Small Business Concessions – Valuations Guidance

The Small Business CGT concessions continue to be vexing.

In a new decision of the AAT in Miley’s Case (Miley and Commissioner of Taxation [2016] AATA 73) we have received further insights into the concept of what is market value. In particular, the AAT held that the price paid by a third party was not the best evidence of market value!

The case involved the sale by a shareholder of their one third interest in a company. The valuation of this interest was critical in determining whether the taxpayer satisfied the $6m maximum net asset value (MNAV) test and thus could obtain the 50% CGT discount on the sale.

In this instance the purchaser paid $17.7m for 100% of the company. Mr Miley’s share of this consideration was $5.9m. Notwithstanding the proceeds received, the question for the AAT was whether this amount was the market value of the shares just before they were sold. It was accepted that if the market value of the shares was greater than $5.81m then the shares plus Mr Miley’s other assets would cause him to fail the $6m MNAV test.

Mr Miley made a submission based on what is described as the ‘Spencer hypothesis’ (Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418.) In that case Griffith CJ said at 432:

                     “In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually 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?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.”

By looking at the market value concept in this manner, a valuer can consider what a hypothetical buyer would have paid for Mr Miley’s shares immediately before the sale. Such an examination requires you to consider that the shares a minority shareholding in the company and thus that a discount for non-control would need to be taken into account. More commonly, a premium for control would be added to the value of Mr Miley’s shares in order to acquire the entire company.

Representations were made by a valuer that a premium for control of approximately 20% would be appropriate in these circumstances. When this premium is deducted from the actual sales price, the market value of Mr Miley’s shares was significantly below that required to satisfy the MNAV test.

We believe this case is a sound application of common valuation concepts, delivering the correct outcome to the Taxpayer.

The case however highlights that this is a topical area for the Commissioner in the application of the CGT concessions and highlights the need to get appropriate advice when seeking to use the provisions.