Paper

1. ME_130644718_1 (W2007)
Tax Valuations
by
Joanne Dunne, Partner and Robert Yunan, Special Counsel
MinterEllison, Melbourne
Introduction
1. This paper examines the relevance of valuations and market value in the Australian tax system for
corporate or business taxpayers, the contexts in which the tax legislation given market valuations
particular relevance, and refers to the ATO's approach and views on the topic. The paper
provides examples focused on capital gains tax (CGT) and thin capitalisation (in the context of
intangibles/assets with no market).
2. Further examples were set out in detail in our slide presentation on 27 May 2016, and we refer
you to those slides for other examples (eg tax consolidation, the principal asset test).
3. We have also set out six practical tips to assist you in obtaining robust market valuations to satisfy
the ATO.
Background - why tax valuations are important
4. Most commonly, in a corporate/business transaction the amount of tax paid has a relationship to
the amount paid or received for a transaction. But when assets are sold, whether on capital or
revenue account, their tax carrying values are always part of the tax calculation. Further, if the
transaction is not at arm’s length, the market value substitution rules or other integrity rules may
apply. The value of assets is an important part of Australia's tax system.
5. Tax legislative areas where market value is relevant include the following:
(a) the maximum net asset value test for small business concessions in the CGT context;
(b) the principal asset test in the CGT context, which seeks to compare the market value of
taxable Australian real property to other assets held by a company;
(c) the commercial debt forgiveness rules and calculating the gross forgiven amount;
(d) value shifting rules under the general value shifting regime;
(e) employee share schemes, particularly determining the discount to market value in relation
to shares/options which must be brought to account for taxation purposes;
(f) tax consolidation, particularly when considering the allocable cost amount for assets for a
joining or exiting entity, and the available fraction for losses;
(g) trading stock, for example, if trading stock is disposed of outside of ordinary business,
market value is deemed to be derived and deemed to be the acquisition cost of such
trading stock;
(h) GST, for example, under the margin scheme, for pre 2000 property a valuation of the
property as at 1 July 2000, can be used to calculate the margin;
(i) R&D, for example, under the feedstock rules, a formula requires the market value of the
marketable product produced from the R&D activity;
(j) self-managed superannuation funds (SMSF), for example, the ATO states that an
independent valuation report to determine market value of an asset must be obtained
before a SMSF member can purchase the asset from a SMSF;
(k) off-market share buybacks, for example, the market value uplift rule in section
159GZZZQ(2) of the Income Tax Assessment Act 1936 (Cth) has the effect that the
consideration for the buyback is deemed to be the market value of the shares at that time;
and
(l) a number of other provisions - including the cultural gifts programme/donations, stamp
duty, transfer pricing, FBT, PAYG and non-cash benefits, to name a few.

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A number of these were discussed in our webinar on 27 May 2016 and are further outlined in the
slides from that session.
6. For a complete list of valuation related provisions in the tax legislation as at 2014, see Appendices
1 and 2 to the Inspector-General of Taxation's Report Review into the ATO's administration of
valuation matters (2014). The extensive list outlined in those Appendices demonstrates the
pervasiveness of the market value concept to taxation.
What does market value mean?
7. The High Court considered the ordinary meaning of market value in Spencer v The
Commonwealth of Australia (1907) 5 CLR 418. Griffith CJ commented (at page 432) that:
'...the test of value of land is to be determined, not by inquiring what price a man desiring to sell
could have obtained for it on a given day, i.e. whether there was, in fact, on that day a willing
buyer, but by inquiring: what would a man desiring to buy the land have had to pay for it on that
day to a vendor willing to sell it for a fair price but not desirous to sell?'
8. The key market value principles recognised by the High Court include:
(a) a willing but not anxious vendor and purchaser;
(b) a hypothetical market;
(c) the parties being fully informed of the advantages and disadvantages associated with the
asset being valued;
(d) both parties being aware of current market conditions;
(e) the parties acting at arm’s length with each other; and
(f) an assumption that the sale is not forced.
9. A market may be defined with respect to geographical limitations, a particular product, or a
particular level (eg wholesale). The High Court majority in Commissioner of State Revenue (Vic)
v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43 stated that market value is the value to a third
party generally, and not the specific value to the actual acquirer.
10. The High Court's guidance provides the principles which must be applied when considering
market value. Because value is critical for so many aspects of tax law, it is important to ensure
that the ATO or relevant State Revenue Office is satisfied and that values adopted are evidenced
appropriately. Guidance may be available from a State Revenue Office, depending upon the
State involved and the nature of the transaction, and specialist advice should be sought to ensure
that the best evidence is retained to support market value. In this paper we focus on Federal tax
issues.
11. The ATO provides comprehensive guidance of what would satisfy it in its booklet Market
Valuation for Tax Purposes (Market Value Guidelines) which is available on its website.
12. The ATO has stated that the meaning of market value depends on the statutory context, and, as
would be the normal course, the statutory provisions should be consulted first.
13. To assist taxpayers, the Market Value Guidelines are set out as follows:
(a) Part A of the ATO Market Value Guidelines provides guidance about determining the
market value for tax purposes.
(b) Part B sets out the 3 valuation processes for real property, plant and equipment that the
ATO will accept. These methods are a direct, sales or market comparison approach, a
depreciated replacement cost approach, and income-based approaches.
(c) Part C sets out several valuation approaches and methods for deriving market value for a
business, securities and intangible assets.
(d) Part D provides guidance on the content required in a market valuation report.

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ME_130644718_1 (W2007)
(e) Part E provides guidance on how to reasonably allocate value to underlying assets.
(f) Part F sets out, among other things, the ATO’s compliance activities and its approach to
ruling requests involving market value.
14. In the Market Value Guidelines, the ATO also indicates the following:
(a) Market value should be assessed at the highest and best use of the asset. The ATO is
looking for optimal market value.
(b) All interrelated assets should be valued on the same use. In other words, you should not
value some assets on an alternative use and others on their existing use if they are
interrelated.
(c) The market value of an asset or transaction is not always the same as what would be
considered an arm’s length consideration. In dealings between foreign related parties, the
transfer pricing rules require the use of consideration that would be expected if the
property had been bought or sold under an agreement between independent parties
dealing at arm’s length in comparable circumstances. Those circumstances may mean
that market value is not the appropriate arm's length consideration.
(d) Market value may be more readily measured than value. Value is defined in the
International Valuation Standards (IVS) as '...an economic concept referring to the
monetary relationship between goods and services available for purchase and those who
buy and sell them.' Market value on the other hand, reflects a market’s measure of the
benefits enjoyed by someone that uses an item or receives a service, at a nominated
date.
(e) Conceptually, market value is also distinct from price and cost. Price is defined in the IVS
as '...the amount asked, or offered, for goods or services.' Cost refers to the result of a
historic transaction, set in time and amount, and is the '...the price that is paid for goods or
a service, or the amount paid to produce the goods or services'. Market value by contrast,
varies through time and circumstances. Depending on the time and circumstances, the
cost and/or price of goods or services may or may not be the same as their market value.
(f) Fair value is an accounting concept used for financial reporting purposes and is not
always the same as market value (although the two are generally defined similarly). The
Australian Accounting Standards Board (AASB) 13 Fair Value Measurement defines fair
value as '...the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. 'Fair value
can be measured in reference to the quoted market price in an active and liquid market (if
available), the current or recent market prices for the same asset or similar assets, the net
present value or depreciated replacement cost.
(g) The ATO may review a taxpayer's market valuation as part of its compliance/risk
assessment processes. The ATO generally uses valuers to confirm whether the market
value is acceptable. The ATO’s valuers will generally review the valuation process to
confirm if it complies with accepted valuation industry practice. Upon receiving a valuation
report from its valuers, the ATO will use its standard risk assessment procedures to
determine whether to take further action (for example, an audit). The way in which the
ATO reviews the valuation process and documentation risk is set out in a matrix in the
ATO Market Valuations Guidelines.
(h) The ATO will generally consider the value of the asset/s, the type of asset/s involved,
materiality of any potential tax adjustment, complexity of the valuation process undertaken
and documentary evidence supporting the valuation.
Where to start – Legislative context, timing of valuation
15. As a first step, the relevant legislation should be consulted, and as the ATO Market Value
Guidelines state, the context of the statutory provisions will to some degree impact upon the
nature of the valuation to be obtained.
16. The second aspect to consider when looking at the statutory provisions is the time at which the
valuation of the asset or transaction is required should be determined.

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17. For example:
(a) for consolidatio
time of joining
(b) for CGT purpo
(c) for thin capital
standards; and
(d) for fringe bene
benefit was pr
Examples
CGT rules
18. Pursuant to section 11
base of a CGT asset i
(a) money paid or
(b) incidental cost
(c) costs of ownin
(d) capital costs to
and
(e) capital costs o
19. Section 103-5 of the IT
providing property, the
provision applying is w
acquisition of an asse
20. If registered for GST,
input tax credits includ
Scrip for scrip transac
21. The example transact
PrivateCo for the issue
22. The vendor will need t
choose CGT rollover r
cost base should be e
acquire the ListCo sha
23. ListCo’s cost base in t
by ListCo to acquire th
exchange, this is likely
determined by the vol
on purposes, the market value of the relevant ass
(or formation or exit, as applicable in the circums
oses market value is determined at the time of the
isation, market value timing is aligned with the re
d
efits tax or PAYG, the market value of non-cash b
rovided.
10-25(1) of the Income Tax Assessment Act 1997
s made up of five elements:
r the market value of property given for the CGT a
ts of acquiring the CGT asset;
ng the CGT asset;
o increase or preserve the value of the CGT asse
of preserving or defending the title or rights to the
TAA 97 provides that where a payment, cost or e
e market value of the property is used. The most
where property is provided as consideration, or pa
t under CGT event A1.
the elements of the cost base are reduced by the
ded in the cost pursuant to section 103-30 of the I
ction
ion involves ListCo, an ASX listed entity, acquirin
e of new ListCo shares.
to calculate the cost base of its new ListCo share
relief in respect of the disposal of its PrivateCo sh
equal to the market value of the PrivateCo shares
ares.
the PrivateCo shares is equal to the market value
he PrivateCo shares. Where ListCo’s shares are
y to be equal to their implied share price (which m
ume weighted average price of a listed share if th
Page 4
sets is worked out at the
stances);
e CGT event;
levant accounting
benefits, is broadly when the
7 (Cth) (ITAA 97), the cost
asset;
et or to install or move it;
CGT asset.
xpenditure involves
t common example of this
art consideration, for the
e amount of any GST net
ITAA 97.
ng all of the shares in
es, assuming it does not
hares. The ListCo share
the vendor provided to
e of the property provided
actively traded on a stock
may be for instance
he market is volatile or

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thinly traded). However, in circumstances involving a private company in the place of ListCo, or if
there is no liquid market for ListCo shares, it may be difficult to value the ListCo shares. In this
event, it could be useful to benchmark the asset against a listed company in a similar industry and
of a similar size.
24. Issues such as whether a control premium or blockage discount should be taken into account
when determining market value of shares in this context can be difficult. Accredited valuers may
take different views on the applicability of such special factors. The ATO's Market Value
Guidelines provide that in some cases those factors will be relevant, but support for the
application of such factors should be recorded in a written valuation which clearly identifies the
process undertaken.
Market Value Substitution Rule (MVSR) – cost base
25. Section 112-20 of the ITAA 97 provides that where an asset is acquired from another entity, the
market value of the asset at the time of acquisition is deemed to be the first element of its cost
base if there was no expenditure incurred to acquire it, some or all of the expenditure incurred to
acquire it cannot be valued, or the transaction was not completed at arm’s length. There may be
an increase or decrease in the asset’s cost base depending on whether the market value of the
asset is greater or less than the actual consideration provided.
26. There are certain exceptions to the MVSR. Broadly:
(a) an acquirer who incurs no expenditure in acquiring the asset will not benefit from deemed
market value consideration where the asset was acquired as a result of CGT event D1
occurring;
(b) deemed market value expenditure will not be substituted where the asset was acquired as
a result of another entity doing something that did not result in a CGT event occurring
(such as a mere issue of shares); and
(c) in a non-arm’s length dealing, market value will only be substituted where the amount paid
was greater than the market value of the asset. In other words, where insufficient
consideration was provided in a non-arm’s length transaction, a step up to market value is
not provided to the acquirer.
27. If the transaction was not completed at arm’s length and did not give rise to a CGT event for the
entity providing the asset, the market value will only be substituted if what was paid to acquire the
asset was more that its market value at the time of acquisition.
28. Subsection 112-20(3) of the ITAA 97 sets out a number of other specific situations in which the
benefit of the MVSR is not available to the acquirer (for example, income from a trust acquired for
no consideration, or bonus shares acquired for no consideration).
MVSR - capital proceeds
29. Under subsection 116-30(1) of the ITAA 97, if no capital proceeds are received from a CGT event,
a taxpayer is taken to have received the market value of the CGT asset that is the subject of the
event. The market value is worked out at the time of the CGT event.
30. Under subsection 116-30(2) of the ITAA 97, the capital proceeds from a CGT event are replaced
with the market value of the CGT asset if:
(a) some or all of the proceeds cannot be valued; or
(b) the capital proceeds are more or less than the market value of the asset; and
(i) the parties did not deal at arm's length in connection with the event; or
(ii) the CGT event is CGT event C2.
31. Parties are acting at arm's length with each other if each party acts independently and neither
party exercises influence or control over the other in connection with the transaction. The law
looks at not only the relationship between the parties, but also the quality of the bargaining
between them. For instance, unrelated parties may not be dealing at arm’s length where a
transaction is structured so as to give one party an advantage to which the other is indifferent.

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MVSR – examples
32. The first example illustrates the typical symmetrical application of the MVSR where there is a
transfer of property for an amount other than market value. As a result of the MVSR applying to
both the capital proceeds on the sale from A to B and to B’s determination of its cost base, the
correct gain is subject to tax overall. If the cost base rule did not apply, for example, there would
be double taxation in respect of the $99 gain attributable to A’s holding.
33. In the second example, by contrast, there is no CGT event on the issue of the shares by
Company A to Shareholder B. Assuming that the value shifting rules do not apply and the share
issue is not otherwise assessable to B (for example, as income or under the employee share
scheme rules), B would have property worth $100 having only paid $1 and neither A nor B have
paid any tax. The appropriate policy outcome is that B would pay tax on this unrealised gain on
any subsequent disposal. Switching off the cost base MVSR where there is no CGT event for the
counterparty achieves this policy intention.
Thin capitalisation
34. Under the thin capitalisation rules, the amount of debt used to fund the Australian operations of
both foreign entities investing into Australia and Australian entities investing overseas is limited.
The rules apply when the entity's debt-to-assets/equity ratio exceeds certain limits (known as 'safe
harbours') and can disallow interest or other debt related deductions. Entities must calculate the
average values of items such as their assets, non-debt liabilities, debt capital and equity capital in
order to apply the thin capitalisation rules and determine if 'safe harbours' have been breached.

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35. Revaluations of assets may increase the safe harbour asset base. Accounting values are used
as a starting point, and accounting standards must be applied when determining the value of
assets, and (with some exceptions), for thin capitalisation purposes an asset arises only if the
accounting standards enable or require that asset to be recognised at that time.
36. The key exceptions are deferred taxes, defined benefit assets and liabilities and internally
generated intangibles. In relation to intangibles, specific rules permit the recognition of intangibles
on a thin capitalisation balance sheet even though the intangibles are not capable of recognition
under AASB 138.
37. If there is no active market to provide an entity with the conditions to use the revaluation model in
AASB 138, an entity will be able to choose to revalue one or more of these assets for the relevant
period (being all or part of an income year) under subsection 820-684(2). This covers all relevant
valuations points within that period, as identified in the average value methods in subdivision 820-
G. The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No 5) Act 2008
states that the revalued amount arising from this process must comply to the maximum extent
possible with the requirements of the relevant accounting standards.
Obtaining robust evidence of market value – 6 practical tips
Tip 1: ATO Valuers Panel
38. Taxpayers should consider obtaining valuation advice from one of the members of the ATO's
Valuers Panel which includes the following external members:
(a) Aon Risk Services Australia Limited;
(b) CIVAS (ACT) Limited (Colliers International);
(c) Crowe Horwath Corporate Finance;
(d) Ferrier Hodgson;
(e) Frontier Economics Pty Ltd;
(f) Gaffney, Cline & Associates Pty Ltd (WA);
(g) Griffith Hack Consulting Pty Ltd;
(h) KordaMentha Pty Ltd;
(i) KPMG;
(j) Lonergan Edwards & Associates Limited;
(k) Opteon Property Group;
(l) PPB Advisory;
(m) PricewaterhouseCoopers;
(n) Revaluate Pty Limited;
(o) Romar Valuation Services;
(p) Sapere Research Group Limited; and
(q) Value Advisor Associates Pty Ltd.
39. Some of these panel members may specialise in particular kinds of asset.
40. The reason for this tip is not to suggest that other valuation firms are not perfectly able to provide
valuation services, just that these firms are obviously considered highly by the ATO, and if one of
these firms is utilised, that can be strategically useful for a taxpayer.

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Tip 2: Instructions – ensure the instructions appropriately support a valuer's independence
41. A person commissioning a valuation for tax purposes should be able to demonstrate that they
have provided the valuer with instructions that clearly:
(a) set out the scope and purpose of the valuation;
(b) ensure the valuer’s independence in writing the report and in drawing conclusions;
(c) recognise the valuer’s right to refuse to provide an opinion or report if not provided with
the information and explanations they needed;
(d) grant the valuer access to the taxpayer’s premises and the necessary records;
(e) ensure the valuer would be provided with all necessary help needed to complete the
report;
(f) establish that any fee, where levied, did not depend on the outcome of the report; and
(g) ensures assumptions to be relied upon are considered.
42. A valuation should be replicable and preferably undertaken by a suitably qualified and
experienced person. A valuation report should be understandable and objectively demonstrate
the valuation process undertaken in accordance with valuation industry practices. The ATO may
not accept that a valuation reflects market value if the process is not adequately explained. In
addition, if a tax matter goes to Court, a valuer should be clearly instructed independently, with
reference to guidelines issued by the Federal Court and the Administrative Appeals Tribunal for
expert witnesses.
43. The ATO has released a standard 'Form for instructing your Valuation Consultant'. The form
provides instructions outlining the information that valuers may require and optional information
that may be included depending on the valuation services required. The form also contains
several warnings and conditions and refers to relevant Court expert witness guidelines. It is often
useful to seek advice from a tax controversy practitioner to ensure that the best possible evidence
is being obtained, that a valuer's independence is not compromised, and that the report obtained
can withstand scrutiny.
44. The ATO has also published a 'Private rulings and valuations fact sheet' which may be consulted
when a request is made to the ATO to determine or confirm the value of an asset for tax
purposes.
Tip 3: Consider two valuers for complex assignments
45. For complex assignments, we recommend a person commissioning a valuation for tax purposes
should consider instructing two valuers. One valuer can act as an independent valuer who (if
instructed properly) can provide expert evidence in Court (if needed), and the other valuer can act
as an expert to assist and guide the taxpayer more directly with instructions to the independent
valuer, appropriate methodology and how to use the report provided to support the tax issue.
Tip 4: Engagement with the ATO
46. A taxpayer wanting absolute certainty as to its position may wish to seek a binding private ruling
from the ATO either asking the ATO to provide a valuation (at the taxpayer’s cost) of the relevant
assets or asking the Commissioner to confirm a valuation supplied by the taxpayer.
47. The ATO may provide private, class or product rulings on valuation matters. However, according
the ATO Market Value Guidelines states:
‘We can only rule on how a relevant provision applies to a particular taxpayer in relation to
a particular scheme and a question about whether or not a particular method is a
appropriate may not fall into this category. Moreover, we will often not have sufficient
facts to determine the appropriate method to use.’
48. When seeking a private ruling, irrespective of whether or not the taxpayer provides its own
valuation in support of a market value, the ATO will generally engage a valuer (either to confirm

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the valuation provided by the taxpayer or to determine the market value) and will pass on the
costs of engaging the valuer to the taxpayer.
49. The private ruling process can take considerable time and may not be an option commonly
undertaken by taxpayers. In practice, a taxpayer will typically obtain its own valuation and seek to
rely upon it if the ATO later proceeds to a review.
50. Taxpayers may enter into an Advance Market Valuation Agreement (AMVA) with the ATO under
which values are set for assets and entities for consolidation purposes. The key advantages to a
taxpayer of an AMVA are the certainty that would be provided about the future tax treatment of
the consolidated group, and that the AMVA could be negotiated with the ATO in a co-operative
fashion. An AMVA would also be suitable to taxpayers if their assets have unique and unusual
attributes.
51. There are other forms of engagement with the ATO, and it is sensible to consider early
engagement strategies, even if rulings, AMVAs or other more formal strategies are not considered
appropriate in the circumstances. Engaging with the ATO is risk mitigation strategy that all
taxpayers should consider.
Tip 5: Avoid disputes - elements of a good valuation
52. In deciding whether to accept or challenge a valuation, the ATO takes into account a number of
factors, including:
(a) the risk to the revenue;
(b) the taxpayer’s risk profile;
(c) the nature and materiality to the business of the assets in question;
(d) the complexity of the valuation issues;
(e) whether the parties are dealing at arm’s length; and
(f) the qualifications, experience and independence of the valuer.
53. Taxpayers should:
(a) avoid the use of indicative valuations (valuations limited in scope, usually due to the level
of information made available to the valuer or some other factor);
(b) appoint an independent expert – the ATO has challenged the independence of a
taxpayer’s valuation expert in several recent cases;
(c) consider the valuer’s qualifications and expertise and ensure these are appropriately
demonstrated;
(d) set out the facts, assumptions and documents relied upon;
(e) frame the precise question that is being asked of the valuer;
(f) ensure the valuer sets out the methodology and reasoning; and
(g) show that there has been a cross-check of the valuation against other valuation methods
(if appropriate).
54. Contentious valuation issues include:
(a) the appropriate methodology to be used in a particular valuation;
(b) facts to be assumed;
(c) valuation ranges;
(d) allocation of value;
(e) process issues (eg the qualifications, experience and independence of the valuer); and

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(f) the clarity and transparency of the valuer’s reasoning.
Tip 6: Manage a valuation dispute with the ATO
55. In the event of a dispute with the ATO, the burden of proof rests with the taxpayer. A taxpayer
who has maintained appropriate records will be in a better position to handle a dispute and will be
in a generally stronger position where they can show that market valuations obtained were based
on reports commissioned in a transparent manner from independent qualified valuers.
56. Consideration should be given on how best to seek to resolve the issue. For instance, through
litigation (which can be expensive and lengthy) or through an alternative dispute resolution
process.
57. Where the valuation process is at the core of the dispute, rather than the facts, it may be possible
to resolve the matter through a range of ADR processes, including:
(a) the joint appointment of an independent valuer;
(b) expert valuer conferencing (this involves discussions between a conference of experts
who agreed upon some matters and identify those in dispute, typically culminating in an
Expert’s Joint Report);
(c) Independent Review; and
(d) Early Neutral Evaluation.