Business Valuation for Tax Purposes.

There are a number of situations where you need a business valuation for tax purposes. These include:

• changes in capital structure
• changes of ownership
• capital gains tax rollovers
• company divestments
• company acquisitions

There are several approaches you can take to valuing a business, or intangible asset. These are usually categorised as:

• market
• income
• asset
• cost

The most suitable approach depends on the context and purpose of the valuation and the particular characteristics of the item being valued.

The approaches described above are only the first step in deriving the value of an item. When determining the market value of a business for tax purposes, additional factors need to be considered according to the asset being valued.

Valuation methods

The valuation of a business for tax purposes is usually based on a number of established valuation methods built around the market-based, income-based and asset-based approaches.

In valuing a business, there are a number of factors that may affect the market value and produce a reasonable and defensible view of the market value. It is important that a business valuation is transparent and any factors affecting the outcome have to be understood.

These factors may include:

• valuation methods –choices need to be explained and demonstrated as to why they are appropriate
• valuation metrics –for instance, a description of how a company weighted average cost of capital was derived.
• valuation date
• purpose of the valuation
• basis or premise of your valuation – for example, valuation of the business on a going-concern basis
• description of the business

Valuing intangible assets and intellectual property

The valuation of intangible assets, including intellectual property but excluding goodwill, is based on a number of established valuation methods using market-based, income-based, cost-based and probabilistic approaches.

These methods include:

• comparable transactions
• incremental income
• excess earnings
• relief from royalty
• replacement or reproduction cost
• simulation analysis.

It is very important to apply these methods in the context of existing legislation, ATO practice (such as rulings) and established industry approaches.

One thing is paramount in Business Valuation, and that is that the valuer has the experience and qualifications to provide a valuation that is accepted for taxation,  merger and acquisition or litigation purposes.

If you require a business valuation for tax purposes, contact Lee Goldstein on 1800 566 872