by email to [email protected] with “Purchase price allocation” in the subject line; or
- by post to:
Purchase price allocation
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140
1.16 Submissions should include a brief summary of the major points and recommendations. They should also indicate whether it is acceptable for officials from Inland Revenue to contact submitters to discuss the points raised, if required.
1.17 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission should clearly indicate if they consider any part of their submission should be withheld under the Act.
[1] Revenue account property is an asset that when sold would result in a taxable gain or deductible loss. Conversely, capital account property is an asset that when sold would result in a non-taxable, non-deductible capital gain or loss. Depreciable property is an asset whose market value is expected to decline in value over its economic life.
[2] In most cases the market value of an asset cannot be precisely determined, may be subject to debate between valuation experts, and falls within a range.
[3] The amounts allocated still have to add up to the global purchase price, but the proportion of that purchase price allocated to a specific asset should be its market value relative to the total market value of all the assets being purchased.