If you are the owner of a lifestyle block worth more than $1 million and looking to sell, you now need to be aware of a new law known as the ‘Purchase Price Allocation Rules’.
The aim of this law – passed on July 1 this year – is to stop taxpayers allocating asset values in a way that gives them a more favourable tax outcome when buying and selling. The tax does this by incentivising parties in a transaction to agree values and follow these in tax returns.
When we talk about asset values, we are including items such as irrigation equipment, tractors, trees, standing crops, fit-outs, buildings or a barn full of hay. These are common assets in lifestyle block sales, and it is imperative that vendors and buyers talk to their accountants about them, and include them in a sales and purchase agreement. PPA now imperative for lifestyle block sellers by Jim Davis, South Island Regional Manager The legislation also applies to any residential deal worth more than $7.5 million.
This is not new thinking, because allocating values to assets that form part of a sale price for businesses or farms has been common practice for a lengthy period of time, and has usually been determined from the start. However, in smaller property deals like lifestyle blocks, it is typically done between accountants after the contract has been signed, and this tends to cause numerous issues for the IRD.
The IRD has now introduced legislation requiring the allocation of values for assets (PPA) be included as part of a sale and purchase agreement. Allocated values should be market value, rather than the ‘old style’ book value that might have previously applied, and the IRD can override the allocated values if they believe they are out of step with current prices.
It’s not the job of your sales consultant to advise on or make up values on assets. That task lays squarely with your accountant, and it must be done at the onset of listing. Your consultant will include an addendum page to your contract to allow for values on assets to be apportioned. In other words, you must tag extras included over and above your typical land and building sale.
Lifestyle properties, however, are tricky to interpret because the new legal requirements are wide open to interpretation. There have not been any public cases yet for a ‘definition’ to be applied to lifestyle properties to say whether they fall into the residential category or not. However, sales consultants are advised to look at the GST status of a vendor – if they are registered, then it’s a good indication that discussions should occur straight away with the vendor’s accountant.
It is also prudent for consultants to look at any of their existing unsold listings and decide whether a conversation is necessary with the vendor’s accountant. This legislation has nothing to do with what we consider a residential, rural or business deal – it’s about how the vendor has treated their property tax-wise. Please talk to your accountant for more information, or ask your sales consultant for guidance.
For more information: https://www.ird.govt.nz/media-releases/2021/business-asset-sales-rules-tightened
These articles were featured in Harcourts Lifestyle & Rural Property Focus, Issue 3 2021.