Assessing the market value of a minority shareholding: Context is key for CGT

expert postcards

Context matters: When is it appropriate to apply a discount for lack of control in assessing the market value of a minority shareholding for CGT purposes?

Commissioner of Taxation v Miley [2017] FCA 1396

The Federal Court has explained that a key factor in determining whether or not the market value of a minority shareholding should incorporate a discount for lack of control1 is whether the sale of the shareholding was part of a larger transaction by which the purchaser gained control of the company.

Key takeaways

  • The agreed price for the sale of a minority shareholding in an arm’s length transaction between a willing but not anxious buyer and seller will often be the best evidence of market value.
  • In this case, it was inappropriate to apply a discount for lack of control where the terms of the sale required the buyer to purchase all the issued shares of the company and the buyer was not required to buy the shares held by one of the shareholders to the exclusion of the shares held by any other shareholder.
  • In other cases where actual sale evidence involves the sale of a minority shareholding on a standalone basis, which does not give the purchaser control of the company, the application of a discount for lack of control may still be appropriate.

Background

Three equal shareholders in AJM Environmental Services Pty Ltd (AJM), of which Mr Miley was one, agreed to sell their shares to an arm’s length purchaser (EIMCO) for $17.7 million, with each shareholder receiving $5.9 million.  

On the Commissioner of Taxation’s view that the market value of Mr Miley’s shareholding immediately before the sale was $5.9 million, it followed that Mr Miley’s total CGT assets at that point in time exceeded a statutory threshold of $6 million and he was therefore not entitled to certain small business CGT concessions.

At first instance, Mr Miley successfully challenged the Commissioner’s assessment with the AAT finding that the market value of the relevant shareholding was $4,914,700, after applying a discount for lack of control of 16.7%. The AAT’s approach was to determine market value of the minority shareholding on a standalone basis, as though the purchaser had only acquired Mr Miley’s shares.

The Commissioner appealed to the Federal Court.

Federal Court judgment

Justice Wigney found in favour of the Commissioner, holding that, since EIMCO had agreed to purchase all of the AJM shares and would never be in the position of a minority shareholder:

  • The AAT erred in approaching the valuation on the basis of an “unrealistic hypothesis” of a sale of Mr Miley’s minority shareholding to a purchaser who was not willing or able to purchase the shares held by the other shareholders;
  • It was inappropriate to apply a discount for lack of control;
  • The market value of Mr Miley’s shareholding was the $5.9 million that EIMCO agreed to pay for it.

Justice Wigney distinguished cases in which the "holder or purchaser of the shares was unable to acquire the remaining shares in the company, or at least further shares that would convert the holding into a controlling holding”, where discounts for lack of control have been applied.

 

Read the full judgment here.

[1] The International Valuation Standards Council defines discount for lack of control as “an amount or percentage deducted from a pro-rata share of the value of 100 percent of an equity interest in a business, to reflect the absence of some or all of the powers of control”. The underlying concept is that, all other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control.

How can we help?

A wide range of stakeholders rely on our rigorous valuations to support transactions and management decisions, resolve disputes, and ensure financial reporting and taxation obligations are met.

A number of our partners are accredited as CA Business Valuation Specialists by Chartered Accountants Australia and New Zealand and Ferrier Hodgson is a member of the ATO’s valuation services panel.

For more information about our business valuations capability in tax controversies and other situations, please contact a Ferrier Hodgson partner in your nearest capital city or click here.

 

Author