Kneebone Service Station Pty Ltd and Commissioner of Taxation
[2000] AATA 324
•27 April 2000
DECISION AND REASONS FOR DECISION [2000] AATA 324
ADMINISTRATIVE APPEALS TRIBUNAL )
) No. NT1999/131
TAXATION APPEALS DIVISION )
Re KNEEBONES SERVICE STATION PTY LTD
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal J. Block, Senior Member
Date27 April 2000
PlaceSydney
Decision The objection decision under review is affirmed
..............................................
Senior Member
CATCHWORDS
INCOME TAX – Capital gains tax - Apportionment as between pre-capital gains tax land and post-capital gains tax land for the purposes of section 160P of the Income Tax Assessment Act 1936 - Method of valuation
Income Tax Assessment Act 1936; sec 160P; 160ZD(4)
Administrative Appeals Tribunal Act 1975
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Munro 97 ATC 5041
Case 53/96, 96 ATC 501
Case 38/94, 94 ATC 343
Case 61/94, 94 ATC 513
TD 94/64
REASONS FOR DECISION
27 April 2000 J. Block, Senior Member
The objection decision under review in this matter is the disallowance in part of an objection dated 20 November 1998 against an amended assessment dated 23 April 1996 in respect of the year ending 30 June 1993 ("relevant year").
(a) The Applicant was represented by Mr D.E. Andrews of Counsel instructed by Andrew Watts Lawyers of Sydney while the Respondent was represented by Mr Martin Dwyer, an officer of the Respondent.
(b) The Tribunal had before it the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with exhibits as follows:
Exhibit A1 is a letter dated 21 March 2000 addressed by Bruce Noble & Associates to the Applicant's solicitors;
Exhibit R1 is a detailed plan of the Site (as defined hereafter in these Reasons);
Exhibit R2 is a witness statement by Mr Robert Tew dated 3 April 2000.
(c) Oral evidence was given by Mr Bruce Noble, a valuator, on behalf of the Applicant and by Mr Robert Tew, also a valuator, on behalf of the Respondent.
Having regard to the evidence, both in writing and given orally, the Tribunal's findings of fact (and it is to be noted that in respect of the facts there was little in dispute between the parties) are as follows:
(a) In February 1981, the Applicant purchased a block of land situated at the corner of the Pacific Highway and Krambach Road in Nabiac; that block of land was improved by the construction thereon of a service station. That block of land was referred to in the proceedings before me (and is referred to in these Reasons) as "Site A".
(b) In January 1987 the Applicant (but see in this context subclause (c) below) submitted a development application to the Greater Taree City Council ("the Council"); that application involved an upgrade of the existing service station on Site A.
(c) Document T14 (at page 109) is an extract from the minutes of the Planning Committee of the Council; it is headed "Extract from Minutes of Ordinary Meeting - 13/7/87 Planning Committee Meeting - 6/7/87 Chief Town Planner's Report No. 22/87". Document T14 indicates that the applicant was a "B. Collins" and that the Owner was "D.G. & J.R. Paff (collectively referred to as "Paff") and Great Lakes Fuel Supply Pty Ltd (the name of the Applicant before it was changed after the sale to Ampol more fully referred to later in these Reasons). The minutes indicate that it was recommended that the development application be refused; the minutes read (relevantly) in this context as follows (pages 110 and 111 of the T Documents):
"It is recommended that the development application submitted by B.Collins of 138 Victoria Street, Taree seeking permission for redevelopment of existing service station on property Lot A DP 162597 and Lot 3 DP634927, Parish of Talawahl be refused by the Council, as the responsible authority under Section 90(1) of the Environmental Planning and Assessment Act for the following reasons:
(a) The development is contrary to the provisions of clause 19(c) of the Environmental Planning and Assessment Model Provisions in 1980;
(b) The proposed development will substantially increase traffic generation from the site and will increase the potential for unacceptable dangerous traffic movements from and onto the Pacific Highway.
(c) No provision has been made for the parking of large trucks and semi-trailers.
(d) The proposed development is opposed on traffic grounds by Council's Traffic Advisory Committee.
The Committee discussed this development on site between 3.15pm and 3.25pm.
RECOMMENDED that Council defer consideration of Development Application 87/12 to permit the Chief Town Planner to hold discussions with the Applicant for the possible acquisition and/or use of additional land at the rear of the site.
4. Development Application 87/12 (Item 46 Planning Committee Report to Council 13/7/87)
Council, on 13 July, 1987 resolved:
"That Council defer consideration of Development Application 87/12 to permit the Chief Town Planner to hold discussions with the applicant for the possible acquisition and/or use of additional land at the rear of the site."
I have written to Bruce Collins and requested that he contact you to discuss the matters raised by the Council. I have provided him with a copy of the Planning Committee's report which incorporates the Traffic Committee's advice.
C.J. Power
Chief Town Planner."
(d) As to why, assuming the development application referred to in subclause (c) related only to Site A, the owner was reflected as both the Paffs and the Applicant is not clear to me, more particularly as the Paffs were the vendors to the Applicant of two of three blocks of land which together constituted the Site referred to in the proceedings before me, and which will be referred to in these Reasons as "Site B".
It is the view of the Tribunal that nothing turns (having regard to both the T Documents and evidence before the Tribunal) on whether the Council refused to grant the development application referred to in subclause (c) or merely recommended its refusal; the latter would appear to be more accurate. Nor in the view of the Tribunal does anything turn on what would or might have transpired if the Applicant had persisted with the development application referred to in subclause (c), and through legal proceedings or otherwise. The plain fact is that, as is altogether clear from the evidence, the Applicant did indeed (as was contemplated in the Council minutes referred to previously in these Reasons) make arrangements to acquire additional and adjoining land both from the Paffs and the Catholic Church; those acquisitions led to an amended development application which was considered at a Planning, Building & Development Committee Meeting of the Council on 8 May 1989; the Tribunal refers in this context to Document T15, pages 112 and 113 of which read as follows:
"PLANNING, BUILDING & DEVELOPMENT COMMITTEE MEETING - 8/5/89
CHIEF TOWN PLANNER'S REPORT No. 29/894. Development Application 89/155
Applicant : Collins, Walshe & Fitzsimmons P/L
Owner : Great Lakes Fuel Supply, Trustees of the Roman Catholic Church and DG & JR Paff
Proposal : Service Station
Property : Pt Lot 3 DP 634927, Lot 31 DP 773226 and Lot 781 DP 551080 (Pt Por 78) Parish of Talawahl
Location : South-Western corner of the intersection of the Pacific Highway and Dyers Crossing Road
Zone : 1(b) Rural 'B'
Proposal
The application proposes replacement of the existing service station on part of the subject land with an extended service station facility. The building shows a commitment to innovative design and is to contain a food outlet and manager's residence in association with the service station fuel and associated products sale.
Entrance only is available to the site from the Highway, with truck and car areas separated on either side of the building. An entry and exit driveway is proposed to Dyers Crossing Road. Space has been provided on site for the parking of 26 cars and two trucks.
Previous History
An application to redevelop the existing service station on part of the subject land was considered by Council on 13 July 1987 when it was resolved:
"That Council defer consideration of development application 87/12 to permit the Chief Town Planner to hold discussions with the applicant for possible acquisition and/or use of additional land at the rear of the site."
The Traffic Committee at that stage had concerns in relation to the lack of parking for trucks, inadequate site area and the generation of cross traffic movements on a State Highway.
That application has not been determined.
Comments
Site details: The subject land now represents a considerable expansion of the existing site. The existing site has an area of approximately 1007m² with frontages of 47.8m and 17.7 metres to the Highway and Dyers Crossing Road respectively. The proposed site has an area of 4526m² with frontages of 57.4 metres and 73.5 metres to the Highway and Dyers Crossing Road respectively.
There are cottages to the north (across the road) and immediately to the west of the subject land. There is farmland adjacent to the south of the property. There is no existing substantial vegetation on the site.
Proposed Building: The proposed building for the service station shows considerable design merit. It is to be constructed of a combination of face brickwork and fibrous cement lining boards with a concrete deck, balustrade and planter box separating the two floors. An innovative roof design using dutch gables and barrel vaults finished in custom orb will give the building a distinctive character. A large canopy extends from the building to cover the pump area.
The building (to the canopy) is 21 metres from the Highway frontage and 10.8 metres from Dyers Crossing Road. The 10.8 metre setback breaches the 12 metre requirement but only for a length of some 4 metres in the 73.5 metre frontage. It is considered that this concession should be allowed.
Traffic Aspects: Access to the site is provided by way of a 6 metre crossing from the Highway which is setback 27.8 metres from the splay of the intersection and a 6 metre crossing in Dyers Crossing Road setback 9 metres from the intersection. Adequate area exists for circulation on the site though some conflict may occur where trucks and vehicles separate to different parts of the site. Provision has been made on site for 26 car spaces and two truck spaces. There are separate standing areas for trucks obtaining fuel, discharging fuel to underground storage tanks and making deliveries to the restaurant/food sales area.
All egress from the site is to a 6 metre crossing on the Dyers Cross Road frontage approximately 55 metres from the intersection. This will direct all vehicles using the site requiring access back to the Highway to enter the Highway at the constructed intersection. From a traffic, access and parking point of view, the site should function effectively. Additional comments on these aspects are provided by the City Engineer and the Traffic Committee.
Impact in the Neighbourhood: The proposed development will have a significant impact on the neighbourhood. The development is a substantial upgrading of the existing service station not only in terms of size but also in the nature of the business. This station is proposed as a 24 hour operation and will include food sales/restaurant services as well.
The plans provide a significant amount of landscaping to try and reduce the impact of this development on adjoining dwellings. The western boundary is proposed to be fenced with coloured metal to 1.8 metres to overcome problems of headlight glare. Earth mounding and landscaping 3 metres wide will soften the impact of the fence. Landscaping along the northern frontage is a minimum of 3 metres and extends out to 12-13 metres wide. This area should also be mounded to help overcome the headlight glare problem to residences across the road. The area adjacent to the intersection should be planted with low vegetation to maintain good sight distances.
Advertising: The application was advertised inviting comment from the public. At the time of writing this report no objections have been received though the exhibition period does not close until 9 May.
Traffic Committee: The application was considered by the Local Traffic Committee where it was resolved to advise Council that:"The Committee has no objection to development on traffic grounds provided the following conditions form part of any approval ...""
(e) Document T10 (at page 110) contains a diagram of the whole Site which indicates the nature and extent of Sites A and B. Site B consists of three blocks of land acquired by the Applicant as to two from the Paffs and one from the Catholic Church at various times (after September 1985) in the late 1980s. Sites A and B were consolidated into one Site described as "all that parcel of land comprising Lot 311 DP803937 Parish of Talawahl, County of Gloucester, City of Greater Taree". The diagram at page 100 of the T Documents is reproduced in these Reasons as follows:
Page 40 (Document T5) of the T Documents indicates that the area of the entire Site as consolidated was 4536m² with a frontage on the Pacific Highway of 60.885m and a frontage on Krambach Road of 73.565m.
(f) As appears from the diagram referred to in the preceding subclause Site A had a frontage on the Pacific Highway of 47.855m. The acquisition of Site B resulted in a small additional Pacific Highway frontage of 9.59m. The term "Site" as used in these Reasons refers to the whole consolidated Site and having an area of 4536m².
(g) The Applicant procured that the Site was redeveloped by the construction of a modern service station and including a restaurant and a facilities store. The evidence before me indicated that in fact all of the petrol pumps and all of the buildings were located on Site B while the underground petrol storage facilities were located partly under Site B and partly under Site A, and near to the Pacific Highway.
(h) For the sake of completeness I also reproduce the rough diagram located at page 94 of the T Documents as follows:
The diagram located at page 94 indicates in respect of Site B the parts acquired from the Paffs and the Catholic Church respectively, and also the prices paid and the dates of acquisition.
(i) Document T3 (page 27) contains a road map plan of the area. Nabiac is a village, with a small population (of between 500 and 1000 persons) in northern New South Wales. The Pacific Highway runs through Bulahdelah and Coolongolook on its way north to Nabiac; the nearest substantial town to the north of Nabiac is Taree. Krambach Road leads away from the Pacific Highway in a westerly direction towards Bucketts Way (an even smaller village with a population of approximately 150 persons).
(j) (1) On 1 July 1992 the Site together with its improvements and including the modern service station, restaurant, convenience store and facilities was sold to Ampol Limited ("Ampol") for $1,100,000. The Applicant in its return for the relevant year apportioned that amount as follows:
"a) Improvements $350,000
b) Equipment $300,000
c) Land pre 1985 $360,000
d) Land post 1985 $90,000"
It would seem then that the Applicant, when it filed its return, apportioned $450,000 to the Site, and furthermore apportioned that Site amount as to $360,000 to Site A and $90,000 to Site B. The Tribunal does not know how those apportionments were carried out or their source; there was no evidence before the Tribunal as to these aspects. These figures differed markedly from those set out in Mr Noble's valuation referred to in clause 4(c), and where he appraised the value of the Site as $260,000 split as to $200,000 for Site A and $60,000 for Site B.
(2) On 23 April 1996 the Respondent apportioned the amount of $1,100,000 as follows:
"a) Improvements $415,000
b) Equipment $210,000
c) Land pre 1985 $90,000
d) Land post 1985 $310,000
e) Goodwill $75,000"
(k) By the time this matter came before the Tribunal the issue between the parties had narrowed to one of apportionment only; the Applicant accepted that an amount of $400,000 should be apportioned to the Site on the basis that the remainder of the amount paid by Ampol ($700,000) could be apportioned to other items; the only remaining issue then is, having regard to section 160P of the Income Tax Assessment Act 1936 ("ITAA"), how that amount of $400,000 should be apportioned as between Site A and Site B, and given that Site A was acquired by the Applicant prior to September 1985 while Site B was acquired by the Applicant after September 1985.
The T Documents contain a number of valuations or appraisals:
(a) Document T3 (pages 8 to 32) is a lengthy and detailed "Proposal to Purchase Existing Service Station at Nabiac, NSW"; it was prepared in respect of Ampol, and contained a request for funds for the purchase of the Garage, on the basis that the independent valuation was $1,000,000; however funding was sought in respect of this amount plus $46,000 for legal costs and stamp duty, and $60,000 for a minor upgrade. Mr Harrington of Eric R Prince & Associates Ltd, who prepared Document T3, was not called to give evidence by either party. Page 7 of that document (page 25 of the T Documents) contains (at its end) an indication of Site value in the following words: "... together with the value of the site ie. estimated to be about $200,000."
(b) Mr Bruce Noble's first valuation of the Garage, which is contained in Document T5 (at pages 40 to 56), was made on 22 March 1991. It took into account relevant factors such as fuel sales volume and shop and restaurant sales; the valuation amount of the Garage as a whole and as set out in Document T5 was $1,500,000; the valuation summary at page 49 of Document T5 reads as follows:
"It is my considered opinion that the subject property has a current market value of One Million Five Hundred Thousand Dollars ($1,500,000), including the value of fuel disposal equipment, kitchen equipment and chattels.
The establishment of an accurate value is difficult due to the short period of trading and the unknown accuracy of the provided and projected trading figures.
Re-assessment of the property is recommended in twelve months time, following proven trading."
It is to be noted that Document T5 did not seek to apportion the amount of $1,500,000 between the Site and the improvements thereon.
(c) Mr Noble issued another valuation which is contained in Document T10 (pages 95 to 100). Since it is the valuation which was used by the Applicant in support of its case (at least initially), I set out the first two pages (pages 95 and 96) as follows:
"Valuation Report
Vacant Sites
located
Pacific Highway and Krambach Road
NABIACUnder instructions from Kneebones Service Station Pty Limited
PO Box 334
Forster 2428
Attention Mr Ross KneebonePhone 065 54 9235
Date of Valuation 17th June 1996
To be determined A current fair market value of each of the properties identified as Site A and Site B, as if they are vacant, for the purpose of assessing Capital Gains Tax liabilities.
Legal description Site A - PART OF THAT land comprising Lot 311 DP803937 and previously being Lot A DP 162597
Site B - PART OF THAT land comprising Lot 311 DP803937 and previously being Lot 781 DP 551080 and part of Lot 3 DP 634927
Parish of Talawahl County of Gloucester City of Greater Taree.
Site areasSite A - 1005m² being some 50.29 x 20.11 metres subject to a splay corner and total road frontages of 68.95 metres.
Site B - 3531m² with some 55.91 metres frontage to Krambach Road and some 9.59 metres frontage to the Pacific Highway.
Town Planning The properties are zoned Rural Valley Agriculture 1(b1), under the provisions of Greater Taree Local Environmental Plan 1995.
The objectives of the zoning include the conservation of prime crop and pasture land.
Only agriculture (other than intensive agriculture), forestry, and oyster farming, are permitted without Council consent.
All other uses are subject to Council development consent, except those uses that are not consistent with the objectives of the zoning.
Highest & best use I consider that the highest and best use of Site A is for a service station, as I have been requested to value it as an approved service station.
I consider that the highest and best use of Site B is for a rural dwelling, being the universal use of nearby properties, and noting that the site is too small for viable agriculture.
Alternate uses Site A, due to its extensive frontage to the Pacific Highway, and corner position, opposite an hotel and cafe, has some potential use for a convenience store for highway traffic (subject to Council consent and the satisfaction of conditions of development).
Site B, due to its low exposure to the Highway, has little potential for other uses, except with council consent and subject to development conditions, a transport depot.
District Character The town of Nabiac is a village catering for Pacific Highway traffic. It also provides a showground, several shops, primary school, police station and post office to the surrounding rural area.
The town has a low population growth, due to the greater appeal of nearby Tuncurry/Forster and Taree, which have more facilities.
Property value levels, in the village, are lower than the nearby larger towns."
And at page 99 of the T Documents, Mr Noble's valuation summary provided as follows:
"I consider that the subject properties have the following fair current market values, on the basis that Site A is an approved service station site:
SITE A Two Hundred Thousand Dollars
($200,000)
SITE B Sixty Thousand Dollars
($60,000)"
Mr Noble's valuation (Document T10) was, in my view, fundamentally and indeed fatally flawed and in particular because:
(1) The date of valuation was expressed to be 17 June 1996, nearly four years after the date of sale of the Garage to Ampol;
(2) It was made on the notional basis that each of Site A and Site B was vacant (and of course they were not); and
(3) Most importantly it takes Site B into account as rural property and having little value; see in particular in this context Mr Noble's comments under the heading "Highest and Best Use".
It is perhaps relevant (although the area difference is very small) that Mr Noble referred to the area of Site A as 1005 square metres; this was calculated by multiplying 50.29 by 20.11 which are the measurements (as appears from page 100 of the T Documents) of a portion of land to the west of Site B. Those measurements should be contrasted with those specifically applicable to Site A, and being 47.855 x 19.92 metres. It is in these circumstances that the area referred to by Mr Tew and by the Respondent of 1007 square metres would appear to be correct.
(d) Document T7 contains Mr Tew's valuation. It is a lengthy and comprehensive report and includes photographs. Page 76 sets out details of sales of petrol and similar products, while page 77 sets out restaurant and shop sales in both cases for the period 1 December 1990 to 30 November 1991.
(a) During the course of his evidence Mr Noble made it clear that he had been instructed to frame his second valuation in accordance with specific instructions given to him by the Applicant. As to why a valuation at 1996 in respect of a sale in July 1992 could have been considered useful is unclear to me. Similarly I do not know why the Applicant should have thought it desirable to seek a valuation on the notional basis that Site B was unimproved, or on the use basis (which was not correct) contained in it.
(b) Mr Noble said that each of his two written valuations took considerable time and effort and, indeed, approximately three weeks of work for each. In his evidence just before and after the luncheon adjournment (5 April) he suggested, albeit with some hesitation, yet another valuation and which resulted in very different figures. He started by assuming that the ratio of traffic carried by Pacific Highway and Krambach Road is 10 to 1; no evidence in support of this proposition was submitted and indeed it is doubtful whether any such evidence exists. He then started by assigning the amount of $400,000 as to two thirds to Site A and one third to Site B; this calculation was made having regard to the traffic ratio assumed and the difference in area. But and since the land fronting on the Pacific Highway has (on this hypothesis) a much higher value, it was then also necessary for Mr Noble to adjust for the fact that a part of Site B falls into the same category (ie it also fronts on to the Pacific Highway). An area of 191 square metres was so reassigned; this relates (as Mr Andrews confirmed) to that part of Site B, which was acquired from the Paffs and which is immediately to the south of Site A. On this basis, and according to Mr Noble's calculations Site A is 1005 square metres (although in fact its area would as set out previously appear to be 1007 square metres); add 191 square metres (having regard to the fact that a part of Site B must in his view be valued in the same way), and the more valuable land is 1196 square metres in extent; this must be pro-rated according to the whole area of the Site which is 4536 square metres. However, so Mr Noble argued, Site A (plus a part of Site B) is (as set out previously) 10 times as valuable as the remainder of Site B. Having regard to all of these factors, (and bearing in mind that the agreed value of the whole Site is $400,000) Mr Noble came to the conclusion that it should be apportioned as to $175,600 to Site B and as to the balance to Site A. Mr Noble's evidence in this context is contained in the transcript for the hearing on the first day (5 April 2000) at pages 53 to 58 as follows:
"RESUMED [2.33pm]
MR ANDREWS: Thank you. Now, before we adjourned, we were on this question of weighting, Mr Noble, weighting in the sense of you raised this question about lot A and lot B weighting, and you were endeavouring to get to the bottom of what precisely, if any, is there a formula for weighting that you had in mind? --- Certainly there are formulas that apply to properties in major CBD areas where the difference in the value of lots is quite precise.
Would they have any application to the situation we've got here? --- In this case, it would be a matter of assessing this site by comparison to others so that we look at the front section and we look at the rear section and do our assessment that way.
Well, you, in '96, you put on it what you thought to be the - in terms of valuation, the highest and best use, right? You have explained that and questions have been asked about that. Mow assume for a moment we've got lot A and lot B rather than - and lot A, there is no question about it - service station and a frontage to the highway and the dispute is, of course, about lot B. Now, putting aside for a moment the question of the rural dwellings for a moment, is there any formula that you now wish to put forward in terms of valuing lot A and lot B, or site A and site B? --- Yes. I think there is - the best way to approach it is to look at the importance of those roads that each of those parts of the site face.
Right? --- So the Pacific Highway, for example, carries most of the traffic. I should weight that over the volume of traffic that might use Krambach Road.
I think your evidence earlier was that Krambach Road led to a very extremely small village and then led on further to the Bucketts Way? --- That is right.
Correct? --- That is right.
Well, is there any way that you then can weight the two blocks by using that approach? --- There is a small complication that part of site B faces the highway.
Yes, that is the 9-odd metres? --- 9 metres, yes. So I would have to adjust - I would have to divide the result of giving a value to the highway frontage by taking that section out.
Have you done that exercise during the luncheon adjournment? --- Unfortunately I haven't got to that stage as yet.
What about the formula for it? --- So if we looked at the highway frontage section at $200 a square metre.
The highway frontage? --- Yes, the Pacific Highway frontage, in other words, site A plus the small section.
Yes, right? --- Then we looked at the volume of traffic that might use Krambach Road which I estimate at about 10 per cent, 10 per cent of what uses the highway and then make an adjustment for the fact that site B has a depth that is three times the depth of the highway frontage area. So although it might be three times, the increase in that value is probably something like 1.5 per cent over what it normally be.
MR BLOCK: You started off by saying the highway is $200 per square metre? --- That is right, that is right. So that, on the basis of 10 to 1, the rest of the property should be worth $20 a square metre.
On the basis of what? --- The difference in the traffic flow between the Pacific Highway and Krambach Road.
I see, that is because of 10 per cent? --- That is right.
So because of 10 per cent you think it is basically 9 as to 1? --- Yes. Well 10 as to 1.
10 as to 1. All right? --- But then, having reached that conclusion ---
Then the area is different? --- That is right, because of depth. So I think that as the depth of the site that faces Krambach Road is three times the depth of the one facing the Pacific Highway, if we use the factor of 1½ on that answer.
We use 1½. I don't follow how you get your 1½? --- Sorry. Mainly because again, it is the frontage that is the valuable part, not the depth. So the depth has an effect, but not the effect of its total - of its total.
Is it possible for you to be specific? What are you suggesting? --- Right. So with site A if we use 200 a square metre and for Krambach Road we used say, $30 a square metre, we would get an answer, or, if we used the $400,000 as a basis, for example, and we used say ---
Couldn't we stop for - I mean, assuming - first of all, 200 to 30 is not 10 to 1 is it? --- No.
220 would be 10 to 1? --- 220. That's right.
So what you are saying, should it be, 200 to 30 or 200 to 20? --- 200 to 30, but I have adjusted for the fact that the land to Krambach Road is deeper.
Yes of course, but of course it is deeper. Why don't we start from we know the value is $400,000 or at least everybody agrees that it is and I'm going to accept that? --- That is all right.
So how do you apportion between the two? --- All right.
And making adjustment for the fact that part of site B also has a frontage on Pacific Highway? - - - Right, okay. So the factor at its worst, in [order] words saying that each metre of depth is worth the same as the frontage, it would be - I need a calculator, I'm sorry.
Mr Andrews, have you read the list of cases which Mr Dwyer submitted?
MR ANDREWS: I have read some of them, yes.
MR BLOCK: Well, have you noticed that the first three cases are all what might be best described as onus cases.
MR ANDREWS: Yes.
MR BLOCK: You are well aware of the fact that the onus is on you?
MR ANDREWS: Yes.
THE WITNESS: So the result is a two-third rating for the front section and a one-third rating for the back section.
MR BLOCK: How did you get that? Does that adjust for the fact that part of the back section does have a frontage on Pacific Highway? --- It doesn't as yet, but I'm just about to do that.
Let us start by - is two-thirds for A and one-third for B purely based on area taking into account the 10 to 1 ratio? --- That is right.
So this is based on area and 10 to 1 traffic ratio, okay? --- Mm.
Now, if we now have back? --- So if we now do that, I add back 42,600 to the back section.
So it is 42,000 added back to the back section. And how do you get that figure? Just by area? --- Yes, purely by proportioning that front section.
But that is only the first of the Paff properties? --- That is right, that is right.
First Paff property. And the area of that was? --- That is 191 square metres.
Right. So what you are saying that we apportion to be one-third of 400,000 which is 133,000 plus 42,000? --- That is right.
600. That is 175,600? --- That is right.
Out of 400. And you think that is the proper value for me? --- Yes, yes.
You are doing this purely because you say that the traffic is 10 to 1. Now let me ask you this? Is 10 to 1 a mere estimate on your part? --- Yes, yes.
Do you have any statistics or figures which would support that? --- No.
No. But of course, it is the surest of guesses is it not, Mr Noble, because at least some of the people who would use this garage would be the people who live in the area? --- Certainly, certainly.
And they may well come from any of these outlying areas including from some of these places to which Krambach Road leads? --- Mm.
Although it is reasonable to assume, I agree, that a majority of people would be travellers on the Pacific Highway. What that majority is neither you nor I know? --- We know that - only that Krambach Road is a low traffic road.
Yes, but we don't know how. Could you just help me by giving me how you got to those figures? --- Certainly.
Let us start with the area of A? --- So the area of A is 1005 square metres and the area of the little section is 191 square metres.
191, that is first Paff? --- That's right. So that gives a total of 1196 square metres. So if we divide ---
The total area of A and B is? --- A and B is 4546.
So if we take 4536, we take away 1196, that is 3340, so B is 3440 and how do your figures then take into account the 10 to 1 ratio. Can you give me the arithmetic? --- I did it very quickly here. My answer for the front section is 266,800 which is a multiple of 6.67.
266,800 which is a multiple of? --- 6.67.
Yes? --- I just need ---
Where does that come from? --- That's what I need to determine. Of course, which is of 400,000. So 400,000 by 6.67, so it is actually .667 of 400,000.
Where do we get times .66, where do we get the 667 from? --- That's a relationship of the two thirds for the front section and the one third for the rear.
We did two thirds for the front section and one third for the rear? We were talking about 10 to 1 a while ago? --- That's right. I'm just trying to work that out.
Mr Noble, if you need me to give you a little time, I'm happy to do so. By the way, Mr Dwyer, I'm going to give you an opportunity to cross-examine further because all of this is new. It is absolutely and completely new. There was no attempt whatever to present this evidence prior?--- So that is ---
Do you want me to adjourn this Tribunal for 5 to 10 minutes to enable you to go - do your figures? --- No. I've - sorry, I'm working on one sheet of paper here but I've got the ---
I can give you some more sheets of paper? --- No, that's all right. So that's by allowing 10 times more traffic for the Pacific Highway against the Krambach Road and then because the Krambach Road site is three times the depth, that 10 per cent is 30 per cent.
I see? --- It comes 30, .3.
I see. Well, that is where we start but then we have still got to adjust for first Paff, haven't we?-- Yes, yes.
So because size is three to one, we get to 667 which is two thirds, then we adjust for first Paff - I'm not going to check your arithmetic, Mr Noble - and the result of all of this is? --- The result of that is that the first Paff is 42,600 as a proportion.
42,600? --- That's right.
And 133? --- That's right.
Plus 133 and that is how you get to a value of 175,600? --- That's right.
Quite a different figure from 60,000? --- Certainly.
Now, is there any basis in your view - firstly, we are guessing at the traffic but do you have any authority whatever which entitles you to say that the volume of traffic is the correct method of valuation? I mean, I'm not expecting you to cite cases to me but I haven't any doubt that there are books on valuation. I remember having a case once - I can't remember whether Mr Dwyer was or Mr James was in it - when I read a very long article by Professor Bernard Marks on the principles of valuation, probably you have read it but I've long forgotten it. There are no doubt text books on valuation. Is there anything in any of these text books which says where there's a site which has two street frontages, you take account of the differing volumes of traffic? --- Yes, they apply to central business areas and it's a different volume of pedestrian flow. So it's a similar ---
All right. Traffic applies in CBDs, pedestrian flow. Okay. A bit of a long shot though, isn't it? -- It's a very long shot.
CBDs out to Nabiac, okay? --- Yes, it is a long shot."
Having considered the evidence in this connection, I am not sure of the accuracy of Mr Noble's arithmetical calculations even on the basis that there was merit in the underlying assumptions. Mr Noble said that pedestrian flows are used in respect of central business district valuations; Nabiac is very far from being analogous; in any event there was, as set out previously, no evidence as to traffic flow in Nabiac, or as to the relevance of methodology referable to the central business district property. It may be that I have not fully understood Mr Noble's calculations; he referred to a factor of .667 which relates, no doubt, to respective area ratios of two thirds and one third. But I cannot accept the underlying assumptions, and which were in my view disingenuous.
The fundamental flaw, in respect of this ad hoc and entirely new valuation, is simply this. The Site is one site which was sold as such (and indeed as the Garage) on 1 July 1992. On that date, the Site (and being the whole of it) had a permissible use as a service station and related facilities which had been constructed on it. The fact that at some time in the past some part of the Site had been or could have been utilised for a different purpose was altogether beside the point. Ampol purchased a service station and related facilities; so far as it was concerned it acquired the Garage which included the Site, and for which it was prepared to pay $1,100,000. At the time of its purchase, the Site was in use as a service station and related facilities, and the pastoral history of Site B was of historic interest only. Since there was no apportionment between Ampol and the Applicant, the Applicant apportioned an amount of $450,000 in respect of the Site divided as to $360,000 and $90,000 for Sites A and B respectively. As set out previously these amounts differ markedly from those set out in Mr Noble's second valuation (Document T10 at page 99) where he valued Site A at $200,000 and Site B at $60,000. Of course, the second valuation was made in June 1996 while the return (Document T4) was signed on 20 November 1994. Did the Site value as a whole drop between 1994 and 1996? This was not explained and Mr Noble was not asked whether he was advised as to the manner in which the return had been framed. At all events we are here concerned with an apportionment of $400,000, and being the Site value agreed between the parties for the purposes of this hearing.
Mr Noble appears to have assumed for the purposes of his new calculation that he must add back a part of Site B, being one of the two Paff portions (ie the portion immediately to the south of Site A). There is however no basis whatever for assuming, perhaps because it is convenient to do, so that the more valuable land goes as far as, but no further, than the western boundary of Site A, and so that the western boundary of that Paff portion (which is south of Site A) is thus equally relevant. To argue that this land has a value 10 times as high as other land forming a part of the same whole, by reference to a boundary which is a matter of historical relevance only, demonstrates just how ludicrous these calculations are. Mr Noble's valuations, both in writing and in recalculated ad hoc form before the Tribunal, are not such that they need be taken seriously. The first valuation (at $1.5 million) may have been too high but it did not seek to apportion. The second valuation in its apportionment of land values was clearly fallacious and made in accordance with assumptions which were not relevant. The same criticism must regrettably be levelled at the ad hoc (10 to 1 ratio) valuation.
If only for the sake of completeness (although I do not accept its relevance or indeed that it was established) I note that the 10 to 1 ratio may well be incorrect in any event. I can accept, of course, that the Pacific Highway carries more traffic than does Krambach Road. But it must be remembered that we are here concerned with a service station and a restaurant and facilities store. Even assuming, as Mr Noble said, that the residents of the surrounding area may not have been sufficiently affluent to patronise the restaurant, the same may not be so of either the service station or the facilities store, and in the latter case especially having regard to the fact that it was apparently open for business in the late hours.
Lastly and in the same context Mr Noble argued that a service station constructed on Site B alone would have failed because of its small Pacific Highway frontage. That notional hypothesis was just that - notional and a hypothesis, which did not occur. What did occur was the construction of the whole Site of all of the buildings, after an attempt to redevelop Site A alone, had not succeeded.
(a) Mr Tew's evidence, coupled with his valuation, was much more credible. He took into account, in my view, all relevant factors including sales of comparable sites at or about the relevant time and taking into account competition and other relevant factors; see by way of example pages 63 and 64 of the T Documents reading as follows:
"Lot 821 Pacific Highway, South Kempsey sold $225,000 on 15/12/1989. Total site area was 1.755 hectares of which 6000m² was approved for a service station in 1987. There was a requirement for significant site and road works to enable the development of a service station. It is considered a substantially inferior site to the subject.
Lot 350 DP 548654 Pacific Highway Taree situated some 3 kilometres north of Taree on the eastern side of the road sold 13/5/1987 for $1,000,000 for a total area of 4.039 hectares. The site had a development application lodged in 1986 (DA 88/86) for use as a Motel, Service Station/Restaurant, and Tourist Information Centre. Approval was granted 21/4/1988 - subsequent to the date of sale. Subsequently part only of the site has been utilised as a service station (Ampol Big Oyster). It is reasonable to estimate that the value of the service station site comprised 50% of the site value ($500,000). This particular site is considered to be strategically located for the purposes of developing a service station.
591 Main Road, Glendale sold to BP Australia Ltd on 29/6/1992 for $950,000 showing $403 per m² of site area over a total area of 2356m². The site has a disjointed frontage to Main Road totalling some 90.98 metres and is bisected by a community titled road access. The site is considered superior location to subject having suburban influence and high traffic volume with moderate competition in proximity on same side of road.
648 Main Road, Glendale sold to BP Australia Ltd on 19/8/1992 for $580,000 showing $211 per m² of site area over a total site area of 2737.34m². The site has frontage to Main Road of some 99.23 metres as well as additional frontages to Neilson Street and Fletcher Street. The site is considered superior location to the subject having suburban influence and high traffic volume, however has substantial competition in proximity on same side of road.
Lots 21 & 22 Pacific Highway, Lisarow on or about 6/1993 for $600,000 showing $147 per m² of site area over total area of 4065m². The site is situated on the south east corner of Parsons Road. The site was sold subject to road widening which was effected subsequent to the sale. Approximately 1456m² of road frontage was purchased by the RTA for $210,000 showing $144 per m² of site area and leaving an area of 2609m² for the development of an Ampol Road Pantry Service Station. The site is considered superior location to subject having suburban influence with moderate competition in proximity.
41 Minmi Road, Maryland sold on or about 10/1993 for $700,000 showing $140 per m² of site area over a total site area of 5,000m². The site required considerable site works to level. Site provides some 90 metres of frontage to Minmi Road. The site is considered in superior location with burgeoning suburban influence and little competition in proximity, site topography however is inferior.
290 Pacific Highway, Motto Farm on 1/11/1993 for $470,000 showing $90.71 per m² of site area over a total area of 5181 m². The site required considerable site and road works be carried out including deceleration lanes and traffic islands in the order of $150,000 total costs. The site is considered superior location to subject with high traffic volumes and moderate immediate competition. The site topography however, is considered inferior."
(b) Mr Tew was cross-examined at some length by Mr Andrews, and in particular in respect of the comparable sites. By way of example, the Motto Farm site (referred to at page 64 of the T Documents) sold for $90.71 per square metre; the Site valuation per square metre by Mr Tew was $88.18. Mr Andrews criticised Mr Tew's use of the Motto Farm sale on the basis that the traffic flow would have been significantly greater than that at the Site. It is to be noted though that in respect of Motto Farm, there appears to have been "moderate immediate competition" while the Garage had little competition in the Nabiac area. But even more to the point is the fact that this line of criticism relates in reality to the valuation of the Site as a whole, and not to apportionments of parts of it. It must be remembered that the parties agreed on a value of the Site as a whole for this purpose at $400,000, and it is this figure which must be accepted by the Tribunal for the purpose of these Reasons. It is possible that the Applicant now on reflection considers (in the light of Document T3) that $400,000 was too high, but that is not to the point so far as the Tribunal is concerned
(c) It is always relevant to remember that we are here concerned with a valuation at 1 July 1992. Since that time there have been developments in road construction which affect some of the bases noted by Mr Tew in respect of the properties to which he referred. But those subsequent developments are not relevant for my purposes.
(d) I note that in general terms Mr Tew was, in my view, a most impressive witness. He gave his evidence clearly and concisely (and above all confidently) and based on a fundamental competence and ability gained over years of experience. He was entirely unshaken by a lengthy cross-examination. In making this statement I do not wish to be construed as being over-critical of Mr Noble. His main valuation was fundamentally flawed because it was based on fundamentally flawed instructions. To value Site B as pastoral, when it was sold as part of a developed service station was, putting it kindly, incorrect; Mr Noble felt obliged to obey his instructions. He then found himself obliged to put forward an alternative method on virtually no notice, and the fact that he had difficulty in doing so is, to some extent comprehensible, even though the result was, as I have demonstrated, unacceptable.
(a) Sections 160P(3), (7) and (8) of ITAA read as follows:
"(3) Where:
(a) land was acquired by a taxpayer before 20 September 1985; and
(b)on or after that date the taxpayer acquired land (whether or not a building was or is erected on that last-mentioned land) adjacent to the first-mentioned land;
the adjacent land shall be deemed for the purposes of this Part to be a separate asset from the first-mentioned land.
(7) On the disposal of an asset that is, by this section, deemed for the purposes of this Part to comprise two or more separate assets, the consideration in respect of the disposal of the first-mentioned asset shall be apportioned between the separate assets.
…(8) Except as provided by this section, land, and any building or other improvement made to the land, shall be deemed for the purposes of this Part to be a single asset."
The effect of section 160ZD(4) of ITAA (which need not be quoted in full) is that in relation to section 160P(7) of ITAA the consideration is deemed to be "so much of that consideration as may reasonably be attributed to the disposal of the assets".
(b) Reference was made to Ruling TD 94/64; paragraphs 3, 4, 5, 6, and 7 of that Ruling read as follows:
"3. On disposal of the property, a separate capital gain or loss calculation is necessary for each CGT asset.
4. If the property is disposed of under a contract, it is preferable that the parties allocate the overall consideration to the separate assets in the contract.
5. If the contract is made, including the allocation of the consideration, by parties dealing with each other at arm's length, we will accept the allocation for the purposes of subsection 160P(7) and subsection 160ZD(4).
6. We will accept a later agreement, between the parties in paragraph 5, which allocates the consideration if this was not done in the original contract.
7. In the absence of an agreed allocation, each party needs to make his or her own reasonable apportionment. In making this apportionment, it is expected that each party would generally have regard to, and be able to justify, his or her reasonable apportionment based on the relevant market values of the separate assets at the time of the making of the contract."
(c) My attention was drawn to Case 53/96, 96 ATC 501, a decision of this Tribunal constituted by Deputy President B.H. Burns and Messrs B.C. Lock and D.J. Trowse (Members); I refer in particular to clauses 54-60 of that decision (with which I respectfully agree) reading as follows (at pages 517 to 519):
"54. Part IIIA of the Act is devoted to the subject of capital gains and capital losses, the general thrust being that any "net capital gain" derived from the disposal of assets acquired after 19 September 1985 forms part of assessable income. It is of interest to note that some assets are exempted from these provisions and that in calculating the taxable gains the amount to be deducted from the consideration payable on sale is the indexed cost of the asset disposed of. More relevant to the matter under review are the provisions of s.160P(3) and (7) of the Act which state that land acquired by a taxpayer after 19 September 1985 which is adjacent to land acquired before 20 September 1985 is deemed to be a separate asset and that, where those assets are sold as a single holding, apportionment of the consideration is necessary. In situations of this kind, s.160ZD(4) of the Act provides that the value to be attributed to the asset disposed of shall be as much of the total proceeds as may be considered reasonable.
55. In 1977 the applicant and his wife purchased 56.5 acres of vacant land in the Adelaide Hills for approximately $40,000. This land, together with improvements constructed in subsequent years, was used by the partnership in the conduct of the horse breeding and racing business. On 4 August 1986 an adjoining block of land comprising 40 acres was acquired by the applicant and his wife for an amount of $74,000 which together with stamp duty and fees provided an overall cost basis of $76,457. Once more this property was made available to the partnership in the pursuit of its business operations. In February 1988 both properties were sold in a single transaction for a consideration of $600,000. No disclosure of the sale of the property acquired after 19 September 1985 was made in either the returns of the partnership or the applicant. The explanation that non-disclosure resulted from the belief that the indexed cost of the land equated with its selling price can only be described as fanciful.
56. Acting on information supplied by a licensed valuer in the employ of the Australian Valuation Office, the respondent allocated a figure of $240,000 to the post capital gains tax land and then proceeded to calculate a gain in the following manner:
Sale value after allowing for rate adjustment and costs $240,004
Indexed cost base $83,322
Capital gain $156,682
Applicant's one half share $78,341
As between the parties, there is no dispute:
(1) that the land in question was an asset to which this Part of the Act applies;
(2) that there has been a disposal of that asset, and
(3) that the methodology applied by the respondent in his calculation was correct.
57. The only matter in contention is the quantum of selling consideration allocated by the respondent to the property purchased in August 1986 and thus the need to examine in some detail the opinions expressed by the licensed valuer in his letter dated 30 August 1991 (T230). The valuer commenced with the statement that his valuation was based on sales of comparable land in the same general locality. After identifying the potential of the more recently acquired land to be either grazing or market gardening, the valuer opined that the land value of the subject portion, based on comparable sales in the district for land with similar potential and a reliable supplementary supply of water, was $240,000 (40 acres @ $6,000 per acre). The correspondence clarifies that the figure of $6,000 relates to the capacity to grow vegetables and that, had the property use been restricted to grazing, the per acre multiplier would have been $2,000.
58. A reconciliation of the value of the remaining land and improvements with the balance proceeds of $360,000 was then undertaken by the valuer who expressed his conclusion in the following terms:
"Using an adjusted rate of $5,500 per acre which would be equally valid in valuation terms, a further division of value for the 22.84 hectares remaining (56.4 acres) would be Land $310,000 (56.4 acres @ $5,500 per acre), Buildings/Improvements $50,000 (remaining)."
The problem of valuing improvements erected for a specified purpose, such as a horse stud, on land capable of a higher use which is adopted by a new owner was adverted to. In those circumstances, the inference was that a willing purchaser would attach a significantly lesser value to those improvements. On this same point, the valuer, "after a quick inspection of the horse stud", indicated a view that, had the improvements been situated on a grazing only location, their value would be in the range of $150,000-$200,000. Finally, the valuer advised that he had discussed his valuation with the purchaser of the property and also the local Elders man and that they had confirmed the value quoted.
59. On behalf of the applicant it was submitted that the valuation relied upon by the respondent for the dissection was "very doubtful" and "lacking in substance". Notwithstanding a reference to the selection of $6,000 rather than $2,000, the central issue appears to be the value of the improvements, all of which, it was agreed, were situated on the property acquired before the advent of capital gains tax. The Tribunal was taken to the depreciation schedules and balance sheets of the partnership and to the fact they revealed expenditure of $206,197 on improvements which included such items as hay sheds, divisional fencing, silos, horse lunging rings and yards. On that basis, it was contended that the value ascribed to the improvements should be more in line with actual cost and that any resultant increases would effectively lower the value of the property under review. This proposition has its own difficulties. First, the improvements were acquired through the agency of Servco at margins comparable with those discussed earlier in these reasons and which in our opinion are excessive. The fact that those costs were accepted by the respondent for depreciation purposes, and that the written down values of the improvements at time of sale were regarded as their selling considerations for that same purpose, has no bearing on the resolution of the dispute. Secondly, there is the added complication that the improvements subject to the deal between the vendor and purchaser are located on a property which was to be used in a way that makes the bulk of the improvements superfluous. In all of these circumstances, our conclusion is that cost is not a suitable foundation for the determination of value as at date of sale.
60. The Tribunal is uneasy with the valuer's method of applying $6,000 per acre to one section and $5,500 to the other. Perhaps in more ideal circumstances, such as where the improvement values have been agreed upon by the parties, the value of the land in question could have been better ascertained by applying the fraction, area of same as it relates to the whole, multiplied by, consideration receivable less the value of improvements."
My attention was drawn in addition to Case 38/94, 94 ATC 343 (at 364 to 365) and to Case 61/94, 94 ATC 513 (at 518 to 519).
(a) It seems to me that Case 38/94 is of little relevance to any decision in this matter. The Tribunal in that case found that for an apportionment one should adopt a "common-sense" approach; a reference to the headnote will suffice:"The taxpayer, a property developer, entered a contract in October 1987 to purchase a property for $800,000. A derelict two-storey building subject to a local council repair/demolition order stood on the site. The taxpayer allegedly did not discover the order until shortly before completion of the purchase in January 1988. A month after completion the building was demolished. The taxpayer erected a new two-storey office building on the site and in October 1989 sold the site for $1.8m.
In his return for the 1987/88 income year, the taxpayer claimed a capital loss of $700,000, incurred as a result of the demolition of the building on the site. The taxpayer claimed that when he contracted to purchase the building he had intended to refurbish it. The loss was calculated on the basis of the purchase price being apportioned as to $100,000 for the land and $700,000 for the building. This apportionment was made after completion of the purchase. After an audit of the taxpayer's affairs, an amended assessment was issued disallowing the capital loss. The taxpayer's objection was disallowed.
The Commissioner also included in the amended assessment for the 1987/88 income year a capital gain of $69,875 in respect of the sale of another two-storey building. The taxpayer had purchased the building for $500,000 pursuant to a contract dated 10 September 1985. At the time, the building was fully tenanted. The ground floor was progressively refurbished in 1986 at a cost of almost $130,000. The first floor was refurbished in August and September 1987, after it became vacant, to meet the requirements of new tenants, at a cost of almost $25,000. In October 1987, the taxpayer sold the building for $1.35m.
The Commissioner contended that the refurbishments were specific improvements deemed to be separate assets from the building pursuant to sec 160P(5) of the Income Tax Assessment Act or were one improvement which was deemed to be a separate asset pursuant to sec 160P(6).
Held: objection allowed in part.When the taxpayer entered into the contract to purchase the site he intended to demolish the building. The site was worth $800,000 and the building on the site had little or no value.
No capital loss or gain arose on demolition of the building under Pt IIIA.
(a) If, by virtue of sec 160P(8), the land and the building formed part of a composite asset, the demolition of the building would be "the loss or destruction of part of an asset" and thus constitute "a disposal of that part of the asset" within the meaning of sec 160N(b). If, however, sec 160P(8) deemed the building to be part of the land, it was arguable that since the building formed part of the land, the loss or destruction of the building would still constitute "the loss or destruction of part of an asset" (the land) and thus "a disposal of that part of the asset", within the meaning of sec 160N(b).
(b) If sec 160N(b) applied, the combined effect of sec 160ZD and 160R was that the consideration in respect of the disposal of the part of the relevant asset was nil. In addition, sec 160ZI(2) applied so that the cost base was nil. This was because the $800,000 consideration in respect of the acquisition of the asset (the land with the building), and any other elements of the cost base, were wholly attributable to the (at the time) undisposed of land. Alternatively, if sec 160ZI(1) applied, none of the elements of the cost base was apportioned to the part disposed of because there was a nil consideration on disposal. The result was that there was no capital loss or gain.
(c) If sec 160N(b) did not apply, the demolition of the building would not result in the disposal of the building. There would be no change in ownership, in terms of sec 160M, of the remains of the building until the taxpayer either sold or abandoned those remains. As there was no evidence that the consideration in respect of that disposal was other than nil and the cost base of that asset was nil, there was no capital loss or gain in the 1987/88 income year in respect of the demolition of the building. As regards the cost base, it would be reasonable, in terms of sec 160ZH(13), not to include any amounts that would have been included in the cost base of the original asset (the land with the building forming part of it) in the cost base of the remains of the building.
The refurbishment of the ground floor was part of one improvement for the purposes of sec 160P(6). However, the refurbishment of the first floor was a separate improvement unrelated to the ground floor refurbishment. As sec 160P(7) did not provide a method of apportionment or set out any basis on which an apportionment could be made, apportionment between the separate assets had to be undertaken on a commonsense basis. Section 160ZD(4) did not take the matter any further than sec 160P(7).
The refurbishments carried out by the taxpayer did not add any real value to the property. Accordingly, an apportionment of the consideration on disposal based on the value of the respective assets which would be deemed to be separate if sec 160P(5) or (6) applied led to the result that no capital gain arose in relation to the improvements to the property. Accordingly, the net capital gain of $69,875 was to be excluded from the taxpayer's taxable income."
(b) Case 61/94 was concerned with section 26AAA of ITAA. The taxpayer owned two properties and purchased an adjacent property in February 1988 for $200,000. In March 1988 the taxpayer sold the whole of the properties for $1,430,000. The purchaser, at the request of the taxpayer, executed two separate contracts; one related to the newly acquired block at an amount of $200,000 and the other to the remainder for $1,230,000.
The Tribunal held that although the sale was made in accordance with an arms-length dealing, the contract for the newly acquired land was not. In these circumstances, so it was held, the total sale price of $1,430,000 should be apportioned to the land as a whole; the value of the newly-acquired land should include a proportion of the value added by its inclusion in the whole block. A short quotation from the decision in Case 61/94 (from pages 518 and 519) will suffice:
"The applicant's valuer took the view that if there was to be an apportionment of the total sale price then the appropriate method was to commence with the assessment of market value of each property on a stand alone basis as at the date of sale. The two valuations should then be deducted from the actual sale price to calculate the premium obtained by combining the two properties as one lot. The percentage increase should then be added to the individually assessed values to arrive at the relevant proportions of the sale price. In applying this method of apportionment he valued 1343 at $200,000 and 1345-1349 at $936,000 on a stand alone basis, giving a combined value of $1,136,000. The sale price of $1,430,000 represented a 25.9% increase and this percentage added to $200,000 produces a figure of $251,800 as the proportion of the total sales price applicable to 1343. The value of $936,000 for 1345-1349 was based on the price obtained from the sale of property at 1499 M Road in July 1988. Whilst the valuer also referred to another sale at 1495 M Road in October 1987, he considered that the property at 1499 was a more desirable development proposition because it was regularly shaped unlike the triangular shape of 1495. The difficulty is that both of the other properties were the same size and each were some 39% larger in area than 1345-1349. The property at 1495 realised $77 per square foot in October 1987 and the property at 1499 realised $130 per square foot in July 1988. The valuer accepted that prices during this period were increasing as a result of a property boom. We have reservations about whether the use of the sale price of 1499 is an appropriate estimate of the market value on a stand alone basis for 1345-1349.
The respondent's valuer took a simpler approach to the allocation of a sale price. He believed that the most appropriate method of apportioning the value was to divide the total proceeds by the total area of land sold and apply the average amount per square foot or square metre to the respective areas of each parcel of land. He argued that once the sites were combined and sold as one the whole potential and utility of the site is enhanced and the increase in value cannot be said to be the same for one small part as for the larger part. As the total site was sold as a corner development site the inclusion of the vacant corner lot could be said to have enhanced the value of the whole but, equally, it could be said that the larger site enhanced the value of the corner site. As it was anticipated that any purchaser would demolish the old single level building he did not consider it appropriate to differentiate between the two sites because one was vacant land and one had a building erected on it. His method resulted in a value at the time of sale for 1343 of $357,500.
Whilst accepting that it may appear anomalous that land acquired in January 1988 for $200,000 could be said to be sold two months later for $357,500, we take the view that this is the most appropriate assessment of value at the time of sale. To accept the applicants' submission would mean that the total premium gained from the amalgamation of the two lots for sale to one lot would accrue to 1345-1349. This would be an equally anomalous result. Faced with the two methods of allocation we prefer that of the respondent's valuer. To accept the applicants' valuer's method requires us to accept his estimate of the market value of each site and as indicated, we have reservations about the method adopted. In the end a total area was sold as one lot for $1,430,000; 1343 represented one-quarter of the total area and, in the absence of persuasive evidence of some more appropriate method, our view is that one-quarter of the sale price, or $357,500, was the value of the subject property at the time of sale."
It is to be noted in particular that the Tribunal there favoured an apportionment on the basis that all of the whole land (and including the newly acquired land) was equally valuable.
(a) In this particular instance we are necessarily concerned with one Site (and being the consolidation of Sites A and B) on which a modern service station and other facilities had been constructed, and in accordance with the necessary regulatory approvals. It was sold for a composite price of $1,100,000 to Ampol and the parties have agreed that $400,000 is the amount to be apportioned to the Site.
(b) The Site is a large one and in all events much larger than that on which the original service station was constructed. But on the date of sale (which is the relevant date so far as I am concerned) there was, as I have said, one Site and one service station and related facilities. The Applicant's attempt to apportion an artificially low value both to the Site as a whole, and to Site B in particular was, as I have said previously in these Reasons, fundamentally flawed and cannot be accepted.
In my view Mr Noble's attempt at an amended apportionment put forward at the hearing was without merit. It was not based on any evidence as to relevant figures or any relevant and accepted principles of valuation.
Mr Tew gave evidence as to statistics of traffic through Nabiac on the Pacific Highway in 1990; there was then a flow of 8,800 vehicles per day which could be treated as compounding on an annual basis at 3%. Further to the south in New South Wales, and where the population is greater, the figures are understandably much higher.
In my view the correct method of valuation and apportionment was that adopted by the Respondent and Mr Tew. The amount of $400,000 was apportioned by the Respondent to the whole area of what was in fact one developed Site (and which was purchased by Ampol) on a pro rata basis. No other solution is, in my view, tenable or reasonable.
The Respondent has drawn my attention to a number of case authorities as to onus of proof. See in this regard Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63, Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 and Federal Commissioner of Taxation v Munro 97 ATC 5041. I need not deal with them specifically. It is clear that the onus is on the Applicant to establish that the amended assessment is incorrect and moreover that the Applicant did not discharge that onus.
The evidence as to valuation of the Site (and apportionment of the agreed amount of $400,000 between Site A and Site B) presented by the Respondent was as I have indicated, much to be preferred to that presented by the Applicant. In particular, and in this context, it does not seem to me that where two sites are consolidated into one, and a building is erected on that consolidated Site, that there are likely to be many cases where the value of one part of the land is infinitely greater than that of the other. That is not to say that such a situation is inconceivable; assume by way of example two pieces of land, one of which has substantial mining rights and the other of which does not and assume further that the two can be and are consolidated and that the consolidated site is sold for one price. I would imagine that in those circumstances a greater ratio value could be attributed (depending on the value of the mining rights) to the portion, which carries the mining rights.
The Respondent's amended assessment was calculated on the basis that every square meter of the Site had the same value and this is, in my view, the correct method for the purposes of this matter. (I note that it accords with the decisions in two of the Tribunal cases to which I have reffered).
Mr Andrews did not make any submission as regards additional tax. Mr Dwyer advised me (and I accept) that although the amended assessment (page 93 of the T Documents) made after audit refers to both additional tax and interest, the amended assessment dealt with other matters which were not before the Tribunal and in relation to the Site and the additional capital gains tax imposed, interest only was charged. The last line of a document entitled "Company Tax and Penalty Calculation" tendered by Mr Dwyer reads:
"Net Capital Gain - $173,706 + NCG from 27/02/95 to 06/02/95 was $4000-12 and no amount was imposed in respect of penalty."
The interest amount charged is not within my jurisdiction.
In Summary:
(a) The Respondent's valuation evidence was greatly to be preferred to that of the Applicant which was flawed and in some respects, purely speculative;
(b) On any basis the Site (including the Garage) constituted one whole sold as such for one price, to Ampol. As regards the Site there was no basis upon which it could be said that any particular part deserved a higher valuation than that attributed to another. The historic past in relation to Site B was not relevant. Site A could not in fact be redeveloped on its own, and the Applicant accepted by its conduct that this was so;
(c) In the circumstances the only reasonable basis was (as the Respondent did) to apportion the agreed value on a pro rata area basis.
In all the circumstances the objection decision under review must be affirmed.
I certify that the 14 preceding paragraphs are a true copy of the reasons for the decision herein of J. Block, Senior Member
Signed: .....................................................................................
AssociateDate/s of Hearing 5, 19 April 2000
Date of Decision 27 April 2000
Counsel for the Applicant David Andrews
Solicitor for the Applicant Brad Watts
Representative for the Respondent Martin Dwyer
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