What is purchase price allocation (PPA)?
Purchase price allocation splits a sale price across asset classes for tax. See how NZ's PPA rules work.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Purchase price allocation splits the total price of a business or property across its different asset classes, so each part gets the right tax treatment.
- New Zealand's income tax rules have required allocation since 1 July 2021 where a sale includes 2 or more asset classes with different tax treatments, above set price thresholds.
- If the buyer and seller agree an allocation, they must both use the same figures in their tax returns, and those figures must reflect market value.
- Since 1 April 2024, commercial building tax depreciation is 0%, so valuing depreciable fit-out correctly matters more than ever.
Purchase price allocation (definition)
Purchase price allocation, sometimes shortened to PPA, splits the total price of a purchased business or property across its different asset classes for tax purposes. It sets out how much of the price relates to each type of asset, such as trading stock, buildings, or goodwill.
Getting the split right matters because different assets are taxed in different ways, so the allocation affects what both the buyer and seller report to Inland Revenue.
Why purchase price allocation is important
When you buy or sell a business, the price you agree covers a bundle of assets rather than a single item. A clear allocation keeps your tax position accurate and helps you avoid disputes later. Here's why it's worth getting right:
- Sets the correct tax treatment for each asset, from trading stock to buildings and goodwill
- Keeps the buyer's and seller's tax returns consistent, which lowers the risk of an Inland Revenue review
- Establishes the buyer's cost base for future depreciation and resale calculations
- Gives both parties a clear, agreed record of what changed hands and at what value
Purchase price allocation rules in New Zealand
New Zealand's purchase price allocation income tax rules took effect on 1 July 2021 under the Income Tax Act 2007. They apply where a sale includes 2 or more asset classes that are taxed in different ways, which is common when buying a business or a commercial property.
You must allocate the price using these rules if the parties haven't agreed an allocation and the deal is above the relevant threshold:
- $1,000,000 or more (including GST) for mixed or commercial transactions
- $7,500,000 or more (including GST) for residential land only
Where an allocation is required, both the buyer and seller must use the same figures in their tax returns, and those figures must reflect market value rather than book value.
How to agree and notify a purchase price allocation
The simplest path is to agree the allocation in the sale and purchase agreement, at market value, so both sides report the same figures. If you can't agree, a set sequence with 3-month timeframes decides who allocates.
Here's how the cascade works if the parties don't agree:
- The seller (vendor) has 3 months from settlement to decide the allocation and notify the buyer and Inland Revenue
- If the seller doesn't, the buyer has a further 3 months to decide and notify Inland Revenue
- If neither party notifies, Inland Revenue can set the allocation and may deny the buyer's deductions until the following year
You notify Inland Revenue through myIR, the online services account most businesses already use for their tax.
What the purchase price is allocated between
The price is split across the asset classes included in the sale, and each class has its own tax treatment. In New Zealand, the purchase price is allocated between the following:
- Trading stock
- Depreciable property other than buildings
- Buildings
- Financial arrangements
- Property whose sale isn't taxable, such as land and goodwill
- Timber or the right to take timber
Grouping the price this way lets you apply the right rules to each part, including how you treat fixed assets that you'll depreciate over time.
How purchase price allocation is done
Once you know what you're splitting the price between, the accounting mechanics follow a clear sequence. You work out the value of the identifiable assets first, then account for any difference against the price paid. Follow these 3 steps:
- Calculate the net identifiable assets: add up the market value of the tangible and intangible assets, then subtract the liabilities you're taking on
- Apply any write-ups or write-downs so each asset sits at its market value rather than the seller's book value
- Calculate goodwill: subtract the net identifiable assets from the total purchase price, and the remainder is goodwill
Goodwill is the part of the price that reflects value beyond the identifiable assets, such as a strong customer base or brand reputation.
Purchase price allocation example
A worked example makes the goodwill calculation easier to follow. Say you buy a landscaping business for $500,000, and the figures break down like this:
- Total purchase price: $500,000
- Tangible assets at market value: $370,000
- Liabilities taken on: $20,000
- Goodwill: $150,000
The maths is the purchase price less the net identifiable assets, so $500,000 - ($370,000 - $20,000) = $150,000. That $150,000 is the goodwill you're paying for the established business rather than its physical liabilities and assets.
How the 2024 depreciation change affects allocation
From 1 April 2024, tax depreciation on commercial (non-residential) buildings returned to 0%. That change makes how you split the price between the building and its fit-out far more important for the buyer's future tax deductions.
Depreciable fit-out, such as lighting, partitions, air conditioning, and lifts, can still be depreciated even though the building itself can't. Identifying and valuing that fit-out correctly, at market value, helps you claim the deductions you're entitled to and keeps your allocation in line with the rules.
Keep your balance sheet in order with Xero
A clean, accurate allocation starts with a clear view of your assets, liabilities, and goodwill. With accounting software that keeps your records in one place, you can track asset values, work with your accountant, and stay ready for tax time. New customers can get one month free to see how it fits your business.
FAQs on purchase price allocation
Here are answers to some frequently asked questions about purchase price allocation in New Zealand.
When is a purchase price allocation required in New Zealand?
Allocation is required where a sale includes 2 or more asset classes with different tax treatments and the parties haven't agreed an allocation. The thresholds are $1,000,000 or more (including GST) for mixed or commercial deals, or $7,500,000 or more (including GST) for residential land only.
What happens if the buyer and seller don't agree?
The seller has 3 months from settlement to set the allocation and notify the buyer and Inland Revenue, then the buyer gets a further 3 months if the seller doesn't act. If neither notifies, Inland Revenue can set the allocation and may deny the buyer's deductions until the next year.
Do you have to notify Inland Revenue?
Yes, if you're the party setting the allocation under the cascade, you notify Inland Revenue as well as the other party. You do this through your myIR account.
What asset classes is the price split between?
The price is split across trading stock, depreciable property other than buildings, buildings, financial arrangements, non-taxable property such as land and goodwill, and timber. Each class carries its own tax treatment, which is why the split matters.
How does the 2024 depreciation change affect allocation?
Since commercial building tax depreciation dropped to 0% from 1 April 2024, the value you assign to depreciable fit-out has a bigger effect on the buyer's deductions. Valuing that fit-out at market value, separate from the building, helps you claim what you're entitled to.
What is goodwill in a purchase price allocation?
You work out goodwill by subtracting the net identifiable assets from the total purchase price, and the remainder is what you're paying for reputation and customer relationships. Because it isn't a taxable asset, keeping it separate from tangible assets keeps your allocation accurate.
Related terms
Learn more about purchase price allocation
Handy resources
Advisor directory
You can search for experts in our advisor directory
Balance sheet template
See where and how assets and liabilities are reported.
Push-button financial reporting
Know your numbers with online accounting software.
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.