Purchase Price Allocation When Buying a Business in Australia: What It Is and Why It Matters

Purchase price allocation (PPA) is the process of dividing the total price you pay for a business across its individual assets — goodwill, plant and equipment, stock, customer lists, restrictive covenants, and anything else included in the sale. In Australia, the allocation has real tax consequences for both buyer and seller: it determines what you can depreciate, what attracts stamp duty, and whether the ATO agrees with how you've structured the deal.

Most buyers hear "purchase price allocation" for the first time when their accountant raises it after signing heads of agreement (which is too late). Understanding it early gives you negotiating room and protects you from agreeing to allocations that look reasonable on paper but cost you money for years.

This is covered in depth in Module 6 of the Playbook.

What purchase price allocation actually means

When you buy a business, you're rarely buying just one thing. You're buying a collection of assets — some tangible, some not — and the total purchase price needs to be carved up across all of them. That carve-up is the purchase price allocation.

In an asset sale (which is how most small business transactions in Australia are structured), the buyer acquires individual assets rather than shares in a company. Each asset class has different tax treatment:

Plant and equipment — depreciable. The higher the value allocated here, the more you can write off each year.
Stock/inventory — treated as trading stock. Generally a dollar-for-dollar rollover for the buyer, but matters for working capital adjustments.
Goodwill — not depreciable for tax purposes, but eligible for the 50% CGT discount on sale (for the seller). No annual deduction for the buyer.
Customer lists and contracts — can be depreciable as intangibles over their effective life.
Restrictive covenants — the seller's agreement not to compete. These are depreciable intangibles, typically amortised over the covenant period.
Intellectual property — depreciable if it has an identifiable useful life.

The buyer generally wants more value in depreciable assets (plant, equipment, customer lists, covenants) to maximise tax deductions. The seller generally wants more in goodwill or capital assets to access the 50% CGT discount — assuming they've held the business long enough. These interests don't always align, which is why allocation is a genuine negotiation point.

How allocation affects your after-tax returns

Here's a concrete example. You buy a landscaping business for $600,000. The deal includes trucks, equipment, trailers, a customer list, and goodwill. How you allocate that $600,000 matters enormously.

Option A: $500,000 to goodwill, $100,000 to plant and equipment. Option B: $200,000 to goodwill, $300,000 to plant and equipment, $100,000 to a three-year restrictive covenant.

In Option A, you get modest depreciation deductions on the plant. In Option B, you get those same depreciation claims plus roughly $33,000 per year in deductions against the covenant — over three years, that's nearly $100,000 in additional deductions you'd have missed. On a $600,000 purchase, that's material.

The flip side: the seller in Option B might push back because higher allocation to plant and equipment produces ordinary income (if assets are sold above book value) rather than capital gains. This is the negotiation — and it's worth having explicitly rather than signing whatever the first draft says.

I saw a deal last year where the buyer and seller had agreed a total price but left the allocation to be "sorted out later". By settlement, the accountants couldn't agree, the vendor wanted $450,000 to goodwill, the buyer wanted $200,000 — and they almost went back to negotiating the headline price all over again. Get the allocation agreed in heads of agreement or at least before executing the SPA.

What the ATO cares about

The ATO doesn't require a specific allocation methodology, but it does require that allocations be reasonable and commercially defensible. "We just split it up" is not a methodology. "We engaged an independent valuer who assessed the fair market value of each asset class" is.

The ATO's general position is that the allocation should reflect the actual market value of each asset. If you allocate $1 to plant and equipment that independent valuers would price at $200,000, that's the kind of thing that draws attention in a tax audit — particularly for businesses with turnover above $5M or acquisitions with significant intangibles.

For smaller trades businesses in the $200K–$800K range, the ATO's scrutiny is less intense, but the principle remains: your allocation needs to be supportable by reference to independent market values or a defensible methodology. Engaging your accountant or a business valuer to prepare a brief PPA report is cheap insurance.

The ATO also has rules about how goodwill is treated for GST. Under section 38-325 of the GST Act, the sale of a business as a going concern can be GST-free — but this requires both buyer and seller to agree in writing that the supply is a going concern. The allocation of the purchase price doesn't affect whether the going concern exemption applies, but it does affect how GST is handled on individual assets. Get this sorted with your accountant before settlement.

For more on the tax side of the deal structure, the stamp duty implications article covers what triggers transfer duty in each state.

The difference between asset sales and share sales

In a share sale, there's no purchase price allocation in the traditional sense — you're buying shares in a company, not individual assets. The purchase price goes to the shares, full stop. The company's existing asset values (book values, tax costs) carry over unchanged. No depreciation reset, no step-up in asset values.

This is one reason buyers often prefer asset sales: you can reset the tax cost base of depreciable assets to current market value and start depreciating from there. In a share sale, you inherit whatever depreciation the previous owner had already claimed — so an asset the seller bought for $100,000 and depreciated down to $40,000 carries a $40,000 tax cost base into your hands, even if you paid market value for it.

The asset vs share sale article goes into the full comparison. The short version: for most small business buyers under $2M, asset sales are simpler and usually better from a tax reset perspective. Share sales have their place — mainly when the company holds licences, contracts, or lease arrangements that can't easily be transferred — but the PPA advantage of asset sales is real.

How to actually do a purchase price allocation

Here's a practical process for a typical trades or services business acquisition:

Step one: identify every asset class in the deal. Work through the heads of agreement or IM with your accountant and list every asset included in the purchase. Don't forget the intangibles — phone numbers, domain names, trademarks, customer databases, software, and any contractual rights.

Step two: get independent values where possible. Plant and equipment should be independently assessed — a licensed plant and equipment valuer can provide a market value report in a few days for a few hundred dollars. This is the anchor for your allocation.

Step three: allocate residually to goodwill. Once you've valued the tangibles and identifiable intangibles, goodwill is what's left. Goodwill = purchase price minus market value of all other assets. A business with $200,000 in equipment and $100,000 in stock purchased for $600,000 has $300,000 in goodwill.

Step four: agree the allocation with the vendor. This is a negotiation. The vendor has CGT interests; you have depreciation interests. There's usually a number that works for both — often somewhere between your optimal and theirs. Get it in writing in the SPA.

Step five: prepare a formal PPA schedule. Your accountant or business valuer should prepare a brief allocation report — usually a one-to-three page document that explains the methodology and supports the numbers. This lives in your deal file and protects you if the ATO ever asks.

For a template that walks you through the full process, grab the free Purchase Price Allocation Template.

When to raise PPA in the deal process

The right time to discuss allocation is before you sign heads of agreement — or at the very latest, before you execute the SPA. By the time you're in the final stages of checking the financials and due diligence, the purchase price is effectively set. Allocation is one of the few remaining levers.

Don't assume the seller's proposed allocation is reasonable. Business brokers often include a draft allocation in the heads of agreement that favours the seller. Review it with your accountant before signing anything. Changing it after the fact is harder than getting it right the first time.

The allocation also affects how you account for the acquisition in your business records. Under Australian accounting standards, a business combination requires a formal PPA — assets are recognised at fair value at the acquisition date, with any excess going to goodwill on the balance sheet. This matters if you have external lenders who require audited or reviewed financials.

If you're normalising EBITDA during due diligence, the PPA you end up with should be consistent with the asset values you've used in your valuation. It's circular, but intentionally so — your valuation implies asset values, and those values should anchor your allocation.

What happens if you get it wrong

The consequences of a poorly documented PPA are mostly tax-related, but they compound over time. If you've allocated $500,000 to goodwill on a deal that should have had $250,000 in depreciable assets, you've missed years of deductions. That's real money — potentially $50,000–$100,000 in after-tax value on a mid-sized acquisition.

The ATO can also challenge allocations it considers uncommercial — particularly if the allocation looks like it was designed purely to minimise tax rather than reflect market values. In practice this is rare for sub-$2M deals, but the risk is real for larger acquisitions with significant intangibles.

On the other side, if you over-allocate to depreciable assets and the ATO audits you, they can reassess the tax treatment and issue amended assessments with interest and penalties. The safest approach is to have an independent, documented methodology. It costs a few thousand dollars to do it properly. The downside of not doing it can be substantially more.

Understanding how to value goodwill is closely connected to this — goodwill valuation and PPA are two sides of the same question.

Want the full template? Grab the free Purchase Price Allocation Template — it includes an asset register, allocation methodology notes, and a schedule you can take to your accountant before settlement.

For more on deal structure, Module 6 of the Playbook covers bank lending, vendor finance, earn-outs, and how to put together a deal structure that works for both sides.

FAQ

What is purchase price allocation for a business acquisition? Purchase price allocation is the process of dividing the total acquisition price across individual asset classes — goodwill, plant and equipment, stock, customer lists, restrictive covenants, and other identifiable intangibles. The allocation determines how each component is treated for tax purposes.

Who prepares the purchase price allocation in Australia? Typically your accountant, often in conjunction with an independent plant and equipment valuer for the tangible assets. For larger acquisitions, a business valuer or transaction advisory firm may prepare a formal PPA report. The buyer and seller both need to agree on the final allocation before settlement.

Can the buyer and seller have different purchase price allocations? In theory, both parties can use different allocations for their own tax purposes — but this creates inconsistency and ATO risk. Best practice is to agree a single allocation in the sale and purchase agreement so both parties use the same figures.

Does purchase price allocation affect stamp duty? In most Australian states, stamp duty (transfer duty) is charged on land and real property only. Allocation to goodwill, plant, or intangibles generally doesn't attract additional duty. However, if real property is included in the sale, the allocation to that component matters. Check with your solicitor for the state-specific rules.

What is a reasonable allocation between goodwill and plant and equipment? It depends entirely on the business. A service business with few physical assets will have most of its value in goodwill. A plant-heavy business (manufacturing, civil contracting) will have more in tangibles. The allocation should reflect what an independent party would pay for each asset class separately — not what's most tax-convenient.