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1
Market Valuation for Tax
Purposes and MNAV
John Sourbis, Australian Taxation Office
6 October 2016
Park Hyatt, Melbourne
VIC 4th Annual Tax Forum
Overview
Context: A valuer’s Perspective
1. MNAV - Basis of Value
2. Market Valuation for Tax Purposes
3. Observations – A Valuer’s Perspective
4. Sources of Guidance
5. Contemporary Approaches
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MNAV - Basis of Value
Section 152-20: The question a Valuer hears
What was the market value of the subject asset on the date of valuation?
MNAV - Basis of Value
Section 152-20: The direction a Valuer needs
What was the market value of the subject asset on the date of valuation?
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MNAV - Basis of Value
Section 152-20: The Valuer’s role
Quantify the market value of the subject asset on the date of valuation.
MNAV - Basis of Value
‘Market Value’ – IVSC Definition:
Market value is the estimated amount for which an asset or liability should
exchange on the valuation date between a willing buyer and a willing seller in an
arm’s length transaction, after proper marketing and where the parties had each
acted knowledgeably, prudently and without compulsion.www.ivsc.org
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Market Valuation for Tax Purposes
Reasonable Expectations: Determining market value for tax purposes.
1. Valuer instructions
2. Classification of valuation advice
3. Valuer capability
4. Valuation replicability
Valuer Instructions
What is the subject of the valuation?
An asset Tangible / Intangible
A group of assets
A Business
100% Interest in company
A minority interest in company
A Security
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Valuer Instructions
Expectations
set out the scope and purpose of the valuation
ensure the valuer's independence in writing the report and in drawing
conclusions
recognise the valuer's right to refuse to provide an opinion or report if not
provided with the information and explanations they needed
grant the valuer access to the taxpayer's premises and necessary records
ensure the valuer is provided with all necessary help needed to complete the
report
establish that any fee, where levied, does not depend on the outcome of the
report.
Classification of Valuation Advice
Valuation Engagement
Limited Scope Valuation Engagement
Calculation Engagement
IER – Independent Expert Report
Other:
‘Indicative Valuation’
‘Restricted Valuation’
‘Preliminary Valuation’
‘Preliminary Assessment’
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Valuer Capability
Have the appropriate specialists been employed?
Specialised Business Valuer
Real Property Valuer
Intellectual Property Lawyer
Patent Attorney
Engineer, Biologist, Technology Expert…
Business valuation accreditation in Australia
Valuation Replicability
Valuation Replicability - Minimum requirements
A valuation should be replicable – in effect, this means the valuation should be
documented and explained well enough that another person or valuer can
understand how the value was determined.
A valuation report should:
be understandable
objectively demonstrate the valuation process undertaken in accordance with
valuation industry practices
(ATO – Market Valuation for Tax Purposes)
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Market Valuation for Tax Purposes
description of asset
purpose and context of valuation
date of valuation
method or methods used
reasons for methods used
specific value
information relied on
evaluation of information
assumptions relied on
evaluation of assumptions
(ATO – Market Valuation for Tax Purposes)
material risks
use of previous valuations
explanation of material differences
expert reports and the use of experts
terms of engagement
relationship between the valuer and
client
working papers
disclaimers and indemnities
valuer's details.
Expectations of valuation reports and Valuer’s working papers:
Market Valuation for Tax Purposes
Valuation Process - Minimum requirements
(ATO – Market Valuation for Tax Purposes)
If you do not adequately explain the process you undertook, we may not accept that the value reached by that process is the market value.
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Observations – A Valuer’s Perspective
Misconceptions:
“The Valuer can do it all”
A Valuer’s opinion is adequate verification of the value
Observations – A Valuer’s Perspective
Pitfalls – Pre-engagement:
Inappropriate Instructions
Subject, Standard of Value, Context, Date (‘just before’ CGT event…)
Legal provision / purpose
Classification of opinion required
Inappropriate or Inadequate Information
Restricting access to information
For example: recent transaction, previous valuations
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Observations – A Valuer’s Perspective
Pitfalls – Mid-engagement:
Inadequate validation of information supplied
Inadequate use of objective verifiable data
Inadequate reconciliation of market evidence
Inconsistent treatment of valuation elements
Double discounting (Cash flows and discount rate)
Enterprise multiples to Equity Earnings
Assumptions /Limitations not disclosed
Subject sale and valuation outcome not reconciled
Cutting corners
Time spent and valuation reliability Direct Correlation
Observations – A Valuer’s Perspective
Pitfalls – Post-engagement
Misunderstanding the valuer’s advice
Accepting a poorly supported valuation outcome
Selectively using elements of a valuation report
For example: Imposing alternative debt assumptions to Equity valuation
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Sources of Guidance
Undertaking market value determinations for Federal Government taxation
purposes:
International Valuation Standards (global professional standards)
APES 225 ‘Valuation Services’ (Revised: May 2012)
ATO Website - ‘Market valuation for tax purposes’
Sources of Guidance
Other Guidance:
ASIC – RG 111, Content of Expert Reports www.asic.gov.au
APES 110 – ‘Code of Ethics for Professional Accountants’ www.apesb.org.au
Mining:
– VALMIN Code
– JORC code
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Sources of Guidance
IVSC – International Valuation Standards Council www.ivsc.org
IVS Framework – International Valuation Standards
PRICE:– Amount asked, offered or paid for an asset
– May be different from the value ascribed to the asset by others
COST:
– Amount required to acquire or create the asset
– When that asset has been acquired or created, its cost is a fact
VALUE:
– Not a fact but an opinion of either:
a) the most probable price to be paid for an asset in an exchange, or
b) the economic benefits of owning an asset.
Sources of Guidance
IVSC – International Valuation Standards Council www.ivsc.org
IVS Framework – Basis of Value
‘Market Value’ Defined:
“Market value is the estimated amount for which an asset or liability should exchange on the valuation
date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing
and where the parties had each acted knowledgeably, prudently and without compulsion.”
Elements of definition are discussed further
Market Value exclusive of costs of sale, cost of purchase or associated taxes
‘Highest & Best Use’
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Sources of Guidance
IVSC – International Valuation Standards Council www.ivsc.org
IVS Framework – Basis Value
Market Value
Investment Value
Fair Value
Special Value
Synergistic Value
Sources of Guidance
IVSC – International Valuation Standards Council www.ivsc.org
IVS 103 –Reporting
Report Contents: ‘All reports shall include reference to the matters listed below’ (IVS 103)
Identification and status of the valuer
Identification of the client and any other intended users
Identification of the asset or liability to be valued
Basis of value
Valuation date
Extent of investigation
Nature and source of the information relied upon
Assumptions and special assumptions
Restrictions on use, distribution or publication
Confirmation that the assignment has been undertaken in accordance with the IVS
Valuation approach and reasoning
Amount of the valuation or valuations
Date of the valuation report
13
Sources of Guidance
IVSC – International Valuation Standards Council www.ivsc.org
IVS 210 - Intangible Assets
Application of the General Standards to intangible assets.
Principal types of intangible assets
Valuation approaches and methods
Sources of Guidance
APESB - APES 225 www.apesb.org.au
The Accounting Professional & Ethical Standards Board (APESB) is an independent, national
body that sets the code of ethics and professional standards by which members of Australia’s
professional accounting bodies must abide.
14
Sources of Guidance
APESB - APES 225
Types of “Valuation Services”
Valuation Engagement
Derived by full research and analysis
Limited Scope Valuation Engagement
Derived by limited research and analysis
Calculation Engagement
Client and Valuer predetermine approach and assumptions.
Produces ‘Calculated Value’
Requirements of a written valuation report
Requirements for orally communicated valuation report
Reinforces documenting oral communication of valuation opinion.
Sources of Guidance
ATO Website:
‘Market Valuation for Tax Purposes’
This guide is intended to provide assistance to taxpayers and their advisers (including valuers)on the processes to establish a market value for taxation purposes.
Topics included:- Part A: Market value for tax purposes
- Part B: Real property and plant and equipment
- Part C: Business valuations (Business, securities and intangibles)
- Part D: Valuation reports
- Part E: Allocating value to underlying assets
- Part F: ATO processes
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Contemporary Approaches
Early engagement
Expert valuer conferencing
Identify areas of agreement and precipitate points of disagreement
Joint instruction of separate valuers
Agreeing on a single set of instructions and appointing separate Valuers
Joint appointment of single valuer
Agreeing on a single set of instructions for one Valuer
Recap
MNAV - Basis of Value
Market Valuation for Tax Purposes
Observations – A Valuer’s Perspective
Sources of Guidance
Contemporary Approaches
16
The Valuer’s Role
The Valuer’s role
Quantify the market value of the subject asset on the date of valuation.
Thank you
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