This topic provides information on the following:
Note: For the assets test treatment of general business items also see 18.104.22.168 Assessment of Assets for Sole Traders and 22.214.171.124 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 126.96.36.199 Treatment of Assessable Assets - Private & Unlisted Public Companies - Not Assessed Under New T & C Rules, 188.8.131.52 Assessing Shares in Private & Unlisted Public Companies - Not Assessed Under New T & C Rules
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:
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.
There are 3 accepted methods of valuing shares in private companies or unlisted public companies:
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.
A market exists where there is:
Generally, it will be rare for an effective market to exist for private companies or large unlisted public companies. However, such markets have operated:
The income support recipient should provide the necessary evidence that a market exists for the shares of a particular company.
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:
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:
If the asset is…
Then use the…
a fixed asset, such as real estate, plant and equipment etc.,
current market value (1.1.M.40) of the asset.
an intangible asset such as a patent or copyright,
current market value (1.1.M.40) of the asset.
an intangible asset such as goodwill or formation expenses,
value shown on the balance sheet. In some cases where the business has ceased or the business has traded at a loss for a number of years, the historical amount may be adjusted.
all other assets,
value shown on the balance sheet.
Apply the net asset backing method where:
Explanation: Active Directors are persons actively engaged in the day to day running of a company.
Circumstances where the application of the net asset backing method MAY not be appropriate include:
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:
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 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:
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.
Deprivation provisions apply if the income support recipient influenced the action of a private company to:
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:
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.
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, 184.108.40.206 Assessing Shares in Private & Unlisted Public Companies - Not Assessed Under New T & C Rules, 220.127.116.11 Loans that No Longer Exist, 18.104.22.168 Failed Financial Investments
Last reviewed: 6 September 2010