Valuations, Teal (again) and Running the Gauntlet
For those following on from the last article:
1) Don’t go down the jam/jelly rabbit hole. Next step after jam versus jelly, is jelly versus jello.
2) The colour teal has disappeared from the radar. Hopefully their policies don’t disappear.
What flavour would this be?!?
3) Tech stocks are still getting smashed.
The reason I’m focussing on this third issue at this current time, is because it’s getting close to ESOP reporting season. Much like your (now redundant) group certificates, employers are required to disclose to their employees the market value of the relevant taxing points for their shares/options, by 14 July. This is in most cases included in the employee’s assessable income.
How good are paper forms…
In 99% of cases, the employee will pre-fill the numbers provided by their employer into their tax return. This is because the market value of many ESOPs (particularly with listed corporations) is quite obvious (it’s staring you in the face on your CommSec or NABtrade account).
What happens though if you work for a small, or even a large, unlisted business? You can’t easily stress-test the numbers you’re given, especially if you have 12 monthly taxing points through the year (very common for RSUs), each of which requiring a market valuation at each particular point in time.
I’m really curious to see how the tech stocks deal with this, because as we all know, their valuations (and the methodologies used to support these valuations) are chopping and changing in response to various conditions; one in particular being rising interest rates across the global economy.
The ATO legislation refers to “market value” in their ESS legislation when it comes to what is assessable. Different stakeholders will view market value differently to others.
Case in point – Australian Tech Darling #2 – Canva.
TEAL EVERYWHERE!
2,000 Australian staff – many of which are participating in their company’s ESOP.
Several key investors have written down the value of their shareholding in Canva in the past six months, one of which being Franklin Templeton, who have reduced the carrying value of their Canva investment by 58.5% - https://www.afr.com/technology/canva-investor-slashes-value-of-stake-by-58-5pc-20220601-p5aqc7#:~:text=The%20revaluations%20suggest%20Canva's%20total,US32%20billion%20on%20the%20firm.
It’s not just this one investor who differs in valuation opinion, either. Three major investors, in their independent valuations, value the business in a range between US $16.6 billion and US $36 billion.
That’s a big spread. US $20 billion is bigger than the GDP of MANY countries.
The valuation GAP (not even the valuation itself), still beats 78 countries…
So, what on earth are companies in this space going to put in their ESS statements, as the market value for recently vested ESOP interests?
This remains to be seen. And we may never know how companies like Canva get to their end figures. As unlisted companies, they can (and are allowed to) keep a lot of things behind closed doors, one of which being their valuation processes.
For many non-tax reasons however, these companies will want the market value of their business to be as high as possible.
This results in a high (and ATO-friendly) taxing point – tax which I should add, the company doesn’t have to pay. Their employees pay this tax on the discount to market value.
So employees naturally will want the lowest (valid) market valuation for the business, to keep their Dollarbucks in their back pocket. Or purse. Or piggy bank.
I know adults WITHOUT kids who watch this show
In fairness, many (if not most) companies do make it clear on their ESS Statements that market value may be calculated differently to that of the company’s methodology.
So, what does this mean for employees with this type of predicament?
They aren’t going to get their own independent valuation of the business – that’s too expensive, and in a way kind of pointless, seeing as there’s various valuations staring you in the face (both in the news – see above – and on their ESS Statement).
Their only options are:
Accept the company’s valuation, even if it is potentially higher than what it potentially could be, and pay more tax; or
Run the gauntlet with an alternative valuation, ensuring that you have sufficient support to back this valuation.
This was the peak of free-to-air television. Tell me otherwise.
It’s a self-assessment system, and as such, you can choose your own adventure.
There is always the risk though, that if you choose a market value that’s almost 60% lower than what is disclosed on your (ATO pre-filled) ESS Statement, the ATO will ask questions either immediately or further down the line. This is because when prefill doesn’t equal tax labels on the tax return, it’s the easiest ATO review of all time.
For a few hundred bucks at stake, employees won’t care and will cop the extra tax.
For a few hundred thousand bucks at stake, employees will (and should) get advice and figure out what to do.
This issue won’t just be limited to Canva by the way – this will affect most, if not all, unlisted companies, both Australian based and abroad.
As always, if this uncertainty may impact you (or your tax return), please feel free to reach out.
AKL