Background

Australia's tax system increasingly relies on concepts such as 'market value'. Whilst there may be sound economic reasons for using such concepts, their use has necessitated a growing need for taxpayers to undertake significant valuation work.

Valuations are required in numerous taxing regimes, including: income tax consolidation, capital allowances, trading stock, transfer pricing, taxation of financial arrangements, capital gains tax, fringe benefits tax, goods and services tax, self-managed superannuation funds (SMSF), minerals resource rent tax, general anti-avoidance rules and employee share schemes.

Market value is often undefined in these regimes, leaving the meaning to be determined by the courts. The Australian Taxation Office (ATO) has issued both general guidance regarding market valuations, as well as specific valuation advice for certain regimes, such as SMSF and MRRT.

Valuations may be required for a variety of assets, transactions, businesses and liabilities amongst others. Assets may be tangible, such as land and property, plant and equipment, or intangible, such as intellectual property and rights. Depending on the circumstances, taxpayers may perform their own valuation or engage the services of a professional valuer, particularly for complex or difficult valuations. Certain tax regimes specifically require the use of professional valuers for certain methods.217

When verifying compliance with the tax laws, it may be necessary for the ATO to determine if a taxpayer's valuations are appropriate. In doing so, the ATO may engage professional valuers who may be from the private sector or the Australian Valuation Office (AVO). The AVO operates as a business line within the ATO which provides fee-based valuation services exclusively to the public sector.

Concerns have been raised with the Inspector-General of Taxation (IGT), by taxpayers, tax practitioners and their representative bodies, regarding the ATO's administration of valuation matters. In general, these concerns relate to:

  • the uncertainty and cost associated with valuations;
  • the ATO's management of the compliance risk associated with valuations;
  • the independence, capability and the ATO's engagement of the AVO and private sector valuers; and
  • interactions between the ATO, taxpayers and valuers and how disputes are resolved.

The IGT seeks to understand the underlying causes for the above concerns and their impacts as well as opportunities for improvement. The IGT has previously made recommendations relating to valuation disputes in his Review into Aspects of the Tax Office's Settlement of Active Compliance Activities218 and more recently his Review into the Australian Taxation Office's Use of Early and Alternative Dispute Resolution.219 The IGT intends to build on the work of these previous reviews.

The IGT will conduct this review pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act) and welcomes your input. The following terms of reference and guidelines are provided to assist with the preparation of your submissions.

Terms of reference

The IGT review into the ATO's administration of valuation matters will focus on:

The valuation requirements in tax and superannuation laws

  1. The extent to which the tax and superannuation laws require valuations and the impact on various types of taxpayers; and
  2. Alternatives or simplifications to valuation requirements with the aim of reducing uncertainty and compliance costs.

The ATO's management of compliance risk associated with valuations

  1. The level and nature of ATO compliance and interpretative work which requires valuation input;
  2. The ATO's strategy for managing valuation risks;
  3. The ATO's internal and external advice and guidance in relation to valuations; and
  4. The ATO's conduct of risk assessment and compliance activities pertaining to valuation matters.

The independence, capability and the ATO's engagement of the AVO and private sector valuers

  1. The extent to which valuation input is provided by ATO officers, AVO officers and private sector valuers;
  2. The ATO officer's use of the valuer's professional advice; and
  3. The interaction between the ATO and AVO or private sector valuers including:
    • independence and the terms of engagement including conflicts of interest and remuneration;
    • capability, timeliness and quality of the valuation service; and
    • nature of any informal communication between the ATO and the valuer.

Taxpayer, ATO and valuer interaction including dispute resolution

  1. The level of, and reasons for, valuation disputes;
  2. The ATO's process for resolving valuation disputes; and
  3. The interaction between the ATO, taxpayers and their respective valuers and the use of the latter's evidence from the commencement of compliance activities through to litigation.

The IGT may also examine any other relevant concerns raised or potential improvements.

Submission guidelines

The IGT envisages that your submission will be set out in two parts:

  • your experiences and views on the use of valuations in tax and superannuation law and how the ATO administers valuation matters; and
  • suggestions for improvement.

Your experiences and views on the use of valuations in tax and superannuation law and how the ATO administers valuation matters

It is important to provide a detailed account of specific valuation related provisions in the law or specific ATO valuation related practices which have had an impact on you. We are seeking examples of ATO practices that have contributed to positive outcomes as well as negative impacts.

The following questions are designed to assist you in your response.

The valuation requirements in tax and superannuation laws

  1. Have you been affected by tax law provisions which require a valuation? If so:
    1. Which provisions were they?
    2. Was the valuation done by an independent professional valuer or yourself? In the case of the former, what were the terms of engagement?
    3. What valuation methods were used? Were alternative methods available and considered? Please provide reasoning.
    4. How much did the valuation cost?
    5. Was the valuation critical to your tax position? If so, what was the impact?
  2. Would you have obtained the valuation in the ordinary course of your affairs if the law did not require it? How would you compare the valuation costs with the size of your business/income and/or the transaction in question?

The ATO's management of compliance risk associated with valuations

  1. What was your first interaction with the ATO with respect to a valuation matter?
  2. Did you seek any advice or guidance from the ATO regarding valuation issues before completing your tax return? If so, what type of advice or guidance did you seek? Please comment on your experience in this regard.
  3. Were you involved in any ATO compliance activities in which valuations were raised as an issue? If so:
    1. How did the ATO conduct the valuation aspect of the compliance activity?
    2. Did the ATO compliance officer advise you that a valuer had been consulted before raising any valuation concerns with you? If so, what was the nature of that advice?
    3. Were you or your valuer given an opportunity to engage with the ATO officer and/or valuer? Please comment on your experience.
    4. Was any ATO advice applicable to your valuation matter? If so:
      1. How did the ATO apply the advice?
      2. Were there any issues raised regarding the taxpayer's valuation being inconsistent with that ATO advice?
  4. If you were involved in any ATO real-time compliance activity, such as a Pre-lodgement Compliance Review (PCR), were valuation issues raised? If so, please describe how this was done.

The independence, capability and the ATO's engagement of the AVO and private sector valuers

  1. Were you involved in any ATO compliance activities in which the ATO engaged the AVO or private sector valuers? If so:
    1. Are you aware of the terms of engagement between the ATO and the AVO or private sector valuers?
    2. How do you view the valuation capability of the ATO officers, AVO officers or private sector valuers involved in the process?
    3. What was your perception of the independence of the AVO or private sector valuer? Please provide reasons for your perceptions.

Taxpayer, ATO and valuer interaction including dispute resolution

  1. If you were involved in a dispute regarding a valuation matter please provide a detailed account of your experience and ensure that the following questions are addressed:
    1. How and when did the dispute arise?
    2. If you had already carried out a valuation as part of self assessment, did the ATO accept your valuation? If not, why not?
    3. Did the ATO initially engage its valuers to critique your valuation or conduct a fresh valuation? Please comment on the impact of the selected approach on managing the dispute process.
    4. Did the ATO's valuer interact with you or your valuer? Please comment on any such interactions and their utility and effectiveness. What was the role of the ATO case officer during this interaction?
    5. Were attempts made early in the process to narrow the issues in dispute or resolve them? For example, were attempts made to agree on facts and matters of principle at the outset such as the most appropriate valuation method?
    6. Please comment on the financial impact of the manner in which the dispute was managed.
    7. Were you offered or made aware of any form of alternative dispute resolution (ADR) by the ATO?

Your suggestions for improvement

The IGT is also seeking your views on potential improvements to the use of valuations in tax and superannuation laws and the ATO's administration of valuation matters.

The following questions are designed to assist you in your response.

The valuation requirements in tax and superannuation laws

  1. What alternatives to concepts such as market value could be used to reduce the need for valuations in tax matters?
  2. Where alternatives are not easily identified, you may wish to comment on simplification or improvements such as defining market value and consistency with other regulatory requirements such as accounting or international valuation standards.
  3. Should these alternatives or simplifications be enshrined in legislation or can they be addressed administratively by the ATO? Please explain your views.

The ATO's management of compliance risk associated with valuations

  1. How could the ATO improve its public advice and guidance on valuation matters to increase certainty for taxpayers in relation to valuation matters?
    1. Which areas warrant more advice or guidance?
    2. What form should such advice or guidance take?
    3. Could such advice or guidance suggest the most appropriate methodology in certain circumstances or provide rules of thumb?
  2. What steps could the ATO and taxpayers take to address valuation issues earlier such as before a taxpayer self assesses? For example, with respect to large business taxpayers, should valuation matters be considered during PCRs? More generally what improvements could be made to the process of obtaining an advance ATO view on valuation matters?
  3. How should the ATO approach different levels and types of valuation risks? What thresholds could the ATO use to make this differentiation effective?

The independence, capability and the ATO's engagement of the AVO and private sector valuers

  1. When, and how, should the ATO's valuers be involved in ATO compliance activities?
  2. How could the ATO improve the way in which it engages valuers?
  3. What information about the ATO's engagement with its valuers should be public or accessible to the affected taxpayer?
  4. How can the ATO improve the perceived or actual independence of the valuers it engages?
  5. How can the ATO ensure that the valuers it engages have the appropriate capability?
  6. What are your views on valuation critiques? What role should they play and how can the ATO improve the use of them?

Taxpayer, ATO and valuer interaction including dispute resolution

  1. What aspects of the interaction between taxpayers, the ATO and their respective valuers could be improved?
  2. At what point should each parties' valuers interact? What should be the role of the taxpayer and ATO during these interactions?
  3. What could taxpayers, the ATO or their respective valuers do to help shorten the duration of a dispute and/or minimise unnecessary costs?
  4. What are your thoughts on the use of valuer conferencing, jointly instructed valuers, jointly appointed valuers, expert valuer panels, single experts, or mediated approaches? How and when could they be used by the ATO and taxpayers to resolve disputes? What other approaches could be used?
  5. Are there any aspects of the way in which valuation issues are resolved during litigation that you have found helpful? How could these be improved or employed earlier?
  6. Are you aware of other approaches to managing evidence from expert witnesses? How could these be applied in resolving valuation disputes? For example, the Federal Court of Australia, Family Court of Australia, Administrative Appeals Tribunal and the NSW Land and Environment Court, amongst others, have special procedures available for the use of expert witnesses.

Lodgement

The closing date for submissions is 20 December 2013. Submissions can be sent by:

Post to:

Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001

Email to:

valuations@igt.gov.au

Confidentiality

Submissions provided to the IGT are maintained in strict confidence (unless you specify otherwise). This means that the identity of the taxpayer, the identity of the adviser and any information contained in such submissions will not be made available to any other person, including the ATO. Sections 23, 26 and 37 of the IGT Act safeguard the confidentiality and secrecy of such information provided to the IGT — for example, the IGT cannot disclose the information as a result of a Freedom of Information (FOI) request, or as a result of a court order generally. Furthermore, if such information is the subject of client legal privilege (also referred to as legal professional privilege), disclosing that information to the IGT will not result in a waiver of that privilege.


217 For example, ATO, A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination, MSV 2009/1 (14 October 2009).

218 IGT, Review into Aspects of the Tax Office's Settlement of Active Compliance Activities, December 2009.

219 Above n 168.