The transfer no one negotiates
Succession transfers rarely involve a negotiated price. A parent transfers shares to a child for nominal consideration, a family trust redirects an interest to the next generation, a company issues equity to a child's entity at par. The commercial instinct is that where no money changes hands, no valuation question arises. Australian tax law takes the opposite view. Where parties do not deal with each other at arm's length — and family members transferring a business generally do not — s 116-30 of the ITAA 1997 substitutes market value for the actual proceeds. The parent is assessed as though they sold at market value on the transfer date, whatever the family actually paid. The gift is still a disposal. The question in a family succession is therefore never whether market value applies. It is whether the market value on the file can be defended.
Three regimes, one requirement
Market value is not a single obligation in a succession — it is applied independently by at least three regimes, and a transfer documented casually can be queried under any of them:
- ·CGT market value substitution — s 116-30 ITAA 1997 deems capital proceeds to be market value where the parties did not deal at arm's length or no consideration was paid. This is the provision that makes a gifted business a taxable disposal at full value.
- ·Division 7A ITAA 1936 — where a private company transfers assets or provides benefits to a shareholder or their associate for less than market value, the shortfall can be treated as an unfranked deemed dividend. Succession structures that move assets out of the family company sit squarely in this territory.
- ·Transfer duty — in states that still levy duty on business asset transfers, and wherever landholder provisions are engaged, duty is assessed on market value regardless of the consideration actually paid. Revenue offices ask for valuation evidence on related-party transfers as a matter of course.
The fairness problem inside the family
Most successions involve a child in the business and children out of it. The child in the business feels — often with some justification — that a meaningful share of the goodwill reflects their own years of work. The children outside the business see the family's largest asset moving to a sibling at a price nobody independent has tested. Parents' estate plans typically equalise through other assets or through the will, and that equalisation only works if the business value is credible to everyone. An informally set value invites decades of grievance and, at the sharp end, disputes over the estate after the parents' death. An independent valuation is the neutral reference point: prepared for the transaction rather than for a side, concluded at the position the methodology and evidence best defend, and signed under an independence statement. It also protects the incoming child — the documented market value at transfer establishes their cost base for an eventual disposal decades later, when reconstructing the evidence will be far harder.
Successions happen in stages
Few families transfer a business in one step. The common pattern is an initial minority tranche while the parent retains control, progressive tranches as the next generation takes over management, sometimes a restructure step along the way — a Subdiv 328-G small business restructure rollover, or a trust or holding-company reorganisation to accommodate the new ownership — and a final control transfer. Each tranche is a separate CGT event at its own date, and the substitution rule applies market value at that date, not the value when the succession plan was drawn up. A business that grows between tranche one and tranche three has a different market value at each event, and the file needs to show it. Minority tranches also raise their own methodology questions: a 20% parcel is not simply 20% of the whole, minority discounts apply, and the magnitude adopted must be reasoned from the rights attaching to the parcel rather than assumed.
The valuation refresh points a staged succession needs
A staged succession does not need the full valuation exercise repeated from scratch at every step, but it does need the value evidenced at each point the law tests it. Where the entity and methodology are unchanged between stages, a refresh is a substantially lighter engagement than the baseline — the methodology is settled and the work is updating the evidence:
- ·A baseline valuation when the succession plan is designed — the reference point for the structure, the duty estimate and any concession eligibility analysis
- ·A refreshed valuation at each tranche transfer, because each transfer is its own CGT event at its own date
- ·A valuation at any restructure step — rollovers such as Subdiv 328-G have their own conditions, and contemporaneous market value evidence supports the positions taken
- ·An interim refresh where circumstances change materially between stages — a major contract won or lost, a key person departure, an acquisition or a divestment
- ·A final valuation at the control transfer, where the treatment of any control premium is addressed explicitly rather than left implicit
Why the ATO looks harder at family transfers
An arm's length sale carries a built-in control: the buyer wants the price low, the seller wants it high, and the agreed figure emerges from genuine tension between the two. Spencer v Commonwealth's willing-but-not-anxious parties are actually present at the table. A family transfer has no such tension, and usually has an incentive pointing one direction — a lower value reduces the parent's capital gain, reduces duty where duty applies, and can bring net assets under the $6m maximum net asset value test for the small business CGT concessions. The ATO's market valuation for tax purposes guidance does not impose a harsher standard on related parties, but reviewers apply the ordinary standard with more attention, because the discipline the market normally provides is absent and the value on the file happens, more often than chance would suggest, to suit the tax outcome. The answer is not to avoid the concessions or to inflate the value defensively. It is to hold evidence commensurate with the scrutiny — a value concluded the same way it would be for strangers, on the IVS 104 market value basis and the willing-but-not-anxious construct, with the reasoning documented so the position is defensible if reviewed.
The evidence file a family transfer needs
For a family succession, the file the accountant should hold looks like this:
- ·The relationship and the purpose disclosed in the report itself — a valuation that acknowledges it is for a related-party transfer reads very differently under review than one that appears to conceal it
- ·Methodology selected and justified for the entity, with a second methodology as cross-check — capitalisation of maintainable earnings tested against market multiples is the common pairing for trading businesses
- ·Comparable evidence documented and current at the transfer date, with the selection reasoning stated
- ·Family-member remuneration normalised — wages above or below commercial rates are among the most common add-back adjustments in succession engagements, and each needs supporting evidence
- ·Minority discounts and any control premium adopted at a stated magnitude, reasoned from the rights attaching to the interest
- ·An independence statement, a senior-reviewer signature, and a working file retained for ten years — with fees fixed at engagement and never contingent on the value concluded
Where this sits, and what we do not do
We have written separately about how methodology selection affects related-party transfer values — a worked example showing the same 35% interest supporting a defensible range and how the most supportable position within it is selected. Every succession engagement applies that same discipline, and our estate and succession valuation service covers the adjacent matters: probate values, post-death cost base, and transfers triggered by a death rather than planned ahead of one. On tier selection, Comprehensive (from $3,995 + GST) suits most single-tranche transfers; the Defensible Valuation File (from $8,995 + GST) is appropriate where small business CGT concessions are claimed, the value is likely above $2–3m, or the succession is staged and the file will be tested more than once. Two boundaries matter. Prismi prepares independent valuations only — we are not a registered tax agent, and how Division 7A, the concessions and duty apply to your structure is a question for your accountant and lawyer. And we will not adopt a value to suit the succession's tax outcome: where a client asks for a target value, we will say so and decline the engagement on those terms. The valuation that protects a family is the one that would read the same way if the parties were strangers.