Market value vs fair value: the standard of value, explained.

Market value, fair value and fair market value are distinct standards of value that can move the outcome by double-digit percentages. Tax valuations use market value under the Spencer test; family law may use value to the owner; oppression remedies and many shareholders' agreements require fair value without a minority discount; AASB 13 defines fair value for financial reporting. Prismi identifies the required standard at engagement and values to it.

Why the standard of value decides the number before any analysis starts

Every valuation answers a question, and the question is set by the standard of value. The same parcel of shares in the same company at the same date can carry materially different values depending on whether the engagement asks what a hypothetical purchaser would pay (market value), what the interest is worth to the person who holds it (value to the owner), or what a departing shareholder should fairly receive (fair value). The standard is fixed by the purpose — a tax provision, a court, a contract, an accounting standard — not chosen by the valuer or the client. Applying the wrong standard is one of the most common defects in Australian valuation reports, and no amount of analytical quality can repair it: the report answers a question nobody asked. The standard must be identified in writing at engagement, before methodology is discussed.

Market value and the Spencer test: what a stranger would actually pay

Market value is the standard for Australian tax purposes, and its foundation is Spencer v Commonwealth (1907), where Griffith CJ asked what a man desiring to buy would have had to pay to a vendor "willing to sell it for a fair price but not desirous to sell" — the willing-but-not-anxious principle. The modern restatement is IVS 104: "the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion". The ATO's market valuation for tax purposes guidance adopts this framework, and the ITAA 1997 provisions that most often require a valuation — s 116-30 market value substitution, the Div 152 small business CGT concessions (including the s 152-40 active asset test), Subdiv 328-G restructure rollovers — all turn on market value. Because the buyer is hypothetical, a minority parcel can attract minority and marketability discounts where the evidence supports them. "Fair market value", the dominant North American term, has no separate meaning in Australia — in Australian documents it is read as market value.

Value to the owner: when family law values what will never be sold

Family law property settlements do not always apply strict market value. Where a party will retain the business interest — and no sale to a hypothetical purchaser will ever occur — family courts have long recognised "value to the owner": what the interest is worth to the person who keeps it, which can exceed what a stranger would pay. The classic application is a minority interest in a family-controlled entity: market value would apply a substantial minority discount, because a hypothetical outsider acquires no control and no ready exit; value to the owner may apply little or none, because the interest sits within a controlling family bloc and the retaining spouse gives up nothing by holding it. Which approach applies in a given matter is a question for the lawyers and ultimately the court — Prismi does not provide legal advice. The valuer's job is to value to the standard instructed, disclose it prominently and, where the standard is contested, show the outcome under both. A report that silently applies a market-value minority discount in a family law matter can understate the property pool by a double-digit percentage.

Fair value: shareholder exits, oppression remedies and the accounts

"Fair value" is a label used by three different sources, and the source decides the meaning. First, shareholders' agreements: many buy-sell and pre-emption clauses require an exit at "fair value", and courts have generally read that term as a pro-rata share of whole-company value without a minority discount — on the logic that a shareholder compelled to exit should not be penalised for holding a minority. The drafting governs: a clause that says "market value" invites the discount, and the difference between those two words can be worth a double-digit percentage of the payout. Second, the oppression remedy under ss 232–233 of the Corporations Act 2001: where a court orders a buy-out, fair value is generally assessed pro-rata, without a minority discount, particularly where the oppressive conduct caused the exit. Third, financial reporting: AASB 13 defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date" — an exit price from a market-participant perspective, close to market value in practice, and despite the shared label distinct from contractual and oppression-remedy fair value. The label tells you little; the source tells you everything.

Which standard applies when: the mapping advisers can quote

• ·Tax — CGT events, Div 152 small business CGT concessions, s 116-30 market value substitution, Subdiv 328-G restructure rollover, Division 7A: market value (Spencer test / IVS 104); minority and marketability discounts available where the evidence supports them
• ·Family law property settlements: market value where the interest will realistically be sold; value to the owner where it will be retained — minority discounts often reduced or rejected within family-controlled entities
• ·Shareholders' agreement buy-sell and pre-emption clauses: whatever standard the clause specifies — "fair value" is generally pro-rata without a minority discount; "market value" generally admits one; the drafting decides
• ·Oppression remedy buy-out orders (Corporations Act 2001 ss 232–233): fair value — generally pro-rata without a minority discount, particularly where the oppressive conduct caused the exit
• ·Financial reporting — impairment testing, business combinations, share-based payments: AASB 13 fair value — an exit price between market participants at the measurement date
• ·State taxes — transfer duty and landholder duty: market value under the relevant state provisions, applying broadly Spencer-based principles

The same shares, three different numbers: a worked contrast

Take a 25 per cent parcel in a private company whose 100 per cent equity value is assessed at $4 million — a pro-rata value of $1 million. For a tax-purpose market valuation, the question is what a hypothetical willing-but-not-anxious purchaser would pay for that parcel: no control, no guaranteed distributions, no ready market. A documented minority and marketability discount — say 25 per cent for illustration — takes the supportable conclusion to around $750,000. In an oppression buy-out at fair value, the same parcel at the same date is generally valued pro-rata: $1 million. In a family law matter where the spouse retains the parcel inside a family-controlled group, value to the owner may also sit at or near pro-rata. Same company, same date, same financial statements — a swing of roughly a quarter of the parcel's value, driven entirely by the standard of value rather than by anything about the business. This is why the standard is fixed in writing at engagement, and why a report prepared for one purpose usually cannot be recycled for another — the supportable range, and the most supportable position within it, only have meaning once the standard is set.

Getting the standard right: which Prismi engagement fits

Every Prismi engagement identifies the standard of value at intake and states it on the face of the report. For a single-purpose tax valuation where the standard is uncontested market value, the Essential report (from $1,495 + GST, 10–14 business days) is usually sufficient. Where discounts must be reasoned — family law interests, shareholder exits under an agreement, minority parcels — the Comprehensive report (from $3,995 + GST, 15–25 business days) tests multiple methodologies and documents the discount evidence. For contested matters — oppression proceedings, litigated family law, positions likely to face ATO review — the Defensible Valuation File (from $8,995 + GST, 25–35 business days) provides an APES 225-aligned report, senior-reviewer signed, with the complete working file retained for ten years. Where the parties dispute the standard, or need the outcome under more than one, the Valuation Range & Scenario Review premium engagement models the value under each standard. Retrospective valuation dates — a separation date, a historical CGT event — attract a $495 surcharge per historical date; additional entities are $750 each. Fees are fixed at engagement and never contingent on the outcome. Prismi prepares independent valuations only — not tax, legal or financial advice; which standard legally applies to your matter is a question for your accountant or lawyer. If a client asks us to conclude a number the evidence cannot support, we will say so and decline the engagement on those terms.