national resources tax conference - greenwoods · this observation applies equally to the...

© Tim Kyle 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. 510763622

National Resources Tax

Conference 26 – 28 October 2016

Session 3: The Legal Meaning of

“Market Value”

Written by:

Tim Kyle

Director

Greenwoods & Herbert Smith Freehills

Presented by:

Tim Kyle

Director

Greenwoods & Herbert Smith Freehills

WA Division

26-28 October 2016

Crown Perth

Tim Kyle The Legal Meaning of “Market Value”

© Tim Kyle 2016 2

CONTENTS

1 Introduction .................................................................................................................................... 5

2 The roles that market value plays in the Tax Acts ..................................................................... 7

2.1.1 Determining tax attributes .................................................................................................. 7

2.1.2 Allocating consideration among multiple assets ................................................................ 8

2.1.3 Imposing a different character for Tax Act purposes ......................................................... 9

2.1.4 Determining access to particular provisions .................................................................... 10

3 The assumptions underpinning market value .......................................................................... 11

3.1.1 The market value of every “thing” can be determined ..................................................... 11

3.1.2 Market value is a single identifiable number ................................................................... 12

3.1.3 Market value can be divined in a rational way ................................................................. 13

3.2 Growing legislative awareness that market value is not a panacea ....................................... 13

4 The proper process for determining market value ................................................................... 15

4.1 The Tax Act market value definition ....................................................................................... 15

4.2 The specific Tax Act market value rules ................................................................................. 17

4.3 ATO administrative safe harbours .......................................................................................... 19

4.4 Where no specific Tax Act rule applies ................................................................................... 19

5 The general law meaning of market value ................................................................................. 20

5.1 Overview ................................................................................................................................. 20

5.2 Market value cases in different contexts ................................................................................. 20

5.3 Spencer’s case ....................................................................................................................... 21

5.4 Practical challenges in applying the Spencer test .................................................................. 23

5.4.1 Overview .......................................................................................................................... 23

5.4.2 How do Courts approach the Spencer market value test? .............................................. 23

5.4.3 MMAL Rentals ................................................................................................................. 24

5.5 Legislative context is critical ................................................................................................... 25

5.5.1 RCF.................................................................................................................................. 26

5.5.2 Case 2/99 ........................................................................................................................ 26


© Tim Kyle 2016 3

6 The nature of the Spencer hypothetical market ....................................................................... 28

6.1 What role do actual transactions play in the Spencer test? .................................................... 28

6.2 Aggregated disposals ............................................................................................................. 29

6.2.1 Spencer ........................................................................................................................... 29

6.2.2 Hustlers ............................................................................................................................ 29

6.2.3 Collis ................................................................................................................................ 30

6.2.4 RCF.................................................................................................................................. 30

6.2.5 Miley................................................................................................................................. 31

7 Special value to the purchaser ................................................................................................... 33

7.1 Overview ................................................................................................................................. 33

7.2 Market value under the IVS .................................................................................................... 33

7.3 The case law position on special value .................................................................................. 34

7.3.1 The Marks article ............................................................................................................. 35

7.3.2 Clay’s case ...................................................................................................................... 35

7.3.3 Vyricherla ......................................................................................................................... 37

7.3.4 Brisbane Water County Council ...................................................................................... 37

7.3.5 MMAL Rentals ................................................................................................................. 38

7.3.6 Boland v Yates ................................................................................................................. 38

7.3.7 Alacer Gold ...................................................................................................................... 39

7.4 ATO guidance ......................................................................................................................... 39

8 Immediately enforceable obligations to pay ............................................................................. 41

9 Specialised assets ....................................................................................................................... 43

9.1 Overview ................................................................................................................................. 43

9.2 Information .............................................................................................................................. 44

9.2.1 What is information? ........................................................................................................ 44

9.3 Is information an asset? .......................................................................................................... 44

9.3.1 Particular difficulties in valuing information ..................................................................... 45

9.3.2 Consequences of the valuation difficulties ...................................................................... 46


© Tim Kyle 2016 4

9.3.3 Approaches to valuing mining information ...................................................................... 46

9.3.4 Mining information in stamp duty cases .......................................................................... 49

9.3.5 Reconciling mining information and other information cases .......................................... 50

9.4 Goodwill .................................................................................................................................. 51

10 Potential market value reform options ...................................................................................... 54

Appendix 1 Table of cases ................................................................................................................. 56

Appendix 2 Table of market value aspects of the Resource Capital Fund III LP litigation.......... 58

Appendix 3 Table of market value aspects of the SPI PowerNet/AusNet litigation ..................... 63

Appendix 4 IGOT Review Tables of valuation-related Tax Act provisions ................................... 73


© Tim Kyle 2016 5

1 Introduction

This paper focuses on the meaning of the term “market value” for the purposes of the Income Tax

Assessment Act 1936 and the Income Tax Assessment Act 1997 (Tax Acts).

Overwhelmingly, the term takes its general law meaning in the Tax Acts.

The views expressed in this paper are the author’s personal views.

An important concept with shaky foundations

Market value has incrementally become one of the most important terms the Tax Acts: the term

appears over 500 times and performs very significant roles.

Yet, the cases reveal that determining market value for Tax Act purposes is a fraught process:

the proper approach is shaped by the vagaries of legislative context;

as Courts frequently acknowledge, valuation is an art and not a science;1

the art-like nature of valuation is borne out by violent disagreements between valuers as to

methodologies and outcomes;

case law-established valuation methods clearly diverge from the valuation guidelines in a number

of respects;

judges are often reluctant to provide meaningful guidance; and

there is significant litigation risk in market value cases.

And so this important Tax Act concept has decidedly shaky foundations.

Topics covered

Topic Section

the roles that market value performs in the Tax Acts 2

the (often mistaken) legislative assumptions underpinning the legislative use of market value:

3

the proper approach to determining market value 4

the general law meaning of market value 5

the nature of the Spencer hypothetical market 6

1 AP Energy, Tomanovic v One Australia


© Tim Kyle 2016 6

special value to the purchaser 7

immediately enforceable obligations to pay 8

specialised assets 9

potential market value reform options 10

Appendices

Appendix Topic

1 citations of cases referred to in this paper

2 table of market value aspects of the RCF litigation

3 table of market value aspects of the SPI PowerNet/AusNet litigation

4 IGOT Market Value Review tables of valuation-related Tax Act provisions


© Tim Kyle 2016 7

2 The roles that market value plays in the Tax Acts

The Inspector-General of Taxation helpfully set out in table form the Tax Act provisions that rely on

the term “market value” in schedules 2 and 3 of his September 2014 Review into the Australian

Taxation Office’s administration of valuation matters (IGOT Review).2

Those tables are set out in Appendix 4.

Four integrity-related themes can extracted from those provisions:

determining tax attributes;

allocating consideration among multiple assets;

imposing a different character for Tax Act purposes; and

determining access to particular provisions.

These themes are discussed below, together with examples of the relevant provisions.

2.1.1 Determining tax attributes

The actual consideration for almost every transaction (whether or not a cross border element is

present) is potentially susceptible to market value substitution for Tax Act purposes.

Sometimes market value substitution is self-executing. Other times market value substitution requires

non-arm’s length dealing.

self-executing market value substitution

Topic Market value substitution trigger Section

trading stock seller sells (and buyer buys) trading stock

outside the ordinary course of business

70-90, 70-95

financial arrangements financial arrangement as consideration for

provision or acquisition of a thing

230-505

direct value shifting value is shifted from one set of company or

trust equity or loan interests to another set of

interests

Division 725

indirect value shifting provisions economic benefits pass between entities for

other than market value consideration –

Division 727

2 http://igt.gov.au/files/2015/01/administration-of-valuation-matters.pdf

http://igt.gov.au/files/2015/01/administration-of-valuation-matters.pdf


© Tim Kyle 2016 8

impacting the market value of equity and

loan interests

off-market share buy-backs an off-market share buy-back price is less

than the market value of the shares would

have been if the buy-back did not occur and

was never proposed to occur

159GZZZQ(2)

non-arm’s length dealing triggered market value substitution

Topic tax attribute impacted Section

CGT asset cost base and capital proceeds 112-20, 116-30

depreciating asset tax cost and terminating value 40-180, 40-300

trading stock the buyer’s outgoing/seller’s disposal

proceeds for the trading stock

70-20

2.1.2 Allocating consideration among multiple assets

Often it is necessary for Tax Act purposes to allocate transaction consideration or other amounts among multiple assets or outgoings/expenditure.

Topic Matter Section

tax consolidation tax cost setting amount of reset cost base

assets

705-35

CGT cost and proceeds the amount that is “reasonably attributable”

to the acquisition/CGT event3

112-30, 116-40

deprecating assets the amount that is "reasonably attributable”

to depreciating assets4

40-195

general and “black hole”

deductions

“to the extent that” apportionment 8-1, 40-880

3 Despite the agnostic nature of TD 9, conventionally the “reasonably attributable” amount is based on relative market values

4 Conventionally, the “reasonably attributable” amount is based on relative market values


© Tim Kyle 2016 9

2.1.3 Imposing a different character for Tax Act purposes

Market value can also effectively impose a different tax character for Tax Act purposes.

Topic effective recharacterisation Section

direct value shifting value shifting transactions are recharacterised as taxable disposals if market value is shifted between assets of a different class or to a different taxpayer

Division 725

CGT “principal asset test” for non-residents

certain shares/trust interests owned by non-residents are characterised as taxable Australian property (TAP) where the market value of Australian taxable Australian real property (TARP) assets exceed the market

value of non-TARP assets

855-30

participation exemption CGT gains/losses made by a company in respect of shares in a foreign company are disregarded to the extent of the active foreign business asset percentage – which can be determined using the market value method

768-510(2)

thin capitalisation interest is rendered non-deductible to the extent that the average value of an entity’s debt exceeds a statutory safe harbour (subject to alternative tests)

Division 820


© Tim Kyle 2016 10

2.1.4 Determining access to particular provisions

Topic Matter Section

scrip for scrip rollover relief market value of original interest and capital proceeds must be substantially the same for certain non-arm’s length dealings

124-780(4)/(5)

small business concessions $6m maximum net asset value test

152-15/20

Division 230 $100m/$300m minimum asset thresholds

230-455


© Tim Kyle 2016 11

3 The assumptions underpinning market value

Mark Brabazon SC made this observation in relation to the s.177CB “reasonable alternative”

counterfactual which was enacted in 2013:

“Reasonableness is the darling of Parliament. It gives an appearance of objectivity and has the

cachet of moderation. Its meaning is also remarkably difficult to pin down.”5

This observation applies equally to the long-standing legislative practice of outsourcing many critical

functions to the market value concept.

This legislative practice appears to be based on a series of implicit assumptions about market value.

Those assumptions are set out in the following sections.

However, when those assumptions are tested, it is clear that they have serious flaws – and so neither

objectivity nor moderation is in fact achieved by the legislative outsourcing to market value.

It must be a bit breezy for the Emperor in his (not so) new clothes.

3.1.1 The market value of every “thing” can be determined

There is an assumption that it is possible to arrive at a market value for every “thing” that the Tax Acts

might be concerned with.

However, the need to isolate the market value of individual specialised assets in particular puts a

great deal of pressure on this assumption.

For example, in the SPI PowerNet/AusNet litigation, the Full Federal Court preferred the ATO

valuation expert’s view that the copyrighted information in 105,000 drawings – which was critical to

operating electricity transmission assets - had no market value independent of those assets.

Additional pressure on this assumption comes from the fact that the legislature has at various times

acknowledged that it may be impossible to value assets. In that regard:

If market value cannot be determined, then there is typically no legislative “plan B”.

However, there are at least two instances in the CGT provisions where the legislature

contemplated the fallacy of this critical assumption and provided a back-up plan.

If a taxpayer exchanges asset A for asset B, then the general rule is that the capital proceeds for

the CGT event is the market value of asset B: s.116-20(1).

However, the legislature contemplated that asset B “cannot be valued” – in which case the capital

proceeds are instead the market value of asset A: s.116-30(2)(a).

The mirror provision in relation to cost base is s.112-20(1)(b).

5 (2014) 43 AT Rev 150.


© Tim Kyle 2016 12

So, the legislative solution when valuation proves impossible is yet more valuation.

Joseph Heller would have appreciated the additional material.

3.1.2 Market value is a single identifiable number

The Tax Acts very clearly assume that the market value of a particular thing is a single identifiable

dollar amount.

However, determining the inputs into any given valuation methodology involves an exercise of

professional judgment. That is, subjectivity is inherently part of the valuation process.

A valuer will have a particular level of confidence about a range of inputs and so will typically report

that the value falls within the range of outcomes generated by those inputs.

That is, typically a valuer will not choose one particular set of inputs to the exclusion of all others and

produce a single value number.

But a market value range doesn’t “work” for most Tax Act purposes.

So, how is the square peg made to fit into the round hole?

It may be that the valuer has the same level of confidence about all outcomes within the valuation

range – in which case the mid-point of the range is generally chosen.

But it may be that the valuer is more confident about particular values within the range than other

values – in which case the task of arriving at a single number is more nuanced.6

The over-simplification inherent in the Tax Act single number value assumption raises two compliance

risks: proportional compliance risk and threshold compliance risk.

Proportional compliance risk

Certain tax outcomes will vary proportionately depending on where in the relevant range the single

number falls.

Determining the precise dollar amount of a capital gain is an example of a proportional outcome.

Disputes involving proportional outcomes occur particularly where the respective valuation experts

produce very different valuation ranges. For example the SPI PowerNet/AusNet litigation, the

difference in the value to be used to determine depreciation cost was hundreds of millions of dollars.

Threshold compliance risk

Other tax outcomes may depend entirely on precisely where in the relevant range market value falls.

6 The charts at Figure 1 of the IGOT Review set out a number of scenarios where there is an uneven distribution of possible

values.


© Tim Kyle 2016 13

For example, whether the company in which a non-resident is shareholder passes the principal asset

test (and so is an indirect Australian real property interest) or whether a taxpayer can access the

small business concession.

As the IGOT Review notes, even a relatively small change in market value can result in a large and

disproportionate change to a taxpayer’s tax liability.7 The worked small business concession example

shows that a mere $5,000 change in market value can result in a $232,500 additional tax liability.

Legislative provisions in this category inappropriately tend to create “all or nothing” situations because

of the failure of the drafters to understand the true nature of the valuation process.

3.1.3 Market value can be divined in a rational way

There is an assumption that market value is a rationally divined question of fact.

This would be the a valid assumption if there were only modest differences in the market value

outcomes produced by different valuers.

Put differently, this assumption would hold if 10 different valuers were asked to value a particular item

and, although unanimity was not achieved, there was a strong level of commonality in methodologies,

inputs and outcomes.

However, as we have seen in many recent cases, valuation experts can (and frequently do) produce

wildly different valuation outcomes.

That is, this assumption overstates the science and understates the art involved in valuation.

And so an intolerable amount of pressure has been brought to bear on this assumption.

3.2 Growing legislative awareness that market value is not a panacea

There is a growing recognition at policy setter level that market value is not a panacea – and

alternative legislative solutions are being implemented.

For example, the earn-out provisions deliberately adopted an income based “active asset” test for

shares rather than an asset based test. The explanatory memorandum to the relevant bill expressly

acknowledges that this choice was made as the parties put in place an earn-out precisely because

they cannot agree on the market value of that subject asset.

Presumably this thinking was also behind the income based “significant global entity” test that now

applies for MAAL as well as Part IVA penalties.

This growing legislative awareness is welcome.

But there is a long way to go if it is to have any material impact on the Tax Acts.

7 IGOT review at page 27.


© Tim Kyle 2016 14

Moreover, the use of the new approach just serves to highlight the defects of the old approach in the

earn-out context. This is because many fact patterns will not be covered by the (restrictively drafted)

earn-out provisions. Rather, those fact patterns are still stuck with the ATO’s view in TR 2007/D10

that tax outcomes are determined based on the market value of the earn-out right. The obvious

difficulty with this ATO view is that the market value of the earn-out right is derived from the market

value of the subject asset – and as noted above, the parties put in place an earn-out precisely

because they cannot agree on the market value of that subject asset.

So the ATO view just kicks the valuation can down the road.


© Tim Kyle 2016 15

4 The proper process for determining market value

Whenever a Tax Act provision requires market value to be determined, a clearly defined process

should be followed.

Departure from that process – for example, immediately outsourcing the task to a valuer – greatly

increases the risk of producing a defective outcome.

The proper process should be:

determine whether any Tax Act modifications to the definition of “market value” apply: see section

4.1;

determine whether a specific Tax Act market value rule applies: see section 4.2;

consider any ATO administrative safe harbours that apply to the provision: see section 4.3; and

apply the general law market value test, having particular regard to the impact of the provision’s

statutory context: see section 5.

4.1 The Tax Act market value definition

The term “market value” appears in the Tax Act in its defined sense.

However, the Tax Act definition of “market value” is spectacularly unhelpful:

“market value has a meaning affected by Subdivision 960-S”. [emphasis added]

Clearly it is not intended to be an exhaustive definition.

This is reinforced by the fact that Subdivision 960-S is very short and only deals with the two very

specific issues discussed below.

The s.960-400 guide to Subdivision 960-S provides as follows:

The expression "market value" is often used in this Act with its ordinary meaning.

However, in some cases that expression has a meaning affected by this Subdivision.

The Commissioner may approve methods to use for working out the market value of assets or

non-cash benefits.

GST exclusive amounts

The first issue that Subdivision 960-S deals with is the impact of GST on the market value of assets

(only).


© Tim Kyle 2016 16

Broadly, s.960-405 excises from the market value of an asset the input tax credit that the taxpayer

would be entitled to under a hypothetical acquisition.

It is an important section because it is easily overlooked and can have a material impact on the

market value of assets.

The section provides as follows:

960-405(1) The market value of an asset at a particular time is reduced by the amount of the

*input tax credit (if any) to which you would be entitled assuming that:

(a) you had *acquired the asset at that time; and

(b) the acquisition had been solely for a *creditable purpose.

960-405(2) Subsection (1) does not apply:

(a) to an asset the *supply of which cannot be a *taxable supply; or

(b) in working out the *market value of economic benefits, or of *equity or loan interests, for

the purposes of Part 3-95 (about value shifting).

Note: Some assets, such as shares, cannot be the subject of a taxable supply.

The intention is clearly for the tax market value of an asset to reflect what would be the real economic

outlay to the taxpayer (ie, net of any available input tax credit) on a hypothetical acquisition of the

asset at that time.

So, if the taxpayer (hypothetically) acquired a particular asset for $110 consideration at a particular

time and the taxpayer would have (hypothetically) been entitled to a $10 input tax credit in respect of

the acquisition, then the asset’s market value for income tax purposes is $100, and not $110.

Interestingly, the use of the term “you” appears to direct attention to the input tax credit entitlement of

a particular taxpayer. And so, if taxpayer A is registered for GST purposes, then the market value of

the particular asset would be $100. But if taxpayer B is not registered for GST purposes, then the

market value of that asset for taxpayer B would be $110.

This means that a particular asset can have a different tax market value for the two different

taxpayers.

Yet most people would intuitively think that a particular asset has one single market value. This is

also the implicit assumption referred to in section 3.1.2 above.

Disregard non-convertibility of non-cash benefits to money

Section 960-410 provides as follows:

960-410 In working out the market value of a *non-cash benefit, disregard anything that would

prevent or restrict conversion of the benefit to money.


© Tim Kyle 2016 17

The precise operation of this section can be critical in determining whether or not a share, right or

option (interest) has been acquired at a discount – and so whether the employee share scheme

provisions apply to it.

The ATO takes an expansive view of 960-410 in a number of private rulings that the section requires

vesting conditions and performance hurdles to be ignored in determining market value of the interest:

see for example the edited private ruling with authorisation number 1011690719326.

With respect, this view may read too much into the words of the section.

Vesting conditions and performance hurdles can have a significant impact on the market value of the

interest because, if they are not satisfied, the employee will not become entitled to the interest.

However, entitlement to the interest is a matter unrelated to the taxpayer’s ability to convert the

interest to money.

Rather, context indicates that the section is directed towards the kind of fact patterns considered in

Cooke & Sherden (free holiday), Tennant v Smith (qualified occupation of an employer provided

house) and Payne (airline loyalty points from employer provided travel that could only be transferred

to relatives) and to which s.21 is directed.

Having said that, s.960-410 clearly does have work to do in the ESS context. For example, it would

require that disposal restrictions be disregarded in determining the interest’s market value.

4.2 The specific Tax Act market value rules

There are various specific Tax Act rules for determining market value.

A number of them are discussed below.

The thin capitalisation regime

Various provisions in the thin capitalisation rules require the value of assets, liabilities or equity capital

to be determined.

An entity must comply with modified accounting standards in determining these values: s.820-680(1).

That is, as a compliance saving measure, determining these values is statutorily outsourced to

modified accounting standards.

Aligning tax values with values used in accounts also imposes a degree of rigour on taxpayers in

circumstances where the accounts are audited and published.

However, this legislative technique is not a complete success. The thin capitalisation provisions apply

a modified version of the accounting standards. For example, internally generated intangibles such

as brands, mastheads, publishing titles and customer lists can be recognised for thin capitalisation

purposes whereas they cannot be recognised for accounting purposes – and intangible assets that

are “recognisable” for accounting purposes can be revalued for thin capitalisation purposes in

circumstances where they cannot be revalued for accounting purposes.


© Tim Kyle 2016 18

The ATO is concerned about arbitrage opportunities arising from the lack of complete book/tax

alignment: see TA 2016/1

Division 230

Various parts of the “TOFA” provisions also outsource tax outcomes to accounting standards.

For example, movements in the accounting fair value of assets and liabilities may be

assessable/deductible under the fair value and financial reports elective methods.

Also, the s.230-455 asset value threshold is determined by applying accounting standards.

Again, one of the principal drivers for this legislative technique was its role as a compliance saving

measure and it certainly achieves that goal.

However, this legislative technique really only replaces one inherently uncertain concept (market

value) with another inherently uncertain concept (fair value).

Safe harbour amounts in the ESS provisions

As a compliance saving measure, regulations provide a safe harbour for valuing employee share

scheme interests that are unlisted rights to shares: s.83A-315 and Division 83A of the 1997 Tax Act

Regulations.

Safe harbour methodologies

An interesting development that has gone relatively unnoticed was the 2015 introduction of the

Commissioner’s power under s.960-412 to develop regulations setting out methodologies for valuing

particular assets/non-cash benefits.

A specified methodology would be a safe harbour for taxpayers as the ATO would be bound to accept

the use of that methodology in valuing the particular asset/non-cash benefit.

One approved methodology is for the purpose of determining market value eligibility for the ESS start

up provisions: in very restrictive circumstances accounting net assets can be used:

http://law.ato.gov.au/atolaw/view.htm?DocID=ITD/ESS20151/00001

There is no specific indication on the face of the legislation that the methodologies would be confined

to the ESS space. However, the explanatory memorandum to the bill that introduced s.960-410

provides as follows:

1.99 While the new approved safe harbour valuation methodology applies more broadly than

ESS, it is anticipated that the Commissioner will initially only exercise this new power with

regard to ESS arrangements for small unlisted corporate tax entities only.

Where particular methodologies are specified, this would undoubtedly be of some utility for taxpayers.

However, it should be noted that many market value cases the dispute is not over the methodology to

be applied – but rather the result of applying that methodology.

http://law.ato.gov.au/atolaw/view.htm?DocID=ITD/ESS20151/00001


© Tim Kyle 2016 19

4.3 ATO administrative safe harbours

The ATO has produced the following elective administrative safe harbours as a compliance saving

measure:

s.70-110 value of goods taken from trading stock: TD 2014/2 and PS LA 2004/3 (GA)

fuel tax credit apportionment percentages: PCG 2016/11 and PS LA 2013/4 (GA)

valuation shortcuts for ACA pushdown: Part H of the ATO’s market value guidelines:

https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-

loss/Market-valuation-for-tax-purposes/

This represents a disappointingly small number of administrative safe harbours in the context of the

extensive Tax Act use of market value.

Moreover, the valuation shortcuts for ACA pushdown (while welcome) are deliberately very limited in

their scope and are subject to a number of constraints.

4.4 Where no specific Tax Act rule applies

Few Tax Act provisions are impacted by specific Tax Act market value rules or ATO administrative

safe harbours.

Rather, for the overwhelming majority of Tax Act provisions, consistent with the note to Subdivision

960-S and well-established principles of statutory construction, market value takes its “ordinary” (ie,

general law) meaning.

The general law meaning of market value is discussed in section 5 below.

https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Market-valuation-for-tax-purposes/

https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Market-valuation-for-tax-purposes/


© Tim Kyle 2016 20

5 The general law meaning of market value

5.1 Overview

This section:

considers the very different contexts in which market value cases have arisen;

reviews the Spencer hypothetical market;

discusses some of the practical challenges in applying the Spencer test; and

highlights the importance of considering legislative context in applying the Spencer test.

5.2 Market value cases in different contexts

Market value cases have arisen in a range of different contexts.

However, despite the different contexts, over time the Spencer test has become accepted as the

universal legal test for determining market value under the general law.

Government compulsory acquisition compensation cases

There is a considerable body of case law on compulsory acquisition cases.

These cases arise where a Government authority compulsorily acquires an owner’s asset and the

authority is charged with paying the market value of the asset.

Spencer is a Government compulsory acquisition case.

Contractual disputes

A body of case law has developed dealing with contractual arrangements requiring market value

consideration.

Often a shareholders agreement will have mechanisms in place designed to ensure that an exiting

shareholder receives market value consideration for their shares.

Examples of disputes involving these contractual arrangements include MMAL Rentals and

Tomanovic v One Australia.


© Tim Kyle 2016 21

Revenue law cases

Market value has become a key concept in a wide range of revenue cases, including income tax,

GST, stamp duty, council rates and death duties.

The body of case law on market value in a revenue law context is expanding rapidly.

5.3 Spencer’s case

Much has been written about Spencer. This section is not a detailed analysis of the case - rather, it is

intended to highlight key aspects of the decision.

Context

Spencer is a Government compulsory acquisition compensation case.

Facts

The facts can be summarised as follows:

Mr Spencer owned a large tract of land in Fremantle near the harbour and railway line;

on 1 January 1905 the Commonwealth resumed the land in order to build a fort;

the Commonwealth was required by statute to pay Spencer compensation effectively by reference

to the “value” of the land as at 1 January 1905; and

at first instance, Higgins J held that the “true value” of the land was £2,250 - on the basis that that

is what could have realised by subdividing and selling the land to be developed for workers

cottages of the type already in the area.

Issue

Was the compensation payable:

£10,000 as Spencer claimed - on the basis that the land could potentially be used as a factory “or

some other enterprise requiring considerable space”; or

£3,000 plus interest, being the amount that the Commonwealth “brought into court”?

Held

In summary, the High Court held that:

the land was undoubtedly suitable for use as a factory;


© Tim Kyle 2016 22

however, the value of the land could not take into account its potential use as a factory because

there was no evidence that any demand for a factory at the site existed at the relevant time;

the evidence only supported use for subdivision and sale to be developed for workers cottages;

and

Spencer had not discharged the onus of proving that he was entitled to more than the £3,000 that

the Commonwealth “brought into court”.

Reasoning

The leading judgments are those of Griffiths CJ and Isaacs J.

In summary:

The value of an item is readily ascertainable where there are many items of the same kind and

frequent sales of them.

However, the position is different with other items: eg, “land in a new port in a new state where the

area of land is limited and each piece of land differs in many of its characteristics from the rest.”

It might be that no-one is willing to buy the land on a particular day.

But clearly that does not mean that the land has no value.

Rather, in that case, the court must put itself as far as possible in the position of a hypothetical

purchaser and a hypothetical vendor and determine the price at which a sale of the asset would

be struck.

The bargain is to be based on five assumptions:

Assumption Observations

1 the parties do actually reach agreement on price

as Isaacs J put it: “we must assume the owner would be willing to take the best he can get”

2 both parties are “prudent” and willing but not anxious to enter into the transaction

for example, a forced sale scenario must be ignored

3 the hypothetical purchaser will put the land to its highest and best use

whether that is the current use or some other use for which the property is suited

4 both parties have full knowledge of all the relevant prevailing circumstances

per Isaacs J: “ … they are perfectly acquainted with the [asset], and cognizant with all circumstances which might affect its value either advantageously or prejudicially including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for the asset and the likelihood as then appearing to persons best capable of forming an opinion of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the [asset]”


© Tim Kyle 2016 23

5 the value is to be unaffected by hindsight

any events occurring after the test time must be ignored

5.4 Practical challenges in applying the Spencer test

5.4.1 Overview

Certain legal tests are remarkably simple on their face, yet are incredibly difficult to apply in practice.

Dixon J’s revenue/capital distinction test in Sun Newspapers is the best known.

And the Spencer market value test is also in this category.

As Griffiths CJ himself put it, with masterful understatement:

“[i]t is, no doubt, very difficult to answer such a question, and any answer must be to some

extent conjectural”.

Over a century after Spencer was decided, the judicial approach to applying the test can still only be

described as in relatively early stages of development: there are numerous unresolved issues and a

dearth of meaningful guidance.

5.4.2 How do Courts approach the Spencer market value test?

Market value cases produce particular challenges for judges.

Typically judges are not professional valuers.

Yet both sides will typically lead very detailed evidence from experts as to their opinion of the market

value.

Almost inevitably, the experts for the respective parties will produce very different market value

amounts – and each expert ostensibly has a plausible position.

There are generally four potential outcomes from market value cases:

The most common outcome is that the court will accept one expert’s approach. The acceptance

may be qualified, but that approach is considered superior to the approach taken by the other

experts (ie, the Court simply “picks a horse”).

Where the Court is not satisfied with the approach taken by the experts, the Court will typically

either:

find that the requisite onus of proof has not been discharged – which typically results in the

taxpayer losing in income tax cases; or


© Tim Kyle 2016 24

remit the matter to the lower Court/tribunal to re-determine market value: eg, the SPI

PowerNet/AusNet Full Federal Court decision.

Sometimes (although now very rarely) judges arrive at market value independently:8

they may make adjustments to the approach advocated by valuer experts in order to arrive at

a result they find more sensible: eg, Edmonds J in RCF at first instance; or

they may rely on other (non-valuer) evidence in order to achieve a sensible result (eg, MMAL

Rentals, Collis and Case 2/99).

But whichever approach a Court takes, they know that the dissatisfied party may well appeal – and

they also know that appeal courts have demonstrated little compunction in overturning market value

decisions of lower courts.

Indeed, in many cases, appeal courts have been highly critical of the lower court decision. See for

example the Full Federal Court decisions in RCF and SPI PowerNet/AusNet.

5.4.3 MMAL Rentals

Facts

MMAL Rentals Pty Limited (M) owned 80% of T, a company carrying on the Thrifty car rental

business;

Bruning (B) was managing director of the business and held 20% of T;

T was in losses and was significantly indebted to M, the controlling shareholder, so that the

prospects of receiving dividends on B’s 20% T shareholding was remote;

M exercised an option in the management agreement to buy the 20% for its “fair market value”;

M had recently offered $535,000 for B’s shareholding – an offer that B had rejected;

M’s valuer asserted an approximately $60,000 valuation using a net asset methodology (which

the first instance judge described as being “as useful as valuing the Sydney Harbour Bridge on

the basis of its scrap metal value”); and

B’s valuer asserted a $6m value based on what the Court found were unrealistic assumptions.

Held

The value was $535,000.

8 This used to be how most cases were decided. But it has become much less common in recent years with the growth of

expert valuation evidence.


© Tim Kyle 2016 25

Reasoning

The first instance judge’s determination was upheld.

M’s recent offer was a “signpost” with probative value.

The first instance judge was right to take into account the “special value” to M arising from acquiring

100% control by retiring B’s minority interest. And so no discount applied on the basis that the shares

were only a minority interest.

5.5 Legislative context is critical

Unfortunately, there is no universally applicable market value principle/methodology for income tax

purposes (or indeed for any purposes).

Rather, the market value of a particular thing can vary depending on the statutory context of the

relevant inquiry.

The challenges that this presents were neatly captured by the IGOT Review:

2.42 Furthermore, laws imposing valuation do not necessarily lend themselves to a common

or unified valuation approach, even if one standard of value is commonly used. This

difference in approach arises from the difference in statutory schemes. For example, the Full

Federal Court recently cited with approval the following comments made by the New South

Wales Court of Appeal in Leichhardt Municipal Council v Roads and Traffic Authority of New

South Wales:

Matters of valuation turn in large measure on the precise statutory scheme. These

schemes differ from one area of discourse to another. It is always important to

commence with the precise words of the statute. There appears to be a tendency to

take a judgment about one statutory regime and classify its conclusion as a “valuation

principle” which is applied to any process of valuation, no matter how different the

statutory regime may be.

The need to determine the value of assets arises in many different legal contexts. It is

the context which determines the relevant principles of valuation to be applied. An

assumption that there is in existence some abstract body of “valuation principles”

applicable in all contexts, irrespective of the statutory scheme or contractual

provision, is liable to lead to error. Judgments in one context may prove instructive by

way of an analogy when dealing with another context. Nevertheless, statutory

differences must be borne in mind. The ultimate task must always come back to the

application of the principles in the particular context…

The impact of legislative context on market value is demonstrated in the cases discussed in the

following sections.


© Tim Kyle 2016 26

5.5.1 RCF

In RCF, whether the taxpayer’s St Barbara Mines Limited (SBM) shares were taxable Australian

property (TAP) ultimately turned on whether the s.855-30 principal asset test required that SBM’s

assets be valued assuming that they were sold either:

under a series of stand-alone sales; or

in a single simultaneous sale.

At first instance

Edmonds J held that the context of s.855-30 required that each asset be valued on the basis that it

was sold on a stand-alone basis, separately from the other assets and using different valuation

methods depending on the asset.

His Honour saw particular significance in the use of the plural “market values” in the phrase “sum of

the market values of the entity’s assets”.

This approach produced a very large value for mining information. Because both parties determined

the market value of the mining rights on a residual basis, the consequence of this approach was that

the taxpayer’s SBM shares did not pass the principal asset test and so were not TAP.

Full Federal Court

The Full Federal Court held instead that the assets were to be valued on the basis that they were

offered for sale as a bundle in one single transaction to a single hypothetical purchaser.

This issue was critical to the s.855-30 outcome – yet the reasoning in both judgments on this point

could be criticised as being poorly developed and far from compelling.

5.5.2 Case 2/99

It may be that an asset is capable of being sold in a number of different markets.

For example, trading stock is typically purchased in the wholesale market and sold in the retail market

at very different prices.

Where trading stock is sold outside the ordinary course of the seller’s business, the actual sale price

is disregarded and the trading stock’s market value is substituted - for both buyer and seller - under

s.70-90 and s.70-95 respectively.

The interesting issue considered in Case 2/99 was which market was the appropriate market for

determining the market value of trading stock.

Facts

A owned a vacuum cleaner spare parts business which got into financial trouble

A had bought the trading stock in the wholesale market for $2m


© Tim Kyle 2016 27

A receiver sold the business assets (comprising principally trade debts and trading stock) to B

following a well-run public tender

The sale was a management buy-out

The sale was accepted as being an arm’s length dealing: both sides were legally represented and

the purchase took a number of months to complete while different offers were considered

The main focus of negotiations was the total price. However, at settlement, a purchase price of

$150,000 was allocated to the trading stock in the sale contract. There was no evidence as to

how that amount was arrived at – it seems to have been the balancing item (ie, total price less

face value of trade debts)

B claimed a $2m deduction despite only outlaying $150,000 on the basis that this was the market

value of the trading stock and so the then s.70-95 equivalent substituted that amount for the

actual amount paid

Issue

Was the market value of the trading stock:

its $2m actual purchase price in the wholesale market?

the $150,000 actual purchase price under the receiver sale?

the higher amount that could have been realised on a sale of the trading stock into the retail

market?

Held

Evidence from a registered valuer as to a 35% discount on A’s $2m purchase price was

dismissed as “a simple guess” with no evidentiary value.

In the context of the trading stock provisions, the relevant market was the particular market in

which the trading stock was actually sold – ie, by a receiver (as opposed to the retail or wholesale

market).

A critical aspect of the legislative context is that market value substitution also applies to both

buyer and seller – and it would be inappropriate to substitute a different market and impose dire

consequences on a seller who is acting at arm’s length (ie, the seller would be taxed on an

amount far in excess of the cash actually allocated to the sale of trading stock).


© Tim Kyle 2016 28

6 The nature of the Spencer hypothetical market

Where there is no readily identifiable actual market (ie, involving multiple transactions and essentially

homogenous items), Spencer creates a hypothetical market operating under specific assumptions.

The Spencer hypothetical market participants are a hypothetical vendor and a hypothetical potential

purchaser.

At first blush, this hypothetical market may appear to take no account of actual transactions between

actual vendors and purchasers.

However, it is clear from case law that the hypothetical market is not a pure hypothetical abstraction.

Particular issues in this hybrid approach include:

the extent to which actual transactions can determine market value: see section 6.1; and

the extent to which evidence of actual purchaser demand can determine market value: see

section 6.2.

6.1 What role do actual transactions play in the Spencer test?

Where neither party is anxious and the other Spencer assumptions are satisfied, then Courts

generally proceed on the basis that the price arrived at under an arm’s length dealing represents

market value consideration.9

That is, evidence of actual transactions informs (and may even determine) the relevant market value.

The ATO accepts this as a general proposition in rulings10

and has argued it many times in market

value cases.

On that basis, the Spencer market should be seen as a hybrid market rather than a purely

hypothetical market.

Indeed arguments that the parties to an actual transaction “are too close to the transaction” and so an

independent valuation should be preferred to the actual transaction price were quickly dispatched in

Excellar.

9 For example, McLelland CJ. in Solomon Pacific Resources NV v Acacia Resources Ltd (No 2) (1996) 14 ACLC 637 at 684” 'In

the case of an honest arms-length transaction, it could generally be presumed that no discrepancy (such as between the value

of the Solpac shares to be acquired and the fair value of the Acacia shares to be issued) would exist, and it could not be

supposed that one party would be willing to acquire property for a consideration significantly greater than the perceived value to

the acquirer of the property acquired.’

See also Case 2/99 at [25]: ‘In relation to a particular market, the best evidence of the market price prevailing is what the

parties dealing with each other at arm’s length at the conclusion of a hard headed business negotiation have agreed upon.’

Sharp J in Alacer Gold at [250]: ‘Where there are no abnormalities affecting a market, the price at which property changes

hands in the ordinary course of business and the market is usually its true value; Nischu at 443, Perpetual at 579 and

Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co (SA) Ltd (1947) 74 CLR 358 at 361.’ 10

See GSTR 2001/6 at paragraph 19


© Tim Kyle 2016 29

However, the Spencer hypothetical market is governed by particular assumptions.

Where the circumstances of an actual transaction are inconsistent with one or more of those

assumptions, then the actual transaction will not produce market value consideration.

For example, the parties may deal with each other at arm’s length, but one party is “anxious” – in

which case the actual consideration will not be market value consideration.

6.2 Aggregated disposals

The hypothetical market test has a highest and best use requirement.

The highest and best use – and so the market value – of an asset may well be different depending on

whether the asset is properly considered:

on a stand-alone basis; or

in combination with other related assets.

This is because a combination approach may open up other potential uses that do not apply on a

stand-alone approach.

But which approach is correct?

Case law establishes that the answer is that a combination approach is the correct approach -

provided that there is evidence that there was demand for that higher/best use at the relevant time.

6.2.1 Spencer

It is tolerably clear from Spencer that only the absence of evidence showing demand for the land to

be used as a factory “or some other enterprise requiring considerable space” prevented the

taxpayer’s £10,000 compensation claim from being successful.

6.2.2 Hustlers

In Hustlers, it was necessary to value three adjoining parcels of land on the Bathurst main street.

The Court rejected valuations prepared on a stand-alone basis.

The greatest value for the parcels would have been derived from the parcels being used for a retail

shop (eg, a Coles supermarket). However, the Court found no evidence of any demand for this use.

Rather, the value was instead derived from their use as a commercial business (eg, CBA or MLC

branch) – as there was evidence of demand for this use.


© Tim Kyle 2016 30

6.2.3 Collis

Facts

C owned 4 parcels of adjoining land of equal size fronting the same road

C had purchased the 4th parcel recently for $200,000

All 4 parcels were sold together at auction under an (overall) arm’s length dealing for one single

amount of $1.43m

C would be taxed on the amount by which the market value of the 4th parcel exceeded $200,000

Issue

Was the market value of the 4th parcel at the time of sale to be determined:

on a stand-alone basis - if so, the highest and best use was as a residential home.

on a combination basis - If so, the highest and best use of the 4 parcels was as an office

development.

Held

The combination basis was the appropriate valuation basis because there was evidence of a demand

for land of such an area for office development

As a result, the market value of the 4th parcel was $357,000 – being ¼ of the total purchase price.

6.2.4 RCF

Where a single seller sells multiple assets, the advantages accruing from that asset combination may

mean that the total sale price is higher than if the assets were sold under separate arrangements to

different purchasers.

For example, there is a clear difference between the expected sale proceeds of a business on a going

concern basis and on a break-up of the business.

RCF wrestled with this issue in the context of the s.855-30 principal asset test, with the Full Federal

Court holding that the legislative context required an assumed simultaneous sale of the SBM assets.

It should be noted that Edmonds J arrived at a similar position at first instance with highest and best

use assumption that he applied effectively aggregating the disposal of the mining rights and mining

information.


© Tim Kyle 2016 31

6.2.5 Miley

Facts

Miley was one of three equal shareholders in a company

the three shareholders sold their shares in the company to a single purchaser for $17.7m under

an arm’s length transaction – so that each shareholder received $5.9m sale proceeds;

Miley would be eligible for the small business concession provided the market value of his shares,

determined just before the CGT event, was not more than $5.81m (ie, an amount less than

Miley’s $5.9m sale proceeds).

Held

The AAT held that:

the $5.9m sale proceeds reflected a 1/3 share of the control premium arising from the sale of

100% of the company;

however, considered in isolation, Miley’s shareholding represented only a 1/3 interest in the

company – and so did not confer control of the company;

accordingly, a 20% control premium was to be deducted from the $5.9m sale proceeds to arrive at

a general law market value of $4.9m for Miley’s shareholding.

Miley is currently on appeal.

Observations

There may well be many circumstances in which the market value of a minority shareholding should

not reflect a control premium. One minority shareholder selling to another minority shareholder

without the purchaser obtaining control of the company would be an example.

But it would be inappropriate in other circumstances. By way of example:

as we saw in MMAL Rentals, the Court held that the market value of a minority shareholding to be

acquired by a majority shareholder reflects the special value to the majority shareholder of retiring

the minority interest; and

when a listed company takeover bid is announced, the target’s trading price typically increases to

reflect the control premium expected to paid by the bidder – and that increased trading price

applies to minority shareholdings.

Moreover, in Miley, it can be presumed that, just before the CGT event, there would have been

evidence of the purchaser’s intention to take over the company and pay a control premium – as well

as evidence of the three minority shareholders collaborating to effect a sale on that basis.


© Tim Kyle 2016 32

And so, with respect, in Miley the hypothetical nature of the Spencer market may have been taken too

literally.

Rather, having regard to the cases referred to above, evidence of actual demand for the shares

should inform the market value analysis. When that is done, there is a clear basis for concluding that

the market value of Miley’s shareholding just before the CGT event was $5.9m.


© Tim Kyle 2016 33

7 Special value to the purchaser

7.1 Overview

Valuers apply the international valuation standards (IVS).

The IVS formulation of market value is remarkably similar to the Spencer hypothetical market test:

The estimated amount [see section 7.2 below] for which an asset or liability should exchange

on the valuation date between a willing buyer and willing seller in an arm’s length transaction,

after proper marketing and where the parties had each acted knowledgeably, prudently and

without compulsion.

Because the two tests are so similar, the Spencer test and the IVS market value formulation to

produce similar amounts in most cases.

However, the two disciplines diverge in relation to a number of issues.

One of the points of divergence is in relation to special value to the purchaser.

Special value arises where an asset has particular value to one particular buyer that is above and

beyond the value to all other buyers. The classic example is a parcel of land that the neighbour wants

to acquire (eg, in order to expand their business operations).

The two tests produce divergent outcomes because the IVS rigidly respect the purely hypothetical

nature of the assumed market, whereas - as was seen in section 6 above - the Spencer test is applied

on a hybrid basis by taking into account evidence of real world matters.

7.2 Market value under the IVS

The IVS are very clear that market value excludes special value for valuation purposes.

Paragraph 30 of the 2013 IVS Frameworks and Requirements provides that:

The definition of market value shall be applied in accordance with the following conceptual

framework:

(a) the “estimated amount” refers to a price expressed in terms of money payable for the

asset in an arm’s length transaction. … This estimate specifically excludes an

estimated price inflated or deflated by special terms or circumstances such as

atypical financing, sale and leaseback arrangements, special considerations or

concessions granted by anyone associated with the sale, or any element of special

value. [emphasis added]

Special value is defined as follows:


© Tim Kyle 2016 34

An amount that reflects particular attributes of an asset that are only of value to a special

purchaser.

Special purchaser is defined as follows:

A particular buyer for whom a particular asset has special value because of advantages

arising from its ownership that would not be available to other buyers in a market.

Paragraphs 45 and 46 provide as follows:

Special value can arise where an asset has attributes that make it more attractive to a

particular buyer than any other buyers in a market. These attributes can include the physical,

geographic, economic or legal characteristics of an asset. Market value requires the disregard

of any element of special value because at any given date it is only assumed that there is a

willing buyer, not a particular willing buyer.

When special value is identified, it should be reported and clearly distinguished from market

value.

7.3 The case law position on special value

The argument for excluding special value from market value is that the neighbour is properly

characterised as an anxious buyer and so is discounted in applying the Spencer test.

The argument for including special value in market value is that doing so merely reflects the intended

operation of one or more of the following express Spencer assumptions that apply to the hypothetical

market:

all purchasers have full knowledge of the prevailing circumstances, including “the then present

demand for the asset”; and

the vendor is willing but not anxious so knows of particular appeal to the purchaser; and

the hypothetical purchaser will put the asset to its highest and best use.

There is significant case law support for the proposition that market value reflects special value to a

particular purchaser. An overview of that case law is provided below.

On this issue, valuers are much more disciplined than judges in preserving the intellectual purity of the

hypothetical market.


© Tim Kyle 2016 35

7.3.1 The Marks article

The most comprehensive technical article addressing special value in a legal and tax context is

“Valuation Principles in the Income Tax Assessment Act” by Professor Bernard Marks of Bond

University.11

After a detailed survey of case law across a range of jurisdictions, Marks concludes that, to exclude

special value from market value “especially for the purposes of the application of the ITAA is incorrect

– indeed, it is contrary to well developed judicial doctrine in Australia, the United Kingdom and

Canada”.

In particular, Marks concludes that:

… the proposition that the special value which a person can obtain from an asset because of

its special adaptability or usefulness or because of the synergistic advantages is excluded

from market value cannot, on any proper analysis of the relevant law, be sustained. The last

time an appellate court directly and definitively supported that proposition was in 1898 [which

was subsequently] decisively overruled in Robinson Bros (Brewers) Limited v Durham County

Assessment Committee by the Court of Appeal in 193712

and the House of Lords the

following year.13

It is submitted that, on proper consideration, an Australian court would both quickly and

decisively recognise … that the exclusion of special value from market value in the

hypothetical market test was an ‘economic paradox’ and a ‘contradiction in terms’.

Marks’s article is over 20 years old. However, cases decided subsequently only fortify his conclusion.

The following sections contain a selection of the cases considered by Marks as well as cases decided

subsequently.

7.3.2 Clay’s case

Clay’s case is a UK land tax case.14

Facts

C owned land which was subject to land tax based on its “gross value”

gross value was defined in a similar way to the Spencer test

if used as a private residence, the land had a value of £750

however, the land was located adjacent to a nurses home

11 Bond Law Review Vol 8, Issue 2, 1996. Available at http://epublications.bond.edu.au/blr/vol8/iss2/2

12 [1937] 2 KB 445.

13 [1938] AC 321.

14 Inland Revenue Commissioners v Clay [1914] 3 KB 466


© Tim Kyle 2016 36

there was evidence that the nurses home was willing to pay £1000 (unlike Spencer where there

was no evidence of demand for the land to be used as a factory)

Held

the gross value of the land was £1000, not £750

Reasoning

there is no basis for excluding from the market value of an asset the price that a special purchaser

is prepared to pay for it

Relevant quotes

I can see no ground for excluding from consideration the fact that the property is so situate that to

one or more persons it presents greater attractions than to anybody else. The house or the land

may immediately adjoin one or more landowners likely to offer more than the property would be

worth to anybody else. This is a fact which cannot be disregarded …15

An “open market” sale of property “in its then condition” presupposes a knowledge of its situation

with all surrounding circumstances. To say that a small farm in the middle of a wealthy

landowner’s estate is to be valued without reference to the fact that he will probably be willing to

pay a large price, but solely with reference to its ordinary agricultural value, seems to me absurd.

If the landowner does not at the moment buy, land brokers or speculators will give more than its

purely agricultural value with a view to reselling it at a profit to the landowner.16

The Solicitor-General contended that as the section said “if sold at the time in the open market”,

the price which only one particular buyer was prepared to pay must be excluded from all

consideration; it might possibly be a fancy price which had no relation to market price; that a

reference to open market shewed that the statute referred to a current market price of land, a

price which one or more valuers might determine to be the market value of the land.

In my opinion this contention is unsound. A value, ascertained by reference to the amount

obtainable in an open market, shews an intention to include every possible purchaser … it is

common knowledge … that when the fact becomes known that one probable buyer desires to

obtain any property, that raises the general price or value of the thing in the market. Not only is

the probable buyer a competitor in the market, but other persons, such as property brokers,

compete in the market for what they know another person wants, with a view to a resale to him at

an enhanced price, so as to realize a profit. A vendor desiring to realize any land would ordinarily

give full publicity to all facts within his knowledge likely to enhance the price.17

[There is an] important question of principle in dispute … The Crown contends that in estimating

the gross value of land … I must exclude the price which one particular buyer will give because of

his particular need; that this is not the price in “the open market”; and that the willing seller must

be willing to sell at a market price, not a fancy price. The Solicitor-General relied on the course of

15 Lord Cozens-Hardy MR at p472

16 ibid

17 Swinfen Eady LJ at p474-475:


© Tim Kyle 2016 37

authorities summarized in Lucas … that in assessing compensation … for compulsory purchase

you cannot consider the special need of the compulsory purchaser; the existence of the scheme

cannot enhance the value of the lands to be purchased under it. This is true, but it is also true

that if there are other possible purchasers besides the compulsory purchaser, even in such a

case the competition of special needs may be taken into account in fixing the compensation to the

vendor … [the vendor] is not required to exclude the principal bidder from his market, because

that principal bidder wants the house [more] than any one else and will therefore give more for it

… the obvious business way to look at the transaction [is that] I cannot exclude from the “open

market” the principal buyer, though for a genuine business reason he will pay a price higher than

others.18

7.3.3 Vyricherla

Vyricherla is a Privy Council resumption compensation case.

The facts are complex and not ultimately relevant.

What is relevant is the following Lord Romer quote at 314 which was cited with approved in several

High Court decisions:19

Take as an example the case of an owner of a vacant land that adjoins his factory. The land

possessed the potentiality of being profitably used for an extension of the factory. But the

owner is the only person who can turn that potentiality to account.

In valuing the land, however, as between him and a willing purchaser, the value to him of the

potentiality would necessarily have to be included.

7.3.4 Brisbane Water County Council

In Brisbane Water County Council, Waddell J held that:

… the ordinary meaning of the term “market value” is the best price which may reasonably be

obtained for the property to be valued if sold in the general market. The cases cited indicate

that where the “value” of an item of property is to be ascertained, this means its value in the

general market with three qualifications. Firstly, if there is no general market, as in the case of

shares in a private company, such a market is to be assumed. Secondly, all possible

purchasers are to be taken into account, even a purchaser prepared for his own reasons to

pay a fancy price. [emphasis added]

18 Scrutton J at p348-349

19 Geita Sebea v Territory of Papua (1941) 67 CLR 544; McClintock v Cth (1947) 75 CLR 1; Nelungaloo Pty Ltd v Cth (1948) 75

CLR 495; Cth v Arklay (1952) 87 CLR 159; Turner v Minister for Public Instruction (1956) 95 CLR 245; Collins v Lingstone Shire

Council (1972) 127 CLR 477; Brisbane City Council v Valuer-General (Qld) (1978) 140 CLR 41.


© Tim Kyle 2016 38

7.3.5 MMAL Rentals

The facts in MMAL Rentals are set out in section 5.4.3 above.

A strong NSW Court of Appeal bench (Spigelman CJ, with whom Mason P and Hodgson JA agreed)

held that the value of the Thrifty shares had to take into account the special potentiality to MMAL (the

80% shareholder) of preventing another minority shareholder from acquiring those shares (eg for

greenmail purposes).

This was because special potentiality (ie, special value) to a particular purchaser should not be

excluded from the exchange value test of market value even where that purchaser is the only

purchaser. That is, to exclude a special purchaser would be to contravene the Spencer approach,

and the Spencer approach properly included such a special purchaser.

Spigelman CJ said:

[A special purchaser] represents the operation of a market and does so even if called

greenmail. This is not an exception to the exchange bargain test established by Spencer’s

case. It is an application of the test involving the determination of how a willing vendor of a

minority interest would behave … It is well-established that if property has some special

potentiality which only one person would buy, it is to be valued on the basis of a notional sale

to that person. The property is not valueless or diminished in value because there would be

no other buyers. [emphasis added]

The Court of Appeal disposed of the proceedings by applying Spencer, and so the application of the

Clay principle as part of the Spencer exchange value test is critical to the ratio of this case.

7.3.6 Boland v Yates

One of the issues in Boland v Yates was the impact of information on the market value of particular

property.

Callinan J at [274] observed that:

Any vendor who failed to capitalise on this work by not extolling to a purchaser its

consequential, demonstrable, realisable potential would be highly imprudent. And any

reasonable purchaser would expect, and know that the price would reflect this potential. It is

not a case of the purchaser's buying, as it were, the plans and the work done in respect of

proving up the potential as one of the examples given by the Full Federal Court [in Yates

Property Corporation v Boland (1998) 85 FCR 84] would suggest. It is merely that, to use the

language of Griffith CJ in Spencer's case, each party to the transaction should be regarded as

being fully conversant, or as Isaacs J said, perfectly acquainted with the subject, that is to say

the subject land with all of its potential. It follows that the more work, the more proving up that

is done by the vendor before the sale, the more any uncertainty as to the realisation of the

potential will be reduced, and the higher the price will be. This fundamental concept the Full

Federal Court touched upon in the passages I have quoted but failed to apply. What was

described as special value by the Full Federal Court and by Handley JA in the Court of

Appeal of New South Wales as the ‘head start’ advantage was no more than an element of


© Tim Kyle 2016 39

the highest and best use of the land and a factor to be taken into account in assessing its

value on that basis. A purchaser who made himself or herself conversant or perfectly

acquainted with the property in the way in which he or she should be taken to do so as

contemplated by this court in Spencer's case would have been in no inferior position to exploit

the planning and building approvals, the clearing work that had been done and the

investigation of the demand for licences than the respondent. [emphasis added]

7.3.7 Alacer Gold

Alacer Gold is a WA State Administrative Tribunal landholder duty decision.

Judge T Sharp (deputy President) held that:

253 There was also discussion amongst the expert witnesses about a 'special purchaser'. A

'special purchaser' is one prepared to offer more than others. Despite a view expressed by Mr

Hughes to the contrary, a special purchaser is not to be disregarded for the purpose of

ascertaining market value. Special value to the purchaser, as well as to the seller, contributes

to the market value; Western Australian Planning Commission v Kelly [2007] WASCA 160 at

[33] [35]. [emphasis added]

254 It follows that where there is an actual sale at the relevant date under which a price has

been paid for indirect ownership of the land and chattels in issue, that price will represent the

value of that land and those chattels unless there is evidence to support the proposition that

this test of value does not satisfy the Spencer test.

7.4 ATO guidance

More specifically, the ATO guidelines on market valuation for tax purposes (ATO Market Value

Guidelines)20

provide as follows in relation to special value:

It is sometimes argued that an asset has special value to a particular buyer. Usually this is not

relevant in deriving a market value. Where there is clear evidence that the special value is

known or available to the wider market, this would be reflected in an objective valuation of the

asset.

However, even where the seller knows that you value the item in a special way, this usually

only means that the item will sell (and the market value will be) at the higher end of the usual

market value range. On the other hand, if two or more hypothetical purchasers were assumed

to exist, both having a special use for the item, the special value may be reflected in the

market value.

If a special value is known and available only to one potential buyer and not known or

available to the wider market, it will not be reflected in market value. [ATO’s emphasis]

Various aspects of these paragraphs are hard to follow. Nevertheless, it is clear that:

the ATO accepts that general law market value is capable of including special value; and

20 https://www.ato.gov.au/General/Employee-share-schemes/In-detail/Market-value/Market-valuation-for-tax-purposes/

https://www.ato.gov.au/General/Employee-share-schemes/In-detail/Market-value/Market-valuation-for-tax-purposes/


© Tim Kyle 2016 40

the ATO focuses on the need for evidence of the special value to the particular purchaser in order

for that to be the case.

The ATO Market Value Guidelines align with case law up to this point.

However, the ATO very clearly considers that special value can only be included in general law

market value if the evidence of special value to the particular purchaser is “known or available to the

wider market”.

No authority is cited for that proposition.

If there are cases that provide support for the proposition then they should be cited.

Otherwise, the ATO Market Value Guidelines should be updated to remove this qualification.


© Tim Kyle 2016 41

8 Immediately enforceable obligations to pay

Another interesting divergence between general law market value and the approach taken by valuers

relates to immediately enforceable obligations to pay.

To illustrate:

A sells an asset to B

the $100 purchase price is left outstanding

it is a non-interest bearing immediately enforceable obligation for B to pay A (ie, A can demand

that B pay A the $100 at any time)

If B’s creditworthiness is questionable, then a valuer’s natural inclination would be to conclude that the

market value of A’s right is less (potentially even substantially less) than its $100 face value.

However, Edmonds J held in Quality Publications that the general law market value of an immediately

enforceable obligation to pay is its face value.

Simplified facts

QP was a company, wholly owned by Mr & Mrs Canty.

QP carried on the “Property Showcase” magazine publishing business.

HP was a unit trust that was wholly owned by the Fairfax group.

QP transferred the business to HP. The consideration was expressed to be $4.1m.

The Canty family trust subscribed for 45% of HP’s units (and 45% of the shares in the trustee).

The consideration was expressed to be $4m.

The purchaser directed the family trust to pay the $4.1m subscription amount directly to QP “on

behalf of HP” (the direction was contemplated by the asset sale agreement and required by the

subscription agreement)

It was accepted that the family trust owed QP $4.1m as a consequence of the direction to pay.

The asset sale constituted CGT event A1 for QP but was omitted from QP’s tax return.

The ATO issued QP an amended assessment on the basis that QP’s capital proceeds were

$4.1m.


© Tim Kyle 2016 42

Issue

Were QP’s capital proceeds from the asset sale money or property (other than money)?

If the capital proceeds were property other than money, then it was necessary to determine the

market value of that property.

Held

Edmonds J concluded that the capital proceeds were money – and so the discussion on the market

value of the immediately enforceable obligation to pay are obiter.

Nevertheless, His Honour turned significant attention to the issue.

After surveying a wide range of case law, he concluded that the “clear weight of authority” establishes

that (unless the obligation is “merely colourable”):

the general law market value of an immediately enforceable obligation to pay an amount of money

is equal to its face value; and

issues of whether the obligor is able to pay are not relevant to general law market value.

The ATO should revisit paragraphs 78 and following of TR 96/14 which reject the proposition that

market value necessarily equals face value in the traditional security contexts.


© Tim Kyle 2016 43

9 Specialised assets

9.1 Overview

In valuation terms, “specialised assets” are assets of an enterprise that are typically only sold when

the enterprise as a whole is sold.

Information and goodwill are the classic examples of specialised assets and they are discussed in

sections 9.2 and 9.3 respectively.

Because specialised assets are not typically sold on a stand-alone basis, there are typically no

(actual) comparable transactions. And valuers find it very difficult to isolate the price at which a

hypothetical willing but not anxious buyer and seller would agree to transact for a particular

specialised asset.

This “egg unscrambling” is not needed for commercial purposes. Nevertheless, quite significant tax

outcomes turn on doing so. For example:

under current law, whether a share disposal by a non-resident is inside or outside the Australian

CGT net can turn on isolating the market value of mining information from the associated mining

rights: see RCF and AP Energy;

it may be necessary to determine the depreciation base of “information” that is recorded in a

depreciable form (eg, copyright): see SPI PowerNet/AusNet; and

the market value of goodwill must be separated from the other assets of a purchased business as

it typically has a different tax treatment.

This goes well beyond the “conjectural” answers envisaged by Griffiths CJ in Spencer.

It is evident from recent cases that Tax Act provisions that require market value to be allocated

between specialised assets puts valuers – and the Courts - in an invidious position:

there is violent disagreement between experts as to the outcomes – experts for the opposing

parties in a particular case will often value the information at the extreme ends of the valuation

spectrum: from nil on the one hand to hundreds of millions of dollars on the other hand: SPI

PowerNet/AusNet; and

the violent disagreement as to outcomes is symptomatic of violent disagreement as to the proper

approach to valuing specialised assets (see in particular the cases on valuing information).

Particular difficulties arise where the specialised asset is information.


© Tim Kyle 2016 44

9.2 Information

9.2.1 What is information?

Information is just knowledge that has been gathered through human experience.

Information may be critical to the use of other assets. For example, in SPI PowerNet/AusNet, both

parties conceded that the electricity network plans were critical to the operation of the network.

And information is an asset in a commercial sense.

But, information is not conventionally considered to be property in a legal sense.21

Information would typically be physically expressed on some medium – for example, it may be printed

on paper, contained in a computer storage device or both.

9.3 Is information an asset?

The law – and particularly tax law – has always had an uneasy relationship with information on the

basis that it is not legal property. For example:

how is information/knowhow to be “transferred” in a sale of assets scenario?

the general law notions of income from property can’t readily be applied.

there are limits to the statutory definition of “royalty” which is intended to (among other things) tax

consideration received for the use of information: Sherritt Gordon Mines.

the income/capital distinction on sale of knowhow can be elusive: Jeffrey v Rolls-Royce, Evans

Medical Supplies.

The legislative context of particular provisions can shape whether information is regarded as an asset.

Is information an “asset” for the purposes of the depreciation provisions?

Mining information is expressly included in the s.40-30(2) “intangible assets” extension to the s.40-

30(1) “depreciating asset” definition.

And so it is widely accepted that mining information is an “asset” for depreciation purposes.

21 see Nischu and the cases referred to in it in relation to mining property. However, as Melanie Baker notes at page 28 of her

2014 paper at this conference, Taxation of Non-Resident Investors on exit from Australia: “Although the learned judges in

Nischu endorsed that approach, it may be relevant to note that correctness or otherwise of that approach was never fully

explored before the Court because of the parties’ agreement.”


© Tim Kyle 2016 45

Is information an “asset” for the purposes of the principal asset test?

Both Edmonds and the Full Federal Court in RCF proceeded on the basis that mining information is

properly included in “the sum of the market values of its assets that are not taxable Australian

property” for s.855-30 purposes.

So too did the AAT and McKerracher J in AP Energy.

But there is no analysis of this issue.

Nischu wrestled with this issue – but both parties agreed that the value of information was in chattels

(ie, the paper on which the information was recorded).

Is information an “asset” for the purposes of the thin capitalisation provisions?

Paragraph 4 of TR 2002/20 provides as follows:

In the thin capitalisation provisions the term ‘assets’ is not defined, and accordingly takes its

ordinary meaning in law relevant to the context. In this particular context we consider that the

term ‘assets’ for the purposes of Division 820 carries its accounting meaning. The accounting

meaning is defined in Statement of Accounting Concepts 4, at paragraph 14, (SAC 4) as:

‘future economic benefits controlled by the entity as a result of past transactions or other past

events’.

This makes sense in the context of those provisions, which rely on accounting methods.

9.3.1 Particular difficulties in valuing information

There are a number of current difficulties in valuing information.

Uncertainty as to how to characterise information

some cases are run on the basis that the value of the information lies in the copyright attaching to

the physical medium on which the information is recorded: SPI PowerNet/AusNet;

other cases are run on the basis that the value lies in the physical medium itself (ie, as a

collection of chattels): Nischu;

yet other cases (particularly cases on mining information) appear to assume that information is

itself a species of identifiable asset with value: RCF; and

frustratingly, none of the cases make any attempt to reconcile the different possible

characterisations.


© Tim Kyle 2016 46

Uncertain impact of Spencer full knowledge assumption

There is uncertainty as to the impact of the Spencer test assumption that the hypothetical purchaser

has “full knowledge” of all the relevant prevailing circumstances:

does this mean that the purchaser has that information only for the purpose of knowing how

valuable the information is and so for arriving at its market value – but would otherwise have to

recreate it?

once the information is assumed to be known, can it never then be unknown – so that the

purchaser would not pay anything to acquire it?

Royalty-free licence?

If the context requires market value to be determined on a simultaneous sale basis, would the

purchaser have a right to a royalty-free licence of the information? This is the approach that two

judges took in the Full Federal Court SPI PowerNet/AusNet decision.

9.3.2 Consequences of the valuation difficulties

As long these basic building blocks of valuing information remain unsettled, “all or nothing” outcomes

will be produced.

This is exacerbated by the lack of consistency in judicial approach as a particular case proceeds

through the courts – parties often lurch from “all” at first instance to “nothing” on appeal.

Judgments also often lack transparent reasoning.

Many frustrated tax judges simply dispose of the case on the basis of the taxpayer’s failure to

adequately discharge onus of proof.

Lord Greene M.R. observed that in many case on the capital/current expense distinction “it is almost

true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find

reasons”.22

A cynic might say that this observation is equally applicable to cases dealing with tax

provisions that require allocation of market value between information and assets.

9.3.3 Approaches to valuing mining information

Some valuation principles can be extracted from mining information cases.

Assets of an energy and resources entity

The assets of energy and resources entities typically comprise:

22 Inland Revenue Commissioners v. British Salmon Aero Engines Ltd (1938) 2 K.B. 482 at 498


© Tim Kyle 2016 47

mining or exploration rights;

mining or exploration information; and

equipment.

There is debate about whether mining producers are capable of having goodwill: see Alcan and

Debra Osborn’s article Goodwill: Much Ado About Nothing, 2010 National Resources Conference 25

October 2010.

The subtractive method

Most income tax and stamp duty cases dealing with the market value of mining information start with

the market value of something that is relatively uncontroversial – such as the market value of the

business in which the information is used.

Even this starting point is not without debate, although there is some degree of consistency among

the Courts in that:

the discounted cash flow method is appropriate for operating miners; and

the market capitalisation method is more appropriate for explorers (eg, both parties in AP Energy

both accepted this proposition and the court made no adverse comment on it).

Cases generally then proceed on the basis that the mining or exploration information and the

equipment are to be valued next.

This leaves the mining or exploration rights determined on a residual basis.

The restoration method

Broadly, the restoration method involves computing the total of the following:

the estimated cost of recreating the information (ie, from scratch); and

the time value/opportunity costs (eg, revenue foregone) during the notional recreation period.

Following the Full Federal Court decision in RCF an unmodified application of the restoration

approach would not be successful – at least in the simultaneous sale scenario apparently required by

the legislative context of s.855-30.

The Full Federal Court in RCF held that where the context of a provision requires an assumed

simultaneous sale of all the relevant assets, then mining information must be valued at less than its

recreation cost with little or no delay.

But how much less?

Frustratingly, the Full Federal Court in RCF failed to give any guidance.

Some courts (eg, RCF at first instance and AP Energy) have valued mining or exploration information

based on a modified application of the restoration method.


© Tim Kyle 2016 48

This approach has a tendency to inflate the value of the information relative to the rights – and so

“bleed” value into the information at the expense of the rights. This approach would reduce the

number of instances in which Division 855 would apply to disposals of interests in mining entities.

The Edmonds J “mid-point” approach in RCF at first instance was roundly rejected on appeal.

The Full Federal Court’s rejection of the “mid-point” approach was complete when it concluded that

the taxpayer’s contention that it applied in respect of the 2007 income year was an “unsupported and

speculative proposition”.

But there is published valuation support for the Edmonds J approach (see below) and so perhaps it is

neither as unsupported nor speculative as the Full Federal Court would have it.

Moreover, the taxpayer succeeded both at first instance and on appeal in AP Energy by applying a

differently modified restoration approach: using the mean of the range in which recreation costs fell.

So surely the AP Energy decision provides a roadmap for successfully valuing mining information in

future cases?

Despite a Federal Court decision that it can – at least in relation to explorers - the ATO clearly doesn’t

think so.

The ATO decision impact on AP Energy states, tartly, that:

The Commissioner considers the decision in this matter to be the consequence of the

particular expert valuation evidence adduced before the AAT by the parties.

Therefore, in our view, the valuation approach that was accepted by the AAT in this case

should not be taken to be precedent for the valuation of mining and exploration information

where the test entity is either an explorer (as the test entity was in this case) or an active

miner.

This is a most unhelpful addition to the landscape.

But it is consistent with the ATO’s long-standing decision impact statement practice: when the ATO

wins a case, it stands for the broadest possible proposition – and when the ATO loses, the case is

confined to its facts.

Is the restoration method appropriate for valuing information?

We must always keep in mind that the general law market value test requires determining the price at

which a hypothetical willing but not anxious buyer and seller would meet, based on certain

assumptions.

Intuitively, the restoration method has no meaningful relationship with that test.


© Tim Kyle 2016 49

And the article “Why the restoration method is flawed” by Wayne Lonergan and Hung Chu23

cogently

sets out why, from a technical valuation perspective, the restoration method is inappropriate for

valuing information.

As the article puts it, the restoration method is an inappropriate methodology because:

the restoration method adopts a base assumption that is unrealistic and inappropriate

where a simultaneous sale assumption applies, it assumes that the purchaser would recreate

the information from scratch rather than negotiate with the seller for its purchase (this concern

drove the Edmonds J “mid point” analysis in RCF at first instance)

it ignores the Spencer knowledgeable purchaser assumption

it ignores the Spencer highest and best use assumption – and so ignores that information as

part of a going concern – and that the land asset “evolves” over time

it requires exact replication of information despite prevailing market conditions and whether

replication would be a value maximising decision for the hypothetical purchaser (why would a

buyer pay a seller for information by reference to its cost if the prevailing trading price for the

relevant mineral has fallen say 75% since the information was generated?)

the restoration method infers the “worst case scenario” for a purchaser of the land assets (ie, the

residual assets)

it should really only be used as a cross-check to establish the maximum value attributable to

the information rather than as a proxy for its market value

the restoration method inherently undervalues land assets and unfairly shifts value from the land

assets to the information due to the artificial sequencing hypothesis

the delay cost calculation unrealistically assumes that no production could occur before all

information has been recreated

this attributes all delay costs to information, as opposed to spreading it across all assets of the

going concern

the restoration method fails to consider the inappropriateness/unreasonableness of the outcome

9.3.4 Mining information in stamp duty cases

The market value of mining information has also been considered for land rich and landholder stamp

duty purposes.

See for example Nichu and Alacer Gold.

23 The Tax Specialist Volume 19(3) at page 123


© Tim Kyle 2016 50

9.3.5 Reconciling mining information and other information cases

There are some startling inconsistencies between the judicial approach to valuing mining information

and the approach that the Full Federal Court took in the SPI PowerNet/AusNet litigation.

A more detailed analysis of the SPI PowerNet/AusNet litigation appears in appendix 3.

Facts

The relevant information related to the electricity transmission assets that SPI PowerNet acquired

from the Victorian Government in 1997.

Both parties agreed that the information was critical to the operation of the transmission assets.

The information was embodied in the 105,000 documents (drawings, plans and manuals).

The drawings were protected by copyright, and so gave rise to depreciation deductions.

The first issue was how much of the unallocated purchase price was to form the copyright

depreciation cost.

The second issue was how much ACA was to be allocated to copyright depreciation cost when

the purchaser later joined a tax consolidated group.

Held

At first instance, Pagone J adopted an approach that was broadly consistent with the judicial

approach to valuing mining information – that is, a method based on the restoration method.

However, in a marked departure from the judicial approach to valuing mining information, the Full

Federal Court held:

on the first issue, that the copyright had little or no value; and

on the second issue, that the matter be remitted to Pagone J to further consider the ATO

valuation expert’s argument that the information had no value.

The no value argument

In circumstances where both parties agreed that the drawings were critical to the operation of the

transmission assets, one would intuitively expect the drawings to have value – and likely considerable

value.

However, the view of the ATO’s valuation expert was that the drawings have no separate market

value from the electricity transmission assets to which they relate on the basis that the drawings

cannot be sold separately from those electricity transmission assets. As he put it:

The copyright cannot be sold separately from the other assets any more than a key can be sold

separately from the only car it can open.


© Tim Kyle 2016 51

But this analogy doesn’t appear very durable:

without a key to operate it, a car isn’t of any utility (as a car); and

there is lucrative market for manufacturers replacing lost car keys.

The problem of course is that this comment applies equally to any specialised asset. For example,

mining information is not typically sold separately from the tenement to which it relates. Yet the Full

Federal Court did not acknowledge this difficulty – and provided no basis upon which the approach

taken in mining information cases could be distinguished.

Moreover, this no value view cuts completely across the Spencer direction to create a hypothetical

market where none otherwise exists.

The implied licence argument

Two of the Full Federal Court judges (Greenwood J, Kenny J agreeing) held that if the buyer hadn’t

separately acquired the copyright, they would nevertheless have had an implicit licence from the

seller to use the copyright - and so it would not have been necessary for the buyer to reconstruct the

drawings in order to carry on the electricity transmission business.

No authority is cited for this proposition.

And it is completely inconsistent with the finding of Malcolm CJ in Nischu:

Ownership of the mining tenements does not include a right of access to the information.

Ownership or possession of the documents and things which contrain the information must be

acquired in order to gain permanent access to the information. It follows, in my view, that any

relevant value must be reflected in the value of the chattels rather than the value of the mining

tenements.

Malcolm CJ’s finding in this regard was quoted with apparent approval by the Full Federal Court in

RCF.

Again, the Full Federal Court provided no basis upon which the approach taken in mining information

cases could be distinguished.

9.4 Goodwill

As we know, there is a clear conceptual distinction between the sources of the goodwill of a business

from the goodwill itself: goodwill is an item of property and an asset in its own right.24

That conceptual distinction has practical consequences under the Tax Acts for reasons including that:

under current law, goodwill is not TARP for the s.855-30 principal asset test; and

24 Murry at paragraph 30


© Tim Kyle 2016 52

many of the non-goodwill business assets will generate deductions for the purchaser (eg, trading

stock and depreciating assets) whereas goodwill is a CGT asset that may never be realised.

The conceptual distinction is also relevant to stamp duty outcomes.

The method for valuing goodwill is generally uncontroversial:

When a business is profitable and expected to continue to be profitable, its value may be

measured by adopting the conventional accounting approach of finding the difference

between the present value of the predicted earnings of the business and the fair value of its

identifiable net assets.25

But the High Court noted at paragraphs 49 and 51 of Murry the difficulties inherent in applying this

valuation method:

Admittedly this approach can cause problems in valuing goodwill for legal purposes because

the identifiable assets need to be valued with precision.

Where the goodwill of a business largely derives from using an identifiable asset or assets,

the goodwill of the business, as such, when correctly identified, may be of small value. That is

because the earning power of the business will be largely commensurate with the earning

power of the asset or assets. If the goodwill of a business largely depends on a trade mark,

for example, and the trade mark is fully valued, the real value of goodwill can only reflect a

value that is similar to the difference between the business as a going concern and the true

value of the net assets of the business including the trade mark. A purchaser of the business

will not pay twice for the same source of earning power. The purchaser will not pay a sum that

represents the earning power of the trade mark and also a sum that represents the earning

power of the business. Nevertheless, the earning power of the trade mark is unlikely to equal

the earning power of the business.

A number of stamp duty have wrestled with the process of isolating goodwill from other assets - land

in particular.

See in this regard for example:

HSH Hotels (Australia) Ltd v. Commissioner of State Taxation (SA) [2005] SASC 39

Primelife (Glendale hostel) Pty Ltd & Anor v Commissioner of State Revenue (VIC) 2004 ATC

4644

Commissioner of State Revenue v. Uniqema Pty Ltd [2004] VSCA 82

Kizleap Pty Limited v Chief Commissioner of Stamp Duties (NSW) 2001 ATC 4095

EIE Ocean BV v. Commissioner of Stamp Duties (QLD) 97 ATC 4013

Re Origen Energy Power Ltd v The Commissioner of State Revenue (2007) 70 ATR 64

On the threshold issue of whether miners can have goodwill:

25 Murry at paragraph 49


© Tim Kyle 2016 53

Commissioner of Territory Revenue (NT) v. Alcan (NT) Alumina Pty Ltd 2008 ATC 20-086

Placer Dome Inc v Commissioner of State Revenue [2015] WASAT 141

Debra Osborn’s article Goodwill: Much Ado About Nothing, 2010 National Resources Conference

25 October 2010.


© Tim Kyle 2016 54

10 Potential market value reform options

The current landscape

Market value plays a number of critical roles in the Tax Acts, yet more than a century after Spencer

was decided, there are still many unresolved market value issues.

And there are very few legislative or administrative safe harbours.

This puts taxpayers in a very difficult position.

Going to the expense of obtaining a professional valuation may not reduce (let alone eliminate) their

tax risk.

And if the ATO challenges the taxpayer, then a long, expensive and ultimately uncertain appeal

process awaits – with the burden of having to discharge the onus of proof hanging heavy over the

taxpayer.

There has to be a better way.

Potential reforms

A single “big bang” solution to cure the current market value ills by eliminating the reliance on market

value is unlikely: market value is too deeply spliced into the DNA of the Tax Acts.

Rather, a more realistic hope would be a combination of ameliorating steps.

In that regard, the IGOT Review has some very sensible recommendations:

Number Recommendation

3.1(a) the regulation impact statement for any new tax laws that rely on market valuations consider the potential compliance and administrative costs of obtaining valuations – and whether this approach has the highest net benefit compared to other approaches

3.1(b) where valuations are required, either:

legislative safe harbours be provided; or

greater book/tax alignment be permitted

3.3 where threshold compliance risk is involved (eg, indirect Australian real property interests and the small business concessions), then tapering rather than hard cut off points be used

4.1 the ATO develop administrative safe harbours where possible to reduce compliance costs


© Tim Kyle 2016 55

Specialised assets

Recalibrating the existing “commercially unrealistic" provisions26

that require the market value of

particular specialised assets to be isolated would go a long way to reducing the scope for dispute on

market value issues.

The 2013 Federal Budget proposal for goodwill and mining information to be assimilated with

Australian real property would undoubtedly reduce the scope for .855-30 principal asset market value

disputes.

But any change in this regard should be balanced: if the range of assets that qualify as TARP is to be

expanded, then the principal asset test threshold should be commensurately increased.

ATO approach to litigation

It would be most helpful if the ATO were to litigate the cases most likely to produce meaningful judicial

guidance on how market value is to be arrived at in regularly occurring fact patterns.

But the ATO should not regard a case decided on the basis of onus of proof as a victory: it is better

characterised as a defeat for the market value concept.

And where judicial guidance is provided, then the ATO should publicly accept that guidance – even if

it is not the result they advocated.27

26 See IGOT Review chapter 3

27 As opposed to the approach taken in the AP Energy decision impact statement


© Tim Kyle 2016 56

Appendix 1

Table of cases

Description Citation

Alacer Gold Alacer Gold v WA CSR [2016] WASAT 31

Alcan Commissioner of Territory Revenue v Alcan (NT) Alumina

Pty Ltd (2008) 156 NTR 1

AP Energy Commissioner of Taxation v AP Energy Investments Pty Ltd

[2016] FCA 577

Boland v Yates Boland v Yates Property Corporation Pty Ltd [1999] HCA 64

Brisbane Water County Council Brisbane Water County Council v Commissioner of Stamp

Duties [1979] 1 NSWLR 320

Case 2/99 Case 2/99 (1999) 99 ATC 108

Clay’s case Inland Revenue Commissioners v Clay [1914] 3 KB 466

Collis Collis v Commissioner of Taxation (1996) 96 ATC 4831

Cooke & Sherden Federal Commissioner of Taxation v Cooke & Sherden (1980)

29 ALR 202

Evans Medical Supplies Evans Medical Supplies v Moriarty [1957] 3 All ER 718

Excellar Excellar Pty Ltd v FCT [2015] AATA 282

Hustlers Hustlers Pty Ltd & Robert Reid Pty Ltd v Valuer-General [1967]

2 NSWR 760

Jeffrey v Rolls-Royce Jeffrey v Rolls-Royce Ltd [1962] 1 All ER 801

Leichardt Municipal Council v RTA

NSW

Leichardt Municipal Council v RTA NSW [2006] NSWCA 353

Miley Miley v Cmr of Taxation [2016] AATA 73

MMAL Rentals MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167


© Tim Kyle 2016 57

Murry Commissioner of Taxation v Murry (1998) 193 CLR 605

Nischu Taxation (WA), Commissioner of State v Nischu Pty Ltd (1991) 4

WAR 437

Payne Payne v Federal Commissioner of Taxation (1996) 66 FCR 299

Quality Publications Quality Publications Australia Pty Ltd v FC of T [2012] FCA 256

RCF Resource Capital Fund III LP v Commissioner of Taxation

(2013) 95 ATR 504

Commissioner of Taxation v Resource Capital Fund III LP

[2014] FCAFC 34

Sherritt Gordon Mines FCT v Sherritt Gordon Mines (1977) 137 CLR 612

Spencer Spencer v Commonwealth of Australia (1907) 5 CLR 418

SPI PowerNet/AusNet SPI PowerNet Pty Ltd v Commissioner of Taxation [2014]

FCA 261

Commissioner of Taxation v AusNet Transmission Group

Pty Ltd [2015] FCAFC 60

Sun Newspapers Sun Newspapers Ltd and Associated Newspapers Ltd v Cmr Of

Taxation (1938) 61 CLR 337

Tennant v Smith Tennant v Smith [1892] AC 150

Tomanovic Tomanovic v One Australia Pty Ltd (2015) 104 ACSR 596

Vyricherla Sri Raja Vyricherla v Vizagapatam [1939] AC 302


© Tim Kyle 2016 58

Appendix 2

Table of market value aspects of the Resource Capital Fund III LP litigation

Courts

Edmonds J at first instance

Middleton, Robertson and Davies JJ in the Full Federal Court

Facts

RCF is a Caymans LP

RCF held 11.95% in Saint Barbara Mines Limited (SBM), a listed Australian gold mining company

SBM’s assets comprised mining rights, mining information, plant & equipment

RCF sold its SBM shareholding in two tranches: 5.65% in July 2007 and the balance in January 2008

Relevant issue

Both sales would be subject to Australian CGT if the SBM shares were taxable Australian property as “indirect Australian real property interests”

They would be “indirect Australian real property interests” if SBM passed the s.855-30 principal asset test

SBM would pass the s.855-30 principal asset test if the market value of its TARP assets (mining rights) exceeded the market value of its non-TARP

assets (mining information and plant & equipment)


© Tim Kyle 2016 59

The pivotal valuation issue

Ultimately the outcome turned entirely on whether the mining information should be valued on the basis of a hypothetical sale:

separate from the other SBM assets (ie, on a stand-alone sale basis); or

together with the other SBM assets (ie, on a going concern basis).

This determined whether delay costs should properly be included when applying the re-creation method.

Matter First instance Full Federal Court

Starting

assumption about

information

Both courts clearly implicitly accepted that:

mining information was a separate “asset” for s.855-30 purposes and

mining information was capable of being valued separately from the mining tenements to which it related

Comment: contrast this with the approach in AusNet

Residual approach

to valuing mining

rights

All the valuers applied a residual approach: [114] of first instance decision

market value of SBM’s TARP assets = market value total assets (see below) – market value non-TARP assets (including mining info + P&E)

Edmonds J said that this approach may mislead - but did apply it: [115] of first instance decision

Valuation

methodology for

SBM’s total assets

Edmonds accepts DCF as proper basis for valuing SBM’s total

assets

rejects market capitalisation – although reasoning not set out

Also accepts DCF

Going concern or

stand-alone basis

for mining rights?

• Stand-alone because of legislative context of s.855-30 - in

particular the phrase “sum of the market values of the entity’s

assets”

• Held that going concern valuation basis is correct in the

context of s.855-30

• It is implicit that the market value of the individual assets are


© Tim Kyle 2016 60


• Going concern basis value of a business by reference to the

present value of predicted earnings of the business [say $140]

may be greater than the sum or aggregate of the individual

market value of each identifiable asset comprising the business

[say $100]

• Any difference may be legal goodwill depending on the

circumstances.

• If so, goodwill is a non-TARP asset.

• Otherwise, the difference is neither TARP nor non-TARP

(comment: perhaps on the basis that the difference is not an

“asset”)

• In order to be consistent with Spencer highest and best use

assumption, Edmonds created an additional assumption that –

for notional sales of mining info and plant & equipment – that the

hypothetical purchaser is the owner of the mining rights and so is

able to use the asset consistently with its highest and best use

[102]

to be ascertained as if they were offered for sale as a

bundle (not as if offered for sale on a stand-alone basis)

[51]

• The term “the sum of the market values” does not literally

require the market value of each asset to be determined

separately, before summed [51]

• There is insufficient indication in the language and context

of s.855-30 for Edmonds “artificial” conclusion that it does

[51]

• Edmonds fell into error by following the approach taken in

Nischu – which was decided in a different context. Nischu

does not apply [53]

• Nischu is a stamp duty case and the issue was whether

the value of a company’s mining tenement >80% of the

market value of all its property – if so, transfer of shares in

the company was subject to land-rich duty [45]

• Edmonds failed to give due recognition to the statutory

context and purpose of s.855-30 [53]

Valuation

methodology for

mining information

• Edmonds accepts re-creation method as proper basis for valuing

SBM’s mining information

Also accepts re-creation method

Delay costs

included in re-

• the difference between the taxpayer’s valuers (EY and Lonergan)

and ATO (Axiom) is that the taxpayer’s valuers included an

• All experts that gave evidence at first instance agreed that

in the case of a simultaneous sale of SBM assets to a


© Tim Kyle 2016 61


creation method? amount for delay in business operations while the information

was being re-created (between 3 and 4 years).

• EY/Lonergan time delay amounts between $100m and $275m so

very significant finding

• Edmonds accepts that delay amounts should be included –

although the reason is not clear

no time delay for P&E – although the reason is not clear

hypothetical purchaser, the purchaser could expect to

acquire the mining information and plant and equipment:

• for less than the re-creation costs; and

• with little or no delay. [54]

Mid-point • Edmonds doesn’t accept re-creation method as producing the

market value of the mining info

• Rather, Edmonds found that re-creation cost establishes the high

point in a “bargaining zone”

• the low point = $nil/$nominal - reflecting either retention by the

hypothetical vendor or sale to a purchaser not owning the mining

rights

• no logical intermediate point guided by any business or financial

principle:

• accepts RCF submission to use mid-point between the two – ie,

divide the notional bargaining zone equally [106], [156]

Did not apply Edmonds’ mid-point approach – see below

The tranche 1

disposal (July

2007)

Parties submissions were RCF: $164-$178, ATO: $18-$63

• Edmonds J found that market value mining rights = $82-$89m

• On that basis, SBM shares not TAP and RCF wins

Comment – the re-creation costs of mining information produced a very

large value for mining information – and so significantly boosted the non-

The FFCt ordered the parties to apply its reasoning and to indicate

whether any issue remains to be determined

In the subsequent FFCT judgment RCF maintained that it was

possible to attribute market value to the mining information and

P&E consistently with the earlier FFCt judgment


© Tim Kyle 2016 62


TARP asset bucket

Comment – this approach was perceived as generating contagion risk

and prompted the former government to announce that, on a prospective

basis, intangible assets connected to rights to mine for natural resources

(notably mining information and goodwill) would be treated as part of the

rights to which they relate. The explanatory memorandum to the Tax and

Superannuation Laws Amendment 92014 Measures No. 4) Act 2014

notes that the proposed legislative amendment was to be deferred until

the effect of the Full Federal Court decision in RCF had been analysed –

effectively subject to a watching brief]

RCF contended that since there was evidence of the replacement

and scrap values of those assets respectively and so:

• rational parties would each take half the difference than

none of it by failing to agree

• the market value that should be attributed to them is ½ of

those amounts

Comment: this appears to be the Edmonds J mid point approach

• FFCt did not accept this a proper basis for valuation in

accordance with the earlier judgment:

• RCF contention is an “artificial conclusion”

• RCF’s valuation evidence adopted valuation hypotheses

and methods inconsistent with those that FFCt held to be

the correct approach

• therefore, RCF did not discharge its burden of proof and so

the ATO succeeds on the TARP issue as at both dates

Comment: the FFCt never decided what the market value of the

mining information or P&E was – ATO won because TP fails to

discharge its burden of proof

The tranche 2

disposal (January

2008)

Parties submissions were RCF: $257-$356m, ATO: $20-$75

Edmonds J found that market value of mining rights = $129-$178

SBM shares not TAP

Comment – the re-creation costs of mining information produced a very

large value for mining information – and so significantly boosted the non-

TARP asset bucket

RCF conceded in the subsequent FFCt hearing that the tranche 2

SBM shares were TAP


© Tim Kyle 2016 63

Appendix 3

Table of market value aspects of the SPI PowerNet/AusNet litigation

[2014] FCA 261 - Pagone J

[2015] FCAFC 60 – Kenny, Edmonds and Greenwood JJ

Facts

SPI PowerNet (S) bought electricity transmission assets from the Victorian government for $2.5b in 1997

The assets included copyright in 105,000 documents - drawings, plans, manuals and other works relating to the transmission assets (drawings)

The purchase price was not allocated as between the various assets

The expenditure on the drawings assets was depreciable under former Division 10B

Commissioner can determine the amount that is deemed to be the depreciable expenditure in circumstances where there is an unallocated

purchase price: s.124R(5)

Court held that this was not an unfettered discretion – rather, Commissioner must determine how much of the total undifferentiated purchase price

was expenditure on acquiring the copyright

S obtained from SKM a $171m valuation for the drawings as at 1997

Presumably A claimed depreciation deductions on the basis of a $171m depreciation base under Division 10B/Division 373/Division 40 in the 1998

to 2006 income years

Commissioner determined a $nil value for the copyright (ie, no depreciation deductions) and presumably issued amended assessments for the 1998

to 2006 years


© Tim Kyle 2016 64

S became a subsidiary member of the AusNet (A) TCG when the group was formed in 2005

It was necessary to allocate remaining ACA to reset cost base assets (including the drawings) based on their respective market values: s.705-

35(1)(c)

A obtained from PwC a $239m valuation for the drawings as at 2005

On that basis, B arrived at a $162m tax cost setting amount for the drawings (ie, a proportionate reduction of the $239m market value)

Presumably A claimed depreciation deductions on the basis of a $162m depreciation base under Division 40 in 2006 to 2011 income years

Issues

Issue #1: what proportion of the purchase price was paid for the copyright in the drawings?

Issue #2: what was the market value of the copyright in 2005 for ACA pushdown purposes?

Submissions

Issue ATO Taxpayer

Did the drawings have a market value separate from the transmission assets to which they relate?

Samuel, no - drawings have no separate market value from the other assets to which they relate because cannot be sold separately

The copyright cannot be sold separately from the other assets any more than a key can be sold separately from the only car it can open

The copyright in the drawings can be separately transacted and so can be separately valued – Lonergan gave the example of sale and licence-backs of copyright

What methodologies are appropriate? market approach – and that produces $nil

replacement cost, with no opportunity costs

replacement cost, including opportunity costs


© Tim Kyle 2016 65

Judgments

Issue #1: what proportion of the purchase price was paid for the copyright in the drawings?

Taxpayer submission: $171m

ATO submission: nil

s.124R(5): Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with

other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the

purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the

Commissioner determines.

Pagone Kenny Edmonds Greenwood

1 Can taxpayer appeal ATO

s.124R(5) determination

under Part IVC?

(Or do ss.175/177 preclude

it?)

Issue not raised at first instance

– assumed yes

Yes [36]

Determination goes to

substantive liability, not just a

procedural step

No [68]

Determination is just part of

process of making the

assessment

No [155]

Reasoning not clear

2 Construction of s.124R(5) What is to be determined is

what part of the total purchase

price is properly to be regarded

as the amount paid for the

copyright (even though it might

not be capable of independent

sale). [32]

Agreed with Pagone Agreed with Pagone Agreed with Pagone


© Tim Kyle 2016 66


The section assumes that part

of the total purchase price was

a taxpayer’s actual cost of

acquiring the unit of industrial

property and that the amount to

be allocated can be determined.

[17], [25]

.. unless it is clear that no part

of the purchase price was paid

of the item – which is not the

case here. [26]

Disagrees with Pagone

Like Edmonds J and Greenwood

J, however, I respectfully disagree

with the primary judge that s

124R(5) “operates where it is

assumed that something was paid

for the unit of industrial property

but its amount (that is, its cost)

was not separately identified”

(emphasis added). Section

124R(5) leaves open the

possibility that no part of the

undifferentiated purchase price is

attributable to the purchase of the

unit of industrial property. [37]


The section, s 124R(5), does not

make any assumption that part of

the total purchase price was a

taxpayer’s actual cost of acquiring

the unit of industrial property. Nor

does s 124R(5) assume that the

Commissioner can and should

allocate, or apportion, the amount

of the total purchase price

referable to the unit of industrial

property. No determination of the

Commissioner pursuant to s

124R(5) is conditioned, or

conditional, upon any such

assumptions. [57]


3 Did the market value analysis

performed comply with

s.124R(5)?

Both sides asked the experts to

determine the market value of

the copyright. This is the wrong

question. [17]

The independent value of the

copyright may be relevant to the

question upon which the

application of s 124R(5)

depends, and in many cases

will suggest or inform the

No [38] No No [188]


© Tim Kyle 2016 67


answer to the question posed

by the section (where, for

example, the unit of industrial

property has a ready market for

its purchase and where that

value can reliably be taken to

have been largely reflected in

the composite purchase price).

[17]

The replacement cost

methodology as employed by

SKM seems best able to

capture the amount required by

s s124R(5) to be determined.

[32]

That amount [$171.8m] can be

taken as that part of the Total

Purchase Price paid by SPI

PowerNet for the copyright for

the purposes of s124R(5)

unless there is some aspect of

the calculation of the amount

that requires modification to

make it accord with the purpose

of the section. [33]


© Tim Kyle 2016 68


4 Did the copyright have a

market value separate from

the assets to which it relates?

The preponderance of expert

evidence was that the drawings

were capable of being valued

under established valuation

methods and that the

replacement cost methodology

is the appropriate methodology

[27], [31]

Probably not (implied) [38] No finding No (implied)

Do not accept that had the

copyright not been acquired,

taxpayer would have had to

recreate it in a non-infringing

way – as taxpayer would have

had an implied licence to use

it [185]

5 What was the market value

for s.124R(5) purposes?

$171m Likely nothing – but no actual

finding

...it is difficult to resist the

conclusion that no part of the

purchase price is attributable to

capital expenditure on the

purchase of the copyright. [38]

No finding It seems to me that the answer to

that question is either nil, or

alternatively if not nil, for the

purposes of these proceedings

the taxpayer has failed to prove

its case …. [188]

6 Methodology Replacement cost method

approved

The SKM/Toohey valuation did

not include deprival/opportunity

costs – satisfied that complied

sufficiently with s.124R(5) [35]

Rejects market approach (per

Samuels): just because no

ready market doesn’t mean that

Adopts reasons of Greenwood None approved None because a purchaser of

the transmission assets would

have an implied licence to use

the copyright. [185]


© Tim Kyle 2016 69


an asset has no value

No suggestion of Edmonds J

RCF midpoint approach [25]

7 Outcome Taxpayer wins as it has

established on balance of

probabilities that ATO

determined number was wrong

ATO wins on onus ATO wins on onus

If it were possible for SPI

PowerNet to show that an

assessment based on the s

124R(5) determination in the

present case is excessive, that

burden has not been

discharged in the present

case. This is because, under

the terms of the Asset Sale

Agreement, it is not possible

to allocate any part of the

Total Purchase Price to any

particular asset, specifically

and relevantly to the copyright

in the drawings, plans and

other works. [70]

ATO wins on onus

The taxpayer has failed to

show error on the part of the

Commissioner in making the

determination and has thus

failed to show that the

assessment is excessive.

[188]

8 Orders Pagone’s judgment be set

aside

As per Kenny (implied) As per Kenny


© Tim Kyle 2016 70

Issue #2: market value of copyright in 2005 for ACA pushdown purposes

Taxpayer submission: $239m

ATO submission: nil

Matter Pagone Kenny Edmonds Greenwood

1 Did the copyright have a market

value separate from the assets

to which it relates?

Yes Undecided Undecided Undecided

2 What was the market value for

s.705-35 purposes?

$239m No discussion No finding

Pagone J didn’t adequately

consider Samuel’s proposition

that the drawings had no

separate market value from

the assets to which they

relate.

As none of the expert reports

were received into evidence,

the FFCt has insufficient

information to determine

whether to accept or reject

Pagone’s conclusion that it

was possible and appropriate

to separately value the

copyright. [85]

As per Edmonds


© Tim Kyle 2016 71


2 Methodology Replacement cost approach –

including deprival/opportunity

costs [48]

Indirect costs like deprival or

opportunity costs could be

excluded as a matter of

statutory analysis in the

application of s 124R(5)

(where the question was what

proportion of an amount

actually paid for many assets

was to be taken to be the price

paid for an asset) but may not

be excluded for the purpose of

s 705-35(1)(c) (where the

question is the market value of

an asset).[48]

N/A N/A N/A

6 Outcome Pagone to rehear Pagone to rehear Pagone to rehear

7 Orders Pagone to rehear [40] Pagone should re-hear the

second issue in order to make

findings on the fundamental

issue of:

whether it is possible and

Pagone to rehear [194]


© Tim Kyle 2016 72


appropriate to value the

copyright separately from

the assets to which it is

related and, if so, what that

value is, or

whether it is possible, but

not appropriate in the

circumstances of this

particular case, to

separately value the

copyright. [103]


© Tim Kyle 2016 73

Appendix 4

IGOT Review

Tables of valuation-related Tax Act provisions

For ease of reference this Appendix replicates the tables in Appendix 2 and Appendix 3 of the IGOT

Review

Division Subdivision Section IGT Comments

Part III – Liability to Taxation

Division 1 -

General

21A Non-cash business

benefits

The ‘arm’s length value’ is

used to account for non-cash

business benefits.

Division 2 -

Income

Subdivision A -

Assessable

income generally

26AJ Investment-related

lottery winnings to be

included in assessable

income


used to account for property or

services, reduced by the

recipient's contribution (if any).

26BB Assessability of

gain on disposal or

redemption of traditional

securities

The ‘arm’s length

consideration’ is used to

substitute for any gain

assessable.

26BC Securities lending

arrangements

The ‘market value’ is

used to account for

eligible and borrowed

securities.

Subdivision D -

Dividends

44 Dividends The ‘market value’ is

used to account for

demerger dividends.

45BA Effect of

determinations under

section 45B for demerger

benefits

The ‘market value


account for demerger

benefits.

45C Effect of

determinations under

sections 45A and 45B for

capital benefits

The ‘market value


account for capital benefits.

47A Distribution benefits

- CFCs

The ‘arm’s length value’ is used

to account for shares or units in


© Tim Kyle 2016 74


relation to redemption or buy-

back.

Division 3 -

Deductions

Subdivision A -

General

51AK Agreements for the

provision of non-

deductible non-cash

business benefits


used to account for the benefit.

63E Debt/equity swaps The ‘market value’ is used to

account for the equity value of

shares or units.

70B Deduction for loss

on disposal or

redemption of traditional

securities


consideration’ is used work out

the amount of any loss.

73A Expenditure on

scientific research

The ‘market value’ is used to

account for the purchase of a

building.

Subdivision H -

Period of

deductibility of

certain advance

expenditure

82KZMGB CGT event in

relation to interest in

82KZMG agreement


account for interest.

Division 3A -

Convertible

notes

82L Interpretation Defines the relevant valuation

period, in relation to a share.

82T Value of shares Defines the value of a fully

paid share as at the valuation

date.

Division 6AAA

- Special

provisions

relating to non-

resident trust

estates etc.

Subdivision A -

Preliminary

102AAB Interpretation The ‘market value’ is used to

account for the net worth

(assets of the trust estate,

reduced by the liabilities) in

relation to a trust estate.

102AAK Deemed

transfers of property or

services to trust estate


account for the part transferred

by a particular partner.

Subdivision D -

Accruals system of

taxation of certain

102AAZD Assessable

income of attributable

taxpayer to include


account for the transferred


© Tim Kyle 2016 75


non-resident trust

estates

attributable income of

trust estate to which

taxpayer has transferred

property or services

property or services.

Division 6A -

Alienation of

income

102B Certain income

transferred for short

periods to be included in

assessable income of

transferor



determine the application of

subsection

102B(1) in respect of transfers.

Division 7 -

Private

Companies

103A Private companies The ‘market value’ is used to

account for the share capital of

a company when exercising

the Commissioners discretion.

Division 7A -

Distributions to

entities

connected with

a private

company

Subdivision B -

Private company

payments, loans

and debt

forgiveness are

treated as

dividends

109CA Payment includes

provision of asset



determine the amount of a use

payment.

Subdivision E -

Payments and

loans through

interposed entities



ascertain the amount of the

payment from the private

company to the target entity.

Division 9AA -

Demutualisatio

n of insurance

companies and

affiliates

Subdivision C -

Tax consequences

of demutualisation

121AS CGT

consequences of

demutualisation

Company valuation amounts

required.

Division 10E -

PDFs (pooled

development

funds)

Subdivision A -

Shares in PDFs

124ZR Effect of company

ceasing to be a PDF


account for CGT purposes.

Division 11A -

Dividends,

Interest and

Royalties paid

to Non-

Residents and

128AC - Deemed interest

in respect of hire-

purchase and certain

other agreements


account for the relevant

agreement property (eligible

value).

http://atolaw/130930124000/ViewFrame.htm?LocID=%22PAC%2F19360027%2F102B(1)%22&PiT=99991231235958


© Tim Kyle 2016 76


to Certain

Other Persons

Division 11B -

Equity

investments in

small-medium

enterprises


account for consideration on

the disposal of shares.

Division 16E -

Accruals

assessability,

etc., in respect

of certain

security

payments

159GZ Stripped

securities


account for the underlying

security.

Division 16J -

Effect of

cancellation of

subsidiary's

shares in

holding

company

159GZZZF Effect on

subsidiary of share

cancellations to which

this division applies

The ‘market value’ and

‘adjusted market value’ are

used to account for shares.

159GZZZG Pre-

cancellation disposals of

eligible interests

The ‘adjusted market value’ is

used to account for eligible

interests.

Division 16K -

Effect of buy-

backs of

shares

Subdivision A -

Interpretation

159GZZZM Purchase

price in respect of buy-

back


account for property other than

money received in respect of a

share buy-back.

Subdivision C -

Off- market

purchases

159GZZZQ

Consideration in respect

of off-market purchase


determine deemed

consideration.

Division 16L -

Tax-exempt

infrastructure

borrowings

159GZZZZE

Infrastructure borrowings

to be non- assessable

and non- deductible


account for deemed re-

acquisition after exemption

period.

Part X - Attribution of Income in Respect of Controlled Foreign Companies

Division 7 -

Calculation of

attributable

Subdivision C -

Modifications

relating to


account for property included

as part of payment.


© Tim Kyle 2016 77


income of CFC Australian capital

gains tax

Schedule 2D - Tax Exempt Entities that Become Taxable

Division 57 -

Tax exempt

entities that

become

taxable

Subdivision 57-E -

Assets and

liabilities

57-25 Deemed disposal

and re-acquisition of

assets


used to account for

consideration.


used to account for cost base

and reduced cost base.

Other market value

requirements.

57-30 Deemed cessation

and re-assumption of

liabilities


account for the

corresponding right or other

asset (adjusted market

value).

Schedule 2H - Demutualisation of Mutual Entities other than Insurance Companies and

Health Insurers

Division 326 -

Demutualisatio

n

Subdivision 326-D

- CGT

consequences of

disposal of

demutualisation

shares or an

interest in such

shares by a

member of a

mutual entity

where the entity or

a holding company

of the entity

becomes a listed

public company


used formulas.

Subdivision 326-E

- CGT

consequences of

disposal of

demutualisation

shares or interests

in such shares by

‘Adjusted market value’

requirements.


© Tim Kyle 2016 78


a member of a

mutual entity

where the entity or

a holding company

of the entity

becomes a

company that is

not a listed public

company


© Tim Kyle 2016 79


Part 2-1 Assessable Income

Division 20 - Amounts

included to reverse the

effect of past

deductions

Subdivision 20-B -

Disposal of a car for

which lease payments

have been deducted

20-135 No amount

included if earlier

disposal for market

value

Part 2-5 Rules about Deductibility of Particular Kinds of Amounts

Division 25 - Some

amounts you can

deduct

25-110 Capital

expenditure to

terminate lease etc.


used to account for

expenditure.

Division 27 - Effect of

input tax credits etc. on

deductions

Subdivision 27-B -

Effect of input tax

credits etc. on capital

allowances

27-80 Cost or opening

adjustable value of

depreciating assets

reduced for input tax

credits


used to account for the

cost of depreciating

assets.

27-95 Balancing

adjustment events


used to account for

depreciating assets

(termination value).

Division 28 - Car

expenses

Subdivision 28-D - The

“12% of original value''

method

28-45 How to calculate

your deduction


used in the ‘12% of

original value’ method

when a car is leased.

The ‘cost’ is used in

the ‘12% of original

value’ method when a

car is acquired.

Division 30 - Gifts or

contributions

Subdivision 30-A -

Deductions for gifts or

contributions

Various valuation

requirements

Subdivision 30-C -

Rules applying to

particular gifts of

property

Subdivision 30-DA -

Donations to political

parties and

independent

candidates and


© Tim Kyle 2016 80


members

Division 31 -

Conservation

covenants

31-5 Deduction for

entering into

conservation covenant



difference between the

market value of the

land just before and

after you enter into the

covenant.

31-15 Valuations by

the Commissioner

You must seek a

valuation of the

change in the ‘market

value’ of the land from

the Commissioner.

Division 35 - Deferral of

losses from non-

commercial business

activities

35-40 Real property

test

The ‘market value’

may be used to

account for real

property or interest.

35-50 Apportionment Either the ‘reduced

cost base’, ‘market

value’ or ‘other value’

is used account for

assets.

Part 2-10 - Capital Allowances: Rules About Deductibility of Capital Expenditure

Division 40 - Capital

allowances

Subdivision 40-C -

Cost


used to account for

various cases.

Subdivision 40-D -

Balancing adjustments

Subdivision 40-F -

Primary production

depreciating assets

Subdivision 40-G -

Capital expenditure of

primary producers and

other landholders

Subdivision 40-H -

Capital expenditure

that is immediately


© Tim Kyle 2016 81


deductible

Subdivision 40-I -

Capital expenditure

that is deductible over

time

Subdivision 40-J -

Capital expenditure for

the establishment of

trees in carbon sink

forests

Division 45 - Disposal

of leases and leased

plant


used to account for

any other benefit you

receive or are entitled

to receive.

Part 2-15 - Non-Assessable Income

Division 51 - Exempt

amounts

51-5 Defence The ‘market value’ is

used to account for

rations and quarters

supplied to you without

charge.

Division 59 - Particular

amounts of non-

assessable non-

exempt income

59-40 Issue of rights The ‘market value’ is

used to account for

rights issued.

Part 2-25 - Trading Stock

Division 70 - Trading

stock

Subdivision 70-B -

Acquiring trading stock

70-20 Non-arm's

length transactions



outgoing.

70-30 Starting to hold

as trading stock an

item you already own

Various ‘market value’

requirements when

determining an item’s

cost.

Subdivision 70-D -

Assessable income

arising from disposals

of trading stock and

certain other assets


used to account for

items of trading stock.


© Tim Kyle 2016 82


Subdivision 70-E -

Miscellaneous

70-120 Deducting

capital costs of

acquiring trees

‘Market value’ and

‘non- arm’s length’

rules.

Part 2-40 - Rules Affecting Employees and Other Taxpayers Receiving PAYG Withholding

Payments

Division 80 - General

rules

80-15 Transfer of

property


used to account for

property included as

payment.

Division 83A -

Employee share

schemes

Subdivision 83A-B -

Immediate inclusion of

discount in assessable

income

83A-30 Amount for

which discounted ESS

interest acquired


used to account for

ESS interests acquired

after 30 June 2009.

Subdivision 83A-C -

Deferred inclusion of

gain in assessable

income

Subdivision 83A-E –

Miscellaneous

83A-315 Market value

of ESS interest

Part 2-42 - Personal Services Income

Division 86 - Alienation

of personal services

income

Subdivision 86-B -

Entitlement to

deductions

86-75 Superannuation The ‘market value’ is


entity's principal work.

Division 87 - Personal

services businesses

Subdivision 87-A -

General

87-25 The

employment test for a

personal services

business


used to account for

the individual's

principal work.

Part 3-1 - Capital Gains and Losses: General Topics


rules

103-5 Giving property

as part of a transaction


used to account for

property included as

part of payment, cost

or expenditure.


© Tim Kyle 2016 83


Division 104 – CGT

events

Various CGT events

may involve a CGT

gain or loss which

depends on the

‘market value’ of the

CGT asset.

Events:

D4

E1; E2; E3; E5; E6;

E7; E9

I1; I2

J1; J4

K1; K3; K4; K5; K6.

Division 110 - Cost

base and reduced cost

base

Subdivision 110-A -

Cost base

110-25 General rules

about cost base


used to account for

property you gave, in

acquiring the asset.

Division 112 -

Modifications to cost


base

Subdivision 112-A -

General modifications

112-20 Market value

substitution rule


used to account for

acquisitions either

where you did not

incur expenditure,

some or all of the

expenditure you

incurred to cannot be

valued or you did not

deal at ‘arm's length’

with the other entity.

Division 115 - Discount

capital gains and trusts'

net capital gains

Subdivision 115-A -

Discount capital gains

115-45 Capital gain

from equity in an entity

with newly acquired

assets

Subdivision 115-B -

Discount percentage

115-115 Foreign or

temporary residents -

percentage for

individuals


may be used to

account for periods

starting earlier than 8

May 2012.


© Tim Kyle 2016 84


Subdivision 115-D -

Tax relief for

shareholders in listed

investment companies

115-290 Meaning of

listed investment

company



proportion CGT assets

that are certain

investments.


proceeds

116-10 Modifications

to general rules


may be used to modify

the general rules

(market value

substitution rule).

116-20 General rules

about capital proceeds


used to account for

any other property

received, or are

entitled to receive, in

respect of the event

happening (capital

proceeds).

116-30 Market value

substitution rule:

modification 1

116-80 Special rule if

CGT asset is shares

or an interest in a trust


used to account for

shares, or the interest

in trusts (capital

proceeds).

Division 118 -

Exemptions

Subdivision 118-A -

General exemptions

118-10 Collectables

and personal use

assets


requirements.

118-20 Reducing

capital gains if amount

otherwise assessable

118-25 Trading stock

118-60 Certain gifts

Subdivision 118-B -

Main residence

118-192 Special rule

for first use to produce

income


© Tim Kyle 2016 85


118-227 Amount of

exemption available

after the principal

beneficiary's death -

cost base and reduced

cost base

Division 122 - Roll- over

for the disposal of

assets to, or the

creation of assets in, a

wholly-owned company

Subdivision 122-A -

Disposal or creation of

assets by an individual

or trustee to a wholly-

owned company


requirements.

Subdivision 122-B -

Disposal or creation of

assets by partners to a

wholly-owned

company


used to account for a

partners interest.

Division 124 -

Replacement-asset roll-

overs

Subdivision 124-B -

Asset compulsorily

acquired, lost or

destroyed



original and other

asset.

Subdivision 124-C -

Statutory licences



original licence and

new license.

Subdivision 124-E -

Exchange of shares or

units



original and new

shares.

Subdivision 124-F -

Exchange of rights or

options



original and new

rights.

Subdivision 124-G -

Exchange of shares in

one company for

shares in another

company


used to account for

shares.


© Tim Kyle 2016 86


Subdivision 124-H -

Exchange of units in a

unit trust for shares in

a company


used to account for

shares and units.

Subdivision 124-I -

Change of

incorporation


used to account for

shares etc.

Subdivision 124-J -

Crown leases


used to account for

assets.

Subdivision 124-L -

Prospecting and

mining entitlements


used to account for

assets.

Subdivision 124-M -

Scrip for scrip roll-over


used to account for

interest/shares, equity

and debt etc.

Subdivision 124-N -

Disposal of assets by

a trust to a company

Subdivision 124-Q -

Exchange of stapled

ownership interests for

ownership interests in

a unit trust


used to account for

ownership interests;

and stapled entity’s

assets.

Subdivision 124-R -

Water entitlements


used to account for

new and old

entitlements; market

value of the ineligible

proceeds.

Division 125 -

Demerger relief

Subdivision 125-B -

Consequences for

owners of interests


used to account for

ownership interests.

Subdivision 125-C -

Consequences for

members of demerger

group


used to account the

asset because of the

demerger.


© Tim Kyle 2016 87


Division 126 - Same-

asset roll-overs

Subdivision 126-B -

Companies in the

same wholly-owned

group

126-85 Effect of roll-

over on certain

liquidations


used to account for of

the CGT roll-over

asset/s.

Subdivision 126-G -

Transfer of assets

between certain trusts


used to account for

interests.

Division 128 - Effect of

death


used to account for

modifications to the


cost base of the CGT

asset in the hands of

the legal personal

representative or

beneficiary.

Division 130 -

Investments

Subdivision 130-A -

Bonus shares and

units

Subdivision 130-B -

Rights

Division 132 - Leases 132-15 Lessee of land

acquires reversionary

interest of lessor


used to account for

land.

Division 149 - When an

asset stops being a

pre-CGT asset

Subdivision 149-B -

When asset of non-

public entity stops

being a pre-CGT asset

149-35 Cost base

elements of asset that

stops being a pre-

CGT asset


used to account for

assets.

Subdivision 149-C -

When asset of public

entity stops being a

pre- CGT asset

149-75 Cost base

elements of asset that

stops being a pre-

CGT asset


used to account for

assets.

Division 152 - Small

business relief

Subdivision 152-A -

Basic conditions for

relief under this

Division

152-40 Meaning of

active asset


part of requirements.


© Tim Kyle 2016 88


Part 3-5 - Corporate Taxpayers and Corporate Distributions

Division 164 - Non-

share capital accounts

for companies

164-15 Credits to non-

share capital account


used to account for

various interests.

164-20 Debits to non-

share capital account


used to account for

non-share equity

interest in the

company.

Division 165 - Income

tax consequences of

changing ownership or

control of a company

Subdivision 165-CC -

Change of ownership

or control of company

that has an unrealised

net loss


either of each asset

individually or together

is used to calculate

whether a company

has an unrealised net

loss.

Subdivision 165-CD -

Reductions after

alterations in

ownership or control of

loss company


either of each asset

individually or together

is used to calculate

whether a company

has an unrealised net

loss.

Also requires the

‘market values’ of the

equity or debt.

Division 170 -

Treatment of certain

company groups for

income tax purposes

Subdivision 170-C -

Provisions applying to

both transfers of tax

losses and transfers of

net capital losses

within wholly-owned

groups of companies



adjustment to the cost


base of an equity or

debt interest.

Division 197 - Tainted

share capital accounts

Subdivision 197-A -

What transfers into a

company's share

capital account does

this Division apply to?

197-15 Exclusion for

amounts transferred

under debt/equity

swaps



shares issued by the

company.


© Tim Kyle 2016 89



transfers made in

connection with

demutualisations of

insurance etc.

companies

Company valuation

amount.


post- demutualisation

transfers relating to life

insurance companies

Part 3-6 - the Imputation System

Division 202 - Franking

a distribution

Subdivision 202-C -

Which distributions

can be franked?

202-45 Unfrankable

distributions



excess purchase price

of the share at the

time of the buy-back.

Division 207 – Effect of

receiving a franked

distribution

Subdivision 207-E -

Exceptions to the rules

in Subdivision 207-D

Special rule about

whether interests in

unit trusts are

defeasible.

Part 3-10 - Financial Transactions

Division 230 - Taxation

of financial

arrangements

Subdivision 230-C –

Fair value method

The ‘fair value’ is used

to account for a gain

or loss from a financial

arrangement (tax-

timing method).

Subdivision 230-D -

Foreign exchange

retranslation method

230-290 Balancing

adjustment if election

ceases to apply

‘Fair value’

requirements.

Subdivision 230-E -

Hedging financial

arrangements method

Some ‘fair value’

requirements in

various sections.

Subdivision 230-F -

Reliance on financial

reports

230-430 Balancing

adjustment if election

ceases to apply


© Tim Kyle 2016 90


Subdivision 230-I -

Other provisions

230-505 Financial

arrangement as

consideration for

provision or acquisition

of a thing

‘Market value’ of the

thing.

‘Fair value’

requirements in parts

of the subdivision.

Subdivision 230-J -

Additional operation of

Division

230-530 Additional

operation of Division

‘Fair value’

requirements

Division 240 -

Arrangements treated

as a sale and loan

240-3 How the

recharacterisation

affects the notional

seller

The ‘cost’, ‘value’ or

‘arm’s length value’ is


consideration for the

notional sale.

240-7 How the

recharacterisation

affects the notional

buyer

The ‘cost’, ‘value’ or

‘arm’s length value’ is


acquisition.

Subdivision 240-F -

The end of the

arrangement

240-90 What happens

if the notional buyer

ceases to have the

right to use the

property



property at the end of

the arrangement.

Division 242 - Leases

of luxury cars


used to determine

whether a luxury car

exceeds the car limit

set.

Division 245 -

Forgiveness of

commercial debts

Subdivision 245-C -

Calculation of gross

forgiven amount of a

debt



value of the debt when

it is forgiven.

Various other ‘market

value’ requirements

throughout the

division.


protected borrowings

247-10 What capital

protected borrowing

and capital protection

are

The ‘market value’ of a

thing needs to be

considered (the

protected thing).


© Tim Kyle 2016 91


Division 250 - Assets

put to tax preferred use

Subdivision 250-B -

When this Division

applies to you and an

asset



asset and financial

arrangement.

Subdivision 250-C -

Denial of, or reduction

in, capital allowance

deductions

Subdivision 250-D -

Deemed loan

treatment of financial

benefits provided for

tax preferred use

Subdivision 250-E -

Taxation of deemed

loan

Part 3-30 - Superannuation


concepts relating to

superannuation

285-5 Transfers of

property



property.

Division 295 - Taxation

of superannuation

entities

Subdivision 295-B -

Modifications of

provisions of this Act

The ‘market value’ of

superannuation

interests is used in the

definition of an

Australian

superannuation fund.

Subdivision 295-D -

Contributions excluded

The ‘market value’ of

the transferor's

investment is used

limit the transfer.

Part 3-32 - Co-operatives and Mutual Entities

Division 315 -

Demutualisation of

private health insurers

Subdivision 315-B -

Cost base of certain

shares and rights in

private health insurers


used to determine the

cost base of shares

and rights issued

under the

demutualisation.


© Tim Kyle 2016 92


Subdivision 315-C -

Lost policy holders

trust

Subdivision 315-D -

Special cost base

rules for certain shares

and rights in holding

companies

Division 316 -

Demutualisation of

friendly society health

or life insurers

Subdivision 316-B -

Capital gains and

losses connected with

the demutualisation

316-65 Valuation

factor for sections 316-

60, 316-105 and 316-

165



friendly society's

health insurance

business.

Subdivision 316-D -

Lost policy holders

trust


used to account for

property.

Part 3-35 - Insurance

Business

Division 320 - Life

insurance companies

Subdivision 320-F -

Complying

superannuation/FHSA

asset pool

320-200

Consequences of

transfer of assets to or

from complying

superannuation/FHSA

asset pool

Subdivision 320-H -

Segregation of assets

to discharge exempt

life insurance policy

liabilities

320-230 Valuations of

segregated exempt

assets and exempt life

insurance policy

liabilities for each

valuation time

320-255

Consequences of

transfer of assets to or

from segregated

exempt assets


© Tim Kyle 2016 93


Part 3-45 - Rules for Particular Industries and Occupations

Division 355 - Research

and Development

Subdivision 355-F –

Integrity Rules

355-400 Expenditure

incurred while not at

arm's length


used to account for

relevant R&D.

Subdivision 355-H -

Feedstock

adjustments



marketable product.

Division 385 - Primary

production

Subdivision 385-E -

Primary producer can

elect to spread or

defer tax on profit from

forced disposal or

death of live stock


used to account for

livestock.

Division 394 - Forestry

managed investment

schemes



forestry interest.

Part 3-50 - Climate Change

Division 420 -

Registered emissions

units


used to account units

and other

requirements.

Not detailed due to

expected government

changes.

Part 3-90 - Consolidated Groups

Division 701 - Core

rules

701-60 Tax cost

setting amount



asset's tax cost setting

amount in some

cases.

701-63 Right to future

income and WIP

amount asset



valuable right.

Division 705 - Tax cost

setting amount for

assets where entities

become subsidiary

members of

Subdivision 705-A -

Basic case: a single

entity joining an

existing consolidated

group

The ‘market value’ for

membership interests,

assets etc are required

throughout subdivision

(Allocable Cost


© Tim Kyle 2016 94


consolidated groups Amount (ACA) and

pre-CGT factor).

Subdivision 705-B -

Case of group

formation


used to account for

membership interests

in subject entity, first

level entity's direct and

indirect membership

interests and first

entity's membership

interests in third entity

held through second

entity.

Subdivision 705-D -

Where multiple entities

are linked by



used to account for

linked membership

interests.

Division 707 - Losses

for head companies

when entities become

members etc.

Subdivision 707-C -

Amount of transferred

losses that can be

utilised


used to account for

available fraction.

‘Market value’ rules

throughout the

subdivision.

There are modified

‘market value’ rules

and rules to prevent

inflation of modified

market value.

Division 711 - Tax cost

setting amount for


where entities cease to

be subsidiary members

of consolidated groups


requirements.

Division 713 - Rules for

particular kinds of

entities

Subdivision 713-A -

Trusts

Working out a joined

group's allocable cost

amount for a joining

trust.


© Tim Kyle 2016 95


Subdivision 713-E -

Partnerships

Special rules where

partnership

joins/leaves a

consolidated group

‘Market value’ of

partnership cost

setting interest.

Division 715 -

Interactions between

this Part and other

areas of the income tax

law

Subdivision 715-A -

Treatment of

unrealised losses

existing when

ownership or control of

a company changes

before or during

consolidation


used to account for

membership interests,

assets etc.

Division 719 – MEC

groups

Subdivision 719-F -

Losses

The ‘modified market

value’ is used to

account for available

fraction for bundle of

losses.

Subdivision 719-K -

MEC group cost

setting rules: pooling

cases



setting the cost of all

reset interests.

Part 3-95 - Value Shifting

Division 723 - Direct

value shifting by

creating right over non-

depreciating asset

Subdivision 723-A -

Reduction in loss from

realising non-

depreciating asset



right and underlying

asset.

Division 725 - Direct

value shifting affecting

interests in companies

and trusts

Subdivision 725-A -

Scope of the direct

value shifting rules


used to determine

changes attributable to

the value shift.

‘Market value’

requirements

throughout the

division.


© Tim Kyle 2016 96


Subdivision 725-B -

What is a direct value

shift?

Subdivision 725-C -

Consequences of a

direct value shift

Subdivision 725-D -

Consequences for

down interest or up

interest as CGT asset

Subdivision 725-E -

Consequences for

down interest or up

interest as trading

stock or a revenue

asset

Subdivision 725-F -

Value adjustments and

taxed gains

Division 727 - Indirect

value shifting affecting

interests in companies

and trusts, and arising

from non-arm's length

dealings

Subdivision 727-B -

What is an indirect

value shift


used to determine the

effects on the interests

(both direct and

indirect) in entities.

Rules of thumb are

included to make it

easier to determine

the ‘market value’ of

some kinds of

economic benefits.

Subdivision 727-C -

Exclusions

Subdivision 727-D -

Working out the

market value of

economic benefits

Subdivision 727-G -

The realisation time

method


© Tim Kyle 2016 97


Subdivision 727-H -

The adjustable value

method

Subdivision 727-K -

Reduction of loss on

equity or loan interests

realised before the IVS

time

Subdivision 727-L -

Indirect value shift

resulting from a direct

value shift

Part 4-5 - General

Division 768 - Exempt

foreign income and

gains

Subdivision 768-G -

Reduction in capital

gains and losses

arising from CGT

events in relation to

certain voting

interests in active

foreign companies


one method used to

determine the active

foreign business

asset percentage.

Subdivision 768-R -

Temporary residents




cost base of the asset

(at the time you cease

to be a temporary

resident).

Division 775 - Foreign

currency gains and

losses

Subdivision 775-B -

Realisation of forex

gains or losses


used to account for

capital proceeds.



benefit you receive by

way of a non-cash

benefit.

Subdivision 775-F -

Retranslation under

foreign exchange

retranslation election

775-315 Balancing

adjustment when

election ceases to

‘Fair value’

requirements


© Tim Kyle 2016 98


under Subdivision

230-D

apply to arrangement

Division 815 - Cross-

border transfer pricing

Subdivision 815-A -

Treaty- equivalent

cross-border transfer

pricing rules


principle’ is used to

ensure that certain

amounts are

appropriately brought

to tax in Australia.

Subdivision 815-B -

Arm’s length principle

for cross-border

conditions between

entities


principle’ is used to

determine a tax

advantage in Australia

from cross-border

conditions.

Subdivision 815-C -

Arm’s length principle

for permanent

establishments

The use of ‘arm’s

length principle’ is

extended to

permanent

establishments (PEs).

Division 820 – Thin

Capitalisation rules

Subdivision 820-G -

Calculating the

average values

The ‘average value’ of

assets, liabilities and

equity etc is required.

The Commissioner to

substitute a more

‘appropriate value’ for

an average value.


gains and foreign

residents

Subdivision 855-A -

Disregarding a capital

gain or loss by foreign

residents

855-30 Principal asset

test


used to account for

taxable Australian real

property (TARP) and

non-TARP assets.

Subdivision 855-B -

Becoming an

Australian resident




cost base of the asset

at the time you

become an Australian

resident.


© Tim Kyle 2016 99


Part 6-1 - Concepts and Topics

Division 960 - General Subdivision 960-S –

Market value

960-405 Effect of GST

on market value of an

asset

The ‘market value’ in

this subdivision is

reduced by the

amount of GST credits

that relate to a taxable

supply and anything

restricting or

preventing the

conversion of non-

cash benefits is

disregarded.

960-410 Market value

of non- cash benefits

960-415 Amounts that

depend on market

value

Division 974 - Debt and

equity interests

Subdivision 974-B -

Debt interests

974-35 Valuation of

financial benefits -

general rules

974-40 Valuation of


rights and options to

terminate early

974-45 Valuation of


convertible interests

974-50 Valuation of


value in present value

terms


© Tim Kyle 2016 100


Part 6-5 - Dictionary Definitions

Division 995 -

Definitions

995-1 Definitions ‘Market value’ has a

meaning affected by

subdivision 960-S.

‘Modified market

value’ of an entity has

the meaning given by

section 707-325.

Various other

definitions rely on

‘market value’.

Definition of ‘fair value’

election.

‘Arm's length

consideration’ has the

meaning given by

section 300-1 of the

Minerals Resource

Rent Tax Act 2012.

national resources tax conference - greenwoods · this observation applies equally to the...

Documents