Valuation methods

You should assess market value on the basis of the highest and best use of the asset as recognised in the market.

The valuation industry and courts have recognised that particular valuation methods are more appropriate for some valuations than others, although each instance needs to be considered in light of the information available to support the valuation method. In practice, it is common to use one or more secondary methods to cross-check or confirm the value derived from the primary method.

To determine the market value, you should use the most appropriate valuation method. Where comparable arm's length sales data is available (for example, in a market for a commodity product), this is generally considered the most appropriate method.

Where a market exists for an asset, that market is widely considered to be the best evidence of market value of the asset.

Part B sets out the valuation methods generally used for valuations of real property, plant and equipment.

The valuation of a business is usually based on a number of established valuation methods built around the market-based, income-based and asset-based approaches.

These methods include:

  • comparable transactions
  • comparable trading
  • capitalisation of earnings
  • discounted cash flow
  • calculation of net assets on a 'going concern' basis.

A significant amount of published material is available regarding these (and other) methods. Accordingly, we will not cover the mechanics of these methods in this guide, but we do provide a general description of them in Part C.

Hypothetical market

If there is no market for the asset being valued, the courts have held that the valuer is to assume a market. This involves developing a 'hypothetical market', consisting of all hypothetical buyers and sellers who could reasonably be expected to be interested in buying or selling the asset. The market value is the price that such hypothetical buyers and sellers would negotiate to achieve a notional sale.

The hypothetical market approach was confirmed in a majority decision of the High Court. In Commissioner of State Revenue (Vic) v. Pioneer Concrete (Vic) Pty LtdExternal Link [2002] – HCA 43, paragraph 44 states:

In determining the value there is no warrant, either in the language of the statute or in principle, for departing from the hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together. The purpose of making the inquiry hypothetical is to isolate the value of the estate or interest to be transferred from factors that are extraneous to the purpose for which such a value is to be ascertained. To introduce into the exercise a special condition for which, on a particular occasion, a particular vendor chose to stipulate, and to which a particular purchaser chose to agree, is to depart from the statutory requirement, which is to determine the value of that which was transferred. It is rather, to value the net benefit which the transaction conferred upon the purchaser.

Special value

It is sometimes argued that an asset has special value to a particular buyer. Usually this is not relevant in deriving a market value. Where there is clear evidence that the special value is known or available to the wider market, this would be reflected in an objective valuation of the asset.

However, even where the seller knows that you value the item in a special way, this usually only means that the item will sell (and the market value will be) at the higher end of the usual market value range. On the other hand, if two or more hypothetical purchasers were assumed to exist, both having a special use for the item, the special value may be reflected in the market value.

If a special value is known and available only to one potential buyer and not known or available to the wider market, it will not be reflected in market value.

Prospective market value

A market value determined in advance may not be reliable because subsequent events may change the appropriate valuation. For example, key personnel in smaller businesses may leave or die, or there may be major fluctuations in equity markets or the economy.

Where the valuer's method takes these unknown future events into account, we may be prepared to accept that method. For example, we will accept a valuation based on the closing price of widely held shares listed on the Australian Securities Exchange (ASX) to derive the market value for a non-arm's length transfer of such shares between a husband and wife, provided the price had not fluctuated materially on the day.

For unlisted shares, there is no reliable method for approximating a market value at a future time.

We generally will not rule prospectively on market value if there is no reliable method for approximating the market value at the future time. We will rule after the event giving rise to the market value has occurred.

Other valuations

Market value is generally the most appropriate basis of value for a wide range of applications and should be applied in all instances where the market value of the asset can be established.

Concepts of special value, synergistic value, liquidation value and salvage value will not be acceptable in the absence of market value, as they do not necessarily involve the exposure of the asset in the market place at large.

Some valuation processes are not intended to result in a market value, for example, an indicative assessment or appraisal. An indicative valuation may occur where the valuer has not been engaged to provide a definitive opinion on market value, or where the valuer does not make reasonable enquiries as to the veracity of information, relevant to providing a definitive opinion on market value. As such, the valuation process may not be accepted as arriving at market value for taxation purposes.

Director valuations are those undertaken by a director. Whether the valuation is acceptable as market value will depend on the valuation process used.

    Last modified: 01 Jul 2015QC 21245