Spreading of acquisition cost of agreements for the sale and purchase of services

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 s 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:
   1. 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.
   2. 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 s EW 8 of the Income Tax Act 2007.
   3. 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 s EW 8 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.

6. 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 s YA 1 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 1April 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:

Deduction allocated to the income year ending:

This determination is signed by me on 3rd May 2012.

Howard Davis
Director (Taxpayer Rulings)