Revenue Seeks More Consistency
A number of you will probably have come across a business sale agreement, which reflects a consideration agreed between the parties as a single global sum, with no allocation breakdown to recognise the different components included in the sale – inventory, depreciable assets, goodwill etc.
Naturally if your client is the vendor in the transaction, when it comes to recognising the disposal for tax purposes, your allocation compass will tend to head in the direction of allocating more of the disposal proceeds towards those items of a capital, non-taxable nature such as goodwill, and less to those items held on revenue account, like trading stock (although there are market value rules you are supposed to adhere to in this case). As the purchaser’s advisor, you will of course be drawn towards the opposite direction.
So who cares? The parties concluded the transaction on an arms-length basis, have settled the transfer of the assets, and have gone on their merry respective ways. Well apparently the Revenue cares, a position substantiated by the release of its latest officials issues paper, titled “Purchase price allocation”. And it’s not difficult to understand why, when you consider that the only “person” missing out by the potential allocation mismatches, is the Government’s pockets due to less tax revenues as a consequence of less assessable income returned by the vendor and increased deductions claimed by the purchaser, in respect of the one commercial transaction.
So what is the Revenue’s suggested solution to address its concerns? The officials issue paper provides the following proposals:
- 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;
- that it may be appropriate to have a de minimis for these suggested changes.
In terms of a de minimis level, the officials issue paper requests feedback on an appropriate level. There is a $50,000 quantum given as an example, where deductible/depreciable items allocations are less than this amount, however this should not be taken as anything more than an illustrative example at this time in my opinion.
It is proposed that the new rules would be introduced in a tax bill in the first half of 2020.
Feedback on the issues paper is requested to be provided no later than 14th February 2020.
Binding Rulings on Shares with Altered Rights
IR has issued BR PUB 19/05 & BR PUB 19/06, in essence a re-issue of the earlier rulings on the same topic, BR PUB 17/04 & BR PUB 17/05.
The rulings deal with two separate scenarios, where shares acquired for the purpose of resale have their rights altered (such rights alterations however not structured as a cancellation and issue of shares).
BR PUB 19/05 in essence confirms that the rights alteration does not result in a disposal of personal property for the purposes of section CB 4 – so there is no deemed disposal event simply due to the rights attached to the shares having been altered.
BR PUB 19/06 however is targeted towards a subsequent disposal of some or all of the shares with the altered rights, and in essence confirms that for the purpose of CB 4, the acquisition date of the shares, remains the original date the shares were acquired, and does not amend to the date the alteration occurred (where the holder could potentially argue they had no resale purpose at that later date).
Operating Leases IFRS Alignment
If you are not preparing IFRS financial statements, then no need to read any further, unless of course you are still trying to hone your Tuesday night pub quiz knowledge base, just in case the question ever gets asked.
Those in the IFRS community have been asking for some time, to be allowed to more closely follow their accounting treatment of leases, for tax purposes, and Government has finally agreed. The proposed rules will be included in a tax bill planned for introduction in early 2020. They would apply to taxpayers with IFRS reporting obligations for income years starting on or after 1 January 2019, to align with the commencement of IFRS 16.
As a result of the legislative amendment, no change is planned to the existing finance/operating lease boundaries and it is only lessees to whom the concessions will apply to.
A lessee will elect into the rules simply by calculating their deductions in the relevant tax return following their accounting treatment, and once the election has been made, they must follow the treatment in all future income years where IFRS 16 is applied.
The following operating leases are unaffected by the changes and existing tax rules will continue to apply:
- a lease of real property;
- a lease from an associated party; and,
- a lease where the asset is subleased.
Final AWIR for 2019
This will be my final edition of AWIR for 2019.
I thank you all for your support during the year (where has it gone!!), and wish you and your families a great Xmas and safe travels over the holiday period.
AWIR will be back on the 13th January 2020.