Purchase Price Allocation (PPA) – Why Getting It Right Matters
Since 1 July 2021, New Zealand’s purchase price allocation rules have affected how buyers and sellers allocate the purchase price of certain commercial property transactions between different asset classes for tax purposes.
Getting this allocation right is extremely important for both vendors and purchasers. The values agreed during the sale and purchase process can have significant implications for future depreciation deductions and tax outcomes.
Buying or Selling Commercial Property? Get Advice Early.
We cannot stress enough the importance of obtaining professional advice as early as possible in the sale and purchase process.
For substantial commercial property transactions, getting the allocation right or wrong can potentially make a difference of tens or even hundreds of thousands of dollars over time.
Thinking of buying or selling? Contact Valuit now. Already purchased or sold? Get in touch — we may still be able to help. Advice is free.
Understanding the Two Stages of Purchase Price Allocation
There are two important stages to consider: agreeing on the allocation of the purchase price between relevant asset classes, and identifying the individual depreciable assets within the property through Valuit’s Commercial MAX service.
Stage 1 – Sale and Purchase Contract
During the sale and purchase process, the purchaser and vendor should consider how the purchase price is allocated between depreciable and non-depreciable assets.
This allocation may be discussed through the real estate agent and should be reviewed with the parties’ legal and tax advisers before figures are agreed.
Three important asset categories to consider are:
- Land – non-depreciable.
- Buildings – generally subject to a 0% depreciation rate from the 2025 income year.
- Depreciable Assets – eligible fixtures, fittings, commercial fit-out and equipment.
IMPORTANT – Don’t Overlook Depreciable Assets!
Fixtures, fittings and commercial fit-out can represent significant value. Failing to properly consider and allocate a value to depreciable assets during the sale and purchase process may compromise your ability to support future depreciation claims and could result in valuable tax deductions being missed.
The wording of the PPA is critical. Many property owners have not claimed their full entitlement, so the value of depreciable assets recorded in their asset register may be low in comparison to what you, as an incoming purchaser, may be entitled to claim.
Don’t get caught out. Don’t let their mistake impact you.
The most critical aspect for an incoming purchaser is to ensure they have the ability to further allocate the value of buildings as follows:
- Not Previously Separately Depreciated Property – Depreciable assets that have not been separated from the building structure in the vendor’s asset register and are instead included within the building value.
Our advice: DO NOT agree to purchase price allocation figures without first seeking appropriate professional advice.
Stage 2 – Valuit Commercial MAX
Stage 2 takes the process further by identifying and valuing the individual depreciable assets within your commercial property. This is where Valuit’s specialist Commercial MAX service comes in.
Rather than treating fixtures, fittings and fit-out as one broad category, Commercial MAX provides a detailed breakdown of individual assets to support appropriate depreciation calculations.
Examples of assets assessed may include:
- Air conditioning and heating systems
- Electrical wiring and lighting
- Plumbing fixtures and equipment
- Commercial fit-out and partitions
- Carpets and floor coverings
- Security systems and signage
- Specialist equipment and installations
- Land improvements
And that’s only the beginning — the list of potential depreciable assets goes on!
Commercial MAX can be completed before or after settlement, depending on the circumstances. The detailed valuation provides information your accountant can use to determine eligible assets and appropriate depreciation treatment.
Unlock the Value of Your Commercial Property
Purchasing commercial property is a substantial investment. But are you fully aware of the value of the individual assets contained within your property?
A detailed Commercial MAX valuation can help identify assets that may otherwise be overlooked, separating eligible depreciable assets from non-depreciable property components.
This gives your accountant the information needed to assess legitimate depreciation deductions and helps you better understand the financial potential of your investment.
Maximise Your Eligible Depreciation Benefits
Different depreciable assets can have different tax depreciation rates. By accurately identifying and valuing eligible assets, Commercial MAX can help ensure the appropriate deductions are considered rather than overlooked.
For some commercial properties, the resulting tax savings can reach tens or hundreds of thousands of dollars each year.
The potential benefits depend on the property, its assets and the owner’s tax circumstances. For larger or extensively fitted-out commercial properties, the opportunity can be particularly significant.
Buying, Selling or Recently Settled?
Whether you’re preparing to purchase, considering selling or have recently settled on a commercial property, Valuit can help you understand the potential benefits of a detailed asset valuation.
Call (0508) 482 583 – Initial Advice Is Free.
Learn More About Commercial Property Depreciation
Purchase price allocation requirements, asset classifications and depreciation entitlements depend on the transaction and applicable New Zealand tax rules. Tax savings are not guaranteed. Seek professional tax and legal advice for your individual circumstances.
