Two discounts, two different problems
A 20% shareholding in a company worth $5m is almost never worth $1m. Two distinct discounts explain the gap. The discount for lack of control (DLOC) reflects what a minority holder cannot do: set dividend policy, appoint or remove directors, control their own remuneration, direct strategy, or decide when — or whether — the business is sold. A buyer of a minority parcel pays less because they are buying a seat at someone else's table. The discount for lack of marketability (DLOM) reflects a different problem: even a parcel with attractive rights has no ready market. A listed share converts to cash in days at negligible cost. A private minority parcel may take months or years to sell, at real transaction cost, into a thin pool of buyers, often subject to pre-emptive rights. The two discounts compensate for different risks, and a supportable valuation quantifies them separately before combining them. Treating "minority discount" as a single undifferentiated haircut is the first sign of a file that will struggle under scrutiny.
How the discounts stack — multiplicatively, not additively
The discounts apply in sequence, not in sum. The analysis starts with the equity value of the business on a control basis and takes the pro-rata share attributable to the parcel. DLOC is applied first, producing a minority, marketable value — broadly, what the parcel would be worth as a non-controlling stake with a liquid market. DLOM is then applied to that result, producing the minority, non-marketable value that reflects the reality of a private parcel. The arithmetic matters: a 20% DLOC and a 20% DLOM do not produce a 40% combined discount. They produce 1 − (0.80 × 0.80) = 36%. At larger magnitudes the gap between additive and multiplicative stacking becomes material, and reports that simply add the two numbers overstate the combined discount — an error that runs in the taxpayer's favour and invites exactly the scrutiny it cannot survive.
Typical ranges — and the evidence behind them
There is no Australian statutory table of discounts, and the ATO's market valuation guidance deliberately does not prescribe one. What exists is a body of empirical evidence and case law that valuers weigh against the facts of the specific parcel. The ranges below describe where concluded discounts commonly fall in Australian private-company practice. They are a starting frame, not an entitlement — the concluded figure has to be argued from the parcel's own circumstances.
- ·DLOC: control premiums observed in Australian takeovers have typically run at around 20–40% above pre-bid trading prices, which implies minority discounts of roughly 17–29% on the inverse calculation. Concluded DLOCs for private minority parcels commonly fall between 10% and 35%, depending on the rights attaching to the parcel.
- ·DLOM: the empirical base is largely US restricted stock and pre-IPO evidence. The SEC Institutional Investor Study (1971) found a mean discount of about 26%; Silber (1991) found a mean of about 34%; pre-IPO studies show higher figures again. Australian practice, following the standard texts (Lonergan's The Valuation of Businesses, Shares and Other Equity among them), typically concludes DLOMs of 10–30% for minority parcels, applied with caution because US evidence does not transplant cleanly to Australian private companies.
- ·Combined: for small parcels with no special rights, combined discounts of 25–45% off pro-rata value are common. Combined discounts above 50% exist in practice but demand unusually strong evidence.
Where discounts are accepted — and where they are rejected
The same parcel attracts different treatment depending on the forum, because each forum asks a different valuation question. For tax purposes — market value substitution under s 116-30 ITAA 1997, restructure rollovers under Subdiv 328-G, the Division 152 concession tests — the question is the Spencer v Commonwealth (1907) question: what would a willing but not anxious buyer pay a willing but not anxious seller for this parcel? Discounts are accepted in principle where the hypothetical sale is genuinely a sale of the minority parcel on its own. In family law, the question is usually different: the Full Court in Turnbull (1991) endorsed valuing shares in a family company on a value-to-the-owner basis, and where the parties between them control the company, the court will often decline any minority discount — the fiction of a hypothetical arm's-length buyer gives way to the reality that the shareholding spouse keeps the company. In shareholder oppression proceedings under ss 232–233 of the Corporations Act, courts ordering the majority to buy out an oppressed minority routinely order fair value on a pro-rata basis without discount, on the express reasoning that letting the oppressor acquire at a discounted price would reward the oppression. Same parcel, three forums, three different answers.
Miley: the tax case every discount file should anticipate
Commissioner of Taxation v Miley [2017] FCA 1396 is the case Australian valuers now write discount sections against. Mr Miley held one third of a company's shares, and all shareholders sold their parcels together to a single buyer. The question was the market value of his parcel just before the CGT event, for the $6m maximum net asset value test in Division 152. The AAT had applied a 16.7% discount for lack of control, concluding a value of $4,914,700 and bringing him within the test. The Federal Court overturned it: where the actual circumstances involved all shareholders selling contemporaneously, the hypothetical sale that determines market value must reflect those circumstances, and no minority discount was appropriate. The lesson is not that discounts are dead for tax purposes. It is that the discount question turns on the transaction the statute requires you to hypothesise, framed by the facts as they actually stood at the valuation date. A minority parcel genuinely valued in isolation can still support a discount. A minority parcel valued on the eve of a whole-of-company sale usually cannot.
Evidencing the discount rather than asserting it
The difference between a discount that survives review and one that does not is rarely the number itself — it is whether the file explains why that number, for this parcel, at this date. A bare assertion that "a 25% minority discount is standard" is not evidence. The working file behind a supportable discount addresses the specific rights and circumstances of the parcel:
- ·The constitution and any shareholders agreement — voting thresholds, board appointment rights, veto rights, pre-emptive rights and transfer restrictions, drag-along and tag-along provisions, buy-sell mechanisms.
- ·The dividend record — a minority parcel in a company that reliably distributes is worth more than one starved of distributions at the majority's discretion.
- ·Shareholder composition — a 20% parcel facing an 80% controller is a different asset from a 20% parcel among five equal holders, where it may carry swing value.
- ·Prior transactions in the company's own shares — the most direct marketability evidence available, where it exists.
- ·The realistic exit horizon — an imminent sale process, succession event or buy-sell trigger compresses the marketability problem, and the discount with it.
Worked example: a 20% parcel of a $5m company
Take a private company with an equity value of $5m on a control basis, and a 20% parcel with a pro-rata value of $1m. The concluded value moves substantially with the discount assumptions the evidence supports:
- ·Favourable rights — board seat, reliable dividend history, tag-along protection: DLOC 15%, DLOM 10%. $1m × 0.85 × 0.90 = $765,000 (combined discount 23.5%).
- ·Ordinary minority — no board representation, dividends at the majority's discretion: DLOC 20%, DLOM 20%. $1m × 0.80 × 0.80 = $640,000 (combined 36%).
- ·Weak position — no distributions, restrictive pre-emption, entrenched controller: DLOC 30%, DLOM 25%. $1m × 0.70 × 0.75 = $525,000 (combined 47.5%).
- ·No-discount context — a Miley-type contemporaneous whole-of-company sale, an oppression buy-out at fair value, or a family law value-to-owner basis: $1,000,000.
Where this lands for owners and advisers
The span in that example — $525,000 to $1,000,000 for the same parcel — is why discount selection is not a footnote. In related-party transfers, restructures and concession claims it is frequently the single largest judgement in the valuation, and the assumption a reviewer reads first. Our Comprehensive and Defensible Valuation File engagements quantify DLOC and DLOM separately, tie each to the rights and evidence of the specific parcel, and test how the conclusion moves across the supportable range. Where the discount itself is the contested question — a marginal Division 152 position, a disputed family transfer — the Valuation Range & Scenario Review engagement maps the concluded value across defensible discount assumptions, with the most supportable position identified and reasoned. Two boundaries hold throughout. We do not select a discount to engineer a threshold outcome; where the evidence supports a smaller discount than the client hoped for, we will say so. And we are valuers, not tax or legal advisers — whether a discount is open in a particular statutory test, and what follows from it, is a question for your accountant or lawyer, working from a valuation documented well enough for them to rely on.