From 1 July 2021 the way that most vendors and purchasers of commercial property enter into agreements for sale and purchase will change, with the introduction of the new “purchase price allocation” (PPA) rules.
Under the new rules, with some exceptions, the parties to a commercial property sale and purchase will need to consider the allocation of the purchase price between the depreciable assets (building, fitout) and non-depreciable assets (land) when negotiating and recording the terms of the agreement.
The changes are the result of amendments to the Income Tax Act 2007 introduced under the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Act 2021, and will apply to agreements for sale and purchase of property entered into on or after 1 July 2021.
The aim of the new legislation is to have vendors and purchasers allocate purchase prices consistently for income tax purposes, thus preventing the practice of “mis-matched” PPAs, where vendors and purchasers adopt different positions in their tax return.
For example, in a commercial property transaction, involving “mixed supplies” of depreciable and non-depreciable assets, the vendor will generally want to allocate more of the purchase price to the land and less to the buildings and fit out. Whereas the purchaser would usually want to allocate more to the building and fit out and less to the land.
To assist parties to address the changes when negotiating any new agreement, the Auckland District Law Society (ADLS) is drafting changes to the standard agreement for sale and purchase of real estate. We understand that the updates are imminent and will include a new schedule for the parties to record an agreed allocation (if it applies).
How the new rules will apply:
In the absence of prior agreement between the parties, the new rules enable the vendor to set the PPA, provided they do so within the required timeframes.
To avoid being exposed to a situation where the vendor has the ability to unilaterally determine the PPA, a purchaser should endeavour to negotiate and agree the PPA along with the other contractual terms, before entering into the agreement.
The rules do not apply to residential properties unless the purchase price is greater than $7.5m, or to commercial property sales under $1.0m. They will apply to other property transactions involving “mixed supplies”, including commercial property and farm sales. The rules also apply to business and asset sales.
Overlooking agreeing on the PPA (if it applies) may have unintended and undesirable consequences for either party.
Please contact a member of Cavell Leitch’s property team today