Property valuations – get them right
Property valuations (and valuations of equipment and other assets for that matter) are relevant in many tax contexts, including capital gains tax (CGT) and GST. Getting a valuation wrong can mean more tax to pay.
A disagreement with the Tax Office on a valuation can materially alter the tax consequences of a transaction. Indeed, a recent decision by the Administrative Appeals Tribunal saw a taxpayer fail the CGT maximum net asset value test (so the CGT small business concessions could not be accessed) because of a valuation issue.
Hand in hand with the need for valuations is the corresponding need to keep good records. In the CGT context for example, an asset that may be subject to CGT when it is later sold, needs to have records kept about its purchase price, any improvements to the asset, etc. If an asset is inherited, it is highly prudent to obtain a valuation of it, in case tax consequences later arise.
Getting valuations is important in a tax context. But not every valuation will necessarily be acceptable to the Tax Office.
Many tax laws require ascertainment of market value. Some common instances are:
• for individuals – transfers of real estate or shares between related parties, such as husband and wife, or family members
• for employees – non-cash benefit transactions, such as gifts
• for small businesses – transfers of assets to related parties, passing the asset threshold tests for the small business capital gains tax concession
• for property developers – the GST margin scheme
• for businesses – consolidation events
• for all taxpayers – many anti-avoidance provisions
Market value is typically defined as the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length.
The minimum requirements are that a valuation should:
• be replicable – in effect, this means the valuation should be documented and explained well enough that another person or valuer can understand how the value was determined, and
• preferably be undertaken by a suitably qualified and experienced person in relation to the asset being valued.
A valuation report should:
• be understandable, and
• objectively demonstrate the valuation process undertaken in accordance with valuation industry practices.
The following elements should be apparent in any properly conducted valuation process, in accordance with valuation industry practice:
• description of asset
• purpose and context of valuation
• date of valuation
• method or methods used
• reasons for methods used
• specific value
• information relied on
• evaluation of information
• assumptions relied on
• evaluation of assumptions
• material risks
• use of previous valuations
• explanations of material differences
• expert reports and the use of experts
• terms of engagement
• relationship between the valuer and client
• working papers
• disclaimers and indemnities
• valuer’s details.