Sollazzo and Secretary, Department of Social Services (Social services second review)

Sollazzo and Secretary, Department of Social Services (Social services second review) [2024] AATA 3815 (30 September 2024)
Division:General Division
File Number(s): 2023/3091 and 2023/3188
Re:Filippo and Antonietta Sollazzo
APPLICANT

Secretary, Department of Social ServicesAnd
RESPONDENT

DECISION
Tribunal:Deputy President Damien O’Donovan
Date:30 September 2024
Place:Canberra

The Tribunal sets aside the decision under review and remits the matters to the Agency to determine the pension payable consistent with the findings set out in these reasons.
………………...[SGD]…………………..
Deputy President Damien O’Donovan
Catchwords
SOCIAL SECURITY – age pension affected by value of assets – valuation of uninhabitable house – whether valuations used fair comparisons with comparable properties – relevance of cost of making the house habitable – neither party’s valuation accepted in full – decision set aside.
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Social Security Act 1991 s 94
Deputy President Damien O’Donovan
30 September 2024
REASONS FOR DECISION

Filippo Sollazzo and Antonietta Sollazzo (the applicants) are recipients of the age pension. In addition to the property they live in, the applicants also own a house on Knaggs Crescent in the suburb of Page in the Australian Capital Territory (the Page Property). Although the applicants derive no income from the Page Property and the property is in disrepair, its capital value affects the amount of the applicants’ pension. On 15 December 2021 an annual indexation assessment was carried out on behalf of the respondent which led to the value of the Page Property being increased from $571,215 to $722,358. As a result, the applicants’ age pension was reduced. The applicants sought internal review of that decision on the basis that the proper value of the Page Property was $450,000.
In response, the Agency sought an onsite valuation of the Page Property from a qualified valuer. After a site visit the valuer assessed the property to be valued at $725,000 as at 29 July 2022. On 3 August 2022 the authorised review officer decided to vary the decision on the basis that the property was valued at $725,000. This resulted in a further reduction in the applicants’ pensions.
The applicants applied to the Administrative Appeals Tribunal (the Tribunal) for review of that decision. The decision was reviewable in the Social Security and Child Support Division of the Tribunal. I will refer to that Tribunal decision as the Tier 1 decision. At Tier 1 the applicants again argued that the valuation should have been lower. They attacked the comparable properties used to determine the value of the Page Property as inappropriate and obtained a building quote for the purposes of allowing an assessment to be made of the cost of bringing the Page Property up to a standard comparable with the nearby properties which had been sold.
A Tier 1 decision was made on 30 March 2023. The Tribunal member found:
…the demand for residential properties in the ACT in the last few years has been unprecedented. I was satisfied that a value of $725,000 which is little more than the unimproved value of the property in 2022 (which reflects the change in property prices in the previous 12-18 months), is a reasonable assessment of the value of the property at the date of the original decision in December 2021.
I considered the submissions of Mr and Mrs Sollazzo but could not find that there is a reasonable basis for concluding that a lower value should apply, especially as there are ample sales of properties in Knaggs Crescent to support such a valuation…for the purpose of this review…I have to determine whether the decision in relation to the value of the property in December 2021, as varied by the authorised review officer to $725,000, is correct…I am persuaded that it is.
The member affirmed the decision under review.
The applicants sought review of the Tier 1 decision in the General Division of the Tribunal. I will refer to this review (the current review) as the Tier 2 review.
During the course of the Tier 2 review, the respondent’s position altered significantly. He accepted that the valuation of the Page Property as at December 2021 was too high and provided a valuation of $625,000. However, due to significant price movements in the Canberra housing market between December 2021 and July 2022, the valuation given in July 2022 of $725,000 following the site visit was affirmed by the valuer as being correct.
Despite this significant alteration of the respondent’s position the applicants were still not satisfied with the position the respondent adopted and both valuations remain disputed.
The applicants provided a 2023 valuation from professional valuers ACT Valuations, but also provided their own valuations, which relied upon the techniques used by the respondent’s valuers but contested the comparisons made between the Page Property and other recent sales in the area. The respondent’s valuations were provided by professional valuers Jones Lang LaSalle (JLL).
While there are some minor disagreements about the precise state of the property and some issues of basic arithmetic, the key issue in dispute is how the valuation of the Page Property should be approached. The applicants take the view that because the Page Property is uninhabitable, the cost of bringing it up to a standard where it can be lived in is relevant and important in assessing the value of the property. The respondent’s position is that focussing too much on the cost of repairing the property will undervalue the property, and the size of the undervaluation increases as the quoted building repair costs increases.
Both are legitimate points, and each party has damaged the credibility of the other party’s valuations. Ultimately, I am persuaded that there are flaws in both techniques. Consequently, I am not satisfied that the valuations should be as high as the respondent contends, but they should be higher than the applicants’ estimate. To understand how I have derived valuations that fall between the two, it is necessary to examine how the valuations evolved.
Progression of the Valuations
The first valuation was generated by the respondent in December 2021. The valuation amount was $722,358 as at December 2021. Neither party considers that to be an accurate valuation.
The next valuation was prepared by JLL following a site visit to the Page Property. The property was valued at $725,000. JLL remain of the view that $725,00 represents a fair market value as at 29 July 2022.
After seeking Tier 2 review, the applicants obtained a valuation report prepared by Valuations ACT dated 31 July 2023. This valuation, which determined the market value of the Page Property as at 31 July 2023, was $500,000.
Following the receipt of that valuation, the respondent obtained a further valuation dated 23 August 2023 (the Supplementary Valuation). This valuation was a desktop assessment conducted by JLL. It found the value of the Page Property as at 15 December 2021 to be $625,000.
The JLL report disagreed with the ACT Valuations Report for the following reasons:
(a)The date of the valuation was different;
(b)The valuer used the wrong methodology for litigation purposes by using the Australian Property Institute’s (API) Property Pro Valuation Pro Forma;
(c)The valuer got the dimensions of the house wrong;
(d)The land was wrongly identified as freehold;
(e)The estimated cost of repair of the house was $90,000 but an adjustment of $196,250 was made;
(f)The valuation states that the current market value of the subject property lies in the range of $700,000 to $900,000 but gave a valuation of $500,000;
(g)The comparisons with ‘comparable’ properties were poorly done.
The Supplementary Valuation then went on to provide more detailed analysis of comparable sales to explain why the valuation as at 29 July 2022 remained unchanged. It also explained why the correct valuation of the Page Property as at 15 December 2021 should be reduced to $625,000.
On 8 April 2024 the respondent filed a statement of facts, issues and contentions which contended that:
i.The decision made by the AAT1 on 30 March 2023 should be set aside and remitted back to the Agency for reconsideration with a direction that the value of the [Page] Property was $625,000 from 15 December 2021 to 28 July 2022, and $725,000 from 29 July 2022; and
ii.The value of the applicants’ combined assets was otherwise correctly assessed.
On 3 May 2024 the applicants filed a response. The response included two annexures, which set out valuations for the Page Property for 2021 and 2022. For the 2021 year the applicants valued the Page Property at $487,070, and for the 2022 year they valued the property at $569,403.
The applicants submitted that the valuations provided by themselves and Valuations ACT should be accepted. The applicants submitted that the valuation calculations, as described in the Supplementary Valuation, contained mathematical errors and errors in details which are not in accordance with the accepted practices of the valuation profession. These errors included the size of some of the improvements on comparable blocks, rounding errors, and a series of mathematical errors which meant that the comparable sales were all undervalued by $10,000.
The applicants further submitted that because they did not have access to the calculations in the original valuation, the original report may have been affected by similar errors.
The applicants also attacked what I will refer to as the presentation adjustments used by JLL when comparing the Page Property with comparable sales in the area. The presentation adjustment was used by JLL to take account of the fact that the other properties that had sold in the area were in a much better state of repair than the Page Property and had other advantages over it, which made them more attractive to buyers. The applicants criticised the presentation adjustments used by JLL as not accurately representing the real world. The applicants noted that they had a quote from a builder which estimated the cost of remediating the property at $251,130. This quote was obtained in circumstances where the original JLL Report described the works required to the kitchen, laundry, and bathroom of the Page Property as essential repairs. The applicants noted that the ‘presentation’ value was intended to represent the difference in the quality and condition of the improvements between the applicants’ property and a comparison property. The applicants then went through the comparable properties in detail and submitted that the presentation values chosen by JLL suggested much smaller differences between the presentation of the Page Property and the comparable sales properties.
The applicants submitted that the valuations they had performed, which valued the property at $487,070 for 2021, and $569,403 for 2022 using a similar market value approach and sales comparison methodology, should be accepted as conclusive for estimating the market value that a willing but not eager purchaser, and a willing but not anxious seller, would agree upon in an arms-length transaction, considering the best use of the property. Further, the applicants’ independent valuation from Valuations ACT for 2023 should be accepted from 30 July 2023. The applicants sought a decision that set aside the Tier 1 decision and remitted the matter back to the Agency with the following directions:
a)The value of the Page Property is $487,070 from 15 December 2021 to 14 December 2022;
b)The value of the Page Property is $569,403 from 15 December 2022 to 14 December 2023;
c)The value of the Page Property is $500,000 from 15 December 2023 until such time as there is a significant change in the condition of the applicants’ property.
JLL were contacted by a representative of the respondent to comment on the applicants’ response. On 7 June 2024 JLL responded to the query and provided the respondent with additional important information.
JLL advised its client that ‘the JLL Supplementary Report provided to the Department was not the final document and was sent in error. The correct version of the Supplementary Report is attached’. That corrected version of the Supplementary Report came to the same conclusion as the Site Visit valuation in July 2022 – ie that the Page Property on that date should be valued at $725,000 – and came to the same conclusion as the subsequent desktop valuation – namely, that as at 15 December 2021 the Page Property was valued at $625,000.
How the calculations were done in the new valuation differed in significant respects from the previous version provided. At first blush, the new report seemed to have been changed in response to the Sollazzos’ identified mathematical errors, but with the intention of keeping the valuation the same even though, when the maths errors were corrected, a different (higher) valuation would have been yielded if all the component numbers were kept the same as in the first version of the Supplementary Valuation.
To properly explain this point it is necessary to lay out how JLL went about deriving its comparisons between the Page Property and nearby properties sold at the relevant time. Starting with the July 2022 valuation, the first step was to identify comparable sales, close to the valuation date, with a known sale price. An illustrative example is:
41 Luehmann St Page ACT
Date of sale: 5 February 2022
Sale price: $835,000
To incorporate the sale into the valuation, the JLL valuer estimated how much of the sale price related to the land and how much related to the improvements on the land. As described by one of the JLL valuers in his oral evidence, this is a partly intuitive process, but it does require a solid understanding of the value of vacant land in the ACT and in and around the relevant suburb. The valuer concluded that the component values for the sale of 41 Luehmann St were:
Land – 743 sqm $600,000
Improvements – 109sqm $235,000
In other words, if the property was a vacant block it would sell for $600,000, but because it had a house and other improvements on the block that a purchaser would value, these contributed $235,000 to the value of the property. As a result, the property actually sold for $835,000.
Then, in order to estimate what the Page Property would sell for if it had been sold at the date relevant for the valuation, adjustments are made by the valuer to reflect the difference in the size of land, the difference in the size of the improvements on the land, differences in the presentation of the property and movements in the market between the point in time when the comparison property was sold and the point in time when the valuation is required.
In the JLL valuation, because the Page Property land was roughly the same size as the Luehmann St property (being only 4 sqm bigger), no adjustment was made for the land being larger. As the improvements on the Page Property were smaller by 17sqm than the improvements on the Luehmann St property, $25,000 was taken off the value of Page Property to reflect that. Then a $90,000 adjustment was made to reflect the fact that the Luehmann St property presented better. It is this allowance that is contested by the applicants as insufficient. The applicants contend that it is insufficient because it does not reflect the fact that the Page Property is uninhabitable. An allowance is also made for movements in the housing market between the date of valuation (July 2022) and the date of sale of the comparable property (5 February 2022). In its first explanation of its report on 30 August 2023, JLL put in an allowance for market improvement of $13,000.
Having had the benefit of the Sollazzos’ response document of 3 May 2024, explaining that the numbers did not add up to the adjusted sale price of $723,000 but to the higher number of $733,000, JLL presented the new report with different figures for some of the components of the calculation, but reaching the same final number for the adjusted sale price as was reached in the earlier report.
In the updated report, the ‘presentation’ deduction for 41 Luehmann St was increased by $5,000, and the market movement amount was reduced to $8,000. As a consequence of these changes, the arithmetic for calculating the adjusted sale price was corrected and the valuation did not change.
I note that if the arithmetic in the original report had been corrected without any changes to the component figures, the valuation would have been adjusted up by $10,000 (a result adverse to the applicants).
It is easy to read this adjusted document as an attempt to fiddle the numbers so that earlier valuations can still be defended. However, I am prepared to accept the sworn evidence given by the valuers that the differences between the original version of the Supplementary Valuation and the subsequent version is not the result of changes being made after the applicants’ exposed basic errors in the first version, but the result of a wrong version being sent to the client.
The letter of 7 June 2024 from JLL to the respondent, which provided the new version of the supplementary valuation report, also critiqued the valuations the applicants had prepared using the methodology explained in the JLL Supplementary report but using a very different ‘presentation’ adjustment.
Before going to the critique, it is useful to describe exactly how the applicants made their valuation calculations for the purposes of reaching their conclusions about the value of the Page Property. Setting out the approach they took when comparing the Page Property to 41 Luehmann St property should illuminate the issue.
The applicants essentially applied the same process as JLL when comparing the two properties, but with two significant differences. First, instead of deducting a ‘presentation’ adjustment, the applicants deducted an amount that came from a building quote to repair and upgrade the Page Property. The amount used was $251,130.[1] This was significantly higher than the ‘presentation’ deduction used by JLL, which was $95,000. Second, the applicants also put in an adjustment for the Page Property land being larger than the 41 Luehmann St parcel.
[1] This amount was put in to every property comparison no matter how old or how recently renovated the comparison property was.
The result of these two changes was that the adjusted sale price for 41 Luehmann St was $575,070 – roughly $150,000 below the JLL estimate. All of it was accounted for by the difference in the ‘presentation’ or ‘repair’ adjustments done in each of the valuations.
In its response document, JLL had this to say about the approach adopted by the applicants in their valuation:
The adoption of the quoted repairs amount of $251,130 as an adjustment for each sale shows a clear lack of understanding of the purpose of the adjustment process. The sales evidence utilised are all improved with dwellings of varying ages with varying standards of internal and external presentation. The condition of the sales evidence ranges from original to renovated. The differing levels of depreciation must be considered when adjusting the sales evidence. Adopting a single figure takes no account of the individual characteristics of the comparable sales. Following this logic, if the quotation increased to $351,130 the valuation amount would be reduced by $100,000. As the quote increases, the point would be reached where the property would be valued at $0. This is patently incorrect. The approach in no way reflects accepted practices of the profession.
This gets to the heart of the disagreement between the parties. If an uninhabitable house is being compared with houses that can be lived in, and which have substantial improvements to them, how should the differences in value be accounted for?

The applicants’ position is that the cost of renovating the house to bring it up to a reasonably high standard of finish is appropriate to allow it to be compared to habitable houses. JLL on the other hand have taken the view that this approach will undervalue the house and it is more appropriate to make a more subjective assessment of the relative presentation of the two houses in the comparison. This reflects the fact that the cost of bringing up an uninhabitable house to a newly renovated standard does not reflect the difference in presentation between a tired but habitable house and an uninhabitable one. Accordingly, it is inappropriate to treat the presentation allowance as linked to the renovation costs of making the house a habitable dwelling, and it is incorrect to keep it constant in relation to all of the houses against which the comparison is being made.
The applicants filed a response dated 1 July 2024.
The applicants (not surprisingly) were concerned about how the changes to the new version of the Supplementary Valuation had been made. In particular, they were concerned that the comparable values of properties stayed the same by changing the component items within the calculation. The applicants submitted:
The Adjusted Sales Price for many have not changed and it is not acceptable professional practice to manipulate the component values (land value, improvement value, and other value) in a way that artificially maintains a predetermined overall value. Such practices undermine the integrity and accuracy of the valuation process and can lead to misleading or incorrect valuations.
The applicants also pointed out that the Adjusted Sales Price for 7 Millhouse Crescent still contained an arithmetical error which undervalued it by $10,000.
The submission noted that despite the site inspection, many items that were said to be in the house in the July 2022 valuation were not in the house.
The applicants also relied upon International Valuation Standards 104 s 30.5, which states:
…various approaches and methods may be used to arrive at an opinion of value providing they use market-derived data. The market approach [which appears to be the approach adopted by JLL] will, by definition, use market-derived inputs. To indicate market value, the income approach should be applied, using inputs and assumptions that would be adopted by participants. To indicate market value using the cost approach, the cost of an asset of equal utility and the appropriate depreciation should be determined by analysis of market-based costs and depreciation.
The applicants contended that multiple methods should have been used to value the property because there were no comparable uninhabitable properties. The Direct Comparison Approach, the Cost Approach and the Market Participant Approach were all available options that could have been utilised.
The applicants also defended the approach they used in their valuation, contrasting the apparent arbitrariness of the presentation values adopted by JLL with the comparative rigour of actually getting a quote (consistent with the Cost Approach) for the necessary cost of getting the house habitable. The applicant defended its hybrid approach as necessary because the house was uninhabitable.
When the matter came on for hearing, both JLL valuers were cross-examined by Mrs Sollazzo. She was an extremely effective cross-examiner. It became clear that despite the site visit, the JLL valuer had not been precise in his description of the level of deterioration in the house in his report and that some descriptions did not fully reflect the dilapidated state of the house. However, despite the differences conceded by the JLL valuer, it was clear that he treated the house as uninhabitable and valued it on that basis.
Mrs Sollazzo was similarly direct in pointing out the arithmetical errors made by JLL and the lack of justification for presentation values selected by the valuation.
When Mrs Sollazzo was cross-examined, it became clear that the building quote she had obtained involved a significant upgrade to the house rather than simply restoring it to a state where it could be rented out or occupied by the owner.
The Valuations ACT valuer prior to the hearing indicated that he would make himself available for cross-examination, but in the end did not attend the hearing. I have given his report less weight for that reason.
CONCLUSIONS
As should be clear from the outline of submissions and evidence above, this matter involves a hard-fought contest about the valuation of the Page Property.
There are at least three reasons why the valuation is difficult. First, the property is in such a state of disrepair that it is uninhabitable. Second, no properties in similar condition came onto the market in the relevant period to allow comparison. Third, the valuations relate to a period in time where the housing market became a very hot sellers’ market.
In these circumstances precision is likely to be elusive.
However, the framework set up by JLL for analysing comparable sales is a useful starting point. It makes it possible to identify roughly what the land value of the Page Property was at different points in time, which will provide a floor on the value of the property – common sense indicates that the Page Property is not going to sell for less than the land value minus the removal costs to return it to vacant land.
It also seems reasonable to try and get a handle on what it would cost a purchaser to get the house into a habitable state for rental purposes or to allow the owner to move in. While it is conceivable that an investor might buy the Page Property in order to hold it just for capital appreciation purposes, many more buyers would be interested in the property in a habitable state and purchase it after comparing it to other habitable properties. The cost of making it habitable must be a relevant question when trying to compare the Page Property with other properties in the area.
With these principles in mind, I am not satisfied that JLL have adequately reflected the kind of price advantage that a buyer would want to make the Page Property to have, to make it attractive when compared with other houses in the area which can be bought as is, and moved into quickly without having to spend a cent. The allowances made of around $95,000 for houses in average condition seem inadequate in light of the Page Property’s state of dilapidation.
Having said that, the applicants’ allowance of $251,130 is excessive, reflecting as it does a high-quality upgrade to create a newly renovated house. In my assessment, using a presentation figure that averages around the $165,000 mark and within a range of $80,000 (for 15 Faucett St Latham and $200,000 for 9 Frost Place Page) seems more realistic – reflecting smaller and cheaper upgrades for a buyer to bridge the gap between the Page Property and some of the less attractive comparison properties and what would need to be spent to achieve some form of parity with the more upmarket properties in the list of comparable properties.
By substituting the ‘presentation’ numbers listed in Schedule A to this decision and then choosing a mid-point in the relevant range, I have determined that the July 2022 valuation of the property should be $657,000 and the December 2021 valuation should be $585,000.
As a cross-check I have looked at the underlying land value of the Page Property at the relevant times. The values which have been yielded by the modified method I have employed sit slightly above the land value, which is realistic given the very poor state of the Page Property.
Decision
My decision is to set aside the decision under review and remit the matters to the Department to determine the pension payable consistent with the findings set out in these reasons.

64. I certify that the preceding 63 (sixty-three) paragraphs are a true copy of the reasons for the decision herein of Deputy President Damien O’Donovan.

..................[SGD].................
Associate
Dated: 30 September 2024

Date of hearing:

8 July 2024

Date final submissions received:

8 July 2024

Applicants’ representative:

Self-represented

Solicitor for Respondent:

Mr Brett Hearnden (Hunt & Hunt)

SCHEDULE A: Presentation adjustment table

Property address

JLL presentation amount

Adjusted presentation amount

22 Earle Street, Page ACT 2614

$100,000

$175,000

5 Whitelegge Close, Florey Act 2615

$90,000

$150,000

41 Luehmann Street, Page ACT 2614

$95,000

$165,000

41 Braine Street, Page ACT 2614

$110,000

$185,000

9 Frost Place, Page Act 2614

$130,000

$200,000

8 Bavay Street, Page ACT 2614

$120,000

$192,000

12 Bavay Street, Page ACT 2614

$110,000

$185,000

28 Knaggs Crescent, Page ACT 2614

$70,000

$130,000

7 Millhouse Crescent, Higgins ACT 2615

$50,000

$100,000

28 Carron Street, Page Act 2614

$80,000

$140,000

15 Faucett Street, Latham ACT 2615

$30,000

$80,000

[2024] AATA 3815

30 September 2024

Key Legal Topics

Areas of Law

Administrative Law

Statutory Interpretation

Legal Concepts

Appeal

Judicial Review

Procedural Fairness

Statutory Construction

Date of hearing:	8 July 2024
Date final submissions received:	8 July 2024
Applicants’ representative:	Self-represented
Solicitor for Respondent:	Mr Brett Hearnden (Hunt & Hunt)

Property address	JLL presentation amount	Adjusted presentation amount
22 Earle Street, Page ACT 2614	$100,000	$175,000
5 Whitelegge Close, Florey Act 2615	$90,000	$150,000
41 Luehmann Street, Page ACT 2614	$95,000	$165,000
41 Braine Street, Page ACT 2614	$110,000	$185,000
9 Frost Place, Page Act 2614	$130,000	$200,000
8 Bavay Street, Page ACT 2614	$120,000	$192,000
12 Bavay Street, Page ACT 2614	$110,000	$185,000
28 Knaggs Crescent, Page ACT 2614	$70,000	$130,000
7 Millhouse Crescent, Higgins ACT 2615	$50,000	$100,000
28 Carron Street, Page Act 2614	$80,000	$140,000
15 Faucett Street, Latham ACT 2615	$30,000	$80,000