Importance of Valuations for Investments

Collins Hume
2 days ago
3 min read

Why a professional property valuation could save investors at tax time

A property valuation is not only useful when buying, selling or refinancing. It can also be essential for calculating capital gains tax and supporting the value reported to the Australian Taxation Office.

With proposed changes to the capital gains tax treatment of investment property attracting attention, investors should ensure they have reliable evidence of their property’s market value at the relevant date.

When might a valuation be required?

A formal valuation may be important when:

a property changes from a main residence to an investment property, or vice versa
ownership is transferred between related parties or through an estate
a property is transferred to or from a trust or superannuation fund
its use changes or it is affected by a tax law change
historical records are incomplete
a market value is required to calculate a capital gain or loss.

The correct valuation date depends on the circumstances and applicable tax rules, so advice should be obtained early.

Why an online estimate may not be enough

Automated estimates and bank valuations may indicate a property’s value, but they are not necessarily suitable for tax purposes.

Bank valuations generally assess a lender’s financial risk rather than establish a defensible market value for capital gains tax. Commercial properties can be harder to assess because there may be fewer comparable sales, while lease terms, rental income, location, permitted use and property condition can all influence the result.

An independent valuation from a qualified professional provides stronger evidence if the ATO reviews the reported value.

Keep supporting evidence

Investors should retain:

signed and dated valuation reports
valuer’s qualifications and engagement letter
comparable sales information
photographs of the property
purchase and sale documents
leases and rental statements
records of improvements and capital expenditure.

These records can be difficult to reconstruct years later, particularly if the property has changed or comparable sales data is no longer available.

Do not chase the most favourable number

A higher or lower valuation is not automatically better. The outcome depends on the property’s cost base, valuation date and applicable tax rules.

The ATO can compare valuations with property databases, council information, state valuation records and previous tax returns. An unsupported valuation could result in additional tax, interest and penalties.

The cost may be modest compared with the tax at stake

Valuation fees vary according to the property’s type, value, location and complexity, with commercial and specialised properties generally costing more.

However, where a substantial capital gain is involved, the cost may be small compared with the consequences of relying on an unsupported figure. Valuation expenses incurred for tax purposes may also be deductible, depending on the circumstances.

Seek advice before commissioning a valuation

Collins Hume can help you confirm:

if a valuation is required
the correct valuation date
the appropriate valuation method
the records you should retain
how the value may affect your tax position.

If you own residential or commercial investment property and are unsure if you need a valuation, contact Collins Hume on 02 6686 3000 before changing the property’s use or completing a transaction.