If you are looking to buy or sell a business, you will need to be aware of new purchase price allocation rules which came into effect on 1 July 2021.
What is purchase price allocation (PPA)?
PPA is an issue in all transactions involving the sale of a mix of asset types which have different tax treatments. It arises, for example, in business sales, commercial property sales and farm sales.
To date, there has been no requirement for buyers and sellers to agree on a PPA between assets when buying/selling a business. This has meant that in some cases, buyers and sellers have been utilising different PPA’s which best minimises their tax liabilities and maximises their tax advantages.
For a business sale, a seller typically wants to allocate less value to depreciable property, and more value to non-taxable capital items like goodwill. A buyer will typically want to allocate a higher allocation to depreciable property, and less to non-deductibles like goodwill.
What are the new rules?
The new rules provide that:
- If the buyer and seller can agree an allocation, both must follow the allocation in their tax returns. Ideally this is agreed up front and provided for in the sale and purchase agreement.
- If the buyer and seller do not agree an allocation, the seller may determine the allocation, and must notify both the buyer and the IRD of the allocations within two months of the change in ownership of the assets (e.g. two months of settlement).
- If the seller does not make an allocation or fails to notify the buyer and IRD of the allocation within the two month time frame, the buyer may determine the allocation and must notify the seller and the IRD.
- If no allocation is made by either party, the seller will be treated as disposing of the property at market value, and the buyer is treated as acquiring the property for nil consideration.
The IRD can challenge a PPA if it considers the allocation does not reflect ‘market value’ or is otherwise inappropriate. You might consider getting an independent valuation of the key assets of the business to support the agreed allocations.
How can I prepare?
As always, you should seek tax and legal advice before entering into any agreement. Try and agree on the PPA early on (ideally before signing anything), and utilise an independent valuer to minimise any challenge by the IRD.