Why are valuations in property transactions important for tax?
There are times when a valuation is necessary for tax purposes.

For example, let’s say that Mr Smith transfers his rental property to his daughter Mary for no consideration.  The tax law, specifically the CGT rules, requires that the transfer be made at “market value”.  If Mr Smith has held the property for a lengthy period of time and the property has increased significantly in value at the time of transfer then he will be up for quite a hefty CGT bill.  This is so even though he has not received a single cent by gifting his property.

In order to work out the extent of any capital gain, Mr Smith will need to obtain an appropriate market valuation of the property which appropriately reflects an arm’s length value.

The Tax Office has recently issued warnings about penalties that could arise when valuations are not done correctly.  A general understanding of how the Tax Office expects valuations to be done is necessary so there are no nasty surprises when the assessment arrives in the myGov inbox.

Valuing real property  
The most appropriate method for the valuation of real property is highest and best use.

Highest and best use

The concept of “highest and best use” of the property in the market takes into account any potential for a use that is higher than the current use of the property, for example development potential based on council approvals.

Factors to consider would be current market transactions, current market trends and condition of the property.

A valuation should be undertaken by a suitably qualified and experienced person in relation to real property valuation, and fully documented to explain how the value was determined.

As with many tax issues, substantiation is extremely important and the Tax Office may not accept the market value determination document is  “fit for purpose”.

Misleading information provided to valuers

But even when using the services of a qualified professional, the Tax Office says there may still be potential penalties for making a false or misleading statement, or for treating the tax law “in a manner that is not reasonably arguable”.

The Tax Office says this could be the case if:

• the taxpayer has not given correct information to the valuer to allow them to correctly assess the value of the item for the period required
• the taxpayer or their agent should reasonably have known that the information provided by the value was incorrect
• the methodology or valuation hypothesis used by a qualified valuer may be based on an unsettled interpretation of a tax law provision or unclear facts.

As with all such matters where an element of informed judgement is called for, taxpayers may be well advised to refer to our office for advice.