Purchase price allocation: how to split the price when buying or selling a business
When a business is sold as a bundle of assets, the price agreed is a single number. For tax purposes, though, it has to be split across the assets being sold: stock, plant and equipment, goodwill, and sometimes land and buildings. That split is the purchase price allocation, and it can change the tax outcome for both sides by thousands of dollars.
Buyers and sellers naturally pull in opposite directions. A buyer wants more of the price allocated to assets they can deduct or depreciate. A seller wants more allocated to assets that aren't taxed on sale, such as goodwill. For agreements entered into on or after 1 July 2021, both parties must follow a purchase price allocation agreed and documented before either files its relevant income tax return. If no allocation is agreed, a statutory notification process applies to transactions meeting the relevant threshold.
In brief:
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How each type of asset is taxed
The rules apply when a sale includes two or more classes of assets with different tax treatments.
The allocation is made between classes, not to each individual asset within a class, although parties often agree values for key assets anyway.
Asset class | Effect for an unassociated buyer | Effect for the seller |
Trading stock | Deductible as the stock is sold | Taxable income |
Depreciable property (plant, equipment, vehicles, fit-out) | Can be depreciated over its life | Any amount above tax book value, up to original cost, is taxable as depreciation recovered; a loss below it is usually deductible |
Depreciable buildings | Most buildings now have a 0% depreciation rate, so value allocated here generally can't be depreciated | Depreciation previously claimed may be recovered |
Financial arrangements (such as loans) | Taxed under the financial arrangement rules | Taxed under the financial arrangement rules |
Timber | Deductible when the timber is harvested or sold | Taxable income |
Land and goodwill | Generally capital and non-depreciable. Land acquisition costs may be deductible where land is on revenue account. | Generally not taxable, unless specific land rules apply |
The tension is easy to see. Every dollar moved from goodwill to plant and equipment gives the buyer future depreciation, and can give the seller taxable depreciation recovered on the same dollar. Timing matters too: buyers prefer value in fast-moving stock, which is deducted within months, over plant that is depreciated over years. Where plant is allocated more than the seller originally paid for it, the excess is not taxable to the seller, while an unassociated buyer can depreciate the full allocated amount, subject to the ordinary depreciation rules.
The rules since 1 July 2021
If you agree an allocation, both buyer and seller must use it in their income tax returns. Ideally, record it in the sale and purchase agreement. Otherwise, agree and document the allocation before either party files its relevant income tax return.
If no allocation is agreed, the statutory notification process applies where total consideration is at least $1 million. A higher threshold of $7.5 million applies where the only property sold is residential land, including its buildings, together with its chattels. Total consideration includes liabilities assumed by the buyer as part of the purchase price, not just the cash price.
The seller goes first. The seller has three months from the change of ownership to notify an allocation to both the buyer and Inland Revenue. For the first five statutory asset classes in the table above (everything except land and goodwill), the allocation uses the higher of relative market value and the seller’s tax book value. If those amounts exceed total consideration, statutory adjustments reduce the allocations so they reconcile to the price.
Then the buyer. If the seller does not notify in time, the buyer may notify an allocation based on relative market values to both the seller and Inland Revenue within six months of the change of ownership—usually settlement.
Then Inland Revenue. If neither party validly notifies an allocation, Inland Revenue may determine one. The buyer’s deductions for the purchased property are subject to statutory deferral rules until the allocation-notification requirements are met.
A valid notified allocation binds both parties. Special rules apply where trading stock or timber is transferred to an associated person below market value.
Below the thresholds, the notification process doesn't apply, but buyer and seller should still use a consistent allocation based on market values. Agreeing it in the contract is the simplest way to achieve that. The thresholds exempt transactions only from the no-agreement notification process. A qualifying documented agreed allocation remains binding below those thresholds.
Market value and when Inland Revenue can step in
An agreed allocation isn't a free choice. Allocations follow relative market values, subject to the low-value depreciable-property exception. The tax-book-value minimum and excess-allocation adjustments apply to the seller’s unilateral allocation under the statutory notification process, not to an agreed allocation.
The low-value exception limits Inland Revenue’s power to substitute market value for an allocation. It applies where:
the seller’s original cost of the depreciable item was less than $10,000,
the total allocation to that item and any identical property is less than $1 million, and
the amount allocated to the item is between the seller’s tax book value and original cost, inclusive.
It does not exempt the transaction from the allocation rules.
Inland Revenue can review it where:
the buyer or seller hasn't followed the agreed or notified allocation in their tax return
the two parties haven't used the same allocation
the allocation doesn't reflect relative market value
the seller’s unilateral allocation does not comply with the statutory tax-book-value minimum and excess-allocation adjustments.
If the allocation is wrong, Inland Revenue can set a different one and reassess the income tax or GST returns affected. GST consequences depend on the applicable GST rules.
An allocation agreed between unrelated parties isn't automatically safe. In Hansen v CIR, a historical case under predecessor legislation, an agreed value for livestock in a farm sale was replaced with a much higher market value, and the seller was taxed on it. Today’s allocation powers are contained in legislation.
Keep records of how the allocation was reached, including any valuations relied on.
A plant and equipment valuation or a business valuation that supports the split is the best protection either party can have.
Commercial property: the building versus the fit-out
Where a sale includes commercial property, the allocation matters even more. From the 2024–25 income year, commercial buildings with an estimated useful life of 50 years or more have a 0% depreciation rate. Qualifying separately identified fit-out remains depreciable. The fit-out may include, depending on the asset's classification: suspended ceilings, lighting, partitions, electrical and plumbing reticulation, air conditioning, floor coverings, among others. Depreciable land improvements may include fences and driveways. Structural components and attached non-structural items used for weatherproofing remain part of the building rather than separately depreciable fit-out.
Failing to identify and support a separate value for qualifying fit-out can mean depreciation is missed or disputed. Agreeing the allocation and obtaining suitable valuation evidence before completion reduces that risk. The fit-out is often a much larger share of the value than people expect.
A practical approach is to identify separate values in the agreement for land, building structure, qualifying fit-out, and any separately depreciable land improvements. Two common mistakes are listing chattels without valuing the wider fit-out, and treating the seller’s tax book values as market values when negotiating an agreed allocation.
Farms, orchards and vineyards
Rural sales have a twist. Farmland improvements (such as drainage, tracks, water supply and shelter structures) and listed horticultural plants are amortised under their own rules. If the buyer carries on a farming or horticultural business on the land, the buyer takes over the seller's tax book values for those items, whatever amount the agreement allocates to them.
The buyer’s opening balance is the seller’s opening tax book value for the year of sale, less relevant deductions for listed plants that cease to exist or be used—not simply an unspecified settlement-date balance.
The buyer must carry on the qualifying business, and the improvements or plants must benefit it in that income year.
The seller gets no annual amortisation deduction in the disposal year; the qualifying buyer takes over that year’s deduction. The seller does not incur depreciation recovery or disposal loss for these items.
Wine-grape vines are non-listed horticultural plants, amortised under the farmland improvement rules. QB 25/22 doesn’t specifically address them, so confirm the treatment for a vineyard purchase.
This matters when you’re pricing the deal. Suppose the agreement values qualifying irrigation channels and water bores at $50,000, but the opening tax book value you inherit from the seller is $30,000. Assuming the improvements benefit your farming business in the purchase year, your first-year deduction at the 5% diminishing value rate is $1,500—not the $2,500 you might expect from the agreed price. The $1,000 first-year deduction gap reduces in later years as the balances diminish. The extra $20,000 paid does not create an additional amortisable balance. For purchase-price-allocation purposes, the improvements’ value can be included with land without a separate allocation. Whether the land’s acquisition cost is deductible depends separately on whether it is held on revenue account. Separately depreciable irrigation equipment follows the ordinary depreciation rules instead.
The reverse also applies: if the seller's tax book value is higher than the agreed figure, you get the benefit of the higher value.
If you're paying more for improvements than their tax book value, factor in the lost deductions when you set your price, rather than assuming the agreed figure will be deductible.
The practical point for buyers of orchards, vineyards and farms is to make sure the agreement requires the seller to provide those tax book values. Without sufficient historical tax-value information, you cannot establish the opening balance needed to support the deductions.
Purchase price allocation: practical steps for buyers and sellers
Raise it before you sign. The allocation is part of the deal, not a tax return afterthought. Agree the allocation before signing where possible. Negotiating it later can be harder, although the tax rules permit a documented agreement before either party files its relevant income tax return.
Agree it in the agreement. Set out the split by asset class, as a dollar value or a percentage. If time is short, or the sale is by auction or tender, include a clause requiring the parties to agree and document the allocation within a short specified period after settlement and before either party files its relevant income tax return. Keep that period within the seller’s three-month notification window so there is time to notify an allocation if agreement cannot be reached.
Distinguish market values from book values. When negotiating an agreed allocation, use supportable market values, subject to the low-value depreciable-property exception. The seller’s tax book values help establish the tax effect but do not, by themselves, establish market value. Different rules apply to the seller’s unilateral allocation and to qualifying rural improvements and plants, whose tax balances pass to the buyer.
Support it with evidence. A valuation of the plant and equipment, or of the business as a whole, gives you a defensible basis if Inland Revenue asks.
Model the tax effect both ways. Buyers should know what the depreciation is worth to them; sellers should know how much depreciation recovered they face. That makes the allocation a negotiating point you can price.
Watch the deadlines. If no allocation is agreed and the thresholds apply, diary the seller’s three-month and buyer’s six-month notification deadlines from the change of ownership—usually settlement. The buyer’s notification right arises if the seller does not notify within its deadline.
How we can help
Whether you're buying or selling, we can work out the tax effect of different allocations, value the business or its key assets to support the split, and review the allocation clause before you sign. If you're buying, our article on buying a business in New Zealand covers the other checks to make before you commit.
Buying or selling a business?
Call us on 03 544 4772 to talk through the allocation before you sign, or visit our business valuations page to book a value conversation.
Last reviewed: 7 November 2026
Disclaimer: The information in this article is general in nature and is not personalised business, valuation or tax advice.
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