Business valuation for Division 7A
Where a private company transfers an asset, forgives a loan or deals with a shareholder or associate other than at arm’s length, Division 7A can treat the difference as a deemed dividend. An independent market valuation is what establishes that the dealing was at arm’s length.
Division 7A problems are rarely discovered at the time. They surface on review, or when a subsequent adviser reads the file — by which point the transaction is done and the only question is what it is worth. A contemporaneous valuation is the answer to that question.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
Your tax adviser, and the ATO if the arrangement is examined.
Market value on an arm’s length basis — what an unrelated party would have paid.
The date of the transaction or the dealing, not the date the issue was noticed.
What the report must contain for this purpose
- The interest or asset being valued, defined precisely
- Market value assessed as between unrelated parties
- The methodology and the evidence supporting it
- Any minority or marketability discount applied, with reasoning
- Related-party arrangements identified and normalised out
- A signed valuer declaration and stated credentials
Sequence
How a Division 7A valuation runs
The engagement is short but the scoping matters: what exactly is being transferred, to whom, and on what date.
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01
Define the dealing
Which asset or interest, between which parties, on what date and under what documents. The scope of the valuation follows from this and nothing else.
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02
Establish the arm’s length position
What an unrelated purchaser would pay, with related-party terms — below-market rent, non-commercial loans, unpaid services — normalised out of the analysis.
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03
Value the specific interest
A parcel of shares is not a proportionate slice of the whole company. Control, governance rights and marketability are assessed for the interest actually transferred.
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04
Document contemporaneously
A report dated at the time of the dealing is worth far more than a reconstruction. Where the transaction has already occurred, the report says so plainly.
Where it goes wrong
Where Division 7A valuations fail
The technical tax analysis is your adviser’s work. These are the valuation errors that undermine it.
What is at stake
A deemed dividend under Division 7A is unfranked and assessable to the shareholder or associate in the year it arises, with interest and potentially penalties on top. Where the amount is material, the cost of a valuation is trivial by comparison — and it is the only document that answers the question directly.
- Using book value for an asset transfer Transferring plant or property at written-down value to a shareholder is the classic Division 7A exposure. Market value is frequently far higher and the difference is the problem.
- Pro-rating the whole-company value Valuing 20 per cent of the shares as 20 per cent of the company ignores control and marketability. The correct figure may be materially lower, which usually matters to the parties.
- Reconstructing the value years later A valuation prepared after the ATO asks is not worthless, but it carries far less weight than one prepared at the time and never revisited.
- Ignoring related-party distortions A company paying below-market rent to a related trust reports inflated earnings. Valuing on those earnings overstates the transferred interest.
- No declaration or credentials A spreadsheet without a valuer’s declaration is not evidence of an arm’s length dealing, however careful the arithmetic behind it.
What we need
Documents for this engagement
The transaction documents matter as much as the financials here, because the dealing itself defines what is being valued.
Open the standard checklist →- Transaction documents Transfer, forgiveness, loan agreement or minute recording the dealing
- Financial statements — three years For the company and any related entities
- Shareholder register and constitution To establish what rights attach to the interest transferred
- Related-party arrangements Loans, leases, service agreements and unpaid present entitlements
- Asset details Registers, titles, finance and condition where an asset is transferred
- Division 7A loan history Existing loans, repayments and prior benchmark interest applied
Whenever a private company deals with a shareholder or associate on terms that need to be shown as arm’s length — transferring an asset, forgiving a debt, issuing or transferring shares, or providing an asset for use. If the market value of what changed hands cannot be established, the difference between the actual and the market position is where the exposure sits.
Only where book value happens to equal market value, which is uncommon. Plant written down for tax, property held at historical cost and shares recorded at issue price are all likely to differ materially from market. Division 7A is concerned with market value, and book value is not evidence of it.
No, but the position is weaker than it would have been. A valuation prepared now, clearly dated and stating that it assesses value as at the earlier transaction date on information available then, is far better than nothing. Your tax adviser can then consider what corrective options exist.
It depends on the size of the parcel, the rights attaching to it and the shareholders’ agreement. A non-controlling parcel in a private company with no ready market ordinarily attracts discounts for lack of control and lack of marketability, and the report sets out the basis for any discount applied rather than asserting a conventional percentage.
Yes, and it is the better arrangement. Your accountant advises on the Division 7A treatment; we provide the independent market value the treatment relies on. Keeping those roles separate strengthens both.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
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