Understanding the Australian Tax Office’s (ATO) valuation requirements is crucial for business owners seeking accurate valuations for tax purposes.
The ATO recently updated its guidance on market valuation, outlining key principles and expectations for business owners and professional valuers.
Per the ATO’s guidance, the Market Value for Tax Purposes definition must adhere to its ordinary meaning but with specific modifications. It excludes elements valuable only to a specific owner or purchaser.
The ATO’s definition of market value emphasises a hypothetical transaction between a willing but not anxious seller and purchaser. This ensures an informed negotiation process, free from forced sales and with full awareness of market conditions.
Fair value, used for financial reporting, is distinct from market value and is defined in Australian Accounting Standard AASB 13. Understanding these nuances is vital for accurate valuations.
Who Can Determine Market Value For Tax Purposes?
According to the ATO, the acceptability of a valuation hinges on the process rather than the valuer’s identity.
A reasonable estimate of market value requires skill, knowledge, and a fair and reasonable process.
Valuations conducted by suitably qualified professionals, following industry standards and codes of conduct, are generally considered more reliable.
Valuation Fundamentals For Tax Purposes
The ATO updated guidance outlines eight fundamental principles for valuations for tax purposes:
- Valuations must be specific to tax and superannuation provisions.
- Market value is distinct from historical cost.
- Valuations must be consistent in nature and source of valuation inputs.
- Valuers should adopt relevant and appropriate valuation methodology. This will be influenced by available data, circumstances, and industry practices.
- Include consideration of more than one valuation approach where possible.
- Valuers must show impartial judgment on inputs and assumptions.
- There must be a proper assembly and recording of evidence.
- Prospective (future-dated) assessment will not be considered reasonable or acceptable.
Furthermore, the ATO references three internationally accepted valuation approaches: market approach, income approach, and cost approach.
- Market approach – estimating market value by reference to market prices in actual transactions and asking prices of assets currently available for sale – essential that of comparison and correlation between the asset to be valued and other similar assets;
- Income approach – estimating market value based on the income or cashflows the asset can generate in the future and
- Cost approach – estimating the market cost of replicating the valuation asset in similar conditions as at the valuation date as a suitable indicator of market value.
The primary methodology should be the most suitable for the asset, supported by evidence and following professional standards.
Expectations Concerning Valuation Reports
The ATO sets minimum expectations for valuation reports, emphasising the objective of a valuation report is to provide convincing and compelling support for the conclusions reached.
Key information includes the scope and purpose, asset details, valuation assessment date, approaches used, and valuer’s identity and qualifications.
Common Issues Found by the ATO in Valuation Reports:
The ATO identifies common issues in market valuation reports, including:
- inappropriate choice or application of methodology,
- misalignment with tax provisions,
- unreasonable assumptions,
- improper apportionment of value,
- lack of analysis,
- failure to verify inputs, and
- omission of assumptions.
These common issues and the ATO’s specified minimum expectations provide taxpayers and valuers with clear instructions on what valuation reports must and must not contain.
Navigating Australian Tax Office Valuation Requirements
Business owners navigating ATO’s valuation requirements must adhere to the outlined principles and expectations.
Engaging qualified professionals, following industry standards, and providing comprehensive valuation reports are essential for meeting ATO standards and ensuring accurate business valuations for tax purposes.
Elements Advisory Group business valuation specialists can provide valuations requiring professional standard APES 225 Valuation services.