Miscellaneous 2016

Pitfalls in applying the small company risk premium for tax and duty purposes

Source: The Tax Specialist Journal Article

Published Date: 1 Apr 2016


At the centre of many tax controversies are valuation issues. These cases typically involve either new valuation issues or require a re evaluation of conventional, but not necessarily correct, approaches to existing valuation issues. In assessing the market value of the total assets of a small company using the discounted cash flow (DCF) valuation method, many practitioners routinely add a small company risk premium to the cost of equity derived using the capital asset pricing model to arrive at the discount rate adopted under the DCF valuation method.

This article examines the potential pitfalls of this practice: failure to recognise the true subject of valuation, incorrect triangulation of empirical evidence from the US markets to the Australian market, and double-counting for risk. The article also explains why this common practice is problematic and why the recognition and avoidance of this unsound practice is important in achieving a credible valuation outcome for tax and duty purposes.

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  • Published By: Hung Chu
  • Published On:1 Apr 2016

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Unless expressly stated, opinions are not that of The Tax Institute, which accepts no responsibility for the accuracy of any of the information contained within it.

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Miscellaneous 2016

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