New Purchase Price Allocation Rules

by | Jul 7, 2021 | Blog, General property Law, Sale and Purchase

The IRD sees consistency as key

The historical issue

In the past, the IRD had concerns with vendors and purchasers taking differing tax positions on the values allocated to mixed assets in relation to sale and purchase transactions. Especially where Purchase Price Allocation (“PPA”) led to the IRD losing out on taxes within the system due to a tax mismatch between the parties.

The IRD has recently changed the rules regarding how purchase prices are allocated to business assets. This is to avoid parties taking advantage of the system, and make the allocations consistent between them.

PPA can have a significant impact on a party’s tax position. For land and building sales, purchasers receive a greater tax advantage by allocating the purchase price to depreciable items, such as fixtures, fittings, and plant (which it would want to allocate a higher allocation to depreciable property) rather than non-depreciable items.

On the other hand, vendors receive a greater tax advantage by selling depreciable assets at their book value. However, in relation to a sale, they would want to allocate less value to the depreciable property (and more to non-taxable capital items like goodwill (purchasers would want to allocate less to non-deductible assets like goodwill)).

The new rules

The Purchase Price Allocation Rules (“PPA rules”) came into effect from 1 July 2021. They potentially apply to all contracts (and nominations) entered into after that date.

They will apply (where relevant) to any mixed-asset commercial property transactions over $1,000,000 and mixed-asset transactions for residential land and chattels over $7,500,000. In the case of residential land, however, sales by one owner-occupier to another owner-occupier are not affected by these rules. The residential transactions that are likely to be caught are sales of high-end rentals or multi-dwelling buildings such as apartment blocks. The rules do not apply to sales of a business by way of shares nor to any transaction that is not a mixed-asset transaction.


The new PPA rules will require the parties to consider the allocation of value with respect to the market value of assets.

Ways in which the purchase price value allocations can be apportioned

  1. By the parties agreeing at the outset – the agreement may be assisted by the parties using the new PPA Addenda. This will be explained in more detail below.
  1. If the parties do not agree at the outset, then the PPA Rules set out a “unilateral allocation”. In this, the first right to allocate values falls to the vendor (who must notify the purchaser and the IRD within 3 months of settlement) and will bind the purchaser.
  1. If the vendor does not make a unilateral allocation, the right falls to the purchaser (who after the vendor’s 3-month period ends, must notify the vendor and the IRD) within 6 months of settlement, and will bind the vendor. In all cases that the IRD has an overriding power to require both parties to adopt a differing allocation. This might be the case if, in the IRD’s opinion, the agreed allocation does not reflect the market value of the assets, or it considers the allocation inappropriate.
  1. If the parties do not exercise those unilateral rights, the IRD Commissioner has the right to determine a PPA that will bind both vendor and purchaser (if required).

In certain situations, PPA will not be an issue for one or both parties. For example, all assets being revenue account assets for a party, or because a party is tax-exempt.

The new PPA rules are more significant for purchasers, especially in any negotiation situation. If the parties do not mutually agree, the vendor can in the first instance unilaterally set the allocation values. The vendor has the upper hand if the PPA is not mutually agreed upon.

The PPA Rules are designed for situations where a Sale and Purchase Agreement has an overall price comprising two or more different categories of an asset. This is common in farm sales, where there are mixed assets involving classes of assets that have different tax treatments. So that the vendor and purchaser’s tax positions are aligned in respect of the allocation of price between the asset classes. It will capture commercial property, forestry land or business transactions.

Which transactions are affected?

A mixed-asset transaction is one that includes any 2 or more of the following tax asset classes for one or both parties.

There are 6 asset classes to which these new rules apply,

  1. trading stock
  2. timber (or the right to take timber)
  3. buildings that are depreciable property
  4. depreciable property other than buildings (fit-out items)
  5. financial arrangements
  6. property for which sale does not give rise to taxable income for the vendor or deductions for the purchaser, for example, land.

Our advice would be to agree on price allocations early. At the very least, set out a process for agreement, to avoid any problems. In practice, the price allocations can be finalised at any time before the date for filing tax returns.

New addenda to agreements

The ADLS/REINZ has created an Addenda with a new schedule. It can be added to the back of the latest ADLS/REINZ forms. Both the Sale and Purchase Agreement for Real Estate/or a Business and the Particulars and Conditions of Sale of Real Estate by Tender. The schedule is flexible so it can be tailored to the relevant transaction.  In addition, there are associated terms that are inserted to incorporate the Addenda into the agreements. If the parties cannot agree on a PPA, there is a process for appointing a suitably qualified valuer to determine the value of the asset classes. Then both parties are bound by the determination.

The Addenda is not considered suitable for the standard auction and mortgagee sale agreements. In these situations, purchasers need to be wary that the vendor may have a statutory right to unilaterally determine a PPA binding the purchaser.

What does it mean for you?

Inclusion of the Addenda seems to be a relatively simple way to ensure the parties have considered these rules. It also ensures the purchaser will not be blindsided down the track by an allocation it was not expecting and which it would be bound to. It also removes the vendor’s first unilateral asset allocation right.

Other issues could arise if it is unclear which party owns the fit-out items, for example. The tenant may own it and have paid for it, so ownership will not necessarily transfer with a land sale. It is important to give this consideration at the outset of any negotiations.

Consider obtaining professional tax advice before entering into any transaction where PPA could be a significant issue in the transaction. This is particularly important if you are the purchaser.

Please contact us if you have any questions regarding the new rules. We can advise you on how they may affect your transactions.

By <a href="" target="_self">Marina Sardelic</a>

By Marina Sardelic