Market value: what it means and how it is worked out

The tax office describes market value as an estimate of what an asset would bring on the open market at a given moment. Behind the figure sit two ideas: the asset's most valuable use, which may differ from how it is used today, and the sum a willing buyer and a willing seller would agree on at arm's length. The office notes that the definition can vary with the part of tax law and the type of asset involved.

Taxpayers may need a market valuation for a range of purposes, according to the tax office. These include dealings between related parties, such as transfers of property or shares between family members, and the point at which a home starts to be used to earn rent or run a business. People who get shares or options through an employee share scheme are another case, as are small businesses checking asset thresholds for capital gains tax concessions, developers working under the GST margin scheme, and businesses that consolidate for income tax purposes.

A market valuation has to be objective and backed by suitable evidence, the tax office says. It notes that work by professional valuers carries more weight than figures from someone who is not a professional valuer. Reports are expected to set out the purpose and scope of the valuation, describe the asset, give the date the valuation was made and, where relevant, the date of inspection, note whether the assessment looks back to an earlier date, explain the basis of the figure, and state the value itself.

The office also sets out what it expects of the person engaging a valuer. Its guidance asks that the instructions cover what the valuation is for and how far it reaches, recognise that the valuer is independent in drawing conclusions and writing the report, and accept that a valuer may decline to give an opinion if the information needed is not supplied. The office expects the person to grant access to premises and records, to give help in completing the report, and to agree a fee that does not depend on what the report concludes. Such instructions are usually recorded in a letter of engagement or a written request. The office says that a person who engages and properly instructs a professional valuer will generally not face penalties if that valuation later proves deficient.

In car insurance the phrase is a recognised insurance industry term. Canstar, a comparison service, explains market value as what a car would be worth on the open market when a claim is made, a figure the insurer works out. The insurer weighs the car's condition and age, its make and model, the kilometres it has travelled, and its service and accident history. The guide says the trade-in value is a different matter, and so is the amount one particular buyer might pay and the cost of swapping the car for a brand new one.

Agreed value is the other option. Canstar describes it as a fixed sum that a driver and an insurer settle on when a policy is taken out or renewed, and that sum sets the payout if the car is written off. Premiums for agreed value are generally higher, the guide says, because the agreed figure is usually more than what the car would fetch on the open market. It notes that agreed value can give certainty about the compensation paid if a car is stolen or written off, which may matter where money is still owed on the car.

The guide also points to things to consider on each side. With market value, it says, there is less certainty about the payout and no say for the owner in the amount the car is insured for. It adds that a driver who disputes the amount an insurer assigns can raise the matter with the insurer, and that a dispute may go on to the Australian Financial Complaints Authority. Of the levels of car insurance available, agreed value cover is typically offered only with comprehensive policies. On choosing between the two, Canstar says there is no single right answer and that the decision comes down to weighing the benefits and the drawbacks of each.