The draft Margin Scheme Valuation Requirements Determination was released for comment in September 2022 with comments required by October 2022. While substantially similar to the current determination, the draft legislative instrument (LI2022/D14) does contain new requirements that may cause issues for property developers currently holding valuations for margin scheme purposes for unsold land.
The background
The draft determination was released by the ATO in response to the unfavorable outcome from 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 and considered the correct margin scheme valuation was much lower.
However, the courts determined 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 in that case conceded that 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 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 to be met for a valuation to be an ‘approved valuation’. Specifically, the valuation would need to meet the following 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), 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 selected by Valuer;
• 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 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 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 after the date of effect of the final instrument.
As such, property developers with unsold land that are covered by historical valuations may be required to obtain updated reports or replacement valuations for any sales of real property that occur outside of the three-month transitional period to ensure the new requirements are met.
This will no doubt be problematic for those property developers holding historical valuations and are undertaking staged developments that take years to conclude, particularly where the original valuer is no longer in practice or is unable to be located. Finding a valuer who is prepared to confirm and document the new requirements for someone else’s historical valuation will prove very difficult and costly – and likely to take much longer than the three months currently offered as a transition period.
Under the proposed changes, there is no certainty the valuation you hold can be relied upon, without having your existing valuation reviewed and ‘brought up to date’ to meet the approved requirements.
Submissions have been lodged with the ATO to alert them of our industry concerns, particularly in response to the comments in the instrument that the changes were minor and would be at no cost to the industry if land covered by historically ‘approved’ valuations is sold within three months. This is clearly an uncommercial approach and doesn’t take into account the time it takes to bring land to the market, let alone those holding multi-stage long term developments.
Given previous Margin Scheme Valuation guideline updates haven’t resulted in material changes for property developers, there may be a number of property developers that aren’t yet aware of the new requirements, who will need to revisit the valuations they currently hold sooner rather than later and start the conversations required with their Valuers.
If you would like to discuss any of the proposed changes and how they may impact your development, please get in touch.
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