In Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and Commissioner of Taxation [2017] AATA 2418 the Tribunal found that the professional valuations obtained by the applicant were not “approved valuations” for the purposes of the margin scheme in Division 75 of the GST Act. The Tribunal found that the only “approved valuation” before it was that provided by the Commissioner, which gave a lower value to the land and resulted in a shortfall of GST for the applicant. The Tribunal also increased the penalties from 25% to 50% on the basis that the applicant’s behaviour was reckless.

The matter involved the sale of lots in a property development in which the Commissioner carried out two audits a number of years apart.

The first audit involved the sale lots by the applicant during the period 1 January 2004 to 31 March 2006. In the course of the audit, the applicant provided three valuations to the Commissioner. The third valuation valued the land at $20,000,000. The Commissioner did not accept any of the valuations as approved valuations and assessments were issued.

The applicant objected to the assessments and proceedings were brought before the Tribunal. The applicant obtained a fourth valuation of $34,000,000 which the Commissioner also rejected. The Commissioner obtained his own valuation of the land of $8,155,000. The matter was settled prior to hearing on the basis of an agreed value of $9,378,250, which equated to $17,051 per lot. The deed of settlement contained the following acknowledgement by the Commissioner:

the valuation of $17,051 per lot sold will not be applicable to tax periods on or after the tax period ended 31 March 2006, unless the taxpayer holds a supporting valuation of the land that complies with the requirements under Division 75 of the GST Act.

The second audit involved sales for subsequent tax periods. The Commissioner concluded that the applicant had not relied on an approved valuation and issued assessments on the basis of a margin determined by reference to the acquisition cost of the property, being $670,000, being $1,192 per lot. The Commissioner also issued penalty assessments at 50% on the basis of recklessness.

The applicant objected to the assessments and provided a fifth valuation of $22,000,000. All of the valuations produced by the applicant were provided by the same professional valuer.

At objection, the Commissioner found that none of the valuations provided by the applicant were approved valuations but partially allowed the objection by increasing the value of the land to $9,378,250, being the value agreed to in the settlement agreement  for the previous tax periods. The Commissioner also reduced the penalties from 50% to 25%.

The issue before the Tribunal was whether the applicant held an “approved valuation” – did any of the valuations provided by the applicant’s valuer comply with the requirements in Determination MSV 2005/3 or Determination MSV 2009/1? The Tribunal concluded that the answer was no. The only valuation that complied with those requirements was that produced by the Commissioner.

The Tribunal referred to the following statement of Middleton J in Brady King Pty Ltd v The Commissioner of Taxation (No.2) [2008] FCA 1918 where his Honour said:

The fact that there may be matters of subject analysis undertaken is encompassed and envisaged by the Determination which relies upon a professional valuer undertaking the task and coming to a valuation. However, in reaching the final valuation, the professional valuer must not deviate from the method of valuation dictated by the terms of the Determination.

As the land was acquired by the applicant prior to 1 July 2000, the land was to be valued at 1 July 2000. Both Determinations required that the valuation be done in accordance with professional standards.

The Tribunal observed that the applicant’s valuer had relied on a “discounted cash flow” methodology in the valuations and that his instructions were to perform the value on an as is basis. The valuer understood these instructions referred to actual costs and sales post valuation date. This allowed him to use actual costs and income at the time of making the valuation, which was August 2014. The valuer said that if he had been asked to perform the valuation on an as was basis, he would have been restricted to using only data known or predicted at the valuation date. The valuer’s evidence was that these instructions were taken from his interpretation of a letter provided by the ATO to the applicant in October 2009. The letter included the following paragraph:

… the market value for the subject property should have regard to the physical and legal state of the subject property as reflected at the date of valuation, being 1 July 2000. The valuation is to be completed on a ‘as is basis’ after consideration of all known factors affecting the market valuation as at the date of valuation. It is the value of the interest in the land, improvements, buildings and machinery fixed to the land, and any property rights connected to the interest that were in existence, in the condition, and under the approved zoning that applied as at the valuation date, 1 July 2000.

The Tribunal concluded that a proper reading of the letter from the ATO made it clear that the expression “as is” is a shorthand method of explaining that what was required was the relevant circumstances relating to the land as it existed at the valuation date. The Tribunal also observed that the discounted cash flow methodology is used in valuations of property at a particular date after discounting for risk of uncertain future events – it is forward looking, not backwards looking. The Tribunal concluded the valuer had misapplied the methodology – it was therefore not in accordance with professional standards and did not comply with either Determination.

The Tribunal agreed with the Commissioner that the objection decision made by the Commissioner (applying the agreed value of $9,378,250) was incorrect. The Tribunal accepted the Commissioner’s submission that the margin scheme can only be calculated by reference to an approved valuation. In other words, the Commissioner’s valuation of $8,155,000 must be applied.

The Commissioner submitted that despite the decision of the Commissioner to reduce the penalties from 50% to 25%, the appropriate level in this case was 50% because the applicant’s conduct was reckless.  The Tribunal agreed and set aside the Commissioner’s decision to reduce penalties, effectively re-instating the initial penalty of 50%.