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Purchase Price Allocation – Plugging A Perceived Gap

The Perceived Gap

There have always been provisions in the Income Tax Act 2007 requiring vendors and purchasers to assign a purchase price to “taxable property”. Further, the assigned purchase price had to be based on “market value”. The objectives of the provisions were to ensure that purchase prices for mixed supplies were allocated consistently by the vendors and purchasers at market value.

However some time ago the Government signalled its concern that there were “gaps” in the legislation which provided the opportunity for vendors and purchasers to separately allocate purchase prices to create either an excessive tax-free capital gain or a deductible loss.


In order to close this “loop hole” and prevent the consequential lost taxation revenue the Government has introduced new tax rules – the purchase price allocation rule.1 The new rules took effect as of 1 July 2021.

The sale and purchase of a business typically involves asset sales which are a mixture of: taxable (revenue) assets (for example trading stock, accounts receivable, personal property for resale, or patents); depreciable (capital) assets such as plant or machinery; and non—taxable (capital) assets such as business goodwill.

The new rules apply to:

  • Mixed supply transactions, so a single sale and purchase transaction which is a mix of taxable and non-taxable property where the total purchase price is $1 million (or more), for example commercial property that comprises both a building and a depreciable fit-out; or
  • For residential real estate and associated depreciable chattels where the quantum is $7.5 million or more.

In these categories of transactions the rules provide that:

  • Where a purchase price allocation (PPA) can be agreed as between the vendor and purchaser, it should be put in writing and that PPA then applied in the parties’ tax returns. In this situation the IRD will typically treat the property/asset as being sold and purchased for that price. Note the following:
    • It is not necessary for the sale and purchase agreement itself to record the final sale price and asset value price allocations, however if that is not included the agreement should incorporate a description of the procedure for how and when that price is to be set.
    • The price needs to have been agreed to in writing before either party files the tax return in which they deal with the tax position regarding the change in ownership of the assets.
  • Where the vendor and purchaser cannot agree a price allocation the vendor may determine the allocation and notify both the purchaser and the Commissioner of the IRD of the price that has been allocated. This information must be provided to the IRD within three months of the change in ownership of the assets.
  • In the event that within those three months the vendor fails to complete a PPA and notify the purchaser and the IRD of the price allocation the purchaser may make the determination and then must notify the vendor and the Commissioner within six months from the sale date.
  • If both parties failed to determine an appropriate price allocation within the timeframes the Commissioner is able to make the allocation at market value.

In any one of these scenarios, if the Commissioner considers that the allocation does not accurately reflect market value or is, for some other reason, inappropriate, the Commissioner may challenge the allocation.


The IRD’s website advises that notification of the PPA can be made through the myIR as a web message or in writing, that the notification should include the phrase “Purchase Price Allocation” in the subject line and record the following details:

  • Both parties name, IR/GST number and contact details;
  • Date of agreement to the transaction;
  • Date of settlement;
  • Global/total price;
  • The price allocated to each class of property sold – Trading stock other than timber or a right to take timber, timber or a right to take timber, depreciable property, other than buildings, buildings that are depreciable property, financial arrangements, and purchased property where disposal does not give rise to assessable income for the seller or a deduction for the purchaser; and
  • A statement that the amounts have been allocated in accordance with section GC 21.


In order to have more certainty around what will constitute an appropriate price allocation it will be helpful if at the very start of the process the vendor and purchaser obtain legal, tax and valuation advice. By way of further assistance to ensure compliance with the new PPA rules ADLS/REINZ has produced an addendum to the standard form real estate and business sale and purchase agreement.

– Shyrelle Mitchell