This Determination may be cited as Special Determination S21: Spreading of Acquisition Cost of Agreements for the Sale and Purchase of Services.
1. Explanation (which does not form part of the Determination)
(1) This Determination relates to the spreading by a certain company ("the Company") of expenditure arising on
the acquisition of certain agreements for the provision of property maintenance services.
(2) The Company acquired the businesses of two other companies on 1 April 2011 pursuant to separate sale and purchase and novation agreements ("the Agreements"). The first of those companies (and its shareholders) is not, and has never been, associated with the second of those companies (and its shareholders) for the purposes of
the Income Tax Act 2007. Two-thirds of the Company is owned by the shareholders of the first company, and one-third by the shareholders of the second company.
(3) Part of the purchase price under the Agreements was allocated on an arm’s length basis to the acquisition of existing contracts for the provision of maintenance services ("the Contracts"). The Contracts were for a fixed term beginning on 1 July 2010 and ending on 30 June 2012, with a two-year right of renewal (subject to the satisfaction of certain performance and other criteria).
(4) The Company must now provide the relevant maintenance services over the remaining term of the Contracts. The Company issues regular invoices, and payment is due within 21 working days of the date on which the invoice is received.
(5) The Company has adopted the International Financial Reporting Standards for the purpose of preparing its accounts.
2. Reference
This Determination is made under section 90AC(1)(bb) of the Tax Administration Act 1994.
3. Scope of Determination
(1) This Determination applies to the tax treatment of the Contracts and any other short-term agreements for sale and purchase with the same term as the Contracts.
(2) The Company acquired the Contracts from two other companies pursuant to the Agreements.
(3) The first of the two other companies (and its shareholders) is not, and has never been, associated
with the second of those companies (and its shareholders) for the purposes of the Income Tax Act 2007.
(4) This Determination is made subject to the following conditions:
(a) The consideration the Company paid for the acquisition of the Contracts was not greater than
the amount that a wholly unrelated arm’s length party in the place of the Company would have agreed to pay the two other companies for those Contracts;
(b) The Company will treat the Contracts and any other short-term agreements for sale and purchase with the same term as the Contracts as financial arrangements under section EW8 of the Income Tax Act 2007.
(c) The Company will continue to recognise income derived from the Contracts and deduct expenditure incurred in relation to the Contracts under general principles (other than amounts dealt with under this Determination).
4. Principle
(1) The Company treats the Contracts and any other
short-term agreements for sale and purchase with the same term as the Contracts as financial arrangements under section EW8 of the Income Tax Act 2007.
(2) This Determination specifies that the only amounts payable to or by the Company for or under the Contracts that are required to be spread under the financial arrangements rules are the amounts allocated to the acquisition of those Contracts in the Agreements. Those amounts must be allocated to an income year on a
pro-rata basis applying the principles of Determination G1A (on a 365-day basis) from 1 April 2011 to 30 June 2014.
(3) If any one or more of the Contracts is not renewed in accordance with its terms, the Company must apply the principles of Determination G25 as if the term of
the relevant Contract had been varied from four years
to two years.
5. Interpretation
In this Determination (and the Explanation), unless
the context otherwise requires, words and expressions used (that have not been defined elsewhere in the Determination) have the same meaning as in section YA1 of the Income Tax Act 2007:
Agreements means the separate sale and purchase and novation agreements under which the Company acquired the businesses of the other two companies on 1 April 2011.
Contracts means the contracts for the provision of maintenance services.
6. Method
(1) The amounts allocated to the acquisition of the Contracts in the Agreements must be allocated to an income
year on a pro-rata basis applying the principles of Determination G1A (on a 365-day basis) from 1 April 2011 to 30 June 2014.
(2) If any one or more of the Contracts is not renewed in accordance with its terms, the Company must apply the method in Determination G25 as if the term of the relevant Contract had been varied from four years to two years.
7. Example
This example illustrates the application of the method (set out in this Determination) for determining the expenditure attributable to the Contracts in each income year.
The example is based on the following parameters:
Acquisition date 1 April 2011
End date 30 June 2014
Aggregate acquisition cost of Contracts $5,000,000.00
Balance date 31 March
Deduction allocated to the income year ending:
31 March 2012 $1,538,785.83
31 March 2013 $1,538,785.83
31 March 2014 $1,538,785.83
31 March 2015 $383,642.51
This Determination is signed by me on the 3rd day of May 2012.
HOWARD DAVIS, Director (Taxpayer Rulings).