Australia: Price may not equal value

Damages Matters
Last Updated: 26 April 2016

Miley and Commissioner of Taxation (Taxation) [2016] AATA 73 (15 February 2016)

1 Introduction

In this edition of Damages Matters, Sasikala Kandiah and Anh Nguyen, Associate Directors in our Sydney office, discuss a recent decision of the Administrative Appeals Tribunal which found that the price of a parcel of shares does not necessarily determine its market value when assessing capital gains tax (CGT):

"I find that the consideration that Mr Miley received for his shares, which formed part of the consideration paid by the Buyer for all the shares in the Company, is more than a hypothetical willing but not anxious purchaser would have paid if it had purchased Mr Miley's shares alone – and that is the basis on which the market value of Mr Miley's shares should be determined. Therefore, while the actual consideration received by Mr Miley should not be ignored as an indicator of the market value of his shares just before the time of the CGT event, it is not determinative of that market value."

2 Background

The taxpayer was one of three equal shareholders in AJM Environmental Services Pty Ltd. During 2008 the shareholders sold their shares for $17.7 million giving rise to a potential CGT liability on the taxpayer's share of the sales proceeds of $5.9 million.

The key issue to be decided by the Tribunal was whether the market value of the taxpayer's shares, together with other assets was greater than the $6 million threshold which entitles the taxpayer to the small business CGT concession.

The taxpayer argued that the market value of his shares should be determined with reference to the hypothesis found in Spencer v The Commonwealth, and that the market value had not necessarily been equal to the price received. The taxpayer applied a discount to the $5.9 million received for the parcel of shares on the basis that the value of those shares was less than the pro-rata value derived from the sales price of all the shares. Valuers often refer to this discount as the 'minority discount'.

The Commissioner argued that no discount should be applied and that the market value was reflected by the actual price.

The Tribunal found in favour of the taxpayer, agreeing that a discount should be applied to the sales price to determine market value.

3 The competing expert evidence

Mr H, the valuer briefed by the taxpayer, applied a discount of 16.7% 1 to the $5.9 million to reflect the lack of control arising from the taxpayer owning only one third of the shares. Mr H' s reason for applying the discount was explained as follows:

"All other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control. The value of control relates to the value in having the power to make decisions that affect the amount, timing, and risk of the cash flows from an investment in the equity of the company, whether listed or unlisted. Those decisions might for example, affect the company's strategic, operating, taxation, investment and dividend payment policies."

The Commissioner's valuer, Mr S took a different approach and concluded that a minority discount should not be applied for the following reasons;

  • the Valuation Date precedes the date on which the Shares were in fact sold on the same terms as the shares held by all other shareholders in the AJM companies by only one day.
  • a market value which contemplates the sale of the Shares in conjunction with all of the other shares would not allow for a minority discount.
  • it would be illogical to determine the market value of the Shares at less than the amount that had been negotiated for the sale as at the Valuation Date. In other words, the circumstances as at the Valuation Date included that a hypothetical willing seller of the Shares would have been aware that the Shares could be sold at the same time as the shares owned by the other shareholders of the companies, thereby enabling the Shares to be sold for a price that included a control premium (as in fact the transaction price did).

4 The tribunal decision

The Tribunal noted that the subject matter of the sales contract was all the shares in the company which would provide the purchaser with complete control of the company . The sale of the taxpayer's shares alone would not have provided its purchaser with the same level of control.

The Tribunal did not accept Mr S's reasoning which it said was based on the assumption that the enquiry envisaged by Spencer was directed towards determining the market value of the taxpayer 's shares whilst contemplating the contemporaneous sale of the other shares in the company . Rather, the Tribunal found that the relevant enquiry was to determine the market value of the taxpayer 's parcel of shares alone, and not as part of a package comprising the sale of all of the shares in the company .

The Tribunal found that the consideration received by the taxpayer was more than a hypothetical willing but not anxious purchaser would have paid, if it had purchased those shares alone; and that this is the basis on which the market value of the taxpayer's shares should be determined. It found that whilst the consideration received should not be ignored as an indicator of the market value of the taxpayer 's shares, it is not determinative of market value.

The market value of the taxpayer's shares was determined to be $4,914,700 2 which entitled the taxpayer to the small business CGT concession.

5 Significance

This case is relevant because it sheds light on the circumstances of the hypothetical transaction assumed by the Spencer formulation of market value. The decision suggests that when asking what is the market value of an asset, courts will look past 'factors that are extraneous to the purpose for which such a value is to be ascertained' and focus on the assets that are the subject of the valuation. As a result, price does not necessarily equal value.

The case may have wider implications. For example, in some stamp duty matters it is necessary to establish the market value of an asset which is only one component of a business. That value might vary greatly depending on whether the hypothetical sale of the asset is assumed to be in conjunction with a sale of the other assets of the business; or a standalone sale of the single asset only .

Footnotes

1 A discount of 16.7% for lack of control is equivalent to a premium of 20% for control
2 5.9 million less 16.7% for lack of control

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions