This article originally appeared in LawNews (ADLS) and is here with permission.
By Nick Bland & Barney Cumberland
Important purchase price allocation (PPA) income tax rules come into effect from 1 July 2021. PPA can significantly impact a party’s tax position so advisers must be aware of the changes and ensure their clients’ interests are protected.
New PPA addenda to the ADLS/REINZ standard form real estate and business sale and purchase agreement will soon be available for affected transactions.
The new PPA income tax rules will apply to agreements entered into (conditional or unconditional) on or after 1 July 2021.
The new rules will be relevant to any mixed asset sale and purchase transaction involving classes of asset that have different tax treatments. This will include business (asset) sales, commercial property sales, forestry and farm sales and certain residential property sales.
However, the harshest aspects of the new rules (discussed below) do not apply to the following:
- Transactions limited to residential land and chattels if the total consideration is less than $7.5million; and
- Other, lower-value transactions where the total consideration is less than $1m.
In some situations, PPA will not be an issue for one or both parties - eg, because all assets are revenue account assets for a party or because a party is tax-exempt.
The new rules are focused on ensuring vendor and purchaser do not adopt, at the expense of the tax base, different PPAs for the assets included in the transaction.
Under the new rules, if the parties agree a PPA in writing, they must determine their income tax positions in accordance with that PPA. The agreed PPA can be overruled by the commissioner only if she considers it does not reflect the relative market value of the assets.
However, if there is no agreed PPA for a mixed asset transaction - and the residential land and lower value transaction exclusions noted above do not apply - the new rules allocate the right to determine the PPA for the transaction as follows:
- Subject to certain constraints, the vendor generally has the first, unilateral right to determine a PPA within three months of settlement. That PPA will bind the purchaser.
- If the vendor does not have or exercise that right, the purchaser has a unilateral right to determine a PPA within six months of settlement. That PPA will bind the vendor.
- If the parties do not exercise those rights, the commissioner has the right to determine a PPA that will bind both vendor and purchaser.
Buyers, in particular, must be aware of the new statutory default position: absent an agreed PPA, a vendor can unilaterally determine a PPA that may significantly impact the purchaser’s tax position – for example, by giving the purchaser a lower-than-expected cost base for depreciable property or revenue account assets.
The two key features of the new PPA addenda are:
- An agreed PPA can be recorded in a new schedule. The schedule is flexible so the PPA can be tailored for the relevant transaction.
- If there is no agreed PPA when the agreement is entered into, and the new PPA income tax rules would skew matters in favour of the vendor, the addendum provisions prescribe a balanced process for a PPA to be agreed post-signing, with provision for expert determination if need be.
Addenda will be available for the ADLS/REINZ real estate standard form and tender ASPs and the business ASPs but are not considered practicable for the real estate auction and mortgagee sale documents.
Buyers must be aware that the vendor by auction or the mortgagor in those situations may have a statutory right to unilaterally determine a PPA that binds the purchaser.
Where PPA is potentially a material issue, transacting parties should get professional tax advice before entering into a transaction.
Barney Cumberland and Nick Bland of Simpson Grierson. This article originally appeared in LawNews (ADLS) and is here with permission.