Some recent changes to legislation for commercial property transactions over $1,000,000 came into effect on 1 July 2021. These changes may have tax implications for you as a commercial property investor.
The new rules require the purchaser and the vendor to agree on the allocation of the purchase price with regards to land, buildings and fitout. This is to ensure that a consistent approach for tax purposes is taken but it can have huge implications on each party’s tax position. A risk for the vendor being that they are left with a significant tax bill following the settlement of the property.
In a perfect scenario both parties would agree to the allocation prior to the execution of the sale and purchase agreement and adopt this allocation in their tax returns. Failing this, the vendor gets the first right to determine the allocation. If they don’t do this, then the purchaser gets the right to determine their preferred allocation. If none of these scenarios happen, then it is left to the IRD to determine the allocation.
It is extremely important that you are aware of the tax consequences of the allocation, and we recommend that you seek specialist tax advice before you enter into any property transaction that is covered by this legislation.