Commissioner of State Revenue v Australian Property Custodian Holdings Ltd
[2010] VSCA 228
•10 September 2010
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No S APCI 2008 3885
| COMMISSIONER OF STATE REVENUE | Appellant |
| v | |
| AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LTD | Respondent |
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| JUDGES | ASHLEY, NEAVE and HANSEN JJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 12 April 2010 |
| DATE OF JUDGMENT | 10 September 2010 |
| MEDIUM NEUTRAL CITATION | [2010] VSCA 228 |
| JUDGMENT APPEALED FROM | [2008] VSC 429 (Mandie J) |
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DUTIES – Aged care facility – Transfer of dutiable property to taxpayer – Unencumbered value of property – Special arrangement between taxpayer and third party included lease at above market rental – No evidence as to premium paid to obtain lease – Commissioner valued property subject to lease – Judge in Trial Division correct to hold Tribunal erred in taking into account lease – Appeal dismissed.
Duties Act 2000, ss 20(1) and 22(1)(a).
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| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr R A Brett QC with Ms P Neskovcin | State Revenue Office |
| For the Respondent | Mr R L Berglund QC with Dr N Orow | Madgwicks |
ASHLEY JA:
I agree with Hansen JA, for the reasons which his Honour gives, that the appeal should be dismissed.
NEAVE JA:
I have had the advantage of reading the judgment of Hansen JA in draft form. For the reasons given by him, I agree that the appeal should be dismissed with costs.
HANSEN JA:
This appeal is brought by leave from the judgment[1] and orders of a judge in the Trial Division which set aside a decision of the Victorian Civil and Administrative Tribunal (‘the Tribunal’) that had affirmed an assessment of the Commissioner of State Revenue (‘the Commissioner’) under the Duties Act 2000 (‘the Act’). In lieu thereof, his Honour ordered that the assessment be varied by substituting $3,070,000 as the dutiable value of the subject property and that the assessment of duty be reduced accordingly to $168,850. For the reasons that follow, the appeal should be dismissed.
[1][2008] VSC 429.
Australian Property Custodian Holdings Ltd (‘the taxpayer’) purchased a property in St Albans Park, Geelong upon which was erected a 50 bed aged low care hostel known as Tannoch Brae Residential Aged Care Facility (‘the property’). The taxpayer purchased the property from Primelife (Geelong) Pty Ltd (‘Primelife’) for $3 million under a contract of sale dated 1 November 2002. No deposit was payable under the contract but the residue (of $3 million) was payable on 31 October 2002 or such other date as mutually agreed.
Section 20(1) of the Act provides that:
The dutiable value of dutiable property that is the subject of a dutiable transaction is the greater of –
(a) the consideration (if any) for the dutiable transaction … ; and
(b) the unencumbered value of the dutiable property.
Section 22(1) of the Act provides that: The unencumbered value of dutiable property is the amount for which the property might reasonably have been sold in the open market –
(a)in the case of a transfer of dutiable property on a sale of the property – at the time the contract of sale was entered into;
…
free from any encumbrance to which the property was subject at that time.
The taxpayer contended that the dutiable value was $3 million, being the purchase price.
Initially, the Commissioner contended that the dutiable value was $5.5 million, based in effect on what the Commissioner alleged to be the total consideration passing under the contract ($3 million) and a related agreement ($2.5 million) which, together, made up the relevant transaction. That approach relied upon s 20(1)(a). Ultimately, however, the Commissioner contended that the dutiable value was $5.25 million, being the amount for which the property might reasonably have been sold in the open market at the time the contract of sale was entered into. That approach relied on s 20(1)(b).
Facts
The learned judge set out the relevant facts with great clarity and precision, and there is no need to go beyond the facts stated by his Honour. Indeed, in this section of the judgment, I gratefully adopt his description of the facts, which appear below in a slightly abridged and, at times, paraphrased form.
At the time of entering into the contract of sale, the parties made a further agreement, also dated 1 November 2002, entitled the Tannoch Brae Sale of Rights Agreement (‘the sale of rights agreement’). Another entity, Primelife Corporation Limited, was a party as a guarantor. The sale of rights agreement recited that Primelife was the owner of the business conducted on the land, that the taxpayer ‘has purchased’ and Primelife ‘has sold’ the land upon which the business was operating and that Primelife had agreed to sell to the taxpayer ‘certain rights connected with the Business ... and to provide for the entering into of the Tannoch Brae PLC Lease’ (‘the Lease’). Pursuant to the sale of rights agreement, the taxpayer purchased for $2.5 million from Primelife ‘the Rights’ specified in the agreement, defined to include (a) the entitlement to acquire the Business on the terms set out in the agreement (being for $1 on the termination or expiry (including renewal) of the Lease), and (b) the entitlement to the benefit granted to the taxpayer under the Lease including the entitlement to the ‘Tannoch Brae Annual Fee’ (being the rent payable under the Lease).
Annexed to the sale of rights agreement was the form of lease to be entered into between the taxpayer and Primelife. Relevantly, the term of the Lease was 25 years - from 5 November 2002 to 4 November 2027 - and the initial rent payable was $522,500 per annum, with provision for five-yearly rent reviews together with certain options for renewal. I interpolate that it was common ground that this annual rental was well in excess of market rental. In short, the taxpayer paid a premium to secure, among other things, the benefit of the Lease under which the taxpayer would receive an above-market annual rent. In addition, clause 5 of the Lease conferred on the taxpayer the entitlement to acquire the business of Primelife for $1 upon the termination or expiry (including renewal) of the Lease.
The ‘Completion Date’ under the sale of rights agreement was 4 November 2002. The transfer of land was executed on 4 November 2002 and the Lease was made on 5 November 2002.
As mentioned above, the Commissioner initially assessed the transfer of land to duty on the basis of a dutiable value of $5.5 million, being the sum of the consideration paid under the contract of sale ($3 million) and the sale of rights agreement ($2.5 million) respectively. The taxpayer objected, arguing that the dutiable value was $3 million being the purchase price under the contract of sale. The Commissioner disallowed the objection, following which the taxpayer appealed to the Tribunal. Pursuant to the Tribunal’s leave, the Commissioner amended the grounds of disallowance (which need not be set out) by adding a further ground, namely –
[T]hat the dutiable value of the property is the unencumbered value of the property … which is $5,250,000 being the amount for which the property subject to the lease agreement might reasonably have been sold in the open market at the time the contract of sale … was entered into on 1 November 2002 …’. (emphasis added)
In effect, the basis of the Commissioner’s assessment of dutiable value changed from the total consideration passing under the two agreements to an assessment of the market value of the property ‘subject to the lease.’ The Commissioner sought to support this new approach by a valuation report of Mr Kevin Bice, dated 18 March 2005, which was put in evidence before the Tribunal. This report was entitled the ‘Overview report’ because it referred to two earlier valuations, of Bice dated 5 July 2002 (valuation of $5.4 million) and of Mr Les Brown dated 13 August 2002 (valuation of $5.25 million). The learned judge noted that these reports appeared to be based upon the existence of the 25 year lease at an annual rent of $522,500. However, they had each assessed the fair market rental at a lower figure. Bice had assessed a fair market rental of $338,000 per annum (based on $130 per bed per week) and Brown had assessed a fair market rental of $377,000 per annum (based on $145 per bed per week). In the Overview report, considering that Brown’s rental figure was achievable at October 2002, Bice adopted Brown’s annual market rental figure of $377,000 and applied a capitalisation rate of 9.5 per cent (recognising the Primelife guarantee), which equated to $3,968,421. He then did a calculation on that part of the rent which he considered to be above market rental. He concluded that $5.25 million was a ‘reasonable depiction of the freehold component value subject to the specified lease’.
When the proceeding came on for hearing in the Tribunal on 20 November 2007, the Commissioner sought and obtained leave to delete from the above ground of disallowance the words ‘subject to the lease agreement’. Counsel for the Commissioner explained this amendment to the Tribunal by saying that the taxpayer took the point that there was no lease agreement as at 1 November 2002. Counsel said ‘We don’t rely upon there being [a lease], we rely upon the prospect.’
Thereafter, the Commissioner proceeded before the Tribunal solely upon this amended ground of disallowance (and not upon the original grounds set out in the Notice of Determination). The Commissioner no longer relied upon the existence of the Lease. Despite that, the Commissioner relied upon Bice’s Overview report which was based upon the existence of the Lease.
Before the Tribunal, the taxpayer relied upon expert evidence from another valuer, Mr Dan Magree. Magree stated that in his instructions (from the taxpayer’s solicitors) he had been advised that ‘the Lease … has no direct relevance to the valuation’. However, he considered that the Lease was ‘one factor which may be considered relevant to take into account if it is, in my opinion, a Lease that reflects the true potential value of the property transferred.’ Later, Magree said that the Annual Fee in the lease equated to a rental of approximately $200 per bed per week and that such rental was significantly higher than the market rental for the property which indicated rates between $114 and $145 per bed per week. Accordingly, he opined that the Annual Fee in the lease did not represent a market rent and overstated the true potential value of the property. By capitalising the market rental, Magree concluded that the unencumbered market value of the property at 1 November 2002 was $3.07 million.
The Tribunal’s reasons
After referring to the parties’ submissions, which included reference to the High Court decisions in Spencer v The Commonwealth of Australia[2] and Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd[3] and the decision of Harper J in The Palace Hotel (Hawthorn) Pty Ltd v Commissioner of State Revenue,[4] the Tribunal stated that the issue between the parties was ultimately ‘the propriety or otherwise of factoring in the 5 November 2002 lease [in the valuation].’ In addressing this issue, the Tribunal said that:
What is between the parties here is the degree to which one stresses the hypothetical to the exclusion of the actual. According to the [taxpayer] one assesses the duty on this transfer not upon the basis of what actually happened and what the parties knew and contemplated would happen but on the basis of what might have occurred in a hypothetical sale. The [taxpayer] says this is what the High Court’s decision in Pioneer requires.
The Commissioner says that what actually happened is relevant and a hypothetical purchaser being cognisant of the intention of [Primelife] to take a lease on the favourable terms to the freehold owner would reflect this fact in the price he would pay and a hypothetical vendor would reflect it in the price he would ask.
[2](1907) 5 CLR 418.
[3](2002) 209 CLR 651.
[4](2004) 8 VR 439.
The Tribunal concluded that:
… hypothetically well informed vendors and purchasers of the subject property on 1 November 2002 would be aware of the willingness of Primelife to take the 25 year lease on the apparently favourable term.
…
Pioneer does not require one to disregard the rental income actual or potential of a piece of real estate in carrying out a valuation of its unencumbered value … Here … the lease was no more than a realisation of an advantageous opportunity known both to the actual vendor and purchaser and inevitably known to any hypothetical vendor and purchaser and operating as an enhancement to the unencumbered value of the land.
Accordingly, the Tribunal accepted the Commissioner’s valuation evidence and affirmed the Commissioner’s disallowance of the taxpayer’s objection.
The appeal to the Trial Division
The taxpayer raised three questions of law and corresponding grounds of appeal, which need not be set out here. In essence, the taxpayer complained that the Tribunal erred in taking into account the ‘specific factors and actual arrangement’ between the parties to the transaction, rather than determining the value of the property on the basis of a hypothetical vendor and purchaser in the open market without regard to the special conditions on which the taxpayer purchased the land, and on the basis that any lease would be on reasonable terms and not above market rent.
The learned judge referred (at [36]) to the Commissioner’s submission that there was no legal error involved in the Tribunal’s conclusion that ‘hypothetically well informed vendors and purchasers of the subject property would be aware of the willingness of Primelife to take the 25 year lease on the apparently favourable term’.
The learned judge then said that:
37… there could have been no error of law if the Tribunal had merely taken into account evidence of prospective tenancies in making a finding as to the amount for which the property might reasonably have been sold in the open market. Nor could there have been any error of law if the Tribunal had made such a finding upon evidence from expert valuers based upon the letting prospects of the property. However, that is not what happened before the Tribunal.
38The expert valuation evidence before the Tribunal fell into two categories. On the one hand, there was a valuation of the property transferred on the basis that it was subject to the Lease – a basis that had been expressly and correctly disavowed by the Commissioner. On the other hand, there was a valuation that took into account the market rental that the property might attract but disregarded the Lease because the rent therein was substantially higher than a market rental.
39The reasoning of the Tribunal was not supported by the valuation evidence. Rather, the conclusion of the Tribunal, as quoted in [36] above, comprised the undeniably rational proposition that hypothetically well-informed vendors and purchasers would take into account the prospect of a 25 year lease on favourable terms as to rent. But, in my view, that proposition was not apposite having regard to the whole of the evidence as to the transaction entered into between the taxpayer and Primelife because the taxpayer had agreed to pay a substantial sum, in part, in order to procure that Lease. There was not a simple prospect of a 25 year lease on favourable terms as to rent as the Tribunal stated – there was a prospect of a 25 year lease on such terms but only in exchange for a substantial payment. The position was thus not analogous to the position that would have existed had the property been subject to the Lease at the time of the sale.
40Given that the particular arrangement between the taxpayer and Primelife involved the payment of a substantial premium for a lease with rental well above market and that there was no evidence explaining this arrangement, the whole arrangement including the proposed Lease was simply irrelevant to the question for what amount the property could be reasonably sold in the open market.
41For the foregoing reasons, I consider that the Tribunal erred in law by taking into account the prospective Lease and that the decision of the Tribunal was one that no reasonable Tribunal could have reached.
The learned judge concluded that as there was no evidence to support the value espoused by the Commissioner and the only other valuation evidence was that the value of the property was $3.07 million, the Commissioner’s determination and assessment should be varied by substituting a dutiable value of $3.07 million and reducing the assessment of duty accordingly.
The appeal to the Court of Appeal
The Commissioner’s notice of appeal contained four questions of law and five corresponding grounds of appeal as follows:
1.The Court’s finding (in paragraph [38]) that the valuation evidence relied upon by the [Commissioner] constituted a valuation of the relevant property on the basis that it was subject to the Lease was not open on the evidence before it.
2.It was not open to the Court to find (in paragraph [39]) that the reasoning of the Tribunal was not supported by the valuation evidence.
3.The Court erred in finding (at paragraph [40]) that evidence was required to explain the particular arrangement between the [taxpayer] and Primelife involving the payment of a substantial premium for a lease with rental well above market.
4.The Court erred in finding (at paragraph [40]) that the arrangement between the [taxpayer] and Primelife, including the proposed Lease, was irrelevant to the question of the amount for which the property might reasonably have sold in the open market.
5.The Court erred in finding (at paragraph [41]) that the Tribunal erred in law by taking into account the prospective Lease and that the decision of the Tribunal was one that no reasonable Tribunal could have reached.
While not abandoning reliance on the matters contained in the notice of appeal and the written submission’s development thereof, senior counsel[5] for the Commissioner took a somewhat different approach in oral argument. He emphasised the following matters.
[5]Who did not prepare the written submission.
First, he relied on the contract of sale, the sale of rights agreement and the Lease ‘all happening at the same time’. He accepted that the Lease was entered into a few days after the contract of sale, but submitted that the Lease was not merely prospective but rather was ‘inevitable’, hence it affected the value of the property and was properly to be taken into account on the valuation. And in reply, he submitted that the valuers’ references to the Lease should be understood as recognition that there was an immediate prospect, indeed probability, of a 25 year lease on the favourable terms referred to above.
Secondly, he submitted that while it was true that the parties’ special arrangement involved a Lease with payment of above market rent, it did not follow that the Lease ought be disregarded altogether. He submitted that the judge erred in so concluding.
Thirdly, as to valuation principles counsel agreed that the determination of the unencumbered value of the property was to be carried out in accordance with the principles in Spencer’s case. It was submitted that the reference in Spencer’s case to vendors and purchasers of a property being cognizant of ‘all circumstances which might affect its value’ was a broad phrase which rendered the arrangements between the taxpayer and Primelife relevant to the valuation.
Counsel for the taxpayer submitted that the relevant passage in Spencer’s case refers to the characteristics of the land rather than matters personal to the vendor and purchaser. He referred to Pioneer[6] as authority for the proposition that, when determining value in accordance with Spencer’s case, one cannot introduce to the enquiry a special condition of the parties. He submitted further that the Commissioner sought to bring into the valuation enquiry one aspect of the special arrangement (namely, the receiving of higher rent) while ignoring the balance of the transaction (namely, the extra payment made by the taxpayer in order to receive the higher rent).
[6]At 667, [44].
Decision
The fundamental issue for the Tribunal to determine was the amount for which the property might reasonably have been sold in the open market at the time of the contract. While accepting that that issue was to be determined by reference to the principles in Spencer’s case, the parties differed as to how those principles applied in the facts of the present case. In essence, the issue between the parties on the present appeal was whether the Tribunal could properly take into account the special arrangement that existed between the taxpayer and Primelife in determining the unencumbered value of the property.
Before addressing that issue, however, it is convenient to deal with ground 1, which attacked the finding of the learned judge that the valuation evidence relied upon by the Commissioner constituted a valuation of the property on the basis that it was subject to the Lease. It was said that this finding was not open on the evidence. In my view the finding was open. Moreover, in my view the finding was correct, for the following reasons. The summary in the Brown report stated that ‘The property is offered subject to a lease in favour of [Primelife] for a 25 year term with three 5 year options at an annual rental of $522,500’, and further that the ‘Property comprises a secure investment with agreed rental growth for a term certain of 25 years’. It concluded with a statement that the market value of the property was ‘$5,250,000 exclusive of GST (freehold subject to execution of lease)’. The earlier Bice report did not mention the Lease, but Bice’s Overview report (which effectively overtook the two earlier reports in any event) assessed the market value of the property ‘subject to the Lease’. Indeed, counsel’s approach on the present appeal was to state that even though the Lease was not executed at the time of the sale, it was inevitable (or at least highly probable) and thus the rental it provided for ought be taken into account on the valuation. Further, the Overview report’s reference to ‘overage rent’ - by which Bice meant that part of the rental above market rent ($145,500 per annum) – confirms that the effect of the valuation evidence was to take into account the fact that above market rental was to be received. Reference to the above-market rental figure and the ‘overage rent’ was only explicable on the basis that the property was being valued subject to the favourable rental terms of the Lease. In my view, it is plain that the Commissioner’s valuation of $5.25 million was on the basis that the property was subject to the Lease.
As to grounds 2 to 5, these need not be dealt with individually. In my view, for the reasons that he gave, the learned judge was correct to conclude that, in the present case, the Tribunal was not entitled to take into account the parties’ special arrangement. The learned judge’s starting point was to accept the proposition that ‘hypothetically well-informed vendors and purchasers would take into account the prospect of a 25 year lease on favourable terms as to rent’. In other words, as a matter of principle, under Spencer’s case regard could be had to an actual transaction. However, in the actual circumstances of this case, as the judge correctly observed, the prospect of a 25 year lease on favourable terms was ‘not apposite having regard to the whole of the evidence as to the transaction entered into between the taxpayer and Primelife because the taxpayer had agreed to pay a substantial sum, in part, in order to procure that Lease’ (emphasis added). In other words, the higher rental return under the Lease (which led to the Commissioner’s valuers ascribing a higher value to the property) did not exist on some hypothetical scenario on the open market, but rather was a product of the parties’ special arrangement by which the taxpayer paid a ‘substantial premium for a lease with rental well above market’. But as the learned judge said, the parties’ arrangement was not explained by the taxpayer, and the Commissioner conducted the case on that basis. It followed that the Commissioner’s valuation evidence made no allowance for the premium, and therefore did not inform as to the property’s value on the open market. Accordingly, the learned judge was correct to conclude that the Tribunal erred in having regard to that evidence.
In the absence of the Commissioner’s evidence, the only other evidence as to value was that led by the taxpayer. In the circumstances, particularly given that the Commissioner chose to run the case on a very specific basis and did not seek leave to adduce further valuation evidence, it was open to the learned judge to accept the taxpayer’s valuation evidence and determine the case on the basis of that evidence rather than remitting the case to the Tribunal.
For these reasons, the appeal should be dismissed with costs.
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