On 24 August 2016, the Chief Commissioner of State Revenue issued Revenue Ruling No. DUT 045 Market Value and GST (Ruling). The Ruling states that the Chief Commissioner does not consider valuations determined on a GST-exclusive basis represent the market value. Further, from 24 August 2016, the Chief Commissioner will only accept valuations if:
- they are accompanied by a copy of the instructions given to the valuer;
- they are not expressed to be determined on a GST-exclusive basis;
- they have not been made on a GST-exclusive basis; and
- the valuer has not been instructed to make a determination of market value on a GST-exclusive basis.
Where a valuation does not satisfy these requirements, the Chief Commissioner will return the valuation and request the valuation be replaced / amended so that it does satisfy these requirements.
What will the changes mean to businesses?
Where a transaction is subject to GST, the decision in Storage Equities states that the amount of GST should be embedded in the market value of the property and included in the purchase price. The result is that the amount of GST is included in the value provided for transfer duty purposes. In these circumstances, the parties would generally provide a valuation determined on a GST-inclusive basis. The Ruling does not disturb this existing practice.
In contrast, the Ruling appears to be problematic where the transaction is not subject to GST. That is, it is open to the Chief Commissioner, pursuant to the Ruling, to reject a valuation of, for example, property the subject of the GST-free going concern or farmland concession (or any other property that would not be subject to GST on its sale) because the valuation is expressed to be determined on a GST-exclusive basis (consistent with the GST treatment).
Taxpayers may be exposed to greater uncertainty as to how to instruct valuers. In the case of the sale of property that would not be subject to GST, as well as when valuing landholdings for landholder duty purposes where GST would not apply because there is no actual sale, do taxpayers instruct valuers to 'stay silent' as to whether the valuation should be determined on a GST-inclusive or exclusive basis? Or should they simply be informed that the parties intend that the concessions apply without expressly referencing GST? The danger of course with this approach is that where there is any ambiguity in a contract or instructions, this may lead to disputes about the intended meaning or interpretation where one or both parties assert that more than one interpretation is possible. You should obtain advice on how to instruct valuers, particularly as these instructions will need to be given to the Chief Commissioner at the time of lodgement.
Interaction between stamp duty and GST
Transfer duty is imposed on the dutiable value of dutiable transactions. The dutiable value is the higher of the unencumbered (market) value of the property, and the consideration. Where the consideration (eg purchase price) is expressed to be GST-inclusive, the amount of GST is not deducted from the consideration.
Landholder duty is imposed on the unencumbered (market) value of the landholdings and goods. The concept of 'consideration' is not relevant.
The transfer duty calculation is based on the GST-inclusive consideration where this is higher than the unencumbered value of the property. This is well recognised as being a 'tax on a tax'. However, the proposition that unencumbered value cannot be determined on a GST-exclusive basis, particularly when the transaction itself would not attract GST, is very different. The implication from the Ruling appears to be that GST applies to all hypothetical sales of property (regardless of GST treatment) therefore affecting land valuations.
Storage Equities Case
In the Ruling, the Chief Commissioner states that while GST may have an impact upon the market value of an item of property, it is not a separate amount to be deducted when determining the market value of the item (following the conclusion in, amongst others, the Storage Equities case). The Ruling states that there is no such thing as a GST-exclusive market value.
In Storage Equities, the sole issue between the parties was whether the valuation of the properties should include GST. Both parties accepted that in determining the 'value of land', the relevant principles to be applied were those articulated in the judgment of the High Court in Spencer (ie when determining land value, the test is the price negotiated between a hypothetical willing vendor and a hypothetical willing purchaser, both having access to all current information affecting the property).
The applicant contended that the sale of land inclusive of GST did not represent or afford evidence of the value of land to the vendor. This was because while the vendor of the property was liable to pay GST, it was only the collector of GST on behalf of the ATO and as such the GST did not represent value to the vendor. Similarly, input tax credits were available to the purchaser of the property so that there was no GST cost to the purchaser. As such, it was contended that the value was evidenced by the price received, net of GST.
The Court rejected the applicant’s arguments and concluded that the amount 'realised' from the sale of the land necessarily reflects “that sum of money that secures the entitlement of the purchaser to a transfer on title” and “regardless of any component of that sum that the vendor may be liable to pay as a consequence of realising it”. The Court concluded that the GST-inclusive value was the land value.
The Chief Commissioner states in the Ruling that the approach taken in Storage Equities, and the Valuer-General's Valuation Policies, when determining land value for the purposes of the Valuation of Land Act 1916 applies equally when determining unencumbered value (in other words, market value) for duty purposes.
The Ruling refers to the following example:
- A valuer is engaged to value two residential properties located side by side. On the valuation date, one property is a newly completed house which has never been occupied and the other is an established home built some years before.
- The valuer would need to take GST into account when determining the market value of the first property (ie taxable supply of new residential premises), but not the second (ie input taxed supply of existing residential premises).
- To complete the engagement, the valuer will need to determine a market value for each property. But it would not be open to the valuer to determine a “GST-exclusive” market value for the first property. That would be contrary to the decided cases and the Valuer General’s policy.
The Ruling does not then provide guidance to taxpayers, particularly in respect of the existing residential premises, as to how it would instruct the valuer. Does the taxpayer 'stay silent' as to the GST position on which the valuation should be determined? The taxpayer would clearly not instruct the valuer to undertake the valuation on a GST-inclusive basis (and this would be entirely inconsistent with the GST position), but the Ruling states the Chief Commissioner will not accept the valuation prepared on a GST-exclusive basis.
Whilst the Ruling goes on to acknowledge that the valuer’s task may appear more difficult where values are required for landholder duty purposes, the Chief Commissioner states "the approach will be the same. The property will need to be valued using the hypothetical sale approach outlined in Spencer, and comparable sales will need to be considered in determining its market value." Again, this does not provide practical guidance to taxpayers as to how to instruct valuers.
Based on the Ruling, it appears that taxpayers will need to instruct valuers to determine the market value of the relevant property without stating whether it was determined on a GST-inclusive or exclusive basis. The Ruling states that "the valuer would look to comparable sales of comparable properties, without enquiry into the GST treatment behind the prices for which the comparable properties were sold" and "the focus should be on the property and prices for which comparable properties have sold, not on the vendor or GST strategies open to it."
It is unclear how this approach can be extended to conducting valuations for landholder duty purposes as the transaction does not involve a transfer of land. As such, it is not clear how a valuer can "look to comparable sales of comparable properties" in determining the unencumbered value of the landholdings and goods.
It is also unclear how this Ruling will affect the prevailing practice of valuers. That is, if the prevailing practice is to exclude the GST component in valuations, this Ruling may cause a wholesale change in approach for valuers. In this context, it is the authors' view that it is both acceptable, and in fact appropriate, in relevant cases for a valuer to be informed that a vendor intends (or where relevant, has agreed) to apply a particular GST concession to a transaction as this is, in effect, an inherent feature of the property.