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ATO valuation

Transfer & ATO Valuation

If a business or equity is transferred between related parties, then often a valuation is required, not least because a capital gain needs to be calculated.

What does the ATO expect to see in a valuation report

In calculating the capital gain on the disposal or transfer of a business, many provisions of the tax laws require a market value to be established. The ATO have principals to be adhered to in the valuation approach. The ATO also sets out what it expects to appear in the valuation report.

Value definition and method

The ATO does not define market value but states that consideration needs to be given to the context in which the term is used. The ATO refers to technical definitions, in particular definitions from the International Valuation Standards Council. The ATO also refers to the High Court case of Spencerv. The Commonwealth of Australia. In short, the definition of market value implies: a willing but not anxious buyer and seller, a hypothetical market, both parties fully informed and aware of market conditions. The ATO also requires the value to be measured on a highest and best use basis.

The ATO does not specify what valuation method should be adopted but does state that the courts have recognised certain methods and the most appropriate method should be used. The ATO identifies five key common business valuation methods: comparable transactions, comparable trading, capitalisation of earnings, discounted cash flow and calculation of net assets.

Instructing us

If you instruct Lotus Amity to value your business, your instructions need to adhere to the ATO guidelines which require you to:

  • set out the scope and purposes of the valuation
  • grant us access to the your premises and the necessary records
  • ensure we are provided with all necessary help needed to complete the report
  • establish that any fee, where levied, did not depend on the outcome of the report.

What the ATO expect in a valuation report

The ATO expect Lotus Amity, as valuers, to consider and include the following to support the valuation:

  • valuation methods – explain the choices and demonstrate why they are appropriate
  • valuation metrics – explain the choice and demonstrate that they have been applied appropriately
  • valuation date
  • purpose of the valuation
  • basis or premise of the 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).

Simon is a CA Business Valuation specialist in Brisbane, Chartered Accountant and a Certified Fraud Examiner. Simon specialises in providing business valuation services. Prior to founding Lotus Amity, he was a Corporate Finance and Forensic Accounting partner with BDO Australia. Simon provides valuation services in disputes, for raising finance, for restructuring, transactions and for tax purposes.