Dangers of retrospective valuations flagged amid CGT changes

However, Auctioneers and Valuers Association of Australia (AVAA) chief executive Troy Williams said retrospective valuations could increase the risk when they are dealing with the ATO, as valuers may be asked to establish what an asset was worth at an earlier date, even though it has since been sold, restored, damaged, altered or separated from a collection.

These asset classes could include property, fine art and antiques, jewellery, collectables, rare coins, stamps, manuscripts, memorabilia, boats, and other unusual or high-value personal assets.

Many of these assets could require physical inspection, specialist research, and thorough analysis, and rare assets may require more time, especially where records are incomplete and reliable comparable sales are limited.

He pointed out, for example, that photographs could have deteriorated in quality, ownership records may be incomplete, and historical market evidence may be difficult to locate. Furthermore, in highly specialised asset classes, there may be no directly comparable sale for use in a valuation report.

“Retrospective valuation becomes harder with every passing month, missing photograph, lost document, and fading record or degradation of the asset, Williams said.

The benefits of contemporaneous valuations

“The strongest valuation is usually prepared while the asset can still be inspected and the evidence remains available,” he said.

Speaking to Accountants Daily, Williams said the difficulty with retrospective valuations is that the valuer would try to reconstruct circumstances that occurred years earlier, which means records may be incomplete, the asset’s condition may be uncertain, and suitable sales evidence may be difficult to verify.

“Subsequent events may also affect the assessment. Any retrospective valuation therefore needs strong evidence, transparent reasoning and appropriate qualifications,” he said.

For illiquid assets, Williams suggested that contemporaneous valuations are typically more reliable because the valuer can inspect the asset and assess the conditions, characteristics, provenance, use, and relevant market circumstances at the applicable valuation date. This also allows valuers to identify, collect, and preserve relevant market evidence while it remains available.

However, it is more difficult to establish these factors retrospectively, particularly if the asset has been altered, damaged, restored, divided, relocated, or changed in any other way, he said.

What robust valuations look like

The AVAA has recommended that taxpayers engage a certified valuer with demonstrated experience in the relevant asset class and obtain a comprehensive, professionally prepared valuation report.

If they engage an AVAA certified valuer, reports prepared by them must comply with the AVAA Professional Standard 6 – Minimum Valuation Report Requirements. This requires reports to identify the client, purpose, intended user, asset, relevant dates and basis of valuation. Reports must also clearly present the valuation conclusion and disclose important assumptions, interests, inspection arrangements, and supporting professional information.

“It will also make sure that if, for whatever reason, the ATO queries it, there’s sufficient information to ensure that that number is robust,” Williams said.

Red flags to watch for

Williams urged valuers to stay within their areas of specialist expertise and avoid providing tax advice, which he said belongs with the client’s accountant or tax adviser. He also said valuers should be cautious if a client seeks a particular figure or outcome.

“A professional valuation must remain independent, evidence-based and capable of withstanding external scrutiny,” Williams said. 

“Also, so-called valuers are preparing reports of only a couple of pages in length, a major red flag which suggests that the valuer really doesn’t know what they are doing.”

The accountant’s role

The ATO’s market valuation of assets guide states that a market valuation report must include the value, purpose, and scope of the valuation; details of the asset being valued; records explaining the basis of the market value; and whether it is a retrospective valuation assessment.

It stipulates that a valuation must be objective with appropriate evidence, and said professional valuers are more credible than valuations provided by someone who is not a professional valuer.

Accountants could play a critical role by identifying the need for a valuation early and seeking specialist advice before the relevant transaction or event occurs, Williams said.

“They should recognise that different classes of assets require different expertise and that the ATO’s guidance can be very precise. Clear instructions between the accountant, client and the certified valuer help ensure the right asset, valuation date, purpose and basis of value are addressed.”