ATO Issues Paper on Valuations and the GST Margin Scheme

On 17 January 2012 the ATO published a “Valuation issues paper” in collaboration with the Australian Property Institute and the AVO.  The paper can be accessed here through the ATO website, but the paper does not appear to be available as a stand alone document.

For ease of reference the complete issues paper is set out below.

Valuation issues paper


The ATO has issued a number of legislative determinations that are applicable to margin scheme valuations, the latest being MSV 2009/1. All determinations require valuations prepared by professional valuers to determine the market value of the property at the valuation date. The ATO considers it is a requirement in a market valuation for the valuer to reflect the value of the subject property on an ‘as is’ basis as at the valuation date.

We have undertaken a significant number of compliance activities since GST was introduced in relation to the sale of real property and whether the margin scheme provisions have been applied correctly. In examining the application of the margin scheme we often encounter valuations which have been used in calculating the GST payable. Given that ATO compliance staff are not professional valuers, many valuations are referred to the Australian Valuation Office (AVO) for a critique. The AVO assesses whether the valuation complies with the ATO determinations, professional standards, if the AVO has concerns on compliance, and provides an opinion on 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 ultimate valuation is higher than it should be resulting in a lower margin and less GST payable.

In reviewing the responses we have received to date from the AVO regarding non-complying valuations we have identified a number of recurring issues. The following outlines some of the issues identified and the ATO’s position when these issues occur.

This paper has been prepared in collaboration with the Australian Property Institute and the AVO.

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 profit and risk ratios are not supported in the valuation report and appear to be well below what could reasonably be expected.

ATO position

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 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 specific to a particular entity or a set of circumstances.

ATO position

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).

Project timeframes (including lead times, selling timeframes, etc)

Valuations need to reflect reasonable allowances for commencement and completion dates as well as selling timeframes, etc as these factors will impact on holding costs, financing costs and overall project risk. In examining valuations the AVO found that in a number of cases lead times for example were unrealistic given the size and the peculiar characteristics of the property development.

ATO position

Project lead times, selling timeframes and completion timeframes must reflect commercial, market and planning reality of a project.

Exclusion of some 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.

ATO position

All relevant costs with appropriate weighting should be included in a hypothetical development valuation.


Valuers 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 contend that valuation standards mandate that in the absence of any quantified evidence they must assume nil contamination and assign nil value to this, with a proviso that should this assumption be shown to be incorrect that they reserve the right to revalue the property.

ATO position

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 given 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 is correct, 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 his/her revised valuation and provide an approved valuation for GST margin scheme purposes.

Assumptions and conclusions in conflict with evidence held

Valuers assuming nil or minimal risk associated with site characteristics, founded upon valuer’s experience or opinion where the assumptions are not reasonable or supported by evidence. Any conclusions 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.

ATO position

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 obtained.

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 we received purported supporting sales data in property valuations without any explanation as to why the data is comparable.

ATO position

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.

Pre-sale values increased for market movements when calculating gross realisations

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 presales exist as at the valuation date, valuers should use the pre-sale prices rather than a value which takes into account market fluctuations.

ATO position

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.

Proper consideration of post valuation date knowledge/events

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 as 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.

Especially, post-valuation date knowledge and events which can enhance values have been utilised without commentary or inclusions of relevant risk weightings or other reasonable adjustments.

ATO position

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.

Value of interest that existed at the valuation date

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).

ATO position

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.


The ATO 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. Regardless of this subjectivity 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.

Where the AVO opinions are supported by evidence, and also align with the ATO’s perception of reasonableness, these will be referred to the relevant valuer to enable these 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 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 valuation cannot be considered a complying professional valuation.


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