The AAT has confirmed that the value assigned by a taxpayer for the purposes of the pre-1 July 2000 margin scheme provisions was $22m as the taxpayer contended (not the $8.1m contended by the ATO) because it was the product of an “approved valuation” (which discounted from actual sales and costs figures, rather than projected figures, as the ATO contended, was required). This was allowed because the valuation method was not ‘contrary’ to professional standards of valuation.
In an earlier proceeding, the Federal Court determined that the issue was not whether the taxpayer’s valuation was correct, but rather whether the valuation was an “approved valuation”: Decleah Investments Pty Ltd v FCT [2018] FCA 717 (see related TT article). In over-ruling the AAT’s original decision, Steward J considered that the valuation was made in a manner not contrary to professional standards and so was an approved valuation for the purposes of s 75-35 of the GST Act.
The matter then returned to the AAT “for reconsideration” in line with the Court’s finding.
- The AAT accepted the contentions of the Commissioner’s expert witness that what the taxpayer had done “was not consistent with customary professional practice and might not be consistent with professional standards” – however, the taxpayer’s valuation was not contrary to those standards.
- To reiterate, the Commissioner’s expert witness said that the valuation may not have been consistent with professional standards, but was not contrary. This was sufficient for the AAT to confirm that the valuation was an approved valuation.
- The taxpayer discounted actual, not predicted cashflows – with a discount rate that allowed, not only for the time value of money. but also the uncertainties in getting from pre-1.7.2000 broad acres, to the actual sale proceeds and actual costs, up to 9 years later.
Allowing the objection also meant that shortfall penalties fell away, too.
The quantum in issue
The key numbers, illustrating the quantum in issue, are as follows (see AAT para [65]).
- Original cost – about $800k
- Commissioner’s valuation – $8.1m (approx 10 times cost)
- Taxpayer’s valuation – ultimately accepted by the AAT – $22m (about 2.5 times Commissioner’s valuation).
- Difference on which taxpayer saved GST – $14m (about $1.4m in GST).
The central use of ‘hindsight’ issue
The Commissioner objected to the valuer using actual sale and cost values (getting the benefit of hindsight). But the Valuer said this was only to understand what the projected values would have been, if they turned out to be exactly right (as the AAT observed).
49. Mr Gibson’s as is model can only operate by the use of hindsight, and thus is contrary to standards. The method improperly relied on hindsight to impute actual knowledge to buyers and sellers of the facts and circumstances nine years after the valuation date. Mr Gibson stated in evidence that:
I relied on hindsight in order to arrive at a view as to what willing, prudent and knowledgeable buyers and sellers might have predicted as at July 2000, if their foresight was accurate.
50. Mr Gibson’s approach did not reflect an interpretation of what a willing buyer or seller, having regard to the knowledge available at the time, may reasonably predict the market might do in the future, but was simply an application of what the market did do some nine years later.
Of course, to simply discount known outcomes, by and interest rate that has no allowance for the risks involved, in projecting uncertain outcomes, would plainly be wrong. But the valuer discounted by a rate that not only reflected the ‘time value of money’ but also the uncertainties attendant in getting ‘broad acres’ to this subdivided profit, 9 years later. See AAT reasons below.
77. To the extent that the attack on the valuation is to demonstrate that it is fanciful or absurd, so as to come within paragraph 12(5) of his Honour’s reasons then that proposition calls for reflection. What Mr Gibson did was take cash flows that were actually enjoyed or sustained and discounted them so as to reach a value at 1 July 2000 using a discount rate that recognised both time value of money and the risks associated with achieving those cash flows. That approach to valuation is plainly not merely the present values of actual cash flows which are all known. It is much more than that. It is one that recognises the risk of the cash flows adopted not being received or sustained in a rather conventional way – by discounting them at a rate materially above the rate required to reflect the present value of future money.
On this basis, the size of that discount rate, might be a pivotal issue, in getting to a ‘market value’. But that is a question of a valuer’s judgement – which is outside the law relating to determining the ‘market value’ as at 1 July 2000. The key issue was whether it was ‘approved valuation’ (AAT para [65]) – which only requires the valuation to be not contrary to professional standards. Valuer judgement differences, are not relevant.
(Decleah Investments Pty Ltd & Anor as Trustee for the PRS Unit Trust and FCT [2021] AATA 4821, AAT, O’Loughlin DP, 24 December 2021.) [LTN 4, 10/1/22]
[Tax Month – January 2022 – Previous 2021] 11.1.22