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ATO valuation

ATO Valuations

At Lotus Amity we are often engaged by clients and advisors to prepare valuation reports for tax purposes. The reports prepared are comprehensive and fully supported to meet the exacting ATO requirements.

We provide valuations in relation to the transfer of shares between related parties, the small business threshold test for GST concessions and the issue of shares or options under an employee share scheme.

You can find more details of what the ATO expect to see in a valuation report here.

Common valuation issues identified by the ATO

At Lotus Amity we provide comprehensive reports for the ATO with detailed supporting documentation, careful input analysis, use of all three valuation approaches, and reasoned and supported assumptions. This approach avoids the four common valuation issues flagged by the ATO:

  • Documentation: omitted, insufficient, incorrect, and or inconsistent documentation and evidence.
  • Analysis: lack of appropriate analysis, scrutiny of information and or verification of inputs.
  • Methodology: inappropriate choice and or application of methodology.
  • Assumptions: unreasonable, unsupported, incorrect, and or inconsistent assumptions.

Further, at Lotus Amity we carry out research and model discount rates and cash flows and ensure that we avoid these other specific valuation issues flagged by the ATO:

  • lack of support for size, risk and other adjustments to the chosen discount rate or capitalisation multiple,
  • inappropriate use of averaging,
  • reliance on post valuation date information and future events which cannot be reasonably foreseeable at the valuation date, and
  • the valuation approach does not align with the relevant tax provision, case law or ATO view documents.

ATO valuation engagements

Previous ATO valuation based reports prepared by Lotus Amity include:

  • The valuation of the equity in a group of veterinary clinics. The report was prepared for the ATO to establish if shareholders were eligible for scrip for scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act.
  • The valuation of business providing demolition services, excavation services and equipment hire. The valuation was required in relation to the small business threshold test for GST concessions.
  • The valuation of a technology company providing a marketplace for auto services including retail and fleet servicing. Valuation was required in relation to an undertaking to the buy-back Employee Share Scheme Shares and to issue new shares
  • The valuation of a national science, engineering, and technology consulting services business. The valuation was required in relation to a transfer between related companies in the group structure.
  • The valuation of a family-owned machining, fabrication and fitting business operating in mining, oil & gas. Valuations were required at five separate dates relating to transfers of shares between family members.
  • The valuation of ordinary and preference shares in a national company operating childcare centres. Valuation required of the ordinary and preference shares to be issued to employees.
  • Valuation of a large national in-home care franchise service group providing services through the home care packages program and disability care through the National Disability and Insurance Scheme. Valuation required in relation to the transfer of personally held shares to a trust.
  • The valuation of a diamond and reverse circulation drilling equipment businesses. Valuation required for a transfer of the business between related parties.

Who can determine market value?

According to the ATO the acceptability of a valuation usually depends on the valuation process and that an estimate of market value requires skill, knowledge and experience.

Further, the ATO states the Commissioner considers a valuation report to be more reliable, if it is carried out by a suitably qualified professional, follows commonly-accepted industry standards and professional codes of conduct, and contains sufficient evidence and reasoning to allow for testing or replication.

Information to be considered by the valuer

The ATO expect the valuer, to consider and include the following information to support the valuation:

  • 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 and 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