Ralph and Repatriation Commission
[2006] AATA 258
•17 March 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 258
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2005/759
VETERANS' APPEALS DIVISION ) Re ROBERT RALPH Applicant
And
REPATRIATION COMMISSION
Respondent
DECISION
Tribunal Deputy President P E Hack SC Date17 March 2006
PlaceBrisbane
Decision The decision under review is set aside and the matter is remitted for reconsideration in accordance with these reasons.
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Deputy President
CATCHWORDS
VETERANS’ AFFAIRS – age service pension – assets test – fractional interest in real property – valuation - unrealisable asset
Veterans Entitlements Act 1986 ss 5L(11)(12), 57B, 52Y
Social Security Act 1991 s 11(2)
Property Law Act 1974 (Qld.) s 38
Re Secretary, Department of Social Security v Langton (1993) 31 ALD 579
Myers and Secretary, Department of Family and Community Services [2005] AATA 1216
Re Ragless and Secretary, Department of Family and Community Services [2005] AATA 1299
Brickwood v Young (1905) 2 CLR 387, 396
Spencer v Commonwealth of Australia (1907) 5 CLR 418
Inland Revenue Commissioner v Clay [1914] 3 KB 466
REASONS FOR DECISION
17 March 2006 Deputy President P E Hack SC 1.The applicant, Mr Robert Ralph, is the recipient of an age service pension. The amount of pension payable to him is subject to an asset test.
2.One of Mr Robert Ralph’s assets is an interest in real property described as Lot 9 on RP95137 in the County of Stanley, Parish of Kedron. The property comprises a suburban residential allotment of 607sm on which a dwelling house is erected. The property is situated at 18 Ohio Street Aspley.
3.Mr Robert Ralph and his spouse, Mrs Pearl Ralph, acquired an interest in the property pursuant to a contract dated 11 August 1996. The purchase price shown on the contract was $170,000.00. Mr Robert Ralph and Mrs Pearl Ralph provided $97,000.00 of the purchase price from the proceeds of sale of another property. The balance of the purchase price was provided by their son and daughter-in-law, Mr Peter Ralph and Mrs Debra Ralph.
4.The sale was completed around 24 September 1996. On that date Robert Leonard Ralph and Pearl Helen Ralph (as joint tenants inter se) and Peter Robert Ralph and Debra Narelle Ralph (as joint tenants inter se) became registered as tenants in common holding respectively 97/170th and 73/170th interests in the land.
5.Mr Peter Ralph and Mrs Debra Ralph reside in the property by arrangement with Mr Robert Ralph and Mrs Pearl Ralph. They pay no rent.
6.On 24 August 2005 the Australian Valuation Office (AVO) undertook valuation of the property at Ohio Street Aspley at the request of the Department of Veterans’ Affairs. The AVO concluded that the value of the Ohio Street property was $390,000.00 and that the interest of Mr Robert Ralph and Mrs Pearl Ralph was $223,400.00, that is, 57% of $390,000.00.[1]
[1]The percentage has been rounded down slightly.
7.This valuation resulted in a reduction in Mr Robert Ralph’s pension of approximately $50.00 per fortnight because his assets, calculated by reference to a value of $223,400.00, exceed the permissible limits. Mr Robert Ralph sought a review of the decision to reduce the rate of his service pension but the decision was affirmed on an internal review under section 57B of the Veterans Entitlements Act 1986 (the VEA). Mr Robert Ralph now seeks a review in this Tribunal.
8.The issue for determination is the value of the interest of Mr Robert Ralph and Mrs Pearl Ralph in the property at Ohio Street. I shall call that, for simplicity, the relevant interest. The respondent says that the relevant interest was correctly valued at $223,400.00. Mr Robert Ralph says that its value is nil and, or alternatively, it is an “unrealisable asset” as that term is defined in section 5 L (11) and (12) of the VEA.
9.It is convenient to first deal with the argument raised by Mr Robert Ralph that the relevant interest is an unrealisable asset. It is unnecessary for present purposes to decide whether the relevant interest answers the statutory description; were it to do so it would mean that the provisions of subdivision D of division 11 of part III B of the VEA might have application. But they would only have application upon the lodgement of a written request to the department that the section apply and the Commission being satisfied that Mr Robert Ralph would suffer severe financial hardship if the section did not apply. Were the Commission to refuse to make a determination under s 52Y, Mr Ralph would have a right of appeal to the respondent and then a right of appeal to the Tribunal.
10.Because there is no decision of the Commission in relation to a request under s 52Y there is no jurisdiction in the Tribunal to consider the application of that section in the present case. Thus the first argument advanced by Mr Robert Ralph must fail.
11.Mr Kelly who appeared for the Commission contended that the correct method of valuing the relevant interest was to apply 97/170th of the current market value, that is, a proportionate approach. He relied upon three decisions of the Tribunal which he submitted supported that method - Re Secretary, Department of Social Security v Langton (1993) 31 ALD 579 (Langton). Re Myers and Secretary, Department of Family and Community Services [2005] AATA 1216 (Myers) and Re Ragless and Secretary, Department of Family and Community Services [2005] AATA 1299 (Ragless).
12.Langton was decided by a Tribunal comprising Deputy President Forgie and Members Gibson and Horrigan. It concerned the value, for the purposes of the Social Security Act 1991, of “Ashmount”, a substantial property of some 2,348 hectares near Roma. “Ashmount” was owned by two brothers as tenants in common in equal shares. The Tribunal was concerned with applications for job search allowance made by the wives of the two brothers and the task of the Tribunal was to determine the value of the wives’ assets and the value of the assets of their husbands.
13.The Tribunal noted s 11(2) of the Social Security Act which was in the same terms as s 5L (2) of the VEA and, in the absence of any definition of what was meant by “value” in the legislation determined that the proper approach to the question was that of the High Court in Spencer v Commonwealth of Australia (1907) 5 CLR 418 (Spencer’s case). That approach seems to me to be perfectly orthodox. The Tribunal then noted at page 594, paragraph (66), in a passage relied upon by the Commission here,
“as tenants in common, [the husbands] are seised only of their own shares or portions of all the rights that make up the whole. The interest of each is not discrete in any physical sense. Their interests only become divided if the tenancy in common is brought to an end. This can occur either by a sale of the whole… or by partition. [The husbands] could apply for partition of Ashmount under Division 2 of pt 5 of the Property Law Act 1974 (Qld)”.
14.The Tribunal then undertook the exercise of a notional partition with adjustment between the tenants for improvements made by each of them: cf. Brickwood v Young (1905) 2 CLR 387 at 396. But, importantly for present purposes, the Tribunal’s starting point was to divide the value of “Ashmount” equally to determine the value of the respective interests.
15.This case is, I consider, readily distinguishable from Langton. The property in issue there was capable of partition. The same is certainly not true of 18 Ohio Street. Moreover the property was an income generating property.
16.The next case, Myers, was also concerned with the Social Security Act. The two applicants in that case each held a one quarter interest (as joint tenants inter se) in a holiday home as tenants in common with two other close relatives. The argument that the applicants advanced was that because, for family reasons, the applicants had no intention of selling the property, it ought be regarded as being as “unrealisable asset” as that term is used in the Social Security Act. Whilst the Tribunal adopted one half of the value of the holiday home as the value to be attributed to the applicants’ interests there seems to have been no argument to the contrary from the applicants who represented themselves.
17.Thus whilst the Tribunal in Myers adopted the proportionate approach it does not appear to me to have been made an issue whether that was the proper approach, rather, in the absence of any argument to the contrary, the Tribunal seems to have adopted that approach without any detailed consideration of its application.
18.In dealing with the question of unrealisable asset the Tribunal said, at paragraph 30,
“The Myers desire to provide a holiday home for their extended family must be balanced with the community expectations that those members of the community with assets use those assets to support themselves.”
The respondent here relied upon this passage in support of a contention that pensioners who enter into non-commercial family arrangements should not expect to receive advantageous pension treatment. As it seem to me that reliance is, with respect, misplaced. The value is not expressed by the legislation to be qualified by reference to pension treatment, advantageous or otherwise. The legislation requires the Commission, and thus the Tribunal, to have regard to “value”. There are other provisions in the legislation that operate to prevent disposal of assets but, for the moment at least, those provisions are not in issue.
19.Of more significance, although not in a legal sense, is the reference in paragraph 23 of the reasons in Myers to evidence that one of the owners had been unable to sell his 1/6th share and had to give it to another relative. As I say, that evidence has no present legal significance but it highlights the issue that has concerned me in this case, and to which I shall return, that of a limited market for sale.
20.The issue in Ragless, the last of the three cases, was also one of unrealisable asset – in that case a 1/7th interest as tenant in common in real property on which a holiday dwelling had been erected. But again, there was no consideration of the issue that arises here, the proper approach to the valuation of an undivided moiety in real property.
21.The starting point in my view is Spencer’s case and the frequently quoted remarks of Sir Samuel Griffith at 432:
“In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, that is, whether there was in fact on that day a willing buyer, but by enquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it but not desirous to sell?’ It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor will come together.”
22.To similar effect Isaacs J. said at 441:
“To arrive at the value of the land at that 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. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.”
23.In Langton the Tribunal referred to these passages and noted the definition of market value adopted by The International Assets Valuations Standards Committee[2] to conclude that value for the purpose of the legislation then in issue should be determined according to the market value of an asset. The same approach should be adopted in considering the meaning of value in the VEA.
[2]“Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing, wherein the parties had each acted knowledgably, prudently and without compulsion.”
24.In the present case Mr Robert Ralph and Mrs Pearl Ralph have an undivided moiety. Their relevant interest is capable of being disposed of by sale but it must be accepted that the market is not the same as the market that might exist for the sale and purchase of the whole of the property or similar properties. Indeed this case brings to mind the remarks of Swinfen Eady LJ in Inland Revenue Commissioners v Clay [1914] 3 KB 466 where at 475 his Lordship said,
“The market is to be the open market, as distinguished from an offer to a limited class only, such as members of the family.”
25.In my view the “market” in this case is likely to be limited to the other co-owners. The experience of the co-owner in Myers being unable to sell the 1/6th share seems to me to be likely to be a common experience in cases such as the present.
26.Moreover it seems to me to be unlikely that an investor would be interested in acquiring the relevant interest however that is a possibility that would need to be considered. It is possible to conceive of an investor who was prepared to acquire the relevant interest in the knowledge that an application could be made for the appointment of statutory trustees for sale pursuant to s 38 of the Property Law Act 1974 (Qld.) and its equivalent in other States and Territories. But an application of that type will involve significant expenditure on legal costs and on the costs of the trustees in effecting a sale. The costs involved are such that I would have thought that any investor acquiring the relevant interest would discount the value determined by application of the proportionate approach to take account of the costs of realisation.
27.In the present case the valuer does not appear to have considered these issues. Instead a proportionate approach has been adopted. In fairness to the valuer he appears to have adopted this approach at the suggestion of the Department. But simply adopting the proportionate approach appears to me to be an erroneous approach since it does not consider the proper measure of value, market value. It must be within the experience of valuers to undertake a valuation of an undivided moiety. I assume that it is required from time to time, for example, in the context of bankruptcy administrations where one of two co-owners is bankrupt and the question arises of the value of the interest of the trustee in the bankruptcy.
28.In that regard I notice that the subject of the valuation of fractional interests is dealt with at some little length in two works on valuation published by the Australian Institute of Land Valuers – Principles and Practice of Valuation, (5th ed.), 1973, by J.F.N. Murray and Land Valuation and Compensation in Australia (3rd ed.),1984 by R.O. Rost and H.G. Collins.
29.In the former work at page 116-7 the following passage appears,
It is often claimed that a fractional interest has a lesser value than its proportionate share of the value of the fee simple; and that a fixed percentage deduction should be made for difficulties associated with management, and because of the differences that may arise between co-owners. There is no general rule which is applicable to the valuation of fractional interests and any appraisal must be based upon the facts existing in any particular case.
It even cannot be accepted as axiomatic that some discount should be made from the proportionate value of the fee simple in determining the value of a fractional interest.
The value of any share in the fee simple is the price that would be paid for it in friendly negotiations between a willing but not eager buyer and a willing but not anxious seller, with both parties fully aware of the nature of the interest, and of all its potentialities, and possessing a knowledge of the legal rights of its possessor as to partition.
The valuation of any fractional interest will call for inquiry along the following lines.
(a)The number of parts into which the fee simple is divided and the manner in which those parts are held.
(b)The nature of the property and its value. The class of property may have an important bearing upon the value of the interest. A share in a subdivisional property, held for sale, will require different treatment from an interest in an old residence or from a part ownership in an investment property.
(c)The size of the interest and whether it is greater or loss that a moiety.
(d)The income, if any, from the property.
(e)Whether partition would, or would not, be in the interests of all parties.
(f)Is physical partition possible, or would a partition call for a sale of the property and a division of the net proceeds.
(g)Is there any special demand for fractional parts? In some cases a tenant may wish to secure his position by becoming a part owner.
(h)What is the legal position regarding partition? In some cases the relevant statutes distinguish between interests greater or less than a moiety.
(i)What costs would be involved in partition.”
30.In the work by Messrs. Rost and Collins the position is put slightly differently although the list (at page 272) of the circumstances to be considered in determining the market value of a fractional interest is very similar. At page 271 the following appears,
“At first sight it might be assumed that the market value of an undivided half share in the fee-simple of land worth, say, $10,000 is equal to half that sum. That is not necessarily true. Valuers dealing with fractional interests sometimes allow a percentage deductions [sic] from the amount represented by the relevant fraction of the value of the property as a whole for reasons such as those which follow.
And at page 273,
The open market provides but little, if any, guidance as to the relativity between whole interests and fractional interests. Nevertheless it is generally accepted by valuers that a fractional interest, if offered for sale, could not be expected to realise as much in the market as its proportionate part of the amount the property would bring if sold as an entirety. In valuing a fractional interest, however, the important question is this: Is it to be assumed that the interest would be sold separately and valued accordingly, or should it be valued at its proportion of the price which the property would realise if sold as a whole? The answer will depend on the circumstances in each case, including the purpose of the valuation. If it is being made for statutory purposes the valuer must comply with the requirements of the relevant legislation.”
31.Ultimately it seems to me that the decision must be set aside. I reach that conclusion on the footing that the valuer has been asked to approach the task of valuation on an erroneous basis and that, accordingly, I am unable to be satisfied that the valuation achieved, correctly reflects the value of the relevant interest of Mr Robert Ralph and Mrs Pearl Ralph. The evidence does not permit me to reach a conclusion as to the vale of that interest and thus I propose to remit the matter to the respondent to consider the question afresh.
32.Finally I note that in the respondent’s Statement of Facts and Contentions (Exhibit 4) reliance is placed on the provisions in the VEA that deal with disposal of assets. It is said, in effect, that if the value is less than that determined by using the proportionate value, the respondent would want to contend that the applicant has received no monetary consideration for the diminution in value of assets. In light of the conclusion that I have reached it is unnecessary for me to reach any concluded view on this aspect of the case.
I certify that the 32 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC
Signed: .....................................................................................
Leisa Pendle, AssociateDate of Hearing 2 March 2006
Date of Decision 17 March 2006
The Applicant appeared in person
For the Respondent Mr J Kelly, Departmental Advocate
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