Purchase price allocations in agreements for sale and purchase of properties and businesses
Legislation to enact the Government’s purchase price allocation (“PPA”) reform has been introduced. The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (“Bill”) was introduced to the House in early June 2020 and is currently being considered by a Select Committee.
The Bill provides a strict framework for the way in which a vendor and purchaser may allocate the “global” purchase price for property that is treated differently for income tax purposes (e.g., the sale and purchase of a combination of non-depreciable property, depreciable property and revenue account property), known as a “mixed supply”. The sale and purchase of commercial, industrial or residential real estate (comprising land, building and fit-out), or the sale and purchase of a business (or part of a business), will ordinarily comprise a mixed supply.
The Government is of the view that there is too much room for a vendor and purchaser to “game the system” by separately allocating purchase price to create either an excessive tax-free capital gain or a deductible loss on sale, thus eroding the tax base and resulting in a loss of Government revenue.
Key Features
The proposed amendments will, if enacted, apply to sale and purchase agreements for mixed supplies entered into on or after 1 April 2021, and can be summarised as follows:
If the vendor and purchaser agree a purchase price allocation (“PPA), they must follow it for purposes of their income tax returns. The vendor and purchaser must have agreed the PPA by the earlier of the day on which the vendor or the purchaser files its income tax return for the income year in which the mixed supply takes place.
As a backstop, if the vendor and purchaser do not agree a PPA, the vendor has the first right to decide the PPA, and must notify both the Commissioner and the purchaser of its PPA within two months of the “change in ownership” of the property. However, if the vendor does allocate the purchase price, the price “floor” is the tax carrying value of the property.
If the vendor does not allocate the purchase price within the two-month timeframe, the right to decide the PPA “flips” to the purchaser.
If the vendor and purchaser do not, in turn, decide a PPA, the vendor will be treated as disposing of the property for “an amount that reflects its respective market value…,” and the purchaser will be treated as acquiring the property for nil consideration (such that it has no deductible or depreciable “base” for income tax purposes).
Neither the vendor nor the purchaser is required to decide the PPA if (1) the “global” purchase price is less than $1M, or (2) the total purchase price allocated by the purchaser to “taxable property” is less than $100,000.
The Commissioner has an over-riding power to allocate the purchase price on behalf of the vendor and purchaser based on “respective market value,” except for “low-value depreciable property.”
Comment
If the Bill is enacted as currently drafted it is essential that after 1 April 2021 vendors and purchasers agree to purchase price allocations (or mechanisms/methods for allocating the purchase price ahead of completion) in the agreement for sale and purchase, after taking expert accounting advice to determine the income tax consequences of purchase price allocations.
