Reid and Secretary, Department of Family and Community Services - [2002] AATA 652

DECISION AND REASONS FOR DECISION [2002] AATA 652

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2001/1067

GENERAL ADMINISTRATIVE DIVISION         )
           Re      IAN JAMES REID
  Applicant
           And    SECRETARY, DEPARTMENT OF FAMILY & COMMUNITY SERVICES
  Respondent

DECISION

Tribunal Ms J Cowdroy, Member

Date2 August 2002
PlaceBrisbane (heard in Hervey Bay)

Decision      The Tribunal decides: In relation to the applicant's claim for newstart allowance, the decision under review is affirmed; and In relation to the applicant's claim for disability support pension, the decision under review is remitted to the respondent for reconsideration in accordance with the reasons for decision of the Tribunal.
  ...........(Sgd)......…….
  Ms J Cowdroy
  Member
CATCHWORDS
SOCIAL SECURITY – social security benefits - assets test – valuation of lots of land in an estate – whether discount should be given to valuation of land for bulk holding – whether lots of land are part of the applicant's principal place of residence – whether land is primarily used for private or domestic purposes

Social Security Act 1991

Re Bohun and Secretary, Department of Social Security (AAT 10864, 12 April 1996)
Re Samek and Secretary, Department of Social Security (1988) 16 ALD 295
Re Secretary, Department of Social Security and Langton (1993) 31 ALD 579

REASONS FOR DECISION
2 August 2002 Ms J Cowdroy, Member
Background to the Application

By decision dated 28 September 2001, the Social Security Appeals Tribunal ("the SSAT"), affirmed decisions made by Centrelink to (i) reject Mr Reid's claim for newstart allowance and (ii) to pay a reduced rate of disability support pension from 31 January 2001. The claim for newstart allowance was rejected on the basis that the value of his assets was above the allowable limit of $125,750.
The reduced rate of disability support pension was attributable to the level of the applicant's assets.
The primary issue for determination relates to the value that should be ascribed to the applicant's properties at Tiaro.

Hearing

The matter was heard in Hervey Bay on 7 May 2002. The applicant gave evidence and called two witnesses, Mr L Maddern and Mr R Barratt. The respondent was represented by Mr R McQuinlan. Mr K W Adams gave evidence for the respondent. The T-documents, pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, were admitted into evidence as E1, together with documents admitted as exhibits E2-E4. The matter was decided on the basis of the oral evidence, the written submissions and the material tendered as exhibits.
Applicant's Case
Mr Reid owns land in Dale Drive, Tiaro. He resides in a house built on Lot 18 Dale Drive. He purchased the land in 1994 for $125,000 as an investment. He borrowed money from family members for some of the costs associated with purchase of the land, and for subdivision and development purposes. When development was completed, he offered the blocks for sale. At that time, the blocks were jointly owned with his wife. There have been no sales. In 1997 he separated from his wife and there has been a property settlement. At that time, there was a severe slump in the demand for land in Tiaro.
Pursuant to the terms of a property settlement, Mr Reid retained twelve parcels of land, namely Lot 1, and Lots 12-21. Lot 18 has never been for sale, and it is accepted that block is his principal place of residence. Lot 1 has not been offered for sale. He withdrew all blocks from sale in 1999, with the exception of lots 19-21. He is not interested in selling the blocks, due to the depressed state of the market, and in any event, he did not believe there were any buyers.
Under cross-examination, he said that all blocks had been taken off the market at various times. The blocks have been listed with several agents at Tiaro and at Maryborough. The withdrawal of the blocks from sale was a process that occurred gradually. He has advised the agents that if there is any interest expressed in purchasing Lots 19-21, he should be advised. He has not discussed a price for those lots with the agents. If he received a reasonable offer he would give it consideration. He thought a reasonable offer would constitute an amount approximating the figures shown in Mr Maddern's valuation, although even if this figure was offered, he would not necessarily accept it. His attitude to the sale of a block/s would depend on his circumstances when an offer was received.
Since 1999, he has regarded the blocks of land as those forming part of his principal residence. The blocks, which are of varying size, either adjoin, are adjacent to, or are near his principal residence. He walks over his entire land holding regularly. He has planted mango trees, palm trees, paper bark and watermelon plants on some of the blocks. Much of it is grassed and he allows the local school to use the property for cross-country events. He provided photos of views from various vantage points of his house. His view from the back of the house overlooks land owned by Queensland Railways.
The applicant contends that up to a total of two hectares of land should be disregarded in determining his level of assets on the basis that it is land which is used primarily for domestic or private purposes in accordance with s 116(a) of the Social Security Act 1991 (the Act). He submitted that the matter of Re Bohun and Secretary, Department of Social Security (AAT 10864, 12 April 1996) was crucial to his case.
The applicant utilised primarily his own funds to purchase the land, although some amounts were advanced from family members to pay the deposit and stamp duty. Additionally, his mother advanced money to meet the costs of survey. The applicant's sister loaned him money, as did his daughter. He also borrowed money from his sister to purchase Telstra shares.
No formal security was given for the loans and all were repaid after his mother's death. However, at the time the claims for newstart allowance and disability support pension were lodged, there were amounts outstanding on these loans. He contended that the value of the Tiaro properties should be reduced by the amounts borrowed from family members. He sought to distinguish the matter of Re Samek and Secretary, Department of Social Security (1988) 16 ALD 295 on the basis of different facts. He contended that as the asset being valued is developed land, the costs involved in developing that asset should be taken into account and deduced from the value of that asset. If the Tribunal accepted that argument, the value of the Tiaro land should be reduced by an amount of $44,735.
Additionally, the loan advanced by the applicant's sister for the purchase of Telstra shares should be deducted from the value of those shares.
In respect to valuation of the allotments, the applicant submitted that their value should be assessed by reference to the recent valuation of Maddern & Associates. Excluding Lot 18, the valuation of the blocks, after allowing for a discount, is estimated at $49,000. Lots 22-26 which are also valued, are to be disregarded as they are now owned by Mrs Reid, pursuant to the property settlement.
Mr Maddern's valuation is to be preferred to that of the Australian Valuation Office (AVO) as Mr Maddern has comprehensive local knowledge and is able to competently assess the sales evidence. Photographs of recent land sales were provided, on the basis they were comparable with the allotments in Tiaro Drive. Of particular significance, in the applicant's view, is the AVO's failure to make any allowance for bulk sales in its valuation.
In essence, the value of his assets did not exceed the permissible limit for the payment of newstart allowance and he was therefore eligible for that benefit during the relevant time. Additionally, his rate of disability support pension should be recalculated, having regard to (i) the exclusion of two hectares of land from valuation, on the basis that it formed the curtilage to his principal residence; (ii) the value of the unsecured loans advanced by family members for the purchase/development of the Tiaro land and the purchase of Telstra shares; and (iii) the value of the Tiaro land being assessed in line with Mr Maddern's valuation.
Noel Lloyd Maddern is a licensed valuer from Bundaberg who has worked in, and is familiar with, land values in the Tiaro area. He prepared a valuation dated 15 April 2002, which is marked as Exhibit E3-C. He provided a valuation of $98,000, with a discount of 50 per cent to be applied if the blocks were to be sold in "one line", rather than individually. The reason such reduction is made is to take into account the interest, rates and other costs payable by the developer until all the lots are re-sold, the agent's commission in reselling, legal costs, stamp duty and other considerations including the number of blocks for sale and the length of time it takes to sell them.
He believed a discount of 50 per cent was a reasonable figure, taking into account the need for the entrepreneur's margin of profit and the costs involved. The figure of 50 per cent was based on a holding of ten lots to be sold within a period of two to four months, with an average number of sales per annum of five. The market for vacant land in Tiaro is very slow, with the frequency of sales reducing to three or four over the last several years. Generally, sales have remained at a low level since 1995.
In providing his valuation, he had had regard to land available in another estate, known as the "butcher's estate", which has a similar level of amenity to the blocks owned by Mr Reid. A block of 1199m2 was sold in September of 1995 for $21,000 and in April 2000 a block of 1200m2 was sold for $10,000. They are the only two blocks sold from that subdivision and there were sixteen or eighteen blocks in the first stage of the development.
Under cross-examination, Mr Maddern acknowledged that his valuation dated 19 May 1998 (T14), valued the blocks at considerably more than his recent valuation. His later valuation reflects the fact that there has been a substantial reduction in values since 1998, and that the full extent of the slump in the industry only became evident during mid 1998. For example, a block that was valued in 1998 at $20,000 was re-valued at $12,000 as at 1 March 1999 and remained at that figure as at 1 January 2000. The sharp drop in value from May 1998 to 1 March 1999 was attributable to the fact that the valuation in 1998 was reliant on sales information to the end of 1997, and since that time, it is evident that sales have declined and continued to do so.
In relation to the practice of selling blocks "in one line", if only three blocks were on the market, the discount he considered appropriate was in the order of 20 to 25 per cent.
In submissions, Mr Reid referred the Tribunal to Re Samek in which the Tribunal referred to the Pensions Manual, which contains an instruction that the outstanding value of an unsecured loan may be deducted from the value of a particular asset if the loan was obtained specifically for the purchase of that particular asset. He contended that the appropriate interpretation of that direction should encompass the situation where loans had been advanced specifically for the development of an asset.
Re Secretary, Department of Social Security and Langton (1993) 31 ALD 579 was said to support the proposition that a person living in a country area should not be disadvantaged when assessing the value of assets. For example, if the applicant's house was located in Maryborough, it would fetch at sale about $30,000 more than it would at Tiaro.
In regard to the issue of curtilage, in all the cases dealing with this issue up until the repeal of s 6AA(4) of the 1947 Act, two hectares of land had been allowed.
In his written submission, the applicant relied on Re Bohun in which the "Department of Social Security completely accepted and even advocated that Mr Bohun be allowed two hectares curtilage despite the fact that Mr Bohun was actively involved in the subdivision and selling of his land during the relevant time".
Richard Charles Barratt is a real estate agent who has operated an office in Tiaro since 1986 and formerly had an office in Maryborough. He had viewed the valuations provided by Maddern Valuation Services and that of Mr Kim Adams of the AVO. He acknowledged that in a sale in a "one line" situation, it was common practice to discount the valuation figure, however he was not competent to comment on the appropriate percentage to be applied.
Three years earlier he had resided in Browns Lane, Tiaro and in his travels to and from his home to the office he observed that the whole of Mr Reid's estate was being used as a residential property. He used the term "principal place of residence" on several occasions. Although there is an access road to the blocks, he described it as "more like a track".
Under cross-examination, he stated that vendors with multiple blocks are not a common phenomena. He gave examples of sales from 1992 to 1994, some of which occurred because of cash flow problems.
Respondent's Case
Kim Warwick Adams is a registered valuer, employed by the Australian Valuation Office for ten years. He has worked in the Burnett region and in the Tiaro Shire as well as Maryborough, Hervey Bay and Bundaberg. He valued property in the Tiaro area up until about six months ago. He prepared a valuation of the applicant's properties in 1997 (T15). The valuation was $247,000. It includes values for blocks which are not now owned by the applicant. He provided another valuation dated 2 May 2001 (T46), based on an inspection on 28 November 2000. That valuation is $181,000 as at both 1 March 1999 and 1 January 2000.
In respect to the 1997 valuation, no discount was suggested for bulk sales on the basis that at that time he understood the intention of the applicant was to sell the lots individually. He had given evidence before the Administrative Appeals Tribunal hearing on 28 May 1999 that if the properties were to be sold in bulk, he considered a thirty per cent discount would be appropriate.
He acknowledged that there had been a substantial decease in values of real estate in Tiaro between 1997 and 2000. He had read the valuation provided by Maddern and Associates and considered the individual values in the 1997 valuations were very similar, his values being slightly less. The Maddern valuation did not value Lot 1, whereas he had taken that allotment into account.
In respect to the valuation provided by the Department of Natural Resources (Natural Resources), as at 30 June 1996, he stated that that is probably not a true reflection of market value because it is a mass appraisal valuation and does not take into account individual properties. It is an unimproved value and Natural Resources has applied a substantial discount for bulk holding. He opined that the value attributed to land by that department in most instances is substantially less than its market value.
He had compiled a list of sales when considering his valuation. From the period 1 January 1998 to 11 April 2001 there had been 27 sales of vacant land in the Tiaro area.
Under cross-examination, he stated that when he first inspected the property he observed "for sale" signs on individual lots. On the second inspection, he made no reference to observing "for sale" signs, however, he had spoken to Mr Barrett who had told him that unofficially they had been taken off the market but they were still available for sale. Some of the sales evidence he had disregarded due to the fact that they were not arm's length transactions.
He believed that the butcher's subdivision is an inferior subdivision to that belonging to Mr Reid on the basis that a large percentage of the former subdivision backs directly onto the Bruce Highway, whereas the applicant's blocks are located on an elevated area with a good aspect and local views. He opined that the applicant's subdivision is probably one of the better locations in Tiaro.
On the basis of the sale of five blocks per annum, and an offer for sale of ten blocks in one line being sold within three to four months, a discount of 30 per cent would apply.
The respondent maintained that the evidence was clear that the majority of the loans provided to the applicant were utilised to improve and develop the property, rather than for the purchase of the land. In such a case, the matter of Re Samek has no application.
There is no legislative basis upon which unsecured loans relating to the Tiaro properties can be deducted from the value of the blocks, however Departmental policy is to the effect that the value of an asset may be reduced by unsecured loans provided such loans specifically relate to the purchase of an asset. In the present matter, the respondent had allowed an amount of $7,1620, representing the cost of deposit and stamp duty. The costs of development after the asset is acquired, are not deductible.
The report of Mr Adams provided did not consist of only two pages, which was a matter of comment by the applicant. His earlier comprehensive valuation carried out in 1997 was incorporated in the present valuation by reference, and additionally he had revisited the properties in 2000. He had viewed recent sales figures and he acknowledged that there had been a reduction in demand.
In respect to whether any of the blocks should be regarded as curtilage, the evidence demonstrated limited private use. The applicant had indicated that if he was offered a reasonable amount for those blocks, he would consider selling. The fact that some trees had been planted and the grass was kept mown does not mean that it is consistent only with a domestic use. The maintenance of lawn on the blocks makes it more attractive to prospective buyers. In any event, some of the gardens and trees which are depicted in the photographs are on properties that do not belong to the applicant.
In respect to the amount of discount to be applied in the case of bulk sales, the evidence of Mr Adams is that at least five blocks would need to be offered to attract a 30 per cent discount. The applicant's blocks were never on the market as a bulk item for sale, they were progressively withdrawn from sale and at this stage, only three properties are tentatively on the market.
Further, Mr Barrett, who gave evidence for the applicant as a person who has expertise dealing in real estate in the Tiaro area, was unable to express an opinion as to what discount should be applied.
Consideration
In respect to the ambit of the applicant's principal residence, s 118(1) of the Act is relevant. It states that certain assets that are to be disregarded in determining the value of a person's assets. Under that section a principal home is disregarded. There is no dispute that Lot 18 Dale Drive, which contains the house in which the applicant lives, is his principal residence. However, the applicant contends that all or part of Lots 12 to 17 and Lots 19 to 21 also form part of his principal home on the basis that he meets s 11(5)(a). It defines "principal home" as including:
"…if the principal home is a dwelling house – the private land adjacent to the dwelling house to the extent that the private land, together with the area of the ground floor of the dwelling house, does not exceed 2 hectares…"
The term "private land" is defined in s 11(6) as follows:
"A reference … to private land adjacent to a dwelling house is a reference to land that is adjacent to the dwelling house and that is used primarily for private or domestic purposes in association with that dwelling house."
In this context, I find that the applicant purchased the land for commercial use. He has been unsuccessful in selling the blocks due to the downturn in demand for vacant land in Tiaro. The fact that trees have been planted on some of the blocks and lawns maintained does not in my view detract from their status as subdivided lots for sale. The fact that the applicant is not actively seeking buyers is irrelevant. Consequently, the subdivided blocks do not fall within the definition of land that is adjacent to the dwelling house which is used primarily for private or domestic purposes. Whilst not argued before me, it seems that many of the blocks would not meet the description of "adjacent", however this is not a crucial issue in deciding this matter.

The cases cited to me by the applicant, in particular, the matter of Bohun, are distinguishable on the facts. In Bohun the matter of curtilage was not argued before the Tribunal.
In previous cases where curtilage has been an issue, the decision has related to the situation where a person's principal home has been part of a farming property or a large holding of land, which is not the case here. Additionally, the method of valuing the principal home as if it were located in the nearest regional centre, as was the case in Langton, is only adopted when assessing the value of a principal home which forms part of larger property. It was the value of the excess land which was at issue and the method was adopted to ensure that the value of a disregarded asset (the principal residence), was given its most liberal value. That exercise has no relevance to the present circumstances.
In respect to the loans advanced by various family members to the applicant, I note that the respondent has allowed the sum of $7,162. That concession is based on Departmental policy.
The legislative authority for working out the value of assets is s 1118, the relevant part of which is as follows:
"(1) If there is a charge or encumbrance over a particular asset of the person, the value of the asset, for the purposes of calculating the value of the person's assets for the purposes of this Act, is to be reduced by the value of that charge or encumbrance."
Clearly there is no evidence of a charge or encumbrance over the blocks. Even if I adopted the more relaxed test enumerated in the Departmental policy handbook, such reduction does not extend to the costs involved in developing a property. Accordingly, I find that apart from the amount of $7,162 conceded by the respondent none of the loans can be utilised to reduce the value of the land. It follows that no regard is to be had to the loan advanced for the purchase of Telstra shares.
The final area of dispute relates to the valuation of the blocks. The applicant contends that the valuation of Mr Maddern should be adopted which should then be discounted by 50 per cent. This would provide a figure of $49,000. The respondent contends that the most recent valuation of the AVO of $117,000 should be adopted, with no allowance being made for a bulk offer for sale.
The Tribunal notes that in a decision of the Tribunal dated 3 February 2000, Senior Member Beddoe was required to assess the value of certain blocks as at October 1997. He determined that the most reliable valuation was that provided by Natural Resources as at 30 June 1996, with a small upward adjustment made to achieve the October 1997 value.
However, the Tribunal notes that the Department of Natural Resources valuation is an unimproved value which is geared primarily for use by local government, as a basis for levying rates, and the Office of State Revenue as a basis for levying land tax. In any event, it was not contended by the applicant that this was the preferred valuation. Even if that was in issue, of considerable significance would be the fact that the Natural Resources valuation was made in 1996, whereas the valuation before this Tribunal is at 31 May 1999 and 31 January 2000 (the relevant dates).
At this point, it might be useful to state that, whilst those two dates are significant in terms of possible entitlement to pension, clearly for valuation purposes, there will be no differentiation. Both the Maddern valuation and that of the AVO reflect no change in value during this period.
Apart from the fact that the Natural Resources valuation is carried out some years prior to the relevant dates, I was also mindful of Mr Adams' evidence that that valuation is based on a bulk holding, or a multiple holding, in respect of which a substantial discount is allowed. In most instances, Natural Resources valuation is substantially less than the market value. Whilst the Act is silent as to the meaning of value, the Tribunal has consistently followed the principles outlined by the High Court in Spencer v Commonwealth of Australia (1907) 5 CLR 418. Those principles have been adopted by the International Assets Valuations Standards Committee in describing what is meant by "market value":
"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 knowledgeably, prudently and without compulsion." (The Valuer and Land Economist May 1993)
The valuations of Mr Maddern and the AVO do not differ substantially in their assessment of the individual allotments. The Maddern valuation is $98,000 and that of the AVO is $117,000.
In considering whether a discount should be applied in the present circumstances, I was mindful of Mr Maddern's evidence that a discount is normally applied when one purchaser buys a number of blocks. His valuation makes an allowance of 50 per cent for fifteen lots "in one line", however in making that statement, he is including four allotments which are not allotments belonging to the applicant.
The rationale for the discount is that the vendor is anxious to offload the blocks rather than paying interest on the money borrowed to develop the blocks, as well as savings made, for example, in the form of agent's commission, by selling the blocks individually. The evidence before me is that the applicant is not anxious to sell the blocks and that only three blocks were "unofficially" on the market. Whilst there was no evidence directly on this point, it seems that the only costs for which the applicant is liable relate to council rates, possibly land tax and the cost of mowing the grass. Additionally, Mr Maddern referred to the discounting process as being referable to the situation where an entrepreneur is willing to accept a lower profit to recoup their costs and make a lower profit, rather than sell the blocks individually over a longer time frame, with the attendant costs involved.
Mr Maddern indicated that if only three lots were on the market, he would probably apply a discount in the order of 20 to 25 percent. Mr Adams considered that with ten lots to sell as a bulk purchase, a 30 per cent discount would be appropriate. Whilst the applicant is the holder of eleven blocks, it is clear that he has no interest in offering the blocks as a bulk parcel, as he would need to be willing to accept a substantially reduced profit margin. However, what is also clear is that there is very little demand for land in Tiaro. Consequently, I am satisfied that it is appropriate to adopt the valuation which provides for the lower values, which is that of Mr Maddern. However, in terms of the discounting process, I am not convinced that a 50 per cent reduction is appropriate, given that only three are "unofficially" on the market and Mr Adams' evidence was that an offering of ten blocks would necessitate a discount in the order of 30 per cent.
Accordingly, Mr Maddern's valuation of $98,000 is to be discounted by 20 per cent. That provides a figure of $78,400. As I understand it, it has been agreed between the parties that other assets have a value of $63,141. Consequently, taking into account the respondent's decision to offset the value of the property by the unsecured loans in the amount of $7,162, the applicant's assets exceed the allowable limit of $125,750 for newstart allowance. In respect to his entitlement to disability support pension, the matter is to be remitted to the Department with the direction that the applicant's entitlement if any, is to be calculated by reference to the decision that the value of his assets, excluding his principal place of residence is $133,979.
The Tribunal affirms the decisions under review insofar as it relates to the applicant's claim for newstart allowance. In relation to the applicant's claim for disability support pension, the matter is remitted to the respondent for reconsideration in accordance with these reasons for decision.
I certify that the 60 preceding paragraphs are a true copy of the reasons for the decision herein of Ms J Cowdroy, Member
Signed:         Sarah Oliver
  Associate
Date of Hearing   7 May 2002 (at Hervey Bay)
Date of Decision   2 August 2002
The Applicant Appeared in Person
Solicitor for the Respondent    Mr R McQuinlan, Departmental Advocate