A recent dispute in respect of capital gains tax required as a first step the apportionment of value between land and improvements. A property had been acquired prior to the establishment of capital gains tax in Australia and additional improvements had been undertaken after this date. The property was then sold. No additional land was acquired in the meantime.

The tax authority maintained that the building extension and improvements constituted a post capital gains tax asset and was therefore liable for capital gains tax. The authority calculated the capital gain by valuing the property as at the date of sale in its configuration respectively at the date of purchase ('before") and the date of sale ("after"). It maintained that the difference between the values was solely attributable to the additional improvements.

Research and analysis was undertaken to arrive at the correct apportionment between the land and the buildings. A review of the literature confirmed that all gains flow through to the land as a surplus. A two step residual approach was used and several expected findings were confirmed. First, the before and after configurations generate before and after residual values. Second, the difference between the before and after residual values is the land value attributable to the additional improvements. Third, the apportionment process must take into account indirect development costs such as interest as well as an allowance for developer's profit and risk. Fourth, whatever the allowances for the indirect costs, profit and the before and after property values, the residual land value is always a variable and the value of the improvements is always a constant.