Tax, restructures, shareholders and buy-ins

Not for a business. The ATO guide states that for tax purposes the acceptability of a valuation usually depends on the valuation process undertaken rather than who conducted it, and that there is no formal admissions board in Australia for business valuers. It adds that a valuation which adopts and follows professional standards can add credibility, and that you are responsible for ensuring the valuer is suitably knowledgeable and experienced, properly instructed and objective. Real property is treated differently: the guide notes that in Queensland valuers must be registered by the Valuers Registration Board of Queensland, and in Western Australia land valuations must be undertaken by a licensed land valuer. Where a practice owns its premises, the land may need a separate valuation.

It is one of the ways to satisfy the basic conditions for the small business CGT concessions. The total net value of the CGT assets of you, entities connected with you, your affiliates and entities connected with your affiliates must not exceed $6 million just before the CGT event, and the ATO states that limit is not indexed. Net value is the sum of the market values of those assets less related liabilities and provisions for annual leave, long service leave, unearned income and tax. Because it turns on market value rather than book value, and because the ATO worked example of a penalty for recklessness involves a taxpayer that valued its own assets and understated them, the test usually calls for an independent valuation.

Often, yes, even though the roll-over itself does not require that market value consideration, or any consideration, be given for the transferred assets. The ATO notes that stamp duty and GST consequences remain, and duty is state based: in Western Australia, for example, goodwill and a restraint of trade arrangement are business assets assessed on the greater of the consideration and the unencumbered value. Shares or units issued by the new entity are usually recorded at value, other owners and lenders may want the figure, and a valuation at the start makes the position easier to evidence if the restructure is later examined. Whether the roll-over is available, and whether the restructure is genuine, are questions for your tax adviser.

Yes. Many tax valuations are retrospective, for example just before a CGT event that has already happened, or at the date a restructure deed was executed. The valuation uses the information that was known, or could reasonably have been foreseen, at that date. The ATO lists reliance on post-valuation date information and on future events that could not reasonably be foreseen among the common issues it finds on review, so later trading results are used only to test the reasonableness of expectations held at the valuation date, not to set the value.

The meaning of market value is broadly the same, but the dutiable base differs by state and so does the list of assets caught. In New South Wales goodwill, intellectual property, statutory licences and debtor receivables are not dutiable, while land, an interest in land such as an assigned lease, and fixtures are. Moveable items such as clinical equipment become dutiable when they are sold in an agreement that also contains dutiable property, so an assigned lease can pull them in. In Western Australia goodwill, a restraint of trade arrangement and a business identity are business assets in their own right, assessed on the greater of the consideration and the unencumbered value. We value each class at one date; your adviser applies the duty rules.

It can. The ATO states that you may apply for a private ruling on an asset's market value, either by asking it to value the asset or by providing a valuation and asking it to confirm the value, provided the value is relevant to a question about the tax law. The ATO may use a professional valuer to conduct or review the valuation and the law allows it to pass that fee on to you. It will not rule on the appropriateness of a valuation methodology or on a market value for a future event. A report that already covers the minimum contents the ATO expects gives a reviewing valuer less to query.

It may. Division 7A of the Income Tax Assessment Act 1936 treats a transfer of property by a private company to a shareholder or an associate as a payment, and section 109C measures that payment as the amount that would have been paid by parties dealing at arm's length, less any consideration given, with the payment being nil where the consideration equals or exceeds that amount. Section 109CA extends a payment to the provision of an asset, so letting a shareholder use practice rooms or clinical equipment can also count. A loan is dealt with separately. An independent market value fixes the arm's length amount; whether Division 7A applies is for your tax adviser.

In many cases a market valuation is still needed, even where little or nothing is paid. The ATO's Market valuation for tax purposes guide explains that income tax is levied on the market value of assets transferred to related parties rather than necessarily the contract price, and that a valuation should be objective, replicable and supported by credible evidence. An independent report supports the figure used, and it gives other family members a basis for seeing how the interest was priced. Whether any small business CGT concession is available on the transfer is a matter for your accountant.

The ATO's guide says that for tax purposes the acceptability of a valuation usually depends on the valuation process undertaken rather than who conducted it, with limited exceptions such as the GST margin scheme and the Cultural Gifts Program. It also says a report by a suitably qualified professional following commonly accepted industry standards generally contains sufficient evidence and reasoning to allow testing or replication, and is considered more reliable. Separately it warns that if you undertake your own valuation, or use valuations from people without adequate qualifications, you risk incorrectly reporting your tax and may be liable to interest and penalties. Independence also matters where the same firm prepares the return.

Usually not. An appraisal is an opinion of a likely selling price, generally short, often based on comparison with recent sales and rarely accompanied by working papers. The ATO expects a valuation approach that is reasonable, supported by evidence, suitable for tax purposes, replicable and well documented, and it expects the report to record the provision, the asset, the date, the inputs, the assumptions and the reasons for the method chosen. Inappropriate choice of comparable assets and insufficient market evidence for inputs both appear on the ATO's list of common issues.

Often yes, because two of the tests are measured in market values. At the time of writing the maximum net asset value test requires the total net value of the CGT assets of you, your connected entities, your affiliates and entities connected with your affiliates not to exceed $6 million just before the CGT event, and the ATO notes that limit is not indexed. Where the asset is a share or trust interest, the modified active asset test compares the market value of active assets against the market value of all assets. Your adviser confirms which conditions apply.

The roll-over itself may not require one. The ATO states that the small business restructure roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets, provided the transfer is part of a genuine restructure of an ongoing business and ultimate economic ownership does not change. A value is still commonly needed for other reasons, and the ATO notes there may be stamp duty or GST consequences to consider before restructuring. Other roll-overs carry their own market value conditions, so your adviser should confirm which one is being relied on.

Goodwill is the value of the business above its identifiable net assets, and it is a valuation question before it is a tax one. The practical issue in a clinical business is how much of that goodwill is transferable, meaning it attaches to the practice, the location, the systems and the patient records, and how much is personal to the practitioner and would leave with them. That split affects the value, the allocation of the price across goodwill, plant and any restraint, and often the tax outcome. The ATO lists inappropriate apportionment of value across assets among the issues it commonly sees.

Yes, where it is prepared for that purpose and says so. The Australian Taxation Office states that the acceptability of a valuation usually depends on the valuation process undertaken rather than on who conducted it, and that the onus of providing a replicable and defensible valuation stays with the taxpayer even when a professional is engaged. It expects a report to record the purpose, scope, valuation date, definition of value, methodology and the evidence relied on. Whether a valuation is needed in your circumstances should be confirmed with your accountant. See tax and restructure valuations.

The doctor is usually acquiring shares or units in the service entity that supplies premises, staff and administration to the practitioners for a fee, not a share of the other doctors' billings. The value depends on the number and stability of practitioners paying service fees, the fee terms, the entity's own costs and the resulting profit, and on the rights attached to the shares on offer. Because the buyer will also pay service fees, the share price and the fee rate should be considered together.

We value the whole business first, deduct interest-bearing debt and add surplus assets to reach equity value, then apportion the interest. Whether a minority discount applies depends on the purpose and on the agreement. Many succession arrangements provide for a pro rata value without discount, because the successor is expected to acquire control over time and the parties want each tranche priced consistently. Others leave the question open, in which case the report explains the rights attached to the interest and the basis adopted. The question is better settled in the agreement than argued at each stage.

Usually, yes, and the direction depends on what the principal does. If the principal keeps billing but hands over management, the practice retains their clinical income while the cost of replacing them in management is added. If their sessions reduce, the billing they generated has to be replaced by the successor or another practitioner before maintainable earnings are sustained. The valuation sets out the remuneration and replacement adjustments at the valuation date and flags which of them will move as the principal's role changes.

Only to the extent of showing the earnings the interest is expected to produce, which a lender or a vendor offering finance will want to see. We do not recommend vendor finance over bank finance or the reverse, and we do not structure the funding. The report gives both sides an independent value and a maintainable earnings assessment so that the funding discussion starts from the same figures. The funding terms themselves belong with your accountant, lawyer and financier.

In most cases the parties want one, even where no rule strictly requires it. The issue or transfer price sets the incoming practitioner's cost base, affects the existing owners' capital gains position and, where equity is provided to an employee at a discount, may bring the employee share scheme rules into play. A valuation at the transaction date gives everyone a common reference and stops the price being set by whoever negotiates hardest, which matters when the parties will keep working together afterwards. Whether a valuation is required in your case, and what follows from it, should be confirmed with the parties' accountant.

They should not be, and the normalisation step is what prevents it. Before earnings are capitalised, every practitioner is charged at a market service fee or market remuneration for the hours they work, including the incoming one, so the maintainable earnings reflect what the practice makes from the arrangement rather than what any one practitioner bills. What the incoming practitioner buys is a share of the transferable goodwill: the location, systems, brand, lease, administrative team and the patients and referrers who stay with the practice. The report separates that from the personal goodwill of each practitioner and states the assumption made about their continued involvement.

Equity provided under such a scheme needs a market value for the shares at the time it is provided, and the ATO lists employees receiving shares or options under an employee share scheme among the situations calling for a market valuation. That value is what any discount to the recipient is measured against, so it is the starting point for the tax treatment rather than a conclusion about it. Concessional treatment carries its own eligibility conditions and, in some cases, its own approved valuation methods. HPNA does not advise on whether a scheme or a concession applies to your practice, which is a question for your accountant; we provide the market value and the reasoning behind it.

Usually the date fixed by the partnership deed, shareholders agreement or the parties' instructions, and it should be settled before work starts rather than assumed. The date matters in a physiotherapy practice because the position can change quickly: a senior therapist resigning, a hospital contract ending or a scheme fee changing can all move maintainable earnings within a single quarter. Where the interest being valued is a shareholding rather than the whole business, the valuation also has to address whether that parcel carries control.

Yes. A valuation reflects what was known or reasonably foreseeable at the valuation date, so an interest valued at the date of an exit notice can differ from the same interest valued at the date of a later settlement, particularly if a practitioner has since left or a lease or funding arrangement has changed. Many shareholders agreements fix the date; where they do not, the parties or their lawyers agree it before the valuation starts.

The shares are valued at the time of the buy-back on the assumption that the buy-back had not been proposed. That is the figure, less any dividend paid under the buy-back, that the ATO's guidance uses for a shareholder's capital proceeds on an off-market buy-back by a company that is not a listed public company where the buy-back price is lower than market value. The valuation moves from the value of the practice to equity value, apportions it to the shares being bought back, and states whether any discount for lack of control is appropriate for the purpose and the agreement. The procedure the company must follow is a matter for its lawyer.

Whoever the shareholder agreement says. Most agreements name a person or a body that nominates a valuer if the parties cannot agree on one, and many require the appointment to be joint so that a single valuation binds everyone. Where the agreement is silent, the parties can still agree to appoint one valuer jointly, or each can obtain its own and negotiate. A joint appointment usually narrows the argument to the analysis rather than to the choice of analyst, but the terms of appointment need to be settled in writing first, including the basis of value, the valuation date and what the valuer may rely on.

It depends on the words the agreement uses. A clause pricing the exit at the relevant proportion of the value of the company as a whole answers the question on its face and leaves the valuer nothing to decide. A clause referring to the market value of the shares themselves opens up whether a parcel carrying no control is worth less proportionately than the whole, and the valuer then has to address it and explain the reasoning. Section 667C of the Corporations Act shows one accepted approach, allocating value pro rata within a class without a premium or a discount, though it governs compulsory buy-outs rather than private agreements. Which reading applies to your clause is a question for your lawyer.

The date the agreement nominates, which is commonly the date the exit notice is given, the last day of the month or the end of the most recent financial year. Two practical points follow. The first is that the accounts at that date will not be final, so the valuer works from management figures and reconciles them later. The second is that months can pass between the date and completion while a replacement practitioner is recruited, and the agreement, not the valuer, decides who takes the profits or losses of that period. Where the agreement is silent on the interim, it is worth settling before the valuation is commissioned.

Not directly, but its absence can reduce the figure. The valuer is testing how much of the earnings survives the departure, so the relevant question is practical rather than legal: can the departing practitioner open nearby, and will patients, participants or referrers follow. Where they can and probably would, the continuing owners are buying a smaller and less certain stream of earnings, and the assessment reflects that. Practitioners often carry a restraint in a service agreement and another in the shareholder agreement, and enforceability differs between states and turns on drafting, so the position should be confirmed with your lawyer.

Many agreements name the practice accountant, or a formula based on the last accounts, as the pricing mechanism, and if both parties accept the figure no valuation is needed. Disputes arise when one party believes the accounts do not reflect the business at the date, when the accountant acts for the continuing owners, or when the formula ignores work in progress, equipment or the departing practitioner's patients. An independent valuation tests the figure against the evidence and, if the agreement allows, can replace it. Whether the clause permits that is a question for your lawyer.

You can, if the agreement binds the parties to it, but it is worth knowing how the formula compares with market value before you rely on it. Formulas are often written when the practice was smaller or under different funding settings, and they can drift well away from what an informed buyer would pay. We report the value on the formula basis and on a market value basis. If the two are far apart, the partners and their lawyers can decide whether to update the agreement before the next entry or exit rather than in the middle of one.

You can agree any price, but for tax and duty purposes it may not be the figure that counts. The ATO applies the market value substitution rule where the parties are not dealing at arm's length and what was received was more or less than market value, and where a private company transfers property to a shareholder or their associate, Division 7A measures the dividend at the arm's length value less any consideration given. An independent valuation gives the parties and their advisers the figure those rules look to, and a record of how it was reached. How the rules apply to your transaction is a question for your accountant.

Market value is the amount a willing but not anxious buyer and seller, dealing at arm's length and fully informed, would agree; it reflects what an outsider would pay for the specific interest, including any discount for lack of control. Fair value is a term agreements use to mean a value that is equitable between the particular parties, and it is frequently defined to exclude discounts or to apply a formula. The two can produce different figures for the same shares. We read the definition in your agreement and apply it, and we flag where the agreement's basis and the basis a revenue authority would apply differ.

A formula is applied as written, and the valuer's role narrows to calculating it and explaining the inputs. Formulas are attractive because they are quick and predictable, and they are risky for the same reason: a formula fixed when the practice had one site and two principals can produce a figure well away from market value once the business has changed. Formulas that key off a single reported year are particularly exposed in healthcare, where a change in billing model, funding program or practitioner mix can move reported profit sharply. If the parties want to depart from the formula, that is a matter for agreement or for their lawyers, not for the valuer.

The exit becomes a negotiation, and several things have to be agreed before a valuer can be instructed sensibly: the basis of value, the valuation date, the scope, who appoints the valuer, whether the conclusion binds the parties and how any disagreement is resolved. Settling those in a short written protocol tends to save more than it costs. Where nothing can be agreed, the Corporations Act provides that a court may make orders, including an order for the purchase of shares, where the conduct of a company's affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member. That is a legal path, and legal advice is required.

Yes, and the harder requirement is keeping it current. A buy-sell agreement is only as good as the mechanism that sets the price when it is triggered, and the two common failures are an agreed value written into the deed years ago and never revisited, and a formula that no longer describes the business it was written for. Insurance compounds the problem, because a sum insured set when the practice had two owners does not fund a buy-out of a practice that now has six, and the shortfall falls on the surviving owners personally at the worst possible moment. A current valuation does three things. It sizes the cover. It tests whether the agreement's own method produces a defensible figure. And it gives the parties a number they have already accepted, before the death, illness or dispute that triggers the clause makes agreement difficult. Review it whenever you review the cover, and after any change in ownership.

Yes. HPNA values the practice as a whole and then the specific interest, taking into account the rights attached to it under the shareholders or partnership agreement. A minority interest, one that does not carry control of decisions or distributions, may be worth less than its proportionate share of the whole. A minority discount or control premium is applied only where the purpose of the valuation and the terms of the agreement justify it. See share and equity valuations.

Yes. Many homes and home care providers are held through companies or unit trusts with several owners. We value the whole business and, where relevant, the property, adjust for refundable deposits, debt, surplus assets and working capital to reach equity value, then apportion that to the interest being valued. Whether a minority discount or a control premium applies depends on the purpose and on the owners' agreement, which often sets out how a departing owner's interest is to be priced. The Commission's responsible person and governing body requirements may also affect who can realistically hold the interest. See share and equity valuations.

Not necessarily. A pro rata share is the starting point, but a minority holder cannot alone decide distributions, remuneration or a sale, and may face pre-emptive rights and transfer restrictions that limit who can buy. Whether the pro rata figure already reflects control depends on the method and the market evidence used to reach it. Valuers may apply a discount for lack of control or for lack of marketability, and the size of any adjustment depends on the rights in the agreement, the distribution history and the purpose of the valuation. Some agreements and some legal contexts direct that no discount be applied, and the report states whichever approach is adopted and why.

Yes. Units are valued by reference to the trust deed, which sets the unit holders' entitlements to income and capital, and by reference to any unit holders agreement. A partnership interest is valued by reference to the partnership agreement and the applicable state or territory partnership law, which govern profit sharing, capital accounts and what happens on retirement or death. The steps are the same as for shares: enterprise value, equity value, then the specific interest and its rights.

A valuation can be prepared on the information available, but its reliability depends on that information and the report will say so. Members can inspect the share register and the minute books and can request a copy of the constitution, and members with at least five per cent of the votes in a small proprietary company may direct it to prepare a financial report. Wider access to the books generally requires a court order, made only where the member is acting in good faith and for a proper purpose. Your lawyer can advise on which of these paths applies before the valuation proceeds.

Yes, if the instructions identify them. Healthcare practices are commonly split across a practitioner entity, a service company or unit trust that owns the fitout and employs staff, and a discretionary trust that receives distributions. The report identifies which entity owns which assets and earnings, values the business as a whole, deducts debt and adds surplus assets to reach equity value, then values the specific shares, units or partnership interest the party holds. Interests held through companies and trusts fall inside the disclosure duty, so the entity records should reach the valuer through the lawyers rather than informally.

It depends on the basis of value and on who is deciding. In a sale between willing parties, a non-controlling parcel in a private practice commonly attracts a discount for lack of control and for lack of marketability. Where a court orders a buy-out after a finding of oppression the price is set between the parties rather than in the market, and a discount may not be applied: in one Supreme Court of New South Wales matter the valuer worked to fair value and applied none to a half interest. Under a shareholders or partnership agreement the clause governs. Because the treatment varies, we show the pro rata and discounted figures separately.

Both are usually reported, because they answer different questions. We value the operating business to reach an enterprise value, then deduct interest-bearing debt and add surplus assets to reach equity value, which is what a successor acquires when they buy shares, units or a share of partnership capital. If the successor is instead buying an interest in the business assets, the report identifies which assets and liabilities are included, since that changes what the price covers and what stays with the outgoing owner. Which structure suits the parties is a question for your accountant and lawyer.

It depends on the basis of value and on the agreement. On a market value basis, a parcel that carries no control may be worth less per share than a controlling interest, and the report will say whether a minority discount has been applied and why. Many practice agreements provide that interests are bought and sold at a proportionate share of the value of the whole business, with no discount, so that owners enter and leave on the same footing. Where the agreement says so, the valuation follows the agreement and states that the result is not a market value of the parcel on its own.

It can be. A conclusion reached by capitalising the maintainable earnings of the whole business generally describes a controlling interest, because it assumes the buyer can set remuneration, distributions and the timing of a sale. A shareholder who cannot do those things holds something less useful, so a parcel may be worth less per share than the same proportion of the whole. ASIC notes that some methodologies carry a premium for control and others do not. Whether an adjustment applies depends on the purpose, the constitution and any shareholders agreement, and should be confirmed with your lawyer.

Yes. We value the business as a whole first, then move from enterprise value, the value of the operations before borrowings, to equity value by deducting interest-bearing debt and adding any surplus or non-operating assets, and apportion that to the interest being valued. Whether a minority discount or a control premium applies depends on the purpose, the size of the parcel and what the shareholders, partnership or unitholders agreement says. That agreement may also fix the basis of value, for example fair value rather than market value. Share and equity valuations covers company, trust and partnership interests.

Either, and which one is settled before the work starts because it changes the analysis. Valuing the business means valuing its operations and the assets used in them, an enterprise value measured before borrowings. Valuing a shareholding means working from that to an equity value: net debt is deducted, any surplus or non-operating assets are added, and an adjustment is made where the business is carrying more or less than the working capital it needs to trade. The next question is what the particular parcel is. A parcel that carries control is not the same asset as a minority interest that cannot direct distributions or force a sale, and a shareholders agreement often prescribes how the parcel must be valued. See share and equity valuations.

Well before the first transfer, and then again at each stage. An early valuation shows how much of the value is personal to the principal and what needs to change for it to transfer, which is useful while there is still time to act on it. Each later tranche, partner admission or retirement then needs its own valuation date, because market value is specific to a date and the earnings, workforce and successor's contribution will have moved. Preparing the first report with updates in mind keeps the later work consistent.

Because the practice stopped recording gross patient billings and started recording only the service fee it charges the doctors. The underlying business may be unchanged, but the revenue line is no longer comparable with earlier years, and any market evidence expressed against revenue is no longer comparable either. A valuation restates the history on a consistent basis before drawing conclusions from trends, and works from earnings rather than revenue where the two have diverged.

The contract allocates it, and the allocation matters because each class is taxed differently, usually in opposite directions for the two parties. Goodwill is a capital gains tax asset for the seller. Plant and equipment falls under the capital allowances rules: the Australian Taxation Office explains that the point at which you stop holding a depreciating asset is a balancing adjustment event, and that the outcome is worked out from the asset's cost and its termination value, so an allocation above written down value can produce assessable income rather than a capital gain. Stock is dealt with as trading stock. A buyer generally wants more allocated to equipment, because it gives them deductions. The ATO's tax governance guidance for privately owned groups expects both sides to retain the capital gains tax calculations, the allocation of purchase price to depreciating assets and the basis for that allocation, and says that on a disposal to a related party you should obtain an independent valuation of the business, goodwill, assets and contractual rights.

At market value on the relevant date, on the facts known or reasonably foreseeable at that date, which is the difficult part of an estate valuation because the event that triggers it is usually also the event that damaged the business. The Australian Taxation Office's market valuation guidance is explicit that value is time specific for a given date, that markets and conditions change so a value may be inappropriate for another time, and that the prudence of the hypothetical parties is assessed by reference to the state of the market at the valuation date rather than with the benefit of hindsight at some later date. So the question is what a buyer would have paid then, knowing the principal practitioner had gone, not what the practice later proved to be worth once patients dispersed or a locum steadied it. An estate sale also lacks what protects price in a planned one: a handover, a restraint that means anything, and time. Executors should expect the report to say so.

Yes, but it is a property valuation, not a business valuation. Your fund is buying real estate, so the value that matters is the market value of the premises, and that figure comes from a property valuer rather than from a business valuer. What the rules require of the fund is strict. The Australian Taxation Office states that an SMSF cannot acquire an asset from a related party unless the price reflects market value, with business real property one of the limited exceptions to the general prohibition, and that trustees must value all fund assets at market value when preparing the fund's accounts, based on objective and supportable data. The lease back to your practice has to be on arm's length terms. A business valuation becomes relevant only if the fund is acquiring an interest in the practice entity itself, which the ATO's in-house asset rules confine to no more than 5% of the market value of the fund's total assets.

Incorporating does not change what the business earns, so on its own it does not change what the business is worth. What it changes is what a buyer can buy and what you take home. A company lets a purchaser acquire shares, which can carry contracts, approvals and registrations that would otherwise have to be reassigned one by one, and for some buyers that continuity is worth paying for. It also exposes them to the company's history, which is precisely why many insist on buying the assets instead. On your side the tax outcome can differ substantially between a sale of shares and a sale of assets, and a restructure shortly before a sale can affect eligibility for the small business capital gains tax concessions, which the Australian Taxation Office lists among the situations where a market valuation may be needed. That is a question for your tax adviser. Decide the structure on tax and transferability, not on a belief that incorporation adds value by itself.