Practical guidance on the purchase price allocation rule

Tax Alert - July 2021

By Emma Marr

If you are buying or selling business assets you will need to become familiar with new tax rules about allocating asset purchase prices, which took effect from 1 July 2021. The aim of rules is to stop taxpayers allocating asset values in a way that gives them a more favourable tax outcome when buying and selling assets. The rules do this by incentivising parties to a transaction to agree values and follow these in tax returns. Many in the tax community felt that the rules were possibly a solution looking for a problem, but they’re here now, and anyone buying or selling assets needs to understand them.

There are incentives for vendors and purchasers of property to set prices that create better tax outcomes. Paying more for a depreciable asset makes sense for a purchaser, selling the same asset for less makes sense for the vendor. However, in an arm’s-length sale the parties have competing interests and can be expected to settle on supportable market values. If they don’t there were various solutions in legislation to enable prices to be re-set. Nevertheless, a specific code now exists for setting consistent asset purchase prices.

Affected transactions

The rules apply to agreements entered into on or after 1 July 2021, if the sale is a ‘mixed supply’ of certain types of property. That means it involves two or more of following categories:

  1. trading stock, other than timber or a right to take timber:
  2. timber or a right to take timber:
  3. depreciable property, other than buildings:
  4. buildings that are depreciable property:
  5. financial arrangements:
  6. purchased property for which the disposal does not give rise to assessable income for the vendor, or deductions for the purchaser.

This ensures the rules encompass agreements to sell what might be viewed as a single asset, for example commercial property that comprises both a building and depreciable fit-out, as well as residential property that includes depreciable chattels (subject to some exclusions around value, as outlined below).

What happens when the parties agree the PPA?

The recommended path is for both parties to agree the purchase price allocation (PPA) in writing, before they file the tax returns in which they take a tax position on the purchased property, and then for both parties to follow that PPA in their tax returns. If that happens, the property will be treated as being sold and bought for that price (subject to the Commissioner disagreeing, which we comment on below).

The sale and purchase agreement does not necessarily have to record the final sale price and asset value allocations, but if it doesn’t it should specify the mechanism for that price to be set (eg, a independent valuation), and the timeframe for that to happen. The price has to be agreed in writing before the earliest day on which either party files the tax return in which they take a tax position on the purchased property.

Although the Commissioner can still re-set an agreed PPA, she won’t intervene to change the PPA for depreciable property that initially cost less than $10k, if the total allocated to that class of property is less than $1m, and the amount allocated isn’t more than original cost, or less than tax book value.

What happens when the parties don’t agree the PPA?

This is where it gets interesting. Before getting into the rules, however, it should be noted that they don’t apply to property worth less than $1m, or $7.5m for residential property (land and chattels).

If the parties don’t agree on a PPA in writing before one of the parties takes a tax position on the purchased property, the vendor has the first right to decide on the PPA. The vendor has to notify the Commissioner of Inland Revenue, and the Purchaser, within three months of the sale date. The price allocated to assets (a) to (e) in the list above must be the greater of market value and tax book value. Any excess is allocated to the final category, property on capital account, and if any is leftover it is allocated pro-rata to the other assets.

If the vendor doesn’t notify the purchaser that they have completed a PPA within three months of the date of sale, the purchaser can complete it within six months of the date of sale. This PPA must reflect the market values of the purchased property.

If both the purchaser and the vendor fail to do a PPA within the specified time-frames, the Commissioner can do the PPA herself, at market value. Although it seems a remote possibility, it’s unclear whether the Commissioner can or should do a PPA until those time limits have expired. The parties can still agree between themselves until such time as one of the parties files a tax return, so it would seem premature for the Commissioner to do so. The same de-minimus exclusions apply as outlined above – there will be no PPA for depreciable property that initially cost less than $10k, if the total allocated to that class of property is less than $1m, and the amount allocated isn’t more than original cost, or less than tax book value.

No deduction can be taken by the purchaser until a PPA has been completed by someone, even if that is the Commissioner. If that happens after the year of sale, this means the deductions cannot be taken until that later date.

Commissioners’ override & guidance on the new rules

It’s important to note that the Commissioner has an overriding ability to allocate the purchase price based on market value, whether there is an agreement or not. It’s not clear yet how or when that ability would be exercised. The guidance Inland Revenue has published on its website on the new PPA rules states:

“If we find that the buyer and seller did not allocate the sale price in reasonably the same way in their income tax returns, or did not allocate it in line with market values or tax book values where required, then we are likely to:

  • investigate the sale
  • set our own allocation for tax purposes
  • reassess any incorrect GST or income tax returns (whichever applies)”

While it’s understandable that the Commissioner would expect the parties to use the same PPA, the circumstances in which the Commissioner would determine that a PPA (particularly one agreed between arm’s-length parties) doesn’t reflect market values are more elusive.

More detailed guidance on the rules is available in the special report released in April 2021, and a Tax Information Bulletin article will be published in due course, likely largely reflecting the special report. It would be useful if future guidance could provide more commentary around the criteria for substituting an agreed PPA, particularly between arm’s length parties. If the circumstances will be fairly limited, it would be helpful for the guidance to confirm that.

Documenting the transaction & notifying the Commissioner

ADLS/REINZ have issued an addendum to the standard form real estate and business sale and purchase agreement, to allow parties to deal with a PPA under the new rules. This should act as a prompt for parties to affected transactions to consider the rules and document the PPA. We are already seeing parties adapting asset sale and purchase agreements to make PPAs clear, and to provide that both parties will comply with the new legislation, and will file their returns in accordance with the agreed PPA. Agreements should also anticipate and provide for the possibility that the Commissioner may investigate and potentially alter an agreed PPA.

Inland Revenue have outlined how the PPA is to be notified to them (which is only required when the parties have not agreed the PPA between them). The notification is to be provided either in writing or via myIR, and should provide details about both parties, the property sale agreement, the price allocation, and a statement that the PPA has been made in accordance with the legislation.


The PPA rules give the vendor disproportionate negotiating power. If the parties cannot agree the PPA, the vendor can decide unilaterally how to allocate the price, within some limits. The incentives for a purchaser to obtain agreement up front are real, but do not necessarily reflect commercial reality. Parties should ensure that any agreement to determine the PPA after settlement is clearly agreed, including any dispute procedures.

It has always been best practice for parties to agree asset valuations upfront but from time to time this doesn’t happen and transactions are entered into without considering tax. While it is positive that standard form agreements are being updated, these are not exclusively used. Businesses should be ensuring that there are good governance processes in place to ensure that transactions are not entered into without considering the tax outcomes.

Please get in touch with your usual Deloitte advisor if you would like to discuss how to incorporate a PPA into an agreement for sale or purchase of an asset.

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