4.7.2.20 Assessable Assets from Private Companies & Unlisted Public Companies

Summary

This topic provides information on the following:

• general introduction,
• shares in private companies (1.1.C.220) and unlisted public companies,
• valuation of shares,
• where a market exists,
• the net asset backing method,
• when to use the net asset backing method,
• when not to apply the net asset backing method,
• deprivation,
• receivership, and
• liquidation.

Note: For the assets test treatment of general business items also see 4.7.1.40 Assessment of Assets for Sole Traders and 4.7.1.50 Assessment of Assets for Partnerships. The assessment of general business items applies to all business structures including sole traders, partnerships, private trusts and private companies.

Policy reference: SS Guide 4.7.2.30 Treatment of Assessable Assets - Private & Unlisted Public Companies - Not Assessed Under New T & C Rules, 4.6.5.50 Assessing Shares in Private & Unlisted Public Companies - Not Assessed Under New T & C Rules

General introduction

While the new rules for trusts and companies have largely replaced methods of valuing shares in these companies, an acceptable method is still required where:

• income support recipients have shareholdings in companies that are not covered by the new rules, or
• assessment decisions need to be made in relation to income support recipients' entitlements before the introduction of the new rules on 1 January 2002.

Shares in private companies & unlisted public companies

A share in a private company or unlisted public company is an assessable asset (1.1.A.290) and needs to be valued for assets test purposes. The assets owned by the company, however, are NOT the property of the shareholder and therefore are NOT assessed as an asset of the income support recipient.

Valuation of shares

There are 3 accepted methods of valuing shares in private companies or unlisted public companies:

• where a market exists - the market value, or
• where a market for these shares does not exist - the net asset backing method, or
• if there is no market for the shares, and it is inappropriate to use the net asset backing method - some other value (see following instructions).

Where a market for these shares exists, the market value is the most appropriate method. Otherwise the net asset backing method should be employed unless it is inappropriate to do so.

When a market exists

A market exists where there is:

• a willing, but not over anxious buyer, and
• a willing, but not over anxious seller, and
• both parties are operating at arms length from one another and not subject to undue influence.

Generally, it will be rare for an effective market to exist for private companies or large unlisted public companies. However, such markets have operated:

• on exempt stock exchanges operating mainly in larger regional centres, or
• through a stockbroker willing to 'make' a market in the shares of a particular company, or
• through the company itself (but note, such a market must be free of restrictions on sale), or
• where 2 individuals meeting the above criteria exist.

The income support recipient should provide the necessary evidence that a market exists for the shares of a particular company.

The net asset backing method

Where no market exists, private company and unlisted public company shares are valued using the net asset backing method. The net asset backing method is the total net assets (current market value of all of the company assets less its total liabilities) divided by the number of shares issued with an entitlement to assets on wind-up.

Exception: If the shares do NOT carry rights to participate in capital distribution, or in certain other cases, other methods of valuing the shares are used (see additional instructions below).

Explanation 1: The Articles of Association of a company outline the special rights or restrictions attached to a particular class of shares issued by the company.

Explanation 2: The net asset backing method is used because it provides a consistent basis for the assessment of the value of all private and unlisted public companies. It is also less complex to administer than other methods. It calculates the:

• adjusted net asset position of the company, by deducting the company liabilities from the current market value (1.1.M.40) of its assets, and
• assessable value of the shares, by using the number of shares that have an entitlement to capital on wind-up to apportion the net assets of the company.

While it uses the shares that give access to capital on wind-up as a way of 'apportioning' the value of the company, the net asset backing method is NOT intended to give a notional value of the company on wind-up. The net asset backing method values the company as a going concern, and at a current market value (1.1.M.40). For this reason, ALL assets on the balance sheet, BOTH TANGIBLE and INTANGIBLE, should be used to calculate the value.

The net asset backing method uses information contained in the company balance sheet and depreciation schedule. Adjustments MAY be needed to reflect the current market value of these assets, because the balance sheet records values of fixed assets at their historical cost. The following table outlines how different assets are treated:

When to use net asset backing method for share valuation

Apply the net asset backing method where:

• the income support recipients control the company (either through special rights of their shares or via an outright majority shareholding), or
• the income support recipients are closely associated with the company controller (i.e. family members), and could reasonably be expected to have some influence on the controller, or
• the income support recipients are the majority shareholders, where those shares entitle the recipients to the equivalent majority of the assets and confer equivalent voting rights on the recipients, or
• the income support recipients made a decision to purchase the shares and therefore could reasonably be expected to be aware of the rights or conditions attached to the shares, or
• where no one would be ascribed with control of that company and where the share register is widespread, and it is reasonably open to the income support recipients to either sell the shares at net asset backing value or initiate change in the company articles to allow this to happen,
• the income support recipients are active directors of the company in question.

Explanation: Active Directors are persons actively engaged in the day to day running of a company.

When NOT to apply the net asset backing method

Circumstances where the application of the net asset backing method MAY not be appropriate include:

• the income support recipients inherited the shares, or
• the income support recipients were 'given' the shares by their parents or the controller in circumstances where they could not be reasonably expected to understand what they were being given (i.e. shares were issued to minors and the children were unaware they had the shares), or
• if the income support recipients were given the shares by the controller and those shares did not, in themselves, confer control etc (see below), or
• the sole or dominant purpose of the income support recipients being issued with these shares was to comply with the former corporations law requirement that companies have at least 2 shareholders.

If one of these conditions is satisfied, and if the income support recipients have no influence over the controller or majority shareholder, then also consider whether the following circumstances may apply:

• the income support recipients were not an active director of the company, and/or
• the income support recipients' shares can be called away from them at any time, and/or
• the company articles, or some other condition, prevents the sale of these shares at will (i.e. to whomsoever at whatever price).

If at least one of these conditions is also satisfied then an alternative valuation method could be used. Alternative methods include (but are not limited to):

• the last sale price, where the last sale was free of undue influence, or
• where the shares could be called away, the amount paid, or potentially could be paid, to the income support recipient when the call is made.

The method should be based on the circumstances of each case.

Note: The guiding principle in the value selected would be to choose the method that best reflects the beneficial interest in the assets the income support recipient holds as a result of holding the shares at the time the assessment is made.

Where the net asset backing method is NOT used the company accountants should be asked to supply the following information:

• net asset backing per share, and
• where the shares can be called away from the income support recipient the amount that would be paid for those shares, and
• the price of any outstanding offer to buy these shares, and
• any recent sales of shares, or
• any other matter that may assist in determining an appropriate value for these shares.

Exception: The 'par' value, or valuation method based on the dividends paid (called the capitalisation of dividends) or on the company earnings (called the capitalisation of earnings), do not provide an accurate assessment of the income support recipient's beneficial interest in their share of the company assets.

Explanation: The level of private company dividends is often low or non-existent due to the common practice of retaining profits for reinvestment in the company. Basing a value on this factor will generally lead to an unjustifiably low value being given to the shares.

Likewise, the accounting policy and method through which returns are distributed to the shareholders can influence the earnings of a company. A valuation based on earnings can also produce an unjustifiably low value for company shares.

The par value is the issue price of the shares and has no relationship to current assets of the company. Further, under the current Corporations Act the 'par' value of a share is no longer recognised as a meaningful term.

If the income support recipient is in severe financial hardship (1.1.S.120) an interim assessment based on the income support recipient's estimate, can be used. In these circumstances the valuation is reviewed when the income support recipient's entitlement to be paid under the hardship provisions is reviewed.

When deprivation provisions apply

Deprivation provisions apply if the income support recipient influenced the action of a private company to:

• issue further shares at their nominal value (normally $1.00) (see explanation), or
• dispose of assets for less than their value and this reduces the value of an income support recipient's share(s)in the company.

Explanation: The income support recipient will have engaged in a course of action to reduce the value of their assets by diluting the assessable value of the shares they hold in the company.

An income support recipient's influence should be assumed as a matter of course if the income support recipient, and/or their partner:

• owns a majority of the issued shares of the company, or
• hold shares with powers such as voting rights, which provide them with the ability to control the operation of the company.

Company in receivership

If a company is in receivership, the assessable asset value of the shares owned, or loans owed, should continue to be assessed as though the company were still managed by the directors.

Company in liquidation

If a company is in liquidation, assets to be maintained should be assessed on the basis of the projected payout to be received by the liquidator.

If an income support recipient advises that they have forgone repayment of a loan, or voluntarily agreed to receive a repayment of a lesser proportion of their loan than other unsecured creditors, deprivation provisions MAY apply. However, consideration should also be given to the circumstances in which a loan no longer exists for social security purposes.

Act reference: SSAct section 1123 Disposal of assets

Policy reference: SS Guide 4.4.2 Deeming of Financial Investments, 4.6.5.50 Assessing Shares in Private & Unlisted Public Companies - Not Assessed Under New T & C Rules, 4.6.5.65 Loans that No Longer Exist, 4.6.5.110 Failed Financial Investments

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Last reviewed: 6 September 2010