Run on valuers and tax disputes loom in new CGT regime

Source: AFR

More than 2 million investors in property and private businesses have been warned they will be slugged thousands of dollars to have their assets valued and risk disputes with the Australian Taxation Office, as they transition to the Albanese government’s new capital gains tax regime.

The anticipated rush to have assets valued when the CGT changes take effect in 12 months will increase demands on a short-staffed valuation industry and cause a blowout in costs well above the $88 million annual compliance expenses estimated by Treasury, valuation and tax professionals said.

Investors are expected to rush to have assets valued before the CGT changes take effect in 12 months. 

Former inspector general of taxation Ali Noroozi told AFR Weekend the CGT transition involved administrative complexity that would cause a jump in valuation fees and legal “argy-bargy” with the ATO.

“First, there is a bottleneck and valuers are going to be in short supply, and from 1 July 2027 they’re probably going to jack up their prices,” Noroozi said.

“Second, there are already a lot of valuation disputes between the taxpayer having one set of valuations and the Tax Office getting other valuations that don’t match.

“The court believes who has given the best evidence so it ends up being who you can afford for a valuer.”

With the support of the Greens, Labor last week passed its contentious tax legislation six weeks after the federal budget, with modest concessions granted after a backlash from business groups, start-ups and investors.

The sweeping laws eliminate the 50 per cent discount on capital gains for most investments and introduce a minimum 30 per cent tax on real – inflation adjusted – gains.

Negative gearing was also axed for residential property acquired after the May 12 federal budget, except new-build homes that add to supply such as houses on greenfield sites, duplexes and apartments.

Capital gains accrued until June 30 next year will be eligible for the 50 per cent discount, but gains earned thereafter will be taxed under the new CGT inflation indexation system after assets are sold.

To comply with the transition to the new system, investors can choose a Treasury valuation formula based on the average annual return and number of years of ownership at the sale date, or have the asset independently valued as at July 1, 2027.

Many investors who earned high capital gains during the boom years – before the recent housing market downturn – are expected to have residential properties, commercial real estate and private businesses professionally appraised at the market value to avoid overpaying tax when they sell out.

The assets must be valued as at July 1, 2027, to determine the adjusted cost base for the new CGT regime, although the appraisal for this date can be conducted in the future, such as when the asset is sold.

The ATO said on Friday it would develop tools, calculators and guidance to assist taxpayers in clearly understanding and meeting their tax obligations, including for the valuation of assets.

KPMG mid-market tax advisory partner Kaylene Hubbard said valuation issues would arise for unlisted assets, including shares in family companies, private equity, commercial property, development projects, land and farms.

“There could be a ‘run’ on valuers because the country and the ATO doesn’t have many of them,” she said.“The assets that are most likely to attract ATO scrutiny is where market value is subjective and small changes in assumptions can produce significant tax differences.”

Property consultant and former NSW valuer-general David Parker said the valuation industry was “resource constrained” and the extra demand would tempt inexperienced operators to move in.

“It’s going to put the valuation industry for both businesses and real estate under some pressure,” Parker said.

“I suspect we’ll see emerging an industry in quick, cheap valuations that are largely AI assisted and computer generated, which might work fine for one-bedroom apartments.”

Parker said the best way to receive a credible valuation for houses and business assets was to have a physical inspection, not a “drive by” or online automated valuation.

“Properties with views, unusual aspects and slightly larger businesses will need a more formal valuation.”

The current cost of valuations ranges from about $500 for small apartments, $1500 to $2000 for a larger house, and upwards of $2000 to $5000 for private businesses, and more for large businesses, Parker said.

Some business owners and wealthy families will have multiple assets requiring valuation and will face fees in the tens of thousands of dollars, on top of additional restructuring costs due to Labor’s other tax changes to discretionary trusts.

The introduction of a minimum 30 per cent tax on discretionary trust distributions will force the unwinding of a common small business structure known as a “bucket company”, due to a potential new tax rate as high as 60 per cent to 70 per cent.

There are 2.3 million investment properties in Australia, plus at least tens of thousands of commercial real estate sites and unlisted business assets including goodwill.

The valuation industry has already been facing skills shortages due to an ageing workforce, strict appraisal rules from banks to grant home loans and the previous high volume of property transactions in Australia.

There are an estimated 5500 to 6500 fully qualified, active property and asset valuers in Australia.

Accounting body CPA Australia estimates the CGT changes will impose a one-off valuation cost on investors of at least $675 million to $825 million, plus ongoing compliance costs for CGT and negative gearing of $295 million to $542 million a year,

“This is three to six times Treasury’s own estimate of $88.4 million,” CPA Australia tax policy lead Jenny Wong said.

Perth-based Westbridge Funds Management managing director Damian Collins said his back-of-the-envelope calculation suggested the full cost could run into the billions of dollars for property and business owners.

‘Most will want certainty’

“They will have to put forward acceptable, simple ways for valuations as the industry will not be able to cope with the workload,” Collins said.

Treasury’s optional apportionment valuation formula assumes the same average annual growth rate in the asset based on the total return and holding period, regardless of how the investment actually performed each year.

“Treasury have said that people can use an apportionment formula instead of a valuation, but I’d be recommending to all our clients that they get valuations done on their properties, and as a fund manager, we will be getting valuations on all our commercial properties,” Collins said.

“While you don’t have to get the valuation until the year of sale, most people will want the certainty of getting it done closer to the date of transition, being July 1, 2027, rather than five, 10 or even 20 years later and attempting to backdate it.”

Assets that were acquired before 1985 and not previously subject to CGT would face additional long-term valuation challenges, KPMG’s Hubbard said.

There has been an increase in disputes between the ATO and small businesses over asset valuation in recent years, as businesses attempt to get under the $6 million asset test to receive the 50 per cent CGT discount when their owners sell out.

The threshold has not been changed for more than 20 years. But in concessions granted last week, the government lifted the revenue thresholds from $2 million to $10 million to qualify for the 50 per cent discount.

However, businesses now below the turnover or asset threshold may still need to have their assets valued in case they grow bigger in the future, either organically or via acquisition.