From 1 April 2024, the start of the 2024–25 income year for most taxpayers, the depreciation rate on commercial and industrial buildings is 0%. The structure you buy earns you nothing. Land never did. That leaves the fit-out, with any plant and chattels, as the only depreciable property in a commercial acquisition, and the only document that decides how much of your price is fit-out is the purchase price allocation.
It is treated as an accounting formality, something the advisors square away after settlement. It is a price term. On a $5.5m Auckland purchase the gap between a low allocation and a component-level one is $63,200 of tax in the first full year, on an identical purchase price. And the leverage to get it disappears the moment the agreement is signed without a clause.
What the purchase price allocation rules say
The rules apply to agreements entered into from 1 July 2021. Where the parties agree an allocation and record it before the first tax return for the year is filed, both must file on it, whatever the price. It has to reflect the relative market values of what was sold, and Inland Revenue can challenge one that doesn’t. Inland Revenue’s technical explanation sets out the detail.
Where nothing is agreed and the total consideration is $1 million or more ($7.5 million where the only property is residential land), a sequence runs from settlement:
- The vendor may set the allocation on its own within three months, notifying the purchaser and Inland Revenue. Broadly, each class of property must carry the greater of its market value and the vendor’s tax book value.
- If the vendor does not act, the purchaser has a further three months.
- If neither acts, the power passes to Inland Revenue, and the purchaser’s deductions are held back until an allocation is notified.
Read that as a timing rule rather than a safety net. You can still agree an allocation after signing, and an agreement recorded before the first return overrides a unilateral one. But once the agreement is unconditional the vendor has no reason to agree to anything that costs it. The party that cares most about the fit-out figure is the buyer, and in the fallback sequence the buyer goes second.
Why the vendor resists
Because it costs them. Allocating more of the price to depreciable fit-out can trigger depreciation recovery income for a vendor who has already claimed depreciation on those assets. What the buyer gains, the seller can pay for.
That is a normal commercial conflict and it belongs at the negotiating table with everything else, priced against settlement date, deposit and the rest of the terms. Raised after settlement, it is a request the vendor can ignore.
A $5.5m Auckland acquisition, allocated two ways
Same building, same price, same day. Only one of these fit-out figures can be the market value. Which one gets adopted depends on the evidence behind it. Tax effect shown at the 28% company rate, for a full year of ownership.
A. Low allocation, single-line fit-out estimate
| Land | $2,200,000 |
| Building structure (0%) | $3,100,000 |
| Fit-out and plant | $200,000 |
| Year one depreciation (building fit-out default class, 10% DV) | $20,000 |
| Year one tax effect at 28% | $5,600 |
B. Negotiated allocation, itemised by component
| Land | $2,200,000 |
| Building structure (0%) | $1,900,000 |
| Fit-out and plant | $1,400,000 |
The $1,400,000 of fit-out, with each category depreciated at its own Inland Revenue diminishing value rate.
| Component | Value | DV rate | Year one |
| Air conditioning system | $280,000 | 10% | $28,000 |
| Electrical reticulation | $180,000 | 8% | $14,400 |
| Sprinkler system | $90,000 | 8% | $7,200 |
| Lifts | $150,000 | 8% | $12,000 |
| Non-load-bearing partitions | $120,000 | 10% | $12,000 |
| Carpet (not modular nylon tiles) | $80,000 | 40% | $32,000 |
| Vinyl flooring | $60,000 | 20% | $12,000 |
| Loose furniture | $200,000 | 16% | $32,000 |
| Office equipment | $240,000 | 40% | $96,000 |
| Total, year one (blended rate) | $1,400,000 | 17.5% | $245,600 |
| Year one tax effect at 28% | $68,800 | ||
| Against scenario A | +$63,200 |
Illustrative acquisition of an existing commercial property with the vendor’s fit-out, furniture and equipment included in the sale. Values are assumed, not a valuation of an identified property. Assumes a company purchaser using the assets wholly to earn taxable income, a full year of use and enough taxable income to use the deductions. Tax effects rounded to the nearest $100.
Scenario A is an assumed low allocation, the kind that follows when nobody puts a component-level valuation on the table. Scenario B is what that valuation can support. The figures are illustrative and the whole of the difference rests on the valuation standing up to scrutiny. A single-line fit-out estimate will not.
Two things the headline number isn’t. It isn’t what lands in the year you buy, because depreciation in that year is apportioned by the months you own the asset. And it isn’t necessarily permanent, because depreciation recovery on a later sale can reverse some or all of it. At worst it is tax paid later rather than sooner. On a leveraged acquisition, later is the point.
The clause that survives contact
A clause saying the parties will agree an allocation in good faith is an agreement to agree, and it gives you very little when the vendor goes quiet. Have your solicitor draft a determination mechanism instead, with four elements:
- a fixed timeline, for example 20 working days for the buyer’s proposal and 10 for the vendor’s response
- a joint valuer nomination, with a fallback appointment by the President of the New Zealand Institute of Valuers
- a binding determination, and a clear choice between arbitration and expert determination
- a settlement independence clause, so the allocation cannot hold up settlement
Leave the last one out and you have handed the vendor a deadline to use against you.
Six questions before you go unconditional
Put these to your valuer, your accountant and your solicitor while the terms can still change.
- Is the fit-out valuation component-level, itemised by asset category, or a single line?
- Which Inland Revenue rate applies to each component identified, and what is the blended rate across the pool?
- Would each line item survive being challenged, and is it documented to that standard?
- What is the five-year cumulative effect against a low allocation, not just year one?
- Does the vendor face depreciation recovery on this allocation, and what are we conceding elsewhere to settle it?
- Is the agreed schedule appended to the agreement as binding, stating that both parties will file on that basis?
Where this actually goes wrong
Not in the tax return. In the two weeks between agreeing a price and signing, when nobody wants to reopen a deal over something that sounds administrative. The allocation is the last price term still on the table at that point, and it is the one nobody asks for.
Raise the purchase price allocation at offer stage, while it can still be traded against the other terms. Agreement is possible later, but only if the vendor wants it, and by then it has no reason to.
This is general information about how the rules work, not tax or legal advice on your transaction.