Purchase Price Allocation - A Quick Update
If you are thinking of buying or selling farmland, it is extremely important that you talk to us prior to signing the Agreement for Sale & Purchase.
The IRD has introduced new Purchase Price Allocation (PPA) legislation which came into effect for sales and purchases after 1 July 2021. This could be one of the biggest changes that will apply to the rural sector for many years.
For Example – The Value of Trees
In effect, the objective of the legislation is to match the values that purchasers and vendors use for the sale and purchase of assets where tax is relevant. For example, where there is a sale of farmland with trees on it the purchaser will want the value allocated to the trees to be high and value allocated to the land to be low so he can deduct the purchase price of the trees off assessable income when they are eventually milled.
On the other hand, the vendor will want the value allocated to trees to be low because there will be tax on the sale of trees. This applies to any asset included which has tax consequences, i.e. depreciable buildings, plant, etc.
Getting the Market Value Right
Where the values are stipulated in the Agreement for Sale & Purchase the prices will be binding unless overturned by the IRD for not being market value. If no agreement the Vendor has the right to choose even if not market value. If vendor doesn’t make this allocation within 3 months the purchaser has the right to choose. If neither chooses within 6 months the IRD can choose.
This legislation will catch out those who are not aware of the implications or where the purchaser has no power i.e. a tender or auction. The main implication for farmers is to ensure the values are stipulated in the Agreement for Sale and Purchase so there are no unintended tax consequences which can come as a nasty shock.
Don’t Get Caught Out
The best advice we can give is to contact your Rural Accountant client manager before agreeing to anything. That way we can ensure everything is covered off and included accurately before it goes to the IRD.
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