OVERVIEW
Overview
Unlisted shares have no quoted price, so they are valued by the supplementary method prescribed in the Inheritance and Gift Tax Act. It takes the weighted average of the net earnings value, being the capitalised profit and loss of the past three years, and the net asset value, being assets less liabilities. The same calculation applies wherever a share value is needed: inheritance and gift, business succession, share transactions between related parties, the unwinding of a title trust, a rights issue, and the liquidation of a company.
VALUE Tax & Accounting begins by fixing the valuation base date. Where items such as provisional payments and receipts, non-recurring profit and loss, and provisions for directors' retirement benefits are left unresolved, the valuation comes out higher than it should or becomes a point of dispute with the tax office. We adjust the financial statements for valuation purposes, derive the net earnings value and the net asset value separately, and review both whether the premium applies and whether the family business deduction requirements are met, before proposing the timing of the filing and the structure of the transaction.
KEY ISSUES
Key tax issues in unlisted share valuation
-
01
How the supplementary method is built
The net earnings value and the net asset value are averaged three to two. For a company holding substantial real estate the ratio becomes two to three, and in either case eighty per cent of the net asset value sets the floor.
-
02
Arriving at the net earnings value
The profit and loss of the three business years before the valuation base date is weighted one, two and three, then divided by the capitalisation rate. Temporary and incidental items must be stripped out, so taking the accounts as they stand produces a different figure.
-
03
Arriving at the net asset value
The figure used is not book value but the amount revalued under the Inheritance and Gift Tax Act. Real estate is taken at market value rather than the published price, and goodwill is added to the assets where the requirements are met.
-
04
The premium for the largest shareholder
Shares held by the largest shareholder and their related parties carry a premium. It does not apply in the cases the statute sets out, such as shares in a small or medium enterprise, so whether the exception applies must be established first.
-
05
When only the net asset value is used
A company that has yet to begin trading, one that is dormant or has closed, one in liquidation, and one whose assets are mostly real estate are valued on the net asset value alone, without the weighted average.
HOW WE HELP
How VALUE Tax & Accounting responds
Fixing the base date and putting the records in order
Working from the date the inheritance began, the date of the gift or the date of the transaction, we gather the financial statements, tax adjustment statements and shareholder register, and identify at the outset the items that need clearing, such as provisional payments.
Deriving the value and comparing the alternatives
We calculate the net earnings value and the net asset value separately to arrive at the valuation, and compare how the tax changes if the timing of the gift or the structure of the transaction is altered.
Filing and the supporting record
We prepare the valuation schedule and the basis of the calculation in the form the return requires, and advise on keeping the adjustments and supporting material in order against a later review by the tax office.
FAQ
Unlisted share valuation FAQ
Q Can unlisted shares be valued at market price? expand_more
Where there was an objective transaction between unrelated parties within the period around the valuation base date, that price is the market value. Transactions between related parties, and trades of small volume, are unlikely to be accepted as market value, so the supplementary method is used in most cases.
Q Can an appraisal be used as the reported value? expand_more
Unlike real estate, an appraised value is not accepted as the market value of unlisted shares. A valuation report may serve as supporting material, but the reported figure must rest on the method the statute prescribes.
Q Can shares in a loss-making company still be valued highly? expand_more
Yes. Even where the net earnings value is low, a large net asset value driven by property holdings pushes the valuation up through the floor rule. A loss is no reason to assume the value is low.
Q Do provisional payments affect the valuation? expand_more
Provisional payments are counted as assets and raise the net asset value, while the deemed interest is added to gross income and so affects the net earnings value as well. Where a gift or a succession is planned, clearing them in advance is the better course.
Q What if the company holds shares in a subsidiary? expand_more
Where the subsidiary is itself unlisted, its shares are valued by the same method first and the result is carried into the parent's net assets. The extra step means the records take longer to prepare.