Question – ‘What’s the value?’
Answer – ‘How long is a piece of string’
Starting point – key terms
‘Market value’ is not defined in the legislation, it is the ordinary meaning that is used, that is, the price that a willing but not anxious buyer would have to pay to a willing but not anxious seller for the item.
Albeit not defined, don’t let that make you think it has little importance. On the contrary to be blunt, market value is referred to extensively throughout the Tax Acts. One of the many key areas is in regard to the maximum net asset value test (‘MNAV test’) for the purposes of the CGT Small Business Concessions.
Intertwined within the ‘non-defined’ term of Market Value is whether or not the parties have dealt with each other at arm’s length.
Unlike market value, arm’s length is defined. Subsection 995-1(1) of the ITAA 1997 states that in determining whether parties deal at arm’s length, you must consider any connection between them and any other relevant circumstance.
A party is not dealing with another at arm’s length if one party does not act independently and is under the control or influence over the other party in connection with the dealings.
Where the Commissioner disagrees with the market value applied and is of the view that the parties have not dealt at arm’s length, the Commissioner may apply the Market Value Substitution (‘MVS’) Rule.
Under the MVS Rule, the market value of a CGT asset is substituted as the capital proceeds of a CGT asset if the actual proceeds are more or less than the market value of the asset and the asset was disposed of in a non-arm’s length dealing.
A recent AAT case reiterated the complexity around arm’s length determinations and market valuations.
The Moloney case [Moloney and FCT (2024) AATA 1483]
The AAT had to consider whether the MNAV test was satisfied. If the taxpayer was able to satisfy the MNAV test, the taxpayer would be entitled to the CGT Small Business concessions.
The key issue being, were the parties dealing at arm’s length and was the value of the business (and the shares of the new related company that acquired the business) determined by the parties (being $3.5M), the true market value?
The Commissioner’s view being that the parties were not dealing at arm’s length and the market value of the business was higher than the capital proceeds. As such he sought to apply the MVS rule. In Deputy President Molloy’s view, the taxpayers did not deal at arm’s length given the vendor and acquirer were controlled by the same parties. The focus then shifted to determine the market value of the business.
The taxpayers obtained a new independent valuation which came in at a midpoint of $3M compared to the ATO’s independent valuation of $7M.
The AAT considered both valuations, noting that both approaches used the same valuation methodology, being a multiple of maintainable EBITDA. Throughout the audit and AAT proceedings, numerous re-workings of the valuation were prepared, this merely proved the existence of the gap between both the ATO and the taxpayer’s valuations.
Taking into account the valuations and all assumptions, Deputy President Molloy sided with the taxpayer’s valuation adjusting for several other factors to determine that the valuation should be $3,352,500.
The result being the taxpayers could utilise the CGT concessions.
Takeaway
Determining the market valuation of an asset in a transaction has always, and will continue to be, a point of contention.
This case proved that two independent valuers using the same methodology can arrive at two very different valuations. Perhaps the only certainty in a valuation is that another valuation can and will likely be different. However, it is imperative that taxpayers undertaking these transactions obtain a truly independent valuation to support the transaction’s sale price.
Supporting documentation and the process undertaken in obtaining a valuation will be key in supporting a particular view.
If you would like to discuss any of the above further, please contact Linken Fragomeli.