The Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) administration of valuation matters was prompted by concerns raised by taxpayers, tax professionals and their representative bodies about the increasing role of valuations in tax law and their associated compliance costs.
There are inherent difficulties associated with valuations, such as their subjective nature, the use of ranges and the potentially prohibitive costs of obtaining them. Minor changes in valuations may also have a disproportionate tax effect where, for example, the eligibility for a concession is dependent on not exceeding certain thresholds. These difficulties, combined with the taxpayers' burden of proof where the ATO challenges their valuation, increase the potential for increased uncertainty, disputation and costs for both taxpayers and the ATO alike.
The IGT has made certain recommendations for the Government's consideration. These recommendations include requiring valuations only where it has the 'highest net benefit', providing shortcuts or safe harbours as an alternative to conducting fresh and full valuations and tapering the eligibility criteria for tax concessions.
The above are bolstered by further recommendations to the ATO to develop administrative safe harbours as well as providing additional tools to assist small businesses determine their eligibility for CGT concessions through the maximum net asset value test.
The ATO's processes for identifying valuation risks and engaging valuation expertise was also identified as an area requiring improvement, particularly given the Australian Valuation Office's closure. As a result, the IGT has made several recommendations aimed at promoting a more transparent and proportionate approach to testing and challenging taxpayer valuations. Specifically, the IGT has recommended that the ATO:
- risk assess taxpayers' instructions to valuers during pre-lodgement processes;
- develop a preliminary risk assessment process as a less costly and less formal alternative to a valuation critique;
- use legal and valuation expertise to assist in issue identification, information gathering and instructing valuers as well as staff training;
- revise its standard template for instructing valuers;
- allow taxpayers to access the ATO's instructions to its valuers; and
- only use publically available information or information that can be disclosed to the taxpayer in arriving at its market valuations.
The IGT has also recommended that the ATO improve and promote the Market Valuation Private Ruling system, which can offer taxpayers with greater certainty, as well as provide more detailed guidance on the application of valuation related penalties.
Disputes between taxpayers and the ATO may be purely attributable to the differing professional judgement of each party's valuer. In these circumstances, given the nature of the self assessment regime, the IGT is of the view that the taxpayer's valuation should be accepted notwithstanding that it is not exactly the same as the ATO's valuation. Accordingly, the IGT has recommended that the ATO provide guidance to its compliance officers to assist them in determining when to accept a taxpayer's valuation.
The IGT's previous review into the ATO's use of early and alternative dispute resolution (ADR review) contained many recommendations aimed at avoiding or resolving disputes, including some aimed at valuation disputes. Given the scope of the ADR review, in this review, recommendations aimed at dispute resolution are limited to the ATO promoting the use of facilitated expert conferencing, joint appointment of valuers and joint instruction of separate valuers by such means as updating its relevant guidance material.
Overall, the report makes three recommendations to Government and nine recommendations to the ATO. The ATO has agreed to almost all nine recommendations.