Will the ATO accept my business valuation for capital gains tax?

The ATO does not pre-approve any business valuation. It will accept a valuation for capital gains tax when the report is independent, uses a method appropriate to the business, documents the evidence and assumptions relied on, and arrives at a market value a reviewer can follow and test. A signed report prepared to the ATO's market valuation guidance meets that standard.

There is no such thing as an ATO-approved valuation

The ATO does not run a register of approved valuers, does not pre-approve reports, and does not issue a confirmation before a valuation is relied on. Any firm advertising ATO-approved valuations is overstating what is possible. What the ATO publishes instead is guidance on what a market valuation for tax purposes should contain, and it assesses a valuation against that guidance only if and when it looks at one.

What the ATO's guidance actually asks for

The ATO's market valuation for tax purposes guide is principles-based. Read together, its expectations come down to five things.

• ·Market value as defined for tax purposes: the price a willing but not anxious buyer and seller would agree, both informed and acting at arm's length.
• ·A methodology appropriate to the business and the purpose, with the choice explained, not just applied.
• ·Evidence: the financial statements, adjustments, comparable data and market information relied on, documented so a reviewer can see them.
• ·Assumptions that are reasonable and stated, including how earnings were normalised and why a particular multiple or discount rate was chosen.
• ·A valuer with the competence and independence to stand behind the conclusion, identified by name and signing the report.

Where valuations fail

When the ATO does challenge a valuation, it is rarely because of the arithmetic. The usual failures are a valuation date that does not match the CGT event, a fee or a valuer that depends on the outcome, undocumented add-backs that flatter earnings, a multiple asserted rather than evidenced, and reports that cannot show how the number was reached. Each of those is a documentation and independence problem before it is a valuation problem.

What a signed report from Oliver Group contains

Every Oliver Group report is signed by the valuer who prepared it, and states the purpose, the valuation date, the entity, the methodology and why it was chosen, the normalisation of earnings with each adjustment listed, the market evidence relied on, the assumptions and limitations, and an independence statement. The fee is fixed before work starts and never depends on the value reached, which is the incentive the ATO's guidance is most alert to. Oliver Group's fees are set by the annual turnover of the business: a Small Business Valuation is $1,495 + GST for turnover under $2 million, a Medium Business Valuation is $2,495 + GST for turnover between $2 million and $3 million, a Large Business Valuation is $3,495 + GST for turnover between $3 million and $10 million, and above $10 million the fee is quoted in writing before work starts. Small-business reports are delivered in 2 business days and medium- and large-business reports in 3 business days; above $10 million the delivery date is agreed before commencement. Delivery time starts once payment and all required information have been received. Retrospective valuation dates are +$495 each and additional entities are +$795 each. The fee is fixed in writing before work begins and never depends on the concluded value.

When you need more than a standard report

Higher-value, retrospective or contested matters, and anything likely to draw a review, are better served by a fuller evidence file: more comparables, a second methodology as a cross-check, sensitivity analysis and a working file prepared for a reviewer.

What ATO reviewers look for

The ATO's market valuation guidance sets out the framework. In practice, reviewers assess: was the methodology appropriate for the asset, evidence and purpose; was the methodology selection reasoned; were rejected methodologies discussed; was the evidence documented and reliable; were the assumptions clearly stated and reasonable; were the limitations disclosed; was the conclusion within the supportable range that the evidence allows; was the report prepared by an independent and appropriately-qualified valuer.

What happens when a valuation is challenged

A challenged valuation is not the end of the matter. The ATO will typically issue questions about the methodology or evidence. The valuer (or the taxpayer's adviser) responds with reference to the working file. Where the response is supportable, the valuation stands. Where the response cannot defend the conclusion, the ATO may propose an alternative valuation. The taxpayer can accept, negotiate, or contest the matter through objection and litigation processes. A well-prepared file makes the response defensible.

• ·Market valuation for tax purposes (guide), Australian Taxation Office
• ·Market valuation of assets, Australian Taxation Office
• ·Small business CGT concessions, Australian Taxation Office
• ·Small business CGT concessions: eligibility conditions, Australian Taxation Office
• ·Income Tax Assessment Act 1997, Federal Register of Legislation