Transferring shares to your family trust: when you need a valuation, and who does it
When private company shares move to your own family trust, tax law can look past the price to market value. Here is what is valued, when, and what it costs.
You may need a market valuation to transfer private company shares to your family trust. If the trustee pays nothing, or you do not deal at arm's length and the price is not market value, tax law uses market value instead (ITAA 1997 ss 116-30, 112-20). Oliver Group, an independent business valuer, values the shares from $1,495 + GST.
Do I need a valuation to transfer shares in my private company to a family trust?
It can be needed, because tax law can replace the price with market value. Moving shares to the trustee of an existing family trust is generally CGT event E2 for you (section 104-60 of the Income Tax Assessment Act 1997), and the law can then use the shares' market value instead of the price. Arm's length is about the dealing, not just the family tie: the Act says to consider any connection between the parties and any other relevant circumstance (section 995-1). The ATO names non-arm's length transactions, such as moving shares between family members, as one reason taxpayers may need a market valuation. Illustration only: shares worth $400,000 sold to the trust for $100,000, not at arm's length, give you capital proceeds of $400,000 and the trustee a cost base starting at $400,000. The tax result, and any roll-over or concession, is for your accountant.
| On the transfer | What the law uses | Section |
|---|---|---|
| The trustee pays nothing | You are taken to have received the shares' market value at the time of the transfer | 116-30(1) |
| The trustee pays more or less than market value, and you did not deal at arm's length | Market value replaces the price as your capital proceeds | 116-30(2) |
| The trustee pays exactly market value | Nothing is replaced; the valuation shows the price was market value | 116-30(2) |
| The trustee pays nothing, or does not deal with you at arm's length | The trustee's cost base starts at the shares' market value when acquired | 112-20(1) |
Who should I use to value shares transferred to my family trust?
Use an independent business valuer that values private company shares and signs a report you can give your accountant; a property valuer values land and buildings, not shares. The ATO's guide to market valuation for tax purposes says acceptability usually depends on the process, not who carried it out, and that you must make sure the valuer is suitably knowledgeable and experienced, properly instructed and objective, with a value supported by credible evidence and a recognised method. The ATO also asks that a valuer's instructions state the fee does not depend on the outcome. Oliver Group values private company shares for transfers like this, for a fixed fee that never depends on the outcome.
What is valued: the company, or my parcel of shares?
Your parcel of shares is valued, not the company. The valuer starts with the whole business, moves to the equity, allowing for debts and any surplus assets, and ends with the parcel, judged on its size, class and the rights in the constitution and any shareholders' agreement. A controlling parcel, which can appoint directors, set dividends or decide a sale, can be worth more per share than a minority parcel that cannot. The size of any difference depends on the rights attached to the parcel and the facts of the company. The ATO's guide counts a report that identifies the interest and its rights as better support for a market value, and our reports do.
What date are the shares valued at?
As at the CGT event. If the event is CGT event E2, the usual event for a transfer to an existing trust, that is when the shares are transferred (section 104-60(2)); your accountant confirms the event and the date, and the report records it. Under the ATO's guide, the value should be based on information known, or that could reasonably be foreseen, at that date, judged without hindsight, and a prospective assessment will not be considered reasonable or acceptable, so we do not value at future dates. If the transfer has happened, we value as at its date, and each retrospective (past) valuation date is +$495 + GST. If it is still planned, we value as at the date it happens, not the intended date, because the law uses the value at the time of the event.
How do loans and Division 7A balances change the value of the shares?
The share value reflects what the company owes and what it is owed. A loan the company owes you is a liability that reduces the value. A loan you or an associate owes the company, the kind Division 7A of the Income Tax Assessment Act 1936 deals with, is a company asset, and the valuer considers whether it will be repaid. The report shows how each balance was treated; what happens to the loans, and any Division 7A consequence, is for your accountant.
Is stamp duty payable when shares move into a family trust?
Whether duty is payable depends on the state and on what the company owns, and landholder duty can apply where the company holds land: in New South Wales, for example, when someone acquires a significant interest (50 per cent or more for a private company) in a company holding NSW land with an unencumbered value of $2 million or more. Check with your state revenue office or adviser; Oliver Group does not advise on duty.
What should I send, and what will the report contain?
Once you engage, send the documents below; nothing is needed to start. The report is signed and sets out a concluded value with a supportable range for the parcel, the method and evidence, the assumptions and limitations, an independence statement and the signature of the valuer responsible. A second valuer reviews every report before it is signed, and the working file is kept for ten years. Usually we need:
- ·Three years of financial statements and year-to-date accounts
- ·The share register, constitution and any shareholders' agreement
- ·The number and class of shares moving, and the transfer date
- ·Loan accounts with owners and related parties, including Division 7A loans
- ·Any property valuation, if the company owns land or buildings
What does it cost, and how do I start?
The fixed fee depends on the annual turnover of the business, from $1,495 + GST; to start, send the enquiry form, with no documents needed. We reply within one business day, and a fifteen-minute call confirms the package, the fixed fee and the delivery date. Under $2 million: $1,495 + GST, signed report in 2 business days. $2 million to $3 million: $2,495 + GST, 3 business days. $3 million to $10 million: $3,495 + GST, 3 business days. Over $10 million: quoted in writing before work starts. Delivery time starts once payment and all required information have been received. Add-ons, agreed in writing before work starts: +$795 + GST for each additional entity and +$495 + GST for each retrospective (past) valuation date. Everyone pays the same published fee. Not included: tax advice (Oliver Group is not a registered tax agent), expert witness work or court appearances (a separate engagement agreed first), and a cross-check against a second or third method.
- ·ITAA 1997 s 104-60: CGT event E2, ATO legal database
- ·ITAA 1997 s 104-10: CGT event A1 and its timing, ATO legal database
- ·ITAA 1997 s 116-30: capital proceeds, market value substitution, ATO legal database
- ·ITAA 1997 s 112-20: cost base, market value substitution, ATO legal database
- ·ITAA 1997 s 995-1: meaning of arm's length, ATO legal database
- ·Market valuation for tax purposes (guide), ATO
- ·Market valuation of assets, ATO
- ·Private company benefits: Division 7A dividends, ATO
- ·What is landholder duty, Revenue NSW
Common questions.
Can my accountant value the shares instead of an independent valuer?+
For a transfer like this, the ATO's guide says acceptability usually depends on the valuation process rather than who carried it out, though it expects an experienced, objective valuer and credible evidence. An independent valuer on a fixed fee keeps the valuation apart from your accountant's tax advice.
Do I still need a valuation if the trust pays full market price?+
It can be worth having, because the valuation is what shows the price was market value. Section 116-30 replaces a price above or below market value where the parties did not deal at arm's length, and a deal with your own family trust may not be. A price equal to market value leaves nothing to replace.
Does it matter whether I transfer all my shares or just some?+
Yes. The value is worked out for the parcel that moves, so a minority parcel and a controlling holding in the same company may carry different values per share. If shares move in stages, each transfer happens at its own time and needs its own valuation date, which your accountant confirms.
Can the ATO confirm the value before I transfer the shares?+
The ATO's guide says you can apply for a private ruling on an asset's market value where it is relevant to a question about the tax law. It also says the ATO cannot give one to determine or confirm the market value for a future event. Your accountant can say whether a ruling suits your transfer.
What if the company owns land or buildings?+
Oliver Group values businesses and shares, not land or buildings. A property valuer values the property, and the share valuation takes that value into account with the company's other assets and debts. Land can also attract landholder duty in some states, so ask your adviser.
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