Why property developers should consider the draft GST Determination for Margin Scheme Valuations

The background

The ATO released the draft for A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination 2022 (LI 2022/D14) in response to the decision in Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust v Commissioner of Taxation [2021] AATA 4821.

In this case, the ATO was disputing the taxpayers margin scheme valuation of $22m and considered the correct margin scheme valuation was much lower at $8.1m.

However, the issue was not whether the taxpayer’s valuation was correct – but whether it was an ‘approved valuation’ for the purposes of Division 75 of the GST Act. Essentially, a valuation is considered an ‘approved valuation’ under the current determination if it is not contrary to professional standards.

The ATO’s expert witness conceded that the while the taxpayer’s valuation ‘was not consistent with customary professional practice and might not be consistent with professional standards’, it was not contrary to professional standards. As such, the court found that the taxpayer’s valuation was an ‘approved valuation’ for GST purposes.

Impact on businesses and the property market

In the draft determination, the ATO seeks to increase the requirements for a valuation to be an ‘approved valuation’. Specifically, the valuation would need to meet the following two additional requirements to be an ‘approved valuation’ for GST purposes.

Firstly, the valuation will need to be made in a manner and in a form that complies with all legal and professional standards recognised in Australia, as identified and advised by the valuer's accrediting professional industry body (or bodies), and that are effective at the date of issue of the valuation. Currently it’s sufficient for the valuation to be made in a manner that is not contrary to the professional standards recognised in Australia.

Secondly, the valuation report will need to include the following additional information:

• the rationale for the valuation approach selection;
• a full description of methodology, inputs and assumptions used in the valuation approach and the rationale for their selection;
• the conclusions of value and principal reasons for any conclusions reached;
• the name and effective date of all professional standards recognised in Australia for the making of real property valuations as advised by the valuer's accrediting professional industry body and that were complied with by the valuer; and
• a signed declaration that the valuation has been undertaken in accordance with all the legal and professional standards in Australia for the making of real property valuations, that are effective at the date of issue of the valuation.

While we don’t anticipate that these additional requirements will cause issues for property developers obtaining new valuations, any existing valuations that don’t meet these additional requirements will only be valid for a three month transitional period.

As such, property developers may be required to obtain replacement valuations for any sales of real property that occur outside of the three month transitional period. We consider that this may be problematic for those property developers that are undertaking staged developments that take years to conclude.

The draft determination is open for comment until 12 October 2022. During this time, we will be consulting with property developers, property valuers and other relevant parties to understand the potential impact of this draft determination, and this will form the basis of our submission to the ATO.

Please don’t hesitate to get in contact to discuss.

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