Valuations: When Do You Need One for Tax and Business Purposes?

Sally Preston

Business owners are often told by their accountant, lawyer, banker or adviser that they need a valuation. That request can feel frustrating if the owner already has a strong view of what the business, shares, property or goodwill is worth. However, for tax and commercial purposes, the question is not simply what someone thinks an asset is worth. The question is whether the value adopted is objective, supportable and prepared for the right purpose at the right valuation date.

Key message - For tax purposes, a valuation needs to be objective, supportable and prepared for the correct purpose and valuation date.

Why valuations matter

A valuation can influence the tax payable on a transaction, the commercial price negotiated between parties, the ability to access concessions, the records required to support a tax position and the level of risk if the ATO reviews the transaction. A poor valuation, or a valuation prepared for the wrong purpose, can create practical problems long after the transaction has been completed.

For tax purposes, the ATO’s guidance emphasises that the taxpayer remains responsible for providing a defensible valuation, even where a professional valuer is engaged. That means the valuation process, instructions, assumptions, evidence and documentation all matter.

When might a valuation be needed?

·       A business sale or succession transaction

·       A restructure involving related parties

·       A transfer of shares, units, property or business assets between related parties

·       Testing eligibility for the small business CGT concessions

·       Issuing shares or options under an employee share scheme

·       Using the GST margin scheme for property development

·       Death, separation, dispute or buy-sell events

·       Tax consolidation or intra-group transactions

·       Financing, estate planning, business growth reviews, depreciating asset transfers, trading stock adjustments and international transactions

When is an external valuer needed?

For tax purposes, the acceptability of a valuation usually depends on the process undertaken, the evidence relied on and whether the methodology is appropriate for the asset and tax provision. In some cases, an internal or management valuation may be sufficient. In other cases, particularly where the amount is material, the parties are related, the asset is complex, or the outcome is likely to be reviewed, an independent external valuation is usually the safer course.

There are also situations where specific expertise or qualifications may be expected or required in practice, such as real property, plant and equipment, GST margin scheme valuations and specialist asset valuations. The key point is that the valuation must be fit for purpose and capable of being explained, tested and supported.

What does the ATO expect from a valuation?

The ATO expects market valuations to be objective and supported by appropriate evidence. The valuation should be prepared for the specific tax or superannuation provision being applied and should consider the relevant law, case law, ATO guidance and industry valuation standards.

The valuation should also use inputs and assumptions that are consistent with the relevant valuation date. Market value is different from historical cost, and later events should not be used unless they were reasonably foreseeable at the valuation date.

Where possible, the valuation should use an appropriate primary methodology and a secondary or cross-check methodology. The report should clearly record the evidence, assumptions, calculations and reasoning so that another person can understand how the value was reached.

Common valuation problems the ATO may question

Common problems include using the wrong valuation method, relying on unsupported assumptions, omitting relevant information available at the valuation date, using inconsistent legal or commercial documents, failing to verify inputs, relying too heavily on historical performance, choosing inappropriate comparable assets, or not documenting the valuation process properly.

These issues matter because a valuation is not just a number. It is a process. If the ATO cannot understand, test or replicate the valuation, the risk of adjustment increases.

New CGT changes: why 30 June 2027 valuations may become important

The new CGT reforms make valuations even more important. The changes are expected to apply to gains accruing after 1 July 2027, which means taxpayers may need to establish the value of relevant assets at 30 June 2027 or 1 July 2027 to separate gains arising before and after the commencement date.

At this stage, further ATO and Treasury guidance is still expected on how taxpayers should determine those transitional values, including whether concessional or simplified methods will be available. Until that guidance is released, taxpayers should not assume that an informal estimate will be enough.

For clients with valuable business assets, shares, units, goodwill, pre-CGT assets, investment properties or other long-held assets, it may be prudent to start identifying which assets may require a valuation and what records will be needed to support the value adopted at the transition date.

How to choose the right valuer

Cost matters, but it should not be the only factor. A good valuer should have relevant qualifications and experience, understand the type of asset being valued, apply a methodology consistent with industry standards, communicate clearly, identify assumptions and limitations, and provide a report that can be relied on for the relevant tax or commercial purpose.

Where the valuation is being used for tax purposes, the instructions to the valuer are also important. The valuer should be told the purpose of the valuation, the relevant asset or interest, the required valuation date, the relevant tax context and any assumptions or restrictions that may affect the work.

What should a valuation report include?

·       The purpose and scope of the valuation.

·       The asset or interest being valued.

·       The valuation date and report date.

·       The definition of value being applied.

·       The valuation standards, methodology and calculations used.

·       The information, assumptions and limitations relied on.

·       The evidence supporting the conclusions.

·       The valuer’s qualifications, independence and engagement terms.

·       Any risks, disclaimers or qualifications.

What happens if the valuation is not accepted?

If the ATO reviews a valuation, it will usually consider the value of the asset, the type of asset, the size of any potential tax adjustment, the complexity of the valuation process and the evidence supporting the conclusion. Intangible assets, related-party dealings and material transactions may attract closer attention.

If the ATO disagrees with the value adopted and the result is underpaid tax, the taxpayer may face additional tax, interest and penalties. That is why it is usually better to address valuation risk before the transaction occurs, rather than trying to defend an unsupported number later.

Practical takeaway

A valuation should not be treated as a formality. It can affect tax outcomes, commercial negotiations, concession eligibility and audit risk. If the transaction is material, complex, between related parties or connected with the new CGT reforms, it is worth obtaining advice early about whether a valuation is needed, who should prepare it and what evidence should be retained.

What should advisers check before relying on a valuation?

☐ Has the correct asset or interest been valued?

☐ Is the valuation date correct?

☐ Does the report identify the relevant tax or commercial purpose?

☐ Is the valuer independent and appropriately experienced?

☐ Are the assumptions clear and supportable?

☐ Does the methodology fit the asset?

☐ Is there enough evidence for another person to understand and test the conclusion?

Need help?

Smart Solutions Tax Advisory can help identify when a valuation is needed, what instructions should be given to the valuer and how the valuation affects the tax outcome.

Disclaimer: This article contains general information only and should not be relied on as tax, legal or valuation advice.

References / Useful links

ATO market valuation: Market valuation of assets | Australian Taxation Office

ATO market valuation guide: Market valuation for tax purposes | Legal database