Share
Kilgour’s case was originally heard by the Federal Court and then the Full Federal Court. It involved the sale of shares in a company.
A brief summary of the relevant background, issues and key points in relation to market value are below.
Background
Three trust shareholders sold their shares in a company. One trust shareholder owned 60%, and the other two trust shareholders owned 20% each.
The total sale proceeds were $31,057,722. The 60% trust shareholder received $18,634,634 and the other two 20% trust shareholders received $6,211,544 each.
Federal Court case
The taxpayers argued that the trust shareholders did not deal with the purchaser at arm’s length, and that the market value substitution rule should apply.
In this regard, the market value of the shares was relevant for the purpose of the Small Business CGT Concessions in respect of the two 20% trust shareholders in the context of the Maximum Net Asset Value Test.
It was held that the parties did deal with each other at arm’s length, and therefore the market value substitution rule did not apply.
But the market value of the shares was still considered for the purpose of the Small Business CGT Concessions.
Full Federal Court case
The appeal focused on the market value of the shares for the purpose of the Small Business CGT Concessions, and not the market value substitution rule.
Key points in relation to market value from both cases
Key points in relation to market value:
- Parties dealing at arm’s length not determinative
- Just because parties are dealing with each other at arm's length doesn’t mean the sale price will be market value and vice versa.
- Value to a specific purchaser considered
- The Commissioner’s guidelines in respect of market valuation for tax purposes states that market value does not reflect attributes of an asset that are of value to a specific purchaser that are not available to other buyers in the market. This is incorrect. It is contrary to over-whelming authority to exclude from the hypothetical market attributes of an asset that are of value to a specific purchaser.
- Actual transaction may potentially be considered
- The actual transaction may potentially be considered when assessing market value, depending on the facts and circumstances of the particular case.
- Minority shareholdings – Discounts
- Where minority shareholdings are sold with the remaining shareholdings the market for a sale of all shareholdings is relevant. In such a case, discounts for a lack of control may be inappropriate.
- But where minority shareholdings are sold in isolation the market for a sale of minority shareholdings is relevant. Is such a case, discounts for lack of control may be appropriate.
- Synergistic value may be relevant
- Synergistic value (also referred to as special value / marriage value) may be relevant when assessing market value, especially where the synergies would be available to other purchasers of a similar type in a hypothetical market.
- Market value does not necessarily equal sale price
- The cases do not support the proposition that market value simply equals sales price.
- Sales price is but one factor that may potentially be considered when assessing market value, depending on the facts and circumstances of the particular case.
- The process of assessing market value, based on market valuation principles, is still required.
Some specific comments re the application to Kilgour’s case
Specific comments from the case:
- Purchasers of the same type would be willing to pay $30 million for the 100% holding because they would independently perceive the same value residing in the asset as News Corp did.
- The factual proposition that $30 million was a “special price” that only News Corp would pay was not established on the evidence.
- Nothing in Spencer’s case or the Assessment Act precluded the primary judge finding (as he did) that the market for the shares included other purchasers like News Corp identifying the same potentials inherent in the CGT asset.