Miley and Commissioner of Taxation (Taxation)  AATA 73 (15 February 2016)
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."|
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.
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 .
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.