Purchase price allocation rules apply from 1 July 2021

Chartered Accountants Australia and New Zealand have voiced our concerns about the changes to purchase price allocation rules over the past year. The Finance and Expenditure Select Committee acknowledged shortcomings in the draft legislation and recommended several changes. 

Our key concerns related to the practical application of these rules and the desire for tax symmetry which impacts the negotiating powers of vendors and purchasers across the entire transaction market. 

These rules came into effect on 1 July 2021 and CA ANZ members need to be aware of these changes when acting for clients in the sale of a business or commercial property with a mixture of taxable assets. 

The intention of the rules is to encourage the vendor and purchaser to reach the same allocation of the sale price to the different asset classes (such as goodwill and plant or machinery). When parties to the transaction can’t agree the rules set out which party can make an allocation, and in what time frames.

Summary of the rules

• When the parties do not agree on the amounts allocated, within 3 months of settlement the vendor may determine the allocation subject to specific constraints and must notify the purchaser and Inland Revenue. 
• If the vendor does not determine and notify within those three months, the purchaser may determine the allocation, at market value, and notify the vendor and Inland Revenue.    
• If neither party has made an allocation and notified Inland Revenue within 6 months of settlement, Inland Revenue may make the allocation at market value and the purchasers tax deduction (if any) will be denied until purchase price allocation has been completed.

In a major revision from earlier versions, a carve out now excludes residential land sales of less than $7.5 million from the rules.

Inland Revenue has issued a media release and updated their website with further guidance to assist business owners and tax agents in applying these new rules.