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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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Page 1: Market Valuation for Tax Purposes and MNAV · Market Valuation for Tax Purposes and MNAV John Sourbis, Australian Taxation Office ... ensure the valuer is provided with all necessary

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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

Page 9: Market Valuation for Tax Purposes and MNAV · Market Valuation for Tax Purposes and MNAV John Sourbis, Australian Taxation Office ... ensure the valuer is provided with all necessary

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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

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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.

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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

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The Valuer’s Role

The Valuer’s role

Quantify the market value of the subject asset on the date of valuation.

Thank you

Upcoming events

Please complete your

evaluation forms and return

them to the registration desk