Monday, April 22, 2024

New tax rules are ‘flawed’

Neal Wallace
New taxation rules will create uncertainty and compliance costs to virtually every farm sales, warns Chartered Accountants Australia and New Zealand (CA ANZ).
Chartered Accountants Australia and New Zealand Tax Leader John Cuthbertson says the GST change will benefit sole traders working from home.
Reading Time: 2 minutes

The association’s NZ tax leader John Cuthbertson says the new legislation coming into force on July 1, is designed to reduce government revenue loss by forcing parties to sale and purchase agreements to agree on the allocation of sale proceeds to particular types of assets for tax purposes.

Cuthbertson says this is known as purchase price allocation.

“If they had just stopped there that would have been acceptable, but they have gone further, impacting the relative negotiating positions of the parties and adding uncertainty and compliance costs,” he said.

The Finance and Expenditure Committee has acknowledged several shortcomings and recommended changes to improve the draft legislation.

“Proposals contained in the Bill represent a substantial departure from the current rules regarding purchase price allocations,” he said, quoting the committee.

“The proposed rules are detailed and complex, and the consequences of not knowing of their existence, misunderstanding them, or ignoring them, are not pleasant”.

He says that unusually the committee has recommended that the new regime be kept under review and if it does not work as intended, prompt adjustments be considered.

“That is not exactly a glowing endorsement of its practical application,” he said.

There are significant implications for farm sales.

“Farm sales already involve intensive logistics and planning,” he said.

“New purchase price allocation rules are expected to apply from July 1, a traditionally busy time for farmers.

Cuthbertson says these rules carry additional steps that farmers need to be aware of and have the possibility to influence the negotiating dynamics of the sale process.

“Because most farm sales are over the $1 million threshold, these rules will apply broadly to the rural sector,” he said.

He says current tax rules allow sellers to reduce their taxable income, and buyers to increase their deductions and depreciation claims by taking different tax positions on the same asset.

“For example, the vendor might attribute more to non-taxable goodwill, while the purchaser may attribute more to depreciable plant and equipment,” he said.

One potential area of conflict are the proposed tight timeframes that vendor and seller must agree on the tax treatment of assets.

“The reality is that buyers and sellers don’t always agree, and the misaligned timeframes contained in the legislation will create a headache for both parties,” he said.

“The intention is that the buyer and seller agree on the purchase price allocation in a sale document by the time that the first party files their tax return.”

If parties fail to agree in the first instance, the allocation is decided by the seller and if that is not done within three months of the sale date, the decision is decided by the buyer.

“It is fundamentally wrong to give primary power to one party to the transaction, either the buyer or seller, when an allocation has not been agreed in the sale and purchase agreement,” he said.

He says CA ANZ prefers a targeted rather than a legislated approach to the problem.

“In our view, Inland Revenue should have first assessed the actual magnitude of the problem and made greater use of its existing tools to seek redress,” he said.

“The CA ANZ understands the Government’s desire for tax symmetry, but does not support the approach to move directly to a legislative solution, which will impact virtually the entire transaction market.”

People are also reading