5 benefits of specialised valuations for plant and equipment

If you’re buying or selling a property or business, you’ll know that commercial asset valuations are an integral step in the transaction process. However, since new tax rules were introduced in 2021, market awareness of purchase price allocations (PPA), in the context of plant and equipment, is still varied. When PPA is misunderstood, it can have significant consequences on your ongoing tax liabilities, among other challenges.

Updated tax rules that apply to the sale of commercial assets have been in effect since July 2021. So, what’s changed? Instead of purchasers and sellers taking their own position on tax values, the amended act requires both parties to agree to the PPA in writing and duplicate these values in their tax returns. These allocation rules are now obligatory for the sale and purchase of mixed supplies with a purchase price of $1,000,000 (including GST) or higher. Previously, there was no legislative requirement for parties to adopt the same allocation.

In the event a PPA is not agreed upon, the vendor has the first right to decide the asset value. In that scenario, the vendor has three months following the change in ownership of the assets to notify the purchaser and Inland Revenue of the PPA.

An inaccurate PPA value can also have a material impact on reported earnings in future periods.

“This can affect market valuations, lending, insurance, and the sale of said assets down the line,” Tony adds. “A PPA ensures the accurate reporting of the acquired company's assets and liabilities on the purchaser’s financial statements. This information is crucial for investors, stakeholders, and regulatory bodies to evaluate the economic worthiness of the assets and financial outcome of the acquisition.”

Do you know how long you can keep using your machinery before it will require repairs? A PPA can help. It’s a useful tool for estimating the remaining useful life of plant and equipment assets. Ascertaining this can help buyers plan for maintenance expenses, reducing the asset’s downtime and improving efficiency.

Being proactive about risk management is critical to maintaining business as usual. With a valuation for your plant and machinery, you can see potential financial and logistical risks and learn how to minimise them. In an uncertain economic climate, managing risk is top of mind for any executive team.