BVWire Australia Issue #7-2 | 16 February 2015


IGT’s report and what it means for small businesses

The last edition of BVWire—Australia reported on the Inspector-General of Taxation Ali Noroozi’s recently released review of the ATO’s administration of valuation matters. If implemented, small businesses would no longer be required to undertake valuations to claim tax concessions.

BVWire—Australia discussed the implications of the change for small businesses with business valuation experts Simon Dalgarno and Elena Saarbrucken (both Leadenhall). Dalgarno says small businesses would benefit due to a greater certainty of compliance for a greatly reduced fee. “If either the requirement for a valuation is eliminated or some form of shortcut or safe haven is introduced, this will allow taxpayers to be sure they are complying with their obligations without having to incur the cost of a formal valuation, which might have been appealed anyway,” he says.

Similarly, Saarbrucken says the main benefit to small businesses is the cost savings of not having to engage professional valuers. “For example, as per the IGT review (paragraph 3.27), the cost of procuring a full valuation for the purposes of capital gains tax (CGT) concessions varies from $10,000 to $20,000. Depending on the complexity of assets or transactions, the valuation costs might rise another $5,000 to $7,000. In my opinion, a reasonable valuation report for small businesses should not exceed the $15,000-$18,000 mark.”

One IGT recommendation is that only small businesses over a certain dollar threshold should carry out valuations. In Dalgarno’s view, this threshold should be $5 million. “Looking at this scenario backwards, if a business is worth $6 million, then it probably has an earnings before interest and taxes (EBIT) of between $2 million and $3 million. In this case, a valuation fee of $20,000 is reasonable. The bigger issue is if the ATO does not believe the valuation is significantly robust, which means the additional accounting/legal/valuer fees could increase rapidly. So I think $5 million should be the threshold, particularly if the valuation is of a good quality and if some of the IGT’s other recommendations are accepted by the ATO.”

The IGT also recommended that the ATO improve and promote the market valuation private ruling system, which would offer taxpayers greater certainty and provide more detailed guidance on the application of valuation-related penalties. Dalgarno says this is good news, as there are currently a number of issues with the concept of “market value.”

“First, the definition excludes special value and hence the price at which a business is sold may not be the market value. Second, there are significant issues with obtaining sufficient information to determine a value.”

Saarbrucken says the current tax law does not define “market value” in any general provision and that this perhaps could be why some people are “uncomfortable with its concepts.” Nevertheless, she is optimistic about its future application. “I agree with the IGT’s observations that ‘market value’ has the advantage of being a longstanding concept that has received general acceptance and significant experience has been gained with its application—particularly amongst the tax profession,” she says.

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Stewart's advice on mine valuation

PwC partner Richard Stewart is the latest local business valuation expert to lend his insight to the “Valuer’s Q&A Corner” feature in Business Valuation Australia (subscription required). For the first time, we are sharing his insight exclusively in BVWire—Australia.

Q: What are your thoughts on applying an income approach to a hypothetical mine plan with a hypothetical income stream to value a drilled, but raw, undeveloped and unpermitted mineral deposit to arrive at a fair market value (FMV)?

A: Conceptually, it is possible to apply an income approach in this situation. To do so requires an estimation of:

  • The likely cash flows of the mine in operation, including forecasts of commodity prices, exchange rates and operating costs over the project life;
  • The likely development and approval costs of the mine;
  • An allowance for the time value of money; and
  • An allowance for the risks both as regards financial outcomes and timing involved in the plan.

In practice, however, it is often difficult to make these estimations and, in certain circumstances, it is actively discouraged. For example, in its regulatory guidance on independent expert’s reports, ASIC requires valuers to have a reasonable basis for the use of all the estimates outlined above. It also requires valuers to be experts in making these estimates. It is a stretch to have this reasonable basis and justify your expertise for these types of assets.

As a result, the most common approach to these types of assets in these contexts is to employ the services of a geological expert who will value the mineral deposit under the VALMIN code. Even so, few of these experts are willing to publicly express their judgements of the factors outlined above, given the wide range of outcomes that can occur in the life of mineral deposits. Accordingly, they tend to fall back on market-based methods or alternatively cost-based methods (often using the Kilburn or modified Kilburn method).

Generally, both the cost and market methods, as applied by geological experts, use drilling results to modify the market information and the cost information to come up with a conclusion of value.

Having said all this, buyers and sellers of these assets use discounted cash flow (DCF) methods under a range of scenarios to make their decisions. As such, there is no theoretical shortcoming of the approach. It is just the uncertainty of the outcome and the paucity of reliable data that can be used by (or sometimes interpreted by) valuers in high-stakes situations.

The “Valuer’s Q&A Corner” is a regular column in the Business Valuation Australia (subscription required). Please submit your questions to us at Get regular access to the “Valuer’s Q&A Corner” by subscribing to BVA now. You can also find out more about valuing natural resources in BVR’s special report, Guidance from the Experts: Valuing Oil and Gas Entities.

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Government releases draft bill to improve taxation of ESOPs

The government has released draft legislation to change how employee share option plans (ESOPs) are taxed in a bid to make them more accessible and attractive to businesses.

The proposed amendments would:

  • Reverse some of the changes made in 2009 to the point at which rights issued as part of an ESOP are taxed for employees of all corporate tax entities;
  • Introduce a further tax concession for employees of certain small startup companies; and
  • Allow the ATO to work with the industry to develop safe harbour valuation methods, supported by standardised documentation to streamline the process of establishing and maintaining an ESOP for businesses.

The proposed legislation also removes the need for startups to get a professional valuation, which can carry prohibitive costs.

The startup and small-business communities welcome the changes. Back in October when the government first signalled that it would be making the changes, Jana Matthews, ANZ chair for business growth and director of the UniSA Centre for Business Growth, said it was heartening to see moves by the government to foster investment in startups. “While anecdotal evidence and recent funding news would suggest that there are rising levels of venture capital being invested into startups, the reality is that Australia still lags behind other developed nations, including our regional neighbours such as South Korea, Singapore and New Zealand,” Matthews says.

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Shape BVA’s direction through the BVWA reader survey

Many of you have responded to our first 2015 reader survey question on what you would like to see covered in upcoming issues of Business Valuation Australia, and we want more input! If you haven’t had a chance to take the survey yet, click here to participate. BVWire—Australia will report on the outcome of this survey in an upcoming issue and reflect your suggestions in our issues to come. Stay tuned!

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Should valuers use pretax or posttax discounted cash flow?

In the most recent issue of Business Valuation Australia (subscription required), John-Henry Eversgerd, chair of the BVA editorial advisory board and national head of valuations at McGrathNicol, assesses whether a pretax or posttax discounted cash flow (DCF) analysis is appropriate in a given situation.

“Many in the Australian and international valuation community have challenged the accuracy and appropriateness of pretax DCF analyses. Pretax DCF analyses continue to be used in practice, however, particularly in the context of calculating loss and damage when quantifying claims in commercial disputes,” Eversgerd says.

He proceeds to compare the results of various DCF scenarios to illustrate how pretax DCF calculations can, in many cases, result in materially incorrect and/or inconsistent results.

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We welcome your feedback and comments. Contact the editor, Sonia Nair, at
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In this issue:

Expert opinions on implications of IGT's report

Stewart's advice on
mine valuation

Draft bill to improve
ESOP taxation

BVWA Reader Survey

Pretax versus posttax DCF





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