Decleah Investments Pty Ltd & Anor as trustee for the PRS Unit Trust v FC of T

Members:
FD O'Loughlin QC DP

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2021] AATA 4821

Decision date: 24 December 2021

FD O'Loughlin QC (Deputy President)

1. Following their appeal being upheld by the Federal Court,[1] Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v Commissioner of Taxation [2018] FCA 717 ; [2018] FCA 929 . the Applicants' continuing dispute concerning whether they had an approved valuation[2] Within the meaning of s 75-35 of the GST Act. of the Land at the heart of the present application[3] The Victorian land described in Certificate of Title Volume 7869, Folio 067. for the purposes of the margin scheme provisions[4] Division 75 of the GST Act. of the GST Act[5] A New Tax System (Goods and Services Tax) Act 1999 (Cth). has been returned to the Tribunal for reconsideration according to law.

2. Because the Court observed apparent conflict in some of Mr Gibson's valuation related evidence led on behalf of the Applicants, and that the Tribunal for the remittal hearing is differently constituted,[6] [2018] FCA 929 at [6]. the terms of the remittal were specific as to evidence. Those terms were:

The proceeding be remitted to the Administrative Appeals Tribunal to be heard and determined in accordance with law on the evidence which was before the Administrative Appeals Tribunal, and with such further evidence as the Administrative Appeals Tribunal directs be adduced, but limited to the witnesses who had given evidence before the Administrative Appeals Tribunal below.

3. The setting for the present application and an overview of the margin scheme were conveniently summarised in paragraphs [2] to [4] of the FC Reasons:[7] Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v Commissioner of Taxation [2018] FCA 717 .

4. Paragraphs [6] through [11] of the FC Reasons outline the relevant legislation and legislative instruments (Determinations) that need to be addressed. For ease of reference those paragraphs are reproduced below.

THE MARGIN SCHEME

  • 6 It is necessary to set out the key provisions of the GST Act before considering the Tribunal's

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    decision below and the applicant's suggested errors of law. Sections 75-10(1) and (2) of the GST Act provide:
    • (1) If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply.
    • (2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.
  • 7 Section 75-10(3), applicable here, provides:
    • (3) Subject to section 75-11, if:
      • (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and
      • (b) an approved valuation of the freehold interest, stratum unit or longterm lease, as at the day specified in the corresponding item in the third column of the table, has been made;

        the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease.

  • 8 Section 75-10(3) then sets out a table, which I need not reproduce, it being agreed between the parties that the applicable date for the purposes of s 75-10(3)(b) is 1 July 2000, that being the date for determining the value of the applicant's land.
  • 9 Section 75-35 is critical. It provides:
    • (1) The Commissioner may, by legislative instrument, determine in writing requirements for making valuations for the purposes of this Division.
    • (2) A valuation made in accordance with those requirements is an approved valuation.
  • 10 The Commissioner, has, over time, made three determinations pursuant to s 75-35, with the last two, for the purposes of this appeal, relevantly using the same language. The determinations prescribe different methods for the valuation of land. Here, the parties agree that "Method 1", as described in the most recent determination made by the Commissioner, is engaged. A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 describes "Method 1" in these terms:

    The requirements for making valuations as determined by the Commissioner for the purposes of Division 75

    • 11. A valuation of the interest, unit or lease made in accordance with the requirements set out by the Commissioner in this determination is an approved valuation of that interest, unit or lease.
    • 12. The Commissioner has determined the following requirements for making valuations for the purposes of Division 75.

    Method 1: valuation by a professional valuer

    • 13. For a valuation by a valuer to be an approved valuation for the purposes of Division 75 that valuation must be made in accordance with the following requirements:
      • (1) the valuer must be a professional valuer;
      • (2) the valuation must be in writing;
      • (3) the valuation must determine the market value of the interest , unit or lease at the valuation date; (Emphasis added)
      • (4) the valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations; (Emphasis added)
      • (5) the valuation must include a signed certificate which specifies:
        • (a) a full description of the property being valued;
        • (b) the applicable valuation date;

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        • (c) the date the valuer provides the valuation to the supplier;
        • (d) the market value of the property at the valuation date;
        • (e) the valuation approach and the valuation calculation; and
        • (f) the name and qualifications of the valuer;
      • (6) if the interest, unit or lease has been supplied by the Commonwealth, a State or a Territory; and
        • (a) the supplier has held the interest, unit or lease since before 1 July 2000;
        • (b) there were no improvements on the land or premises in question as at 1 July 2000; and
        • (c) there are improvements on the land or premises in question on the day on which the taxable supply takes place, the valuation must be made as if no improvements had been made at the date of the taxable supply; and
      • (7) the valuation must be made by the time specified in clauses 21 to 23 below.
      • …
  • 11 A "professional valuer" is defined in the determination as follows:

    Professional valuer means:

    • (1) a person registered or licensed to carry out real property valuations under a Commonwealth, a State or a Territory law; or
    • (2) a person who carries on a business as a valuer in a State or a Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or
    • (3) a person who is:
      • (a) a member of the Australian Property Institute and accredited as a Certified Practicing Valuer; or
      • (b) a member of the Royal Institution of Chartered Surveyors and accredited as a Chartered Valuation Surveyor; or
      • (c) a member of the Australian Valuers Institute and accredited as a Certified Practicing Valuer.

5. At paragraph [12] of the FC Reasons, the Court made some observations concerning the Margin Scheme in the following terms:

6. Against this acknowledged backdrop of apparent acceptance or agreement of the parties, with perhaps a preference of the Commissioner that he might have a greater ability to dispute valuations that he might regard as incorrect, the principles that emerge from the FC Reasons might be summarised as:

7. As to the facts and arguments, his Honour's conclusions were that:

The facts

8. The evidence before the Tribunal for the first hearing discloses the historical facts concerning acquisition, ownership, subdivision, and sales of the Land, the two audits conducted by the Commissioner, and disputation associated with the assessments that flowed from those audits.

9. By way of overview:

2.7 The Commissioner acknowledges that:

…

2.7.2 the valuation of $17,051 per lot sold will not be applicable to tax periods on or after the tax period ended 31 March 2006, unless the taxpayer holds a supporting valuation of the land that complies with requirements under Division 75 of the GST Act.

…

3.2 The taxpayer acknowledges that:

…

3.2.2 the Commissioner will not be required to accept any valuation per lot sold for tax periods on [or] after the tax period ended 31 March 2006 unless the taxpayer holds a supporting valuation of the land that complies with the requirements under Division 75 of the GST Act…

10. In 2013 the Commissioner again audited the Applicants' BASs for the quarterly periods from 1 October 2009 to 30 June 2012. During that period the Applicants reported sales of 203 lots and applied the margin scheme using a value of $33,000 per lot save for one lot which was given a value of $45,000 for the purposes of calculating the taxable margin.

11. At the end of the audit the Commissioner decided that none of the valuations provided by the Applicants were approved valuations and as a result he applied the consideration method to calculate the applicable taxable margin and imposed penalty at 50% with an uplift of 20%.

12. In his objection decision, the Commissioner reduced the penalty to 25%, removed the uplift and allowed a value of $17,051.36 per lot being consistent with previous decisions concerning the earlier audit.

13. The Commissioner subsequently informed the Applicants that the objection decision and the reasons accompanying it did not reflect his view, and he served a position paper contending that the applicable penalty ought be 50% and that the only approved valuation was that of the expert engaged by the Commissioner, Mr Murray, such that the applicable value per lot for calculating the taxable margin should be approximately $15,000 per allotment.

14. In the earlier hearing the Tribunal agreed with the Commissioner's revised positions as to both the lot value for margin calculation purposes and the penalty uplift, and so found.

The valuation expert evidence

15. Over the course of its ownership of the Land through to the present application the Applicants provided five valuations to the Commissioner. They were:

16. The Commissioner accepts that if the corrected fourth valuation, namely the fifth valuation provided in August 2014 is an approved valuation then the Applicants should be taken to have had that valuation at the applicable time for calculating the GST liabilities for the period 1 October 2009 to 30 June 2012.

17. In the fourth and fifth valuations, Mr Gibson used a discounted cash flow method to generate a residual land value as at 1 July 2000. These valuations were made after a meeting between Mr Gibson and offices of the ATO at Mr Gibson's premises. At that meeting Mr Gibson maintains that he was instructed that the required valuations needed to be made on an as is basis and that that contemplated using actual cash flows that were known up to the date that the valuation opinion was formed. Following that meeting the ATO wrote to Mr Gibson

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concerning the valuations that were required. That correspondence from the ATO did not expressly state that actual cash flows or projected cash flows were to be modelled into the valuation process. Mr Gibson's evidence was that he read that letter through an understanding of what was required of him formed during the discussions at the earlier meeting. In the fourth and fifth valuations, Mr Gibson adopted his interpretation of an as is approach which took into account actual outlays and receipts to the date. He prepared the valuation and projections of future receipts and outgoings, and the then approved lot yield for the subdivision project (namely 600 lots), and then discounted those net cash flows to a 1 July 2000 value.

18. The Commissioner did not accept that any of these valuations satisfied the requirements to be regarded as approved valuations.

19. The Commissioner engaged Mr Murray, to prepare an independent expert report. Mr Murray valuing the Land and to give his opinions concerning questions related to professional standards and how Mr Gibson's fifth valuation aligned with applicable standards.

20. Mr Murray valued the Land at $8,155,000 as at 1 July 2000. He adopted a comparative sales basis. Both parties accept that this is an approved valuation.

21. The respective valuers' expertise is not disputed.

The professional standards expert evidence

22. Three parts of Mr Murray's evidence in the first a Tribunal hearing were reproduced in the FC reasons.

23. First,[10] FC Reasons at [22] and [23]. in response to the following questions about the Applicants' valuation report:

Mr Murray said:

Yes, there are Professional Standards/Guidelines, but no Standards specific to Margin Scheme Valuations. In this regard Valuers have been guided by legal advice . Valuer's are governed by the Australian Property Institute (API) and guided by the Australia and New Zealand Valuation and Property Standards 2007, which have been published by the API and Property Institute of New Zealand (PINZ). Reference to International Standards 3 Section 4.4 Valuation Reporting Sub Section 3.0 Definitions, defines a Valuation Report as:

A document that records the instructions for the assignment, the basis and purpose of the valuation, and the results of the analysis that led to the opinion of value. A Valuation Report may also explain the analytical processes undertaken in carrying out the valuation, and present meaningful information used in the analysis. Valuation Reports can be either oral or written. The type, content and length of a report vary according to the intended user, legal requirements, the property type, and the nature of and complexity of the assignment.

I highlight the word "may" as being critical to the preparation of a report, as it does not state that the Valuer "must" explain or include specific supporting information. The extent of the content is left to the Valuers discretion.

….

It appears, in my opinion, that the Fifth valuation report addresses the requirements pursuant to the Professional Standards definition of Valuation Report. I do state however that in my opinion there are areas which are deficient and require further clarification. (Emphasis added)

24. Second[11] FC Reasons at [25] and [26]. was some of Mr Murray's cross examination evidence:

I will refer to them just as property standards or valuation standards. What I want to ask you is you would agree that there's no one objectively

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appropriate method or technique of valuation?---Yes, I agree.

And you would agree that different valuers might regard different methods as the appropriate method to use?---Certainly, yes.

And each of those valuers might disagree with one another. One might consider (a) is appropriate and not (b); the other might consider (b) is appropriate and not (a). Would you agree with that?---Certainly.

And both of them are not acting contrary to the valuation standards?---That's correct.

…

One of those factors [ concerning various factors that can affect a valuer's choice of valuation method] might be, as I've said, the valuer's own personal skills and abilities?---Certainly.

And one of them might be directions that are received as to be object of valuation?---That's correct, yes.

So that in a case, let's say, [where] valuation is being performed through the Tax Department, instructions received from the Tax Department might cause a valuer to regard one method as appropriate which another, not receiving those instructions, might not regard as appropriate?---That's correct, yes.

And really from the point of view of the standards, they would all be appropriate?---Could well be, yes.

…

You stated in your expert report that in your opinion that there were aspects of the actual report that was prepared that required further clarification?--Yes.

But if we're focusing now on the - not the way it was reported, but the actual valuation, would you say that that was made in a manner that was contrary to the valuation standards?---Not contrary to the standards, no.

25. Third[12] FC Reasons at [27]. was some of Mr Murray's re-examination evidence:

You were asked a question about whether the - you described the fifth valuation was made in accordance with the standards. In your report at page 2 the question was:

Has the report been completed in a manner that is contrary to such professional standards?

And your answer is:

…

It appears, in my opinion, that fifth valuation report addresses the requirements pursuant to the professional standards definition of valuation report. I do state, however, that in my opinion there are areas which are deficient and require further clarification.

So is what you're saying is [in] a matter of form the valuation complied with the standards?---No. I'm basically saying it does not not comply. I think after I reviewed the latter affidavit or further statement from Mr Gibson, one of my major concerns was in relation to the instruction and the comments within the earlier reports. And he further clarifies in relation to this meeting with the ATO representatives and relies upon that as the basis of the assessment. One of the major - as I see it, one of the major statements within a valuation report is the - clearly states out the conclusions and that it is not misleading. My understanding of Mr Gibson's report, it is very definitive on how he has actually done the assessment, and basically he has emphatically stated how he has done it.

26. The apparently conflicting evidence given by Mr Gibson that caused the remittal[13] See para [2] above. was in his cross-examination evidence to the effect that his valuation was, in the Court's words, at odds with the professional standards but was effectively contradicted or withdrawn in re-examination. That cross-examination evidence was:

Can I then take you to 3.2.8, it says the phrase:

"… wherein the parties had each acted knowledgeably and prudently …" presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the property, its actual and potential uses, and the state of the market as of the date of valuation.

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And then prudence, skipping one sentence:

Prudence is assessed by referring to the state of the market at the date of valuation, not with benefit of hindsight at some later date.

Isn't it the case that your as-is model utilises hindsight?---Yes.

So would you say that your as-is model is not consistent with the descriptions of these words from the standards? As you were instructed to do by the ATO - - - ?---Correct.

- - - that that model is not consistent with these standards?---Correct.

27. The at odds description used by the Court needs to be read as not consistent with, as opposed to contrary to.

28. Mr Gibson's re-examination evidence (in relation to another part of the relevant standard) was:

Can you see 6.1.10

…

And it starts with the words, "A subdivision development technique"?---Yes.

…

A subdivision development technique may also be applied to land valuation. This process entails projecting the subdivision of a particular property into a series of lots, developing incomes and expenses associated with the process, and discounting the resulting net incomes into an indication of value.

Would you say that's the discounted cash flow method?---Yes, I would.

Is that the method that you applied?---Yes, it is.

And that requires valuation on an as-is rather than as-was basis?---Yes.

29. Mr Murray's further evidence for the remittal hearing was to a similar effect as that given for the original hearing. For reasons outlined below Mr Murray's evidence is of some significance so some of it is set out below.

30. Mr Murray's further report included:

e) In your opinion, in preparing the Fourth and Fifth Reports, was the approach of Mr Gibson of using the actual sale prices received for the subdivided lots and the actual development and construction costs for the purposes of undertaking a historical market valuation of land as at 1 July 2000 one that was contrary with the Professional Standards?

If so, please explain why.

In my opinion, it appears that Mr. Gibson has misconstrued the instructions and the definition of an 'As Is' approach and the associated appropriate considerations.

On the basis of the preceding and the explanations included within Mr. Gibson's Statement, I do not believe that the presented valuation assessments are representative of valuations of the market value of the land as at July 1, 2000.

It is my view that the methodology does not conform with the definition of market value relating specifically to the relevant or effective date of the valuation, and on the basis of the inputs and assumptions made by Mr. Gibson pursuant to his specific instructions appears to be representative on Non-Market value assessment as detailed within Clause 6.9 "Discount Cash Flow Analysis for Market Valuations and Investment Analyses", section 5.4.

Therefore, I am of the opinion that the valuations do not accord with the definition of Market Value as per the Standards, however were prepared in accordance with specific instructions as outlined within Fourth and Fifth reports.

I acknowledge that I have an overriding duty to provide impartial assistance to the Tribunal. No matters of significance have been withheld from the Tribunal.

31. In the remittal cross examination Mr Murray gave the following evidence:

Now, the valuation - sorry, I should say you would agree from what's on the face of the fourth report that the valuation presented in that report was prepared for the purpose of a margin scheme valuation?---That's correct.

And you would agree that the Professional Standards are silent as to the manner in which valuations prepared for the purposes of the margin scheme valuation are to be made?---That's correct.

Now, the valuation presented in the fourth report applied a discount flow analysis for the purposes of a retrospective market

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valuation, correct?---Yes, there is a discount analysis, yes.

And it was for the purposes of a retrospective valuation, that is it was made in - - -?---Yes. Yes.

And the Professional Standards are silent, I think you've said, and I'm asking if you agree, as to the manner in which discount flow analysis should be applied for the purposes of a retrospective market valuation, is that correct?---That is correct.

And thirdly, the valuation presented in the fourth report used future actual outcomes?---Yes, that is correct, as stated.

And I think you've said, and I'm asking you if you would agree, that the Professional Standards are silent in the manner in which a valuation is using future actual outcomes are to be made?---Yes, there is no statement on it.

And there's also no statement, in other words the Professional Standards are also silent, as to whether valuation is using future actual outcomes may or may not be made?---That's silent, yes.

Now, drawing all of the evidence you've given so far together, you would agree that there's no Professional Standards recognised in Australia which say anything about the manner in which the valuation presented in the fourth report ought to have been made?---No, there is no guidance, except in the general valuation practice . (Emphasis added)

Yes. And there's no guidance in relation to anything specific in the manner in which Mr Gibson undertook his valuation?---No, there's not.

…

And you would agree that it's not an easy task to work out what would be in the minds of people some nine years prior to the time of making a report?---Certainly.

And different valuers might approach that task in different ways?---That is correct.

And have widely varying results?---It does happen, yes.

And the Professional Standards impose no requirements as to how that task is to be undertaken?---It doesn't specifically state, no.

So some valuers, you would agree, might assess that the actual market state and circumstances nine years earlier was such that the hypothetical buyer and seller at that time would not have predicted that future sales would fetch as high a price as they ultimately did?---Yes, that's correct.

And there's no reason to suggest merely for that reason that the valuers have breached the Professional Standards?---That's correct.

…

you and Mr Gibson disagree about what the correct assessment of the value as at June 2000 was, the market value, correct?---That's correct.

And as you've said, it's legitimate for valuers to have disagreements as to market value?---That is correct.

But you agree that both your and Mr Gibson's valuations were not made in a manner contrary to the Australian Professional Standards that bind you both?--- I believe not . (Emphasis added)

…

I suppose what I'm asking you is whether there is a difference between valuation practice, conventional practice, what you regard as appropriate practice for a valuer and practice that is so far beyond the pale that it breaches the standards. Would you agree that there is quite a difference between those two?---I would think so, yes.

32. In the remittal re-examination Mr Murray gave the following evidence:

…. You were asked whether there was anything in the Standards to I guess explain how a retrospective valuation should be applied. If I could take you to page 3 of your second report, the last paragraph, and we could put that up on the screen, just the last paragraph which is highlighted. You say,

Albeit the Standards are not explicit in specifying how the relevant assumptions made in respect of the DCF should be sought. In understanding a retrospective discount value approach with the inputs of time and considerations, it is my opinion that the inputs and assumptions

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should be reflective of the market as at the relevant date, sourced from data that would have been available as at the relevant date.

Do you maintain that opinion?---Yes, I do. That's appropriate valuation methodology .

And I think you also referred to the standard methodology. Is that how you would construe this paragraph?--- It's - it's a standard valuation practice , established in, I believe probably there's two court cases, the Spencer case, and the Closer Settlement case, which both establish the methodology of a hypothetical subdivision or DCF model.

…

… You were asked about the possibility, I think the question was in circumstances of a development which might take nine, 10, or 20 years to develop. And you were asked whether a valuer - or whether a purchaser - a hypothetical purchaser or vendor may accurately predict what the costs and sales were for such a development, and I think your response was "It's a possibility", is that correct?--- That's correct, it's a possibility .

How likely would that possibility be, in your opinion?---Well, in my opinion, and from a valuation perspective, we always looked at the relevant date or the circumstances of sales and costings as at the date of purchase or valuation date.

(Emphasis added)

33. Importantly, Mr Murray did not recant from his earlier evidence that Mr Gibson's valuation was not contrary to applicable standards. And he did this in the face of an invitation to do just that by the Commissioner.

34. In his 29 May 2017 statement Mr Gibson said:

Conference with ATO Representatives, clarifying the meaning of "as is" basis

In paragraph 4 of my Statement, I state that the 2014 Valuation "was prepared for the approval of the ATO as I believed, was as requested by them at a meeting in my office and subsequent letter".

The meeting to which I refer there took places at some time in September 2009. The meeting took place at my office premises in 49 High St Berwick. It was attended by myself, Souhail Mondous (director of Decleah Pty Ltd), and two persons who had introduced themselves as representatives of the Australian Tax Office ( ATO Representatives ). I do not remember the ATO Representatives' names, although they did introduce themselves at the time. I recall that they were males and they said they came from Geelong.

The main purpose of the meeting was to clarify the basis upon which the ATO wanted the valuation of the Land to be carried out, for purposes of determining the GST payable on sales of subdivided blocks. The ATO Representatives went through the previous valuations which had been prepared, and were very clear that the ATO required the valuation to be prepared on a different basis. The ATO required the valuation to be based on the actual price at which subdivided parcels of land had been sold after 1 July 2000, and the actual development costs involved in creating those subdivided blocks, and to discount those into a cash flow. The ATO Representatives were very clear that this was the approach which the ATO required. That is what the whole meeting was about.

The letter to which I refer in paragraph 4 is the letter of Bronwyn Simmonds, Assistant Commissioner, to David Rewell dated 16 October 2009. That letter was received approximately 3 weeks after the conference. I assumed that the ATO Representatives were advising me of the ATO's policy in relation to this issue, and that in writing her letter Ms Simmonds was also aware of that policy. For that reason, I interpreted Ms Simmonds' references to "as is" basis as being a reference to the basis of costs and expenses as at the time the valuation report was made.

As a result of the meeting with the ATO Representatives and Ms Simmonds' subsequent letter, and because the valuations were being prepared for GST purposes, my valuation of the Land provided in mid-November 2009 ( 2009 Valuation ), and the 2014 Valuation were both performed on an "as is" basis, as defined by the ATO Representatives - that is, on the

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basis of costs and expenses as at the time the report was made.

The method used was in any event an appropriate method

In paragraph 7 of my Statement, I state that the Discounted Cash Flow method was the only method that allowed me to provide a valuation on an "as is" basis, in accordance with the instructions of the ATO.

It is also the case that in my view the Discounted Cash Flow method, produced on an "as is" basis, that is, on the basis of the actual sales and development costs after 1 July 2000, is an appropriate method or technique for estimating the value of the Land as at 1 July 2000, and complies with the standards that bind me.

Further, the Discounted Cash Flow method, produced on an "as is" basis, would have been an appropriate method even if the ATO had not instructed that the valuation was to be prepared on an "as is" basis.

35. In a further witness statement prepared after the Court's appeal decision Mr Gibson said:

36. Mr Gibson agreed:

37. As noted above in applying his as is methodology to prepare his discounted cash flow valuation Mr Gibson took actual sales prices for the developed lots to November 2009, the actual development time, the actual number of stages of the subdivision, the actual number of lots and the actual development holding costs, and other actual costs. Mr Gibson then discounted backwards to 1 July to arrive at a value.

38. Notwithstanding the assumption of accurate predictions of costs and revenues at least between 1 July 2000 and the 2009 time when the valuation was undertaken, Mr Gibson discounted the net cash flows to that point and projected net cash flows beyond that point at a rate of 20% because he felt that a real buyer at 2000 would apply a discount rate, never knowing the actual figures.

39. In his remittal hearing evidence Mr Gibson repeated his beliefs as to the ATO's required as is methodology and that belief or understanding was derived from:

"… a meeting here in my office with two representatives of the Australian Tax Office who - and the owner of the property, and we spent some time going back over my reports, and also they - they made it clear to me that they wanted me to use actual sales and actual development costs as they were now analysing the 2006 valuation, and where I had relied on estimates and they wanted me to use actual. And so when the letter of instruction came through talking about the as is, well, then that's where I interpreter as is because those officers kept saying to us, "Use the - I want you to use the as-is information." So I provided the report for their approval on the basis that I interpreted their instructions. And - - -

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Is there anywhere else where you've learned of or come to an understanding of this as-is methodology, the discounted cash-flow analysis, other than this conversation with the ATO employees?---No. No. I thought it was their instructions for me to undertake the valuation, which I did for - and I made it clear that it was - the valuation was for their approval, as it was my understanding from their instructions.

And as a professional valuer, have you ever adopted this approach to valuation at a particular date other than in this case?---No.

40. Mr Gibson's remittal hearing evidence took a new slant not advanced at the time of the first Tribunal hearing to the effect that his rationale for using actual cash flows was that as at 1 July 2000, the hypothetical purchaser of the Land would have projected the cash flows in connection with the Land accurately and that the hindsight information was used to quantify what those accurate projections would have been.

41. There should be some reservations about this new explanation of what Mr Gibson did in 2009 concerning accurate projections that the hypothetical purchaser could be expected to make, when he undertook his valuation work which led to the fifth valuation presently under review.

The parties' arguments

The Commissioner's Submission

42. The Commissioner contends that the fifth valuation is not an approved valuation with the effect that the Applicants do not have an approved valuation for the purposes of Division 75 of the GST Act.

43. The nub of the Commissioner's submission was an attack on Mr Gibson's valuation because it used hindsight information. Having accepted that the question as to whether a valuation has been made in a manner contrary to the Professional Standards is a matter to be determined by expert opinion, the Commissioner continued and submitted that the issue is also to be determined by reference to established legal principles with respect to the determination of "market value". In this regard, unsurprisingly, the definition of Market Value in the June 2008 Standards reflects the established legal definition.

44. The determinations made under s 75-35 of the GST Act set out the requirements for an approved valuation. Each determination has for present purposes the same two mandatory elements. The valuation must:

45. Mr Murray's evidence was that:

46. Mr Gibson used a discounted flow method in preparing the valuation. That methodology has been explained as making speculative projections and discounting them to compensate for risk.

47. Mr Gibson factored in a 20 per cent discount rate in circumstances where there is no risk in the cash flows, since they were perfectly accurate and predicted. Mr Murray's evidence regarding the discount cash flow approach should be considered a Non-Market Value estimate rather than an estimate of Market Value, and is therefore not an approved valuation.

48. A valuation should reflect the actual market state and circumstances at the effective valuation date. The valuation was made in a manner that was contrary to the relevant standards because Mr Gibson's valuation has made use of information that post-dated the 1 July 200 valuation date. As such, the Applicants did not hold an approved valuation when applying the margin scheme to calculate GST.

49.

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Mr Gibson's as is model can only operate by the use of hindsight, and thus is contrary to standards. The method improperly relied on hindsight to impute actual knowledge to buyers and sellers of the facts and circumstances nine years after the valuation date. Mr Gibson stated in evidence that:

I relied on hindsight in order to arrive at a view as to what willing, prudent and knowledgeable buyers and sellers might have predicted as at July 2000, if their foresight was accurate.

50. Mr Gibson's approach did not reflect an interpretation of what a willing buyer or seller, having regard to the knowledge available at the time, may reasonably predict the market might do in the future, but was simply an application of what the market did do some nine years later.

51. The Applicants have failed to adduce evidence to establish that a seller or purchaser would have been aware of or could have predicted all the events from 2000-2009, including a 2002 planning permit for 600 lots, a subdivision into 550 lots, the length of time the development would take, the numerous stages of development (14), and the cost of the development.

52. The Tribunal should conclude that the fifth valuation was made in a manner contrary to the relevant standards and is not an approved valuation for the purpose of Division 75 of the GST Act.

53. The evidence of Mr Murray is that the fifth valuation is not a valuation of the market value of the land as at 1 July 2000. The value reported in the Fifth Valuation was not representative of being within a reasonable range of the Market Value as at 1 July 2000.

54. The relevant case law explaining the definition of Market Value is as follows:

Value is determined by forming an opinion as to what a willing purchaser will pay, and a not unwilling vendor will receive for the property.[14] Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 ; (1999) 199 CLR 413 , [49].

The market for the property is, therefore, assumed to be an efficient market in which buyers and sellers have access to all currently available information that affects the property.[15] Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 ; (1999) 199 CLR 413 , [50].

55. The definition of Market Value in the June 2008 Standards reflects the established legal definition:

Market Value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms'- length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

56. The Fifth Valuation fails at the following two hurdles:

The Applicants' Submission

57. The Applicants contended that the Tribunal should find that at the time Mr Gibson made his 2009 valuation, there were no professional standards recognised in Australia for the making of real property valuations which regulated:

58. Mr Murray's evidence is that there are no standards that govern the use a valuer can make of hindsight in conducting a retrospective valuation for margin scheme purposes. Mr Gibson remained steadfast in his view that a valuation that applied an inappropriate methodology on instructions (given to him by the ATO) would be a valuation of market value, if made with appropriate qualifications. Mr Murray's evidence was that he would make a valuation which used hindsight if he was instructed to do so.

59. If there were no standards applicable to the manner in which Mr Gibson made his valuation, it logically follows that the valuation

ATC 9873

could not have been made in a manner contrary to the relevant standards. If there are relevant standards, the next step is to determine whether Mr Gibson's valuation was made in a manner contrary to those standards.

60. Even if the valuation improperly relies on hindsight, it was not made in a manner contrary to the standards because there are no standards that govern the use a valuer can make of hindsight in conducting a retrospective valuation for margin scheme purposes.

61. In the FC Reasons, Steward J, explained that:

62. Where some valuers may underestimate or overestimate the future cash flows and profits from developing the Land, these views are irrelevant to the question of whether a valuer has breached the relevant professional standards.

63. Mr Gibson used post-valuation data to confirm the likely foresight of willing, prudent and knowledgeable buyers and sellers, on the assumption that they would have based their assessment of the value of the Land on accurate predictions of the profit that could be derived from its future development. The guiding principle that Mr Gibson was permitted to refer to actual circumstances (such as actual sales and actual cost) not to prove a hindsight but to confirm a foresight, comes from Housing Commissioner (NSW) v Falconer[19] Housing Commission of New South Wales v Falconer [1981] 1 NSWLR 547 , 558 . per Hope JA:

… there are many decisions, including decisions of the High Court, in which it has been held that evidence of future events is admissible not to prove a hindsight, but to confirm a foresight: see for example,
Trustees Executors and Agency Co Ltd v Commissioner of Taxes (Victoria) (1941) 65 CLR 33; Minister for
Army v Parbury Henty & Co Pty Ltd (1945) 70 CLR 459, at 514, 515;
McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, at 16; Australian Apple and Pear Marketing
Board v Tonking (1942) 66 CLR 77, at 108.

64. The expert evidence before the Tribunal is that the valuation was made in a manner not contrary to the relevant standards, and it complied with MSV 2005/3[20] A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3. and MSV 2009/1.[21] A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1. As such, the valuation having satisfied the requirements of MSC 2005/3 and MSV 2009/1, is an approved valuation.

Consideration

Valuation variances

65. Attention ought not be distracted by what might be seen to be vast differences between the acquisition consideration for the Land as principally reflected in a transfer of land instrument, the Commissioner's expert's valuation, and the Applicants' expert's valuation. Even the Commissioner's expert's valuation was approximately 10 times the acquisition consideration, and the Applicants' expert's valuation approximately 2.5 times the Commissioner's expert's valuation. As was noted by Justices Steward and Middleton in the FC Reasons and the Brady King[22] Brady King Pty v F. C of T. [2008] FCA 1918 ; 220 FCR 284 . decision respectively, the relevant enquiry is to whether there has been an approved valuation rather than whether the correct market value has been identified. And as Steward J noted above, valuers can have differences in opinion and those differences can be significant. As noted above, Mr Murray also gave evidence that different valuers can adopt different approaches and arrive at conclusions that are at times significantly different.

Non market valuation

66. Much has been made by the Commissioner of the concept of a non-market valuation as provided for in the professional standards. The Commissioner put some reliance on the proposition that what Mr Gibson did was a non-market valuation and therefore not a market value valuation as required by the Commissioner's determinations.

67.

ATC 9874

The concept of a non-market valuation is a limited compass concept within the relevant professional standards, and the limited compass does not specifically include the critical features of the present matter. Focusing on this concept under the professional standards only serves to confuse the requisite outcome.

Respective weight of expert's evidence

68. Mr Gibson's evidence was evidence of a professional whose own work and perceptions of what took place at a meeting with ATO staff was under scrutiny for the third time. It is difficult to accept that it could be fully objective in all respects even in circumstances where, as the Tribunal accepts, he has a genuinely held belief that it is.

69. Mr Murray was a professional in the field with no vested interest in the outcome, and has resisted saying precisely what the Commissioner can be presumed to have preferred him to say.

70. Mr Murray's evidence is of more weight in the present circumstances and is to be preferred.

The origins of the as is approach to valuation

71. Mr Gibson explained that he undertook his valuation on an as is basis following a meeting with ATO officials at his premises. He was steadfast in his evidence that he was told by at least two ATO officials that he was required to adopt actual cash flows and other information concerning the property that were known as at the time of his valuation and projections of future cashflows and attributes. Mr Gibson's evidence was also that that was the only time he had used this concept of an as is valuation using known cashflows and attributes at a time after the relevant date of the valuation, and he only did it because of his understanding as to the Commissioner's requirements.

72. The Commissioner does not accept that Mr Gibson was so instructed or advised, and he points to a letter after the meeting which does not suggest that actual cashflows and attributes known at the time of the valuation are to be used. The Commissioner has not produced any file notes of discussions at the meeting to which Mr Gibson refers.

73. In circumstances where Mr Gibson's evidence is consistent, this is the only time that he has undertaken a valuation adopting this approach, and where the Commissioner's files produced to the Tribunal do not include notes of the discussions at the relevant meeting, the Tribunal accepts and concludes that:

74. In concluding that Mr Gibson had the honestly held beliefs and understandings as noted the Tribunal is not suggesting any kind of
Jones v. Dunkel[23] (1959) 101 CLR 298 inference ought be or is being drawn. All the Tribunal is doing is accepting that Mr Gibson had an honestly held belief and understanding as described and, given that he had only undertaken a valuation in that way once, that there must have been something somewhat unusual that caused that to happen.

Was Mr Gibson's valuation an approved valuation?

75. The Commissioner's submissions constitute a robust attack on the quality of the Applicants' expert's valuation, particularly its use of hindsight information, whether that use was as a surrogate for accurate projections made as at the date of valuation or merely the result of the Applicants' expert's understanding of the communications from the Commissioner's staff. That attack is openly a criticism of the valuation arrived at so as to reach a conclusion that the valuation must have been contrary to applicable professional standards.

76. Whether these submissions were made to the Court is not clear. If they were, two telling observations are called for: first, Steward J did not give any indication of the strength and stridence with which they were made, and second, the conclusion reached by his Honour at paragraph 12(9) of the FC Reasons, is a complete rejection of them. If these arguments weren't raised before the Court, and

ATC 9875

they are raised now by way of response to his Honour's finding at paragraph 12(9) of the FC Reasons, then the Tribunal is not the place to deal with dissatisfaction toward his Honour's conclusion that whether a valuation was contrary to professional standards is a matter for professional opinion. If the Commissioner is dissatisfied with that aspect of the FC Reasons, the Tribunal is not able to entertain that dissatisfaction.

77. To the extent that the attack on the valuation is to demonstrate that it is fanciful or absurd, so as to come within paragraph 12(5) of his Honour's reasons then that proposition calls for reflection. What Mr Gibson did was take cash flows that were actually enjoyed or sustained and discounted them so as to reach a value at 1 July 2000 using a discount rate that recognised both time value of money and the risks associated with achieving those cash flows. That approach to valuation is plainly not merely the present values of actual cash flows which are all known. It is much more than that. It is one that recognises the risk of the cash flows adopted not being received or sustained in a rather conventional way - by discounting them at a rate materially above the rate required to reflect the present value of future money.

78. Properly considered Mr Gibson's valuation represents him turning his mind to the valuation that he understood was required of him, in a setting or context where the requisite standard is easy to achieve, and a setting where considerable variability between relevant opinions can be tolerated.

79. Considered through the lens of the evidence led, the Commissioner's submissions are an attack on Mr Gibson's departures from what might be regarded as principles, practices or methodology customarily used and accepted in determining market value of assets, as opposed to professional standards. Practices of professionals might at times have significant overlap with professional standards, but they are not necessarily the same thing. It might be accepted that what Mr Gibson did was not consistent with generally accepted valuation practices in determining market value, but that is not to say that he has done something that is contrary to professional standards. Behaviours of a professional in the context of relevant professional standards might sit on a spectrum where at one end there is compliance and consistency with professional standards and the other there are behaviours which are contrary to professional standards. And in between there might be behaviours described as not consistent with professional standards or not in observance of or compliance with professional standards, but for some of those behaviours it might not be possible to say that that they are contrary to professional standards. Here the relevant experts consistently say the professional standards are silent concerning the factors to take into account in margin scheme and discounted cash flow styled valuations. Where professional standards are silent on a matter, and the question for determination is whether the behaviour was contrary to professional standards, it might be a difficult task to establish that something that has been done was in fact contrary to professional standards. That is the case here. Justice Steward's observation that the relevant standard here is vague, making compliance with it an easier task, cannot be ignored. Added to that is the consistent evidence of Mr Murray that what Mr Gibson did was not contrary to professional standards. It can be accepted that Mr Murray's evidence was that what Mr Gibson did was not consistent with customary professional practice, and might not be consistent with professional standards, but he was steadfast in his conclusion that Mr Gibson's work was not contrary to those standards.

80. It ought not be forgotten that the Commissioner's expert, Mr Murray, was very clear in his evidence, notwithstanding the Commissioner's attempts to have him say otherwise, that Mr Gibson's valuation was not contrary to professional standards. His evidence was that the problems involved methodology and departures from usual practices. One example of Mr Murray's refusal to concede that Mr Gibson had acted contrary to Professional Standards was identified by his Honour noted above. Another example was reflected in his 6 August 2019 opinion extracted above.

81. Given the preference for Mr Murray's evidence and the command from the Court that whether something done is contrary to professional standards is a matter for professional opinion, without the gloss urged by the Commissioner, the necessary

ATC 9876

conclusion must be that Mr Gibson's valuation was not contrary to professional standards and, notwithstanding the disparity in numerical value of the valuation, needs to be accepted.

82. The conclusion concerning the valuation for the GST margin requires the objection decision to be set aside and GST liability calculated by reference to the approved valuation amount of $22m.

83. That also requires the objection decision concerning penalties to be set aside and in substitution therefore there be no penalty.

Alternative conclusion

84. In the event that the conclusion concerning valuation is wrong, then GST margin calculation and penalty issues arise.

85. As to GST margin calculation, the Commissioner contends that the appropriate valuation is the Commissioner's valuation of $8,150,000 with GST calculated by reference to that amount rather than the amount adopted to calculate the GST margin in the objection decision.

86. The Applicants contend that in these circumstances the objection decision ought be merely confirmed with no alteration of the calculation of GST liability.

87. While the Tribunal may have the capacity to increase a GST liability from that in an objection decision by adopting different values to calculate the GST margin, the Tribunal is not fully aware of all of the circumstances of the dealings concerning the Land between the ATO and the Applicants and in those circumstances takes the view that the appropriate decision would be to recognise that the taxpayer has failed to show that the assessments are excessive and that the objection decision should be affirmed.

88. In relation to penalty the Commissioner submits, and the Court noted that the submission had some force, that the penalty should be increased to 50% rather than remain at the objection decision level of 25%.

89. The Applicants contend that the appropriate penalty is 25% as per the objection decision simply on the basis that the Applicants have not proved that it is excessive, and that the objection decision ought be affirmed. Alternatively, the Applicants contend that the fact of reliance on the meeting with the officers of the ATO in formulating the valuation opinion and the basis upon which it was to be formulated, calls for a penalty set by reference to failure to take reasonable care, namely 25%.

90. Again, in circumstances where the Tribunal is not fully apprised of all of the dealings between the Commissioner and the Applicants concerning the Land the appropriate course to follow would be simply to affirm the objection decision and leave the penalty where it stands.

Footnotes

[1] Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v Commissioner of Taxation [2018] FCA 717 ; [2018] FCA 929 .
[2] Within the meaning of s 75-35 of the GST Act.
[3] The Victorian land described in Certificate of Title Volume 7869, Folio 067.
[4] Division 75 of the GST Act.
[5] A New Tax System (Goods and Services Tax) Act 1999 (Cth).
[6] [2018] FCA 929 at [6].
[7] Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v Commissioner of Taxation [2018] FCA 717 .
[8] Business Activity Statements.
[9] Australian Taxation Office
[10] FC Reasons at [22] and [23].
[11] FC Reasons at [25] and [26].
[12] FC Reasons at [27].
[13] See para [2] above.
[14] Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 ; (1999) 199 CLR 413 , [49].
[15] Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 ; (1999) 199 CLR 413 , [50].
[16] FC Reasons [12](5).
[17] FC Reasons [12](5).
[18] FC Reasons [12](7).
[19] Housing Commission of New South Wales v Falconer [1981] 1 NSWLR 547 , 558 .
[20] A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2005/3.
[21] A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1.
[22] Brady King Pty v F. C of T. [2008] FCA 1918 ; 220 FCR 284 .
[23] (1959) 101 CLR 298

 

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