Assessable Assets from Private Companies & Unlisted Public Companies

Method of valuation

While the new rules for trusts and companies have largely replaced methods of valuing shares, an acceptable method is still required where:

• persons have shareholdings in companies that are not covered by the new rules, or

• assessment decisions need to be made in relation to a person's entitlements before the introduction of the new rules on 1 January 2002.

Shares in private companies & unlisted public companies

A share in a private company or unlisted public company is an assessable asset and needs to be valued for assets test purposes. The assets owned by the company, however, are not the property of the shareholder and therefore are not assessed as an asset of the person.     

Valuation of shares

There are three accepted methods of valuing shares in private companies or unlisted public companies:

• where a market exists - the market value,

• where a market for these shares does not exist the 'net asset backing' method, or

• if there is no market for the shares, and it is inappropriate to use the 'net asset backing' method - some other value (see following instructions).

When a market exists

A market exists where there is:

• a willing, but not over anxious buyer,

• a willing, but not over anxious seller, and

• both parties are operating at arms length from one another and not subject to undue influence.

Generally, it will be rare for an effective market to exist for private companies or large unlisted public companies. However, such markets have operated:

• on exempt stock exchanges operating mainly in larger regional centres,
• through a stockbroker willing to 'make' a market in a particular company's shares,

• through the company itself (but note, such a market must be free of restrictions on sale), or

• where 2 individuals meeting the above criteria exist.

The person should provide the necessary evidence that a market exists for a particular company's shares.

The 'net asset backing' method

Where no market exists private company and unlisted public company shares are valued by calculating the 'net asset backing' per share if they carry rights to participation in capital distributions, as shown in the company's Articles of Association or Company Constitution. The net asset backing method of valuation of shares in a private company is used because it provides a consistent basis for assessment of the value of all private companies. It is also less complex than other methods to administer. The company's Articles of Association outline the special rights or restrictions attached to a particular class of shares issued by the company.

Exception: If the shares do not carry rights to participate in capital distribution, or in certain other cases, other methods of valuing the shares are used (see additional instructions below).

What does the 'net asset backing' method calculate?

The net asset backing method of valuation of shares in private companies and unlisted public companies calculates the:

• adjusted net asset position of the company, by deducting the company's liabilities from the current market value of its assets, and

• assessable value of the shares, by determining the amount of surplus capital that would accrue to each share if the company was wound-up.

This calculation is based on information contained in the company balance sheet and depreciation schedule. Because the balance sheet of a company records the value of fixed assets at their historical cost, adjustments may be needed to reflect the current market value of these assets.

When the adjusted net asset position of a company has been determined:

• capital is first returned to shares which do not carry the right to participate in the distribution of surplus capital on wind-up, and

• then all remaining net capital is divided between the shares which do carry the right to participate in the distribution of excess capital on wind-up.

This calculation is based on information contained in the company balance sheet and depreciation schedule.

When to use 'net asset backing' method for share valuation

Apply the 'net asset backing' method where:

• the person controls the company (either through special rights of their shares or via an outright majority shareholding),

• the person is closely associated with the company controller (ie wife/husband/sister/brother), and could reasonably be expected to have some influence on the controller,

• the person is the majority shareholder, where those shares entitle the person to the equivalent majority of the assets and confer equivalent voting rights on the person,

• the person made a decision to purchase the shares and therefore could reasonably be expected to be aware of the rights or conditions attached to the shares,

• no one would be ascribed with control of that company and where the share register is widespread, and it is reasonably open to the person to either sell the shares at net asset backing or to initiate change in company's articles to allow this to happen, or

• the person is an active director of the company in question.

Explanation: Active Directors are persons actively engaged in the day to day running of a company.

When not to apply the 'net asset backing' method

Circumstances where the application of the net asset backing method may not be appropriate include:

• the person inherited the shares,

• the person was 'given' the shares by his/her parents or the controller in circumstances where they could not be reasonably expected to understand what they were being given (ie shares were issued to minors and the children were unaware they had the shares),

• if they were given the shares by the controller and those shares did not, in themselves, confer control etc (see below), or

• the sole or dominant purpose of the person being issued with these shares was to comply with the former corporations law requirement that companies have at least two shareholders.

If one of these conditions is satisfied, and if the person has no influence over the controller or majority shareholder, then also consider whether the following circumstances may apply:

• the person was not an active director of the company, and/or

• the person's shares can be called away from them at any time, and/or

• the company articles, or some other condition, prevents the sale of these shares at will (ie to whomsoever at what ever price).

If at least one of these conditions is also satisfied then an alternative valuation method could be used.

Alternative valuation methods

Alternative methods include (but are not limited to):

• the last sale price, where the last sale was free of undue influence, or

• where the shares could be called away, the amount paid, or potentially could be paid, to the person when the call is made.

The method should be based on the circumstances of each case.

The guiding principle in the value selected

The guiding principle in the value selected would be to choose the method that best reflects the beneficial interest in the assets the person holds as a result of holding the shares at the time the assessment is made. Where the 'net asset backing' method is not used the company accountants should be asked to supply the following information:

• net asset backing per share, and

• where the shares can be called away from the person the amount that would be paid for those shares, and

• the price of any outstanding offer to buy these shares, and

• any recent sales of shares, or

• any other matter that may assist in determining an appropriate value for these shares.

Exceptions: The 'par' value, or valuation method based on the dividends paid (called the capitalisation of dividends) or on the company earnings (called the capitalisation of earnings), do not provide an accurate assessment of the person's beneficial interest in their share of the company's assets. The level of private company dividends is often low or non-existent due to the common practice of retaining profits for reinvestment in the company. Basing a value on this factor will generally lead to an unjustifiably low value being given to the shares.

Likewise, a company's accounting policy and method through which returns are distributed to the shareholders can influence the earnings of a company. A valuation based on earnings can also produce an unjustifiably low value for a company's shares. The par value is the issue price of the shares and has no relationship to current assets of the company. Further, under current Corporations Law the 'par' value of a share no longer is recognised as a meaningful term.

If the person is in severe financial hardship an interim assessment based on the person's estimate, can be used. In these circumstances the valuation is reviewed when the person's entitlement to be paid under the hardship provisions is reviewed.     

When deprivation provisions apply

Deprivation provisions apply if the person influenced a private company's action to:

• issue further shares at their nominal value (normally $1.00) (see explanation), or

• dispose of assets for less than their value and this reduces the value of a person's share(s) in the company.

The person will have engaged in a course of action to reduce the value of their assets by diluting the assessable value of the shares they hold in the company.

A person's influence should be assumed as a matter of course if the person, and/or their partner:

• owns a majority of the issued shares of the company, or

• hold shares with powers such as voting rights, which provide them with the ability to control the company's operation.

Company in receivership

If a company is in receivership, the assessable asset value of the shares owned, or loans owed, should continue to be assessed as though the company were still managed by the directors.

Company in liquidation

If a company is in liquidation, assets to be maintained should be assessed on the basis of the projected payout to be provided by the liquidator. If a person advises that they have forgone repayment of a loan, or voluntarily agreed to receive a repayment of a lesser proportion of their loan than other unsecured creditors, deprivation provisions may apply. However, consideration should also be given to the circumstances in which a loan no longer exists for income support purposes.