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Income Tax Act 2007

Avoidance and non-market transactions - Market value substituted

GC 20: Effect of purchase price allocation agreement

You could also call this:

“Agreement on sale price allocation for different property types in a transaction”

This law applies when you sell different types of property to someone else. The property can be things like trading stock, timber, equipment that loses value over time, buildings, financial arrangements, or other items.

You and the buyer need to agree on how much of the total sale price goes to each type of property. You must write this down before either of you files a tax return about the sale.

The amount you agree on for each type of property is usually the amount used for tax purposes. However, if the tax department thinks the amount doesn’t match the property’s real value, they can change it.

If you’re selling to someone you’re connected with (like family or a business partner), there are special rules for trading stock and timber. The agreed amount can’t be less than what these items are really worth.

For equipment that loses value over time, there are some exceptions. If the item originally cost you less than $10,000, and the total amount for this and similar items is less than $1 million, the tax department won’t change the agreed amount. This is as long as the amount isn’t more than what you paid for it and isn’t less than its current tax value.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS519816.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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“How to split the sale price when you and the buyer don't agree”

Part G Avoidance and non-market transactions
Market value substituted

GC 20Effect of purchase price allocation agreement

  1. This section applies when—

  2. for consideration, a person (person A) disposes (the disposal), to another person (person B), items of property (the purchased property) that, for person A or for person B, fall into 2 or more of the following classes (the classes of purchased property)—
    1. trading stock, other than timber or a right to take timber:
      1. timber or a right to take timber:
        1. depreciable property, other than buildings:
          1. buildings that are depreciable property:
            1. financial arrangements:
              1. purchased property for which the disposal does not give rise to assessable income for person A or deductions for person B; and
              2. person A and person B have agreed, and recorded in a document, amounts of the total consideration allocated to any of the classes of purchased property before the earlier of—
                1. the day person A files a return of income in relation to their tax position for the purchased property:
                  1. the day person B files a return of income in relation to their tax position for the purchased property.

                  2. A class of purchased property—

                  3. is treated as disposed of and acquired for the relevant allocated amount; or
                    1. may be treated by the Commissioner as disposed of and acquired for an amount that reflects the relative market value of the class of purchased property, proportional to the other classes of purchased property, if the Commissioner considers the allocated amount does not reflect that value.

                      1. Subsection (2) does not apply to a class of purchased property described in subsection (1)(a)(i) or (ii) if—

                      2. person A and person B are associated persons at the time of the disposal; and
                        1. the allocated amount for the class of purchased property is less than the total market value of the items of purchased property in the class of purchased property at the time of the disposal.

                          1. Subsection (2)(b) does not apply to an item of purchased property that is an item of depreciable property, if—

                          2. the original cost of the item for person A is less than $10,000; and
                            1. the total allocated amount for the item and for any identical property is less than $1 million; and
                              1. the allocated amount for the item is—
                                1. no greater than its original cost for person A; and
                                  1. no less than its tax book value as described in section GC 21(13)(c).

                                  Notes
                                  • Section GC 20: inserted, on , by section 83(1) (and see section 83(2) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                  • Section GC 20(2B) heading: inserted, on , by section 83(1) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                  • Section GC 20(2B): inserted, on , by section 83(1) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                  • Section GC 20 list of defined terms associated person: inserted, on , by section 83(2) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).