Valuing a Healthcare Business for Tax Purposes

When does the ATO expect a market valuation?

The Australian Taxation Office expects a market valuation whenever a tax provision turns on the market value of something you own. For a healthcare business that is usually the practice as a going concern, the goodwill inside it, meaning the value of the business above its identifiable net assets, the shares or units in the entity that runs it, or a single asset such as the equipment or the rooms.

The ATO's guide, Market valuation for tax purposes, was current at October 2022. It states that on a market valuation review the onus for a replicable and defensible valuation remains with you even when a professional is engaged, and that you are responsible for engaging a valuer who is suitably knowledgeable, properly instructed, objective and unobstructed, and who supports the value with credible evidence and a recognised methodology. The value must therefore be capable of being rebuilt by a third party from the working papers, on the information that existed at one date, which is why a short market appraisal is not a substitute. See business valuation versus business appraisal.

What follows is how such valuations generally work, not tax advice.

What market value means for tax purposes

The ATO's guide explains that the definition of market value in the Income Tax Assessment Act 1997 does not apply in all contexts: unless a provision defines or qualifies it, market value carries its ordinary meaning, drawn from case law and the International Valuation Standards Council, whose definition the Commissioner treats as consistent. The guide points to the principles the High Court identified in Spencer v Commonwealth of Australia [1907] HCA 82: the valuer assumes a hypothetical market, and market value is the price for a notional sale after voluntary bargaining between a willing but not anxious seller and purchaser, both fully informed and aware of market conditions.

Three things follow. Price is not value: a price is what two identified parties agreed in their own circumstances, so an actual sale is evidence rather than proof. Special value is excluded: the guide says market value disregards any element of value available only to a specific owner or purchaser, and reflects the highest and best use a market participant has in mind. An advantage several buyers could realise can sit inside market value, while the extra a group already operating the imaging practice next door would pay for that combination generally does not. And fair value, the financial reporting measure, is a different concept, so a figure in the accounts is not automatically the tax answer.

The tax events that most often require a healthcare business to be valued

Selling, gifting or transferring the practice or its shares

Most disposals trigger a CGT event, and the ATO states that where there is a contract of sale the event happens when you enter the contract, not at settlement. Where the dealing is not at arm's length the contract price may not be the taxing point: the ATO explains that if you receive nothing for a CGT asset you are taken to have received its market value, and that market value may also be substituted where what you received differed from it and the parties were not at arm's length. Transfers to a spouse, an adult child or a family trust sit in that territory.

A healthcare sale also rarely produces a single number: the price splits across goodwill, plant and equipment, stock and any restraint, and a pharmacy, a dental practice and a psychology practice each split it differently. See pharmacy valuations and dental practice valuations.

Testing the small business CGT concessions

Two of the eligibility tests are measured in market values. The first is the maximum net asset value test, one of the tests for the ATO's first eligibility step: the total net value of the CGT assets owned by you, entities connected with you, your affiliates and entities connected with your affiliates must not exceed $6 million just before the CGT event, which the ATO states is not indexed. That reach matters in healthcare, where ownership is commonly spread across a practice company, a service entity and a trust holding the rooms, so all of those holdings must be valued at the same date on the same basis, with the rooms at market value rather than book cost. See medical practice valuations.

The second applies where the asset sold is a share or a trust interest. The ATO's modified active asset test also compares market values: at least 80 per cent of the entity's total asset market value must be active assets, plus cash or financial instruments inherently connected with the business, with anything held only to meet that requirement disregarded. It must be met for at least half of the ownership period, so a practice company sitting on a large accumulated cash balance can fail a test its trading performance would otherwise pass. See share and equity valuations.

Restructures and roll-overs

Healthcare practices restructure often, whether a sole practitioner incorporating or a group interposing a holding company before admitting practitioner shareholders, and not every roll-over needs a market value. The ATO states that the small business restructure roll-over does not require that market value consideration, or any consideration, be given for the transferred assets, but does require a genuine restructure of an ongoing business rather than an artificial or inappropriately tax driven scheme, with ultimate economic ownership unchanged. The ATO also notes stamp duty or GST consequences may need considering before restructuring.

A restructure also raises a question the paperwork can hide: whether the approvals and registrations the business trades on move with the assets. Pharmacy approvals, Ahpra registrations, Medicare provider numbers and NDIS provider registration are each held by a particular person or entity, so value depending on something the transferor holds does not transfer merely because the assets do. See tax and restructure valuations and NDIS business valuations.

Division 7A and related-party dealings

Where a practice company transfers property to a shareholder or an associate, section 109C(4) of the Income Tax Assessment Act 1936 measures the payment as the amount that would have been paid by parties dealing at arm's length, less any consideration given by the transferee, and the amount is nil where that consideration equals or exceeds the arm's length figure. This reaches beyond cash: a dental chair or an ultrasound unit moved into a shareholder's new rooms needs a supportable figure, and written down book value is a tax number, not a market one. Section 109C also points to section 109CA, under which providing an asset for use counts as a payment, so an asset the company lets a shareholder use rather than transfers raises the same question.

Employee share arrangements with practitioners

Practices offering equity to an associate practitioner, rather than a partnership buy-in, need a value for the shares. For offers under the employee share scheme start-up concession, the ATO's legislative instrument LI 2025/19 sets out two approved valuation methods carrying safe harbour status, meaning the ATO will accept the resulting valuation. Under the first, the company's chief financial officer or a qualified independent valuer determines market value from the assets, market comparables, control premiums, discounts for lack of marketability, key person risks and projected cash flows, endorsed by a written board resolution. The second, a net tangible asset method, suits few practices, whose value usually sits in goodwill. Because both are approved for that concession, an established practice company outside the start-up conditions falls back on ordinary market value principles. See internal transaction valuations.

Why the valuation date decides the answer

Every provision fixes a date, and the ATO's guide is firm that market value for tax purposes requires valuation for a date specified by the legislation: a prospective assessment, made for a future date, will not be considered reasonable or acceptable. The date also sets the information boundary. The guide lists reliance on post valuation date information, and on future events not reasonably foreseeable at that date, among the issues it commonly sees, and says prudence is assessed against the market at that date, not with hindsight. The test is foreseeability, not chronology: a principal who had already given notice before the contract date belongs in the analysis; an unexpected resignation two months afterwards generally does not.

A valuation prepared for another purpose rarely transfers cleanly. Where a valuer relies on an earlier one, the guide asks the report to explain its relevance, confirm the earlier assumptions still hold, and declare any adjustments made for statutory requirements.

What the ATO expects of the valuation itself

The guide sets out five characteristics of an acceptable valuation approach: reasonable given the asset and the information available, supported by evidence, suitable for tax purposes, replicable, and well documented. The bases of valuation must also exclude buyer or seller transaction costs. It describes three internationally defined approaches, market, income and cost, and recommends a secondary or cross-check method where possible.

Maintainable earnings, the multiple and the equity bridge

For an established practice the primary method usually sits in the income approach: capitalisation of future maintainable earnings, the profit the practice can be expected to sustain, converted into a value by a multiple, which is the inverse of a capitalisation rate. Maintainable earnings are built by normalising the reported results, meaning adjusting them to what the business would earn under notional arm's length ownership, and the normalisations that matter in a healthcare business are sector specific: replacing owner and family remuneration with a market rate for the clinical and administrative work actually performed, substituting market rent where the rooms are held in a related trust, restating service entity fees between related entities, removing non-recurring items such as fit-out write-offs and locum cover, and adjusting for a billing or funding profile that changed part way through the period. Where practitioners are engaged as contractors, the true cost of that arrangement, including any payroll tax exposure your adviser identifies, belongs in the earnings a buyer would face. See what is maintainable earnings and payroll tax and medical practice value.

Earnings are usually expressed as EBITDA, earnings before interest, tax, depreciation and amortisation, or as EBIT, before interest and tax. Capitalising either produces an enterprise value, the value of the operations before borrowings; equity value, what the owners' interests are worth, is reached by deducting debt, adding surplus assets and adjusting working capital, since the capitalised figure assumes the business comes with the debtors, stock and creditors it needs to trade. A pharmacy holding stock well above its normal level is adjusted, not ignored.

A discounted cash flow, valuing forecast cash flows at a discount rate reflecting their risk, suits a practice whose future will plainly differ from its past. A net assets basis, identifiable assets less liabilities at market value rather than book value, is used where the business is not profitable or is being wound up. Book net assets is not a floor for a trading practice, because a business earning less than a commercial return on the assets it employs can be worth less than its balance sheet suggests. See healthcare business valuation methods.

Market evidence, goodwill and the interest being valued

Market evidence is harder to use in healthcare than it looks. Practice sales are private, and a headline price bundles goodwill, stock, plant and a restraint on terms that differ between deals, so comparing a share sale with an asset sale unadjusted produces the wrong answer.

Two further healthcare judgements sit inside the framework. The first is how much of the goodwill is transferable, meaning it attaches to the practice, its location, its systems and its patient or participant records, rather than being personal to the practitioner and leaving with them. That differs by sector: a pharmacy's goodwill is heavily locational, a general practice's depends on how much of the billing follows the individual doctor, and a sole practitioner psychology practice may have little that transfers. The second is key person risk, the risk that earnings depend on one individual. Both move the multiple. See transferable goodwill.

Where the subject is a parcel of shares or units, a non-controlling parcel may attract a minority discount and a controlling parcel a control premium, though whether either applies turns on what the provision requires to be valued.

What the report has to contain

The ATO sets minimum contents. Among them: the purpose and the provision, the scope and its limitations, details of the asset and, where it is an interest, the rights attached to it, the inputs and assumptions and their source, the valuation assessment date, the definition of value, the approaches chosen with reasons, why a figure was adopted from a range, and a declaration of independence. The guide adds that a market value is better supported where the instructions secured the valuer's independence, granted access to premises and records, and established that any fee did not depend on the outcome, and that failure to keep detailed working papers may affect credibility and may not meet statutory record keeping requirements.

Where healthcare tax valuations most often go wrong

Several issues on the ATO's list are familiar in practice valuations. Proxies based on historical performance are one: a practice whose billings profile, funding mix or practitioner roster changed during the period is rarely valued reliably on an average of the reported results, which the guide lists as inappropriate averaging.

Inappropriate apportionment across assets is another: a pharmacy contract allocating a round figure to stock rather than counting it at the valuation date, a dental sale treating written down value as the market value of the chairs and imaging, or a restraint given a number chosen to balance the page. Each will be tested, and the allocation may carry duty consequences.

Lack of support for adjustments to the multiple is a third. Saying a practice is practitioner dependent is not an adjustment; showing the share of billings generated by the principal, the terms on which practitioners are engaged, the notice periods and the restraint is. The equivalent in an NDIS business is participant and funding concentration, which needs revenue analysed by participant, funding source and service type. The guide lists inconsistency with the legal documents and omitted assumptions. See how practitioner dependence affects business value.

What is settled with your adviser first

A tax valuation begins with three questions the valuer cannot answer: which provision the value is for, since that fixes the definition, the date and sometimes the method; what is being valued, whether the business as a going concern, a single asset such as the goodwill or the equipment, or a parcel of shares and the rights attached to it; and the perimeter, since a maximum net asset value test reaches connected entities and affiliates, so valuing the practice alone will not answer it. A private ruling is sometimes considered too: the ATO says you can apply for one on an asset's market value relevant to a tax law question, but not on a methodology's appropriateness or on the market value for a future event, and that where it engages a valuer the law allows it to pass that fee on to you. See how it works.

This is general information, not tax advice

Nothing here is legal, taxation or financial advice, and the settings described are those at the time of writing. HPNA provides the independent value and the working papers behind it; your accountant or lawyer identifies the provision and the tax consequences. Request a valuation to discuss scope.