The Purchase Price Allocation (PPA) legislation has been in place since 1 July 2021. The purpose of the legislation is to ensure vendors and purchasers allocate consistent prices (based on market value) to land, buildings, and ‘other depreciable property’ (plant and fit out), for tax purposes when selling and buying assets. A key target of the PPA rules is commercial property sale transactions, and only applies when the purchase price is $1mill or more.
From a vendor’s perspective, they’ll most likely want to allocate the bulk of the purchase price to land (as this is a non-depreciable asset), and less on the building, plant and fit out. For a purchaser, they’ll want the opposite in order to maximise their tax depreciation on the building, plant and fit out (depreciable assets) over the coming years. Prior to the legislation being introduced, parties could sometimes adopt different amounts giving rise to inconsistent treatment and loss of tax revenue to the Government.
If PPA is not agreed or adopted, the vendor will have the first say within 3 months of the change of ownership (settlement) on how the purchase price should be allocated by notifying both the purchaser and the Commissioner of Inland Revenue, and both parties must then follow this allocation.
If the vendor fails to notify within the 3-month timeframe, the purchaser will then have the opportunity to determine the allocation by notifying the vendor and the Commissioner of the allocation within a further 3 months (so 6 months from settlement).
If no allocation is made by either party within the 6-month period, then either party may notify an allocation to the Commissioner, but it will be at the Commissioner’s discretion whether to enforce an allocation given to them by either party, or to determine the allocation themself based on market values.
Best practise is for both parties to agree on the PPA in the Sale and Purchase Agreement, after seeking advice from their respective Accountants. At the end of the day, it is the vendor to front foot the PPA, and everything is assessed by market value.
Disclaimer:
This post is of a general nature only and should not be used as a substitute for seeking professional advice. Please obtain specific advice from a chartered accountant or tax lawyer as minor changes in facts may result in significantly different outcomes.
