Everything you need to know about the new taxation bill

It’s one of the most common questions clients ask when it comes to property transactions. 

In evaluating a deal, both vendors and purchasers look to properly assess their tax, within the realms of the law, at the time of the sale and into the future. 

While tax outcomes have always been a major consideration, the latest amendments to the Income Tax Act bring more questions and considerations for property owners to the forefront.

In this article we explain what it means for you if you are purchasing or selling a commercial property.

Previously, when it came to allocating the purchase price for a property, the vendor and purchaser were able to allocate the sale price in different proportions between the land and depreciable building and fit-out assets. This was important because allocating more cost to the depreciable assets makes sense for a purchaser, as they can claim more depreciation from a higher cost base.

Meanwhile, selling the land for more and depreciable assets for less is better for the vendor, to limit depreciation recovery (income tax payable on the price received for an asset over its tax book value). These differences meant that the tax base was eroded.

Several sections of New Zealand taxation law already explicitly require purchase prices to be allocated to taxable property based on market value. However, market value application is often considered to be a grey area in the law for taxpayers to take advantage of. The government is of the view that there is too much room for a vendor and purchaser to ‘game the system’ by separately allocating purchase price to create tax-free capital gains or deductible losses on sale (for vendors), or skew excessive purchase price to depreciable assets (purchasers).

Looking to ensure fairness in property transactions and protect its tax base, the government has recently amended the Tax Act to make certain that sale price allocations are agreed by both sides of the transaction. Notable tax professionals have commented that the new rules are a “solution looking for a problem”. However, regardless of opinions, the rules are here to stay and must be adhered to.

The rules apply to practically all industrial, office, hospitality or retail property sales, if the total sale price of the property is over $1,000,000.

Since April 2021, the amended act has required both parties to agree to the purchase cost allocation in writing, within three months of the change in ownership of the assets. The agreed values must be duplicated in their tax returns. These changes can have a large impact on purchasers’ future tax depreciation claims and vendors’ tax depreciation recovery.

What is a property cost allocation? Simply put, it is the process of apportioning your property’s purchase price between the land, building structure and fit-out, based on current market value. The deliverable of this apportionment provides you with a summary of costs to be used as a tax depreciation schedule.

If the parties don’t agree on a purchase cost allocation in writing before one of the parties takes a tax position on the purchased property, the vendor has the first right to decide the values. The vendor must notify Inland Revenue and the purchaser within three months of the sale date. The price allocated to assets must be greater than the market value or the tax book value. This stops the vendor from allocations that result in tax losses on sale (some are potentially deductible).

JLL NZ Valuation Advisory Director, Graham Barton, believes that while the changes will impact both vendors and purchasers, in strong markets the vendor has an unfair advantage. 

“We are seeing sale and purchase agreements with clearly non-market related apportionments and clauses that both parties must follow these apportionments in their tax returns. This ensures the purchaser cannot object to an apportionment afterwards, because they have signed a contract to abide by it. If any potential purchasers won’t accept the apportionment, the vendor just sells it to someone else who will. But this situation will not exist forever.”

Rule application: Applies to most industrial, office, hospitality or retail property sales, if the total sale price of the property is $1m+

Alongside 35 years of local experience with tax depreciation and property issues, we have New Zealand’s largest team of specialist plant and machinery valuers. As one of the leading valuation firms we can assess independent and fair market values and help you to understand all of the competing interests and tax implications with property transactions.

1. Our registered valuers can provide an independent valuation of assets that form part of a sale. This provides a fair and accurate value of assets for both parties to a transaction and assurance of the assets’ market value.

2. We can apportion the purchaser’s building and fit-out cost into Inland Revenue’s asset categories, based on a market valuation and calculate future depreciation claims. 

3. We can apportion sale prices based on market values to calculate depreciation recovery (or losses on sale) for vendors. This provides certainty on your future financial positions and ensures compliance with the new regulations. 

New Taxation Bill (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters)