Valuation of land for duty purposes

Key information

Land transfer duty is calculated using the dutiable value of the property. This is usually the higher of the price paid and the property’s market value.

In some transactions, the price does not reflect the property’s unencumbered value. In these cases, we generally require a valuation to make sure duty is assessed correctly.

A valuation is based on a hypothetical sale on the open market between unrelated parties who are knowledgeable and act without pressure. In some cases, the property’s highest and best use will be an alternative use to its current use.

We require independent valuations in certain circumstances, and they must meet industry standards. We review valuations to ensure the basis, rationale and assessed value are reasonable for duty assessment purposes.

Circumstances requiring a valuation

In certain circumstances, you need to provide an independent valuation of your property from a qualified valuer.

This includes situations including where:

• you are given property as a gift
• you purchase property from a friend, an associated person or an associated entity
• you purchase property at a discounted price or for some form of non-monetary consideration
• your purchase involves a fractional interest in property
• you purchase property in connection with a business for a total sum of more than $1 million
• the purchase price is equal to or less than the property’s current capital improved value for rating purposes.

If we request an independent valuation, you must engage a qualified valuer. The valuer must be certified by the Australian Property Institute and have experience valuing the specific property type.

Valuations undertaken for duty purposes

We generally accept valuations prepared for duty purposes if they comply with:

• the valuation practices and standards set by the Australian Property Institute, and
• the International Valuations Standards Council. 

A valuation must:

• identify and value the full and correct interest in the property being transacted at the date of the transaction
• include all relevant improvements, fixtures and plant and equipment
• use appropriate valuation approaches and methodologies supported by relevant comparable sales evidence
• rely on an alternative method only when there is insufficient sales data due to the nature of the property and market
• contain detailed workings, including assumptions and comparable sales and/or rental data used.

We accept most valuations prepared for duty purposes. However, we have identified issues with some valuation approaches and methods. Our view on these practices is set out below.

Valuations prepared for other purposes

Valuations are prepared for a variety of purposes, including mortgage security, financial reporting and insurance purposes.

We will consider valuations prepared for mortgage security and other purposes. However, we may not accept these valuations for duty purposes if they have limitations. 

Many valuations include a qualification that warns against its use other than for the purpose it was prepared. 

These limitations may include:

• the interest valued does not include all relevant improvements and/or plant and equipment, including items owned by someone other than the purchaser
• the valuation date and any material changes to the property since the valuation, including changes to the physical structure or zoning, or approved development plans or permits
• the valuer relied on specific instructions or critical assumptions.

Depending on the presence and significance of the above limitations, we may:

• accept the valuation as a reasonable estimate for duty purposes
• require an adjustment to the ascribed value
• not accept the valuation.

If we do not accept the valuation, you will be given the opportunity to obtain a valuation prepared for duty assessment purposes or have your matter referred to Valuer-General Victoria.

Letters of appraisal by licensed real estate agents

Real estate agents are typically not qualified valuers and letters of appraisal are not considered formal valuations.

Although letters of appraisal are not formal valuations, we may consider them as evidence of value for duty purposes. We are aware that real estate agents can be pressured by their clients to appraise a property’s market value to be equal to or less than the property’s capital improved value for rating purposes. Rating values are based on general market data rather than property-specific information. They also do not take into account all relevant improvements and fixtures for duty purposes. As a result, rating values tend to be conservative and rarely provide an acceptable value for duty purposes.

We may not accept an appraisal on its own and may require additional information or a formal valuation. This may occur where: 

• the appraisal letter does not set out sufficient detail about the property, its improvements or the comparable sales data used
• the property description in the appraisal letter does not match information we hold
• a planning permit has been issued for the property
• the appraisal letter provides a value for the property that is equal to or below its capital improved value at the time of the transaction
• the appraisal letter provides a value for the property that is equal to or below the price the property last sold for on the open market.

Refer to the Evidentiary Requirements Manual when lodging documents for duty assessment.

Valuation approaches

IVS 103 in the International Valuation Standards provides guidance on when the market, income and cost approaches are appropriately used in valuation assessments.

Direct comparison method

The direct comparison method comes under the market approach. It assesses market value by comparing the property with sales of similar properties. Valuers should use this method when there is an active market for the relevant property type. 

When deciding whether sales are relevant and comparable, valuers must consider a range of factors including:

• the parties to the sales, the sale dates and any special terms or conditions
• the size, location and topography of the properties, including the nature of any improvements
• the zoning of the properties, including town planning restrictions, permits and/or approvals
• other factors that affect desirability, including whether the properties are superior or inferior to the property being valued.

In some cases, the sales evidence used may not be directly comparable to the subject property. Examples include:

• using sales of properties without ocean views to value a beachside property with extensive views
• comparing a property on a quiet suburban street with sales of properties on a busy thoroughfare or near a railway line. 

When analysed on a value per unit basis, these sales may indicate a rate that does not accurately reflect the property’s value for duty purposes.

Capitalisation of net income method

This may be appropriate where property is purchased as an investment based on the income it produces. This includes retail, commercial, industrial and multi-unit residential properties. This method does not usually apply to standard single residential properties, even though they may be purchased as investments. 

Valuers should not use this method where a property is not developed to its highest and best use. In these cases, capitalising the rental income, even if at a market rate for the current use, would understate the property’s value as a development site.

When using the capitalisation of net income method, valuers must ensure that both the rent and yield:

• fall within acceptable market parameters for the relevant property type, and
• are supported by market evidence.

We often receive valuation reports where the rent is below market because of an association between the landlord and tenant. In such cases, valuers must adopt a market rent in line with relevant valuation practice.

We also receive valuation reports where the adopted yield falls outside the range shown by the sales evidence. For example, a report may identify sales with yields ranging from 5–7%, but adopt a yield of 8%. In these cases, the valuer must clearly explain and support the reasons for this variation.

Hypothetical development method

Australian courts have criticised the use of this method. They have said that the method relies on many estimates and assumptions. For this reason, valuers should not use it where they can make use of comparable sales evidence. 

However, courts have endorsed the use of this method where:

• comparable sales evidence is not available, and
• the property is not developed to its highest and best use.

In these circumstances, the method must use appropriate market-based assumptions and estimates.

For example, if a property is to be developed and held as an investment, or part of a business operation, it is not appropriate to deduct costs such as sales commissions, legal expenses and advertising. This is because the property is not being developed for sale by a developer.

When valuing a development where construction had commenced before the valuation date, the valuation must take into account the value of any completed construction works.

The depreciated replacement cost method

The depreciated replacement cost method comes under the cost approach. Valuers may use it to value highly specialised and purpose-built properties with extensive plant and equipment. 

The cost approach may be appropriate where valuers consider the market and income approaches to be unfeasible. Valuers may also use the cost approach in addition to the market and/or income approach. 

The cost approach is based on the theory of substitution in that a purchaser would not pay more for an operating asset than the cost of replacing it with a new modern equivalent. However, substitution may not always be an option for highly specialised assets due to economic or other barriers to entry.

In these cases, valuers must take into account:

• the operating and functioning nature of the asset
• the profitability of the asset
• any physical, functional and economic obsolescence affecting the plant and equipment that make up the asset, but not the land on which it is located.

In some cases, valuers assign significant goodwill to a business operating a highly specialised asset. This is often based on accounting concepts and the gap between the business’ enterprise value and the asset value. However, when the income of a business derives mainly from using an identifiable asset or assets, such as specialised plant and/or equipment affixed to land, this gap may indicate that these assets have been undervalued. This is because the earning power of such a business is largely commensurate with the earning power of its assets. When appropriately valued, the business goodwill associated with such specialised assets is usually of small value.

Where significant goodwill is claimed for a business operating a highly specialised asset, we may request an explanation of the source and calculation of that goodwill. We may also request additional valuation information.

Referral of matters to Valuer-General Victoria

If we consider that the value you have provided understates the value of your property for duty purposes, we may refer the matter to the Valuer-General Victoria for valuation.

You may be liable to pay the cost of the valuation if the Valuer-General Victoria determines a value that is 15% or higher than the value you provided. 

You can obtain a copy of the Valuer-General Victoria’s valuation if you sign a confidentiality agreement. The agreement confirms that you will use the valuation for duty purposes and to understand the basis of any assessment we issue.