Using valuation shortcuts
Valuation shortcuts are for consolidation purposes only. Businesses can use them to obtain a reasonable approximation of the true market value of certain assets and membership interests, instead of obtaining new valuations.
The valuation shortcuts are provided under our general administrative powers. Using them reduces the risk of us undertaking a market valuation review of the relevant assets.
Use of the valuation shortcuts is subject to constraints. For example, they are not available for calculating a joining entity's market value for determining the maximum use of transferred losses.
Type of asset |
Valuation option |
|---|---|
1. Depreciating assets, not including intangible assets, that have not been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount |
Adjustable value can be used as market value. It can be revised to ignore any balancing adjustment amount that reduced it |
2. Depreciating assets, not including intangible assets, that have been depreciated on an accelerated basis, whose individual adjustable values are 1% or less of the joining subsidiary's allocable cost amount |
Adjustable value revised to ignore the effect of accelerated depreciation can be used as market value. It can be revised to ignore any balancing adjustment amount that reduced it |
3. Trading stock, other than livestock and growing crops, that is not a retained cost base asset |
Terminating value at the joining time may be used as market value except in certain circumstances |
4. Employee share scheme shares |
Existing market valuation updated if appropriate |
5. Unlisted shares |
Existing market valuation updated if appropriate |
Constraints on use of valuation shortcuts
Use of the valuation shortcuts is subject to constraints:
- Supporting documentation required
- One in, all in – with an exception
- Not available where there is an intention to sell
- Not available for calculating the available fraction
- Use in determining goodwill
- Use of previous valuations
Supporting documentation required
When you use a valuation shortcut for an asset, you must have adequate supporting documentation which demonstrate that the asset satisfies the eligibility requirements of that shortcut.
One in, all in – with an exception
While using the valuation shortcuts is optional, the decision to use a particular shortcut must apply to all of an entity's assets to which the shortcut applies.
For valuation shortcuts 1 and 2, there is an exception to this rule. You can opt to use these shortcuts for a joining entity's eligible depreciating assets while obtaining new market values for the assets (including those eligible for the shortcut) that make up a single large functioning unit of integrated plant. Such a unit includes integrated plant within:
- an oil refinery or a communications cable
- a factory production line.
The single large functioning unit of integrated plant must have a total adjustable value greater than 1% of the joining subsidiary's allocable cost amount (ACA) to qualify for this exception.
Without this exception, the one in, all in rule prevents you from obtaining new market values for those constituent assets that were otherwise eligible for the shortcut.
The exception works as follows:
- You opt to use the valuation shortcut to value your eligible depreciating assets. Among these are several assets that constitute one or more items of integrated plant. A market value is determined for the integrated plant and the value is allocated on a reasonable basis among the plant's constituent assets. These values may be adopted as the market values of the constituent assets instead of the values that would otherwise be determined under the shortcuts approach.
- In valuing an integrated functioning unit of plant, the market value must reflect the physical value of the plant. It must not comprise any embedded goodwill or other intangible value. Take care to ensure none of the value attributed to the asset is actually goodwill attached to the use of that asset or any other intangible assets.
Not available where there is an intention to sell
Valuation shortcuts, except for shortcut 3 (trading stock), are not available if there is an intention at the joining time to sell any of the following after consolidation:
- the joining entity in which the asset is held
- the underlying business of the joining entity in which the asset is held
- part of the underlying business of the joining entity in which the asset is held
- the asset.
This provision only applies where:
- at the joining time, an asset has been the subject of a fully determined specific intention to sell, and
- the expectation is that the asset will be sold within 2 years of the joining time.
For example, the provision would apply when a decision had been made to:
- market an asset with the intention to sell if a suitable buyer could be found
- accept an offer to buy an asset but the decision to sell had not yet been communicated to the buyer.
However, the provision would not apply where an entity had:
- a history of disposing of its assets on a strategic basis but had not taken a decision to sell in relation to any particular asset at the joining time, or
- merely fielded offers in respect of a specific asset or assets but had made no decision to sell at the joining time.
Where this provision applies to an asset, it will no longer be treated as an asset of that type for purposes of applying the one in, all in rule. The intention to sell the asset prevents the use of the valuation shortcut. However, it will not prevent the valuation shortcut from applying to other assets that qualify for that shortcut.
Not available for calculating the available fraction
Valuation shortcuts cannot be used to calculate the available fraction for the use of a joining entity's losses by the head company. For this purpose, market valuations of the loss entity and the consolidated group at the joining time will be required.
Use in determining goodwill
Where valuation shortcuts have been adopted for certain assets, the shortcut values should be used in determining the market value of the entity's goodwill. Goodwill is determined as the excess of the market value of the entity over the market value of its net identifiable assets at the joining time.
The net identifiable assets may have a mixture of market values and shortcut values. If a taxpayer market values any of the entity's net identifiable assets that qualify for one of the shortcuts to work out the value of goodwill, they should not adopt that valuation shortcut for qualifying assets that have been market valued.
Use of previous valuations
If you rely on a previous valuation for current purposes, it will be difficult if the previous valuation was compiled for a different purpose. The current valuation should:
- explain how the earlier valuation is relevant to the current one, with a focus on the purpose of the original valuation compared to the current one
- confirm that the information and assumptions used in the original valuation are still relevant
- declare how adjustments and changes were made to comply with statutory requirements associated with the valuation.
Shortcut 1: Depreciating assets that have not been depreciated on an accelerated basis
The adjustable value at the joining time, which may be revised to ignore a balancing adjustment amount, can be taken as the market value for all depreciating assets where all the following apply:
- They have not been depreciated on an accelerated basis.
- Their individual adjustable values amount to 1% or less of the joining entity's ACA.
- They are eligible for a deduction under Division 40 of the ITAA 1997, except for the following intangible assets
- mining, quarrying or prospecting rights
- mining, quarrying or prospecting information
- items of intellectual property
- in-house software
- IRUs (indefeasible rights to use an international telecommunications submarine cable)
- spectrum licences
- datacasting transmitter licences.
The market value determined by applying valuation shortcut 1 may be affected by a balancing adjustment event occurring under the income tax law.
If you have an assessable balancing adjustment amount because of a balancing adjustment relief, you have the option of revising the adjustable value. The revision ignores any balancing adjustment amount that reduces the amount available for decline in value of the depreciating asset.
Shortcut 2: Depreciating assets that have been depreciated on an accelerated basis
A revised adjustable value can be taken as the market value for all depreciating assets where all the following apply:
- They have been depreciated on an accelerated basis.
- Their individual adjustable values amount to 1% or less of the joining entity's ACA.
- They are eligible for a deduction under Division 40 of the ITAA 1997, except for the same intangible assets that are not eligible for valuation shortcut 1.
The revised adjustable value reflects an amount calculated as if the asset had been depreciated at normal rates in accordance with its effective life. This ignores the effect of broad-banding of effective life under the accelerated depreciation provisions and can ignore the effect of a balancing adjustment amount. We prescribe the effective life unless you self-assess it for depreciation purposes.
To work out the revised adjustable value at the joining time, you must recalculate the asset's depreciation from the time it was first depreciated by the joining entity up to the joining time. You can also choose to exclude any balancing adjustment amount that had reduced the amount available for a depreciating asset's decline in value.
For the recalculation, use the applicable standard (non-accelerated) rates that would have applied to that asset from the time it was first depreciated by the joining entity up to the joining time.
Shortcut 3: Trading stock
This shortcut is not available for joining entities that were majority owned by the prospective head company at 27 June 2002. The trading stock of these entities must be treated as a retained cost base asset.
The terminating value at the joining time can be taken as the market value for trading stock, except where either of the following applies:
- The trading stock is made up of livestock, standing or growing crops, crop-stools and trees planted and tended for sale.
- The value of the trading stock has been affected by market volatility, market collapses, obsolescence or other event to the extent that its terminating value would not be a reasonable approximation of its market value at the joining time. The trading stock should be market valued appropriately at the joining time.
Shortcut 4: Employee share interests
Shares and stapled securities issued under an employee share scheme (ESS interests) that represent 1% or less of the membership interests in an entity are disregarded in determining whether an entity is wholly owned. However, the head company still uses their market value to calculate its ACA for membership interests in the joining entity.
The availability of this shortcut option acknowledges that valuing minority interests is a difficult and complex process.
Where an employee, under the former Division 13A of the ITAA 1936, holds shares or stapled securities, those interests will have been market valued where the employee has either:
- elected to have the discount given to their ESS interests included in their assessable income at the time they were acquired
- not elected to have the discount included in their assessable income but the cessation time has occurred and they continue to hold the shares.
This also applies where the employee has previously held rights, has exercised those rights, and now holds shares or stapled securities.
For employers providing ESS interests to their employees after 30 June 2009, Division 392 of the TAA requires, that they report the discount given in relation to those interests to us by 14 July after the end of the financial year they are provided. To meet their reporting requirements, employers will need to market value the ESS interests.
Under this valuation shortcut, the head company may rely on these existing market valuations when calculating the employee share interest component of the ACA for the joining entity, provided for ESS interests acquired either:
- before 1 July 2009, the valuation was for the purposes of Division 13A in accordance with the former sections 139FB, 139FD and, in the case of rights, 139FE of the ITAA 1936
- after 30 June 2009, the valuation was for the purposes of Division 83A in accordance with Subdivision 960-S of the ITAA 1997, in accordance with any method specified by regulation in the Income Tax Assessment Regulations 1997, or (from 1 July 2015) using any method approved by legislative instrument in accordance with section 960-412 of the ITAA 1997, and the
- original market valuations were appropriately documented
- decision to use the existing market valuations is documented and these valuations are, if necessary, updated in accordance with the requirements set out under Use of previous valuations.
Shortcut 5: Membership interests that are unlisted shares
As all membership interests in a wholly-owned subsidiary will be held by the head company or other members of the consolidated group, they will not be listed on a stock exchange.
The availability of this valuation shortcut acknowledges that valuing unlisted membership interests is a difficult and complex process.
Where any ESS membership interests in the joining entity have been market valued for Division 13A of the ITAA 1936 or Division 83A of the ITAA 1997, the head company can rely on these valuations to work out the cost of all its membership interests in the joining entity, provided the:
- ESS membership interests acquired before 1 July 2009 were valued for the purposes of either
- Division 13A in accordance with the former sections 139FB and 139FD
- the former Division 13A and
- arose because of the granting of qualifying rights
- those rights have been exercised, or the cessation time in relation to those rights has occurred and the employee continues to hold the shares
- those rights were valued in accordance with the former sections 139FC, 139FD and 139FE
- ESS membership interests acquired after 30 June 2009 were valued for the purposes of Division 83A in accordance with any of the following
- subdivision 960-S of the ITAA 1997
- a method for calculating the value of an ESS interest specified by regulation in the Income Tax Assessment Regulations 1997
- from 1 July 2015, a method approved by the Commissioner by legislative instrument, in accordance with section 960-412 of the ITAA 1997
- original market valuation was appropriately documented
- decision to use the existing market valuation is documented and this valuation is, if necessary, updated in accordance with the requirements set out under Use of previous valuations.