• Part C: Business valuations

    This part provides guidance on valuation approaches and methods for deriving market value for a business, and for securities and intangible assets.

    There are a number of occasions when you need to know the market value of a business, security or intangible asset for tax purposes, including:

    • changes in capital structure
    • changes of ownership
    • capital gains tax rollovers
    • company divestments
    • company acquisitions
    • formation of a tax-consolidated group
    • entry to a tax-consolidated group
    • exit from a tax-consolidated group
    • thin capitalisation.

    Valuation approaches

    There are several approaches you can take to valuing a business, security or intangible asset. These are usually categorised as:

    • market
    • income
    • asset
    • cost
    • probabilistic (this approach may be included within other valuation approaches, such as the income approach).

    The approach you choose depends on the context and purpose of the valuation and the particular characteristics of the item being valued. Often, you will combine several valuation approaches to reach an opinion on the market value of an item.


    When using the market-based approach, you would analyse transactional or trading data based on information typically found in the public domain. This information may include licensing agreements, mergers and acquisitions, capital raisings, divestments and on-market transactions.

    The comparable transaction and comparable trading methods are examples of the market-based approach and are often used to derive or assess a market value for securities.


    Using the income-based approach, you determine the market value of an item by estimating a set of economic benefits (such as cash flow or earnings) that will be derived from that item for either a finite or perpetual term. This approach often overlays evidentiary factors (such as price or earnings multiples available from the public markets) with more subjective factors (such as estimated earnings). The 'capitalisation of earnings' (often categorised as a market-based method) and 'discounted cash flow' methods are examples of the income-based approach.


    The asset-based approach is typically used to derive the market value of a business, usually on a 'going-concern' or liquidation basis. This approach is commonly used (on a going-concern basis) for valuing holding and investment companies.


    The cost-based approach can be used to derive market value where market or income factors are difficult to obtain or estimate with reliability (for example, for some intangible assets). The cost approach is normally categorised into two methods:

    • replacement cost (in basic terms, the cost of replicating functionality)
    • reproduction cost (in basic terms, the cost of recreating the asset).


    The probabilistic approach is often used to derive a valuation based on a range of outcomes or discrete events. This approach is commonly used to value an item where several layers of uncertainty and co-dependability exist (for instance, from a budgetary, time or variables perspective).

    Probabilistic approaches are often used to value items such as research and development, mining projects or the option-embedded elements of securities. Simulation analysis (for example, Monte Carlo) and lattice-based models (also known as decision-tree analysis) are examples of the probabilistic approach.

    The approaches and methods described above comprise of only the first step in deriving the value of an item. When you are determining the market value of something for tax purposes, you need to identify a number of variables and incorporate them into the derivation of the market value. We discuss some examples of these below.

    Valuation of a business

    What is a business?

    In this guide, we use 'business' in a way consistent with usual valuation industry descriptions and definitions, applied within the context of Australian federal tax law.

    Business is defined in the International glossary of business valuation termsExternal Link as meaning 'business enterprise' and is defined as: 'a commercial, industrial, service, or investment entity (or a combination thereof) pursuing an economic activity.'

    Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include an occupation as an employee'.

    We have also provided some guidance in relation to the meaning of 'business'.

    See also:

    • TR 1999/16: Income tax: Capital gains: goodwill of a business.

    Valuation methods

    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, the mechanics of these methods are not covered in this guide other than to note their application within the context of existing legislation, our publications and established industry approaches

    See also:

    In valuing a business, we would expect to see that you have considered a number of factors that may affect the market value and produced a reasonable and defensible view of the market value.

    These factors may include:

    • valuation methods – you would need to explain your choices and demonstrate why they are appropriate
    • valuation metrics – you would need to explain your choice and demonstrate that you have applied them appropriately; for instance, you would need to show how you derived a company weighted average cost of capital (WACC)
    • valuation date
    • purpose of the valuation
    • basis or premise of your valuation – for example, valuation of the business on a going-concern basis
    • description of the business
    • a summary of the corporate structure and management of the business – including such details as the operating history, management and board, capital structure, company constitution, board minutes, shareholder agreements, business and strategic plans, marketing plans and operating plans
    • market information – including key customers and spread, customer lists, sales pipeline, barriers to entry, competitors, alternative products, market size and growth
    • operations – including information such as manufacturing and production, service delivery, research and development capability/plans, fixed asset details, key suppliers, intellectual property protection and utilisation, resourcing, risk identification and management and regulatory issues
    • products or services – including information such as product description, product pipeline, pricing and the basis of pricing (for example, market or cost-plus)
    • financial requirements and financial structure - including information such as current and historical financial statements, budgets, forecasts, key operating metrics, funding details and terms (equity, hybrid and debt funding – existing and planned), off-balance-sheet structures, capital expenditure requirements and operating cash flows
    • strategic and corporate development initiatives – including information such as previous and planned acquisitions, previous and planned divestments, corporate restructures, corporate actions, strategic alliances and joint ventures
    • sales and marketing strategies – including information such as target markets (existing and planned), direct or channel strategies, reseller or supplier agreements, compensation strategies and product and brand awareness strategies
    • adjustments for items such as non-operating assets (for example, investments) and excess cash
    • adjustments for factors such as control and liquidity or marketability (at the company or business level).

    Valuation of securities

    What is a security?

    The term 'security' is defined in a range of legislative and industry applications. For the purpose of this guide, we discuss a number of securities (but not all) that fall within the definition of 'security' in subsection 159GP(1) of the ITAA 1936, namely:

    • stocks, bonds, debentures, certificates of entitlement, bills of exchange promissory notes or other securities
    • deposits with banks or other financial institutions
    • secured or unsecured loans
    • any other contracts, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

    The Financial Services Reform Act 2001 (FSR Act) defines the term 'security' (section 761A and Part 7.11) to mean one of the following:

    • a share
    • a debenture
    • a legal or equitable right or interest in a share or debenture
    • an option to acquire, by way of issue, any of the above securities
    • a managed investment product.

    Securities may be listed or unlisted and may be categorised generally into three types:

    • equity
    • debt
    • hybrids.

    Examples of equity securities include:

    • ordinary shares
    • preference shares (depending on structure).

    Examples of hybrid securities include:

    • some preference shares (depending on structure)
    • convertible notes (not covered in this guide).

    Examples of debt securities include:

    • discount securities
    • bonds
    • floating rate notes.

    For the purpose of this section, we refer to ordinary shares, preference shares, floating rate notes and bonds in accordance with commonly accepted industry understanding, but applied within the context of Australian federal tax law.

    Valuation approaches

    The valuation methods that may be used to determine a market value for securities are based on established approaches that are market-based, income-based, cost-based or probabilistic.

    These methods include:

    • business valuations adjusted for the relevant security or ownership interest
    • trading benchmarks, for example, volume weighted average price (VWAP) or closing price
    • security-based discounted cash flow.

    Equity securities – ordinary shares

    An ordinary share may be either:

    • listed – registered on a recognised exchange such as the Australian Securities Exchange (ASX)
    • unlisted – held privately by an individual or group of shareholders.

    Registration of an ordinary share on a recognised exchange provides for a daily market in the ordinary share, whereas an unlisted share is sold in either in a limited market or in a transaction between two or more parties.

    Preference shares, convertible notes, bonds and floating rate notes may also be registered and traded on a recognised exchange.

    Valuing listed shares

    As listed ordinary shares are commonly traded on a daily basis, you may be able to rely on the appropriate share market as the source for valuing a listed ordinary share.

    When you value a listed share, we would expect you to take into account a number of factors in addition to the listed price. These include:

    • liquidity
    • volatility
    • valuation changes resulting from company capital structural events or changes in retained earnings (for example, as a result of dividend payments)
    • the period to which the valuation applied.

    If a stock is relatively liquid and does not exhibit significant price volatility, you may, in certain circumstances, refer to a point-in-time valuation (such as the closing price of a share). However, there are a number of tax contexts where this may not be applicable.

    A common method of smoothing the effects of illiquidity (that is, thin trading) and volatility of a stock is for a person to adopt the volume weighted average price (VWAP) of the stock over a certain period. You may also adopt the VWAP method if the stock is liquid but does not exhibit excessive volatility. Within a tax context, this method is commonly applied to corporate events and actions.

    In addition to the valuation of an individual listed share, the value of a block of listed shares in the hands of one owner will often be derived using the value of a listed share as a base. As an example, depending on the size of the shareholding (in absolute and percentage terms), a discount may need to be applied to take into account the difficulty of selling this block of shares into the market. This is known as the blockage discount.

    The application of the blockage discount needs to be based on the particular facts relating to a case. For example, a significant holding of listed shares, in some circumstances, could require the application of a premium rather than a discount.

    The value of a company's equity (or significant portion, where an individual legal or beneficial owner could exert significant influence) will often also be derived using the value of a listed share as a base. In such situations, a premium for control would often be added to the value of the company's shares. This would be necessary to account for factors such as the influence a particular shareholder may exert on the running of the company and synergies that may be gained through the acquisition of a controlling holding.

    Valuing unlisted shares

    Where an ordinary share is held privately by an individual or group of shareholders, applying the appropriate valuation method (or methods) may be more complex.

    When you value an unlisted share, we would expect you to take into account a number of factors that may affect its market value, including:

    • many of the factors described in Valuation of a business (accounting for the specific interest)
    • adjustments – you need to adjust for factors such as liquidity (at the holdings level) and degree of control (actual or effective) and show that these adjustments are appropriate (for instance, you could benchmark a minority interest in an unlisted investment company against a listed investment company operating in a similar environment)
    • the rights of other equity and debt holders (which may influence the market value of an ordinary share).

    If an ordinary share is held privately by an individual or group of shareholders, applying the appropriate valuation method (or methods) may be more complex.

    Hybrid securities – preference shares

    Preference shares may either be unlisted or listed, and may be classified as either equity (depending on the preference structure) or debt.

    From the equity perspective, the preference share may be represented as an additional class of equity (despite the hybrid tag) differentiating itself from an ordinary share in its basic rights (for example, voting rights and liquidation preferences).

    From the hybrid perspective, the preference share may be more akin to a debt instrument where a number of debt-like features comprise the elementary features of the preference share – for example, in the form of a reset preference share (RPS) that may include a conversion option, fixed dividend, step-up rights and redemption.

    Valuing a preference share

    In valuing a preference share, we would expect to see that you have taken into account relevant factors that may affect the characterisation (that is, equity or debt classification) and valuation of the preference share.

    While a preference share may trade on a recognised exchange, you will need to consider certain factors concerning the preference share's structure (including attached rights) when assessing its market value, including:

    • issue date
    • issue rating
    • issue price
    • term/maturity
    • reset dates (if applicable)
    • dividend rate
    • dividend payment period
    • whether it is cumulative or non-cumulative
    • whether it is redeemable or non-redeemable
    • conversion details (if applicable)
    • conversion discount (if applicable)
    • voting rights
    • ranking
    • liquidation preferences.

    Some of these factors may also apply to a number of hybrid structures more widely.

    Where you use a traded preference share (such as an RPS) as a benchmark in assessing the market value of a debt instrument, we would expect you to exclude the equity factors embedded in the pricing of the preference share.

    In deriving the value of an ordinary share by reference to preference shares issued by a company, we would expect to see the rights attached to the preference shares incorporated fully into any valuation.

    We do not expect to see preference shares valued at their paid-up value unless warranted by industry standards. We would expect to see the rights of the preference shareholders fully incorporated and priced in the market value of the ordinary shares for the valuation of a start-up firm where a senior class of shares was subsequently issued.

    Debt securities

    In this section, we focus on the valuation of debt securities that are not listed on a recognised exchange or traded in the 'over-the-counter' (OTC) markets. Such debt securities should be priced using industry accepted practices.

    In basic terms, any interest-bearing instrument is generally referred to as debt (such as discount securities, bonds and floating rate notes). This definition extends to cover zero-coupon notes and bonds, but excludes hybrid and derivative structures.

    Valuing a debt security

    In most circumstances, we would expect the yield or price adopted in a transaction to be appropriately benchmarked to the market (accounting for the arm's-length principle). When you value a debt security or derive a market yield we would expect you to take factors such as the following into account:

    • issue date
    • issue price
    • term/maturity
    • early redemption options
    • face value
    • coupon rate or interest rate
    • coupon payment period
    • coupon payment date
    • accrued interest
    • par yield curve (for instance, Government)
    • zero yield curve
    • forward curve
    • credit rating (actual or estimated, issuer or issue)
    • credit curve
    • liquidity.

    Price may vary depending on the circumstances and structure of the debt. Where inter-group debt has been issued, we would expect to see the debt priced at market value. Our general expectations about certain debt structures and price are as follows:

    • coupon that is equal to the yield to maturity – we would expect to see the bond priced around par
    • coupon greater than the yield to maturity – we would expect to see the bond priced at a premium to par (the amount of principal owing on the bond at maturity; this value may include accrued interest, as in the case of a zero-coupon bond)
    • coupon that is lower than the yield to maturity – we would expect to see the bond priced at a discount to par
    • zero-coupon or discount structure – we would expect to see the issue price lower than the face value.

    Where an Australian subsidiary issues debt to an offshore parent, we would expect you to price the issue with reference to factors such as those mentioned above.

    Valuation of intangibles

    What is an intangible asset?

    The term 'intangible asset' has both legislative and industry definitions.

    Intangible assets are typically categorised as follows:

    • identifiable intangible assets (excluding intellectual property and goodwill)
    • intellectual property
    • goodwill.

    Accounting Standard AASB 138 Intangible assetsExternal Link provides a detailed definition of an intangible asset (refer paragraphs 8–17). For example, in Paragraph 8 an intangible asset is defined as:

    an identifiable non-monetary asset without physical substance.

    And Paragraph 12 states:

    An asset meets the identifiability criterion in the definition of an intangible asset when either it:

    (a) is separable, that is, is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability

    (b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

    AASB 138 also contains detailed information relating to accounting recognition criteria for an intangible asset (refer Paragraphs 21–23):

    An intangible asset shall be recognised if, and only if:

    (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity…

    Accounting Standard AASB 3 Business combinations provides a number of examples of intangible assets that meet the definition and recognition criteria (as outlined in AASB 138) within the context of a business combination.

    Intellectual property

    There are both legislative and industry definitions for Intellectual property.

    From an industry perspective, the World Intellectual Property Organization (WIPO)External Link defines intellectual property as follows:

    Intellectual property refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

    Intellectual property is divided into two categories: Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs.

    The World Trade Organization (WTO)External Link defines intellectual property rights as follows:

    …the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.

    These rights include patents, trademarks, copyright, industrial designs and trade secrets.

    Within the context of the Australian federal income tax law, section 995-1 of the ITAA 1997 defines intellectual property as the rights (including equitable rights) an entity has under Commonwealth law (or equivalent rights under a foreign law) as the owner or licensee of a:

    • patent
    • registered design
    • copyright.


    Tax law does not define 'goodwill'. However, the term is defined in a range of industry applications. AASB 3 Business Combinations defines goodwill as:

    Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

    AASB 3 also describes how goodwill is measured (refer Paragraph 51(b):

    …the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities…

    In the wake of Commissioner of Taxation v. Murry (1998) HCA 42 (16 June 1998), we have published TR 1999/16: Income tax: capital gains: goodwill of a business. This ruling provides guidance regarding the meaning we assign to goodwill.

    For guidance in relation to goodwill and consolidation,

    See also:

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

    Valuing intangible assets and intellectual property

    The valuation of intangible assets, including intellectual property but excluding goodwill, is based on a number of established valuation methods using market-based, income-based, cost-based and probabilistic approaches.

    These methods include:

    • comparable transactions
    • incremental income
    • excess earnings
    • relief from royalty
    • replacement or reproduction cost
    • simulation analysis.

    A significant amount of published material is available regarding these (and other) methods. Therefore, this guide focuses on how you apply these methods within the context of existing legislation, ATO practice (such as rulings) and established industry approaches.

    When you value intangible assets (other than goodwill), we expect to see a number of factors taken into account. These factors include:

    • any relevant factor described in Valuation of a business (accounting for the specific interest)
    • a description of the specific intangible asset or item of intellectual property and substantiation that the intangible asset or item of intellectual property is adequately categorised (that is, under the separability and/or contractual/legal criteria)
    • a description of the complementary assets used in generating value for the intangible asset or item of intellectual property, and the calculation of any value allocation or charge needed to account for the use of those assets
    • an analysis of the useful or effective life of the intangible asset or item of intellectual property
    • an analysis of the obsolescence factors affecting the intangible asset or item of intellectual property (such as functional, economic, legal and technical factors)
    • the legal rights associated with the intangible asset or item of intellectual property
    • evidence that the intangible asset or item of intellectual property derives incremental value (for instance, establishing proof of the value generated by the aesthetic elements of an industrial design versus the utilitarian nature embedded within the design)
    • expert reports, where relevant (for instance, the results of any prior art search from an intellectual property attorney).

    Valuing goodwill

    The valuation of goodwill is generally based on the calculation of a residual value. In basic terms, this approach requires the valuation of the net identifiable assets of the business (market-adjusted) and the valuation (market value) of the equity of the business.

    A residual value may be derived by subtracting the value of the net identifiable assets of the business from the value of equity of the business. As a general rule, the calculation of a residual value will be the most appropriate method for deriving goodwill. However, other methods may be accepted if they are appropriate to the circumstances.

    Further details on valuing goodwill can be found in part E: Allocating value to underlying assets.

      Last modified: 07 Feb 2017QC 21245