Valuation of land
In certain circumstances, you may be required to provide an independent valuation of your property from a qualified valuer, including when:
- you are given property as a gift
- you purchase property from a friend, an associated person or an associated entity
- you purchase property at a discounted price or for some form of non-monetary consideration
- your purchase involves a fractional interest in property
- you purchase property in connection with a business for a total sum of more than $1 million
- the purchase price of your property is equal to or less than the property’s current capital improved value for rating purposes.
If you are requested to provide an independent valuation, you must engage a qualified valuer (i.e. a person certified or accredited by the Australian Property Institute).
You should also ensure that the qualified valuer is familiar with the overarching principles and factors that need to be taken into account in valuing a property for duty purposes. In essence, this requires the determination of value based on a hypothetical sale of the property (inclusive of all relevant improvements and fixtures) on the open market after proper marketing between unrelated and fully informed parties acting prudently and without compulsion. In certain cases, this concept of market value may not be by reference to the property’s current use but its highest and best use.
While it is generally understood that valuations are inherently subjective assessments, if undertaken objectively and supported with relevant comparable sales and/or rental data a valuation should arrive at a reasonable and acceptable estimate.
Generally, the Commissioner will accept a duty valuation prepared by a qualified valuer provided it meets the standards set by the Australian Property Institute and has identified and valued the full and correct interest in the property (inclusive of all relevant improvements and fixtures) at the required date.
The Commissioner’s position on a number of common valuation practices and issues is detailed below.
Letters of appraisal by licensed real estate agents
Because real estate agents are typically not qualified valuers, their letters of appraisal are not considered formal valuations.
The Commissioner is also aware that real estate agents can be pressured by their clients to declare a property’s market value to be equal to or less than the property’s capital improved value for rating purposes. As rating values are based on general rather than specific data, and do not take into account all relevant improvements and fixtures for duty purposes, they tend to be conservative estimates of market value and rarely provide an acceptable value for duty purposes.
While not considered formal valuations, the Commissioner is prepared to receive letters of appraisal by licensed real estate agents as evidence of value for duty purposes.
However, additional information or a formal valuation may be required in certain circumstances, including where:
- the appraisal letter does not set out any details in relation to the property and its improvements, or the comparable sales data relied upon
- the description of the property in the appraisal letter does not accord with information held by the State Revenue Office
- a planning permit has been issued in respect of the property
- the appraisal letter provides a value for the property that is at or below its capital improved value at the time of the transaction
- the appraisal letter provides a value for the property that is at or below the price that the property last sold for on the open market.
Refer to the Evidentiary Requirements Manual when lodging documents for duty assessment.
Mortgage security and other valuations
Valuations are prepared for a variety of purposes, including mortgage security, financial reporting and insurance purposes.
The Commissioner is prepared to receive and consider the relevance of valuations undertaken for mortgage security and other purposes.
However, there are a number of limitations that may prevent the Commissioner accepting these valuations for duty purposes. In addition to the qualification included in a valuation that warns against its use other than for the purpose it was prepared, these limitations include:
- the nature of the interest in the property valued and whether it takes into account all relevant improvements and/or plant and equipment (whether or not purchased with the property or owned by someone other than the property purchaser)
- the date of the valuation and whether there have been any material changes to the physical structure and zoning of the property, including whether development plans and/or permits have been approved/issued for it.
Depending on the presence and significance of the above limitations, the Commissioner may determine that a valuation undertaken for mortgage security or other purposes provides a reasonable estimate for duty purposes, or require it to be adjusted because of the limitations. In certain circumstances, the valuation may not be accepted by the Commissioner and you will be given the opportunity to obtain a valuation for duty purposes or have your matter referred to Valuer-General Victoria for valuation.
Valuations undertaken for duty purposes
The Commissioner generally accepts valuations undertaken for duty purposes provided that they:
- identify and value the full and correct interest in the property being transacted, inclusive of all relevant improvements, and plant and equipment at the date of the transaction
- use an appropriate valuation methodology that is supported by the use of comparable sales evidence, and only rely on an alternative method when there is limited comparable sales data because of the nature of the property
- contain all detailed workings, including the information, assumptions and comparable sales and/or rental data relied upon to justify and support the value of the property
- conform with the valuation practices and standards set by the Australian Property Institute and the International Valuations Standards Council.
While most duty valuations are accepted by the Commissioner, the Commissioner has observed certain practices and issues associated with the methods of valuation used in some instances. The Commissioner’s views on these practices and issues follow.
Direct comparison method and the use of relevant and comparable sales data
The comparable sales method of valuation should be used when there is a deep and active market for the type of property being valued. In deciding whether sales of certain properties are relevant and comparable, a range of factors need to be considered, including:
- the parties to the sales, the dates of the sales and any special terms or conditions that applied to the sales
- the size, location and topography of the properties, including the nature of any improvements
- the zoning of the properties, including any town planning restrictions, permits and/or approvals
- any other factors affecting the desirability of the properties in deciding whether the properties are superior or inferior to the property being valued.
Often sales are used that may not be directly comparable to the subject property. An example of this may be the valuation of a beachside property with extensive ocean views where the comparable sales used are properties without ocean views and ignore the availability of sales data from similar beachside properties. Another example may be the valuation of a property on a quiet suburban street when compared with sales of a property on a busy thoroughfare, in proximity to a railway line, or where any other aspect may adversely affect a property’s value. When analysed on a value per unit basis for comparison purposes, these sales may indicate a rate that does not accurately reflect the subject property’s true value for duty purposes.
Capitalisation of net income method
This may be an appropriate methodology to adopt when property is purchased as an investment on the basis of the income stream it produces. This includes retail, commercial, industrial and multi-unit residential properties but does not extend to typical suburban residential properties even though they may be purchased as investments. This methodology should also not be used to value a property if it has not been developed to its highest and best use. This is because the capitalisation of the property’s rental income, whether or not it represents a market rate on its current use, would understate the property’s true value as a development site on the basis of its optimal use.
When using the capitalisation of net income method, it is important that both the rent and yield adopted for the property are within acceptable market parameters for the property type being valued and is supported by market evidence.
Often the Commissioner receives valuation reports where the passing rent is below market because of an association between the landlord and tenant but it is nevertheless adopted for the purposes of the report. In such cases, appropriate adjustments need to be made to the adopted rent to reflect market conditions in accordance with relevant valuation practices and principles.
It is not uncommon for the Commissioner to also receive valuation reports where the adopted yield is not within the range of the sales evidence within the report. For example, if a valuation report identifies sales evidence indicating a yield range of between 5-7% but adopts a yield of 8% then the reasons for this variation will need to be explained in the report.
Where a property has not been developed to its highest and best use, or is currently under development to optimise its use, the preferred method of valuation is the direct comparison method and in certain circumstances the hypothetical development method.
Hypothetical development method
Australian courts have criticised the use of this method. They have said that because many estimates and assumptions must be made when using the method, it should not be used where some use can be made of comparable sales evidence. However, where there is an absence of comparable sales evidence and the relevant property has not been developed to its highest and best use, the courts have endorsed the use of the method provided it utilises appropriate market-based assumptions and estimates.
For example, if a property is to be developed and held by a person as an investment, or part of the person’s business operations (and not by a developer as a project to develop and sell), it would be inappropriate for deductions to be made in respect of sales commissions, legal expenses and advertising.
When valuing a development where construction had commenced before the date of valuation, the value of the completed construction works ought to be taken into account in arriving at a valuation under the hypothetical development method.
Depreciated replacement cost method
This method is used to value highly specialised and purpose-built properties with extensive plant and equipment where an active market does not exist and sales evidence is not readily available (such as water treatment facilities, gas production facilities, petrol refineries and power stations).
The method is based on the theory of substitution in that a purchaser would not pay more for an operating asset than the cost of building a new modern equivalent. However, as substitution may not always be an option for highly specialised assets (due to economic or other barriers to entry), the operating and functioning nature of the asset under consideration, and its profitability, should be taken into account in determining value under this method. This equally applies in determining whether any physical, functional and economic obsolescence exists in relation to the plant and equipment that make up the asset but not the land on which it is located.
Often significant goodwill is assigned to a business operating a highly specialised asset on the basis of accounting concepts and the gap between the business’ enterprise value and the asset value. However, when the income of a business derives mainly from using an identifiable asset or assets, such as specialised plant and/or equipment affixed to land, this gap may indicate that these assets have been undervalued. This is because the earning power of such a business will be largely commensurate with the earning power of its asset. When appropriately valued, the business goodwill associated with such specialised assets is usually of small value.
Accordingly, you may be requested to explain the source of goodwill or provide additional valuation information when significant goodwill is claimed to exist in a business operating a highly specialised asset.
This approach to valuation should not be used as a substitute for direct market-based valuation methods if market evidence is available.
Referral of matters to Valuer-General Victoria
If the Commissioner considers that your submitted value understates the value of your property for duty purposes, the Commissioner may refer the matter to Valuer-General Victoria for valuation.
You may be liable to pay the cost of the valuation if Valuer-General Victoria determines a value that is 15% or higher than the one you have provided. You can obtain a copy of Valuer-General Victoria’s valuation of your property, provided you sign a confidentiality agreement confirming that it will only be used for duty purposes and for understanding the basis of any assessment issued by the Commissioner.