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An evaluation of control premium and its tax implications


A correct understanding and assessment of control premium has direct implications for the outcome of a principal asset test required to determine whether or not a foreign resident is liable to Australian capital gains tax arising from a capital gain on a sale of shares in a company and the assessment of enterprise value and goodwill value for tax purposes under the top-down residual method. Unfortunately, such understanding has proved elusive in practice.

This article discusses the important distinction between ex-ante control premium and ex-post observed takeover premium and the incorrect practice of mechanistically assessing the ex-ante control premium for an entity which has not been subjected to a takeover bid as at the valuation date based on average observed ex-post takeover premium. In fact, achieving the correct understanding and assessment of control premium for a given entity requires significantly complex and lateral valuation thinking.

Author profile

Dr Hung Chu
Hung is a Director of Lonergan Edwards & Associates Limited. Dr Hung Chu completed his master degree in Finance and Banking (with Merit among the top 2% of graduates) from the University of Sydney and his doctoral degree in Finance from the University of Technology, Sydney (graduated on Chancellor's List for Exceptional Scholarly Achievement in PhD research). He has 12 years of experience in the provision of valuation services and numerous technical papers published in academic and practitioners' journals. - Current at 01 June 2016
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