Valuer-General Victoria v WSTI Properties 490 SKR Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2023 0081

VALUER-GENERAL VICTORIA	Applicant
V
WSTI PROPERTIES 490 SKR PTY LTD	Respondent

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JUDGES:	EMERTON P, KENNEDY and LYONS JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	1 March 2024
DATE OF JUDGMENT:	4 July 2024
MEDIUM NEUTRAL CITATION:	[2024] VSCA 157
JUDGMENT APPEALED FROM:	WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria (Red Dot) (Land Valuations) [2023] VCAT 734 (Quigley J and Senior Member Jacono)

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LAND VALUATION – Assessment of site value under the Valuation of Land Act 1960 – Where land is subject to site-specific heritage overlay due to presence of heritage building – Where other planning controls permit more intensive development of land – Where heritage overlay requires a permit to demolish, remove or carry out works affecting external appearance of building – Whether building is an improvement for the purpose of site value assessment – Relevance of highest and best use – Leave to appeal granted – Appeal dismissed.

Valuation of Land Act 1960, ss 2(1), 2(2), 5A.

Commonwealth Custodial Services Ltd (as Trustee for Burwood Trust Fund) v Valuer-General (NSW) (2006) 148 LGERA 38; Trust Company of Australia Ltd v Valuer-General (2007) 154 LGERA 437; Surfers Paradise Resort Hotel Pty Ltd v Department of Natural Resources and Water (2007) 163 LGERA 14; Spencer v Commonwealth (1907) 5 CLR 418; Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498; ISPT Pty Ltd v Melbourne CC [2018] VCAT 1647, considered.

Caltex Oil (Australia) Pty Ltd v Chief Executive, Department of Lands (1996) 16 QLCR 435; Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111, distinguished.

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Counsel
Applicant:		Mr A Finanzio SC with Mr G Kozminsky and Mr J Waller
Respondent:		Mr S Goubran KC with Mr P Annabell
Solicitors
Applicant:	Maddocks
Respondent:	Minter Ellison

TABLE OF CONTENTS

Introduction

Legislative framework

Determining the value of land

Amendments to the VLA concerning heritage-affected land

The planning scheme

Procedural history

First valuation objection

Second valuation objection

Expert evidence in the Tribunal

Heritage evidence

Planning evidence

Valuation evidence

The Tribunal’s decision

Tribunal’s approach to determining site value

Effect of site-specific heritage overlay

Whether the building adds value

Valuation method

Whether VGV’s evidence of a higher value is a new valuation

Tribunal’s conclusions

Proposed grounds of appeal

Grounds 1, 2, 3 & 4 — Assessing the site value of land

VGV’s submissions

WSTI’s submissions

Consideration

Grounds 5 & 6 — The Tribunal’s role on review

Conclusion

EMERTON P
KENNEDY JA
LYONS JA:

Introduction

‘Landene’ is a Queen Anne-influenced, two-storey red brick villa constructed in 1897. It sits on a 1,046m² parcel of land at 490 St Kilda Road, Melbourne (‘the Land’).[1] As one of the few remaining fragments of the 19^th century built environment on St Kilda Road, it is surrounded by much newer commercial and residential towers.
[1]More particularly described as Lot 1 on Title Plan 110409N, contained in Certificate of Title Volume 10114 Folio 065.
The Land is zoned ‘Commercial 1’ under the Port Phillip Planning Scheme. It is subject to a number of design and development overlays (‘DDOs’),[2] along with a site-specific heritage overlay.[3] Among other things, the site-specific heritage overlay prevents the demolition of Landene without a permit, thus constraining the development of the Land in accordance with its zoning.
[2]Schedules 13, 26-5A and 28.
[3]Schedule 331.
The respondent, WSTI Properties 490 SKR Pty Ltd (‘WSTI’), purchased the Land in August 2019 for $8.25 million. The new owner extensively renovated the interior of Landene for use as a private gallery for its collection of art and antiques.
The Land was valued on 1 January 2020 and 1 January 2021 pursuant to the Valuation of Land Act 1960 (‘VLA’). On both occasions, the Land returned a site value of $6.2 million.[4]
[4]On the bases of the assessed site values, the Port Phillip Council issued, respectively, two rates, charges and valuation notices, one dated 7 September 2020 and the other dated 21 September 2021.
WSTI objected to both the 2020 and 2021 site valuations on the basis that they were too high. The applicant, Valuer-General Victoria (‘VGV’), disallowed WSTI’s objection to the 2020 site valuation and WSTI applied[5] to the Victorian Civil and Administrative Tribunal for a review of that decision.[6]
[5]Pursuant to s 22(1) of the Valuation of Land Act 1960 (‘VLA’).
[6]This review application was the subject of proceeding P1013/2021 (‘P1013 proceeding’).
As to WSTI’s objection to the 2021 site valuation, VGV was deemed to have made a decision that no adjustment to the valuation was justified.[7] WSTI also applied to the Tribunal to review that decision.[8]
[7]This was because of the passing of four months within which the valuer was required to provide a decision on the objection but that no such decision was given to WSTI: VLA, s 22(2).
[8]This review application was the subject of proceeding P10049/2022 (‘P10049 proceeding’).
The two Tribunal proceedings were heard together over four days by the President of the Tribunal and a Senior Member with expertise in land valuation. In the Tribunal, as here, the contest turned on whether Landene was to be treated as an improvement for the purpose of assessing site value under the VLA.
On 30 June 2023, the Tribunal agreed that the returned site valuations were too high, and made orders reducing the site value in each of the 2020 and 2021 valuations to $2.925 million.
VGV now appeals the Tribunal’s decision on the grounds that the Tribunal erred in its construction of the provisions of the VLA that governed the determination of the site value of the Land, and that it misapprehended its task on review.
For the reasons that follow, VGV’s application for leave to appeal should be allowed but the appeal should be dismissed.

Legislative framework

The functions of VGV include the performance of duties and functions conferred by legislation,[9] and to cause general valuations and supplementary valuations to be made.[10] Section 11 of the VLA requires a general valuation of rateable land[11] within an area to be made as at 1 January in each calendar year.

Determining the value of land

[9]VLA, s 5(1)(a).

[10]Ibid s 5(1)(ab).

[11]‘Rateable land’ has the same meaning as in the Local Government Act 1989, which is ‘all land’ with certain exceptions, none of which is applicable here.

The ‘site value’ of land is defined in s 2 of the VLA as
the sum which the land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or other charge, might in ordinary circumstances be expected to realise at the time of the valuation if offered for sale on such reasonable terms and conditions as a genuine seller might be expected to require, and assuming that the improvements (if any) had not been made.
This essentially reproduces the test for ascertaining the value of land in Spencerv Commonwealth[12] — the price paid for land as the result of a bargain reached between a willing but not anxious vendor and a willing but not anxious purchaser, both properly acquainted with the land[13] — but based on the assumption that any ‘improvements’ on the land ‘had not been made’.
[12](1907) 5 CLR 418; [1907] HCA 82 (‘Spencer’).
[13]Ibid 432 (Griffith CJ); 436–7 (Barton J); 441 (Isaacs J).
The meaning of ‘improvements’ is given in the VLA as follows:
improvements, for the purpose of ascertaining the site value of land, means all work actually done or material used on and for the benefit of the land, but in so far only as the effect of the work done or material used increases the value of the land and the benefit is unexhausted at the time of the valuation, but, except as provided in subsection (2AA), does not include—
(a)work done or material used for the benefit of the land by the Crown or by any statutory public body; or
(b)improvements comprising—
(i)removal or destruction of vegetation or the removal of timber,           rocks, stone or earth; or
(ii)      the draining or filling of the land or any retaining walls or other           works appurtenant to the draining or filling; or
(iii)     the arresting or elimination of erosion or the changing or     improving of any waterway on or through the land—
unless those improvements can be shown by the owner or occupier of the land to have been made by that person or at that person’s expense within the fifteen years before the valuation[.][14]
[14]VLA, s 2.
Importantly, in order to be an improvement, the works done or materials used (‘the improvement’) must have the effect of increasing the value of the land. The ‘improvements’ referred to in para (b), essentially involving the removal of vegetation, and landscaping and drainage works, are works that generally increase the value of the land, but they are not to be treated as such for the purpose of determining the site value of the land unless made in the last 15 years.
Section 2(2) of the VLA specifies how the ‘value of improvements’ are to be assessed and relevantly provides:
In estimating the value of improvements on any land for the purpose of ascertaining the site value of the land, the value of the improvements is the sum by which the improvements upon the land are estimated to increase its value if offered for sale on such reasonable terms and conditions as a genuine seller might in ordinary circumstances be expected to require.
Section 5A of the VLA is the central provision for determining the value of land, including land that is affected by heritage controls. Section 5A provides:
(1)Unless otherwise expressly provided where pursuant to the provisions of any Act a court board tribunal valuer or other person is required to determine the value of any land, every matter or thing which such court board tribunal valuer or person considers relevant to such determination shall be taken into account.
(2)In considering the weight to be given to the evidence of sales of other lands when determining such value, regard shall be given to the time at which such sales took place, the terms of such sales, the degree of comparability of the lands in question and any other relevant circumstances.
(3)Without limiting the generality of the foregoing provisions of this section when determining such value there shall, where it is relevant, be taken into account—
(a)the use to which such land is being put at the relevant time, the highest and best use to which the land might reasonably be expected to be put at the relevant time and to any potential use;
(b)the effect of any Act, regulation, local law, planning scheme or other such instrument which affects or may affect the use or development of such land;
(c)the shape size topography soil quality situation and aspect of the land;
(d)the situation of the land in respect to natural resources and to transport and other facilities and amenities;
(e)the extent condition and suitability of any improvements on the land; and
(f)the actual and potential capacity of the land to yield a monetary return.

Amendments to the VLA concerning heritage-affected land

Because of the way in which this appeal was argued,[15] it is necessary to have regard to the provisions of the VLA that were repealed before both the 2020 and 2021 valuations, specifically ss 2(8) and 2(9). Those provisions were directed to the assessment of the value of heritage-affected land and modified, for heritage sites, the approach to determining site value. They were repealed in 2019 by the State Taxation Acts Amendment Act 2019.[16]
[15]See [93]–[98] of these reasons for VGV’s submissions on appeal.
[16]See s 56 of the State Taxation Acts Amendment Act 2019.
Section 2(8) relevantly provided that the site value of any rateable land which was a registered place within the meaning of the Heritage Act 2017 or on which there was situated a building which was included in the Heritage Register established under that Act had to be calculated on the basis of the assumptions set out in paragraphs (a) to (c) of that subsection. Those assumptions included that such land could be used only for the purpose for which it was used at the date of valuation and that the building could not be removed or demolished.
Section 2(9) provided that if a planning scheme under the Planning and Environment Act 1987 prohibited the pulling down or removal of a building, or required a permit before a building could be pulled down or removed and the responsible authority had refused to grant a permit or the Tribunal had directed that no permit be issued, the value of any rateable land that included the building had to be calculated on the basis that the building could not be pulled down or removed.
The second reading speech for the State Taxation Acts Amendment Bill 2019 explained that ss 2(8) and 2(9) of the VLA were to be repealed in response to the decision of the Tribunal in ISPT Pty Ltd v Melbourne CC[17] (known as the ‘GPO case’).[18]
[17][2018] VCAT 1647.
[18]Victoria, Parliamentary Debates, Legislative Assembly, 28 May 2019, 1638 (Tim Pallas, Treasurer, Minister for Economic Development, Minister for Industrial Relations).
The GPO case concerned a dispute about the site value of the land on which the former Melbourne General Post Office (‘GPO’) was located. As the GPO building and land were heritage listed, the GPO’s site value was required to be determined in accordance with the assumptions in s 2(8) of the VLA. Melbourne City Council (as the authorised valuer) had assessed the GPO’s site value as $14,800,850. ISPT, the owner of the GPO land, contended for the figure of $1. In the Tribunal, VGV (standing in for the authorised valuer) contended for the figure of $26,375,000.
VGV argued that the valuation should take into account the commercial trading in the GPO building and advanced a novel ‘rental differential’ methodology, by which the site value of the land would be derived by determining the value of the land if free of heritage restrictions and reducing that amount by the ratio of the rental income actually being achieved to the rental income that might be achieved if the land were developed to its maximum potential free of heritage restrictions. For its part, ISPT relied upon a hypothetical feasibility method, which assessed the cost of developing the land to notionally construct the improvements actually in place compared to the returns that could be derived from doing so. Those costs were so high that the net returns were negative, resulting in a valuation of $1.
The Tribunal held that in the absence of comparable sales, the hypothetical feasibility method (advanced by ISPT) was a permissible approach for the calculation of site value. Although not an ideal basis on which to assess site value, the feasibility method supported a site value of $1. The Tribunal observed that given the practical difficulties of applying the statutory assumptions under the VLA, the heritage provisions were anachronistic, and led to inconsistent outcomes and litigation. The Tribunal suggested that it was desirable that the legislation be clarified to simplify the exercise of valuing heritage registered land.
Thus, the second reading speech for the Bill recorded the following:
Disputes over the valuation of heritage registered properties have led to significant litigation costs for the Valuer-General and municipal councils. As the recent GPO case has demonstrated, these disputes have resulted in unrealistic outcomes such as site values of $1. It is not fair to the rest of the Victorian community that large landowners avoid the payment of land tax on valuable heritage-registered properties due to this anomaly in the valuation regime. This Bill will bring much needed clarity to the valuation of these properties by repealing the specific assumptions that currently must be made when valuing heritage-registered property. This will enable valuers to determine site values for heritage-registered property taking into account its highest and best use on a consistent basis to all other properties. The amendments will ensure that any objections, reviews and appeals to the site values issued for heritage registered properties against the 2018 valuations onwards will be considered in light of the amendments being made by this Bill. This is necessary to ensure consistent treatment of all landowners and to protect the substantial land tax revenue at risk. The Bill does not remove the normal rights of taxpayers to object to site valuations for reasons other than those related to the specific heritage valuation provisions being repealed.[19]
[19]Ibid.
Following the repeal of ss 2(8) and 2(9) of the VLA, land containing heritage-registered properties was to be treated in the same way as other land.

The planning scheme

As discussed, the Land is zoned ‘Commercial 1’ in the Port Phillip Planning Scheme. The purpose of the ‘Commercial 1’ zoning is ‘to create vibrant mixed use commercial centres for retail, office, business, entertainment and community uses’, with ‘residential uses at densities complementary to the role and scale of the commercial centre’.
The Land is, as mentioned, subject to three DDOs, the purposes of which are to implement Port Phillip Council’s planning strategy and planning policy framework, as well as to identify areas that are affected by specific requirements relating to the design and built form of new development.
The three DDOs applicable to the Land are as follows:
(a)Schedule 13, which is aimed at protecting the view line of the Shrine of Remembrance along Swanston Street from outside the State Library;
(b)Schedule 28, which ensures protection of the flight path areas associated with the helicopter landing site at the Alfred Hospital; and
(c)Schedule 26-5A, which concerns the development potential of the land if vacant. The Land being located within Sub-Precinct 5A, a building height of 65 metres, with setback requirements, is permitted.
The Land is also subject to a site-specific heritage overlay (HO331), which seeks to conserve and enhance Landene’s heritage character and ensure that development does not adversely affect its heritage significance.
The heritage overlay means that a permit is required to carry out works on Landene that may affect its external appearance (including such things as replacing the fence, installing solar panels or water tanks, and painting, rendering or sandblasting externally). A permit is also required to demolish or remove a building.
The decision guidelines in cl 43.01-8 of the Port Phillip Planning Scheme make repeated reference to avoiding matters that may adversely affect the significance of the heritage place.

Procedural history

First valuation objection

On 7 September 2020, the Port Phillip Council issued a rates, charges and valuation notice in respect of the Land for the period 1 July 2020 to 30 June 2021 (‘the 2020 valuation’). The notice recorded a site value of $6.2 million as at 1 January 2020, a capital improved value of $7.2 million, and a net annual value of $360,000. The rates payable were $13,923.30.
The 2020 valuation was prepared by Briony Stephen and Lee-Ming Tan, who were contract valuers in the employ of Matheson Stephen Valuations.
On 4 November 2020, WSTI lodged an objection to the 2020 valuation on the basis that the assessed site value was ‘too high’ (‘first objection’). WSTI instead contended for a site value of $1.825 million. The submission in support of the contended value was as follows:
The returned Site Value assessment is too high having regard to heritage constraints of the property being identified as an individually significant heritage property, the estimated cost to replace the existing heritage constrained building, and the definitions as prescribed by the Valuation of Land Act 1960.

Subsequently, between November and December 2020, WSTI and VGV exchanged prescribed information[20] concerning the 2020 valuation.
[20]Pursuant to s 20 of the VLA.
On 11 June 2021, one of the contract valuers, Lee-Ming Tan, wrote to WSTI on behalf of the Port Phillip Council, notifying WSTI that its first objection had been disallowed. The letter stated:
A valuer has revised the valuation objection and considers that no adjustment in the valuation is justified. Please refer to the attached notices of disallowance for particulars of the property and outcome.
The attached disallowance notice was also dated 11 June 2021 and was signed by the contract valuer. The notice recorded the valuation authority as VGV and stated that ‘no adjustment in the valuation is justified’ pursuant to s 21(3)(a) of the VLA.
On 9 July 2021, WSTI applied to the Tribunal pursuant to s 22(1) of the VLA to review the decision to disallow the first objection. That application is proceeding P1013/2021.

Second valuation objection

On 21 September 2021, the Port Phillip Council issued another rates, charges and valuation notice in respect of the Land for the period 1 July 2021 to 30 June 2022 (‘the 2021 valuation’). The notice again recorded a site value of $6.2 million as at 1 January 2021, a capital improved value of $7.2 million, and a net annual value of $360,000. The rates payable were $14,283.95.
The 2021 valuation was prepared by Briony Stephen and Lee-Ming Tan, contract valuers from Matheson Stephen Valuations.
On 12 November 2021, WSTI lodged an objection to the 2021 valuation, again on the basis that the assessed site value was ‘too high’ (‘second objection’). WSTI contended for a site value of $2 million. The reason for the second objection was as follows:
The returned Site Value assessment is too high having regard to heritage constraints of the property being identified as an individually significant heritage property and the definitions as prescribed by the Valuation of Land Act 1960.
There was no response to WSTI’s objection to the 2021 valuation. In the event, the four months within which a decision had to be made on the second objection lapsed and, by virtue of s 22(2) of the VLA, VGV was deemed to have made a decision that no adjustment to the 2021 valuation was justified.
On 9 December 2021, after VGV had provided the prescribed information under the VLA, the valuers retained by each of the parties corresponded and agreed to wait for the Tribunal’s decision in proceeding P1013/2021, rather than engaging in further discussions.
On 10 August 2022, WSTI applied to the Tribunal for a review of VGV’s deemed decision pursuant to s 22(1) of the VLA. That application is proceeding P10049/2022.
On 26 October 2022, the Tribunal ordered that proceedings P1013/2021 and P10049/2022 be heard and determined together, and that evidence in one proceeding be taken to be evidence in the other proceeding.

Expert evidence in the Tribunal

Heritage evidence

Heritage consultants Mr Bryce Raworth, on behalf of WSTI, and Ms Anita Brady, on behalf of VGV, each provided expert reports on the heritage controls affecting the Land.
Mr Raworth opined that neither the Tribunal nor the Council would support an application for a full demolition of Landene. He considered that there was little potential for substantive development on the site with the existing building in its current location, and little opportunity for substantive additions to the existing building.
Ms Brady opined that in any application for redevelopment, the existing building would have to be substantially retained, but the Council might approve applications to extend the building on the ground and first floors.
Ms Brady also gave evidence that without Landene, the heritage value of the Land was effectively extinguished and heritage-related development constraints would fall away, such that the Land’s development potential would be consistent with that of adjoining properties, which are not subject to heritage overlays.
In a joint statement, the experts confirmed that Landene should be substantially retained in any redevelopment and that demolition would not be supported by the Council or the Tribunal. However, some minor demolition and alteration to parts of the building might be possible. They also generally agreed that small-scale additions might be possible to the rear and south of the Land.

Planning evidence

Mr Tim McBride-Burgess and Mr Andrew Clarke, town planning experts on behalf of WSTI and VGV respectively, gave evidence on the planning controls affecting the Land.
Mr McBride-Burgess considered that the heritage constraints and the mandatory setback requirements imposed by DDO sch 26-5A significantly constrained the Land’s development potential, such that the redevelopment of the Land on any substantial scale was not possible. However, absent the heritage constraints, redevelopment of the Land for a mix of uses within a tall building was strategically conceivable. Mr McBride‑Burgess was not instructed to express a view assuming the Land was vacant.
Mr Clarke accepted and adopted all Ms Brady’s recommendations and conclusions regarding heritage issues, including that Landene should be retained and not demolished. According to Mr Clarke, the Land would have significant development potential if it was vacant and free from the heritage impediments. Mr Clarke set out four possible development scenarios, comprising a building of either 15 or 17 stories, with variable floor space ratios. He also proposed two development scenarios if Landene was retained. He considered the possibility of further additions to the existing building, being 30m² to 140m² of gross floor area over two floors.
In a joint statement, Mr McBride-Burgess and Mr Clarke agreed with the heritage experts’ opinions that the existing building should be substantially retained and that opportunities for additions were limited.[21] Both planners agreed that if the property did not have heritage constraints, larger-scale development could be considered.

Valuation evidence

[21]While the planning experts disagreed about the requirement for a mandatory setback of 4.5 metres to the western boundary of the Land, they agreed that if a 4.5 metre setback is required, the remnant developable area is confined to the areas in front of the existing garage, which could be developed to two stories, providing a total floor area addition of 18m². It was also agreed that if the 4.5 metre setback is not required, the remnant developable area is a ground level extension, giving an additional 50m² of total floor area. In other words, depending on whether there is a 4.5 metre setback requirement, the Land could have an additional development area of between 18m² to 50m².

VGV relied upon valuation reports by Mr Nicholas Haines of Matheson Stephen Valuers[22] and WSTI relied upon valuation reports by Mr Grant Jackson of m3property.[23] Each valuer prepared a report in respect of the first objection (in P1013/2021); and each valuer also prepared a subsequent report in respect of the second objection (in P10049/2022). Mr Haines prepared a third report entitled ‘Evidence in Reply’ that, in substance, argued the case for the valuation methodology he used in his two earlier reports.
[22]Valuation reports dated 20 May 2022, 22 December 2022 and 27 March 2023, respectively.
[23]Valuation reports dated 26 May 2022 and 22 December 2022, respectively.
The valuers used starkly different methodologies to assess site value. Mr Haines arrived at a value that was far higher than the returned valuation of $6.2 million; Mr Jackson arrived at a value that was far less.
It is important at this point to note that VGV did not attempt to defend the returned site values. The returned valuers were not called to explain the returned valuations or to otherwise assist the Tribunal. Instead, VGV retained Mr Haines to assess the site values of the Land using the methodology set out in the letters of instruction given to him. That methodology involved, first, determining by a particular means whether Landene (that is, the building and works on the Land) was an improvement and then, valuing the Land in the conventional way, including by reference to its highest and best use.
In determining whether Landene was an improvement, Mr Haines emphasised that this involved considering whether Landene added value to the Land. This, he contended, involved comparing:
(a)the value of the Land as vacant (‘scenario one’); and
(b)the value of the Land with existing building and works (‘scenario two’).
According to Mr Haines, if the value in scenario one is higher than the value in scenario two, Landene cannot be an improvement because it does not increase the value of the Land. This means that it is not to be treated as not having been ‘made’ (for the purposes of the definition of ‘site value’). In other words, it is to be included with the Land when determining site value. When carrying out a comparable sales analysis, the relevant sales are sales of improved land.
In the vacant land scenario (scenario one), Mr Haines posited that the Land was unaffected by any heritage controls and treated it as a prospective development site in accordance with Mr Clarke’s planning evidence that a 15 to 17 storey built-form yield was achievable. Mr Haines analysed comparable sales of development land and arrived at values based on two different floor space ratios (one of which took into account a possible 4.5 metre setback from the western boundary). He chose the midpoint between the two ratios, assessing the vacant land value to be $12.825 million as at 1 January 2020.
For scenario two, Mr Haines assessed the value of the Land with the building and works, having regard to comparable sales in what he described as the ‘heritage market’. Mr Haines concluded that there was no evidence to suggest that the sale of Landene in August 2019 was not ‘at market’. As a consequence, he adopted the transaction price of $8.25 million as the non-vacant land value of the Land as at 1 January 2020.
Mr Haines concluded that as scenario one yielded a higher value than scenario two, the building and works on the Land could not be classified as ‘improvements’ because they did not increase the value of the Land. It followed that the site value as at 1 January 2020 was the value of the house and the Land, being $8.25 million.
In his second report, Mr Haines carried out the same exercise of comparing the vacant land scenario with the non‑vacant land scenario. In relation to the former, he again adopted the midpoint of $12.825 million as the value of the vacant land as at 1 January 2021. In relation to the non-vacant land scenario, Mr Haines again looked at contemporaneous sales and had regard to the 2019 sale of Landene in the context of other sales of heritage‑protected properties in inner Melbourne. He again considered the $8.25 million sale price of Landene in August 2019 to be ‘at market’, but recognised that since January 2020, substantial renovations and works had been undertaken to modernise and secure the interior of Landene. Adding $1.285 million in renovation costs to the 2019 sale price, Mr Haines arrived at a figure of $9.535 million for the non‑vacant land scenario as at 1 January 2021.
Once again, since the vacant land figure was higher than the non‑vacant land figure, Landene was not treated as an improvement. Mr Haines assessed the site value of the Land as at 1 January 2021 as $9.535 million.
Of course, this was later acknowledged to be an error as the renovation costs should, on Mr Haines’ analysis, have been deducted from the figure of $8.25 million, rather than added on to it.
Mr Jackson began his analysis at a different point, being the identification of the highest and best use of the Land, on the basis of which he carried out a direct comparison of sales evidence using an improved sales analysis. He then arrived at a value for the Land as vacant by deducting the replacement costs of the building from the value arrived at by the improved sales analysis, ‘with appropriate adjustments made to reflect the condition of the improvements at the time of sale’.
According to Mr Jackson, the highest and best use of the Land was the existing two‑storey building (Landene), with minor potential extension to the rear boundaries. He considered that Landene provided ‘considerable added value to the Land and that the sale price [in 2019] reflected the added value’. To determine the underlying value of the Land, he deducted from the $8.25 million sale price the replacement costs of the building, which were adjusted to reflect its condition at the time of sale.
At the time of his first report in May 2022 (which concerns the 2020 valuation), the replacement costs were $6,658,103. This left a rounded figure for site value as at 1 January 2020 of $1.59 million.
Mr Jackson also carried out a hypothetical development analysis, which assumed that the Land contained the building with heritage restrictions, but in new condition. He determined the ‘gross realisation value’ of the Land and deducted from that figure the construction costs, selling costs, holding costs, acquisition costs (et cetera), which he said enabled him to arrive at the underlying site value. Using the hypothetical development approach, Mr Jackson assessed the site value as at 1 January 2020 as $1.38 million. This was said to provide support for the figure arrived at using the improved sales analysis.
Mr Jackson’s report concerning the 2021 valuation (in P10049/2022) was based on an updated quantity surveyor’s report for the replacement costs of the building, which had increased to $6,911,078. This resulted in a rounded site value of $1.34 million as at 1 January 2021. Again, this figure was said to be supported by a hypothetical development analysis, which produced a rounded site value of $935,000 as at 1 January 2021.
In this report, Mr Jackson also adjusted the inputs relating to the development costs as at 1 January 2020 (for the purpose of the hypothetical development analysis originally given in the 2020 valuation) in light of the updated quantity surveyor’s report. This produced a revised site value of $1.285 million for 1 January 2020 (compared to the previous figure of $1.38 million).
In his reply report dated March 2023, Mr Haines summarised the differences between his approach and that of Mr Jackson as follows:
My approach and [Mr Jackson’s] differ as to how buildings and works on the land are designated (or not) as ‘improvements’ as defined in Section 2(1) of the Valuation of Land Act 1960, and consequently whether any such buildings and works are to be assumed to have never been made as is required in assessing Site Value. The parties’ valuation methodologies diverge accordingly.
I employ the Direct Comparison approach, having first ascertained whether the buildings and works on the land constitute ‘Improvements’: My analysis concluded that by comparison to the subject land’s value assuming those buildings and works are absent, the property’s value with the intact buildings and works (‘non-vacant’) is lower. As a consequence, the buildings and works cannot be said to increase the value of the land and do not therefore constitute ‘Improvements’ under the relevant definition contained in the Valuation of Land Act 1960. Accordingly, assessment of Site Value at both relevant dates must not disregard the buildings and works, nor the site‑specific Heritage Overlay designation that applies to the land.
Mr Jackson for [WSTI] illustrates two methodologies for each Relevant Date, both of which embrace a hypothetical non‑vacant selling price, deducting a building replacement cost/development cashflow to arrive at a ‘residual’ assessment of Site Value. Both methods automatically assume buildings constitute ‘Improvements’.
As [WSTI’s] two ‘methods’ do not adequately investigate whether the subject property’s buildings are ‘Improvements’ I am unmoved in my approach articulated in my Expert Witness Statements [sic] dated December 2022.

The Tribunal’s decision

The Tribunal identified the ‘focal point’ of the dispute in this case to be ‘the correct approach to determining site value of land which is subject to a site-specific heritage overlay’.[24] It identified five questions for determination:[25]
(a)What is the correct construction of the VLA and thus the correct approach to the assessment of site value?
(b)What is the effect of the site-specific heritage overlay on the subject property?
(c)Does the building on the subject property ‘add value’?
(d)Which valuation method is most appropriate in the circumstances?
(e)Is the VGV’s evidence of a higher value than the returned valuation a new valuation and is it relevant?

Tribunal’s approach to determining site value

[24]WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria (Red Dot) (Land Valuations) [2023] VCAT 734, [34] (‘Reasons’).

[25]Ibid [35].

The Tribunal held that the correct approach to determining the site value of the Land was to first apply s 5A of the VLA, which ‘is the primary guiding provision for determining the value of land’.[26] The Tribunal considered to be ‘untenable’, VGV’s contention that the starting point is to ask whether the ‘improvements’ add value because the answer to that question is that ‘it depends’ on the factors set out in s 5A.[27]
[26]Ibid [105].
[27]Ibid [121].
The Tribunal recognised that while s 5A(3) sets out six factors that a valuer must, where relevant, take into account, it provides no express guidance as to sequencing or weight to be given to those factors.[28] However, the Tribunal was of the view that
it would be logical to consider for example, the specific attributes of the subject property — such as location, land area, topography, shape, extent and condition of improvements, planning controls, other instruments etc. — before being able to consider the HBU [highest and best use of the Land]. This would then enable the consideration of the suitability of any improvements, which can only be made in the context of the HBU. This in turn would inform what sales might be appropriate (at the relevant time) and the degree of comparability of those sales.[29]
[28]Ibid [119].
[29]Ibid.
The Tribunal concluded that the correct approach to determining the site value of land that is subject to a site-specific heritage overlay is to follow four steps, each one of which informs the step that follows:[30]
132.1Firstly, to ascertain the specific attributes of the subject property such as location, land area, topography, shape, extent and condition of improvements, planning controls, other instruments, etc;
132.2Secondly, this would then enable the valuer to consider the HBU [highest and best use of the Land] and the suitability of any improvements, which can only be made in the context of the HBU;
132.3This would then inform the third step in ascertaining what sales might be appropriate (at the relevant time) and the degree of comparability of those sales; and
132.4 Finally, the statutory definitions can be assessed and determined.
[30]Ibid [132].
As to the principal cases referred to by the parties that set out the contrasting approaches to the sequencing involved in determining site value — Commonwealth Custodial Services Ltd (as Trustee for Burwood Trust Fund) v Valuer-General (NSW),[31] Trust Company of Australia Ltd v Valuer-General,[32] and Caltex Oil (Australia) Pty Ltd v Chief Executive, Department of Lands[33] — the Tribunal considered the approach in Caltex Oil to be ‘most similar’ to the approach that was required ‘in this case and in the context of the legislation of this jurisdiction’.[34]
[31](2006) 148 LGERA 38; [2006] NSWLEC 400 (‘Commonwealth Custodial’).
[32](2007) 154 LGERA 437; [2007] NSWCA 181 (‘Trust Company’). Trust Company is the appeal to the New South Wales Court of Appeal from one of the appeals in Commonwealth Custodial.
[33](1996) 16 QLCR 435 (‘Caltex Oil’).
[34]Reasons, [122].

In Caltex Oil, the owner sought to reopen the annual valuation of a plot of land that it owned in the parish of Yeerongpilly. The land had been developed for service station purposes and, before the relevant valuation date of 31 March 1992, had been entered as a ‘probable site’ in the Contaminated Sites Register maintained under s 24 of the Contaminated Land Act 1991 (Qld).[35] As between the parties, it was agreed, among other things, that the highest and best use of the land was as residential land and that the figure of $135,000 was the starting point for determining whether the unimproved value of the land should be reduced by reason of the operation of the Contaminated Land Act.[36] The owner contended that in arriving at the land’s value, the relevant zoning of the land and other statutory restrictions affecting the land ought to be considered.[37]
[35]Caltex Oil, 440–1 (Fryberg J and Mr Neate).
[36]Ibid 441–2.
[37]Ibid 452.
In the course of their reasons, the majority observed that an ‘improvement’ was something that added value to the land and said:
It cannot be said whether a structure on or other quality of land amounts to an improvement in this sense until it is known whether the structure or quality enhances the value of the land. Any enhancement in turn will usually depend upon whether the structure or quality advances or inhibits a particular use. Thus, whether the structure or quality constitutes an improvement cannot ordinarily be known until the highest and best use of the land is determined.[38]
[38]Ibid 458.
To reason otherwise, the majority said, was to assume the conclusion.[39]
[39]Ibid.
According to the Tribunal, Caltex Oil supports the view that the highest and best use of the land will inform the question of whether the improvements add value to that use.[40]

Effect of site-specific heritage overlay

[40]Reasons, [123]–[124].

The Tribunal rejected VGV’s argument that Landene has a ‘chilling effect’ on land value because its removal would diminish the effect of the site-specific heritage overlay, such that a very significant development opportunity would arise.[41] According to the Tribunal, the fallacy in VGV’s argument was that it equated ‘the theoretical assumption of removal of the building, for the purposes of site value assessment, as being the same as if the building were in fact not there’.[42]
[41]Ibid [136]–[137].
[42]Ibid [137].
The Tribunal held that a ‘realistic’ as opposed to a ‘highly hypothetical approach’ ought to be adopted when considering the effect of the site-specific heritage overlay.[43] It held that the effect of the planning control was to be taken into account, rather than ‘the theoretical removal of the building to effectively retrofit an argument that no building equates to no heritage control’.[44]

Whether the building adds value

[43]Ibid [138].

[44]Ibid.

The Tribunal determined that there was unequivocal evidence before it to indicate that Landene added value to the Land and was therefore an improvement for the purpose of determining site value.[45] The correct approach to ascertain if ‘improvements’ add value is
to compare the market value in its full current state, that is, including its limited development potential and existing structures with the market value that the land would have with the same development potential, without the buildings on the land.[46]

Valuation method

[45]Ibid [153].

[46]Ibid [162].

After considering the valuation methodologies adopted by Mr Haines (for VGV) and Mr Jackson (for WSTI), the Tribunal rejected[47] Mr Haines’ methodology of comparing an unencumbered site, being vacant land where no heritage controls apply, with an encumbered one, with the existing building and works in place and the relevant heritage controls in force.
[47]Ibid [214].
Following a careful examination of Mr Jackson’s valuation methodology and after making adjustments to his calculations, the Tribunal determined the site value of the Land to be $2.925 million at each of the relevant dates.[48]

Whether VGV’s evidence of a higher value is a new valuation

[48]Ibid [262].

The Tribunal stated that its role was to stand in the shoes of the (returned) valuer and to determine, on the merits of the evidence before it, whether the valuer’s decision on the objection was the correct or preferable decision.[49] The Tribunal referred to its earlier decision in S & JG Investments Pty Ltd v Valuer-General Victoria (Land Valuation),[50] in which it determined that ‘evidence of a higher valuation must be in addition and not in substitution of the returned valuation’.[51]
[49]Ibid [265], [267].
[50][2023] VCAT 246 (‘S & JG Investments’).
[51]Reasons, [270].
Having considered the new valuation evidence led by VGV, the Tribunal concluded that Mr Haines’ evidence was ‘an entirely new valuation, untethered in any way to the returned valuation’.[52] The Tribunal held that although VGV could have contended for a new valuation by an independent expert to demonstrate that the returned valuation was not too high, this should only be done in addition to the evidence of the valuer who made the returned valuation and not in substitution for the evidence required to review the decision.[53]

Tribunal’s conclusions

[52]Ibid [282].

[53]Ibid.

After addressing the five issues that arose for determination, the Tribunal returned to the three-step process that it said it would undertake in review applications brought under s 22 of the VLA.[54] Having undertaken these steps, the Tribunal determined that the site value of the Land as at 1 January 2020 and 1 January 2021 was $2.925 million.[55] Comparing this figure with the returned site valuation of $6.2 million, the Tribunal concluded that the returned valuation was ‘too high’,[56] which meant that the valuation ought to be reduced pursuant to s 25(1)(a) of the VLA.[57]
[54]Ibid [283], citing S & JG Investments.
[55]Ibid [284].
[56]Ibid [285].
[57]Ibid [286], [293].