tax valuations
TRANSCRIPT
Tax valuationsJoanne DunnePartner
Robert YunanSpecial Counsel
27 May 2016y
Agenda
Market value and the Australian tax system – when market value is relevant
What is market value? – relevant resources and definitions to refer torefer to
Commonly used valuation methods Some relevant examples Obtaining robust evidence of market value – practical tips
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When is ‘market value’ relevant in the Australian tax system?
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Market value and the tax legislation
• Purchase price allocations – eg depreciable assets • CGT - maximum net asset value test – small business• CGT – cost base• CGT – market value substitution
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• CGT – taxable Australian property• Debt forgiveness, value shifting rules and employee share
schemes• Thin capitalisation – asset valuation• Tax Consolidation
Market value and the tax legislation - other• Trading stock• GST – eg margin scheme partly completed developments;
pre 2000 property• Research and development
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• FBT, PAYG and non-cash benefits• Self managed superannuation funds – fund assets• Off-market share buybacks• Cultural gifts programme / Donations• Stamp Duty• Transfer pricing – eg Guidelines re intangibles*
Timing of valuation
It is important to note the time at which the valuation should be determined - eg Consolidation – joining, formation or exit CGT – time of CGT event Thin capitalisation – aligned with the relevant accounting
standards Non-cash benefits (FBT or PAYG) – broadly, market value
when benefit provided, note for PAYG, withholding must be before benefit provided
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What is ‘market value’?
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Relevant resources
Case Law ATO: Market Valuation for Tax Purposes (“Market
Valuation Guidelines”)
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) International Valuation Standards Council
1. Case law
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What is market value?
Spencer v The Commonwealth per Griffith CJ at 432: “...the test of value of land is to be determined, not by inquiring
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 g y, , , y gbuyer, 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?”
Price between knowledgeable and willing buyer and seller
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What is market value?
Key principles recognised by the High Court: the willing but not anxious vendor and purchaser a hypothetical market – determining a market the parties being fully informed of the advantages and
disadvantages associated with the asset being valued both parties being aware of current market conditions the parties acting at arm’s length with each other assume the sale is not forced
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What is market value?
Highest and best use Market value is not necessarily the same as the arm’s length
consideration f Market value as distinct from value, price and cost
Market value as distinct from fair value Pioneer Concrete Value to a third party generally – not the specific value to
the actual acquirer
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2. ATO Market Valuation GuidelinesGuidelines
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ATO Market Valuation GuidelinesPart Summary
A Provides guidance about determining the market value for tax purposes
B
Sets out the 3 valuation processes for real property, plant and equipment that the ATO will accept. These methods are:• a direct, sales or market comparison approach;• a depreciated replacement cost approach; and• income-based approaches
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C
Sets out several valuation approaches and methods for deriving market value for a business, securities and intangible assets including:• market;• income;• asset;• cost; and• probabilistic
D Provides guidance on the content required in a market valuation report
E Provides guidance on how to reasonably allocate value to underlying assets
F Sets out, among other things, the ATO’s compliance activities and its approach to ruling requests involving market value
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ATO Market Valuation Processes
The ATO may review a market value as part of its compliance / risk assessment processes
The ATO will generally consider the following: value of the asset/s value of the asset/s type of asset/s involved materiality of any potential tax adjustment complexity of the valuation process undertaken documentary evidence supporting the valuation
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ATO Market Valuation Processes
ATO Panel of expert valuers – analyse taxpayer valuations, support ATO, provide ATO valuations
Specialist ATO internal Valuation Gatekeeper Unit Broadly, the ATO’s valuers will consider: how adequately the valuation process was documented which market value definition has been used how appropriate the method was (remember: not a science) what assumptions and information have been relied on
Risk assessment
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3. International Valuation Standards CouncilStandards Council
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IVSC – Professional and valuation standards
Look for your valuer to be accredited The IVS website sets out valuation issues being consulted
on, and provides access to information about valuation standards
International Valuation Standards are set by the IVSC and include guidance on how to determine market value and what it is for specific assets
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Commonly used valuation methodsvaluation methods
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Valuation methods Valuation methods: Income approach - Forecast cash flows and NPV analysis Market approach - What would someone else pay for that asset or a
similar asset Cost approach - Cost to recreate that asset - limited or no goodwill assets Use of secondary method to cross-check
Other issues Special value generally not accepted by ATO … but consider it Prospective market value
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Purchase price allocations in transactions and small business relief
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Allocation of purchase price in business acquisition contracts The price paid for business assets may be expressed as a lump sum The allocation of the purchase price to underlying business assets has
important taxation consequences for both the vendor and the purchaser Tax law requires a reasonable allocation to the acquired assets Factors to consider include: Competing interests of the vendor and purchaser (e g vendor may have Competing interests of the vendor and purchaser (e.g. vendor may have
preference for allocation to particular assets over others) Collis – whether allocation has been at arm’s length
Multiple CGT events – section 116-40(2) attribution; ensure allocation Stamp duty Acquisition accounting
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Allocation of value – key risks Three broad areas of risk associated with the allocation of value whether the total transaction value is accurate whether the taxpayer has recognised all assets to which value is
to be allocatedh th th t h ll t d l tl t h whether the taxpayer has allocated value correctly to each
underlying asset The ATO is likely to accept that values reflect market value where
parties deal with each other at arm’s length and agree in a bona fide manner on the value of underlying assets Sale Agreements ATO risk matrix
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Small business relief Maximum net asset value test – basic relief condition in Div 152-A Key traps/issues Miley - control premium AAT held that the purchaser had in this case paid a premium for
complete control of the company. Market value of taxpayer’s shares was not his share of the sales proceeds, but actual market value.
Excellar – GST liabilities the GST component of certain liabilities was included in the MNAV
calculation. A taxpayer’s entitlement to input tax credits has no relevant implication in the circumstances
Bell – incurring debt to preserve assets was not sufficient to ‘relate to assets’ Debt not taken into account when determining MNAV text
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CGT cost base rules
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Cost baseFive elements of the cost base
1. Money paid or the market value of property given for the CGT asset2. Incidental costs of acquiring the CGT asset3. Costs of owning the CGT asset4. Capital costs to increase or preserve the value of the CGT asset or to p p
install or move it5. Capital costs of preserving or defending the title or rights to the CGT
asset Section 103-5: where a payment cost or expenditure involves providing
property, the market value of the property is used. If registered for GST, the elements of the cost base are reduced by the
amount of any GST net input tax credits included in the cost
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Example – Scrip for scrip transaction: Vendor
• Transaction – ListCo acquires shares in PrivateCo from Vendor in exchange for the issue of ListCo shares• What is the cost base of the ListCo shares
i d b V d f th l f th iListCo
New issue of shares = $100
Shareholder / Vendor of Private Co
received by Vendor for the sale of their PrivateCo shares to ListCo?• Determining the market value of property provided – PrivateCo shares
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PrivateCo
Acquisition of 100% of shares
Value of shares = $90Control Premium = $10
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Example – Scrip for scrip transaction: Purchaser• Transaction – ListCo acquires shares in PrivateCo from Vendor in exchange for the issue of ListCo shares
• What is ListCo’s cost base in the PrivateCo shares received? ListCo
New issue of shares = $100
Shareholder / Vendor of Private Co
• Market value of ListCo shares provided - is this the ListCo shares’ ASX price? (issues such as volatility?)• Practical issues may arise in determining cost base where neither ListCo nor PrivateCo are traded on an active market.• Potential for unrealised gain in PrivateCo shares
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PrivateCo
Acquisition of 100% of shares
Value of shares = $90Control Premium = $10
CGT market value substitution rule –cost base andcost base and capital proceeds (MVSR)
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MVSR for cost base – general rules Where an asset is acquired from another entity, the market value of the asset
(at time of acquisition) is deemed to be the first element of its cost base if: there was no expenditure incurred it acquire it some or all of the expenditure incurred to acquire it cannot be valued, or the transaction was not completed at arm’s length the transaction was not completed at arm s length
However, if the transaction was not completed at arm’s length and did not give rise to a CGT event for the counterparty, the market value will only be substituted if what was paid to acquire the asset was more that its market value at the time of acquisition Example: Tom gifts land to his daughter Sarah with a market value of
$400,000. The first element of the cost base or reduced cost base for Sarah of the land is $400,000
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MVSR for capital proceeds – general rules The MVSR is relevant if: no capital proceeds received from a CGT event some or all of the capital proceeds cannot be valued, or the parties did not deal at arm’s length in connection to the CGT
tevent The MVSR will always apply to CGT event C2 (about cancellation,
surrender or similar endings) unless the more appropriate event is CGT event C1 (about assets being lost or destroyed)
Some exceptions to the MVSR – section 112-20(3) The market value is worked out at the time of the CGT event
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Mirror image: example – CGT events for both partiesTransaction A sells to B an asset that A purchased on
market for $1 with a market value of $100 B provides $1 of consideration to A for the
asset B then sells the asset two days later to C for
A Cost base of asset: $1Capital proceeds from sale to B: $100 (MVSR)
Capital gain to A: $99
Cost base of asset: $100 B then sells the asset two days later to C for $110
Analysis The market value substitution rule should
apply as the transaction will give rise to a CGT event for both A and B
There will be a step up in the cost base for B This prevents double taxation of the same
economic gain
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B
C
Cos base o asse $ 00(MVSR)Capital proceeds from sale to C: $110
Capital gain to B: $10
A’s capital gain: $99B’s capital gain: $10Total capital gain: $109*
*Being $110-$1
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No mirror image example – CGT event for one partyTransaction Company A issues shares with a market
value of $100 to Shareholder B Shareholder B provides consideration of $1
for the issue of shares
Company A
No CGT event for Company A on issue of shares
Shareholder B sells the shares to C two days later for their market value ($100)
Analysis MVSR will not apply to step up the cost
base for Shareholder B. This is because there is no corresponding gain to assess.
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Shareholder B
C
Cost base of shares issued by Company A: $1 Capital proceeds from sale to C: $100Capital gain: $99
Overall gain: $99
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Taxable Australian property calculations
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What is taxable Australian property? Direct Australian real property interests including interests in Australian land
and rights to mine minerals in Australia Indirect Australian real property interests, which are interests in an entity,
including a foreign entity, 10% or more of the entity is held and value is principally attributable to Australian real property
CGT assets that are used in carrying on a business through a permanent establishment (PE) in Australia (always TAP assets even if cease to be held through a PE)
Taxable Australian property also includes an option or right over any of the above interests
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The principal asset test Requires a comparison of the market values of the entity’s taxable Australian
real property (TARP) and non-TARP assets If the principal asset test is satisfied, a foreign resident who would otherwise
disregard their capital gain and who satisfies the non portfolio test, must include that capital gain in their Australian assessable income
Note this test is similar to most of Australia’s double tax agreements which refer to value of underlying shares being principally related to Australian land DTAs apply to capital and revenue DTAs do not have a non portfolio test requirement
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When does Division 855 apply to tax non-residents on capital gains?
France Co
France S bC
Sing JVCo
SingCo
60% 40%STEP 2: Assuming that the only asset held by Sing JVCo is the shares in Aus Tax Group, we now use the results of Step 1 to arrive at the level of TAP held by SingCo
Result: As the value of SingJVCo’s TAP is greater than its non-TAP, and SingCo has an interest greater than 10% in Sing JVCo, SingCo will be subject to Australian CGT on disposal of the shares in Sing JVCo.
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France
SubCo
AUS tax group
JVCo
AUS tax Group
Singapore
Australia
$75 LAND $25 NON-TAP
STEP 1: Split shares in Aus Tax Group into two categories:
TAP ASSET: 100% x $75 = $75 TAPNON- TAP ASSET: 100% x $25 = $25 NON-TAP
100%
level of TAP held by SingCo
TAP ASSET: 40% x $75 = $30 TAPNON- TAP ASSET: 40% x $25 = $10 NON-TAP
The principal asset test – valuation issues Intercompany assets Ignored under new integrity rules – not an intention test
Fixtures v plant Tenants fixtures
Statutory severanceStatutory severance Mining information Is information a TARP asset? Appropriate valuation methodology for information – cost approach? Should valuation of the information be undertaken separately or as a ‘package’ with other
assets? Resource Capital case Dealings with ATO on audits and compliance activity
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Resource Capital
RCF III Limited Partnership
Cayman Islands
Limited partners(US residents)
General partner (Cayman Island resident)
97%
>10%
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St Barbara Mines Limited
Australian company
TARP assets
>10%
Indirect Australian real property interests Transitional rule – former Div 136 taxed foreign residents if the asset had a
necessary connection with Australia The first element of the cost base of a CGT asset on 10 May 2005 is the
market value of the asset on that day if, on that day: the CGT asset was a membership interest the taxpayer held in anotherthe CGT asset was a membership interest the taxpayer held in another
entity the taxpayer was a foreign resident, or the trustee of a trust that was not a
resident trust for CGT purposes the CGT asset was a post-CGT asset, and the CGT asset did not have the necessary connection with Australia
Grandfathering of pre May 2005 gains – need to demonstrate value at that time
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Debt ForgivenessDebt Forgiveness
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Market value and debt forgiveness Relevant to debtors who have commercial debts forgiven Assignments Debt for equity swaps
Calculation of the gross forgiven amount may involve valuation of propertyproperty Offset amount for property provided is equal to the market value
of that property at the time it is provided GFA on a debt for equity swap will depend on the market value of
the shares issued in the debtor company. How can a wholly owned subsidiary be valued? Insolvent debtors
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Value ShiftingValue Shifting
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Value shifting General value shifting regime (GVSR) Several exclusions and safe harbours Market valuation is central to value for the purposes of the GVSR
Both direct value shifting and indirect value shifting are premised on th bilit t l it d l i t t i th l t titithe ability to value equity and loan interests in the relevant entities Deemed gain on direct value shifts – similar to a disposal Cost base adjustments only for IVS
De minimis Both DVS rules and IVS rules have thresholds – important to
document compliance if taxpayer is relying on de minimis rules
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EmployeeShareShareSchemes
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ESS and market valuation Central to the operation of the ESS rules is the ability to determine
the market value of the shares, options or other rights Discount on issue as a ‘gateway’ Market value at ESS Deferred Taxing Point being assessable as
income (less any cost)income (less any cost) Unlisted ESS interests Safe harbour method for valuing options/rights in the Regulations Start up options/rights No value? Concessions from 1 July 2015
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Asset valuations for thin capitalisation calculationscalculations
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Asset valuations for thin capitalisation calculations An entity to which the thin capitalisation rules apply must comply with the
relevant accounting standards in determining the value of its assets Adoption of the Australian equivalents to International Financial Reporting
Standards (AIFRS) from 1 January 2005 Modifications to the rules regarding the recognition and valuation of g g g
assets, liabilities and equity capital under the thin capitalisation regime were required
For thin capitalisation purposes, an entity has an asset at a particularly time only if the accounting standards enable or require that asset to be recognised at that time Key exceptions – deferred taxes, defined benefit assets/liabilities and
internally generated intangibles
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Asset valuations for thin capitalisation calculations
Revaluing assets up may increase the safe harbour asset base Statutory accounting values used as a starting point, including any
revaluations up (or impairments down) Where there is no specific accounting standard relevant to an asset or
liability the valuation must be in accordance with an appropriateliability, the valuation must be in accordance with an appropriate accounting policy per AASB 1001: Accounting Policies (AASB 1001)
The Commissioner considers that compliance with AASB 1001 would include demonstrating that the process and judgement used for selecting the accounting policy that was used to value the assets has followed the order of preference set out in AASB 1001
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Asset valuations for thin capitalisation calculations Specific rules for thin capitalisation relax the accounting requirements An entity may revalue one or more assets in a class of assets (but not
all of the assets in that class, which would have been a requirement of the AASBs), provided that no asset in the class has fallen in value since the most recent valuation of the total value of assets in that class Carried out by an independent expert or by an internal expert provided
there is no other conflict of interest and the revaluation is verified by an external expert
Special requirements where an asset revaluation is carried out by an employee of the entity or by someone who performs services for the entity under a similar kind of arrangement
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Asset valuations for thin capitalisation calculations The entity must keep records of the revaluation unless an exception applies Statutory account exception Intangibles with no active market exception
The records must contain particulars of: The methodology used in the revaluation, including any assumptions; How the methodology was applied, including any relevant data and other
information used; The name and credentials of the expert making the revaluations; and The remuneration and expenses paid to the expert
Additional record-keeping requirements if the revaluation was undertaken by an internal expert
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Thin capitalisation and internal intangibles Specific rules permit the recognition of intangibles on a thin capitalisation
balance sheet even though the intangibles are not capable of recognition under AASB 138 Removal of ‘active market’ condition The items traded in the market are homogeneousThe items traded in the market are homogeneous Willing buyers and sellers can normally be found at any time, and Prices are available to the public
Key focus area for the ATO Reduction in safe harbour – sharply increasing revaluations Potential write downs of other assets Degree of judgment involved
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Assets with no active market – thin cap concession
For thin capitalisation purposes, if there is no active market to provide an entity with the conditions to use the revaluation model in AASB 138, an entity can choose to revalue one or more of those assets for the relevant period under subsection 820-684(2)
R l ti d ti 820 684 i d t b d t k i th Revaluations under section 820-684 are required to be undertaken in the same way as subsection 820-680(1)
Entity must comply with the accounting standards as if the revaluation were allowed by those standards Impairments Frequency Other requirements of AASB 138
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Tax values in consolidation
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Tax cost setting
Tax cost setting is a method of apportionment which requires allocation of an amount of tax cost calculated (ACA) to the underlying assets of an entity
Allocation on entry to underlying non-monetary assets is proportional t d i l ti t t d b th k t l fto, and in relation to revenue assets capped by, the market value of the asset
Market valuations can also be relevant on exit, where the exit ACA is allocated between classes of membership interests being sold
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Tax values in consolidation Market valuations are required in consolidation to: Calculate the ACA for subsidiary members Step 1 is limited by the market value of the membership interests Step 2 intercompanies are limited by market value of corresponding receivables
Allocate ACA between non-monetary assets and to cap revenue asset TCSAy p Changing the relative market value of assets can change the allocation of ACA and the
cap applied to revenue assets such as depreciating assets Calculate the pre-CGT proportion of membership interests in a joining entity Establish and adjust the available fraction attached to losses transferred to a consolidated
group Example – diluting the AF on a subsequent equity issue or non arm’s length transaction
Allocate of exit ACA between membership interests
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Consolidation example – capping
Example 1 does not cap PP&E and Example 2 shows the impact of the capping provisions
Example A – Capping does not apply Example B – Capping applies
Total ACA calculated $2 000 Total ACA calculated $2,000
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Total ACA calculated $2,000
Market value Reset TCSACash $100 100.00$ PP&E $900 $1,554.55Goodwill $200 $345.45
$1,200 $2,000
Total ACA calculated $2,000
Market value Reset TCSA Cap (MV) ResetCash $100 100.00$ 100.00$ PP&E $900 $1,554.55 1,500.00$ $1,500.00Goodwill $200 $345.45 $400.00
$1,200 $2,000 2,000.00$
Consolidation example – skew to PP&EThe impact of changing market values can be illustrated in the following examples, which both assume ACA of $1,000 is allocated to underlying assets. Example A does not have any rights to future income. Example B splits RFI from goodwill
Example A – Goodwill includes RFI contracts
Total ACA calculated $1 000
Example B – RFI contracts split out
Total ACA calculated $1 000
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Total ACA calculated $1,000
Market value Resert TCSACash $100 100.00$ PP&E $900 $736.36Goodwill $200 $163.64
$1,200 $1,000
Total ACA calculated $1,000
Market value Resert TCSACash $100 100.00$ PP&E $900 $771.43RFI $50 $0.00Goodwill $150 $128.57
$1,200 $1,000
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Available fractions
Available fraction is intended to be an approximation of the income generating capacity of the real loss-maker measured as a proportion of the income generating capacity of the group as a whole
Initial calculation of available fraction for a bundle of lossesmodified market value of real loss-maker
at initial transfer timetransferee’s adjusted market value
at the initial transfer time Adjustments to AF depend on increases in market value of transferee Value attributable to tax losses and franking credits
Impact on purchase price of AF
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Using valuation ‘shortcuts’ in consolidation
Certain shortcuts may be used to provide a reasonable approximation of the market value of an asset for the purpose of setting asset costs Use of shortcuts reduces risk of ATO undertaking a market valuation
review of the assets for which the shortcut options have been usedp The decision to use a particular shortcut must generally apply to all of an
entity’s assets that are eligible for that shortcut Shortcuts not available where there is an intention to sell
Not available for calculating a joining entity’s market value for the purpose of determining the maximum use of transferred losses
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What are the valuation ‘shortcuts’?Valuationshortcut Type of asset Valuation option
1 Depreciating assets (not including intangible assets) that have not been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount (ACA)
Adjustable value (which can be revised to ignore any balancing adjustment amount that reduced the adjustable value) can be used as market value
2 Depreciating assets (not including intangible Adjustable value revised to ignore the effect of2 Depreciating assets (not including intangible assets) that have been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount (ACA)
Adjustable value, revised to ignore the effect of accelerated depreciation (and which can be revised to ignore any balancing adjustment amount that reduced the adjustable value), can be used as market value
3 Trading stock (other than livestock and growing crops) that is not a retained cost base asset
Terminating value at the joining time may be used as market value except in certain circumstances
4 Employee share scheme shares Existing market valuation (updated if appropriate)
5 Unlisted shares Existing market valuation (updated if appropriate)
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Obtaining robust evidence of marketevidence of market value – some tips
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Tip 1: ATO Valuers Panel – external members
•Aon Risk Services Australia Limited •CIVAS (ACT) Limited (Colliers International) •Crowe Horwath Corporate Finance
•KordaMentha Pty Ltd •KPMG •Lonergan Edwards & Associates Limited •Opteon Property Group•PPB Advisory
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Finance•Ferrier Hodgson •Frontier Economics Pty Ltd •Gaffney, Cline & Associates Pty Ltd (WA)•Griffith Hack Consulting Pty Ltd
PPB Advisory •PricewaterhouseCoopers •Revaluate Pty Limited •Romar Valuation Services •Sapere Research Group Limited •Value Advisor Associates Pty Ltd
Tip 2: Instructions Create best evidence – risk proof your client ATO “Form for instructing your Valuation Consultant” – reference to
ATO Market Value Guidelines, Court expert guidelines, APES 225 Accounting Professional Ethical Standards Board APES 225
Valuation ServicesValuation Services For accounting professionals in Australia APES 225 sets out
standards for valuers Independence, confidentiality, competence, documenting terms of
engagement, providing written Valuation Reports – all covered
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Tip 3: For complex assignments - consider two valuers
Take two out – one as independent valuer; one as “dirty” expert to assist and guide with instructions and appropriate methodology and how to use the report provided to support the tax issue
As per Tip 4 save money by directly engaging with the ATO eg by considering a joint valuation with the ATO
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Tip 4: Engagement with the ATO
Binding rulings - generally only rule on how a relevant provision applies to a particular taxpayer in relation to a particular scheme – cost may be an issue
Advance Market Valuation Agreements (AMVA) Values are set for assets and entities for consolidation
purposes - administratively binding on the ATO Other engagement with the ATO – eg early engagement
processes; joint valuations
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Tip 5: Avoid disputes - elements of a good valuationThe following elements should be apparent, as appropriate:
• description of asset• purpose and context of valuation• date of valuation
• material risks• use of previous valuations • explanation of material differences
• method/s used• reasons for method/s used• specific value• information relied on and evaluation of
information• assumptions relied on and evaluation of
assumptions
• expert reports and the use of experts• terms of engagement• relationship between the valuer and the
client• working papers• disclaimers and indemnities• valuer’s details
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Tip 6: manage a valuation dispute with the ATO
In the event of a dispute with the ATO, the burden of proof rests with the taxpayer
Litigation or Alternative Dispute Resolution (ADR) – consider ADR ADR processes ADR processes joint appointment of an independent valuer expert valuer conferencing (a “hot tub”) Independent Review Early Neutral Evaluation
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Questions?
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Joanne Dunne Partnert +61 3 8608 2944 f +61 3 8608 1944 m +61 4 2189 7133 MinterEllison Rialto Towers 525 Collins Street Melbourne VIC [email protected]
Robert Yunan Special Counselt +61 3 8608 2486 f +61 3 8608 1261 m +61 4 1114 0709t +61 3 8608 2486 f +61 3 8608 1261 m +61 4 1114 0709MinterEllison Rialto Towers 525 Collins Street Melbourne VIC [email protected]
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