Private ruling: Market valuation of shares
Published: March 2014
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is an acceptable market value of your shareholding in the company, for the purposes of the maximum net asset value (MNAV) test, considered to be the value provided by the Australian Valuation Office in their critique of your valuation? | A1: Yes

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • your application for private ruling which we received • copy of valuation of the shares provided by your valuer • copy of critique of the valuation you provided by the Australian Valuation Office (AVO) You are Australian residents for income tax purposes. You each held share capital in the company. In the relevant financial year, a contract for the sale of 100% of shares was signed. The valuation provided by your valuer is less than the valuation provided by the AVO.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-20(1)

Reasons for decision: Detailed Reasoning - Maximum net asset value (MNAV) test: Section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Subsection 152-20(1) of the ITAA 1997 provides that the net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) the liabilities of the entity that are related to the assets; and (b) the following provisions made by the entity: i. provisions for annual leave; ii. provisions for long service leave; iii. provisions for unearned income; iv. provisions for tax liabilities. | Detailed Reasoning - Market Value: The current tax law does not define market value in any general provision. It is defined in the 'Definitions' part (section 995-1 of the ITAA 1997), but not in a way that fixes its meaning in all contexts. As a result, 'market value' usually takes the ordinary meanings given below, unless specially defined or qualified in a particular provision. Valuers of real property adopt the definition used by the International Valuation Standards Council (IVSC): ... the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. Business valuers in Australia typically define market value as: …the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length. The High Court cast light on the ordinary meaning of 'market value' in Spencer v The Commonwealth of Australia (1907) 5 CLR 418. In this case, the Commonwealth had compulsorily acquired land for a fort at North Fremantle in Western Australia. In discussing the concept of market value, Griffith CJ commented (page 432) that: … 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 buyer, 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? Isaacs J subsequently expanded on the concept (page 441): … to arrive at the value of the land at that date, we have … to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood as then appearing to persons best capable of forming an opinion, of a rise or fall for what reasons so ever in the amount which one would otherwise be willing to fix as to the value of the property. In this case, the High Court recognised the principles of: • the willing but not anxious vendor and purchaser • a hypothetical market • the parties being fully informed of the advantages and disadvantages associated with the asset being valued (in the specific case, land), and • both parties being aware of current market conditions. | Detailed Reasoning - Application to you circumstances: We generally use valuers to confirm whether the market value is acceptable. They usually review the valuation process to see if it complies with accepted valuation industry practice. Broadly, the review involves looking at: • how adequately you documented your process • which market value definition you used • how appropriate your method was, and • what assumptions and information you relied on. At the conclusion of the review, the valuers provide us with a report on the valuation which may include an estimate of the market value (or likely range) of the asset or assets, based on data available to them at that time. You have provided a valuation undertaken by a valuer. However, a critique of that valuation completed by the AVO values the shares at a higher value. Based on the critique provided by the AVO in relation to the valuation of your shareholdings we consider that an acceptable market value for each of your shareholdings in the company would be the value as noted by the AVO.