A low property valuation could leave you paying thousands more in tax

Over the years, I have seen clients obtain retrospective property valuations for capital gains tax purposes. Typically, the report arrives, the client forwards it to their accountant and the valuation is accepted, normally without question. After all, it has been prepared by a professional valuer, so why would anyone challenge it?

The problem is that not all valuations are created equal. And when it comes to capital gains tax, an inaccurate valuation can have significant financial consequences.

A difference of $50,000 or $100,000 in a historical property valuation could potentially translate into tens of thousands of dollars in additional tax.

Are the comparable properties used really comparable?

One of my biggest concerns with retrospective valuations is the selection of comparable sales.

Imagine owning a townhouse in a premium coastal location, within walking distance of the beach and situated in a quiet residential neighbourhood. Your valuation report arrives using comparable sales from other parts of town, perhaps on busy roads, in larger townhouse complexes or several kilometres inland.

On paper, the properties might appear similar. The same number of bedrooms, bathrooms and perhaps a comparable floor area. But anyone familiar with the local property market understands that location can make an enormous difference.

The demographics of an area, proximity to amenities, surrounding properties, privacy, traffic and general desirability all influence what someone is prepared to pay.

A townhouse in a premium coastal neighbourhood is not necessarily comparable to one in a less desirable part of town simply because the buildings look similar.

If these differences have not been carefully considered and adjusted for, the resulting valuation could significantly understate your property’s true market value.

Do the numbers actually make sense?

Another simple check is to compare the valuation against historical property price movements. This information should already be included in the valuation report.

Let us take a real-life client example. A property was purchased in 2006 for $435,000 and subsequently received a retrospective valuation as of May 2012 of just $420,000. That suggests the property had actually declined in value by $15,000 over almost six years.

Now that might be reasonable if the local property market had experienced a downturn. But the historical market data showed that property prices in the area had increased by an average of 4.5 per cent per annum over the same period?

Applying that growth rate to the original $435,000 purchase price would suggest an indicative value of approximately $565,000 by May 2012. That is a difference of $145,000 from the valuation provided!

Of course, historical market growth is not a substitute for a professional valuation. Property markets do not move in straight lines and individual properties can perform differently. However, it provides a valuable sense check.

If the broader local market has experienced consistent growth while your valuation suggests little growth or even a decline from the original purchase price, surely that deserves some explanation?

One argument might be that the purchaser simply overpaid for the property back in 2006. But in this particular example, the property was actually purchased below the asking price despite competing buyer interest. The original purchase price was therefore established through genuine market competition rather than an inflated price paid by an overly enthusiastic buyer.

Why does this matter for capital gains tax?

Historical valuations can play an important role in calculating capital gains tax, particularly for Australians who have lived overseas or properties that have changed from a principal place of residence to an investment property.

For expatriates, 8 May 2012 is a particularly important date because of changes to the CGT discount rules for foreign and temporary residents. A qualifying historical valuation can influence the amount of capital gain eligible for the discount.

Similarly, when a former main residence is first rented out, certain circumstances require the property to be valued at the date it first produces income. That valuation can become the starting point for calculating a future taxable capital gain.

Not every change of use triggers a market value reset, which is why understanding the applicable rules is essential.

Is a cheap valuation fee really worth it?

Technology has made property valuations quicker and cheaper. Automated systems can produce estimates in minutes using historical sales data and property characteristics.

These systems can be useful, but they do not always capture the differences between neighbourhoods, individual streets or the characteristics that make one property considerably more desirable than another.

If your valuation is going to influence a capital gains tax liability of $100,000 or more, does saving a few hundred dollars on the desktop valuation really make sense?

Does a professional valuation guarantee accuracy?

Property valuers are subject to professional standards and the ATO has clear expectations about the evidence and methodology used in valuations for tax purposes. In fact, the ATO specifically identifies inappropriate comparable sales and unsupported assumptions among the common problems it encounters.

However, a report prepared by a qualified valuer is not necessarily beyond question. Valuations remain professional opinions based on available market evidence and the responsibility for supporting the figures used in a tax return ultimately rests with the taxpayer.

This is why I encourage clients to look beyond the valuation figure itself. A professional signature does not automatically mean the comparable sales are appropriate or that the valuation accurately reflects the property.

Will your accountant question the valuation?

Most clients are not property experts and naturally rely on the professional valuation they have commissioned. They forward it to their accountant who then uses that figure to calculate the capital gain.

But how many accountants will question whether the valuation is reasonable?

I suspect most simply accept the figure provided. And while accountants are not property valuers, an accountant experienced in capital gains tax and tax planning should recognise when something does not look right and flag it with you before the return is prepared and submitted.

If the valuation appears low compared with the original purchase price, historical market movements or the property's location, that should prompt further investigation.

Would a different valuation materially change the tax outcome? Are the comparable sales appropriate? Is there sufficient reason to request a review?

You do not need your accountant to become a property valuer. You need an accountant who is engaged enough to recognise when a valuation deserves to be challenged.

Do not be afraid to challenge the valuation

A professional valuation is an independent opinion based on available market evidence. It is not necessarily the final word.

If the figure seems unusually low, examine the comparable sales. Consider whether those properties are genuinely similar and whether appropriate adjustments have been made for location, condition and desirability.

Look at historical median property price movements and compare them against the valuation. They will not establish the property’s precise value, but they may highlight inconsistencies worth questioning.

If you believe something has been overlooked, ask the valuer to explain or reconsider the assessment based on your findings.

The objective is not to obtain an artificially high valuation to reduce tax. It is to ensure the valuation accurately reflects what the property was worth at the relevant time.

Capital gains tax is not just about calculating the numbers when a property is sold. It is about making sure the information behind those numbers is accurate in the first place.

The most expensive valuation is not necessarily the one that costs the most to obtain. It could be a cheaper desktop valuation that goes unquestioned and ultimately costs you tens of thousands of dollars in unnecessary tax.