Property Valuations & Margin Scheme

Wrong property valuations can be costly

Property valuations are relevant in many tax contexts, including CGT and GST. A disagreement with the Australian Tax Office (ATO) on a valuation can materially alter the tax consequences of a transaction eg see the recent decision in AAT Case [2011] AATA 857, Re M & T Properties Pty Ltd v FCT, where the taxpayer failed the maximum net asset value test because of a valuation issue.

The ATO has now released an issues paper highlighting what it says are recurring issues concerning valuations of property in relation to the application of the GST margin scheme provisions. The ATO notes that many valuations are referred to the Australian Valuation Office (AVO) for evaluation, particularly as to whether or not the valuation specifies a value that is within a range that is reasonable. Often, when certain elements of a valuation are outside an acceptable range, the ATO says the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable. The paper was prepared in collaboration with the Australian Property Institute and the AVO.

The paper sets outs the main issues regarding non-complying valuations identified by the ATO and its position when those issues occur. Some highlights from the paper are summarised in the following table.

Issue ATO position
Profit and risk ratios: When valuing a property on the basis of a hypothetical development approach, the anticipated profit and risk margins are determined after consideration of the level of risk associated with a project as at the date of valuation. In many cases, the ATO says profit and risk ratios are not supported in the valuation report and appear to be well below what could reasonably be expected. Valuers need to determine profit and risk ratios that are reflective of the characteristics and condition of the subject property at the valuation date. These ratios need to reflect realistic profit expectations with appropriate and reasonable weightings for risks apparent at the date the property is required to be valued.
Market interest rates: Valuations need to reflect an open market interest rate. The ATO considers the use of negotiated commercial rates, “in-house” finance rates or special discounted rates may not be appropriate as these rates are not reflective of open market rates but, rather, are specific to a particular entity or a set of circumstances. Valuers need to apply appropriate interest rates at the date the property is to be valued. These rates should reflect commercially available rates supported by evidence from within the industry at that point in time or alternatively based on the rates published by the Reserve Bank of Australia.
Comparable sales: Often comparable sales are unavailable at valuation date and pre- and post-valuation date sales are used as a reference point for a valuation. Also there are instances where purported comparable sales from a geographically different area or different market segment to that of the subject property are referenced in a valuation. Often, supporting sales data in property valuations is provided without any explanation as to why the data is comparable. Comparable sales must withstand objective scrutiny of their comparability. If post valuation date sales or remote area sales are to be used, these must have commentary as to why the valuer considers it reasonable to use these sales to establish the subject property value.
Development costs: Many valuers undertaking hypothetical development valuations have completed these valuations with the exclusion of important development costs such as acquisition costs, legal costs and holding costs. All relevant costs with appropriate weighting should be included in a hypothetical development valuation.

Other issues covered in the paper include:

  • project lead times, selling timeframes and completion timeframes;
  • contamination on a site;
  • assumptions and conclusions in conflict with evidence;
  • value of interest that existed at the valuation date;
  • pre-sale values increased for market movements when calculating gross realisations; and
  • post-valuation date knowledge/events.

The ATO said it accepts that valuations can, by their very nature, be a subjective assessment of a property’s value and in many cases there are interpretive assessments of impacts on the property value. However, it said that regardless of this subjectivity, there is still an expectation that values will fall within a “reasonable range”. It added that this is regardless of the valuer who is valuing the property or the method adopted.

Where the AVO opinions are supported by evidence, and also align with the ATO’s perception of reasonableness, the ATO said these will be referred to the relevant valuer to enable those noted elements of the valuation to be reviewed. If there is sufficient merit in the valuer’s adopted assumptions and conclusions, such that these can be considered reasonable, the ATO said the valuation can be accepted as a complying valuation. Where the valuer’s assumptions and conclusions are not sustainable based on evidence, or are not reasonable, the ATO said the valuation cannot be considered a complying professional valuation.

Source: ATO publication, “Valuation issues paper”, 17 January 2012