Posted 15 Apr 16 by Steve Perri
As accountants and tax practitioners we often require valuations to support transactions and to underpin advice provided to clients. Have you ever taken a moment to consider the risk that the valuations prepared, which you may also be providing tax advice for, fail to meet the guidelines issued by the ATO? If you were not aware that the ATO had published guidelines in this area then you may be exposing yourself and your clients to unnecessary risk.
The ATO have initiated compliance activities on business valuations which may involve reviewing the market value adopted. The areas of focus of these reviews are determined by considering the tax risk associated with the market value, and the risk in the market valuation process itself.
In assessing the likelihood, consequence and tax risk associated with a valuation, the ATO usually consider the following:
- Value of the asset or assets determined or used;
- Type of asset or assets involved (intangible assets are more likely to increase risk)
- Materiality of any potential tax adjustment
- Complexity of the valuation process
- Documentary evidence supporting the valuation.
In assessing the valuation process risk the ATO generally use valuers to confirm whether the market value is acceptable. They usually review the valuation process to see if it complies with accepted valuation industry practice. Broadly, the review involves looking at:
- How adequately the process was documented
- Which market value definition was used
- How appropriate the method used was
- What assumptions and information was relied upon
At the conclusion of the review, the valuer provides the ATO with a report on the value adopted which may include an estimate of the market value (or likely range) of the asset or assets, based on data available to them at that time. When the report is reviewed the ATO use a standard risk assessment procedure to decide whether to take further action, such as an audit.
Click here for a full overview of how the ATO reviews the valuation process and documentation risk.
Please contact our Corporate Finance team for assistance with business valuations.