Tax Tip 173: Strategy – Don’t rely of a lender’s valuation for CGT Purposes

When a property first becomes income producing the cost base is reset to the value at the date it becomes income producing section 118-192(2) ITAA97.


Many people want to save a few hundred dollars by not ordering a valuation themselves but getting their broker to order a bank valuation which they rely on. These valuations often come at no charge to the client.


This could be potentially costing them money.


Example

Ned moves out of his property and gets his broker to order a bank valuation which comes in at $480,000. Ned thinks this is a bit low, but doesn’t really think about it any further.

Maude, Ned’s wife, orders a valuation which comes in at $500,000.


When the property is later sold for $600,000 there will be a difference in the cost base

1st Valuation will make the gain to be $120,000

2nd valuation will make the gain to be $100,000


Applying the 50% CGT discount these become

$60,000, if the first valuation had been used or

$50,000 if the second valuation had been used.


Added on to their marginal tax rates of 39%

$23,400 in CGT if the first valuation had been used, or

$19,500 if the second valuation had been used.


Maude taking the time to order a second valuation has resulted in a tax saving of $3,900 for the family.

Spending money can save money!

 

As most of my clients are in the development game i always see conservative bank valuations.

 

Good point Terry. Bank vals make a poor basis for valuation if s118-192 is being used. I would always encourage a taxpayer to seek a few agent opinions and stick with one that is towards the higher end.

A further strategy for those who may move out of the former home and its first starts being a IP is to check if the property has FALLEN in value. If so, get tax advice as you could face tax on profit you havent even made. Some exceptions exist so that s118-192 isnt mandatory. If one applies and you dont use it that can also cost a bit.

The other big mistake I see is getting CGT calcs wrong. Over or underpaying tax are both equally risky. IMO I dont think CGT calcs are simple - Loads of exceptions, conditions and limits.

 

I had a client seek a valuation and what her former accountant suggested and what I suggested was $400K apart. Had NO CGT effect whatsoever as it was a pre-CGT asset. But it had a GST impact and reduced profit on the dev by a further $400K as well. Two hundred grand in tax savings + $36K saved in GST.

There are valuations and valuations. The ATO even agree you can make the "best use of the land" if you wish. There are many ways to influence profit (up and down) and affect GST too with land.

Difference between a property savvy adviser and the suburban practitioner who rarely (if ever) sees a developer.

 

Just speaking yesterday to the valuer doing the bank val on our PPOR for sale and asked if there was any difference in the purpose of valuation between Bank and CGT.
His words were: "should be no difference"
There ya go...that even sounds logical. Or is it oils aint oils?

 

The value of a property has some wiggle room, Where a mortgagee is instructing the valuer has a risk of being sued where the property is sold under possession of a bank, but where the individual is instructing the valuer, and they state the purpose, there is less risk for them and the property could be valued higher - perhaps as much as 10%.

 

Hi Terry,

Great tip. Is there a cutoff time to obtain the valuation report to be valid for CGT purposes?

 

No. Just needed when preparing tax return

 

Hi again,

I had a question re my subdivision, Torrens title into 2 lots. Council has just stamped the subdivision certificate. My surveyor is now about to submit documents to LPI to create 2 new titles. Is it a good time for me to get independent valuation now, or when LPI releases the titles, or either.

Thanks

 

what would be the purpose of the valuation.
Subdivision is not a CGT trigger usually.

If you are wanting to split loans it won't really matter much.

 

I was surprised by some Valuations that came in with my recent build.

Westpac 430k (expected)
NAB 470k
ANZ 460k
AMP 440k

I estimate I could sell the property for 450k so valuations higher than that are a win.

 

And an agent may provide an opinion of $485K

 

Why are you subdividing ?

If you create two allotments and sales are proposed OR retention of both etc then a valuer may assist to APPORTION the costbase or there could be a CGT benefit to reset the value of land used for each lot IF you are permitted and choose to do so. Tax advice on which methods and options could help. Many people get this element wrong and it later restricts options. If land ownership predated 01 July 2000 there could also be a requirement to value EACH LOT at that date too.

 

Indeed, when proposed that the valuation is needed for a CGT reason and not to sell via that agent in my experience that is.

 

Taxpayers are permitted to choose a "best use" too. For example vacant land held for a single resi dwelling may have a land value of $1m. Held to build 4 villas it may be worth $1.5m... Strategy can be to trigger a CGT event if land is to be used for trading stock. Potential for $500K with a 50% CGT discount in that example.

This is a strategy many fail to choose when they use a non-property savvy tax adviser. Non-property savvy tax advisers would tell the client they need to pay CGT now and not in two years time.

 

Hi Paul,

Currently it is a 1 title with two detached dwellings, both IP since purchase in 2013. After subdivision into 2 lots, each IP will be on its own title.

Original purpose of subdivision into 2 lots: to build a granny flat behind each existing dwelling to increase CF, we are at the end of 'accumulation stage' and happy to start doing things to improve CF.

New purpose of subdivision is (1) build a granny flat behind lot A (2) KDR: knock down dwelling on lot B and build PPOR in future. (Currently renting, too expensive to buy PPOR elsewhere in Sydney, KDR seems most feasible.)

The independent valuation is to apportion the two lots such that the IP lot will have greater value (due to larger land and newer dwelling) so when loan is split, a greater portion of the loan can sit on IP. The other (smaller) loan to sit on future PPOR. Best case scenario, entire loan can sit on IP if it's value has increased enough.

Would be great if you could add any comments to this.

And I wasn't sure when I should obtain the independent valuation. The council have just approved the subdivision and issued the subdivision certificate. The next task is to send these documents to the mortgagee for their endorsement.

Other benefits of this subdivision:
- with future PPOR on lot B, the land value of lot A with IP is lower, this minimises or even avoids land tax

 

My comment. Is pay for personal tax advice and strategy advice. It would ensure you understand each and every option and issue and minimise tax.

eg selling to a developer may be an option you havent costed.

 

Hi Terry does this mean the valuation can be backdated to the time when I have moved out? I’ve got a former PPOR that I converted to an IP in 2014 but didn’t have a valuation done at the time as I was planning on selling within the 6 year exemption window but I am considering holding the property for longer now.

Thanks

 

Yes, valuers can back date valuations - which sounds dodgy, a better phrase may be to do a valuation at a point of time in the past.

 

Thanks for the info that’s really helpful to know.