What is Market Value?
The case of Spencer v The Commonwealth of Australia (1907) is the origin of the modern meaning of market value, which was defined as: The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein each party had acted knowledgeably, prudently and without compulsion.
More recently the Australian Property Institute has adopted the International Valuation Standards Council definition of market value, which is similar to the aforementioned definition but is defined as follows:
The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
Property valuations around the world used to be based on different definitions but the global property valuation profession has come together in recent years to formulate a standard set of definitions. The most frequently used definition of value is market value.
Market value is to be assessed at the ‘Highest and Best Use’ of the asset as recognised in the market. The ‘Highest and Best Use’ is defined as “the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued.”
An example of the above is the valuation of a 2 Bedroom dwelling situated upon 10 Hectares of developable land within an established residential locality. The ‘Highest and Best Use’ of the site is likely to be a residential development site ie. If offered to the market the likely purchaser would be a developer as opposed to an owner occupier or investor seeking a two bedroom dwelling. The property would be valued having due regard to comparable Development Sites and would not be compared to two bedroom dwellings.
Some common reasons for market valuations defined by the Australian Taxation Office are are:
- for individuals – transfers of real estate or shares between related parties, such as husband and wife, or family members
- for employees – non-cash benefit transactions, such as gifts, or other benefits, such as car parking
- for small businesses – transfers of assets to related parties, passing the asset threshold tests for the small business capital gains tax concession
- for property developers – the GST margin scheme
- for businesses – consolidation events
- for all taxpayers – many anti-avoidance provisions.