Australia: Market value of shares in a private company

Last Updated: 3 January 2018
Article by Carlos Gouveia


In Commissioner of Taxation v Miley [2017] FCA 1396 the Federal Court has considered the principles that should be applied in determining the market value of shares in a private company for the purposes of the capital gains tax (CGT) small business concessions.

Those principles are:

  • the broadly accepted definition of market value at general law is what a willing and knowledgeable, but not anxious buyer would pay a willing and knowledgeable, but not anxious seller for the shares
  • if there is no willing and knowledgeable, but not anxious buyer for the shares, the valuation method generally involves hypothesising that there is such a buyer. The question then becomes what a willing but not anxious seller could reasonably expect to obtain, and what amount the hypothetical buyer could reasonably expect to have to pay, if they got together and agreed on a price
  • where the shares have been the subject of a recent arm's length sale, it is generally unnecessary to use the hypothesis of a willing seller and buyer. If the recent sale transaction is one between willing but not anxious parties, the price that the parties actually agreed on may generally be taken to be the market price, or at least a reliable indicator, if not the best evidence, of the market price
  • if it is necessary to apply the hypothesis of a willing seller and buyer, if there is or likely to be a particular buyer who is willing to pay more for the shares than other buyers because it is in a better position to exploit the shares (for example, it is able to buy all of the issued shares of the company), that buyer should not be excluded in considering the relevant market or market value
  • it is not appropriate to apply a discount for lack of control where the terms of the sale require all of the issued shares of the company to be sold contemporaneously and the buyer is not required to buy the shares held by one of the shareholders to the exclusion of the shares held by any other shareholder


The case concerned the sale of 100 shares in AJM Environmental Services Pty Ltd which were owned by Andrew Miley. The other shareholders were Jonathan Perry and Adrian Minshull, both of whom held 100 shares.

On 7 March 2008, the shareholders signed a Sale and Purchase Agreement under which they agreed to sell their shares to EIMCO Water Technologies Pty Ltd for $17.7 million. Each shareholder received $5.9 million. It was a condition of the agreement that the buyer would buy all of the shares held by each of the shareholders contemporaneously and the buyer was not obliged to buy the shares held by one of the shareholders to the exclusion of the shares held by any other shareholder.

Miley claimed the benefit of the small business CGT concession. This concession required satisfaction of the maximum net asset value test contained in section 152-15 of the Income Tax Assessment Act 1997 (Cth) (ITAA):

You satisfy the maximum net asset value 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)).

The ITAA required the net value of the assets to be determined by subtracting certain liabilities and provisions from the sum of the market value of the assets. The ITAA contained a limited definition of market value, but it had no application in the present case.

Following an audit of Miley's tax returns, the Commissioner issued Miley with an amended assessment for the year ended 30 June 2008. The Commissioner's opinion was that Miley did not satisfy the maximum net asset value test because the net value of Miley's shares just before the sale was $5.9 million. When this amount was added to $120,000, being the net value of Miley's other assets, the total net value of assets was $6,020,000.

Miley objected to the amended assessment and the objection was disallowed. Miley appealed to the Administrative Appeals Tribunal (AAT), where he was successful. The Commissioner then appealed to the Federal Court and the matter was heard by a single judge.


Both parties submitted expert valuation evidence which produced very different valuations.

Miley submitted that the market value of a CGT asset is to be determined by reference to a hypothetical sale between willing but not anxious parties and this was not necessarily equal to the amount paid by the actual buyer. He referred to the High Court decision in Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd (2002) 209 CLR 651:

...The determination of such an amount [that is, the unencumbered value of property on the open market] is a familiar task, to be carried out in accordance with the principles stated in Spencer v The Commonwealth. The subject of the valuation is the unencumbered estate in fee simple. In determining the value there is no warrant, either in the language of the statute or in principle, for departing from the hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together. The purpose of making the inquiry hypothetical is to isolate the value of the estate or interest to be transferred from factors that are extraneous to the purpose for which such a value is to be ascertained. To introduce into the exercise a special condition for which, on a particular occasion, a particular vendor chose to stipulate, and to which a particular purchaser chose to agree, is to depart from the statutory requirement, which is to determine the value of that which was transferred. ...

The Commissioner's principal argument was that the most reliable evidence of the market value of the shares sold by Miley was the price that the unrelated buyer in fact paid for them.

The AAT accepted Miley's argument and found that the market value of the shares was $4,914,700, although this was different to the expert valuations submitted by both parties. This amount was determined by applying a 16.7% discount for lack of control to Miley's share of the purchase price of $5.9 million.

The AAT preferred the reasoning adopted in Miley's valuation and found that the Commissioner's valuation proceeded on an assumption that the enquiry was one directed towards determining the market value of the shares subject to "special circumstances", namely that the sale of the shares should contemplate the sale of the shares owned by all the other shareholders. The correct enquiry was directed towards determining the market value of Miley's shares alone, not as part of a package comprising all of the shares in the company. It found that the consideration Miley received for his shares was more than a hypothetical willing but not anxious buyer would have paid if it had purchased only Miley's shares.


The substantive issue that was argued before the Federal Court was whether a discount for lack of control should be applied in valuing the shares. Certain procedural issues were also raised, including whether the appeal raised a question of law.

The Federal Court overturned the AAT decision and found in favour of the Commissioner.

The Federal Court found that the AAT had misdirected itself in relation to Pioneer Concrete which caused it to ignore a relevant consideration, being the fact that just before the sale, there was a buyer in the market who was ready and willing to purchase all the shares for $17.7 million and that Miley and the other shareholders were ready and willing to sell their shares for that price. That was not a special circumstance as contemplated in Pioneer Concrete, it was the reality of the market and it was not appropriate to apply a discount for lack of control. The agreement required all of the shares to be sold contemporaneously, and even if it could be described as a special condition, it could not be said to be a factor that was extraneous to the purpose for which Miley's shares were to be valued.

There was nothing to suggest that the parties were not willing and knowledgeable, or anxious or that the price that was struck between the parties was not the product of an arm's length negotiation. The price that was struck was therefore the market value of the shares.

The AAT also failed to have regard to the principles that have been applied in valuation cases where the asset had special potential for a particular buyer.

Miley submitted in the Federal Court that the actual contract that was entered into by him should be ignored for the purposes of determining the market value because section 152-15 required a valuation "just before" the CGT event. The Federal Court rejected this submission and held that the words "just before" indicate the legislature's intention to exclude from the maximum net asset value test the effect of the CGT event itself, in this case the shares had to be valued on the basis that the shares had not in fact been disposed of.


The Federal Court's decision is a clear statement that exceptional circumstances are required before the market value of an asset will be anything other than the price paid by a willing and knowledgeable, but not anxious buyer in an arm's length transaction.

Carlos Gouveia
Corporate advisory
Colin Biggers & Paisley

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.

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Carlos Gouveia
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