A Summary of the ATO Market Valuation Guidelines?
Business valuations are often required to support the submissions made to the ATO relating to the sale and purchase of business assets. Having an ATO compliant business valuation report is a key step in getting a favourable outcome from the ATO.
Prior to 2011 the ATO tended to take a binary and prescriptive approach to interpretations of valuation reports and rulings on the value of an asset. However a review of the guidelines adopted a more risk-based and valuation principles approach to help business valuers, tax advisers and taxpayers in determining the value of assets and presenting valuation reports.
When is a business valuation required by the ATO?
The central issue that the ATO wants to know is that you have reported any relevant assets, whether acquired or sold, at the appropriate market value.
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In essence a business valuation report for ATO purposes will determine the market value of the relevant assets – whether that is the enterprise in question or shares, units or some other holding in the entity within which the enterprise operates.
The typical situations that require an ATO compliant business valuation report include the reporting of:
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Income received from the sale of assets.
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Purchase or sale of shares or units in an entity.
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Commitments associated with capital gains tax.
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Allocating value to underlying assets (such as goodwill and intellectual property).
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Self-managed superannuation fund assets.
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Employee share schemes.
There are other circumstances where the reporting of market value of property transactions are also required, although Exit Value Advisers primarily deal with business valuation matters only.
In most cases the ATO is no longer as prescriptive as in the past in requiring documentation. The central concept of self-assessment is that you have sought sufficient professional advice in submitting your tax returns, whether personal or business. So as long as you can justify any claims with sufficient information then a business valuation report is not required.
However, the more appropriate and compliant information you can produce to substantiate your tax claims, the less investigation, interrogation, and auditing of your tax affairs is likely to occur.
Our Business Valuation Reports
Complies with
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APES 225 and IVS
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ATO Market Valuation Guidelines
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Evidence requirements for Family Court and Supreme Court
Our reports also comply with IPEVC Valuation Guidelines when required for these purposes.
What do the ATO Market Valuation Guidelines say?
The ATO Market Valuation Guidelines are detailed online over several links:
What the ATO Market Valuation Guidelines are meant to provide is direction on how to interpret key taxation and valuation concepts and what the ATO expect to see in a report.
Key concepts included in the ATO Market Valuation Guidelines are:
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Definition of Market Value
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Highest and best use concept
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Valuation methods
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Valuation reports
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Risk mitigation by ATO
Definition of Market Value
We have discussed the definition of market value (and other standards of value) elsewhere and explained its importance in exit strategies and buying or selling a business.
The ATO primarily uses the same basis of market value, that of "...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", which has stemmed from the Spencer v. The Commonwealth of Australia (1907) 5 CLR 418 case in the High Court.
However there are nuances that can influence the ATO's view of market value such as the existence (or absence) of a suitable open market, whether the owner may or may not be in financial stress, and the extent to which arm's length has been or can be imposed. Just because a similar asset has sold at a particular price does not necessarily indicate that is the market value.
A good business valuer specialist can navigate these nuances to ensure an appropriate interpretation is obtained. An example might be where a significantly higher than market price was negotiated for a business, however the capital gains tax was determined with reference to an appropriate market value.
Highest and Best Use
The “highest and best use” concept is based on recognising that an asset (or business) should be valued as if it is utilised in its “highest and best” use.
An example might be a taxi business that generates EBITDA of $33,200 pa using a 1954 Rolls-Royce Silver Wraith in immaculate condition and perfect working order (worth more than $240,000). The market value of the business would be more appropriate to value based on the individual asset values rather than as a going concern business, as the highest and best use of the Rolls-Royce would be as a collectors item.
It takes experience to understand the nuances and successfully prosecute a valuation where the highest and best use concept is involved.
Valuation Methods
The ATO Market Valuation Guidelines provide an indication of the typical business valuation methods, which we have detailed further under What Business Valuation Methods Should be Used.
Whilst not detailing them here, the typical methods suggested by the guidelines, in order of preference, are:
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Market-based method (such as comparable transactions and comparable trading)
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Income-based methods (such as future maintainable earnings, capitalisation of earnings and discounted cash flow).
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Asset-based methods (such as net assets on a going-concern basis).
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Probabilistic-based methods (such as Monte Carlo modelling).
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Cost-based methods (such as relief from royalty, reproduction cost or depreciated replacement cost).
The business valuer is expected to determine (and explain) the most appropriate method to use for each valuation, asset and context.
Often one of the central issues the ATO will question is the appropriateness of the method used, and why other methods were not used.
Our Business Valuers Experience
Exit Value Advisers has:
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Been consulting to over 1,000 SMEs over an 18 year period.
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Completed more than 1,000 business valuations.
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Undertaken business valuations for a diverse range of applications including
What is Acceptable in a Good Business Valuation Report
We have provided more detail on the standards and requirements of both valuers and valuation reports elsewhere under Business Valuer Requirements.
The ATO Market Valuation Guidelines list out the minimum requirements of a “good” valuation report, which are also in line with both the APES 225 standard and the IVSC standard. The key is the report must:
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Be understandable.
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Objectively demonstrate the valuation process undertaken in accordance with valuation industry best practices.
In addition a valuation must be:
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Replicable.
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Undertaken by a suitably qualified and experienced person in relation to the asset being valued.
Risk Mitigation Approach By ATO
Most people cringe when you mention the ATO and they have a perception of "ATO inspectors" chasing every taxpayer around the country for verification of what they wrote on their last tax return. At least when it comes to business, this is not the case.
The ATO now takes a risk management approach and considers two central questions:
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What is the likelihood of non-compliance with a tax law and the consequences of that non-compliance?
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The likelihood that the market value is acceptable?
After all - if there is a low likelihood of a breach of tax law and the market value in question is likely to be reported correctly then there is no point wasting taxpayer dollars chasing an unlikely outcome.
So the ATO look at a range of factors to determine the risk that the tax outcome is incorrect in some way. These factors include:
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Appropriateness of the methodologies (consistent across asset types and using the appropriate data).
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Qualifications of business valuer.
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Integrity of valuation process (experience, access to information, basis of engagement).
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Use of supporting methods.
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Information supplied in the market valuation report (description of the assets, purpose and context of valuation, value date, details of the methods used, information relied upon and all assumptions used).
If, on analysis of these factors the risk is low then the valuation report and associated tax submission is likely to be accepted.
In other words, the more detailed the valuation report, the more experienced and qualified the business valuer is and the more consistent the valuation has been undertaken with appropriate standards then the less likely your tax submission will be questioned.
How Do You Know if a Valuation is ATO Compliant
A good business valuation expert will provide an indicative or sample business valuation report that is compliant with ATO Market Valuation Guidelines, and will also be at least compliant with the APES 225 standard.
You should be able to:
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Find each of the key headings on this page in the business valuation report.
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Understand how each of these features have applied to the business valuation.
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Be able to follow understand how the conclusion was made.
High quality ATO compliant business valuation reports will also include a reference table as an appendix, where each of the key compliance requirements with both ATO Market Valuation Guidelines and APES 225 standard has been mapped to particular parts of the business valuation report.
You should also be able to show this report to your accountant and they can provide some indication if the valuation report will be suitable for the purpose you require.
