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Ruling

Subject: market valuation for the purposes of calculating allocated cost amount

Question 1

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

Answer

Yes.

This ruling applies for the following periods:

1 July 2007 to 30 June 2008

Relevant facts and circumstances

1. A Pty Ltd acquired all the ordinary shares of B Pty Ltd.

2. At that time, B Pty Ltd and its 100% owned Australian subsidiaries joined the existing A consolidated tax group (A Group).

3. One of the companies owned by B Pty Ltd was the owner and operator of the C business.

4. The assets of the C business included inventory comprising of Plant and Equipment and Trading Stock (the C assets).

5. An independent valuer valued the C 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 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 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 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, 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

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 (Spencer v The Commonwealth) 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 looking to apply the concept of 'willing buyer and willing seller' to ascertain the market value of land, Griffith CJ commented at page 432 that:

…the test of value of land is to be determined, not by inquiring about 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?

The definition of market value in Spencer v The Commonwealth embraces the following principles:

· The purchaser is willing but not anxious to buy

· The seller is willing but not anxious to sell and

· The purchaser is assumed to be independent and dealing at arm's length with the seller.

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.

The principles in Spencer v The Commonwealth is particularly relevant to consolidation as the consolidation legislation focuses on the head company's cost of acquiring the joining entity's assets at the joining time.

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 services of the Australian Valuation Office (AVO) were engaged to provide a critique on the independent valuer's report and to conclude whether they considered the market valuation of the independent valuer to be fair and reasonable. The AVO came to the view that the market value provided in the market valuation of the independent valuer was fair and reasonable. In coming to this view, the AVO considered the sales comparison approach to valuation and market based evidence provided by the independent valuer.

Accordingly, the valuation prepared by the independent valuer is fair and reasonable, and thus acceptable for the purpose 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.

Thus, in determining the tax cost setting amount for the joining entity's depreciable assets based on their proportionate market value under section 705-35(1)(c) of the ITAA 1997, the market valuation provided by the independent valuer is acceptable for tax purposes.