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  • Compliance activities and allocations of value

    When you allocate a total transaction amount (usually a sale or purchase price) to underlying assets, you need to do so on a reasonable basis. The most appropriate basis requires you to establish the market value for each underlying asset (see Allocating value to underlying assets).

    There are three broad areas of risk associated with the allocation of value. They are whether:

    • the total transaction value is accurate
    • you have recognised all assets to which value is to be allocated
    • you have allocated value correctly to each underlying asset.

    If we doubt the integrity of the total transaction value you have used, we will examine that transaction and its basis. If the transaction amount:

    • is based on a valuation (for instance, in cases of consolidation, where there has been no actual sale), we will consider the risks associated with that valuation
    • is not based on a valuation or there is no statutory requirement for market value to be determined, we will examine the basis on which it has been determined in the context of the legislation and factual circumstances.

    It is important that all assets are identified and that you have allocated amounts only to separately identifiable assets. We would confirm this by examining the transaction documentation and the vendor balance sheets prior to the transaction, and by comparing values in prior years.

    We have found that the assets most likely not to be identified individually are intangibles and goodwill. For instance, a vendor may prefer to bulk allocate value to intangibles and goodwill (to reduce CGT and capital allowance balancing adjustments on other assets). However, a buyer may prefer to allocate value individually to assets that are deductible, depreciable or likely to be sold in the short term (giving them an increased cost base or higher adjustable value to reduce CGT and balancing adjustments).

    We may use a valuer to ensure all the assets are recognised and to consider the integrity of the valuation process.

    Where parties deal with each other at arm's length and agree, in a bona fide manner, on the value of underlying assets, we are likely to accept the values as reflecting market value. If an allocation of value does not exhibit particular characteristics (summarised in the table below), we are likely to consider the allocation of value to be a higher risk, and may subject it to greater scrutiny.

    Risk matrix for allocations of value


    High risk

    Medium risk

    Low risk

    Integrity of the allocation values (overall transaction value)

    • Value is transparent.
    • Value has been determined or tested in the marketplace.
    • The transaction was conducted in a bona fide manner between arm's length parties.
    • There were no related transactions or side agreements.
    • None of the parties was, effectively, tax-exempt.


    Transaction not transparent

    • Value has not been tested.
    • Does not meet at least one of the other criteria.


    Transaction somewhat transparent

    • Value has been tested.
    • Does not meet at least one of the other criteria.


    Transaction likely to be transparent

    • Value has been tested.
    • Meets the other criteria.


    Allocation-of-value process

    • Underlying assets were specifically identified, especially intangible assets and goodwill.
    • Allocation of value was documented and agreed between the parties at the time of the allocation.



    • Some underlying assets not identified, especially intangible assets and goodwill (if appropriate).
    • No agreed allocation of value.


    • All underlying assets identified.
    • Agreed allocation of value.


    Integrity of allocation process

    • Allocation process fully documented.
    • Basis of allocation appears to be reasonable.
    • All values appear to be materially correct.
    • Parties are not related.
    • None of the parties is, effectively, tax-exempt.
    • There is no suggestion that the values were at risk of manipulation.



    • Allocation process is fully documented.
    • Does not meet at least one of the other criteria.


    • Allocation process is fully documented.
    • Meets all other criteria.


    Report information

    We need the following information to understand the report:

    • asset description that enables identification of the asset
    • purpose and context of valuation
    • specific market value
    • date or period the valuation relates to
    • commencement and completion dates of valuation
    • details of the methods used
    • information on which the valuation is based
    • detail of all the assumptions used.


    Report does not have sufficient information for us to understand it.

    Report has most but not all of the information we need to understand it.

    Report contains all of the information we need to understand it.

    Other allocation and apportionment processes


    Under the law, you align the tax cost of the assets of an entity joining a consolidated group with (broadly) the tax cost of the membership interest in that entity. When an entity leaves the group, the entry allocation process is reversed and the group's cost base of the leaving interest is derived from the net tax cost of the entity's assets taken out of the group.

    This tax cost-setting process is basically an apportionment method, and requires you to allocate the ACA to the assets of the entity.

    Construction expenditure for income-producing capital works

    If you are entitled to a tax deduction for construction expenditure for income-producing capital works, the following tax ruling provides an outline of how to establish and apportion the construction expenditure (or cost):

    • Taxation ruling TR 97/25 Income tax: property development: deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements.

    See also  

      Last modified: 18 Aug 2017QC 21245