• Part H: Consolidation valuation shortcuts

    Consolidation: Valuation shortcut options

    The following valuation shortcut options are for consolidation purposes only. They enable businesses to avoid the need to obtain new valuations for certain assets and membership interests. These shortcuts, which are provided under the Commissioner's general administrative powers, provide a reasonable approximation of the true market value of the asset.

    Use of these options may avoid the need for new valuations for the purpose of setting assets costs. However, the valuation shortcut options are not available for calculating a joining entity's market value for the purpose of determining the maximum use of transferred losses.

    The use of valuation shortcut options reduces the risk of the ATO undertaking a market valuation review of the assets for which the shortcut options have been used.

    Table H1: Consolidation: Valuation shortcut options

    Valuation shortcut

    Type of asset

    Valuation option

    1

    Depreciating assets (not including intangible assets) that have not been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount (ACA)

    Adjustable value (which can be revised to ignore any balancing adjustment amount that reduced the adjustable value) can be used as market value

    2

    Depreciating assets (not including intangible assets) that have been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount (ACA)

    Adjustable value, revised to ignore the effect of accelerated depreciation (and which can be revised to ignore any balancing adjustment amount that reduced the adjustable value), can be used as market value

    3

    Trading stock (other than livestock and growing crops) that is not a retained cost base asset

    Terminating value at the joining time may be used as market value except in certain circumstances

    4

    Employee share scheme shares

    Existing market valuation updated if appropriate

    5

    Unlisted shares

    Existing market valuation updated if appropriate

    Constraints on use of valuation shortcuts – supporting documentation required

    When choosing to use a valuation shortcut for a particular asset, the taxpayer must ensure they have adequate supporting documentation that demonstrates the asset satisfies the eligibility requirements of the particular shortcut.

    One in, all in – with an exception

    While use of the valuation shortcuts is optional, the decision to use a particular shortcut must generally apply to all of an entity's assets that are eligible for that particular shortcut.

    For valuation shortcuts 1 and 2, there is one exception to this rule. A taxpayer can generally opt to use shortcuts 1 and 2 for a joining entity's eligible depreciating assets, while obtaining new market values for the assets (including those eligible for the shortcut) that make up a single large functioning unit of integrated plant. Such a unit includes integrated plant within an oil refinery, or a communications cable, and integrated plant within a factory production line.

    The single large functioning unit of integrated plant must have a total adjustable value greater than 1% of the joining subsidiary's allocable cost amount to qualify for this exception. Without this exception, the 'one in, all in' rule precludes the taxpayer from obtaining new market values for those constituent assets that were otherwise eligible for the shortcut.

    The exception works as follows:

    • A taxpayer opts to use the shortcut to value their eligible depreciating assets. Among these are a number of assets that constitute one or more items of integrated plant. A market value is determined for the integrated plant and the value is then allocated on a reasonable basis among the integrated plant's constituent assets. These values may then be adopted as the market values of the constituent assets instead of the values that would be adopted for these assets under the valuation shortcuts applying to depreciating assets.
    • In valuing an integrated functioning unit of plant, the market value must reflect the physical value of the plant and not comprise any embedded goodwill or any other intangible value. That is, care should be taken to ensure none of the value attributed to the asset is actually goodwill attached to the use of that asset or to any other intangible assets held by the entity.

    Not available where there is an intention to sell

    Valuation shortcuts, with the exception of valuation shortcut 3 (trading stock), are not available for use for assets if there is an intention at the joining time to sell any of the following after consolidation:

    • the joining entity in which the asset is held
    • the underlying business of the joining entity in which the asset is held
    • part of the underlying business of the joining entity in which the asset is held
    • the asset.

    This provision only applies where both of the following apply:

    • at the joining time, an asset has been the subject of a fully determined specific intention to sell
    • the expectation is that the asset will be sold within two years of the joining time.

    For example, it would apply where either of the following applies:

    • a decision had been taken to market an asset with the intention to sell if a suitable buyer could be found
    • a decision had been taken to accept an offer to buy an asset but the decision to sell had not yet been communicated to the buyer.

    However, this provision would not apply where either of the following applies:

    • where an entity had a history of disposing of its assets on a strategic basis but had not taken a decision to sell in relation to any particular asset at the joining time
    • where an entity had merely fielded offers in respect of a specific asset or assets but had made no decision to sell at the joining time.

    Where this provision applies to a particular asset, it will no longer be treated as an asset of that particular type for purposes of applying the 'one in, all in' rule. The intention to sell the asset prevents the use of the valuation shortcut in relation to that asset. However, it will not prevent the valuation shortcut from applying to other assets that qualify for that particular shortcut.

    Not available for calculating the available fraction

    The valuation shortcuts cannot be used to calculate the available fraction for the use of a joining entity's losses by the head company. For this purpose, market valuations of the loss entity and the consolidated group at the joining time will be required.

    Use in determining goodwill

    Where valuation shortcuts have been adopted for certain assets, the shortcut values for those assets should be used in determining the market value of the entity's goodwill. Goodwill is determined as the excess of the market value of the entity over the market value of its net identifiable assets at the joining time.

    The net identifiable assets may have a mixture of market values and shortcut values. If a taxpayer market values all or any of the entity's net identifiable assets that qualify for one of the shortcut options in order to work out the value of goodwill, they should not adopt that valuation shortcut for qualifying assets that have been market valued.

    Valuation shortcut 1

    Depreciating assets that have not been depreciated on an accelerated basis

    The adjustable value at the joining time, which may be revised to ignore any balancing adjustment amount, can be taken as the market value for all depreciating assets where all of the following apply:

    • they have not been depreciated on an accelerated basis
    • their individual adjustable values amount to 1% or less of the joining entity's ACA
    • they are eligible for a deduction under Division 40 of the ITAA 1997, except for the following intangible assets       
      • mining, quarrying or prospecting rights
      • mining, quarrying or prospecting information
      • items of intellectual property
      • in-house software
      • IRUs (indefeasible rights to use an international telecommunications submarine cable)
      • spectrum licences
      • datacasting transmitter licences.
       

    The market value ascertained by applying valuation shortcut 1 may be affected by a balancing adjustment event occurring under the income tax law. A taxpayer that has an assessable balancing adjustment amount because of a balancing adjustment relief has the option of revising the adjustable value. The revision ignores any balancing adjustment amount that reduces the amount available for decline in value of the depreciating asset.

    Valuation shortcut 2

    Depreciating assets that have been depreciated on an accelerated basis

    A revised adjustable value can be taken as the market value for all depreciating assets where all of the following apply:

    • they have been depreciated on an accelerated basis
    • their individual adjustable values amount to 1% or less of the joining entity's ACA
    • they are eligible for a deduction under Division 40 of the ITAA 1997, except for the same intangible assets that are not eligible for valuation shortcut 1.

    The revised adjustable value reflects an amount calculated as if the asset had been depreciated at normal rates in accordance with its effective life. This ignores the effect of broad-banding of effective life under the accelerated depreciation provisions and can ignore the effect of a balancing adjustment amount. The effective life is prescribed by the Commissioner, unless the taxpayer has self-assessed the effective life for depreciation purposes.

    To work out the revised adjustable value at the joining time, the taxpayer must recalculate the asset's depreciation from the time it was first depreciated by the joining entity up to the joining time. The taxpayer can also choose to exclude from the adjustable value of the asset any balancing adjustment amount that had reduced the amount available for a depreciating asset's decline in value. The depreciation rates to be used for the recalculation are the applicable standard (that is, non-accelerated) rates that would have applied to that particular asset for the period from the time the asset was first depreciated by the joining entity up to the joining time.

    Valuation shortcut 3

    Trading stock

    This shortcut is not available for joining entities that were majority owned by the prospective head company at 27 June 2002. The trading stock of such entities must be treated as a retained cost base asset.

    The terminating value at the joining time can be taken as the market value for assets that are items of trading stock, except where either of the following applies:

    • the trading stock comprises livestock, standing or growing crops, crop-stools and trees planted and tended for sale
    • the value of the trading stock has been affected by market volatility, market collapses, obsolescence or any other event to the extent that its terminating value would not be a reasonable approximation of its market value at the joining time. In such cases, the trading stock should be market valued appropriately at the joining time.

    Valuation shortcut 4

    Employee share interests

    Shares and stapled securities issued under an employee share scheme (ESS interests) that represent 1% or less of the membership interests in an entity are disregarded for the purposes of determining whether an entity is wholly owned. However, the head company still uses their market value to calculate its allocable cost amount for membership interests in the joining entity.

    The availability of this shortcut option acknowledges that valuing minority interests is a difficult and complex process.

    Where an employee, under the former Division 13A of the ITAA 1936, holds shares or stapled securities, those interests will have been market valued where either of the following applies – the employee has:

    • elected to have the discount given in relation to their acquisition of the ESS interests included in their assessable income at the time they were acquired
    • not elected to have the discount included in their assessable income but the cessation time has occurred and the employee continues to hold the shares.

    This also applies where the employee has previously held rights and has exercised those rights, and now holds shares or stapled securities.

    For employers providing ESS interests to their employees after 30 June 2009, Division 392 of the TAA requires employers to report the discount they give in relation to those interests to us by 14 July after the end of the financial year in which they are provided. In order to meet their reporting requirements, employers will need to have market valued the ESS interests.

    The valuation shortcut operates as follows.

    The head company may rely on these existing market valuations when calculating the employee share interest component of the allocable cost amount for the joining entity, provided for ESS interests acquired either:

    • before 1 July 2009, the valuation was for the purposes of Division 13A in accordance with the former sections 139FB, 139FD and, in the case of rights, 139FE of the ITAA 1936
    • after 30 June 2009, the valuation was for the purposes of Division 83A in accordance with Subdivision 960-S of the ITAA 1997, in accordance with any method specified by regulation in the Income Tax Assessment Regulations 1997, or (from 1 July 2015) using any method approved by legislative instrument in accordance with section 960-412 of the ITAA 1997, and the      
      • original market valuations were appropriately documented
      • decision to use the existing market valuations is documented and, they are, if necessary, updated in accordance with the requirements set out under 'Use of existing valuations'.
       

    Valuation shortcut 5

    Membership interests that are unlisted shares

    As all membership interests in a wholly-owned subsidiary will be held by the head company or other members of the consolidated group, they will not be listed on a stock exchange. The availability of this valuation shortcut acknowledges that valuing unlisted membership interests is a difficult and complex process.

    Where any ESS membership interests in the joining entity have been market valued for Division 13A of the ITAA 1936 or Division 83A of the ITAA 1997, the head company can rely on these valuations to work out the cost of all its membership interests in the joining entity, provided:

    • the ESS membership interests acquired before 1 July 2009 were valued for the purposes of either      
      • Division 13A in accordance with the former sections 139FB and 139FD
      • the former Division 13A and       
        • arose because of the granting of qualifying rights
        • those rights have been exercised, or the cessation time in relation to those rights has occurred, and the employee continues to hold the shares
        • those rights were valued in accordance with the former sections 139FC, 139FD and 139FE
         
       
    • the ESS membership interests acquired after 30 June 2009 were valued for the purposes of Division 83A in accordance with any of the following       
      • subdivision 960-S of the ITAA 1997
      • a method for calculating the value of an ESS interest specified by regulation in the Income Tax Assessment Regulations 1997
      • from 1 July 2015, a method approved by the Commissioner by legislative instrument, in accordance with section 960-412 of the ITAA 1997.
       
    • the original market valuation was appropriately documented
      • the decision to use the existing market valuation is documented and they are, if necessary, updated in accordance with the requirements set out under Use of previous valuations.
       
      Last modified: 07 Feb 2017QC 21245