Market value and GST
- A question has arisen as to whether, in determining unencumbered market value, the price that a willing purchaser would pay for property should be adjusted to deduct any GST payable on the supply of the property. This may also be referred to as determining a GST-exclusive market value. The answer to this question can make a difference to the value upon which duty is assessed. If the valuation adopts a comparative sales methodology, the difference in value could be 10%, 1/11th or some other amount, depending on how the GST (if any) has been incorporated into the purchase price for the comparable sale. The difference in duty outcomes arises for two reasons.
- The first is that landholder duty under Chapter 4 of the Duties Act 1997 (the Duties Act) is payable on the relevant proportion of the “unencumbered value” of the landholdings and goods (if any) of the relevant entity represented by the interest acquired (see s155(1)).
The second is that transfer duty under Chapter 2 is payable on the greater of:
- the consideration for the dutiable transaction, or
- the "unencumbered value" of the relevant dutiable property (see s19 and s21(1)).
So, it is important to understand what part, if any, GST plays in the determination of unencumbered value.
- For the purposes of this ruling:
- "GST exclusive valuation" means a market valuation relating to dutiable property that:
- is expressed to be determined on a GST exclusive basis (i.e. without taking into account GST that may be applicable on the supply of the property, if any); or
- has been determined on a GST exclusive basis; or
- for which the valuer has been instructed to determine the market value on a GST exclusive basis.
- "GST inclusive valuation" means a market valuation relating to dutiable property that has been determined taking into account the GST that may be applicable on the supply of that property, if any.
- "unencumbered value" means the market value of the dutiable property free of encumbrances (see CCM Holdings Trust Pty Ltd v CCSR  NSWSC 1072 at paragraph 82).
- When a market valuation is submitted to Revenue NSW, it must be:
- in the form of a GST inclusive market valuation; and
- accompanied by a copy of the instructions given to the valuer in connection with the valuation.
- The Chief Commissioner may not accept a GST exclusive valuation.
- A GST exclusive valuation may be returned to the lodging party with a copy of this ruling and a request that the valuation be replaced with a GST inclusive valuation (or amended so it becomes one) that conforms to the approach to GST set out in this ruling.
- The reason for this approach is that the Chief Commissioner accepts the line of authority set out below, in particular, the conclusion in the Storage Equities case, 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.
- The following cases have been considered in preparing this ruling:
- CSR Ltd v Hornsby Shire Council  NSWSC 946, a decision of the NSW Supreme Court;
- Tomago Aluminium Company Ltd v Valuer-General  NSW LEC 4, a decision of the NSW Land and Environment Court; and
- Storage Equities Pty Ltd v Valuer-General  NSWLEC 137, a decision of the NSW Land and Environment Court.
- The first of these decisions, CSR Ltd v Hornsby Shire Council was decided by Gzell J of the NSW Supreme Court. It involved, in part, the determination of the market value of land for the purposes of the Land Acquisition (Just Terms Compensation) Act 1991. As part of the process the NSW Valuer-General prepared a notice setting out the amount of compensation to be offered in connection with a compulsory acquisition of land. The notice contained a statement by the Valuer General that "Any liability for GST is a factor in the market for property and is therefore embedded in the lands Market Value … consequently this determination is GST inclusive" (para 7).
- Although it was strictly unnecessary for Gzell J to determine whether there was a separate GST component in the determination of market value, his obiter conclusion was that there was no such separate component. Instead, Gzell J adopted the view of the Valuer General that the market place had adjusted to the imposition of GST and imbedded it in the market value of land (at para 15).
- Further, Gzell J rejected any proposition that market value was less than the GST-inclusive price paid for a supply in the open market. "If the market commands a payment of $550 to purchase a video recorder at $500 plus $50 GST, I am of the view that the market value of the video recorder is $550" (at para 16).
- The approach taken by Gzell J was adopted in a later case before the NSW Land and Environment Court, Tomago Aluminium Company Ltd v Valuer-General. One of the issues considered by the NSW Land and Environment Court was whether GST should be included as a separate component in a market valuation of a parcel of land.
- Although it was not strictly necessary to decide the point, Pepper J concluded (at para 60) that GST should not be regarded as a separate component in the determination of market value. Pepper J noted that the valuer who had excluded GST from the value of the land had conceded under cross examination that a price inclusive of GST is the consideration for sale which a willing purchaser would have to pay. This supported the conclusion of Pepper J that GST 'logically forms part of the market price of the land and so becomes evidence of its value' (para 60).
- A similar conclusion was reached by the NSW Land and Environment Court in Storage Equities Pty Ltd v Valuer-General. However, in this case, the conclusion formed the ratio of the judgement and, unlike the position in the CSR case and Tomago Aluminium Company, was not obiter.
- Storage Equities involved an objection by a land owner to a determination by the Valuer General of the “land value” of land as defined by the combined operation of ss.6A(1) and 14G(1) of the Valuation of Land Act 1916 (the VoL Act).
- Relevantly, the land value determined under those provisions comprised the “capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require” subject to certain specific assumptions about improvements and other matters identified in the statutory provisions. There was agreement between the valuers for the opposing parties as to that land value, apart from the impact of GST. The issue for the Court was whether the land value, properly determined, was inclusive or exclusive of GST. The Court concluded that the GST-inclusive value was the land value.
- The following points of the decision are noteworthy:
- The starting point for determining land value is the test articulated in Spencer v Commonwealth (1907) 5 CLR 418, namely the price negotiated between a hypothetical willing vendor and a hypothetical willing purchaser, both having access to all current information affecting the property (see paras ,  and ).
- In determining value by reference to comparable sale transactions, no adjustment should be made to those transactions on account of any GST liability of the vendor (see para ).
- The Court’s conclusion in Storage Equities was that the land value is the amount expected to be received on the sale of the land, including any GST which the vendor may be liable to pay.
- In the Chief Commissioner’s view, the approach taken to GST in Storage Equities when determining land value for the purposes of the VoL Act applies equally when determining unencumbered value (in other words, market value) for the purposes of the Duties Act.
Consistent with the Valuer General’s Policy
- The Valuer General has issued a number of Valuation Policies including Policy No. 7, which was issued in August 2014. Its first sentence states that 'this policy guides valuers on the treatment of the Goods and Services Tax (GST) in land values'. Paragraph 1.2 contains the following:
- Where GST is paid in a property transaction, you must treat GST as part of the market price. This is consistent with a number of court decisions.
- When you analyse sales of property any GST paid by the purchaser is to be included as part of the sale price.
21. While the Valuer General’s policies apply to valuations carried out under the VoL Act, the Chief Commissioner’s view is that the same approach to GST applies when determining market value for duty purposes.
The GST treatment of hypothetical sales
- There will be circumstances where the sale of land or other dutiable property will not be a taxable supply and GST is not applicable. Such circumstances may arise where:
- the supplier is not GST registered, or required to be GST registered;
- land is sold subject to a lease (or agreement for lease) as a GST-free going concern;
- land is sold GST-free as a supply of farm land;
- an existing residential premises is sold as an input taxed supply; or
- goods are included as part of a GST-free going concern sale.
- A GST inclusive valuation must always take into account the amount of GST payable on a hypothetical sale of land or goods. However, the Chief Commissioner may accept that the amount of GST payable in the above circumstances is nil, provided that the basis for the sale not being a taxable supply is clearly stated in the valuation report.
- The Chief Commissioner may also accept that the GST payable on a taxable supply of real property is less than 1/11th of the sale price if the margin scheme would be applicable and this is clearly stated in the valuation report.
- If a valuation relates to land or goods that have different GST treatments (for example, the sale of land that is partly GST-free and partly taxable), the differing treatments must be clearly set out in the valuation report.
The GST treatment of comparable sales
- In making a determination based on comparable sales, the valuer would look to sales of comparable properties, without enquiry into the GST treatment behind the prices for which the comparable properties were sold (see Storage Equities para ).
- Expressed another way, if the purchase price relating to a comparable sale includes an amount for GST, that purchase price must not be reduced to exclude the GST amount. The full purchase price, including the amount for GST, must be taken into account in determining market value based on a comparable sale.
The impact of GST withholding
- The Chief Commissioner's views on GST withholding are set out in ruling DUT 047
- For the avoidance of doubt, the fact that GST amounts relating to sales of residential premises or residential land may need to be withheld and remitted by the purchaser does not mean the GST amount that has been (or would be) withheld can be disregarded for valuation purposes.
- For comparable sales, this means the purchase price data must include amounts payable on account of GST, regardless of the fact the GST may have been remitted by the purchaser and not paid to the vendor.
- For hypothetical sales, this means the purchase price determined must include GST, regardless of the fact that GST may be remitted by the purchaser and not paid to the vendor.
A valuer is engaged to value 2 residential properties located side by side on a hypothetical sale basis. On the valuation date:
- one contains a newly completed house which has never been occupied and which would be taxable if sold; and
- the other contains an established home built some years before which would be input taxed if sold.
For both properties a GST inclusive market valuation is required that takes into the GST payable on the sales, if any.
In respect of the newly completed house, the price determined for the hypothetical sale must include an amount for the GST that would be payable on the sale. This is regardless of the fact the purchaser may be required to withhold and remit the GST amount (rather than pay that amount to the vendor).
In respect of the sale of the established home, it will be accepted that the price determined for the hypothetical sale does not include any GST if the fact that the sale would be input taxed is clearly set out in the valuation report.
Land held by a company or unit trust where landholder duty is payable on the acquisition of the company or trust.
The property will be valued using comparable sale method to determine the market value. The comparable purchase prices must not to be reduced to exclude GST (if any) included in those prices.
If there is no suitable comparison data available, the property will need to be valued using the hypothetical sale approach outlined in Spencer. A GST inclusive market valuation will need to be submitted that takes into account the GST that would be payable on the hypothetical sale, if any. The Chief Commissioner may accept that no GST would be applicable (and hence no GST is included in the hypothetical purchase priced determined) if the basis for this is clearly set out in the valuation report.
Sale of a commercial property subject to a lease.
ABC Pty Ltd purchases the property as a GST-free going concern which does not attract GST.
Therefore, the price determined using the hypothetical sale method will not include any amount for GST. If the fact the sale would be GST-free as the supply of a going concern is clearly set out in the valuation report, the Chief Commissioner would accept this is a GST inclusive valuation.