Price allocation in agribusiness sales

State revenue authorities provide guidance on the extent to which they will accept an allocation for these purposes, but from the ATO’s perspective, price allocation in a transaction is addressed in Tax Determination TD 98/24.

The ATO will generally accept an apportionment set out in writing in the relevant sales contract on the basis that the parties are dealing at arm’s length.

In the absence of an apportionment clause, the ATO accepts that each party may make their own apportionment of the sale proceeds against particular assets so long as it is “reasonable”. This may require a separate valuation being undertaken to substantiate the allocation provided to each category of assets by the vendor or purchaser. 

Potential issues

Allocation of the purchase price among the specific pastoral assets being acquired and disposed of will be an important issue for clients and their advisers to consider early in any potential transaction. These issues may significantly impact outcomes.

For instance, a purchaser may wish to allocate a higher part of the purchase price to water licences and entitlements on the basis that those pastoral assets are not subject to duty in the jurisdiction in question, whereas the land acquired will be dutiable.

However, the vendor in the same transaction may prefer a higher amount of the purchase price to be allocated towards the land on the basis that the land is firmly established as a pre-CGT asset whereas the water licences might be considered post-CGT assets. This may result in tensions in negotiating the sale contracts.

Other allocation issues may involve:

• The purchaser desiring a higher purchase price for the depreciating pastoral assets so that it can maximise its deductions going forward. This might conflict in circumstances where this allocation will create a balancing adjustment assessment for the vendor for pastoral assets that are ineligible for the 50 per cent discount or other CGT concessions.
• The purchaser desiring a higher value for livestock to maximise its cost of stock for when it sells the stock on the open market, in circumstances where the vendor will have a disposal of trading stock outside the ordinary course of business and assessable income that again does not qualify for CGT concessions
• The vendor desiring a higher price for the land but allowing the purchaser the proceeds of an existing crop so that the vendor’s other assessable income for the year of a taxable capital gain will be less

Valuations may become critical as disputes can arise as to the apportionment of the price attributable to various assets between vendors and purchasers.

Limits on price allocation

The starting point when considering issues of price allocation is to recognise that a price allocation as negotiated between arm’s length parties is ordinarily accepted as the market value of the relevant assets.

There is extensive case law addressing the meaning and scope of an arm’s length transaction. In this regard, the courts have found that the determination is one of whether parties have dealt with each other in a manner as arm’s length parties would normally do, so that the outcome of their dealing is a matter of real bargaining. This might be contrasted with a transaction in which the parties collude to achieve a particular result or in which one of the parties submits the exercise of its will to the dictation of the other.¹

From an income tax and CGT perspective, the Commissioner of Taxation will generally accept an apportionment set out in writing in the relevant sale contracts on the basis that the parties are dealing at arm’s length.² In the absence of an apportionment clause, the Commissioner does accept that each party can make their own apportionment of any sale proceeds so long as it is “reasonable”.³ This may require a separate valuation being undertaken to substantiate the position taken by the vendor or purchaser.

When acting in a transaction, the authors consider it preferable to initially seek out a likely indication of the other party’s price allocation and if an acceptable result can be achieved, to have that agreed in writing as soon as possible.

Where an acceptable price allocation clause cannot be achieved, it may be acceptable for a vendor or purchaser, acting reasonably, to make their own determination of the apportionment of the purchase price.⁴ In this respect, and perhaps surprisingly, the Commissioner does not require a consistent (or symmetrical) approach adopted by both parties.⁵

When acting for the purchaser and the parties have not agreed to the specific apportionment between pastoral assets, another approach might be for the purchaser to request that the relevant sale contracts contain a clause giving the purchaser a right to have the land and fixed improvements (i.e. the dutiable component of the purchase) stamped at a value determined by the purchaser provided that such value is not less than the relevant valuer-general’s valuation of the land. This may avoid a dispute immediately prior to settlement when the purchaser seeks to prescribe a value to the dutiable components of the sale for duty purposes.

From a state revenue perspective, purchasers seeking to mitigate their potential duty costs should acquaint themselves with the relevant rulings or other pronouncements of state revenue authorities, who may seek to test the values given for land.

In respect of land and water, the following pronouncements are worth noting: 

• Revenue NSW Ruling DUT023 (transactions relating to water rights)
• SRO Victoria Revenue Ruling DA.029 (transfers of land and business)
• NT Revenue Office Commissioner’s Guideline CG-SD-010 (tax assessments requiring evidence of value)
• ACT Revenue Authority Revenue Circular DAA010.4 (evidence of value)
• SRO Tasmania Guideline: duty payable on the purchase of business assets
• RevenueSA Information Circular 102 (valuations of land, interests in land and landholder interests)

 It may be seen from a review of the above rulings and pronouncements that the approach between the jurisdictions varies.

In NSW, the price allocation between land and water rights will generally be accepted where the parties are dealing with each other at arm’s length.⁶ Whereas in South Australia, despite the use of price allocation clauses, where the value allocated to land is less than the value ascribed by the valuer-general, the value will not be accepted unless supported by satisfactory evidence of value (for example, an approved professional valuation).⁷

Vendors and purchasers should always be aware that both the federal and state tax and revenue authorities may challenge values attributed to specific pastoral assets – even where the parties are ostensibly dealing at arm’s length.

Practice tip: Purchase price allocation – raise from the outset

It is often critical for the adviser and their client to consider price allocation issues from the outset. Failure to do so may result in a particularly unpalatable result once the sale contracts are executed or if these issues are sought to be introduced at a late stage in the negotiations. 

This is an edited extract from chapter 4 of the Australian Agribusiness Advisers’ Guide, available now from Cowell Clarke for $250.

Peter Slegers is director of the tax and revenue and agribusiness teams at Cowell Clarke.

Notes:

1 The Trustee for the Estate of the late AW Furse (No 5) Will Trust v Federal Commissioner of Taxation (1990) 91 ATC 4007, at 4015; Spencer v Commonwealth (1907) 5 CLR 418, at 432 and 440-441; Marks v GIO Australia Holdings Ltd [1998] HCA 69, at [49]; Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, at 29; Granby Pty Ltd v Commissioner of Taxation (1995) 129 ALR 503.

2 See paragraph 3 of Taxation Determination TD 98/24 for CGT (“TD 98/24”) and ATO Interpretative Decision ATO ID 2002/818 for depreciating assets.

3 Paragraph 5 of Taxation Determination TD 98/24.

4 Consistent with paragraph 5 of TD 98/24.

5 Paragraph 5 of TD 98/24.

6 See paragraph 10 of Revenue NSW Ruling DUT023.

7 See Example 3 of RevenueSA Information Circular 102.