Commissioner for Act Revenue v S. Pelle Pty Ltd (Administrative Review)

Case •

[2011] ACAT 54

•

17 August 2011

ACT CIVIL & ADMINISTRATIVE TRIBUNAL

COMMISSIONER FOR ACT REVENUE V S. PELLE PTY LTD  (Administrative Review) [2011] ACAT 54

AA 42 & 43 of 2010

Catchwords:             ADMINISTRATIVE REVIEW – valuation of unimproved value of land – impact of Global Financial Crisis (GFC) on the value of sites – is deduction of site value by 52% for GFC,  allowed by the Tribunal at first instance appropriate? -  the GFC had insignificant effect in Canberra - Figures used by valuers in relation to comparable sales of sites

List of legislation:      Taxation Administration Act 1999, s 104

Tribunal:                  Mr W G Stefaniak, Appeal President
  Mr G Trickett, Member

Date of Orders:  17 August 2011          
Date of Reasons for Decision:         17 August 2011

AUSTRALIAN CAPITAL TERRITORY            )
CIVIL & ADMINISTRATIVE TRIBUNAL       )          AA 42 & 43 of 2010

BETWEEN:

COMMISSIONER FOR ACT REVENUE

Appellant

AND:

S. PELLE PTY LTD

Respondent

TRIBUNAL:            Mr W G Stefaniak, Appeal President
  Mr G Trickett, Member

DATE:  17 August 2011

ORDER

  1. The appeal is allowed.

  2. The orders of the Tribunal at first instance dated 19 November 2010 are set aside.

  3. The following orders are made:

    (1)

    The unimproved value of Block 2, Section 3, Gungahlin, as at the


    1st of January 2009 is $1,513,000 and the GFA is $1531 per square metre;

    (2)

    The unimproved   value of Block 3, Section 3, Gungahlin, as at the


    1st of January 2009 is $1,513,000 and the GFA is $1531 per square metre.

………………………………..

Mr W G Stefaniak
Appeal President

REASONS FOR DECISION

  1. In this matter, the Commissioner for ACT Revenue is appealing against the decision made by the ACT Civil and Administrative Tribunal on the 19th of November 2010.
  1. On the 19th of November 2010, Senior Member Allan O’Neil and Member Harold Hird made the following order:

(1)

The decision under review is set aside and substituted with the decision that the unimproved value of Block 2, Section 3, Gungahlin, as at


1 January 2009 is $889, 200. 

(2)

The decision under review is set aside and substituted with the decision that the unimproved value of Block 3, Section 3, Gungahlin as at


1 January 2009 is $889,200.

  1. The respondent in the appeal, S Pelle Pty Ltd, applied to the ACAT on the 23rd of November 2009 for a review of 2 decisions made on the 26th of October 2009 by the Commissioner for the ACT Revenue pursuant to section 104 of the Taxation Administration Act 1999, as amended.  The decisions were to affirm the valuations dated 15th of July 2009 determining that the unimproved value of each of the 2 parcels of land subject to this appeal, namely, Blocks 2 and 3, Section 3, Gungahlin, was $1,513,000. For the purpose of these reviews, there is no significant difference between the 2 matters and the parties agreed that they should be considered together.  The appeals relate to these 2 blocks (hereafter referred to as the subject sites), both of which were subject to the valuation in the Tribunal at first instance.
  1. The Tribunal at first instance looked at a number of sites that might assist it in terms of assessing a rate value.  The rate value per square metre for the relevant subject sites was, for each block $1531/m2 GFA.  The IPG site over the road had a value of $1589/m2 as assessed by that Tribunal.  A site at Bonner, which was used as a comparison, had a value of $1356 /m2.  Block 1, Section 88 (75, Gozzard Street), Gungahlin, just up the road, and further away from the prime area of commercial real estate in Gungahlin was valued at $355/m2 and Block 5, Section 88, further along, away from the Town Centre, along Gozzard Street, was valued at $322/m2.
  1. The Tribunal took into account in relation to the subject sites a 52% reduction as a result of the Global Financial Crisis (GFC).  It did that as at the relevant date of valuation which was the 1st of January 2009 and the prescribed date was 1 July 2009 (see paragraph 6 of the decision at first instance).  The subject sites were valued as at the 1st of January 2009.  Other sales are as listed in this judgment. The closest comparison was the IPG site sold in March 2009 using the same valuation method and the same relevant valuation dates. 
  1. The Tribunal at first instance, deducting 52% for the GFC on the subject sites, arrived at a figure of $735/m2.  The strongest influence in setting a GFA rate was the uncontested valuation of the subject sites on 1 January 2009 adjusted to account for the GFC. (see, paragraphs 22 to 26 ).
  1. The IPG site sale in March strongly influenced the Tribunal to place a higher GFA rate on the subject sites as did the sale of the Bonner site.  By contrast, the sale of 75 Gozzard Street and nearby Block 5 of Section 88, Gungahlin, placed downward pressure on the GFA rate
  1. The Tribunal in paragraph [83] of its judgment went on to say, “Having regard to those matters the Tribunal considers the GFA rate of $900/m2 for the subject land on the relevant date is appropriate.  This results in an unimproved value of the subject land of $889, 200 on the relevant date. The Tribunal finds that the unimproved value of Blocks 2, Section 3, Gungahlin, as at
    1 January 2009 is $889,200 and that the unimproved value of Block 3, Section 3, Gungahlin, as at 1 January 2009 is $889,200.” 
  1. The Commissioner for ACT Revenue was not happy with the decision and appealed it.  The matter went to the Appeal Division of the ACAT.  It was unable to be resolved at conference and went to a hearing where further evidence was put before this Tribunal.  Expert opinion was given by
    Mr McInerney and Mr Cummins, consultant valuers for the applicant and the respondent respectively. 

Valuation method  

  1. Mr McInerney and Mr Cummins, the consultant valuers for the applicant and respondent respectively, assessed the Unimproved Value using the comparable sales method. From their methods of direct comparison of comparable sales evidence, adjusted for comparison of the two subject sites, they agreed that:

·   

The present use of the two adjoining sites was the highest and best use consistent with the purpose clause in the Crown Lease at the relevant date of


1 January 2009.

·   On 1 January 2009 there was erected on the two subject sites stand alone single storey buildings one used as an office and the other for retail purposes.

·   The lease is the same for each site and allows a maximum development of two storeys with a GFA of 988smq.

·   The ACT Revenue Office Valuation Notice determined the value of the subject sites to be $1,513,000 each at 1 January 2009, the relevant date.

  1. The valuers disagreed on the valuation of the unimproved value of the subject sites at the relevant date. Mr McInerney, for the applicant, confirmed that the unimproved value was $1,513,000 and contends that the statutory assessment of $1,467,000 should be affirmed. Mr Cummins determined that the unimproved value should not be greater than $600,000, though appears to have later amended this to $500,000.

Comparable sales used by the valuers.

  1. Mr McInerney originally identified nine sites as comparable sales and Mr Cummins originally identified eight sites as comparable sales:  one site, Block 1 Sect 88 Gungahlin (75 Gozzard Street) was the only common comparable sale.
  1. The Tribunal at first instance concluded that five sites were comparable.  They are: 

IPG; Bonner; Block 1 Sect 88 (75 Gozzard St); Block 5 Sect 88 Gungahlin, and the subject sites. All these sites are in the town centre of Gungahlin except for the Bonner site. The KFC site, Bl 2 Sect 8 Gungahlin was not included by the Tribunal due to its sale process.

Block 2 Section 8 Gungahlin Site (IPG Site)

  1. We note that the subject sites and the IPG site are located at the western end of Ernest Cavanagh Street, diagonally opposite each other, approximately two street blocks from the ‘Big W’ as well as the shopping centres in Hibberson Street which is the main street in the Gungahlin Town Centre, and that both sites are located in the same CZ6 Leisure and Accommodation Zone as set out in the Territory Plan. A CZ6 zone provides for development of “indoor entertainment and recreation facilities, clubs, drink establishments, restaurants and commercial accommodation,  Limited shops, residential, and non-retail commercial and community uses may also be included”. Commercial Zones - Overview – ACT Planning & Land Authority.
  1. Mr McInerney identified the March 2009 sale of the IPG site as a comparable sale. Though Mr Cummins gave evidence that the sale was done without proper marketing, the GFA was smaller and there was a possible issue with the $500/week rent, we are inclined to accept the sale of this site as one of the two most comparable to the subject sites; it is the closest site with respect to location and time of sale on which to base adjusted values for comparison (if the KFC site is excluded). We agree with the Tribunal’s finding of the GFA rate of $1,589/m2.

Block 1 Section 12 Bonner Site

  1. We note that this site is located in a CZ4 Local Centre Zone as set out in the Territory Plan. A CZ4 zone provides for development “of local shops, non-retail commercial and community uses, service stations, and restaurants to service a local community. Residential uses may also be permitted”. Commercial Zones - Overview – ACT Planning & Land Authority.
  1. We do not believe that the Bonner sale price can be adequately adjusted without there being a margin of error that is too great. The site, sold in March 2010, is in an inferior location to the subject sites, located in a residential suburb rather than a town centre as are the subject sites. The subject sites are also able to be used for the purposes of a restaurant, shop, financial establishment, business agency, health facility and/or public agency, whereas the Bonner site is proposed to be used as a small neighbourhood shopping centre with an anticipated GFA of 2,000 square metre most likely including a Woolworths supermarket.

Section 88 sites

  1. We note that the following two sites in Section 88 Gungahlin are located to the north-west of the Gungahlin Town Centre proper, approximately two and a half to three street blocks from the subject sites.  Both sites are located in the same CZ2 Business Zone. A CZ2 zone provides for “more fringe commercial activities, primarily non-retail commercial uses, commercial accommodation, and some restaurants and indoor entertainment and recreation facilities. Residential and community uses are also permissible, subject to design and siting, provided they are not incompatible with primary uses”. Commercial Zones - Overview – ACT Planning & Land Authority.

Block 1 Section 88 (75 Gozzard Street) Gungahlin Site

  1. The 75 Gozzard Street site was a market auction sale of an unimproved site. The sale date was June 2008 and it was sold at the same time as Blocks 2, 3 and 4 which are all adjoining blocks. We are inclined to accept the sale of this site as one of the two most comparable to the subject sites; it is the closest unimproved land sale with respect to location and time of sale on which to base adjusted values for comparison. We note that the 75 Gozzard Street site is an inferior site to the subject sites due to its location outside of the town centre proper and adjacent to residential development, its inferior lease purpose clause, and that it was sold at the same time as the three adjoining blocks which would probably have had the affect of lessening the market competition as opposed to a one-off sale. The GFA rate at the time of the June 2008 sale was $739/m2. We disagree with the finding of the Tribunal at first instance that this should be adjusted down 52% due to the GFC and that it was not adjusted up appropriately for the inferior location, its inferior lease purpose clause and the fact it was sold at the same time as the three adjoining blocks. The Submissions of Appellant, at paragraph. 43, states that Mr McInerney considered that an upwards adjustment of 100% was necessary while Mr Cummins is stated to have required an upwards adjustment of 30% to 40%.
  1. An adjustment upwards would need to be made for these factors and we believe a +70% adjustment is reasonable. This would result in a GFA rate of $739 + $517.30 i.e. $1,256/m2.  This does concern us and we will further address this site later.

Block 5 Section 88 Gungahlin Site

  1. We do not believe that the Block 5 Section 88 sale price can be adequately adjusted without there being a margin of error that is too great, because the site, sold in June 2009, is at least 50% larger than the subject sites, it is in an inferior location to the subject sites, more inferior than Block 1 Section 88, and without any developments on the neighbouring blocks, unlike the subject sites. It also has an inferior lease purpose clause and development on the block is required to have a GFA of at least 1,400sqm.
  1. The finding of the Tribunal at first instance of the GFA rate of $1,589/m2 for the IPG site, sold March 2009, should have suggested that the lower rates for some of the sites that were arrived at in their conclusion made those sales of those sites not properly comparable to the subject sites. We are of the opinion that the IPG site is the most comparable of all the sites, while 75 Gozzard Street is the most comparable with respect to the sites assessed with sales of unimproved land.


GFC

  1. The financial quarter at the end of 2008 (Oct Nov Dec) showed negative growth. The following quarter (at the time of the sale) did not show negative growth, therefore, the Australian economy was technically not considered to be in a recession. For the tribunal to come to a conclusion that a 52% reduction in the sale values of all pre 2009 sales is correct based on the sale of Block 5 compared to Blocks 1, 2, 3 and 4 of section 88 without a full analysis of their different leases, block sizes and location was probably not well founded and given the lack of evidence that was led with respect to the economy at the time we suggest was not warranted.

Averaging

  1. Taking the $/m2 for the sites as set out by the Tribunal at first instance and excluding the subject sites which should not have been included, the total is $3,622, giving an average of $905.50. The tribunal found that the GFA rate should be $900/m2. It is not unreasonable to deduce that averaging was the process followed. If so, we feel that averaging is not a valid means of arriving at a valuation.
  1. Apart from the 5 sites which both parties accepted as being relevant for consideration and dealt with as discussed above, a number of other sites were covered and canvassed in a more informal way before the Appeal Tribunal.  These are sites that reflected various valuations for not dissimilar properties, but in other parts of Canberra, which was helpful for a general view but certainly did not assist this Tribunal in terms of making any necessary adjustments to the sites in Gungahlin that we dealt with.  The sites dealt with in the rest of Canberra are helpful, however, as indeed were other sites canvassed in Gungahlin, to show what little, if any, effect the GFC  had.
  1. It would appear there was some minimal movement in parts of Canberra for office based commercial properties, possibly as a result of the GFC.  It would appear to this Tribunal that the most relevant site in terms of the GFC and the effect of the GFC, was the IPG site, as that property was sold some 2 months after 1 January 2009, the date of determination of  the subject sites which are the basis of this appeal.
  1. This Tribunal rejects the decision and reasoning of the Tribunal at first instance in relation to reducing the value of the subject sites by 52% as a result of the GFC. 
  1. Mr McInerney, in his evidence, and the Tribunal found him to be a very experienced valuer, felt that the GFC had little if any effect in Canberra, and indeed it would seem that prices in Canberra, both commercial and residential, increased during the GFC.  Clearly other factors were at play in the ACT economy.  Mr Cummins, also an experienced valuer, indicated that he felt the GFC would have had a perhaps 15% to 20% detrimental effect in relation to property prices.   
  1. Accordingly, this Tribunal in assessing all the various properties put forward in relation to the GFC and paying particular attention to the most relevant properties, mainly the sale of the IPG site, came to the conclusion that the GFC had insignificant effect in terms of these properties.  If this Tribunal is wrong in this, it would certainly agree that in a worst case scenario Mr Cummins’ evidence of 15% to 20% effect for a small period of time may be within the ball park, but we do not think that is so when one looks at all the other sales evidence during this period before the Tribunal.  We will refer to this further later in this decision. 
  1. The Appeal Tribunal already looked, as indicated above, at the relevant sites put before it.  One other site which was mentioned and which the appellant asked to be considered was the KFC site.  This site is next door to the IPG site.  It is leased by an international franchise and it was valued at about $2276/m2.  There were however some factors which were raised by the respondent and which were stressed as factors the Tribunal should take into account in ruling out the site.  It was suggested to the Tribunal that the sales factors leaves this site too open as to how the Tribunal could adjust the percentages for open sale so to arrive at a proper valuation figure.  The sales factors involved in this site were of a private sale which complicated any valid assessment and the Tribunal accepts the respondent’s argument that  it would be dangerous to use the KFC site as a relevant site despite its close proximity to the subject sites.  At any rate, the Tribunal feels we do not have to do so. 
  1. This Tribunal, in looking at the 5 subject sites which were used by way of comparison, rejects a number of them.
  1. The Bonner site, cited to have a GFA value of $1356/m2, is a very different property in a different area to what we are considering.
  1. Block 5, Section 88, and indeed Blocks 2, 3 and 4 are also in a different category and also not in the prime area of real estate around the Town Centre or even on its immediate peripheries.  They are very much further removed and the conditions attached to the Crown lease in relation to Block 5 also are problematic.  We do not regard them as sites that can be compared without a margin of error that is too great.
  1. There are 2 sites which we feel are of relevance.  The IPG site, which is directly opposite the subject sites and which was assessed with a  GFA of $1589/m2 and to a less degree, Block 1, Section 88 (75 Gozzard Street), which was assessed as having a GFA rate of $739/m2 (less 52% GFC) and was further away from the Town Centre proper, had an inferior lease purpose clause, and in adjusting it to make it appropriate in terms of the comparison, we feel an adjustment rate of at least 70%  would be needed as indicated earlier.  This is an adjustment rate which is very significant. As we felt at least 70% and possibly more would be needed, upon reflection, we decided not to include this as the margin of error is simply too great (even though in our view it is the next best site by way of comparison).  That leaves the IPG site which, to our mind, is the site most relevant for any comparisons. 
  1. In paragraph [51] through to [53] in the judgment of the Tribunal at first instance, it was assessed that the IPG site actually had its GFA reduced from $2830/m2 by Mr McInerney to $1900/m2.   In other words, a reduction of 32.8%.  We accept Mr McInerney’s reduction in terms of this particular site. 
  1. We note that the Tribunal at first instance, in fact, went further in terms of its reduction.  Whilst the Tribunal at first instance adopted a reduced GFA rate of $1900/m2 to take into account the size variation in relation to that site, it went further.  In paragraph [53], it reduced by a further 11% the value of the site.  The Tribunal stated in paragraph [53] “The Tribunal considers that in the absence of more specific information it is reasonable to adopt the mid-point of 11% for a good local tenant.  This results in a GFA rate of $1589 /m2.  The $1589/m2 was the rate the tribunal at first instance accepted for the IPG site.
  1. We do not necessarily accept the further reduction of 11% from the original $2830 /m2 rating because of the good local tenant.  Ratings are based on the best use that can be made of a site. ( i.e., what is permitted in the lease purpose clause )  As Mr McInerney  says , there are so many variables it is impossible to cover every contingency.  Whilst who is a tenant may well be relevant when selling and buying a property, it’s not really relevant for a rates valuation.
  1. We understand the value to a landlord of a franchise like KFC – but tenancies can change.  At the end of the day, the most important factor is the location of the site, what the purpose clause allows the site to do and flowing from that what is the best use the site can be put to. .  Also as indicated earlier, there were other factors involved in the KFC site in terms of exactly how the sale was undertaken, which takes that out of the ordinary sales process which makes any comparison with that site difficult. 
  1. It is the Appeal Tribunal’s view that a more proper valuation for the IPG site would be in the vicinity of $1900/m2 (not $1589/m2 as a result of the further 11% reduction on the basis that there was a good local tenant), but it was different from KFC.
  1. There were some other differences between the IPG site and the 2 subject sites, making the IPG site a slightly better one, and these were also properly taken into consideration by the Tribunal at first instance in relation to coming to its conclusion. 
  1. The conclusion was a GFA rate of $1589/m2.
  1. We note the appellant has indicated that they are quite comfortable with a GFA rate of $1531/m2 as determined and that the respondents were quite comfortable with the $900/m2 given by the Tribunal at first instance even though the respondent argued that it should be less than that.  
  1. The Appellant is not arguing that the valuation should be higher and whilst we can find good reason to accept the valuation of the IPG site at $1,900/m2, or at least closer to that as we do not necessarily agree with the further reduction by 11% to take that down to $1589/m2, nevertheless, that is the closest site in terms of proper valuation principles to be used.  
  1. We also note that if Mr Cummins were correct in relation to his assertion that some deductions should be made for the GFC (he feels a maximum of 15 to 20%), then even if we adopted a 10% GFC reduction, this would be very much in the ball park of the $1,589 figure arrived at.  We, however, reiterate our view that it is comparable sales that should be used to determine unimproved land value rather than supposition as to whether the GFC had an effect in relation to the unimproved value of the subject sites, and we again reiterate the very approximate sale of the IPG site as a factor proving this.
  1. We reinstate the principles in terms of valuation which are quite clear. It is not appropriate to average out prices. It should be said that whilst it may appear, on face value, that the Tribunal at first instance did this, there is nothing to indicate whether they did one way or the other.  However, if they did they were wrong.
  1. The principles are that the valuations should be done by assessing what the values were on comparable sites that have as much in common with the subject site as is possible.  If that is not possible, one then has to look at the closest comparable site or sites. That is, sites that may be comparable using the methodologies that were put before us by both parties (even though there were some differences as to how they went about that process). 
  1. There are always some grey areas in valuations. It is not and really cannot be an exact science.   It is often impossible to get exact sites which one can use, but in this instance the Tribunal is fortunate in having a very similar site, in our view, in the IPG site to use as a comparison.  We note that if not for the assessment of the GFC, the Tribunal at first instance was quite happy with the GFA rate of $1531/m2.  We believe that apart from their comments in relation to the 11% reduction for a good tenant for the IPG site, that the methodology in coming to that valuation was sound.  Where they erred was in relation to a reduction in value to other sites due to their erroneous conclusion that an adjustment of 52% was necessary because of the effect of the GFC, which we  simply do not  agree with.
  1. Having said this, the Appeal Tribunal does not consider it necessary to look in any detail in relation to whether Mr McInerney’s evidence was far preferable to Mr Cummins’ or vice versa, or at the issues in relation to evidence Mr Cummins is alleged to have not put before the Tribunal at first instance which would have assisted them.  Clearly if the parties want to take any of those issues further, they can do it in some other place.  At the end of the day, there is sufficient evidence put forward by both Mr McInerney and Mr Cummins which would indicate some common threads and common themes.  It should be noted that a lot of Mr Cummins’ evidence in relation to matters put before the Tribunal did not necessarily back up his argument that the valuation should be $900/m2 or less for GFA.
  1. The Tribunal makes no comment and does not feel it necessary to make any comment in relation to the credibility of both these valuers of the site, except to say that both are very experienced men. We thank them and everyone else who helped the Appeal Tribunal for their assistance in this matter. 
  1. The appeal will be allowed and the orders of the Tribunal at first instance  dated
    19 November 2010 are set aside and the following orders made:

(3)

The unimproved value of Block 2, Section 3, Gungahlin, as at the


1st of January 2009 is $1,513,000 and the GFA is $1531 per square metre;

(4)

The unimproved value of Block 3, Section 3, Gungahlin, as at the


1st of January 2009 is $1,513,000 and the GFA is $1531 per square metre.

……………………..             
W G Stefaniak

Appeal President

PUBLICATION DETAILS

TO BE PUBLISHED

To be completed by Tribunal Staff

PART A  FILE NO: AA 42 & 43 of 2010

APPLICANT:                Commissioner for ACT Revenue
RESPONDENT:            S. Pelle Pty Ltd

COUNSEL APPEARING:       APPELLANT: Mr R Bayliss

RESPONDENT: Mr D Robens        

SOLICITORS:  APPELLANT: ACT Government Solicitor

RESPONDENT: DibbsBarker

OTHER:  APPLICANT:          

RESPONDENT:      

TRIBUNAL MEMBER/S:   Mr W G Stefaniak, Appeal President, and
Mr G Trickett, Member

DATE/S OF HEARING: 23 & 24 May 2011               PLACE: CANBERRA

DATE/S OF DECISION: 17 August 2011                  PLACE: CANBERRA

PART B

RECOMMENDATION:

FULL REPORT ( )        CASE NOTE ( )        UNREPORTED DECISION ( )

COMMENTS:

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