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 995-1External Link). 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.
The High Court cast light on the ordinary meaning of 'market value' in Spencer v. The Commonwealth of AustraliaExternal Link (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-SExternal Link 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.
Refer to Taxation Ruling TR 97/20: Income tax: arm's length transfer pricing methodologies for international dealings for further information.
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 AASB 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'.