Market value and GST (superseded)
24 August 2016
||Stephen R Brady|
Chief Commissioner of State Revenue
24 August 2016
||20 January 2020|
||Superseded by DUT 45 v2|
- A question has arisen as to whether it is possible to determine a GST-exclusive market value. The answer to this question can make a difference of 1/11th in the value upon which duty is assessed.
- 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, unencumbered value is regarded as synonymous with market value free of encumbrances (see CCM Holdings Trust Pty Ltd v CCSR  NSWSC 1072 at paragraph 82).
- When a market valuation is submitted to the Office of State Revenue, it must be accompanied by a copy of the instructions given to the valuer in connection with the valuation, so that the Chief Commissioner or his delegate can determine the basis on which it has been made.
- The Chief Commissioner will not accept a valuation as a market valuation if it is expressed to be determined on a GST-exclusive basis, or has been made on that basis, or the valuer has been instructed to make a determination of market value on that basis.
- Any such valuation will be returned to the lodging party with a copy of this ruling and a request that the valuation be replaced by one (or amended so it becomes one) which 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.
- In other words, there is no such thing as a GST-exclusive market value.
- 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 concerned 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 ).
- The impact of GST upon each of the vendor and purchaser depends upon their particular, individual circumstances. However, the hypothetical vendor under the Spencer test cannot be assumed to have attributes (eg: GST registered or selling as a going concern) which affect the GST consequences of the sale for the vendor (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 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'. Paragraph1.2 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.
- 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.
- To take a simple example, assume that:
- a valuer is engaged to value 2 residential properties located side by side;
- on the valuation date, one contains a newly completed house which has never been occupied; and
- the other contains 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, but not the second, because GST is not payable on the sale of an established home. 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 valuer’s task may appear more difficult where values are required of land held by a company or unit trust, for example, so that landholder duty can be assessed and paid on the acquisition of the company or trust. But 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.
- To take another example a valuer would be entitled, after taking GST into account, to determine the market value of a commercial property by estimating the price it would fetch on a hypothetical sale as a price unaffected by GST, on the basis that the property would ordinarily be sold subject to tenancy as a going concern.
- In making that determination, 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 (see Storage Equities para ). In carrying out the hypothetical sale exercise required by Spencer, the valuer would not take into account the particular GST basis on which the vendor might sell the property (see Storage Equities para ). 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.