Giusida Pty Ltd v Commissioner for ACT Revenue
[2013] ACAT 59
•10 September 2013
ACT CIVIL & ADMINISTRATIVE TRIBUNAL
GIUSIDA PTY LTD & COMMISSIONER FOR ACT REVENUE (Administrative Review) [2013] ACAT 59
AT 12/19
Catchwords: ADMINISTRATIVE REVIEW – unimproved value (UV) of land – “capital amount” in section 6 of the Rates Act 2004 – “change of circumstances” in section 11A of the Rates Act – impact of contamination of site on UV – whether there was contamination in subject land - impact of cost of remediation on UV – decontamination as change of circumstances - effect of terms of Crown lease on UV – highest and best use of land – “worsements” as deduction from UV – impact of “change of use charge” on UV – adjoining owner influence – related party influence – adjoining service station influence
List of Legislation: Rates Act 2004, ss 6 and 11A
Taxation Administration Act 1999, ss 19 and 101
Planning and Development Act 2007, s 277
List of Cases: Brisbane City Council v Valuer-General (Qld) (1978)
140 CLR 41Commonwealth Custodial Services Limitedv Valuer-General [2006] NSWLEC 400
Hamilton v DemgoldPty Ltd (1990) 97 ALR 481
Junstamp v Commissioner for ACT Revenue [2013] ACAT 50
McGeoch v Federal Commissioner of Land Tax (1929) 43 CLR 277
ReAinslie Football Club and Minister for Environment, Land and Planning (1996) 41 ALD 741
Re Gaider [1979] AATA 48
Spencer v Commonwealth (1907) 5 CLR 418
Toohey’s Limited v The Valuer-General [1925] AC 439
Trust Company of Australia v Valuer-General [2007] NSWCA 181
Tribunal: Mr A. O’Neil – Senior Member
Date of Orders: 10 September 2013
Date of Reasons for Decision: 10 September 2013
AUSTRALIAN CAPITAL TERRITORY )
CIVIL & ADMINISTRATIVE TRIBUNAL ) AT 12/19
BETWEEN:
GIUSIDA PTY LTD
Applicant
AND:
COMMISSIONER FOR ACT REVENUE
Respondent
TRIBUNAL: Mr A. O’Neil – Senior Member
DATE: 10 September 2013
ORDER
The Tribunal Orders that:
Pursuant to section 68 of the ACT Civil and Administrative Tribunal Act 2008 the reviewable decision is set aside and remitted to the Commissioner for reconsideration in accordance with the directions of the Tribunal set out in paragraphs 71 and 72 of the Reasons for Decision.
………………………………..
Mr A. O’Neil – Senior Member
REASONS FOR DECISION
On 30 March 2012, Giusida Pty. Ltd. (“the Applicant”) applied to the Australian Capital Territory Civil and Administrative Tribunal (“the Tribunal”) for the review of a decision of the Commissioner for ACT Revenue (“the Commissioner” or “the Respondent”) to disallow an objection by the Applicant to the Commissioner’s redetermination of the unimproved value of Block 11 Section 28 Braddon known as 3 Lonsdale Street (“the subject land”). The Applicant is the Crown lessee of the subject land. The Commissioner determined the UV of the subject land at $4,350,000 on 1 January 2009, at $5,000,000 on 1 January 2010 and at $5,000,000 on 1 January 2011 under section 11A of the Rates Act 2004 (“the Rates Act”). Section 6 of the Rates Act sets out the meaning of unimproved value (“the UV”). The Rates Act is administered under the Taxation Administration Act 1999 (“the TAA”). The disallowance by the Commissioner of a taxpayer’s objection is a reviewable decision by the Tribunal under s108A of the TAA.
The relevant law is in sections 6 and 11A and in the definition of “relevant date” in the Dictionary for the Rates Act, sections 19 and 101 of the TAA, and section 277 of the Planning and Development Act 2007. These sections are set out at the end of the decision.
Hearing
The matter was heard over four days on 21 and 22 February 2013, 28 March 2013 and 6 June 2013. Mr R Arthur of Counsel appeared for the Applicant and Dr D. Jarvis of Counsel appeared for the Respondent. The Applicant called two witnesses namely, Mr Green, an experienced commercial valuer and head of valuation at Jones Lang LaSalle and Dr Gunton, a geologist with Robson Environmental who holds a PhD in geochemistry and in the last five years has practised as a contaminated land consultant, managing the assessment and remediation of contaminated industrial sites. Dr Gunton is familiar with the Braddon precinct. The Respondent also called two witnesses namely, Mr Robertson, also an experienced commercial valuer with the Australian Valuation Office (the “AVO”) and Mr Power, the acting director of Environment Protection and Water Regulation Branch. Dr Gunton and both valuers gave evidence as expert witnesses.
The Tribunal had before it the documents relevant to the Respondent’s decision (the “T-Documents”), written statements by witnesses, exhibits tendered by the parties, Facts and Contentions filed in the Tribunal and written and oral submissions made on behalf of the parties. The Tribunal inspected the subject land and the three comparative sales sites in Braddon.
The Applicant’s Contentions
The Applicant contends that section 11A of the Rates Act does not apply because the grant of the new varied lease on 18 December 2009 to include residential use is not a change of circumstances because the Applicant is not free to use the subject land for residential purposes. This will only occur when the Territory is satisfied that the subject land is free from contamination. Until then the subject land remains at its pre-variation value or even below that value because the UV must be based on its semi-industrial uses. It follows that the prerequisite to the exercise of the power to re-determine under section 11A has not arisen.
The Applicant initially contended that as section 11A commenced with effect on 1 January 2010 it should not apply to a change of circumstances prior to that date for example on 18 December 2009. This argument was not pressed at the hearing.
It is further contended by the Applicant that there is a real possibility of significant contamination on the subject land because of known and suspected sources of contamination. These include fill brought onto the land, an underground fuel storage tank (“UST”), now filled with sand, which may have leaked, and off-site sources of contamination which may have migrated onto the subject land via underground water courses. The Crown lease expressly requires that the Territory be satisfied the subject land is decontaminated before it can be used for residential purposes. This assessment and remediation process may take up to a year and cost an estimated $1,034,000. The cost of possible remediation works is something a prudent purchaser would take into account in assessing the value of the subject land. This contamination cannot be considered an improvement because it does not enhance the value of the subject land compared to its natural state (Trust Company of Australia v Valuer-General [2007] NSWCA 181.) Rather it is a “worsement”, the antithesis of an improvement as it was described by Briscoe J in Commonwealth Custodial Services Limitedv Valuer-General [2006] NSWLEC 400 at paragraph 69. Briscoe J concluded that the UV of the subject land should therefore be reduced by this “worsement”.
The Applicant says Toohey’s Limited v The Valuer-General [1925] AC 439 (Toohey’s case) may be distinguished because of the slight but important difference in wording between the statutory provisions. The Applicant contends that in Toohey’s case the statutory assumption was that the improvements “are to be taken, not only as non-existent, but as if they never had existed”, whereas the ACT legislation only requires that the improvements be “not there” on the relevant date. It does not require that they were never there. This allows past operations of man affecting the land associated with improvements to be taken into account. This permits past operations that detrimentally affect the subject land to be taken into account.
The Applicant further says that the delay occasioned by the assessment and remediation process would affect the UV of the subject land and would reduce it by 2%.
Additionally, the Applicant contends that the possibility of contamination would reduce the number of financial institutions willing to lend on the security of such a property. Those that would lend would require additional security and would charge a higher interest rate on the loan. A buyer would be likely to demand a higher rate of return for the increased risk. These factors would result in a fall in the number of potential buyers, reduced competition and result in a lower sale price for the subject land. The Applicant says that the UV of the subject land should accordingly be reduced by 10%.
Because the subject land adjoins the service station on Block 19 Section 28 Braddon, the Applicant argues that its value as a residential development would be diminished. The reduction in the UV of the subject land would be 10% as a result of this proximity.
The comparable sales evidence of the Respondent needed to be considered in some detail and changes made. There were a number of factors that in the Applicant’s submission required adjustments to be made if these sales were to be properly comparable to the subject land. A full discussion of these adjustments is set out later in this decision but appears in a summary form in the following paragraph.
In the Applicant’s submission the comparable sales evidence coupled with the necessary adjustments to those sales figures result in the following UV’s for the subject land:
1 January 2009 $4,020,000
1 January 2010 $4,300,0001 January 2011 $4,300,000.
These UV figures do not take into account the specific negative characteristics of the subject land outlined above which require further reduction. The total deductions for service station influence, extra time to decontaminate the site and finance impediments to a residential development amount to 22%. In addition, the Applicant argues that the remediation cost of $1,034,000 must also be deducted. This results in the following UV figures:
1 January 2009 $2,101,600
1 January 2010 $2,320,000
1 January 2011 $2,320,000.
The Respondent’s Contentions
The Respondent contends that the variation of lease purpose constitutes a circumstance that affects the UV of the subject land and it satisfies the condition that permits a redetermination under section 11A of the Rates Act. It says that the UV derives from the market value and the market would value the subject land based on its highest and best use regardless of the provisions of the lease. It also contends that at the end of section 11A of the Rates Act is an example of an approval that authorises a use of land that increases the value. This indicates that the circumstances giving rise to a redetermination could occur even before the lease variation takes place. The actual approval of additional development rights will affect value although the amount may be difficult to quantify (Re Ainslie Football Club and Minister for Environment, Land and Planning (1996) 41 ALD 741).
The Respondent contends that the UST and any fill are improvements and the statutory assumption does not permit them or any contamination caused by them to be considered in determining the UV of the subject land. It says that UST is part of the heating system of a building and fill is an integral part of a building’s construction and are thus improvements to the land compared to its natural state. It says it is incorrect to make the comparison with a later highest and best use (“H&B”).
The Respondent also argues that to permit the Applicant to deduct the cost of possible remediation is contrary to the legislative policy of the Rates Act, the relevant authorities and the legislative history of the provisions. These provisions are intended to tax the “unearned increment” in the value as distinct from value that accrues by virtue of the actions of past and current owners: McGeoch v Federal Commissioner of Land Tax (1929) 43CLR 277. The Respondent also cites the words of Lord Dunedin in Toohey’s case that the statutory assumption requires that any improvements are “to be left entirely out of view” and says that the New South Wales Court of Appeal approved of this passage in Trust Company of Australia Limited v The Valuer-General [2007] NSWCA 181. It says that its position is also supported by Hamilton v DemgoldPty Ltd (1990) 97 ALR 481.
The Respondent says that the past operations of man associated with improvements cannot be taken into account. It contends that the introduction of the “relevant date” concept into the UV definition in 1967 did not change the assumptions that “no improvements ... had been made”. The Respondent says that the Trust Company case affirmed that improvements are things that enhance value as compared with the value of the land in its natural state. The Trust Company decision expressly approved Lord Dunedin’s words in Toohey’s case when he said that what the valuer has to consider
“...is what the land would fetch as at the date of the valuation if the improvements made had not been made. Words could scarcely be clearer to show that the improvements were to be left entirely out of view ... . What the Act requires is really quite simple. Here is a plot of land; assume that there is nothing on it in the way of improvement; what would it fetch in the market?"
The Respondent contends this means that the improvements are assumed not to have been made at all.
The Respondent contends that there is no evidence that any contamination exists on the subject land. Dr Gunton’s evidence was that he had not examined the site and he knew of no actual contamination assessment of the site. Dr Gunton discussed what he saw as possible sources of contamination both from on-site and off-site sources. Some sources were from identified things such as the UST but others arose from the migration of off-site contamination onto the subject land. He could not say from what he knew that there was any contamination on the subject land. Dr Gunton’s estimate of $1,034,000 is on a “worst case scenario “(Exhibit A13, page 15) which included the removal of 3.5 metres of fill across the whole site.
The deduction of $1,034,000 is in the view of the Respondent speculative. Possible contamination in Braddon is just among the risks a hypothetical purchaser of the subject land would consider and thus it is reflected in the sales evidence. The allowance of an additional deduction for possible contamination would amount to double counting.
The Respondent says that if the Tribunal decides that a deduction for contamination is permitted then any deduction should be based on the actual costs of remediation. However if the remediation is by means of soil removal no additional deduction is warranted if the removal would be incidental to the development.
If a deduction for contamination is approved by the Tribunal it should be limited to the actual cost of decontamination. The Applicant contends that if actual contamination is discovered at a later date, the Applicant is entitled to a refund from the Commissioner under section 19 of the TAA.
The Respondent contends that the 22% deduction from the UV of the subject land for service station influence, extra time to decontaminate the site and finance impediments to a residential development, is not supported by any evidence and should be rejected.
Section 6 of the Rates Act 2004
This provision of the Rates Act and other similar State legislation have been considered in a number of decided cases and is discussed in the following paragraphs.
In Hamilton v DemgoldPty Ltd (1990) 97 ALR 481, Justice Wilcox (at pages 493-494) considered section 5 of the Rates and Land Tax Ordinance 1926 (being effectively identical to section 6 of the Rates Act) and indicated that the section requires the valuer, in relation to the stated assumptions, to:
disregard the true facts in favour of the specified assumptions. ... But, except in relation to those assumptions, the valuer is required to take the lease as it is, asking how much would be offered at a hypothetical sale of the right to take that lease. All factors which would have influenced that offer should be taken into account, be they physical factors such as the location of the land, its access and services and its suitability for a particular use; legal restrictions on the type and scale of development, whether they arise under the provisions of the lease or under general legislation; economic factors; political factors and announcements, whether applying generally or to the particular part of the Territory or particular parcel of land.
He went on to say that the assumptions were intended:
“… to put all lessees on an equal footing whether they were original lessees or not. So the valuer was required to assume a Crown auction at the relevant date.”
In other words:
“The valuer is required to take into account all the advantages and disadvantages which would have flowed to a person who acquired the lease governing the subject site at the relevant day, having regard to the actual terms of the lease, except where they conflict with the specified assumptions.”
Griffith CJ in Spencer v Commonwealth (1907) 5 CLR 418 said that the question to be answered to establish the value of a parcel of land is:
“’[w]hat would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?’... or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.”
In the Trust Company case, the NSW Court of Appeal held that for the purposes of a materially identical NSW provision to that of section 6 of the Rates Act:
“… improvements were any human operations on the land that have the effect, as at the date of valuation, of enhancing the land’s value compared with its natural value.”
The NSW Valuer-General in the Trust Company case argued that “improvements” could either be positive or negative in terms of the value of the land. The court rejected that argument and adopted the words of Gibbs J in Brisbane City Council v Valuer-General (Qld) (1978) 140 CLR 41 at 51 when he said:
“… some thing done on or appertaining to the land which reduces rather than enhances its value is not an improvement for the purposes of the Act, any more than it would be in the ordinary sense of the word.”
The court also held that the:
“… office buildings on the land, whilst not suitable for the land’s highest and best use, were improvements because they enhanced the land’s value compared to its natural state”.
At paragraph 73, the Court commented that the
“broad policy that underlies this method of taxation can be seen to include the perceived inappropriateness of taxing a landholder of the value of land, to the extent to which that value has been contributed to by alterations that have been made to the land by the landholder or any of the predecessors in title of the landholder.”
The Court then quoted with approval what Knox CJ and Dixon J had said in McGeoch v Federal Commissioner of Land Tax (1929) 43 CLR 277 at 290:
“In the legislation in Australia imposing tax on the unimproved value of land we think it is clear that the subject matter sought to be taxed has always been that part of the value of the land at the relevant date which has been commonly described as the “unearned increment”.The value at any given date of any parcel of land has been considered as including two factors namely, (1) the portion of the value at the relevant date attributable to improvements on or appertaining to the land made by the owner or his predecessors in title and (2) the portion of the value at such date attributable to extrinsic circumstances, such as public roads or railways, increased settlement in the neighbourhood, public services brought within reach and other causes not brought about by the operations on the land by successive occupiers … we think the unimproved value which is the subject of taxation under this Act is the value at the relevant date of the land in its natural state as for the time being affected by extrinsic circumstances of every kind, for example, those mentioned above but not by what has been done to it or upon it in the shape of improvement of any kind effected by the operations of successive owners the benefit of which continues as a factor in the then present value of the land”.
The Court also held that no deduction from the value of the assessed land should be allowed for the cost of demolishing the buildings that were not suitable for the land’s H&B use.
Campbell JA, with whom Ipp JA and Beazley JA agreed, said in his judgment (at paragraph 33) that the provision firstly requires that the “improvements” be notionally removed and it is only then that the notional sale can occur. He went on to say that the “notional sale is of the subject land based on its highest and best use”.
It is clear from the authorities that any “worsements” are to be deducted from the UV of the subject land. The actions of a landholder in enhancing value are properly excluded from the UV for the reasons set out in McGeoch but why should the destruction of value by the landholder reduce the taxable value of the land and disadvantage the community? The answer lies in the word “unimproved” that carries with it the implication that the focus is on removing improvements but is silent about those things in or on the land which detract from value. The tax on “unimproved value” is a tax on land with improvements removed other than those set out in section 6(1)(a) but with “worsements” unaffected. The land is not in that sense returned to its natural state.
The current office building on the Subject Land can be understood as an improvement in terms of the above definition even if it needs to be demolished or substantially modified in order to redevelop the subject land to its H&B use. However, the unusable UST which is a potential contamination source cannot be seen to enhance the value of the land compared to its natural value as at the valuation date. If the UST had been in use on the relevant dates it would likely to have been viewed as an improvement. In the Tribunal’s view, however, it is not an improvement on the relevant dates.
Contamination of the Subject Land
Dr Gunton gave detailed evidence about contamination on and in relation to the subject land, which is principally contained his report of 16 July 2012 (Exhibit A13). Dr Gunton identified four possible sources of contamination. These were:
a.a UST on the subject land;
b.contamination migrating onto the subject land from the service station on the southern boundary;
c.contamination migrating onto the subject land from other sites to the north;
d.contamination contained in fill brought onto the subject land during the construction of previous buildings.
In relation to fuel storage tanks, Exhibit A1 contains a number of old plans from the 1970’s disclosing approvals to construct various things on the subject land. Mr Power said it is not certain that construction of all the proposed building works actually occurred. Plans 3702/N and 3702/O show an existing underground heating oil tank under the basement floor slab in the north-east corner of the building. Mr Power gave evidence that it was later decommissioned and filled with sand. Plan 3702/02/P shows details of a distillate tank room intended to house a metal tank of 11,897 litres in the north-west corner of the basement. This tank room has its own concrete slab above the existing basement floor slab. Plan 3702/W shows two “500g” (presumably gallon) oil tanks one of which is within a motor vehicle inspection pit probably used to collect sump oil from vehicles and the other is under the exit ramp on the south wall of the basement. It is possible that the oil tank under the ramp has been removed as it appears not to have been set into the slab. In the case of the tank in the pit, if the space is now a car park the pit has presumably been filled in and the tank possibly removed although spillage may have leaked into the pit itself. No evidence was called by the Applicant to show the current situation in the basement.
Dr Gunton’s view on the UST was unequivocal. The UST was “a potential primary contaminant source” and before the subject land could be used for residential purposes it must be removed. The Tribunal also considers that should any other old oil tanks be found in or on the subject land then these would also require removal and the costs would be deductible from the UV.
The adjacent service station was considered a high risk contaminant source because contaminants may migrate onto the subject land via underground water flows. Mr Power’s evidence was that the underground water flow was in a southerly direction away from the subject land. Dr Gunton did not dispute this evidence but said that directional flows could reverse. He did not suggest that this flow had. The evidence before the Tribunal does not show that contamination has actually occurred from the adjacent site.
Some 200 metres north of the subject land in Lonsdale Street is the site of a former service station and dry cleaning business which had in the past been assessed for contamination by Dr Gunton. In his view, the chemicals used and dumped into the sewer could dissolve in groundwater and migrate to other sites to the south. He said it is possible that by this method the subject land could be contaminated by dry cleaning waste products. Dr Gunton did not say it was probable or likely that this had occurred but only that it was possible. The Tribunal is unable to conclude on this evidence that contamination occurred.
The final potential contamination source identified was imported fill. Dr Gunton said it is possible that fill came from a contaminated site. That possibility cannot be disputed. However, there is nothing in the evidence to show that fill was ever used on the subject land or if it was that it was contaminated.
Except for the UST there is no evidence of a potential primary contamination source on the subject land. More importantly, there is no evidence of actual contamination on the subject land.
In his report and evidence, Dr Gunton outlined a staged process to investigate for contamination and to remediate the subject land, should contamination be discovered. Phase 1 is a preliminary desktop study which has been substantially completed and is contained in his report. He did not go on site or conduct interviews which he would normally do as part of phase 1. The cost of this initial phase would be between $4,000 and $10,000 to complete. Phase 2 involves onsite sampling and testing to determine the type and extent of any contamination. Phase 2 might require repeated sampling depending on the degree and extent of contamination found. The cost of a phase 2 environmental site assessment for the subject land was estimated by Dr Gunton at $60,000. If no contamination was found no further expenditure would be needed but if it was, a decontamination plan would need to be developed. Following the decontamination work, the site would again be checked to ensure the site had been remediated to levels that met the required standards. Ongoing testing might be required for a number of years. On a worst case scenario, Dr Gunton estimated that the cost to decontaminate the subject land would be $1,034,000. The vast majority of the cost would be the removal of the area of the whole site (i.e. 1254 square metres) below the basement level to a depth of 3.5 metres. The minimum cost for phases 1 and 2 only would be $64,000.
The Subject Land
The subject land is situated at the southern end of Lonsdale Street close to Cooyong Street and Civic and is well placed for commercial including retail use. Braddon is rapidly developing into an area of medium density mixed residential and commercial use. The parties agree that the H&B use of the subject land is retail commercial on the ground floor, offices on the first floor with residential on the floors above. They did not agree on the details of a development on the subject land. They agree that the area of the subject land is 1254 square metres and that is in the CZ3 zone which permits a plot ratio of 3:1 provided that residential use is not less than 1254 square metres which results in a gross floor area (GFA) of 3762 M2. The land has a frontage of 30.8 metres to Lonsdale Street and a depth of 40.6 metres. The building height is restricted to 22 metres. It is next to an operating service station.
The lease purpose clause of the subject land permits the following:
(i)community use LIMITED TO educational establishment;
(ii)freight transport facility;
(iii)indoor recreational facility LIMITED TO fitness centre and gymnasium;
(iv)light industry;
(v)non retail commercial use LIMITED to office and business agency;
(vi)plant and equipment hire business;
(vii)residential use PROVIDED THAT the site is decontaminated to the satisfaction of the Territory;
(viii)restaurant;
(ix)shop PROVIDED ALWAYS THAT the maximum gross floor area of a supermarket or other shop selling food shall not exceed 200 square metres;
(x)transport depot;
(xi)vehicle sales; and
(xii)warehouse;
PROVIDED ALWAYS THAT residential use shall not be permitted at ground floor level or first floor level;
FURTHER PROVIDED ALWAYS THAT the basement shall be used for carparking only.
The above uses are substantially expanded by the interpretation clause in the Crown lease. The Crown lease permits residential use but with the proviso that “the site is decontaminated to the satisfaction of the territory” (T-27). The requirement to decontaminate was previously contained in DA No. 200913940 but the Applicant applied to amend the DA so that the decontamination condition was moved into the lease.
Comparable Sales
Both valuers agreed that the comparable sales method was the most suitable in the circumstances. Mr Robertson said that four sales were comparable. These were 27 Lonsdale Street, 8 Mort Street, and 43-45 Torrens Street all in Braddon, and the fourth sale was in Turner at 6 Watson Street. Mr Green did not offer any other comparable sales but provided further information and alternative analyses of the four sales relied on by Mr Robertson.
Mr Robertson said that the Turner sale (block 1 section 45 Turner) on 21 February 2008 for $3,000,000 showed a commercial rate of $1362/square metre for a property that was substantially inferior to the subject land both in terms of its locality and permitted land uses. This figure supported his rate per square metre for the subject land of $1,200 on 1 January 2009 and $1430 for 2010 and 2011. Mr Green said that this sale was less useful because residential was not a permitted use but did not disagree with the commercial rate evidenced by the Turner sale. The Tribunal accepts that this sale provides a minimum commercial rate that would underpin any rate that might be applied to the subject land.
The Applicant objected to the sale in 2011 of 43-45 Torrens Street (block 23 section 21 Braddon) as being a reliable comparative sale because the vendor was a company controlled by Mr T who also had a part interest in the purchaser. The evidence supported this view. The Commissioner argued that an allowance of a deduction of 5% would be a sufficient adjustment for any related party influence. The difficulty is that neither the Tribunal nor the parties have any evidence to show what percentage adjustments, if any, should be made to the sale price. In these circumstances, the Tribunal will not have regard to this transaction.
The sale of 27 Lonsdale Street (block 14 section 20 Braddon) took place in August 2008 for $4,300,000. The site area is 1252 square metres and has a plot ratio of 2:1 giving a gross floor area in square metres of 2504. The lease purpose clause on that date did not permit residential use and was generally more restrictive than that of the subject land. This land like the subject land is in the CZ3 zone which permits residential on floors above the first. On the condition that 1252 square metres is developed for residential, an increased plot ratio of 3:1 is allowed but a change of lease purpose is required. The addition of residential will probably result in a Change of Use Charge (“CUC”) under section 277 of the Planning and Development Act 2007 if this results in an increase in value of the land.
Mr Robertson estimated that costs of demolition increased the sale price by $150,000 and Mr Green did not disagree with this sum. Mr Robertson reduced the sale price by 5% for adjoining owner influence as the purchaser Mr B was the owner of the properties on either side of 27 Lonsdale Street. This resulted in a deduced land value of $4,235,000 with a commercial GFA rate of $1691 per square metre.
Mr Green however considered that while a 5% adjustment was appropriate when two blocks were involved, in his opinion the deduction should increase to 10% because this was a three block consolidation. Mr Green in his report had accepted 5% because he then thought it was a two block consolidation. He did not offer any sales evidence to support his view that 10% was now the correct adjustment. If the 10% reduction of Mr Green is used in the adjustment the sale price becomes $4,020,000, which gives a commercial GFA rate of $1,605 per square metre. Mr Robertson offered some evidence that the purchaser Mr B, who was obviously aware that the consolidation involved three blocks had told another AVO valuer that he had paid a 5% premium to obtain the land. The Tribunal is not of course bound by the technical rules of evidence. In my view, based on the evidence available the Tribunal believes that a 5% adjustment is the most appropriate. It is of interest to note that both valuers in Junstamp v Commissioner for ACT Revenue [2013] ACAT 50 agreed that the correct adjustment was 5%.
In August 2010, blocks 13, 14 and 15 were consolidated by DA201017683 and the lease purpose clauses amended to include residential use as well as similar uses to that of the subject land. The DA indicated a CUC, if any, was payable within 28 days. There was no requirement to decontaminate in either the DA or the draft lease. Mr Robertson speculated and said, in cross examination, that Mr B as a hypothetical prudent purchaser would have investigated contamination earlier on the adjoining blocks 13 and 15 and known contamination was unlikely on block 14. This speculation is not helpful to the Tribunal.
Mr Robertson gave oral evidence that he had been told that a CUC of $383,000 was paid. The applicant protested that the evidence was hearsay and should be rejected. The Applicant also argued that a subsequently determined CUC should not be used to conclude what was in the mind of a hypothetical purchaser at some earlier time. The informed hypothetical purchaser would have known that a CUC was payable on any increase in value and would have taken this into account although the precise amount would be an estimate only. The Tribunal is of the view that the amount of the CUC actually paid is the best figure to be used in this exercise. The Tribunal notes in Junstamp, mentioned above, that it was accepted that the CUC paid on the lease variation of block 14 was $287,500. In ensuring the Tribunal is comparing like with like and there is a CUC for the lease variation required to achieve comparability, the CUC must be added to the sale price. However, in the present case it would be unsafe for the Tribunal to accept Mr Robertson’s evidence and set the CUC at $383,000.
The contract for the sale of 8 Mort Street (block 5 section 28 Braddon) is dated 24 March 2011 for $5,000,000. The site area is 1517 square metres and has a plot ratio of 3:1, giving a gross floor area in square metres of 4551 assuming at least 1,517 is for residential use. The lease purpose clause on that date was generally similar to that of the subject land. This land like the subject land is in the CZ3 zone which permits residential on floors above the first. It is not disputed that demolition costs of $100,000 were correct and that this cost should be added to the sale price.
There are a number of curious aspects in the sequence of events leading to the contract dated 24 March 2011. It would appear that Mr O, a well known and experienced developer in Canberra, before he had a contract spent many thousands of dollars to get the lease varied, the CUC paid and plans prepared and approved for a seven storey building plus two basement levels of parking. The Applicant suggested Mr O may have had an option and that may be correct but the Tribunal simply does not know. As early as 31 May 2010, the vendor appointed Mr O’s architect to lodge a DA (Exhibit A5). On 8 September 2010, a DA to vary the lease was approved (Exhibit A4). On 20 September 2010, a DA with development plans was lodged and it was approved on 7 March 2011 (Exhibit A3). Those plans increased the GFA to 5850 square metres. A little over two weeks later the contract was signed. Each DA required an assessment of contamination to be made. After settlement a new Crown lease was granted to the purchaser on 29 November 2011 (EX A2) which did not contain the obligation to assess the contamination. There was much speculation about what Mr O as an experienced developer did or did not do, whether he had an enforceable contract, whether the land was contaminated, various other matters and who paid the CUC. If it was the vendor then the CUC should not be added to the purchase price but if it was the purchaser then the sale price should be increased by the CUC. Mr Robertson said that the CUC was $369,000 but in Junstamp previously mentioned the CUC for this lease variation was accepted by the Tribunal as being $500,000. The Tribunal is not satisfied it knows the correct CUC and declines to adjust the sale price.
The Tribunal finds that the sale of 8 Mort Street occurred on the 24 March 2011 for a sale price of $5,000,000, which should be increased by the demolition costs of $100,000 to $5,100,000.
The plans approved on 7 March 2011 for 8 Mort Street were for 59 residential units and 320 square metres of commercial space. Both valuers agreed that the subject land was superior in terms of commercial use. Mr Green analysed 8 Mort Street and concluded that the residential unit rate was $78,576 per unit based on a unit size of 72 square metres. Mr Robertson produced a unit rate of $78,000 for the property. The above unit rates are based on an adjusted sale price of $5,100,000.
Other Matters
The Respondent argued that a general percentage change to the UV was to be avoided and relied on the decision in Re Gaider [1979] AATA 48. I am not convinced that the decision is as far reaching as the Respondent contends. At paragraph 9, the Tribunal rejected adjusting the UV based on such factors as “inflation of the currency … increase in the cost of living … increases in incomes”. These matters are of a general nature and do not directly concern the subject land or the development of the subject land. I do not necessarily rule out adjustments based on percentages but accept the need for caution.
The Respondent also argued that if the subject land was found to be contaminated in the future, the Respondent would be obliged to refund to the taxpayer the amount of any overpayment as provided for in section 19 of the TAA. Section 11A of the Rates Act might also require a redetermination as contamination of the subject land is likely to amount to a change of circumstances adversely affecting the UV of the land.
The Applicant argued that a hypothetical purchaser would reduce the UV of the subject land by 2% for delays in decontaminating the site. Mr Green did not provide any sales evidence to support his general proposition nor for the selection of 2%. The Applicant has the burden of proof under section 101 of the TAA and has not convinced the Tribunal that the 2% reduction is justified.
The Applicant also argued that the UV of the subject land should be reduced by a further 10% because the risk of contamination would alter the circumstances of the sale. Mr Green said that fewer financiers would be willing to lend and those few would require additional loan security and charge higher fees to offset the greater risk. The result of these impediments to financing would limit the pool of potential buyers and depress the sale price by 10%. This gloomy picture was not supported by any specific evidence which the Tribunal believes the Applicant must produce if is to discharge the burden of proof that it carries. The Tribunal accepts the proposition that the general risk of contamination in Braddon has been absorbed into the price structure for the area and that a hypothetical informed purchaser would know this. Where a specific risk is identified such as the UST then a specific deduction can properly be made. This is also the case where a specific activity is required such as the phase 2 assessment alluded to by Dr Gunton. The cost of this activity has been accepted by the Tribunal as a correct deduction from the UV.
The Applicant’s closing submission adopted a 10% deduction from the UV for what Mr Green described as “adjoining service station influence”. In his report (Exhibit A9), he allowed a figure of 5% but on analysing the sale of 43-45 Torrens Street he said that it showed a 20% difference in the rate per square metre compared with the sales of 8 Mort Street and 27 Lonsdale Street. He attributed this lower rate to the negative influence of the adjoining service station. The Respondent countered by arguing that this was the result of incorrectly using a plot ratio of 2:1 when it should have been 3:1. It is unnecessary to evaluate these competing arguments because the Tribunal has already concluded that the sale of the Torrens Street property is not a reliable comparative sale because of related party influence. Mr Green did not offer any other comparative sales evidence to support his 10% deduction. The Tribunal does not accept the Applicant has discharged its burden of proof.
Before the Commissioner can re-determine the UV of the subject land under section 11A of the Act, there must first be a change of circumstances that affects that value. The variation of the lease purpose to increase the number of usages available to the lessee and, in particular, to permit residential use culminated in the issue of the varied lease on 18 December 2009 and is a change of circumstances. The Applicant denies however that it increases the UV of the subject land because the subject land cannot be used for residential purposes until any contamination is remediated. It is only then the Applicant says that its value is increased. At a practical level, both Mr Green and Mr Robertson have placed a value on the residential use of the subject land that exceeds $1,034,000, which is the maximum cost of remediation. The lease variation also added a number of uses which provided greater flexibility in the use of the subject land and in all likelihood increased its value. The Tribunal is of the view that the lease variation did increase the UV of the subject land notwithstanding the condition that any contamination must be remediated. The requirements of section 11A are satisfied.
It seems to the Tribunal that the process of valuation is a mixture of science and art. Much of the information is objective but the interpretation of that information is both complicated and subjective. It is adjusted through the application of the individual valuer’s experience which permits a range of possible outcomes. The process is perhaps not unlike reaching a legal decision.
The Unimproved Value of the Crown Lease of the Subject Land
Mr Green accepted that the commercial rate per square metre of GFA for the subject land of $1500 was appropriate. He based this on the rate attributable to 8 Mort Street but allowed only 300 square metres of commercial. Mr Robertson selected a 2009 rate of $1,200 and the rate for 2010 and 2011 of $1,430.The Tribunal accepts these commercial rates of Mr Robertson which are supported by the rate for the Turner sale of an inferior property. The subject land is located close to the city and is very suitable for commercial activities both retail and office. Mr Robertson proposed 2508 square metres of commercial which the Tribunal accepts as a better use of the subject land.
Based on 8 Mort Street, Mr Green considered a rate of $78,576 per residential unit of 72 square metres was appropriate while Mr Robertson’s rate was $78,000. Mr Robertson suggested a residential component of 16 units on the subject land while Mr Green contemplated a larger component of 48 units. In Mr Robertson’s proposal the units would be of 78 square metres and occupy 1254 square metres of GFA. The Tribunal considers that the 16 unit proposal is preferable with the greater GFA given over to commercial use. The Tribunal will adjust Mr Robertson’s rate for the larger sized unit and adopt a residential unit rate of $80,000 for 2009 and $85,000 for 2010 and 2011.
Without making any deductions for contamination issues the UV of the subject land as at 1 January 2009 is set out below:
Commercial component: 2,508 square metres x $1,200 square metres
= $3,009,600.
Residential component: 16 residential units x $80,000 per residential unit = $1,280,000.
UV without deductions = $4,289,600.
Without making any deductions for contamination issues the UV of the subject land as at 1 January 2010 and 2011 is set out below:
Commercial component: 2,508 square metres x $1,430 square metres
= $3,586,440.
Residential component: 16 residential units x $85,000 per
residential unit = $1,360,000.
UV without deductions $4,946,440.
The valuer or the hypothetical purchaser “is required to take the lease as it is” (Wilcox J in Hamilton v Demgold Pty Ltd). In the case of the subject land this involves the requirement that a phase 2 assessment be made. Dr Gunton estimated that this will cost $64,000 and this sum should be deducted from the previously calculated UV amounts. This will result in the UVs set out below which the Tribunal directs the Commissioner to adopt on the relevant dates, although further adjustment needs to be made in accordance with the paragraph below:
1 January 2009 - $4,225,600
1 January 2010 - $4,882,440
1 January 2011 - $4,882,440
The valuer or hypothetical purchaser will be aware from publicly available information that there is a sand filled UST on the subject land that is an identified possible source of contamination. The UST will require to be removed and the resulting damage caused will need to be made good. The estimated cost should be deducted from the UV of the subject land. Unfortunately there is no evidence of this cost before the Tribunal. The Tribunal therefore directs the Respondent to seek an informed opinion on the cost of the removal and make good and deduct this sum from the UVs set out above.
Relevant Law
Rates Act 2004
6Meaning of unimproved value
(1)The unimproved value of a parcel of land held under a lease from the Commonwealth is the capital amount that might be expected to have been offered on the relevant date for the lease of the parcel, assuming that—
(a)the only improvements on or to the parcel were the improvements (if any) by way of clearing, filling, grading, draining, levelling or excavating—
(i)if the Territory or Commonwealth had, before the parcel became rateable as a separate parcel, granted a development lease of land that included the parcel—made by the lessee under that lease or by the Territory or Commonwealth, or the cost of which was met by that lessee or by the Territory or Commonwealth; or
(ii)in any other case—made by the Territory or Commonwealth or the cost of which was met by the Territory or Commonwealth; and
(b)the circumstances that existed on the prescribed date also existed on the relevant date; and
(c)on the relevant date, the lease had an unexpired term of 99 years; and
(d)a nominal rent was payable under the lease for the 99 year term.
NoteRelevant date is defined in the dictionary.
(2)The unimproved value of a parcel of land held in fee simple is the capital amount that might be expected to have been offered for the parcel at a genuine sale on the relevant date on the reasonable terms and conditions that a genuine seller would require, assuming that no improvements had been made on or to the parcel.
(3)In this section:
prescribed date, for a parcel of land, means—
(a)for a determination of the unimproved value of the parcel—the date the parcel became rateable; or
(b)for an annual redetermination of the unimproved value of the parcel—the date the redetermination applies; or
(c)for a redetermination of the unimproved value of the parcel under section 11 (Redetermination—error) or section 11A (Redetermination—change of circumstances)—the date the redetermination begins to apply to the parcel.
11ARedetermination—change of circumstances
(1)This section applies if a change of circumstances happens in relation to a parcel of land that affects the unimproved value of the land.
(2)The commissioner may redetermine the unimproved value of the parcel as at a date if the unimproved value as at that date is used in calculating the average unimproved value of the land for the year in which the change of circumstances happens.
(3)The commissioner may also redetermine the unimproved value of the parcel as at a later date if a determination of the unimproved value as at that date did not take the change of circumstances into account.
(4)A redetermination under subsection (2) applies to the parcel for the period—
(a)beginning on the day the change of circumstances happened; and
(b)ending on 30 June in the next calendar year.
(5)A redetermination under subsection (3) applies to the parcel for the period—
(a)beginning on 1 July in the calendar year in which the relevant date when the redetermination is made falls; and
(b)ending on 30 June in the next calendar year.
Example—s (4)
On 1 September 2009, Mungo obtained development approval for an authorised use of Mungo’s parcel of land (the change of circumstances) that increases the unimproved value of the parcel. Before the change of circumstances, the commissioner determined the unimproved value of the land as at 1 January 2007 as $260 000, 1 January 2008 as $280 000 and 1 January 2009 as $300 000.
The average unimproved value (the original AUV) of the land for the year beginning 1 July 2009 was calculated as—
($260 000 + $280 000 + $300 000)/3=$280 000
After the change of circumstances, the commissioner redetermined the unimproved value of the land as at 1 January 2007 as $320 000, 1 January 2008 as $340 000 and 1 January 2009 as $360 000.
The average unimproved value (the recalculated AUV) of the land was recalculated as:
($320 000 + $340 000 + $360 000)/3=$340 000
The original AUV applies for the period starting on 1 July 2009 and ending on 31 August 2009, and the recalculated AUV applies for the period starting on 1 September 2009 and ending on 30 June 2010.
NoteAn example is part of the Act, is not exhaustive and may extend, but does not limit, the meaning of the provision in which it appears (see Legislation Act, s 126 and s 132).
relevant date, for a parcel of land, means a date when a determination of the unimproved value of the parcel is or is to be made.
Taxation Administration Act 1999
19Entitlement to refund
(1)If a taxpayer has paid a greater amount of tax in relation to a tax liability than the amount assessed for that liability, the commissioner must refund the difference to the taxpayer, subject to this part.
(2)To remove any doubt, it is declared that an amount by which tax is overpaid is taken to be tax for this part.
101Grounds for objection
(1) The grounds for the objection must be stated fully and in detail, and must be in writing.
(2) The grounds for the objection, for a reassessment, are limited to the extent of the reassessment.
(3) The burden of showing that an objection should be sustained lies with the taxpayer making the objection.
Planning and Development Act 2007
277Lease variation charges—s 277 chargeable variations
(1)The commissioner for revenue works out the lease variation charge for a s 277 chargeable variation of a nominal rent lease as follows:
(2)In this section:
LVC means the lease variation charge payable for the s 277 chargeable variation of the lease.
V1—
(a)for a variation other than a consolidation or subdivision, means the capital sum that the lease might be expected to realise if—
(i)the lease were varied as proposed; and
(ii)the lease were genuinely offered for sale immediately after the variation on the reasonable terms and conditions that a genuine seller would require; and
(iii)the rent payable throughout the term of the lease or, for a variation that involves the surrender of a lease and issue of a new lease, the new lease, were a nominal rent; or
(b)for a variation that is a consolidation or subdivision, means the capital sum that the new lease or leases to be granted under the consolidation or subdivision might be expected to realise if—
(i)the consolidation or subdivision were to take place as proposed; and
(ii)the new lease or leases were genuinely offered for sale immediately after the variation on the reasonable terms and conditions that a genuine seller would require; and
(iii)the rent payable throughout the term of the new lease or leases were a nominal rent.
V2—
(a)for a variation other than a consolidation or subdivision, means the capital sum that the lease might be expected to realise if—
(i)the lease were not varied during the remainder of its term; and
(ii)the lease were genuinely offered for sale immediately before the variation on the reasonable terms and conditions that a genuine seller would require; and
(iii)the rent payable throughout the term of the lease, or lease to be surrendered, were a nominal rent; or
(b)for a variation that is a consolidation or subdivision, means the capital sum that the lease or leases to be surrendered under the consolidation or subdivision might be expected to realise if—
(i)no consolidation or subdivision were to take place during the remainder of the term of the surrendered lease or leases; and
(ii)the lease or leases were genuinely offered for sale immediately before the consolidation or subdivision on the reasonable terms and conditions that a genuine seller would require; and
(iii)the rent payable throughout the term of the lease or leases to be surrendered were a nominal rent.
(3)If the amount worked out as V1 is equal to or less than the amount worked out as V2, no lease variation charge is payable.
(4)If the development approval for the relevant development application relates to 2 or more s 277 chargeable variations, V1 and LVC are worked out as if the s 277 chargeable variations were a single s 277 chargeable variation of the lease.
………………………………..
Mr A. O’Neil – Senior Member
PUBLICATION DETAILS
FILE NUMBER: | AT 12/19 |
PARTIES, APPLICANT: | Giusida Pty Ltd |
PARTIES, RESPONDENT: | Commissioner for ACT Revenue |
COUNSEL FOR APPLICANT | Mr R. Arthur |
COUNSEL FOR RESPONDENT | Dr D. Jarvis |
SOLICITORS FOR APPLICANT | Ms McCormick, Bradley Allen Love |
SOLICITORS FOR RESPONDENT | Ms Holley, ACT Government Solicitor |
TRIBUNAL MEMBERS: | Mr A. O’Neil – Senior Member |
DATES OF HEARING: | 21-22 February 2013 28 March 2013 6 June 2013 |
PLACE OF HEARING: | Canberra |
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