• Part A: Market value for tax purposes

    This part provides information about determining the market value for tax purposes, including:

    Market value

    Many of the laws we administer require ascertainment of market value. Some common instances are:

    • for individuals – transfers of real estate or shares between related parties, such as husband and wife, or family members
    • for employees – non-cash benefit transactions, such as gifts, or other benefits, such as car parking
    • for small businesses – transfers of assets to related parties, passing the asset threshold tests for the small business capital gains tax concession
    • for property developers – the GST margin scheme
    • for businesses – consolidation events
    • for all taxpayers – many anti-avoidance provisions.

    What 'market value' means

    Although the law frequently refers to market value, the meaning of that term will depend on its statutory context. In each instance you need to take into account the context in which the term is used, and pay particular attention to its definition and any specific requirements in that context. Where a statutory definition is provided for a particular context, it must be used.

    The current tax law does not define market value in any general provision. It is defined in the 'Definitions' part at the end of the Income Tax Assessment Act 1997 (ITAA 1997), but not in a way that fixes its meaning in all contexts (section 995-1). As a result, 'market value' usually takes the ordinary meanings given below, unless specially defined or qualified in a particular provision.

    Valuers of real property adopt the definition used by the International Valuation Standards Council (IVSC)External Link:

    ... the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.

    Business valuers in Australia typically define market value as:

    the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.

    Market value is not to be taken to mean simply any value. The term 'value' is used in a number of contexts, for example, community values, scientific value, heritage value and cultural value. Such terms tend to be intangible and thus difficult to measure.

    Market value can be more readily measured. It reflects a market's measure of the benefits enjoyed by someone that uses an item or receives a service, at a nominated date.

    'Value' is described in the International Valuation Standards as:

    … an economic concept referring to the monetary relationship between goods and services available for purchase and those who buy and sell them (General valuation concepts and principles 4.5).

    Conceptually, market value is quite distinct from 'price' and 'cost'.

    'Price' is defined in the International Valuation Standards as:

    … the amount asked, or offered, for goods or services.

    and 'cost' as:

    … the price that is paid for goods or a service, or the amount paid to produce the goods or services (General valuation concepts and principles 4.2 and 4.3).

    Cost refers to the result of a historic transaction, set in time and amount, whereas market value varies through time and circumstances. Further, although the cost of an item might be consistent with its market value at the time of purchase, there are a number of situations where this may not be the case. For example, the cost of constructing a building in a remote Australian community may be greater than the building's market value on the limited local market.

    Depending on the financial strengths, special needs or the interests of the parties, the cost or price of goods and services may or may not be the same as their market value.

    Judicial interpretation

    The High Court cast light on the ordinary meaning of 'market value' in Spencer v. The Commonwealth of Australia (1907) 5 CLR 418. In this case, the Commonwealth had compulsorily acquired land for a fort at North Fremantle in Western Australia.

    In discussing the concept of market value, Griffith CJ commented (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?

    Isaacs J subsequently expanded on the concept (page 441):

    … to arrive at the value of the land at that date, we have … to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood as then appearing to persons best capable of forming an opinion, of a rise or fall for what reasons so ever in the amount which one would otherwise be willing to fix as to the value of the property.

    In this case, the High Court recognised the principles of:

    • the willing but not anxious vendor and purchaser
    • a hypothetical market
    • the parties being fully informed of the advantages and disadvantages associated with the asset being valued (in the specific case, land)
    • both parties being aware of current market conditions.

    Statutory adjustments to market value

    More recent tax law qualifies the ordinary meaning established by the High Court. For instance under Subdivision 960-S of the ITAA 1997 you are to:

    • reduce the market value of an asset by the amount of GST credits, to the extent that such credits relate to a taxable supply
    • disregard anything restricting or preventing the conversion of non-cash benefits (that is, property or services in any form except money), into money if you are determining the market value of non-cash benefits.

    The law specifically defines 'market value', in the context of:

    Where a statutory definition is provided for a particular context, it must be used.

    Highest and best use

    You should assess market value at the 'highest and best use' of the asset as recognised in the market. The concept of 'highest and best use' takes into account any potential for a use that is higher than the current use.

    The current use of an asset may not reflect its optimal value. Optimal value is defined by the IVSC as:

    …the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued.

    You should value all inter-related assets on the same use. You should not value some assets on an alternative use and others on their existing use if the assets are inter-related.

    Other standards of value

    Valuers are sometimes required to assess value using different standards of value in specific circumstances. Typically, these may reflect the 'value to the user' or the utility of an asset in its current use. The use of accounting concepts inclusive of 'value-in-use' and 'investment value' may be inconsistent with the measure of market value and we may not accept these as substitutes for market value.

    Arm's length value for transfer pricing purposes

    Market value is not always the same as the arm's length consideration that the transfer pricing rules require for income tax purposes, where a taxpayer buys or sells property under an agreement with a foreign related party.

    In such cases, the transfer pricing rules call for use of the consideration that would be expected if the property had been bought or sold under an agreement between independent parties, dealing at arm's length with each other, in comparable circumstances. A market value or price is, therefore, only used for this purpose where this makes business or commercial sense in all of the taxpayer's circumstances.

    See also:

    • TR 97/20: Income tax: arm's length transfer pricing methodologies for international dealings for further information.

    Fair value

    Fair value is an accounting concept specifically used for financial reporting purposes. It is not always an identical concept to market value, although it is generally defined in a similar way to market value.

    International accounting and valuation standards bodies have adopted 'fair value' for financial reporting purposes as a means of relating financial statements to market-based values.

    Fair value is 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. (See AASBExternal Link 13 Fair Value Measurement.)
    (Australian Accounting Standards Board, 116 – Property, plant and equipment).

    Fair value can be measured in reference to the:

    • quoted market price in an active and liquid market, if available
    • current or recent market prices for the same asset or similar assets
    • net present value (if an established cash flow can be identified)
    • depreciated replacement cost (DRC) – for specialised assets that are not traded in an active and liquid market.

    Where an asset has been declared surplus to requirements, fair value will be represented by its 'market selling price' or 'market value at the highest and best use'.

    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 Ltd [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.

    Who may undertake a market valuation?

    For tax purposes it is usually the valuation process undertaken, rather than who conducted it, that governs the acceptability of the valuation. However, some exceptions do exist; for example, only a professional valuer may undertake a market valuation for GST margin scheme purposes or for determining non-monetary consideration for GST purposes.

    Depending on the situation, a market valuation may be undertaken by one of the following – a:

    • registered valuer
    • member of a recognised professional valuation body (see Qualifications and experience)
    • director, for balance sheet purposes
    • person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data.

    Except for the most straightforward valuation processes, valuations undertaken by persons experienced in their field of valuation would be expected to provide more reliable values than those provided by non-experts.

    According to legal precedent, experts who assess market value should have specific knowledge, experience and judgment in that particular field. While professional qualifications may add weight to the valuer's opinion, he or she should also display personal integrity and competence. To ensure the objectivity of the report, the valuer should be independent of the interests of the party commissioning the report.

    Documentation

    The valuation process should be adequately documented; if it isn't, we may not accept the resulting value as a market value.

    See also:

    Qualifications and experience

    Formal qualifications and membership of appropriate industry and professional bodies are prima facie evidence of a valuer's expertise.

    Valuers may have the qualifications, registrations, memberships and experience detailed in the following sections.

    Property valuers

    Property valuers operating in New South Wales, Queensland and Western Australia are registered with a state board established by legislation and responsible to a minister. The boards register and discipline people who conduct land valuations.

    They usually examine the character, experience and qualifications of applicants before they give them full or conditional registration as practising valuers.

    In other states and territories the professional bodies have the dual role of advancing the profession and maintaining the practice standards of their members.

    Valuers of real property and equipment may seek membership of bodies such as the Australian Property Institute and the Royal Institution of Chartered Surveyors. The main role of these bodies is to set and maintain high standards of professional practice, education, ethics and discipline.

    Business valuers

    There is no formal admissions board in Australia for business valuers (encompassing the valuation of businesses, securities and intangible assets). Business valuers traditionally have significant experience in areas such as financial markets, investment banking, corporate finance, corporate management, and academic qualifications in areas such as accounting, finance or economics.

    Valuers of cultural or heritage material

    Valuers of cultural or heritage material may seek 'approved valuer' status within their area of expertise under the Cultural Gifts Program.

    Instructing the valuer

    We expect that a person commissioning a valuation for tax purposes will be able to demonstrate that they provided the valuer with instructions that clearly:

    • set out the scope and purpose of the valuation
    • ensured the valuer's independence in writing the report and in drawing conclusions
    • recognised the valuer's right to refuse to provide an opinion or report if not provided with the information and explanations they needed
    • granted the valuer access to the taxpayer's premises and the necessary records
    • ensured the valuer would be provided with all necessary help needed to complete the report
    • established that any fee, where levied, did not depend on the outcome of the report.

    Instructions to valuers will usually be in the form of a written request or could be documented in the engagement letter.

    ATO products dealing with valuations

    This following tables list some of our advice and guidance products that deal with matters involving valuations.

    See also:

    Table 1: Products based on the nature of the transaction or event

    Nature of transaction

    Examples of tax context

    ATO products (not exhaustive)

    Capital gains tax (CGT) events generally

    Wherever market value is required

    TD 10W: Capital Gains: What are acceptable valuations for CGT purposes?

    TD 97/1: Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business?

    Transfers to related parties

    Transferring real estate to family or friends.

    Defining an asset

    TR 2004/13: Meaning of an asset for the purposes of Part 3-90 of the Income Tax Assessment Act 1997

    Share buy-backs

    Valuing shares in buy-backs

    TD 2004/22: Income tax: for Off-Market Share Buy-Backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936?

    PS LA 2007/9: Share buy-backs.

    Unlisted shares for ESS schemes

    Form for completion by a registered company auditor.

    Declaration of the value of unlisted shares.

    Trading stock

    Valuation of land as trading stock in property development

    Valuation of land that is ventured into a property development

    TD 92/132: Income tax: property development: if land is trading stock, do related interest costs, council rates and land taxes, form part of the cost price for trading stock valuation purposes?

    TD 97/1: Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business?

    Allocation of value to underlying assets

    Disposals and transfers of more than one asset for a single undivided amount

    TD 9: Capital gains: How do you apportion consideration received on the disposal of a composite asset?

    GST margin scheme

    Taxable Supplies of Real Property

    GSTR 2000/21: Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000

    GSTR 2006/7: Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

    GSTR 2006/8: Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000

    Consolidated entities

    Consolidation events generally – including entries, exits, cost base setting and determining the allowable fraction

    TR 2005/17: Income tax: goodwill: identification and tax cost setting for the purposes of Part 3-90 of the Income Tax Assessment Act 1997

    TD 2007/1: Income tax: consolidation: in working out the market value of the goodwill of each business of an entity that becomes a subsidiary member of a consolidated group, should the value of related party transactions of each business of the entity be recognised on an arm's length basis?

    TD 2007/27: Income tax: consolidation: is the cost base of the goodwill referred to in subsection 711-25(2) of the Income Tax Assessment Act 1997 limited to the cost base of goodwill under subsection 705-35(3) of that Act?

    Self-managed superannuation funds

    Valuing fund assets

    Valuation Guide for Self-managed super funds: Self-managed superannuation funds

    Research and development concession

    Value of contributions to R&D

    IT 2451: Guide to the research and development tax concession – paragraphs 12-14

    Fringe benefits tax

    Car parking fringe benefits

    TR 96/26: Fringe benefits tax: car parking fringe benefits – paragraphs 46 and 50

    Table 2: Products and methodologies based on asset class

    Real property

    Components

    Examples of tax context

    ATO product

    Commonly adopted methods

    All types of land, with or without buildings and improvements

    Rights associated with land, including leases and licences to occupy

    First element of cost base under ss110-25(2) ITAA 1997

    Capital proceeds using the market value substantiation rule: s116-20 ITAA 1997

    TD 97/1: Income tax: property development: if land, originally acquired as a capital asset, is later ventured into a business of development, subdivision and sale, how is the market value of the land calculated at the time it is ventured into the business?

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

    TD 92/132: Income tax: property development: if land is trading stock, do related interest costs, council rates and land taxes, form part of the cost price for trading stock valuation purposes?

    Transferring of real estate to family or friends

    Direct comparison.

    Capitalisation of net income.

    Discounted cash flow analysis.

    GST Margin Scheme

    Taxable Supplies of Real Property

    GSTR 2006/7: Goods and services tax: how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

    GSTR 2006/8: Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000

    GSTR 2000/21: Goods and services tax: the margin scheme for supplies of real property held prior to 1 July 2000

    MSV 2009/1: : A new tax system (goods and services tax) margin scheme valuation methods Determination MSV 2009/1

     

    Margin Scheme Valuation

    MSV 2015/53: A new tax system (goods and services tax) margin scheme valuation method extends the cost of completion method in MSV 2000/2 to partly completed premises supplied on or after 1 July 2005. Determination MSV 2015/53

    Other MSVs may apply to prior periods not covered under MSV 2009/1 and MSV 2015/53, please refer to Margin scheme valuation for more information.

     

    Plant and equipment

    Components

    Examples of tax context

    ATO product

    Commonly adopted methods

     

     

     

    Going concern – based on optimised depreciated replacement cost.

    Disposal of surplus assets/orderly realisation of assets: based on auction realisable value less costs of sale.

    Business

    Components

    Examples of tax context

    ATO product

    Commonly adopted methods

     

    First element of cost base under ss110-25(2) ITAA 1997

    Capital proceeds using the market value substantiation rule: s116-20 ITAA 1997

    CGT rollovers

    Asset sales or divestments

    Cost base setting

    Entries into consolidated groups

    Exits from consolidated groups

    Thin capitalisation

     

    Common specific approaches:

    • comparable transaction
    • comparable trading
    • capitalisation of earnings
    • discounted cash flow, and
    • calculation of net assets.

    (These methods will often overlap.)

    Securities

    Components

    Examples of tax context

    ATO product

    Commonly adopted methods

    Equity

    Hybrid

    Debt

    CGT rollovers

    Cost base setting

    Entries into consolidated groups.

    Exits from consolidated groups.

    TD 2004/22: Income tax: for off-market share buy-backs of listed shares, whether the buy-back price is set by tender process or not, what is the market value of the share for the purposes of subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936?

    PS LA 2007/9: Share buy-backs

    Common specific approaches:

    • business valuations adjusted for the relevant security interest
    • trading benchmarks (e.g. VWAP/closing price)
    • security based discounted cash flow.

     

    Intangible assets

    Components

    Examples of tax context

    ATO product

    Commonly adopted methods

    Identifiable intangible assets

    Intellectual property

    General examples can include:

    CGT rollovers

    Asset sales or divestments

    Cost base setting

    Entries into consolidated groups

    Exits from consolidated groups, and

    Capital allowance issues relating to IP.

    TR 2005/17: Income tax: goodwill: identification and tax cost setting for the purposes of Part 3-90 of the Income Tax Assessment Act 1997

    TD 2007/1: Income tax: consolidation: in working out the market value of the goodwill of each business of an entity that becomes a subsidiary member of a consolidated group, should the value of related party transactions of each business of the entity be recognised on an arm's length basis?

    TD 2007/27: Income tax: consolidation: is the cost base of the goodwill referred to in subsection 711-25(2) of the Income Tax Assessment Act 1997 limited to the cost base of goodwill previously identified under subsection 705-35(3) of that Act?

    Common specific approaches:

    • comparable transaction
    • incremental income
    • excess earnings
    • relief from royalty
    • replacement/reproduction cost, and
    • simulation analysis.

     

    Goodwill

    TR 1999/16: Income tax: capital gains: goodwill of a business

    Table 3: Commonly used valuation methods for selected securities

    Event or transaction description

    Legislative references
    and ATO guidance
    (not exhaustive)

    Selected valuation approaches (under certain circumstances)
    (This should not be taken as definitive guidance and will vary depending on the particular case. We recommend that you contact us to discuss the circumstances in more detail before seeking a ruling.)

    Off-market takeovers

    ITAA 1997:

    • subsection 124-800(1)
    • subsection 116-20(1)
    • subsection 124-790(1)
    • para 110-25(2)(b)
    • TD 2002/4

     

    From the time that the bid becomes unconditional, closing price at the time of acceptance, up to and including the deemed effective date of compulsory acquisition.

    Merger/scrip restructure via a scheme of arrangement

    ITAA 1997:

    • Subsection 124-800(1)
    • Subsection 116-20(1)
    • Subsection 124-790(1)
    • Para 110-25(2)(b)
    • Subsection 124-780(5)

     

    1-day VWAP on implementation date of scheme.

    Demergers

    ITAA 1997:

    • Section 125-70
    • Section 125-80
    • TD 2006/73

     

    For cost base allocation – five-day VWAP from the commencement of trading.

    Equal capital reductions

    ITAA 1997:

    • Subsection 116-30(3A)

     

    Closing price or 1-day VWAP or five-day VWAP.

    Selective capital reductions

    ITAA 1997:

    • Subsection 116-30(3A)

     

    Establishment of market value under subsection 116-30(3A).

    Employee share acquisition schemes

    ITAA 1936:

    • former section 139FB

     

    Establishment of arm's length value under former section 139FB of the ITAA 1936 which has continued application under the IT(TP)A 1997.

    Off-market buy-backs

    ITAA 1936:

    • subsection 159GZZZQ(2)
    • section 159GZZZM
    • TD 2004/22
    • PS LA 2007/9

     

    Establishment of market value under subsection 159GZZZQ(2) of the ITAA 1936.

    VWAP = volume weighted average price

      Last modified: 07 Feb 2017QC 21245