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The ATO is unable to prescribe methods that taxpayers must use in arriving at a market value or the processes which taxpayers must undertake in appointing or instructing a valuer. However, the ATO can provide guidance as to good practices that taxpayers may choose to put in place. This may involve seeking certainty from the ATO (for example, by way of a ruling) and/or taking steps to reduce the likelihood of an ATO review or adjustment in relation to the market value of mining assets for starting base purposes.
This early guidance sets out to clarify what the ATO considers to be good practice.
It is the ATO's experience that market valuations can be a matter of dispute in tax administration. The Policy Transition Group1 (PTG) noted that the valuation of the starting base could have a significant bearing on taxpayer liabilities for minerals resource rent tax (MRRT) and different valuation methods and assumptions can produce quite different results.
The ATO considers the following factors to be relevant in assessing the level of risk that a particular valuation may be inaccurate:
- the reliability of valuation data
- the appropriateness of the valuation method used
- the relative difficulty of the valuation
- the professionalism and competence of the valuer
- whether an open and transparent process to appoint the valuer was conducted, and
- the transparency of the valuation report.
These factors are consistent with guidelines that are currently issued by various governing bodies. Such guidelines include:
- the Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (the VALMIN Code)
- International Valuation Standards
- Australian Securities and Investments Commission (ASIC) Regulatory Guide 111: Content of expert reports and Regulatory Guide 112: Independence of experts
- Australian Professional and Ethical Standard (APES) 225 Valuation Services, and
- Market valuation for tax purposes by the ATO.
Experts who will be undertaking the technical assessment and valuation will not necessarily be bound to follow such guidelines. However, as the guidelines represent good industry practice, their use is more likely to lead, in the ATO's view, to more accurate market values than if those practices were not used. Where practices followed by the taxpayer differ from those in the above guidelines, an explanation of what those differences are and why they differ will assist the ATO in determining whether the valuation process represents good industry practice.
The reliability of valuation data
The reliability of data used as an input into a valuation can have a significant effect on its quality.
In assessing the reliability of the technical valuation data used by the valuer, the ATO will consider whether the valuer has:
- critically evaluated the data and any other information provided by the taxpayer, or otherwise obtained2
- undertaken suitable checks, enquiries, analyses and verification procedures to ensure the integrity of the data. For example, where an inspection of a material mineral asset or tenement is likely to reveal information or data that is material to a valuation report, good practice would require that the valuer inspect the asset3
- provided specific and definite material assumptions4
- considered changes in assumptions that are likely to materially affect the valuation5, for example, changes in the commodity price, exchange rate and inflation rate
- applied reasonable grounds in the preparation of any forward looking information used and, if such information has been provided to them, that they have made sufficient enquiries to ensure it was prepared on a reasonable basis6.
The ATO recognises that in-house expertise may be best placed to process and compile the technical valuation data.
The documentation of the information and data relied upon in the valuation of starting base assets will assist the ATO in a review of the valuation. This documentation should include the reasons why the valuer relied upon such information and data, and any adjustments made to reflect reliability issues.
The ATO recognises that the purpose of the valuation is to estimate market value. Due to the complexity of valuations, there will be a range within which the true market value of an asset lies. The ATO understands that a value chosen from within a range is dependent on the facts and circumstances specific to that valuation. The ATO expects where a value is chosen from within a range, that records show how the choice was made.
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The valuation report should contain sufficient information about the data and valuation methods used so the ATO can understand the procedures used and replicate the valuation result, if required. For more information on record keeping, see Record keeping for starting base.
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The appropriateness of the valuation method used
Valuers rely on a range of planning tools and documents in approaching the valuation of mineral assets and mineral securities. These planning tools and documents include:
- the ore reserves and mineral resource statements
- life of mine (LOM) plans
- LOM models
- scheduling tools, and
- feasibility studies.
The planning tools and documents will contain information such as the technical assessment of the amount of reserves and resources at a given point in time, the mine design by stage, planned capital expenditure and the planned production schedule. These assumptions will inform the valuation process by providing inputs to the valuation method.
In assessing the risk of an inaccurate valuation, the ATO will consider whether the valuation method used was appropriate for the particular circumstances. The ATO considers it good practice for the selection of the valuation method to have regard to guidelines, such as the VALMIN Code7, ASIC Regulatory Guide RG 111: Content of expert reports8 and the International Valuation Standards9. For example, the VALMIN Code states that selection of an appropriate valuation method depends on such factors as:
- the nature of the valuation
- the development status of the mineral assets, and
- the extent and reliability of available information10.
There are three broad approaches11 to valuing a mineral asset or mineral security. They are:
- the income approach, which is based on the future income expected in relation to the mineral asset or mineral security
- the market approach, which is based on comparable sales that relate to the mineral asset or mineral security, and
- the cost approach, which is based on costs of the operations that relate to the mineral asset or mineral security.
Particular methods will be classified into the three broad approaches. Some methods also cross over two or more of the above approaches.
The market approach is the most desirable approach to valuations in a general sense. This is because it reflects the value the market places on a particular asset. However, it may not always be appropriate or possible in the context of mineral projects as they are not traded frequently and there may not be a deep market to observe. Further, it is uncommon that mining projects are comparable.
The income approach is generally recognised as the next best approach for valuing an asset. However, forecasting a future income stream from a mining project can be difficult. Mines in production will be able to rely on historical data to aid in forecasting. Mines that are not in production, but where there is a good understanding of the ore in the mining project, may also be able to forecast future income streams. Caution will need to be exercised when forecasting future income streams for mining projects in early exploration where there is little knowledge of the ore body.
The most common and well-known method under the income approach is the discounted cash flow method which is frequently used for mining projects in production or pre-production stages.
The ATO considers it good practice to use a primary method and at least one other valuation method as a cross-check where possible and practicable12. The ATO recognises that this can add to costs of compliance for the taxpayer and may only be practicable for the larger scale projects. Where more than one valuation method has been undertaken, the ATO considers it good practice to document:
- any inconsistencies between the alternative valuations, and
- which method the valuer has had primary regard to in determining the value, and the reasons why this method was chosen.
Relative difficulty of the valuation
The risk of an inaccurate valuation with material or significant consequences for the taxpayer's MRRT liability may be expected to increase with the size and complexity of the assets.
In considering the relative difficulty of valuing assets, the ATO will adopt the approach taken in 'Market valuation for tax purposes' but adapted to the MRRT context13. In that context, the ATO will take into account the:
- size and scale of the taxpayer's operations
- nature of the assets, for example, type of coal or iron ore product
- possible complexity of the valuation
- simpler - for example, an entity with only one mine extracting one resource with relatively few physical assets, where comparable asset values are readily obtainable and a non-expert can easily obtain these; or recent valuations are available and are still accurate
- more complex - for example, different resources, many mines, several mining rights, integrated rail and port infrastructure, and purpose-built processing plant.
The professionalism and competence of the valuer
The risk of an inaccurate valuation can be affected by the professionalism and competence of the valuer. The ATO considers it good practice for the valuer to have:
- acted independently by operating at arm's length of the authority, control or influence of the taxpayer. This would apply equally to in-house and external valuation experts
- the appropriate experience. While there is no test of what is 'appropriate experience' it is good practice for a valuer to provide, as a matter of course, their resume when providing a written valuation. This will help to inform all who read it whether the stated experience indicates a competence befitting the scale of the valuation undertaken
- the relevant educational qualifications and professional expertise, and
- used methods consistent with best practice principles in line with industry standards.
The ATO recognises that the availability of suitably qualified and competent valuers will affect both who undertakes the valuation and when it is done. The closer the valuation is reasonably done to 1 May 2010 the better it will be to ensure availability of data and to minimise impacts of hindsight influencing the valuation as at that date14. However, it is recognised that many taxpayers cannot or will not be able to commit to the cost of an independent valuation until there is a reasonable level of certainty in respect of the MRRT legislation. Accordingly, valuations undertaken up to the due date for lodgment of the starting base return15 in respect of assets in existence at 1 May 2010 will be considered by the ATO to be done in a reasonably contemporaneous manner.
While the ATO considers it good practice for the taxpayer to use an external valuer, it also recognises that in-house valuers may be used for a range of reasons, including the availability or otherwise of external valuers, and the existence of strong in-house valuation expertise. Further, it is recognised that if an external valuer is used, it is likely that the technical information they rely on is provided by in-house expertise.
Where an in-house valuer is used, the ATO would also consider their professionalism, competence and independence by observing whether:
- a professional relationship exists between the in-house valuer and their employer
- the in-house valuer acts strictly in a manner that is independent of their employer in respect of the valuation
- the principles of materiality, competence, independence and transparency, as described in the VALMIN Code, are followed in accordance with industry valuation practice
- the taxpayer has engaged an independent expert to corroborate the work of the in-house valuer, for example, in relation to the methods used, assumptions adopted, processes followed and data relied upon, and
- appropriate documentation is given to and retained by the taxpayer.
In the absence of resource-industry specific valuation qualifications, the ATO considers it good practice for the taxpayer to be able to demonstrate that the in-house valuer used has experience, skills, and professional standing consistent to the greatest extent possible with the VALMIN Code16.
The process of appointing and instructing the valuer
The process used to appoint and instruct a valuer can also provide insights as to the level of risk. In assessing the transparency of the process to appoint a valuer, the ATO considers it good practice that:
- appropriate records of the process are retained by the taxpayer
- the records contain information that logically leads to and supports the decision to appoint an external or internal valuer
- appropriate documentation from the valuer is given to and retained by the taxpayer
- a professional relationship exists between the valuer and the taxpayer throughout the process, and
- the principles of materiality, competence, independence and transparency, as described in the VALMIN Code, are followed in accordance with industry valuation practice.
The ATO may seek documented evidence of instructions provided to the appointed valuer, which clearly:
- sets out the scope and purpose of the valuation
- ensures the valuer's independence in writing the report and in drawing conclusions
- recognises the valuer's right to refuse to provide an opinion or report if not provided with the information and explanations they need
- grants the valuer access to the taxpayer's premises and the necessary records
- ensures the valuer is provided with all help needed to complete the valuation report, and
- establishes that any fee, where levied, does not depend on the outcome of the report17.
The level of transparency of a valuation report can be determined by the extent that another valuer could use the information and assumptions provided in a report and replicate the valuation.
Good practice in being transparent involves documenting the reasons why particular assumptions and methods were used. It also involves documenting the reasons why material and relevant guidelines were not used.
The ATO recognises that the level of detail in a report needs to be balanced. Too much information can have the same effect of reducing transparency as not enough18. What the ATO understands to be good practice in the level of detail contained in a valuation report is provided in Record keeping for starting base.
1 Policy Transition Group (PTG) Report to the Australian Government on the new resource taxation arrangements (2010), Canberra, p. 69
2 Based on Australian Securities and Investments Commission's 2011, Regulatory Guide 111 Content of expert reports, RG 111.92:
3 The Australasian Institute of Mining and Metallurgy (AusIMM) 2005 Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (The VALMIN Code), The VALMIN Committee, paragraph 65
4 Based on Australian Securities and Investments Commission's 2011 Regulatory Guide 111 Content of expert reports, RG 111.75-111.76:
5 Ibid RG 111.77
6 Based on Australian Securities and Investments Commission's 2011 Regulatory Guide 111 Content of expert reports, RG 111.95-111.96:
7 The VALMIN Code, 2005
8 Australian Securities and Investments Commission's 2011 Regulatory Guide 111 Content of expert reports:
9 The Standards are available through the Australian Property Institute at http://www.api.org.au/menuitem/professional-and-technical-standards/valuation-property-standards
10 The VALMIN Code 2005, page 8, paragraph 32
11 International Valuation Standards Council, International Valuation Guidance Note No. 14, 2007, paragraph 5.1.7. The Standards are available through the Australian Property Institute at http://www.api.org.au/menuitem/professional-and-technical-standards/valuation-property-standards
12 Based on Australian Securities and Investments Commission's 2011 Regulatory Guide 111 Content of expert reports RG 111.65
13 Australian Taxation Office 2011, Market valuation for tax purposes 12 May 2011, p 23
14 Sub-section 170-10(2) prevents things to be taken into account where they were only known with the benefit of hindsight
15 In the Minerals Resource Rent Tax (Consequential Amendments and Transitional Provisions) Bill 2011 proposed sub-section 117-20 (3) of the Tax Administration Act 1953, the due date is the first day of the sixth month after the end of the first MRRT year, but can be extended at the discretion of the Commissioner
16 VALMIN Code, paragraph 20
17 Australian Taxation Office Market valuation for tax purposes available on ato.gov.au, accessed 12 May 2011
18 Blumer J The VALMIN Code - Bible, Roadmap or Signpost?, the article is available at http://www.mineralsappraisers.org/aima_mica_papers.html
Last Modified: Friday, 19 August 2011