In certain circumstances one sale price will have to be apportioned between distinct assets that are covered under one sale contract with a common price. For example:
? You might sell land with an attached asset that is eligible for capital allowance claims. In such a case, the price attributable to the attached asset needs to be clear to enable claiming capital allowances for that asset.
? You might sell plant and machinery items that belong to different asset pools and hence need to be accounted separately
The general rule is that the apportionment should be done in a just and reasonable manner. However, the seller and buyer have opposing pulls in fixing the price of assets that are eligible for capital allowances.
The buyer would like to see it fixed at a high value so that the person can claim maximum capital allowances. The seller, on the other hand, would like to apportion a low value to the asset so that there will be no surplus over the written down value (original expenditure minus capital allowances claimed so far).
Where an asset is sold at a price over the written down value, tax authorities will consider excessive capital allowances to have been given and add back the excess to current taxable income. The taxpayer will thus be forced to bear additional tax burden.
Because the buyer and seller have to use the same apportionment, a negotiation process usually follows. However, if the result of the negotiation appears to be designed to avoid tax with no reasonable basis, tax authorities might not accept the apportionment. Instead, they might open an enquiry in consultation with the concerned District Valuer.
Where buyer and seller has not entered into any agreement for apportionment of the sale price, the buyer can do the apportionment in consultation with the District Valuer.
The price apportioned to the asset eligible for capital allowances cannot exceed:
? The amount on which the seller could have claimed capital allowances
? The total sale price
Provided that the sale contract has been made at "arm's length" leading to the assumption that is has not been fixed to avoid tax, and the above provisions have been followed, apportionment of the sale price will not normally be rejected.
Similar provisions apply in the case of a lease transaction with the lessee paying a premium and using the asset for a qualifying activity.
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