Edited version of private ruling

Authorisation Number: 1011628991338

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Market Valuation

Question 1

In determining the tax cost setting amount for the joining entity's reset cost base assets based on their proportionate market value under paragraph 705-35(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997), is the market valuation prepared by the valuer acceptable for tax purposes.

Answer

No.

This ruling applies for the following period:

1 July 2007 to 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

A Pty Limited, a 100% owned subsidiary of the B Group, acquired all of the ordinary shares of C Limited.

At that time, C Limited and its 100% owned Australian subsidiaries joined the existing B consolidated tax group.

At that time, one of the companies owned by C Limited was the owner/operator of the D business.

At the time of acquisition of C Limited, the assets of the D business included inventory comprising of Plant and Equipment, and Trading Stock.

At the time of acquisition, the Board of the B Group requested the valuer to provide the Board of B Group with a valuation of the D assets. That valuation included a valuation of the plant and equipment, and trading stock assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 705-35.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

The market valuation of the plant and equipment and trading stock determined by the valuer is considered inconsistent with the relevant valuation standards and definition of market value. Accordingly, the valuation prepared by the valuer is not acceptable for the purposes of allocating the tax cost setting amount for the joining entity's reset cost base assets (other than excluded assets) as required under paragraph 705-35(1)(c) of the ITAA 1997.

Detailed reasoning

In accordance with subsection 705-35(1) of the ITAA 1997 for each asset of the joining entity (a reset cost base asset) that is not a retained cost base asset or an asset (an excluded asset) covered by subsection (2), the asset's tax cost setting amount is worked out by:

a) first working out the joined group's allocable cost amount for the joining entity in accordance with section 705-60; and

b) then reducing that amount by the total of the tax cost setting amounts for each retained cost base asset (but not below zero); and

c) finally, allocating the result to each of the joining entity's reset cost base assets (other than excluded assets) in proportion to their market values.

Paragraph 705-35(1)(c) of the ITAA 1997 requires the result from paragraphs (1)(a) and (1)(b) to be allocated to each of the joining entity's reset cost base assets other than excluded assets in proportion to their market values.

The current tax law does not define market value in any general provision. Section 995-1 of the ITAA 1997 defines market value as having a meaning affected by Subdivision 960-S of the ITAA 1997. However, Subdivision 960-S at section 960-400 provides that the expression market value is often used in this Act with its ordinary meaning.

The High Court case Spencer v. The Commonwealth of Australia (1907) 5 CLR 418 casts some light on the ordinary meaning of market value. In this case it was held that a valuation of land should be based on the price that a willing purchaser at the date in question would have had to pay to a vendor not unwilling, but not anxious to sell.

In the context of consolidation and setting the costs of an asset brought into the consolidated group by a joining entity the task of establishing the market value of an asset is approached with the typical definition in mind. That is, market value is generally taken to mean 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.

Importantly, the approaches to market valuation need to be tailored to the facts and circumstances of each case and the result of the valuation should reflect the underlying purpose of the statutory provisions.

In this case, the Australian Valuation Office (AVO) was engaged by the Australian Taxation Office to confirm the market valuation prepared by the valuer. The AVO, in considering the facts presented and the market valuation prepared by the valuer came to the view that the market value estimated by the valuer was unreasonable as the valuation did not consider the active secondary market where the market buying and selling price is readily available.

In coming to this view the AVO also considered the process undertaken by the valuer and completed a risk assessment analysis of the valuation report prepared by the valuer.

Accordingly, the valuation prepared by the valuer is not acceptable for the purposes of allocating the tax cost setting amount for the joining entity's reset cost base assets (other than excluded assets) as required under paragraph 705-35(1)(c) of the ITAA 1997 as the market value estimated by the valuer is unreasonable.