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.