Valuation Issues in Australia

By: William Hughes

Leadenhall Corporate Advisory Pty Ltd.

This is a high level summary of issues likely to be relevant to international groups with operations in Australia or that are considering transactions in Australia. The following overview was prepared by VRG member firm Leadenhall Corporate Advisory Pty Ltd.

Financial Reporting

Australian financial reporting is based on International Financial Reporting Standards (IFRS). The Australian Accounting Standards Board (AASB) has issued AASB standards mirroring IVS with a few very minor changes.

When are Valuations for Financial Reporting Required in Australia?

Market value is a commonly used term in Australian tax law. Valuation advice is often useful in the following circumstances:

Post-Acquisition. The cost base of various assets held by the acquired company can be re-set to market value. This includes tangible assets and certain intangibles, notably software, but excludes goodwill. Transactions will need to be structured correctly for this option to be available.

Group Restructures. Non-arm’s length transactions, for example as a result of a group restructure, typically trigger capital gains tax, which is based on market value.

Thin Capitalization. For certain international groups, the amount of interest payments that can be claimed as a tax deduction is limited to a proportion of the relevant company’s assets. Certain assets (particularly intangibles) can be included at market value, despite being held at cost for accounting, when making this assessment.

Form and Content

Australian Taxation Office (ATO) has developed a document referred to as Form for Instructing Your Valuation Consultant. While not a formal requirement, best practice would be for this form to be completed by the client at the outset of an engagement.

The ATO has also issued guidance referred to as Market Valuation for Tax Purposes. This document sets out minimum expected requirements for valuations prepared for taxation purposes. The bulk of the requirements are disclosure related.

Independent Expert’s Reports (IERs)

IERs are similar to fairness opinions, although they generally include a detailed analysis of a proposed transaction, including industry and company background and fully reasoned valuation analysis. The main circumstances when an IER is needed are:

  • Related Party Takeover. An IER is required if the acquirer has a pre-existing stake of 30% or more, or if the target and acquirer have a common director.
  • Related Party Purchase/Sale. An IER is required if a listed company proposed to buy an asset from or sell an asset to a related party and the value of the asset is greater than or equal to 5% of the book value of equity of that company.
  • Major Shareholding. If a proposed transaction would result in a shareholder gaining greater than 20% of a listed company, or increasing a stake that is already over 20%, in the absence of a full takeover offer, then an IER is generally required.
  • Voluntary. Target company boards of directors often seek an IER in response to a takeover offer, despite not having a regulated requirement to do so.

To learn more about how VRG and Leadenhall Corporate Advisory Pty Ltd. can work with your company, we welcome you to visit us online or contact Richard Norris at RNorris@Leadenhall.com.au.

For more information about VRG’s full scope of international valuation and value-related services, contact Bill Hughes.

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