We have identified a number of issues that occur with valuations and have explained our position when these issues occur.
- Profit and risk ratios
- Market interest rates
- Project timeframes, such as lead times and selling timeframes
- Exclusion of some development costs
- Assumptions and conclusions in conflict with evidence
- Comparable sales
- Pre-sale values increased for market movements when calculating gross realisations
- Proper consideration of post-valuation date knowledge/events
- Value of interest that existed at the valuation date
We have issued a number of legislative determinations that are applicable to margin scheme valuations.
Valuations are required to be prepared by a professional valuer to determine the market value of the property at the valuation date. Valuers need to reflect the value of the subject property on an 'as is' basis as at the valuation date.
When looking at the application of the margin scheme, we often find valuations which have been used in calculating the GST payable. Often, when certain elements of a valuation are outside an acceptable range, the ultimate valuation is higher than it should be, resulting in a lower margin and less GST payable.
We accept valuations can be a subjective assessment of a property's value and there can be interpretive assessments of impacts on the property value. However, there is still an expectation that values will fall within a 'reasonable range'. This is regardless of the valuer who is valuing the property, or the method adopted.
If there is sufficient merit in the valuer's adopted assumptions and conclusions the valuation can be accepted as a complying valuation. However, where the valuer's assumptions and conclusions are not sustainable, based on evidence, or are not reasonable, the valuation cannot be considered a complying professional valuation.
We have identified a number of recurring issues and have provided our position on these issues.
- GST and the margin scheme
- Market valuation for tax purposes
- Valuations for the margin scheme
- MSV 2009/1 A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination
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, 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.
Valuations need to reflect an open market interest rate. The use of negotiated commercial rates, 'in-house' finance rates, or special discounted rates may not be appropriate because these rates are not reflective of open market rates, but instead 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 (RBA).
- Cash rateExternal Link Reserve Bank of Australia
Valuations need to reflect reasonable allowances for commencement and completion dates, as well as selling timeframes and similar, because these factors will impact on holding costs, financing costs and overall project risk. In examining valuations, it has been found that in a number of cases, lead times, for example, were unrealistic given the size and the peculiar characteristics of the property development.
Project lead times, selling timeframes and completion timeframes must reflect commercial, market and planning reality of a project.
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.
Valuers often place a 'nil' cost for remediation of contamination on a site despite evidence and site history strongly suggesting that the site may have been contaminated. Some valuers argue valuation standards mandate in the absence of any quantified evidence they must assume nil contamination and assign nil value to this. This is on the condition that, if this assumption is shown to be incorrect they reserve the right to revalue the property.
Assumptions of nil contamination are unreasonable where evidence indicates a probability the property interest being valued is likely to be contaminated. In these circumstances, contamination impacts should be addressed because this would be of material importance to a 'willing but prudent purchaser'.
The failure to reference this is likely to result in an inflated value. It is a requirement in a market valuation engagement to reflect the value of the subject property on an 'as is' basis as at the valuation date. If a property has been valued on the basis of 'nil contamination' when evidence suggests the site may be contaminated, a valuer can only provide a qualified assessment unless all relevant environmental and remediation documentation is provided.
A valuer may provide a qualified valuation excluding the impact of contamination and revise their valuation once the full extent of contamination is known. With GST margin scheme valuations, it is assumed that the application of the valuation for assessing the margin scheme does not occur until the supply of the end product. Prior to the commencement of the development, there would be a requirement to remediate a contaminated site to make it fit for the end development. At this point, full contamination reports and costs would be available. These should be provided to the valuer, who could reflect the full impact of contamination in their revised valuation and provide an approved valuation for GST margin scheme purposes.
Any conclusions by the valuer based on opinion, experience or unsubstantiated statements on risk, which are contrary to readily available information and evidence, will have an impact on how the property is valued.
Valuation standards require all assumptions be reasonable and supportable, and valuer's opinions, no matter how experienced the valuer, cannot be sustained where these opinions can be refuted by direct evidence.
Comparable sales are often unavailable at valuation date and pre- and post-valuation date sales are used as a reference point for a valuation. There are also 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. We often receive purported supporting sales data in property valuations 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.
A gross realisation value is sometimes needed as a starting point for property valuations. Pre-sales, for example, commit the owner to a sale at an agreed price, with ownership passing at a later date, generally when the development is completed. In determining a gross realisation value, where pre-sales exist as at the valuation date, valuers should use the pre-sale prices, rather than a value which takes into account market fluctuations.
Pre-sales and off-the-plan sales will define the property value and deny any market appreciation, or devaluation, and impacts on the value of property between the contract date and the valuation date.
Relevant information regarding the site, on and after the valuation date, may not have been properly considered when valuing properties. Where post-valuation information exists that clarifies the state of the property as at the valuation date, then this information may be considered in the valuation because it is expected that a prudent purchaser would undertake appropriate investigation to limit their risk. Where post-valuation information changes the state of what existed as at the valuation date, then this information should not be used – for example, a development application has been lodged and approved.
Post-valuation date knowledge and events which can enhance values have especially been used without commentary or inclusions of relevant risk weightings, or other reasonable adjustments.
Post-valuation date impacts can be considered – however, these need to be reasonable, with an expectation of evidence that these existed on valuation date. If due consideration is not given to relevant site information at or after valuation date, then the value may be overstated or understated by a considerable amount. Commentary needs to accompany the use of post-valuation date information to explain why it is reasonable to take that information into account.
Many valuations reflect a value of the real property interest that is being sold, rather than the interest that existed at the valuation date (this could be an issue with the instructions being given).
If the valuer is asked to value a real property interest that did not exist at the valuation date but was derived from another interest that existed at that date, the valuation must be made as follows:
- a valuation of the interest in existence at the valuation date must be made
- the valuation of that interest must be apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the interest that is being sold. All factors taken into account in the apportionment need to be explained to show why the apportionment is fair and reasonable.