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If you are planning on buying or selling a business or farm this year, you need to be aware of the new tax rules that came into effect on the 1 July 2021. These new rules impact the way parties to a transaction allocate the purchase price between business assets. This will need to be considered and addressed in the negotiation and documentation of your transaction terms.
New purchase price allocation rules apply to contracts entered into on or after 1 July 2021. These rules require the vendor and purchaser to agree, in writing, the allocation to be used between various categories of property included in a sale and purchase agreement. These categories include buildings, depreciable property, trading stock and non-taxable property such as land on capital account.
Where no agreement is made, one party can unilaterally determine the allocation, within certain limits, or if no parties make a determination the Commissioner can do so. This can have implications for either party on taxable income or deductions such as depreciation recovered.
Crucially for the purchaser, they are also denied a deduction until these allocations have been agreed or determined by the Commissioner. This puts a significant incentive on the purchaser to get these agreements. While there is a minimum threshhold, it has always been best practice, and our recommendation, to have these agreed as part of the agreement process.
If you have any questions about this, please do not hesitate to contact us.