The severe disruption caused by the coronavirus (COVID-19) pandemic has impacted on many areas of economic life, not the least of which is the impact on the value of assets for taxation and other purposes. That disruption raises a considerable degree of uncertainty and creates new challenges to the task of valuation in accordance with the established principles. While it may be too early to make any meaningful predictions as to the trends, some preliminary comments may not be out of order.

First of all, while there has been considerable volatility in the stock market, the erratic movements in the value of securities in listed entities may to some extent exaggerate the extent of the changes at hand. It is generally well accepted that privately held assets may better reflect true value as the value of privately held assets tends to move in a more steady way compared to the day to day changes in the value of securities that are traded on stock exchanges. This pattern, which is usual in times of uncertainty appears also to be borne out in the current circumstances.

General uncertainty nevertheless remains. That uncertainty may remain until there is greater clarity as to what is happening in a number of areas importantly including government policy and how that policy will impact on economic activity. Particularly relevant may be the extent to which government subvention of businesses activity occurs. That is, once a level of stability is brought to bear by government in terms of its policy settings, that certainty may assist in stabilising values of businesses and business assets. Indeed, one of the most remarkable and perhaps unexpected consequences of the present crisis is the return of big government both in Australia and overseas in a way not seen for decades ("Leviathan Rising", Economist, March 2020, p 52).

As some sectors of the economy are adversely affected sometimes in extreme ways, for example tourism, hospitality and education, others may find that their revenue increases at least in the short term from responses to the pandemic for example consumer staples and freight and logistics. The application of traditional methodologies for valuation will be difficult in such a context even if a degree of certainty can be brought to bear to the situation by rapid government action.

Traditionally, a preferred methodology for valuation has relied on comparable sales, where the true value of an asset is derived from the value of sales of similar assets in comparable circumstances (eg . New South Wales Cremation Company Pty Limited v Valuer General [2016] NSWLEC 135). This type of methodology is usually preferred where there is a market for sale of the particular asset to allow derivation of enough data to make a meaningful comparison. However, challenges may arise in applying a comparable sales methodology given that the relevant data may derive from the activity in the preceding period for example the preceding twelve months when conditions were significantly different to current conditions.

Another method of valuation that is commonly used is that of a value based on discounted cash flows ("DCF") derived from the expected revenues from use of the relevant asset (e.g., Regis Aged Care Pty Ltd v Commissioner of State Revenue [2015] VSC 279). This methodology too requires reference to data from the recent past as well as predicted earnings from the period following the sale. A DCF methodology may also prove problematic where there is not sufficient certainty to apply data from the recent past or to make the required predictions as to future cash flows in radically different economic circumstances.

It is well accepted that abnormalities in market conditions should not affect the task of a valuer in that what is required is a hypothetical sale between willing but not anxious vendors and purchasers (Brisbane Water County Council v Commr of Stamp Duties (NSW) 9 ATR 576). Whether the current situation can be regarded as abnormal remains to be seen, particularly if uncertain conditions remain for the foreseeable future. It is clear enough that the Courts will accept that unusual circumstances that persist for a time, such as in wartime conditions, may disrupt normal activity for a period and affect valuation (Elder's Trustee & Executor Co Ltd v Higgins [1963] HCA 48; (1963) 113 CLR 426). Nevertheless, that is an assessment that valuers will need to make as a question of fact, that is, while abnormalities will need to be disregarded, valuations will need to be made having regard to the circumstances as foreseen during the period of the life of an asset.

Alternative methods of valuation that are usually less favoured than the preferred methodologies may become more useful in the current circumstances, for example methodologies based on cost (e.g., see Collins v Livingstone Shire Council [1972] HCA 35; (1972) 127 CLR 477) although the choice of methodology remains the prerogative of the valuer.

These are challenges that valuers and the legal and tax advisors instructing them will need to pay careful consideration to in the current circumstances. While the basic principles for valuation are well understood and contain considerable guidance as to the task of the valuer even in these difficult times, these principles will need to be applied in circumstances that are very different to those of the recent past and remain subject to considerable uncertainty. This may require consideration of methodologies that in normal circumstances may not find favour.

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