Concepts
Market value
Market value is the price an asset or service would reasonably be expected to fetch in an open sale between informed, willing and independent buyers and sellers.
Market value is the amount that would be agreed in a sale between a willing buyer and a willing seller, each with reasonable knowledge of the relevant facts and neither under pressure to act. In everyday business, it is the price you would expect to get if you offered an asset or service to the open market. It is a benchmark that tax law uses when the actual price paid might not reflect reality.
The tax system relies on market value in several situations. When an asset is disposed of for no payment, or for a price that is not at arm's length, the proceeds may be treated as equal to its market value. When a business gives an asset to an owner, or an employer gives a benefit to an employee, the value of that benefit is often measured using market value or a similar yardstick. These rules close gaps where the real price is missing.
Establishing market value can be straightforward or complex. For listed shares, the market price is easy to find. For motor vehicles, comparable sale listings and dealer guides help. For real property, a valuation from a qualified, independent valuer is the strongest evidence. For businesses and unique assets, specialist valuation advice may be needed. The ATO publishes guidance on valuations for some situations and may accept reasonable methods if they are supported by evidence.
For GST, market value comes into play where a supply is made for no consideration or less than full value between associates, or where a taxable supply is made without a price. In some of those cases, the GST is calculated on a value equal to the market value rather than the nominal price. It can also be relevant when you take business stock for private use, which may be a supply of goods, with GST payable on the value of the supply.
Keeping evidence is crucial. Record the date and the basis you used, for example screenshots of comparable sales, written quotes, a valuer's report or a dealer's trade-in guide. If the ATO later questions the value, a contemporaneous record is far more persuasive than an estimate made afterwards. When the numbers are large, such as a property or business transfer, professional valuation is usually a worthwhile expense.
A common misunderstanding is assuming that a lower price agreed between family or friends is the value that counts for tax. If the dealing is not at arm's length, the law may substitute market value. Another is forgetting that market value for GST usually needs to be worked out including or excluding GST consistently, depending on the rule. This is general information only, so confirm how market value applies to your situation with the ATO or a registered tax professional.
Worked example
A retailer takes a TV from stock for his home. Similar TVs sell for $1,650 including GST, which is the market price. Where the rules require GST to be accounted for on the value of the supply, the GST amount is $1,650 divided by 11, which equals $150. He would also consider the income tax treatment of taking trading stock for private use, with the value usually measured by reference to selling price.
Practical tips
- Record how you arrived at a market value and keep the evidence on file.
- Use an independent valuation for high-value assets such as property or a business.
- Do not assume the price actually paid is the figure that counts if the dealing was not at arm's length.