This subdivision, or the tax acts elsewhere, does not explain what is the ordinary meaning of market value and so this is where one turns to case law for guidance.<\/p>\n

CASE LAW GUIDANCE
\n<\/strong>The case of\u00a0Spencer v Commonwealth<\/em>\u00a0is widely accepted as the most important judicial pronouncement on the ordinary meaning of \u201cmarket value\u201d. Spencer provides that a valuer is to assume a hypothetical market operating under specific assumptions. The market value is the price that buyers and sellers would negotiate in such a hypothetical market.<\/p>\n

The judge in the case, Samuel Griffith, said \u201cthe test of the value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e. whether there was, in fact, on that day a willing buyer, but by inquiring: What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?\u201d<\/em><\/p>\n

Justice Issacs expanded on this by adding:\u00a0\u201cTo arrive at the value of the land at that date, we have\u2026to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further support both to be perfectly acquainted with the land, and cognisant of all circumstances which might affect its value\u201d.<\/em><\/p>\n

This test was also adopted in\u00a0Abrahams v FC of T<\/em>^{11<\/sup>\u00a0where a Justice Williams said that market value is:\u00a0\u201cThe price which a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to pay \u2026 if the vendor and purchaser had got together and agreed on a price in friendly negotiation\u201d.<\/em><\/p>\n}

Where neither party is anxious, both parties are knowledgeable, negotiations are conducted at arm\u2019s length and the other\u00a0Spencer v Commonwealth<\/em>\u00a0market assumptions are satisfied, the actual market will align with the hypothetical market and market value will align with the agreed price.<\/p>\n

However, applying the test in\u00a0Spencer<\/em>\u00a0is not always straightforward \u2013 for example in cases of special value or aggregated disposals.<\/p>\n

SPECIAL VALUE
\n<\/strong>One point of contention is how to determine market value where there is a buyer willing to pay more than an asset\u2019s intrinsic value because it has a particular adaptability or usefulness to them. This may occur where, for example, there is a parcel of land that a neighbour wants to acquire. It could also reflect synergistic advantages such as economies of scale or reduction in competition; for example, a business acquiring a supplier or a competitor.<\/p>\n

It can be argued that such a special value should be excluded when determining market value, since the buyer could be characterised as being \u201canxious\u201d. The opposing argument is that market value should include this special value since doing so reflects the\u00a0Spencer<\/em>\u00a0assumptions that both parties are \u201ccognisant of all circumstances which might affect (the asset\u2019s) value\u201d and that the hypothetical purchaser will put the land to its highest and best use.<\/p>\n

The ATO\u2019s view, as expressed in its publication\u00a0Market valuation for tax purposes<\/em>^{12<\/sup>\u00a0is that special value is not usually relevant in determining market value. The guide states that where \u201cthe special value is known or available to the wider market, this would be reflected in an objective valuation of the asset\u201d. However, \u201cif a special value is known or available only to one potential buyer and not known or available to the wider market, it will not be reflected in the market value\u201d. This appears to reflect the view that a special purchaser would bid just enough to outbid other interested purchasers, rather than making an offer which reflects the complete value to them.<\/p>\n}

With respect, it appears that the ATO has taken an alternative interpretation. There is strong judicial support for including special value. For example, in\u00a0Brisbane City Council v Valuer-General (Qld)<\/em>^{13<\/sup>\u00a0it was held that \u201call possible purchasers are to be taken into account, even a purchaser prepared for his own reasons to pay a fancy price\u201d. In a comprehensive and widely cited review of cases that have addressed the question of special value14<\/sup>, Professor Bernard Marks found that, \u201con any proper analysis\u201d the proposition that special value be excluded from market value could not be sustained.<\/p>\n}

AGGREGATED DISPOSALS
\n<\/strong>Market value should be assessed at \u201cthe highest and best use of the asset as recognised in the market\u201d. However, the highest and best use may depend on whether the asset is considered on a stand-alone basis or in combination with other assets.<\/p>\n

In\u00a0Hustlers<\/em>\u00a0case^{15<\/sup>\u00a0it was necessary to value three adjoining parcels of land. The court accepted a valuation based on their combined use as a commercial business. A valuation prepared on a stand-alone basis was rejected, as was a valuation based on use as a retail shop (even though it gave the highest value), since there was no evidence of such demand. The principal established, and reaffirmed in other cases such as\u00a0Collis<\/em>16<\/sup>, is that market value reflects the highest and best use, including on a consolidated basis, provided there is actual demand for such a use.<\/p>\n}

MILEY\u2019S CASE^{17
\n<\/sup><\/strong>This controversial 2016 case addressed many of the issues discussed above. The taxpayer was one of three equal shareholders who sold their shares to a single purchaser. The amount paid by the purchaser reflected a premium for control of the company and therefore the proceeds received by Mr Miley included one-third of this premium.<\/p>\n}

The AAT found that the correct enquiry was directed towards determining the market value of Mr Miley\u2019s 100 shares alone \u2013 not as part of a package comprising the entire 300 shares in the company. The AAT went on to accept Miley\u2019s argument that the market value of the CGT asset is to be determined by reference to the\u00a0Spencer<\/em>\u00a0hypothesis and is not necessarily equal to the amount actually paid. Accordingly, the control premium was to be deducted from the sale proceeds to arrive at the market value of the shareholding. It should be noted that the ATO has indicated it will appeal this decision.<\/p>\n

Syttadel Holdings<\/em>^{18<\/sup>\u00a0is another case (from 2011) which, like\u00a0Miley<\/em>, demonstrates that market value is not always equal to the contract price \u2013 even where the parties deal at arm\u2019s length. At issue was the market value of a marina. Interestingly, valuers for the taxpayer and the ATO both agreed that the market value was considerably less ($4.5 million and $5.3 million respectively) than its $8.9 million sale price. In its decision impact statement, the ATO indicated that, while each case must be considered on its merits, it still considers that the sale price of its asset will generally be its market value.<\/p>\n}

WHAT SHOULD TAXPAYERS DO?
\n<\/strong>Where the market value of an asset needs to be ascertained, taxpayers are typically^{19<\/sup>\u00a0not obliged to obtain a detailed valuation from a qualified valuer. They may compute their own valuation based on reasonably objective and supportable data.20<\/sup><\/p>\n}

However, the onus is on taxpayers to establish that their valuation is correct. The ATO may challenge valuations where appropriate. Therefore, a taxpayer would be prudent to retain the services of a professional valuer if there is any doubt about the market value. Furthermore, the methodology adopted by the valuer should be one that is in accordance with valuation industry practices.<\/p>\n

Taxpayers (or the valuer they appoint) should clearly document the process which was undertaken in reaching the value, to demonstrate that it was done in accordance with sound valuation principles. In the event of a dispute, a failure to keep adequate documentation will likely be fatal to a taxpayer\u2019s position. The ATO also outlines the various elements of a good valuation in its\u00a0Market valuation for tax purposes<\/em>\u00a0publication \u2013 one critical aspect is that \u201ca market valuation is a valuation that applies the definition of market value for tax purposes\u2026\u201d.<\/p>\n

AVOIDING PENALTIES
\n<\/strong>The majority of taxpayers who use a qualified valuer will generally not be liable to an administrative penalty, even when the valuation ultimately proves to be deficient, since relying in good faith on an expert\u2019s advice is generally consistent with the taking of reasonable care. However, penalties may still apply where:<\/p>\n