| JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL STREAM : COMMERCIAL & CIVIL ACT : TAXATION ADMINISTRATION ACT 2003 (WA) CITATION : HAZEL HOLDINGS PTY LTD and COMMISSIONER OF STATE REVENUE [2013] WASAT 93 MEMBER : JUSTICE J A CHANEY (PRESIDENT) HEARD : 30 MAY 2013 DELIVERED : 24 JUNE 2013 FILE NO/S : CC 146 of 2013 BETWEEN : HAZEL HOLDINGS PTY LTD Applicant
AND
COMMISSIONER OF STATE REVENUE
Respondent
Catchwords: Taxation - Duty on transaction involving sale of land - Sale of 32 lots 'in one line' - Whether dutiable value should be based on aggregate value of each lot if sold separately or value if sold 'in one line' - Dutiable transaction Legislation: Duties Act 2008 (WA), s 10, s 11, s 15, s 26, s 27, s 36(4)(b)(i)
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Result: Reassessment of duty ordered
Summary of Tribunal's decision: This matter raised the question as to how, for the purposes of assessment of duty, the value of a transaction involving a single sale of 32 lots of residential land should be determined. The Commissioner of State Revenue contended that the dutiable value of the transaction was the aggregate of the amounts for which each lot could be sold. The applicant contended that the value should be assessed on a 'sale in one line' basis. That basis brought to account the factors which a buyer of multiple lots, intending to resell them individually, would apply in order to take account of matters such as holding costs, selling costs, profit and risk.
The Tribunal concluded that the applicant's approach was the correct approach and directed that the Commissioner reassess the duty.
Category: B
Representation: Counsel:
Applicant : Ms PA Martino
Respondent : Mr J O'Sullivan
Solicitors:
Applicant : PA Martino
Respondent : State Solicitor for Western Australia
Case(s) referred to in decision(s):
Flotilla Nominees Pty Ltd v Western Australian Land Authority & Anor (2003) 27 WAR 403
Nelson v Housing Commission of New South Wales (1962) 8 LGRA 408
Spencer v The Commonwealth of Australia (1907) 5 CLR 418
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REASONS FOR DECISION OF THE TRIBUNAL:
Introduction 1 The applicant, Hazel Holdings Pty Ltd (Hazel Holdings) seeks a review of a decision by the respondent, the Commissioner of State Revenue (Commissioner) disallowing an objection to an assessment of duty in relation to a contract to purchase 32 lots of recently subdivided land. Duty is assessed on the unencumbered value of the land the subject of the transaction. The point of disagreement between the parties is as to the basis of establishing that value. The Commissioner contends that the value is to be ascertained by aggregating the individual values of each lot. The applicant contends that value should be determined on the basis of what it describes as a 'sale in one line' which involves discounting the gross realisable value of the 32 lots to take account of matters such as holding costs, costs of sale and profit and risk. 2 If the approach to valuation contended for by the respondent is accepted, further issue arises as to what value should be attributed to the land as a result of the application of that method of valuation.
The background facts 3 A company called Sky City Blue Pty Ltd (Sky City) purchased two lots of land within the Harvey Town site within the Shire of Harvey in February 2008. The land was purchased for the intention of being subdivided and sold as individual residential lots. The development was to be known as the Tuart Private Estate. 4 Sky City subsequently applied for and was granted approval to subdivide the land into 46 lots, 44 of which were residential lots ranging in size from 550 square metres to 747 square metres. Subdivision subsequently proceeded and individual certificates of title were issued in respect to the subdivided lots. The lots were marketed to the public by Sky City as vacant residential land. 5 Sky City was incorporated in about September 2007. Its Directors were Mr Timothy Paul Jasper, whose father, Mr Brian Fensome and the wives of business associates of Mr Jasper and Mr Fensome, Tony Calabro and his brother Joe Calabro (Calabros). 6 The shareholding of Sky City was held between a family company of Mr Jasper and Mr Fensome known as Golden Hotels Pty Ltd (Golden Hotels) and various entities associated with the Calabros. (Page 4)
Initially the Calabros had a majority of the shareholding in Sky City being approximately 75%, with Golden Hotels holding the remaining 25%. 7 Funding for the purchase was provided by Westpac Banking Incorporation, and it was intended that the funding would be repaid as each block sold. Until the funding was repaid, the shareholders were to meet the costs associated with the funding in proportion to their shareholding. As it turned out, the entire funding of the Wespac loan was met by Golden Hotels, or perhaps some other entity associated with Mr Jasper and Mr Fensome. Because they had funded the loan, Golden Hotels shareholding in Sky City was increased to 50% by the time the subdivision was completed towards the end of 2009. 8 The lots were then marketed, and some sales occurred in 2010 and 2011, but out of the 44 lots only approximately 12 sold during that two year period. Of those 12, four were purchased by companies associated with Mr Jasper and Mr Fensome. Golden Hotels continued to fund the Westpac loan throughout that period. 9 By late 2011, Mr Fensome and Mr Jasper decided to purchase the remaining lots of the development through another corporate entity which they controlled, being the applicant Hazel Holdings. 10 Mr Fensome sought advice from Mr Scott Robinson, a valuer, as to the market value of the 32 lots if sold in one transaction. As a result of advice from Mr Robinson, Hazel Holdings entered into a contract to purchase the remaining 32 lots in the Estate for a price of $2,133,344. 11 Mr Jasper explained to the Tribunal that the contract needed to be at market value because their obligations to Westpac Banking Incorporation which required the properties to be sold at market value, and also because the Calabros had guaranteed borrowings to Westpac and therefore the remaining lots in the development had to be sold at market value irrespective of the fact that the parties involved in the transactions were related. 12 The contract of sale was subsequently lodged for assessment of duty. The assessment was for $193,992.50 based on a dutiable value of the transaction of $3,885,000. Although 32 titles were to be conveyed, the transaction was effected by a single contract of sale and a single transfer of land document. 13 On 13 March 2012, two contracts were entered with unrelated third parties by Hazel Holdings for the sale of a total of eight lots for a price (Page 5)
which represented $120,000 per lot. Those contracts were conditional, the condition was not fulfilled, and the sales did not proceed. 14 Subsequently, on 21 November 2012, the applicant sold 24 lots from the Estate to an unrelated party, Rainchase Holdings Pty Ltd for a total of $1,600,000, or $66,660 per lot on average.
The value of the individual lots 15 Evidence of value of the land in question was provided to the Tribunal by Mr Scott Robinson, who had been instructed by the applicant, and Mr John Harvey, who had been instructed by the respondent. In accordance with the Tribunal's usual practice, the two valuers were required to confer to identify the matters upon which they agreed, and the matters upon which they disagreed. They agreed with the values of each individual lot as at the relevant date which ranged from $95,000 to $130,000. They thus agreed that if sold individually, the lots collectively would achieve a gross value of $3,835,000 inclusive of GST, or $3,651,653 exclusive of GST. 16 It is on that basis that the Commissioner contends that the dutiable value of the land should be assessed.
Value on the basis of a sale in one line 17 Mr Harvey suggested a value of $2,800,000 in the event that valuation proceed on a 'one line basis'. That figure was arrived at by the following calculation:
| Sale In One Line Approach | Gross Realisation Value on an Individual Lot Sale Basis
GST Exclusive assuming margin scheme | $3,651,651 | Less Legal and Selling Costs, Say | 3.50% | $123,486 | | Net Realisation | $3,528,165 | Less Profit and Risk, Say | 10.00% | $320,742 | $3,207,423 | Less Legal Costs on Purchase | 1.50% | | | 4.50% | | | 8.50% | | | $406,180 |
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$2,801,243 | | Gross Realisation Value on an in One Line Basis | $2,801,000 | | Adopt | $2,800,000 | 18 In the joint statement of the valuers, Mr Harvey said of this valuation: My assessment of a sale in one line represents a wholesale discount of 23%. My approach has been to establish what a willing buyer would pay for these lots and a willing seller would sell the lots for in their current developed state with underground services, sealed bitumen roads, and boundary fencing situated within a well-established rural town, located 50 kilometres from the City of Bunbury approximately 70 kilometres from the City of Mandurah and with good access to the new Forrest Highway connecting Perth to the Southwest. From my verbal enquiries to real-estate professionals, it appears that the sale in one line calculation is frequently provided by valuers to lending institutes in order to advise them of their minimum level of risk if a developer defaults. I have also been informed that there is evidence of sales in one line transaction occurring where a discount of up to 40% has been applied. Given this percentage of discounting allowed by certain developers it would tend to indicate that in my opinion these transactions were possibly sold under distressed sale condition not within the framework of a willing buyer willing seller concept of market value. This would be especially evident, in my opinion, if the sale price of the lots were less than that of the original development cost. In general terms a sale in one line for the initial development of the subdivision calculates the Gross Realisation of a project and makes allowances for factors such as demolition and development costs, selling and legal fees, element of profit and risk associated with the project, holding costs, stamp duty, GST and in some cases an allowance for public open space. In addition a sale in one line often takes into account a perceived discount a prudent investor would expect, given the purchase of multiple lots and in consideration of the above mentioned factors. My approach has therefore been to establish what the Market Value of a sale in one line would be in keeping with The Australian Property Institute and the International Valuation Standards Committee definition of Market Value: (Page 7)
'The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion' Valuation principles and practice second addition page137 In keeping with this definition of market value I have assessed the sale in one line at $ 2,800,000 exclusive of GST assuming the margin scheme. 19 Mr Robinson assessed the value on a 'sale in one line' basis at $2,200,000 based on the following calculation:
| Gross Realisation from Individual sales (inclusive of GST) | 32 lots @ $120,000 per lot | $3,840,000 | | Gross Realisation (exclusive of GST - assuming the margin scheme) | $3,656,198 | | Less Selling, Advertising Expenses and Settlement Costs @ say 6%) | $ 230,400 | | Less Profit and Risk @ say 20% | $ 570,966 | | Less Rates and Taxes @ say $250 per lot | $ 8,000 | | Less Interest over selling period of 24 months @ say 9% | $ 535,489 | | Less Stamp Duty on Acquisition | $ 112,949 | | One Line Sale Value | $2,198,394 | | | 20 Mr Robinson continued: We note this represents a discount of some 42.71% on the assessed gross realisation of $3,840,000. I am aware of other 'one line sale' transactions in the Peel Region that have generally analysed to around 40% discount on the retail gross realisation values. The end result of this cash flow calculation is in my view a realistic guide as to the market value of the subject lots on a 'one line sale' basis. This calculation measures what a prudent purchaser would be able to afford to pay for the property, market and sell the lots at a retail price and includes an allowance for a commercially realistic risk weighted return for the buyer reflecting the prevailing soft market conditions for vacant residential land in this location. As further evidence, we are aware 24 lots of the 32 lots in the subject estate have again been on sold in an arm's length transaction at a 'one line sale' price of $1,600,000 representing $66,667 per lot or a discount on the above tabulated values of 43.86%.
The proper assessment of duty 21 Section 10 of the Duties Act 2008 (WA) (Duties Act) imposes duty on 'dutiable transactions'. (Page 8)
22 Section 11 defines 'dutiable transaction'. It relevantly defines dutiable transaction as 'an agreement for the transfer of dutiable property, whether conditional or not'. 23 Relevantly, s 15 of the Duties Act provides that land in Western Australia is dutiable property. 24 Section 26 provides that duty is chargeable by reference to the dutiable value of a dutiable transaction at the general rate of duty. Section 27 provides that the dutiable value of a dutiable transaction is either the consideration for the dutiable transaction, or, relevantly, where the unencumbered value is greater than the consideration for the transaction, the unencumbered value of the dutiable property the subject of the transaction. In this case, the consideration for the transfer of the 32 lots was $2,133,344. The lowest figure attributed to the value of the land the subject of the transfer was Mr Robinson's estimate of $2,200,000. It follows that the unencumbered value, whatever the Tribunal might ultimately determine it to be, is greater than the consideration for the transaction, and thus it is the unencumbered value which must be the dutiable value of the transaction under examination. 25 Section 36(4)(b)(i) of the Duties Act provides: (b) in applying the ordinary principles of valuation - (i) it is to be assumed that a hypothetical purchaser would, when negotiating the price of property, have knowledge of all existing information relating to the property[.] 26 That provision makes it clear that the ordinary principles of valuation are to be applied. Those well established principles find their origins in Spencer v The Commonwealth of Australia (1907) 5 CLR 418. In essence, the test is as to what price for the land would be agreed between a purchaser conversant with the land and a willing but not anxious vendor might agree for the sale of the land. The test was expressed by Isaacs J at 441 as follows: To arrive at the value of the land at [the relevant] date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. … (Page 9)
That is practically the same as asking what is the highest sum such a purchaser would give, because we must assume the owner would be willing to take the best he can get. The best he can get in those circumstances is the test of what he loses, and it is his loss which must be replaced. 27 The valuers who gave evidence agreed that the 'sale in one line approach' satisfied the test of the price that a willing buyer and a willing seller at arms length and acting knowledgably, prudently, and without compulsion (essentially the Spencer Test) where there is a sale of multiple lots intended to be sold for their highest and best use, in this case residential purposes. The respondent contends, however, that it is necessary to determine the unencumbered value of each lot at the time of the transaction in order to determine the dutiable value. 28 In my view, the respondent's contention ignores the true nature of the transaction. It is the dutiable transaction which attracts duty. The dutiable transaction in this case was an agreement to transfer dutiable property, namely 32 lots of land. The effect of the transaction was that it enabled the disposal by the seller, in one transaction to a single purchaser and on one day, of a parcel of land made up of 32 lots. The evidence of Mr Jasper, and of the valuers, which I accept, was that sales of lots over the preceding years had been particularly slow, and there was no reason to expect the rate of sales to improve. The respondent contends that sales could have been achieved by a reduction in price, but that submission is, at least to a degree, speculative, and the evidence before the Tribunal does not enable any assessment to be made as to whether or not, having regard to selling expenses and holding costs, any greater value might be achieved for the individual lots on some sort of fire sale basis. It was not disputed by the Commissioner, and was supported by the evidence of the valuers, that no purchaser of 32 lots would pay $3,835,000 for those lots at the relevant time in the market which subsisted at that time. 29 The question can be approached by looking at how the vendor might assess the value of the asset which it held at the relevant date. That value would not be assessed by simply looking at the likely selling price of the 32 lots individually and aggregating those figures. That is because the vendor would necessarily bring to account the fact that, in order to sell the lots, marketing costs would be incurred, there would inevitably be holding costs (as indeed in this case there were) by way of interest and outgoings on the land, and that in order to achieve sales, discounts from the anticipated prices for the lots may need to be given. It follows that a prudent vendor, willing but not anxious to sell, would agree to a price which represents a discount from the gross receipts from sale of the land, (Page 10)
in order to recover the value of the asset it holds. On the other side of the transaction, a purchaser would inevitably bring to account the deductions identified in the sale in one line calculations of the valuers, to ascertain the price which it was willing to pay for the lots. 30 There were not, in this case, 32 individual dutiable transactions. There was a single transaction for the sale of 32 lots. The true character of that transaction cannot be ignored in assessing the dutiable value of the land, namely the 32 lots sold together, that was the subject of the dutiable transaction. The respondent argues that the decision of Pullin J in Flotilla Nominees Pty Ltd v Western Australian Land Authority & Anor (2003) 27 WAR 403 (Flotilla) should lead to a different conclusion. That case was concerned with an assessment of five lots of land for the purposes of compensation following compulsory taking of the land. His Honour, after considering the observations of Hardie J in Nelson v Housing Commissionof New South Wales (1962) 8 LGRA 408, expressed the view that 'there has never been a change to the requirement of Spencer v The Commonwealth that in relation to the property being valued, the hypothesis should be that there is one vendor and one purchaser in relation to the property being valued'. He observed that the issue thrown up in the case before him was whether it has to be assumed that all of separate properties are being sold at one time to one purchaser, or whether there is a hypothetical separate transaction in relation to each lot. He concluded that it was not appropriate to assume there was one purchaser for all five lots being sold on the same date. He said that 'It would be a very strange result if the defendant were able to pay a lower rate per hectare to the plaintiff because it had five lots of land resumed, and to pay a higher rate in relation to' adjoining land where only one lot had been resumed. 31 There is a distinction between the context of Pullin J's observations in Flotilla, and the present case. In Flotilla, his Honour was considering the hypothetical assumptions which were to be made for valuation purposes. In the context of compensation, it is not surprising that his Honour concluded that it should not be assumed that there was a hypothetical purchase by a single purchaser of the five separate lots that had been resumed. It is inherent in the issue that was being considered that, were the assumption to be made that there was a sale of all five lots to one purchaser, the price which the purchaser would pay would be lower than the aggregate of the prices that would be paid by five different purchasers of the respective lots. (Page 11)
32 In this case, the task is to value the land the subject of the dutiable transaction. There is no cause to employ assumptions as to whether there is a single purchaser or multiple purchasers. The transaction involves a single purchaser purchasing 32 lots of land. The valuers were agreed that no single purchaser of 32 lots of land would pay the aggregate of the price of each lot which might be obtainable from purchasers of single lots. 33 In my view, the appropriate valuation method for present purposes is the 'sale in one line' method of valuation. 34 The respondent submitted that the sale in one line was in the nature of a distressed sale given the funding issues between the shareholders of Sky City. The valuers have not, however, approached their assessment of value on the basis of sale in one line on the assumption of a distressed sale. Mr Harvey suggested that the ultimate discount from gross realisable value inherent in Mr Robinson's figures, which discount Mr Robinson considered was consistent with his experience of other sales of bulk lots in the Peel Region, might be a rate applicable to sales in the context of distressed developments. That was not, however, the basis upon which Mr Robinson approached his valuation. Nor was Mr Harvey's sale in one line valuation figure of $2,800,000 based on any assumption of a forced or distressed sale. If the present transaction were undertaken in a context of distress, that would potentially have an impact on the consideration actually paid. The consideration is not, however, the basis for assessment of duty, since on all the evidence, the value of the 32 lots, even on a sale in one line basis, exceeds the consideration. There is no suggestion that the valuers have made any assumptions in arriving at their figures other than the assumption of a willing buyer and a willing seller at arms length appraised of all relevant information. The circumstances of the transaction are, therefore, irrelevant to the determination of dutiable value.
Valuation based on the sale in one line method 35 On balance, I prefer the value attributed to the 32 lots sold in one line as determined by Mr Robinson. 36 The principal differences between the calculations of each valuer lay in the area of costs associated with the sale, the allowance for profit and risk, and the holding costs comprising principally of interest. 37 Mr Robinson's explanation for his higher allowance for selling costs was that, at the relevant date, the market for lots of this nature was poor. That fact was accepted by Mr Harvey and reinforced by the evidence of (Page 12)
Mr Jasper. Mr Robinson considered that a purchaser would anticipate that there would be a need for vigorous marketing of the lots in order to achieve sales in a market of that kind, and accordingly his allowance of 6% for selling costs comprising mostly of advertising expenses, was reasonable. Mr Harvey accepted that a prospective purchaser would reasonably expect to need to spend significantly on advertising. In those circumstances, I am prepared to accept Mr Robinson's assessment of costs associated with sale at 6%. 38 Mr Robinson assessed profit and risk at 20%, but Mr Harvey considered that the allowance should be 10%. Mr Harvey justified his figure on the basis that a general profit and risk figure for a greenfield site would be in the range of 20 to 25%, and in the absence of any capacity to analyse profit and risk figures utilised in comparable sales of large numbers of lots in a completed development, he considered that a figure of 10% was reasonable. 39 Mr Robinson acknowledged that a 10% allowance in a good market would not be unreasonable. He considered, however, that a 20% allowance should be made in the circumstances of the present transaction because it was known at the time of the transaction that sales of the development had progressed slowly over the two years since its completion, and he considered that a prudent purchaser would bring to account the possibility that prices may need to be reduced in order to achieve sales. On that basis, he considered that a figure of 20% was reasonable. 40 Again, I prefer the estimate of Mr Robinson of the appropriate profit and risk deduction. In the context of a slow market and proven difficulties in disposal of lots within the development, I accept that a reasonable purchaser would apply a higher profit and risk deduction to cater for the uncertainties as to the timing and price that might be achieved with sales. 41 The third significant difference was the interest component of holding costs. Mr Harvey allowed holding costs of 8.5%, whereas Mr Robinson assumed interest at 9% over a selling period of 24 months. Mr Robinson, from personal experience, gave evidence as to the difficulties at the relevant time in obtaining bank funding in relation to residential subdivisions in the Peel Region. He said that banks were reluctant to lend on such developments, and where they did so would be likely to seek a higher rate of interest to cover the risks associated with a poor market. Mr Harvey's figure appears to assume that interest would be (Page 13)
incurred for one year, whereas Mr Robinson allowed for interest over a selling period of 24 months. Given the history of only eight sales to unrelated parties in the development in the approximately two years leading up to this transaction, I consider it is more likely that a prospective purchaser of the unsold portion of the development would adopt Mr Robinson's estimate of a longer selling period. I therefore prefer Mr Robinson's deduction on the basis of interest over that assessed by Mr Harvey. 42 As indicated in the passage setting out Mr Robinson's sale in one line valuation, he noted that the value which he assessed represented a discount of 42.71% on the assessed gross realisation of the 32 lots. He gave evidence that that figure was consistent with three other sales of multiple lots in the Peel Region around the time of the transaction under review, which he said also involved discounts in the vicinity of 40%. The details of those transactions were not formally proved in the Tribunal, and I have had no opportunity to examine their comparability. Mr Harvey had not undertaken any analysis of those transactions, although he appeared to accept that discounts of 40% had been applied on sales in one line. No objection was taken by the respondent to Mr Robinson's evidence on this point, notwithstanding the absence of particularised evidence of the transactions in question. 43 In the absence of any capacity to examine the underlying transactions, and although the respondent did not object to that evidence by Mr Robinson, I am disinclined to place weight on the assessment of the overall discount as supportive of Mr Robinson's opinion. For the reasons outlined above, however, I accept the rationale of the components of the calculation applied by Mr Robinson, and accordingly find that the value of the 32 lots the subject of the transaction in respect of which duty is payable is $2,200,000.
Conclusion 44 For those reasons, there should be a direction that the respondent reassess the duty the subject of the Duties Assessment Notice dated 29 February 2012 on the basis that the dutiable value of the transaction is $2,200,000. Order (Page 14)
for the transfer of 32 lots from Sky City Blue Pty Ltd to Hazel Holdings Pty Ltd is $2,200,000. |