Valuation issues following Miley’s case – Discounts and restrictive covenants for the purpose of the Maximum Net Asset Value test
29th January 2020
Miley’s case was originally heard by the AAT, then the Federal Court, then back to the AAT. It involved the sale by a taxpayer of a 1/3rd interest in a company as part of a package where the two other shareholders also sold their 1/3rd interests in the company for a 100% sale.
A brief summary of the relevant issues and decisions is below.
First AAT case
– The taxpayer contended that, for the purpose of the MNAV test, a discount for lack of control should be applied to the market value of his shares on the basis that his 1/3rd interest was not a controlling interest. The AAT agreed indicating that the market value of the taxpayer’s shares alone should be considered rather than the market value of the package of shares making up 100% of the company with control.
Federal Court case
– The Federal Court disagreed with the AAT’s position on the basis that the reality of the market was that there was a willing purchaser for all of the shares in the company. The Federal Court further said that if the recent sale transaction can be said to be one between a willing but not anxious seller, and willing but not anxious buyer, the price that the buyer and seller actually agreed on may generally be taken to be the market price, or at least a reliable indicator, if not the best evidence, of the market price. The Federal Court distinguished other cases where a discount for lack of control was considered appropriate on the basis that in those cases the purchaser was unable to acquire the remaining shares in a company. The Federal Court remitted the case back to the AAT for determination according to the law.
Second AAT case
– In the second AAT case (remitted from the Federal Court), the taxpayer argued that the value attributed to his shares should be reduced on the basis that part of the price he received under the sale contract was attributable to the non-competition clauses in the contract rather than the value of the shares, with these rights not existing “just before the CGT event”, and therefore the value attributed to the restrictive covenants should not be included in the MNAV test. The AAT disagreed, indicating that without the sale, the covenants probably had no value: they were only valuable to a buyer in connection with the sale because they protected and preserved the goodwill that was embedded in the price paid for the shares. It followed that the value of the shares just before their sale was impacted by the terms of the deal that was formally struck immediately thereafter. As such, the value of the restrictive covenants should be included in the value of the shares just before the CGT event for the purpose of the MNAV test.
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