CATCHAGPDS : a e- Administrative law - judirtial review - private nursing home - : 2. nursing her# tes. approved bv delegate' of Permanent Head of we Deoartnent of Health - allowance fsr profit based on 1972 values - whether such allowance so unreasonable as to make deieqate's decision one to which rc reasonable serson cculd have come - whether delegats in reaching decision omitted relevant consideration from account - whether delegate decided the matter according to a rule or policy without ragard to the merits of the instant case. National Health Act 1953, s. 49AA Administrative Decisions (Judicial Review) Act 1977, paras. 5(1)(e) and 5(2)(b),(f) and (g) ALEMANDRA PRIVATE GERIATRIC HOSPITAL PTY LIMITED (T/AS ALEMANDPA PRIVATE NURSING HOME) v. NEAL BLEWETT AND ANOR. No. VG 239 of 1984 Coram: Smithers, Sheppard and Jenkinson JJ. Date: 12 July 1985 Place: Melbourne U_TRE WEDEFAL CoMPT OF AUSTRALIA SETWEEST ALEVSNDPA FUIVATE CEPIATPIC ICTEITEL OCY LIMITED Appellant AND: MINUTE OF CPDER JUDGES MAKING ORDER: Smithers, Sheppard and Jenkinson JJ. . DATE OF ORDER 3 127uly 1985 WHERE MADE : Melbourne THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The judgment of the Henourable Mr. Justice Woodward of 7 August 1984 be set aside. 2. The decision of the delegate of the Permanent Head of the Department of Public Health dated 13 March 1984 be set aside and the matter remitted to the delegate to be re-considerzd in accordance with the decision of this Court. 4. The respondents pay the appellant's costs of the appeal. 5 The question of the costs of the proceedings before Mr. eo hin fer the making ¢ zn the light of th i)iu r ur c such IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG NO. 239 OF 1984 ) GENERAL DIVISION ) On appeal from a single judge of the Federal Court of Australia. BETWEEN: ALEXANDRA PRIVATE GERIATRIC HOSPITAL PTY. LTD. (Trading as "Alexandra Private Nursing Home") (Appellant) AND: NEAL BLEWETT (who is sued as the Commonwealth Minister of Health) and LAWRIE J. WILLETT (who is sued as the Permanent Head of the Commonwealth Department of Health) (Respondents) Coram: Smithers, Sheppard and Jenkinson JJ. Date: 12 July 1985 REASONS FOR JUDGMENT Smithers J.: On 13 March 1984 the delegate of the Permanent Head of the Commonwealth Department of Health, operating pursuant to the provisions of the National Health Act 1953, (the Act) made a determination applicable from 15 March 1984 of the maximum fees that might be charged by the Alexandra Private Nursing Home (the appellant) which was a nursing home approved under the Act. This decision of the delegate is challenged under the Administrative Appeals (Judicial Review) Act 1977 (ADIR Act) For some years prior to 1973 the appellant conducted the nursing home at Caulfield in Victoria. The business was carried on successfully and profitably. It was in 1973, shortly after the introduction of the Commonwealth scheme for the provision of nursing home care for qualified patients pursuant to the National Health Act No. 149 of 1972 that the home became an approved home. Pursuant to s.40AA(6)(c)(i) of the Act there was forthwith a determination by the Permanent Head of the Department of a scale of maximum fees which the home might charge patients for the service provided by it. For the purpose of that first determination the delegate assumed, that at the existing fee structure established by the home it was making a profit satisfactory to itself and not unduly burdensome to the patients. That scale of fees was determined at the rates previously adopted by the home. It was fixed without specific or perhaps even conscious reference to the amount of that profit but it did reflect it. That existing fee structure was used in each subsequent determination before that of March 1983 as the basis of the determination. Increases in approved costs were simply added to the scale as last determined. Not all actual costs incurred by the appellant were approved because the appellant maintained a staff structure higher than was thought necessary by the department. As a result the "profit" component in the fee structure was eroded and the financial position of the home deteriorated quite seriously. Fee determinations from time to time are initiated by an application by the proprietor on what is known as form NH19. On 15 October 1982 the appellant submitted an application for a determination of a scale of fees to reflect rising costs. Like previous submissions it made no reference to profit allowance. Form NH19 did not provide for any specific yeference to capital values or profit. Pursuant to this application a determination was made on 8 March 1983. This determination was made after specific consideration of the amount of profit which, as a separate component, might be allowed for in the scale of fees for the period of the new determination. The change in departmental procedure reflected the view of the department that to comply with the decision of the Full Court of the Federal Court in Howells v. Nagrad Nominees Pty. Ltd. (1982) 66 FLR 169 it was necessary for the delegate to consider the question of profit specifically and separately and to anclude an allowance therefor in the scale of fees determined. Thus the previous method of adding increases in costs to the fee structure as last determined was abandoned. Thereafter in each determination the total approved costs were calculated on a basis which took into account CPI adjustments and other variables and to such actual costs there was added a sum for profit. Two avenues of assessment were -used. First actual profits for twelve months prior to June 1972 were ascertained from data supplied by the proprietor. Secondly, there was calculated ten per centum of the amount shown in the balance sheet of the home as at June 1972 as the cost of land and buildings, in this case being $113,129.00, and twelve and one half per centum of the value of the other assets shown in that balance sheet namely $94,911.00. The result of this calculation was the sum of $23,177.00. That sum slightly exceeded the actual profit for 1971-72 ascertained by the first method of approach. $23,177.00 was adopted as the profit figure for the period commencing 15 March 1983 and was reflected in the relevant scale of fees. The profit included in the fee structure determined to operate from 15 March 1984 was $27,280.00 there being included an additional $4,103.00 for profit being 10% of the capital cost of additional hospital accommodation recently provided. By letter dated 20 October 1983 Nasah Management Services acting for the appellant sought an increase in the scale of fees to reflect the current rental value of the land and buildings of the nursing home. It was submitted that: "The major problem we seek to overcome is the totally inadequate return to the Proprietor of this Nursing Home who, has recently been advised by your Department that she is entitled to make $23,177.00 per annum return for the Nursing Home freehold and business. This figure relates to approx. §8.00 per patient per week. To support our claim that the amount currently recognised is grossly inadequate and restricts the Proprietor from selling her Nursing Home at a fair market value we have enclosed for your attention a copy of a Valuation undertaken by K. L. Dowling & Co., Estate Agents & Registered Valuers of 424 St. Kilda Road, Melbourne on August 16, 1983. The report clearly indicates that a reasonable rental for the property, on current market value, would be in the vicinity of $27.70 per patient per week or $77,781.60 per annum. In addition to the above, any responsible Proprietor who undertakes to operate the Nursing Home business would require in addition to the above rental a minimum of $67,500 per annum or $1,250.00 per patient per annum (including working capital) to provide a service and facility commensurate with current acceptable standards." The delegate responded to the submission in the following terms: "the excess of permanent fee income over approved expenditure currently included in the fee structure provides for a reasonable return on the historical investment in Alexandra Nursing Home and no further adjustment 18 considered necessary at this stage. If you are not satisfied with this determination you have the right of appeal under Section 40 AE (of the National Health Act). If you require further information in respect of your rights of Appeal please contact Mr. R. Dunlop on 669 6231." The determination of 13 March 1984 proceeded in accordance with the views so expressed. As stated in the affidavit of Mr. Taft the senior executive officer of the Nursing Home Benefits & Service Branch, Victorian Regional Office of the Commonwealth Department of Health: "J... Since the determination which was to apply from the 15th March, 1983, the Delegates have had regard to the cost (as disclosed by the financial reports) of land, buildings, plant and equipment. It ais, however, only the actual cost to the Applicant which has been taken into account. The Delegates have not allowed for any increased value which may be placed upon the land, buildings, Plant and equipment through the effects of inflation or other market forces." Tt is said for the appellant that in adhering to a profit figure calculated substantially by reference to the value of the land and buildings as at 30 June 1972 the delegate in March 1984 failed to perform in accordance with the Act, the duty imposed upon him by s.40ARA 6(c)(1) of the Act. And whether he did so or not is the question before the Court. In March 1984 the Act was not in the form in which it was when Howells v. Nagrad (supra) was decided. In particular s.40AA(6) had been amended to read as follows: "(6) The approval of premises as an approved nursing home is, except in the case of a Government nursing home, subject to the following conditions: (c) a condition that - (i) the fees charged in respect of the nursing home care of a qualified nursing home patient in the nursing home will not exceed such fees as are from time to time applicable in respect of the nursing home care of the patient in accordance with such scale of fees as is determined, subject to any principles that have been formulated under sub-section (7) and that are in force, by the Permanent Head in relation to the nursing home;" and s.40AA(7) had been replaced by a new sub-section reading as follows:- "(7) The Minister may, by writing under his hand, formulate principles in accordance with which scales of fees are to be determined for the purposes of sub-paragraph (i) of paragraph (c) of sub-section (6) in relation to nursing homes generally or in relation to nursing homes included in specified classes of nursing homes. (7A) Without limiting the generality of sub-section (7) principles formulated under that sub-section may - (a) specify matters of a kind that are, in the case of each nursing home or of each nursing home included in a class of nursing homes, to be taken into account in determining a scale of fees for the purposes of sub-paragraph (i) of paragraph (c) of sub-section (6); (b) specify matters of a kind that are, in the case of each nursing home or of each nursing home included in a class of nursing homes, to be disregarded in determining a scale of fees for the purposes of sub-paragraph (1) of paragraph (c) of sub-section 6; and {c) specify criteria for assessing, in relation to matters of a kind that are required, in accordance with principles of a kind referred to in paragraph (a) of this sub-section, to be taken into account in determining a scale of fees, the amounts that are to be so taken into account in relation to matters of that kind. (7B) In formulating principles under sub-section (7) the Minister shall have regard to - (a) the need to ensure that nursing homes are efficiently and economically operated; (b) the need to ensure that the cost to nursing home patients of nursing home care is not excessive or unreasonable; and (c) any other matters the Minister considers to be relevant." However, in March 1984 the formulation by the Minister of principles as contemplated in these amendments had not materialised. Accordingly the delegate's primary duty was to determine the scale of fees for the hospital in accordance with s.40AA(6) as the scale of fees which, in making charges against its patients, the hospital in future would not exceed. There was nothing in the Act specifically guiding the delegate in his approach to his task. He did not even have the assistance of a provision such as the earlier s.40AA(7) which had at least told him that he must have regard to those costs necessarily incurred in providing nursing care in the nursing home. Nevertheless his duty was to be gathered from the provisions of the Act and the purpose of Parliament discernible therein. He might have regard to the Ministerial and other statements to Parliament made in relation to Parliament's consideration of the Act and its amendment. From all this it would have appeared that ait was Parliament's auntention that there should be in the community as many nursing homes as were considered desirable for providing nursing care to qualified patients needing such care and that such nursing homes should be conducted on a private enterprise basis. Efficiency and such economy as is attainable consistently with efficiency may be assumed to be purposes of the Act. But in the exercise of setting the upper limit for any such home considerations of the financial viability of that home are inevitably involved. From the decision of the majority of the members of the High Court in R. v. Hunt; Ex parte Sean Investments Pty. Ltd. (1979) 53 ALJR 552, (1979) 25 ALR 497 it 1S apparent that in determining the scale of fees pursuant to s.40AA(6) as it stood before the recent amendments, the delegate was required to take into account "costs necessarily incurred and profit". And the same view is expressed in Nagqrad Nominees Pty. Ltd. v. Howells (1981) 54 FLR 170. There is no lack of recognition by the respondent that this is so and it appears that the same view is taken by the respondent with respect to the situation obtaining under the Act as amended in 1981. The respondent contends that on 13 February 1984 it took into account the question whether some and what allowance should be made in respect of profit and determined that it was appropriate to allow in respect of profit an amount equal to 10% of the cost to the proprietor of the land and buildings of the nursing home as at the date of its original approval in 1972 as a nursing home under the Act together with 10% of the cost of the recent additions and 12 1/2% on the value of certain equipment. This is true. But it does not state fully what the delegate did. Stated fully 1t 15 necessary to incorporate the statement of Mr. Taft set out above. The situation is stated succinctly by the learned trial Judge as follows:- "I believe the delegate left the current values of the appellant's lands and buildings out of account in exercising his discretion. He was fully aware of this consideration but regarded himself as bound by a departmental policy to base his calculation on historic costs. There is nothing to suggest that he disagreed with this policy." To my mind the evidence amply supports this finding. It raises the critical issue in this case. Clearly, the delegate in determining a scale of fees for the appellant is entitled to look at the question whether any and what amount for profit should be allowed. But in doing so it is his duty to take into account all relevant considerations affecting the 10. finances of the home with respect to the period during which the determination will apply. It is profit for that period which is in contemplation. It is apparent that just as it is the amount of costs which will be incurred in the conduct of the home in the contemplated period which are relevant to the task, so the contribution made by the appellant by way of capital in the form of land and buildings during that period is a relevant consideration. It is a most important factor in any such exercise. It 1s the combination of that capital contribution plus the day to day services rendered to patients in the home which are the justification for charges to the patients. Of course in one sense the capital contribution in 1984 is the same as it was in 1972. Subject to the recent additions, it is the same land and buildings that are contributed. But profit is by its nature commercial, and when one comes to consider profit, commercial considerations are inevitably involved. Commercially the capital contribution is much more than it was in 1972. And just as it was reasonable for a 1973 profit to have regard to a 1972 valuation so it is reasonable for 1984 profit to have regard to the 1984 valuation. The shrinkage in the value of money rendered it inevitable that real profit in 1984 of the home considered as a private enterprise project must be related to the 1984 value of the assets used in the project. The rule that for the purposes of an assessment of an allowable profit the capital contribution of the appellant should be taken into account at the 1972 cost value of the land and buildings meant that with respect to the period for ll. which the determination was to be made no regard was paid to the true value of the capital contributed to the project during that period. To my mind the exclusion from consideration of the current value of the appellant's contribution to capital for the relevant period necessarily invalidated the exercise of the discretion of the delegate. And it did so whether it was done by way of implementation of Ministerial policy or otherwise. There may be reasons why, when the costs of the contemplated period are assessed and the capital contribution of the proprietor for the period is assessed at its true value, the delegate may refrain from determining a scale of fees to apply during the relevant period which includes an allowance proportionate at any particular rate ta that true value. But until the contribution is assessed and its true value with reference to the period of operation in contemplation is known and treated as relevant it is simply not possible to exercise a discretion as to the amount of profit to be allowed. When it is known, all those considerations such as the fear of mounting valuations of goodwill and the increase in sale value of homes may be given such weight as they are, if relevant, entitled to. But to exercise a discretion as to profit, where profit is and must be considered, without regard to the value of the appellant's actual contribution to the project is to rob the exercise of any value. In the exercise carried out by the delegate it was recognized that the profit must be assessed by reference to some standard. The standard adopted was the profit made by 12. the hospital twelve years earlier in 1972. Even if it be said that the delegate or the Minister might ultimately take the view that proprietors ought to be satisfied in perpetuity with the profit that was made before the home was approved under the Act, it would still be necessary for the delegate or the Minister in performing their statutory duty to have before him the capital contribution of the proprietor with reference to the particular period with respect to which consideration of the matter was proceeding. The learned Judge commented on the position as follows:- "Tt is arguable that the profit allowed by the delegate ~- $27,280 - is so much less than its 1972 profit, adjusted for changes in the value of money (estimated as $70,900), or than the economic rental of the premises (said to be about $78,500), that it shows no concern for the viability of such enterprises. I agree that it is, from the applicant's point of view, quite unfair that 1t should have to accept a profit in 1984 that is little different from that which 1t was receiving in 1972. But can it be said that this enforced reduction of profit margins in real terms is so contrary to the policy of the Act as to be unlawful? An expert accountant, called for the applicant, described the use of historic costs, allied to a 10% profit rate, as "patently absurd" and "just a fantasy". He said that in his opinion the applicant company was not financially viable; it was significantly undercapitalized and could only continue in business with an injection of capital and a significant and sustained improvement in profitability. He made the very reasonable suggestion that the profit element in fees, so far as it related to lands and buildings, should be calculated by reference to the economic rent of the premises, thus putting all nursing homes, whether new or old, owned or leased, on the same footing. The Department's attitude as explained by its chief witness, Mr. Tratt, is that in the case of nursing homes established before 1973 it continues to allow a profit element based on 10% of the historic costs of land and buildings and 12.5% of 13. other assets. If the business is sold along with the premises, the same figure will be allowed - on the basis that a change of ownership should not affect patients' fees. If it leased, the same allowance will be made irrespective of the rent actually paid, on the basis that a change of method of occupation should not affect those fees. In the light of this evidence, there can be little doubt that the Department is taking a hard line with the proprietors of established nursing homes. A new nursing home, by way of contrast, would have its fees fixed to include a profit element based on the notional fair rent of the premises, to be determined by the Department after valuation, together with a 12.5% allowance for other assets. Such a nursing home would, of course, be much better off than the applicant, because the valuation would have to be at current prices. But its profits would in its turn be eroded with the passage of time, and with inflation, in the same way as the applicant's. In the meantime the contrast only serves to highlight the unfortunate position in which the applicant has been placed - through no fault of its own, unless a determination to give a good standard of nursing care can be described as a fault. The applicant's basic difficulty is that the poor level of profit at ais allowed is not sufficient to cushion it against the losses sustained by its use of more staff than the Department will recognize. It is in this sense that the applicant's business is not viable or barely viable. It is certainly not making a profitable use of valuable assets." His Honour added:- "On the other hand, it was pointed out for the Department that lack of competition, very high nursing home occupancy rates, negligible had debts, anda high level of cost recoveries are virtually guaranteed and, at the profit levels allowed, many people are still trying to get into the industry. Indeed the ruling figures for sale of goodwill would enable the applicant to sell its business for some $400,000 in addition to the value of the fixed assets. In the face of this surprising but uncontradicted evidence, I cannot be satisfied that the Department's approach to profits is 50 contrary to the policy of the Act as to make 1t unlawful." 14. The considerations last referred to may carry, weight if they are taken into account in any particular case. But to assess the weight they ought to carry in any particular case it is essential that the true value of the capital contribution of the proprietor to the project during that period be known and taken into account. It is not enough toa make an ainflexible rule by which the scale of fees 15 determined not by the finances of the home as they exist during the period in question but by what they were twelve years earlier. So to do inevitably introduces what the learned Judge described as a hard line with the proprietors of established nursing homes. And of course the longer the process of ignoring current values continues the more seriously does this hard line operate against such proprietors. The notion that 1t 41s always appropriate to ignore current values in favour of historical costs seems to have little to recommend it save that 1t minimises the amount of fees which may Le allowed. It is the refusal to consider at all that which has happened between 1972 and 1984 which renders the so called exercise of discretion a barren exercise. Every year that passes, with inflation still in operation, the value, in monetary terms, of the capital contribution made by the proprietor to his service to the sick, the fees for which Parliament seeks to provide and control under its scheme, increases. To exclude from all consideration the actual current monetary value in determining a fee structure for an ensuing period is inconsistent with any standard of reasonableness. The legal significance of so doing was simply that the discretion reposed in the delegate, 15. or for that matter in the department, or the Minister, with respect to the period commencing on 15 March 1984 just was not exercised in accordance with the requirements of the Act. A policy which operates so harshly against one section of proprietors has the appearance and to my mind the substance of operating unfairly and oppressively. One would think that the problems which have been in the mind of the department and have caused it to adopt the policy in question could be dealt with in some other manner. And we have been informed by counsel for the respondent that the policy has been materially changed as from July 1984. It is said that if the proper inference to be drawn from the facts is that the delegate did take into account the fact that the current value of the land and buildings far exceeded the 1972 cost price thereof and regarded himself bound by departmental policy to base his calculation on that historic cost, that was but a proper exercise of his discretion. The policy was based on considerations which the delegate was entitled to take account of, namely the possibility that unless such a policy were implemented excessive valuations for goodwill might be established and nursing home businesses would change hands at exorbitant prices to the detriment of the taxpayer and patient. Steps to reduce these possible undesirable developments were reasonable and justifiable. With this in mind it could be seen that the delegate had recognized that the current value of the land and buildings was anelement to be taken into account, but he did not attribute any weight to it as a matter of discretion. In that 16. sense the delegate took into account the current value of the land and buildings. But it was not to do so in the sense relevant to the implementation of the requirements of the Act. To perform the duty imposed on the delegate by the Act it was necessary for him to look at all relevant matters including the current value of the land and buildings with respect to the circumstances of the individual home in question and with respect to the period for which the determination was to be made as a factor to which, in those circumstances, weight might be given. In the instant case if one looked at the current value one would recognize that it far exceeded the 1972 value and that during the twelve years that had elapsed the real profit of the business had been eroded year by year by rising prices and that unless some additional profit was allowed as from March 1984 the real profit for the ensuing period would be much less than the profit component in the existing scale of fees as established twelve years earlier. And the view might well have been taken that it was not adequate. But the adoption of the policy as a rule precluded any reference by the delegate to any of these considerations. The so-called exercise of the discretion eliminated consideration of the relevant factor, namely, the actual size of the proprietor's capital contribution for the relevant period and the degree of hardship imposed by adopting the 1972 valuation. The so-called exercise of discretion was applied for the wrong purpose, namely to exclude from the exercise of determining the appropriate fee consideration, a relevant factor. If the 17. order of the procedure had been reversed, namely first to consider the relevant factors and their significance and then to bring to bear relevant discretionary considerations the injustice of ignoring the proprietor's current capital contribution would have been avoided and the statutory duty would not thereby have been unfulfilled. In that case the allowance to be made in respect of profit would depend, after proper scrutiny, on all the relevant circumstances. But the policy which was applied eliminated a consideration of profit according to at least one of the relevant circumstances. Performance of the task of the Court was facilitated by the acknowledgement by counsel for the respondent that the statutory provisions dealt with in, for instance, The Shire of Swan Hill v. Bradbury (1937) 56 CLR 746 and The Queen v. The Australian Broadcasting Tribunal & Ors; Ex parte 2HD Pty. Ltd. (1979) 144 CLR 45 may be distinguished from the provisions applicable to the exercise of the discretion under the Act. As he said "under the Act the scale of fees 1s being fixed for a statutory purpose and unless regard is had to certain considerations the statutory purpose will not be achieved ... it is a necessary implication of the statute that the delegate must have regard to certain considerations." He referred to the observations of Deane J. in Sean Investments Pty. Ltd. v. MacKellar (1981) 38 ALR 363 at 374 and 375 to the effect that:- "As has been seen, a failure to take a relevant consideration into account in the exercise of a power is, under s.5(1) and (2)(b), a permissible ground for attacking a decision pursuant to s.5 of 18. the Administrative Decisions (Judicial Review) Act 1377. This does not, however, mean that a party affected by a decision is entitled to make an exhaustive list of all the matters which the decision-maker might conceivably regard as relevant and then attack the decision on the ground that a particular one of them was not specifically taken into account. ... In a case such as the present, where relevant considerations are not specified, it ais largely for the decision-maker, in the light of matters Placed before him by the parties, to determine which matters he regards as relevant and the comparative importance to be accorded to matters which he so regards. The ground of failure to take anto account a relevant consideration will only be made good if it is shown that the Gecision-maker has failed to take into account a consideration which he was, in the circumstances, bound to take into account for there to be a valid exercise of the power to decide." It is obviously possible for the Court to identify some matters which it is essential, according to the Act, that the delegate should consider in relation to the determination of a scale of fees to be charged as from a particular date. The scale of fees affects the various parties having diverse and even opposing interests in the conduct of the home. The fact that the basic unit of service to the patients is a private enterprise project, which the statute uses as such, is of importance. The viability of the project is alsa of importance because the standard of care in a home not financially viable is likely to deteriorate perhaps seriously. As a private enterprise project the level of profit is anevitably a relevant matter. To determine what profit should be reflected in the fee structure for any period it is clearly essential to know and to take into account the amount of capital then involved in the project. And the amount of capital 15 not taken into account 1f the items constituting it are taken into account, not at current values, but at the value they had twelve years ago. When all the tacts an current terms are taken into account in relation to what 1s required by way ot land and buildings and equipment and recurring costs then the delegate and the Minister are in a position to assess whether in balancing the interests of the taxpayer, the patients and the proprietor, discounts should be imposed by which a propriet- or s returns may fall below commercial rates. But to attempt to do this without full consideration of the current contribution ot the proprietor appears to me inevitably to involve a fundamental failure of duty 1n the exercise or the discretion according to the Act. Accordingly, the appeal should be allowed with costs thereor and the matter remitted to the delegate for further consideration in accordance with the views expressed in these reasons for judgment. I would refer the question ot costs ot the proceedings before the learned trial judge to him. I certify that this and the eighteen (18) preceding pages are a true copy of the Reasons tor Judgment of the Honourable Mr. Justice Smithers. J AWW O th, bho bbe Associate Dated: 12 July 1985 IN THE FEDERAL COURT OF AUSTPALTA ) ) VICTORIA DISTRICT PEGISTPY ) No. VG 239 of 1984 ) ENERAL DIVISION an . \LESANDRA PPIVATE GEFIATRIC Ee Hos SPITAL PTY LIMITED Appeliant AND WEA BLEWETT and ANOR. Pespondsnts CORAM: SMITHERS. SHEPPARD and JENKINSON Jt. DATE: 12 guly 1985 REASONS FOR JUDGMENT SHEPPAPD J.: For the purposes of developing my reasons in this matter, I have drawn heavily upon the carefully detailed judgment of the learned primary Judge. I have also had the advantage of reading the judgment to be delivered by Smithers J. The comprehensiveness of the two judqments makes it unnecessary for me to set out fully the relevant legislation and the overall facts of the matter. Tne only questions which arise for decision centre upon whether the delegate of the Permanent Head of the Department of io) Health was bound. as a matter of law, when determining a scale of fees for the appellant's nursing home, to have regard to the current freehold market value and the current rental market value of the property in which fie nursing home 1s carried on. The appeliant's contentions were put in various ways. Pirskly, 1t was submitted thar the deleqate's decision to omit rurrent values ome' from consideration was so unreasonable as ta make the decision one ta which no reasonakle person c uld have come (paras. 3/1)(e) a and 5(2)(q) of the Administrative Decisions '/Jisiicial Review'! Act 1977 ("the Judicial Review Act")). Then it was said that the w fey i) delegate ain reaching Al cision had omitted a relevant consideration from account, namely, the current values of the property; 5 a 2 paras. 5(1)fe) amd 5/2)(5) of the Judicial Review Act. A third submission was that the delegate had decided the matter according to a rule or policy without cegard to the merits of the instant case; see paras. 5(1}(e) and 5:2)\f). It will eventually be seen that there may well be some overlap of these grounds; cf. Associated Provincial Picture Houses Limited v. Wednesbury Corporation £19487 1 K.B. 223 at p. 229, The legislation in question is essentially to be found in sub-secs. (6), (7) and (7A) of s.40AA of the National Health Act 1953 ("the Act"). Section 40AA was the subject of amendment in 1983; see National Health Amendment Act 1983, s. 3. Sub-section (6) was amended, sub-section {7) was replaced and a number of new sub-sections, including sub-section (7A), were added to the section. The relevant provisions of sub-secs. (6) and (7) in wd their new form are as fallows:- "(6) The approval of premises as an approved nursing home 18, except an the case of a Government nursing home, guk ject to the following conditions: , Ca veer ee re i {2} a condition that - are - (i) the fees charged in respect of the nursing heme care of a quat2fied nursing home patient in the nursing home will not exzcee es as are from time to t le in x re of eowith such scale of fees as is determined, subject to any principles that have been formulated under sub-section (7) and that are in force, by the Permanent Head in relation to the nursing home; (7) The Minister may, by writing under his hand, formulate principles in accordance with which scales of fees are to be determined for the purposes of sub-paragraph (1) of paragraph (c) of sub-section (6) ain relation to nursing homes generally or in relation to nursing homes included in specified classes of nursing homes." Sub-section 40AA(7A) specified certain principles which the Minister might formulate pursuant to sub-sec. 40AA(7). No such principles had been formulated before 13 March 1984 when the delegate made the decision in question in the present case. Principles have since been formulated; see Commonwealth of Australia Gazette No. 5 166 of 9 May 1984. These principles are not relevant to the outcceme of this appeal. 4. Since the amendments to s.40AA were made, there has been no decision of the High Court nor of this Court in relation toa problem such as the present except the decision of the learned peimary Judge now under consideration. It follows that the decision of the High Court in Req. v. YWint; 8x parte Sean Investments Ptv Limited (1979) 53 A.L.J.R. 52 and the deci $ of this Court in Nagrad Nominees Pty Limited v. Howells '19981) 38 A.L.R. 145; (1982) 43 A. R. 283, Sean Investments Pry Limited v. Mackellar (1921) 392 A.L.R. 362; (1982) 42 A.L.R. 9676 and Croft wv. Minister for Health (1993) 45 A.L.R. 449 must be read with it in mind that they were decided at a time when the legislation was in a different form. At that time the words, "subject to any Principles that have been formulated under sub-section (7) and that are in force," did not appear in sub~-para. 40AA(6)(c)(1) and sub-section 40A(7) provided:- "(7) The Permanent Head shall, in determining the scale of fees in relation to a nursing home for the purposes of sub-paragraph (i) of paragraph (c) of the last preceding sub-section have regard to costs necessarily incurred in providing nursing home care in the nursing home." It was with the words, "costs necessarily incurred" that the High Court had been concerned in the first of the cases to which I have referred. But in Nagrad's case this Court held that the Minister or his delegate in discharging his function under s.40AA was bound, in deciding upon the scale of fees he would approve, to include an allowance for profit to be earnt by the nursing c ste home. That was not because of the words, "costs necessarily incurred," but because of the terms of sub-para. (6)(c)(i) of the sectier. In Nagrad's case Smithers J. said '43 A.L.R. at p. 294) :- ne Pa ' "The prigary duty "to deteymine a suitable scale of fees 1s to be found in "sub-s. (6). Sub-section (7) ensures that allowance 1s made in respect of all costs necessarily incurred in providing the nursing care. Under sub-s. (6) the discretion is wide enough to enable and require the Permanent Head to consider items not being costs which are costs necessarily incurred within the meaning of sub~-s. (7) but which are relevant to the level of fees appropriate, in a particular case, to implement the statutory provisions. Thus profit is a proper item for consideration." A consideration of the history of the administration of the legislation since 1972 reveals that although 1t was not mentioned specifically, profit was taken into account. But the method adopted, both before and after Nagrad's case was a historical cost method. In other words, assets were taken at their 1972 values. These values were never increased. It is the fact that they have not been increased which is at the heart of the appellant's complaint in this case. Mr. P.D. Tratt is a senior executive officer of Nursing Home Benefits and Services Branch for the Victorian Regional Office of the Department of Health. He is one of the Permanent Head's delegates. Mr. Tratt gave the principal evidence on behalf of the respondents to the application. In his affidavit he made the position quite clear. He said, "It is. however, oniy the actual cost to. the Applicant which has been taken into account. The Delegates have nat allowel for any increased value which may be flaced upon the land, buildings, plant and 2quipment through the effects of inflation or other market forces." The policy 218 one which, 32 far as.he evidence discloses, has are . ' " « been invariably applied. Apparently over the years, when rroprietors of nursing homes have made complaint about the policy, they have been invited to appeal to the Minister. A number of appeals were brought; so far as Mr. Tratt was aware mone was ever successful. The volicy seems to have evolved from what was said in 2 letter written by the hen Minister for Health, Mr. Hayden, to Mr. McGregor, the Chairman of the Nursing Homes Fees Review Committee of Inquiry on 17 May 1973. Amongst other things Mr. Hayden said:- "It is my view that fees determined by my Department, in the first place, or by me acting on a recommendation of a Committee, should not be such as to put a home in an improved financial position to that which it held previous to the introduction of the fee control measures. This means, for example, that if a home was earning a return on capital at a particular rate then, provided that rate was not excessive - say less than 12 and ahalf per cent - it could be permitted fee increases to maintain that rate but it should not be permitted fee increases to improve that rate." It 1S not apparent to me that the then Minister intended any policy that profits were to be determined on the basis of historical costs to arise out of what he said. Indeed, I would = te not myself have taken him to mean that values were, in effect, to be frozen at 1972 values and never increased, even for the purpose of allowing for inflation. Netwithstanding that view, +" the policy waz adopted and applied by suczessive administrations From 197 ud is a wv ps ee 'o May 1984 when the new principles formulated ¢ pursuant te sub-sec. 40NA(7) came unto'sffect. cm That the policy was consisteéntiy applied is underlined in the following evidence given by Mr. Tratt. He said:- "There are some principles which are adopted by the Department and by various Ministers since the scheme started in 1972 which become really basic premises for determining fee stuctures. The one you mentioned, historical ccst, it 1s a policy which, as I said before, ail Ministers, ranging from Mr. Hayden to Mr. Carlton, Mr. Hunt, they have all written letters at various times sticking to this policy of historical costs and that is one area where 1t is a major principle, we believe, of the Department and it is one which we do not feel ourselves we can depart from." Mr. Tratt went on to mention a right of appeal but, because of what he had said about it elsewhere, it seems to have been an empty right. Mr. Tratt was pressed on whether there were written guidelines for the benefit of delegates dealing with this problem. He said that delegates had regard to the basic principles that profit should be determined on a historical cost basis. He conceded, however, that there was nothing in any manual concerning the matter but he referred again to the Ministers' attitudes. He said that neither he nor any other of the delegates had any discretion about the matter. He added, "It is a major principle which the Department has adopted for oo consistency, amongst other things." rd - Some other aspects of- the molicy need to be understocd. The freeholds of many nursing homes are not owned by the proprietors of the businesses carrying them on; they ars owned by investors who lease them to the proprietors. If a nursing home, in existence in 1972, were the subject of a lease, the proprietor was entitled to recover as part of his costs the amount of rent i) paid to the lessor. So much was decided by the High Court in Hunt's case. That, of course, was under the Act as 1t was prior to the amendments to which I have earlier referred. A different position prevailed in relation to a nursing home which was carried on by the owner of the freehold in 1972, but subsequently leased by that owner to a lessee who thereafter would carry on the business. The matter was explained by Mr. Tratt. He said that if the appellant in the present case were to sell the business, but retain the freehold, the new proprietor would be allowed a rental value of $13,887, that is, the same profit figure as the appellant is presently allowed in respect of the provision of the freehold for use as a nursing home. The new proprietor would not be allowed what might be thought to bea current market rent. In those circumstances it would seem unlikely that a purchaser of the business taking a lease from the 9. appellant would be prepared to pay a rental of more than the sum of $13,887. That would provide the appellant with the same uneconemic return which it presently receives. Tf a new nursing home were established aftr 1972, the ' Department would approve its being taken in at the actual cost or te value of the huilding at the time the business was commenced. Thus a building erected or acquired as a nursing home, but not previously used as such, in more recent years would provide for its owner a return much closer to that which would be regarded as reasonable. A similar course is followed in relation to additions to nursing homes, provided additional beds are added as a result of the increased size of the buildings. The capital cost is taken into account at the date 1t was incurred. In summary it may be seen that persons who carried on nursing homes prior to 1972, but who were lessees and not owners of the freehold, were not disadvantaged because the actual rent had to be taken into account. Nor are nursing home proprietors who own freeholds seriously disadvantaged by the present policy if they have commenced a nursing home business in comparatively recent years. That is because the value will be much closer to present day values. But people such as the appellant in the present case, who owned the freehold and were carrying on business as a nursing home proprietor in 1972, are seriously disadvantaged because the value of their assets is frozen, in effect, at 1972 values. 10. Professor Officer is a professor in the Department of Accounting and Finance in the Faculty of Economics and Politics at Monash University. He has previously held various accounting and finance positions in academic institutions. Professor Officer said that the policy being applied by the Department was inequitable. He added:- "T£ you set these things too low then implicitly what you are asking is for one section of the community to subsidise health car2® when in fact 1t should be the responsibility of the total community and not just one group. That is the equity argument I put up in relation, I suppose, to how this should be applied and the context of reasonableness from a private sector point of view." In the course of the proceedings two valuers were called to give evidence of the value of the property. One thought $710,000 was its market value; the other thought $760,000. As I understand this evidence, it was given on the basis that a proper rent or other return would be obtained. The rental value of the property was put at figures approximating $80,000 per year. Mr. Tratt gave evidence that there was an active market for nursing homes and that these sold at prices reflecting a value of $8,000 per bed. His Honour referred to this evidence saying:- "On the other hand, it was pointed out for the Department that lack of competition, very high nursing home occupancy rates, negligible bad debts, and a high level of cost recoveries are virtually guaranteed and, at the profit levels allowed, many people are still trying to get into ll. the industry. Indeed the ruling figures for sale of goodwill would enable the applicant to sell its business for some $400,900 in addition to the value of the fixed assets. In the face of this surprising but uncontradicted evidence, I cannot be satisfied that the Department's approach to profits 15 so contrary to the policy of the Act as to make it untawful." t ' The only trouble with what his Honour has said, so fa "sS a re) concerns the present case, is that the appellant in unable to sell its premises or business. Ample evidence of this was given by Sister Goode who is one of its directors. She said that an agent she consulted thought the business, as distinct from the freehold, would be worth selling if a rental component in the fee could be guaranteed. Mr. Tratt's evidence plainly establishes that 1t cannot. Sister Goode described a number of attempts which had been made to sell the premises but without success. Amongst other things she said:- "A local agent and Mr. Phillip Eccles (another estate agent) keeps wandering up with clients which he will have no hope of buying it. I did give it to a local agent and to Mr. Eccles fora while. I withdrew it and realized the tangle we were getting into was a sheer waste of time." His Honour made a finding that the evidence of Mr. Tratt should be accepted. He made no finding in relation to the evidence given by Sister Goode, but I do not understand that the evidence was challenged and I think that it should also be accepted as being correct. I think the explanation for the apparent discrepancy which there is between the two is that the 12. gale prices derived from Mr. Tatt's evidence are available in cases of leased nursing homes, but only where a current market cental may be charged. This will only occur in those cases where the Department will approve fees based on such a rental. This is not a case of that kind. It follows that the appellant is6 left with a business catried on on premzses which are said to be worth a figure ef the order of $700,000 or a little more, but which cannot be sold except perhaps for the land value of the premises which is of the order of $370,00C. If the appellant were to invest $700,000 in Australian Treasury Bonds at, say, 12 per cent per annum, it would receive $84,000 per year - somewhat more than the rental value which the valuers say that it has. Instead, this asset, used as it is in the conduct of the business, yields the appellant some $17,000 per year. I have now said enough about the detail of the evidence to come to the questions which are involved. As I have said, the provisions of the legislation have changed. The authorities upon the provisions in question have to be read with those changes in mind. Furthermore, the problem that arises for consideration in this case is not one so far judicially considered in any legislative context. The authorities established that rental paid under a lease was a necessary cost and that in a letting situation the lessee proprietor was entitled, not only to have the rent considered as a cost, but was also entitled to an amount for profit. What was not the subject of any decision was the amount of that profit or the basis upon which it should be 13. calculated. The Department, however, as the result of Nagrad's case took the view, correctly in my opinion, that a proprietor who owned the freehcii upon which a nursing home was carried on was also entitled 2? an amount for profit. It appears to have been the practice all alorg that such an allowance was in fact made, although, of course, upon the basis of historical cests or on values. The first question for consideration is whether the amendments to the legislation make any difference to the way in - which the problem should be approached. As earlier noticed, the "only relevant words of the Act are now those contained in sub-para. 40AA(6)(c)(i) which are:- "the fees charged in respect of the nursing home care of a qualified nursing home patient in the nursing home will not exceed such fees as are from time to time applicable in respect of the nursing home care of the patient in accordance with such scale of fees as is determined ... by the Permanent Head in relation to the nursing home." I have omitted the words which were added by amendment in 1983 because they refer one to sub-sec. 40AA(7) which has no application because at the relevant time no principles had been formulated pursuant to it. Does it follow from the words 1n question that the delegate must necessarily allow anything for profit? This question cannot 14. be answered without a consideration of the policy underlying the Act. That policy 15 that approved nursing home care is to be provided, at least in part, by privately owned nursing homes. The premi32 1s that each of these homes will be carried on, not by a government agency, but by a person carrying on business on nis own accovnt. The _cbhject underlying business activity 1s * profit making. One cannot make profits unless the return which is received covers costs and leaves a surplus for the proprietor; n f. the judgment of Smithers J. in the Nagrad case at pp. -294, especially the passage therefrom e#arlier cited. His Honour took the view that profit was a proper item for consideration, not because of anything contained in the former sub-sec. 40AA(7)}, but because of the provisions of para. 40AA(6)(c}. That provision has not undergone relevant amendment, no principles having been formulated pursuant to the new sub-sec. 40AA(7) at the relevant time. Iam thus of opinion that, notwithstanding the generality of the language in sub-sec. (6) of the Act, the delegate was obliged, as a matter of law, to take into account costs and to provide for a profit margin when he came to consider what fees should be approved. That conclusion, however, does not take the appellant far. The delegate did allow necessary costs and did take into account a profit figure. The question is whether he erred in law in giving effect to a profit figure which was based on 1972 values and not upon current values. I should say in passing that, although, because of the view I 15. take of the effect of the statute, I do not need to express a final view upon the matter, I am anclined to think that the fact that the delegate has decided to allow a profit factor itself exposes his decision to review at least to the extent 2f the Court being required to intervene if, in its view, the figure is so low as to be ng real reflection of a reasonable allowance for profit. ' . *. The first question that arises is whether the profi ctv rh Q is r Lv) which has been allowed, based a5 1% 15 on historical costs, that is 1972 values, 15 so unreasonable that no reasonable person could have so exercised the power; see para. 5(2)(g) of the Judicial Review Act. The test is an objective one, but requires an exercise in judgment. In performing the exercise one ought not to reach the conclusion that the decision is so entirely unreasonable unless one 1s clearly of the opinion that no reasonable mind could reach it. The decision will not be vitiated just because a court itself believes that the decision is unreasonable. It must be satisfied that no person acting reasonably could arrive at such a decision. Having given the matter due consideration, I have reached the clear conclusion that the profit figure allowed is of such a minimal kind that no reasonable person could have possibly regarded it as at all sufficient to provide the applicant with an adequate return on the principal asset of the business, the premises upon which the business was carried on. 16. Inflationary trend2 in the Australian community since 1972 are a matter of notoriety. The valuation figures given in evidence in the present case, when compared with the 1972 values upon which the profit figure was vasedy suggest that the building has appreciated in value by more than 590 per cent in the 12 years that have. intervened. That sort of increase is common experience, not only in relation to real estate, but in relation to goads, services, governmental charges, and salaries and wages in every sphere of the Australian community's life. Yet, because of a policy which was designed to freeze profits at 1972 levels, the proprietors of nursing homes, who owned the fresholds of the homes in that year, are being compelled to do what no other member of the community has had to do, namely, to accept a return which has not moved one cent upwards in more than a decade. I do not think it is going too far to say that the accounts of no business, including businesses in which the sole or principal proprietors were one or other of the governments of this country, would reveal such a situation. I am afraid that no conclusion is open other than that the Department, by the implementation of an inflexible policy, has attempted (and apparently largely succeeded) in keeping nursing home fees down by freezing profit levels at 1972 values. In the words of Professor Officer earlier quoted, nursing home proprietors have been called upon by governments to subsidise the costs of nursing home care. It would seem to me that the principal reason why his Honour took the view that he did was because of evidence that there was a ready market for nursing homes substantial figures. So long a was his Honour's view that demonstrate unreasonableness of of the delegdte. But the case Qne can only go on the evidence *. + . . understand. any oft, his Honours findings fa and that they could be sold for s that remained the position, it the appellant had failed to the required extent on the part must be looked at individually. whicn is in this case. I do not to suggest that the acpeilant is able to sell the nursirg home in its entirety, or the business as Jistinct from the freehold, for a price which would at all reflect its true value. The evidence which Sister Goode gave militates against this. It is supported by the tealities. If she atbempts to sell the business as it stands, a prospective purchaser will understand that he will be in no better position than is lend itself to any other use. home it would be unlikely to bring more than its land value. the business is sold and the fr will be fixed at $13,000 per could be expected to pay a return on the freehold would r the last 12 years. In consequen unsaleable as it is now. It follows upon the ground that no reasonable person could have arrived at it. take the view that the the appellant. year. greater rental. appellant has been The building does not If it were not used as a nursing If eehold retained, the rental value No lessee of the business The appellant's emain exactly as it has been for ce the building would still be as that in my opinion the appeal should be upheld that the delegate's decision was so unreasonable I would also the victim of the 18. implementation of a policy without the individual circumstances of its case having been taken into account; see para, 5(2)(f) of the Judicial Review Act. I do rot find it necessary to reach a conclusion on the question of whether the delegate has omitted a relevant matter from consideration, namely, the current value of the property; see "para. 5(2)(b) of the Judicial Review Act. I would therefore propose that the appeal be allowed with costs. His Horour's decision should be set aside and the matter remitted to the delegate to be re-considered in the light of this decision. I would refer the question of the costs before the learned trial Judge to him because it would seem to me, upon the face of the record, that there were a number of matters upon which the appellant unsuccessfully relied before him and which were not the subject of any argument on appeal before us. thet this and the 17 preceding icertfy S3et ¢ pages arc atece copy of 12 easons for judgment herein of The Honourable ' Mr Justice Sheppard. /, ck ror aa O—~ "Associate Dated /2 Fvay /9E5- IN THE FEDERAL COURT OF AUSTRALIA ) VICTORIA DISTRICT REGISTRY ) VG No. 239 of 1984 GENERAL DIVISION ) On appeal from a single judge of the Federal Court of Australia. BETWEEN: ALEXANDRA PRIVATE GERTATRIC HOSPITAL PTY. LTD. (Trading as "Alexandra Private Nursing Home") Appellant AND: NEAL BLEWETT (who is sued as the Commonwealth Minister of Health) and LAWRIE J. WILLETT (who is sued as the Permanent Head of the Commonwealth Department of Health) Respondents CORAM: Smithers, Sheppard and Jenkinson JJ. PLACE: Melbourne DATE: 12 July, 1985 REASONS FOR JUDGMENT JENKINSON J. Appeal against the dismissal by Woodward J. of the appellant's application for an order of review in respect of an administrative decision made by a delegate of the second-named respondent. The circumstances of the case are explained in the reasons for judgment of the other two members of the court. It was submitted on behalf of the appellant that the exercise of the function of determining a scale of fees, pursuant to s.40AA(6)(c)(1) or s.40AD(1)(b) of the National Health Act 1953, is by law required to be directed to enabling the proprietor of the nursing home to continue to provide proper nursing home care in the nursing home. If the correctness of that submission be assumed, the next step in the argument on behalf of the appellant may be considered : that a scale of fees for 1984 in the computation of which a return of about ten per centum per annum of the appellant's 1972 book value of the land and buildings is included cannot be considered the product of an exercise of the function so directed. Depreciation of the currency during that decade having resulted in a great nominal increase in the market value of the land and buildings, a scale of fees which yields to the appellant about ten per centum per annum of a1972 value affords a return, on the appellant's investment of the land and buildings in the business the appellant 1s conducting, so small in comparison with the likely returns from other commercial dispositions of that land and those buildings which the appellant might make that the appellant could not be expected to continue in the conduct of that business, according to the submission. The argument on behalf of the appellant was put in several ways. It was said that the allowance made, in the computation of the scale of fees, in respect of the land and buildings produced financial results of the conduct of the business so unprofitable that the appellant would soon be faced with insolvency. It was said that accepted principles and rules, in accordance with which those skilled in accountancy and economics essay prediction of the financial courses of business enterprises, and reckon success and failure of such enterprises, are principles and rules by reference to which the delegate was required to exercise his function, and that by fixing a scale of fees without regard to the return which those fees might be expected to yield upon the current values of the land and buildings invested in the business the delegate had disregarded those accepted principles. It was said that a comparison between the allowance made in respect of land and buildings which had constituted the premises of an approved nursing home conducted by the freehold owner of that land since 1972 (ten per centum per annum of the value assigned to them in 1972) and the allowance made in respect of any similar land and buildings which had constituted the premises for an approved nursing home conducted by such an owner for a substantially shorter period (about ten per centum of their value at the time when the premises were first approved) demonstrated such discrepancy in the rates of return on the two real property investments, valued in the money of 1984, that no reasonable person could have adopted such a mode of determining the allowance. The question whether the scale of fees determined by the delegate was so low as to produce financial results of the conduct of the business tending to insolvency could in my _ opinion reasonably have been answered by the delegate in the negative, either upon the material before him or on the more extensive evidence adduced on the hearing of the application. As Woodward J. pointed out, adherence to the values of 1972 may, if money continues to depreciate or if the value of real property substantially appreciates in comparison with other economic commodities, eventually produce financial results of that' kind. But that had not happened when the determination was made. Short of insolvency, the question as to what may be regarded as outside the range of reasonableness of monetary return on fixed capital investment ought not in my opinion to be answered according to accepted economic doctrine or "ordinary business principles". (Cf. Prescott v. Birmingham Corporation [195413 Ch. 210 at 236.) I think that the language of s.5(2)(g) of the Administrative Decisions (Judicial Review) Act 1977 - "an exercise of power that is so unreasonable that no reasonable person could have so exercised the power" - leaves the person exercising the power free to give effect to economic and political views which are well beyond the middle ground of public and academic opinion, provided that those views are not beyond the ground which may he reasonably defended. The strength of the criticism which may be made of the method adopted for the calculation of a return on the investment of land and buildings by a nursing home proprietor who is the freehold owner is demonstrated by the reasons for judgment of Smithers J. and of Sheppard J.. But the application of that method of calculation was not shown to have driven freeholding proprietors from the nursing home field. When regard is had to the security of the nursing home investment, to the returns offered by governmental and statutory authorities on public loans for long terms, and to the very great weight which those exercising the statutory discretion might, not unreasonably, allow to the public interest in minimising the cost to the community of nursing home care, I do not think that limitation of the return on the freeholding proprietor's investment of land and buildings by reference to the capital value at the time of first approval of the nursing home can be said to be so unreasonable that no reasonable person could have so exercised the power. It might have been, but was not, argued that to impose such a limitation without having clearly warned applicants for approval before the first grant of approval that the limitation would be imposed was to render the imposition of the limitation so unreasonable as to satisfy the description contained in s.5(2)(g). I say nothing about that argument. The evidence disclosed that the allowance of & percentage of the values of 1972 was an application to the appellant's nursing home of a general Departmental policy. The policy required that,1if application for approval of premises as an approved nursing home were first made by a proprietor who was the freehold owner of the premises, the scale of fees should be calculated on the basis that allowance be made for a return to the proprietor of about ten per centum per annum of the value, as at the time when approval was first given, of the land and buildings constituting those premises. Because approval of the appellant's premises had been first given in 1972, the values of that year, as evidenced by the appellant's book values, were taken as the values upon which the return was to be calculated. If after approval had been given the premises and the business were sold together, the purchaser would as proprietor of the approved nursing home be allowed the same return as the vendor would have been allowed on the land and the buildings if he had continued as owner and proprietor, the policy prescribed. Any proprietor of an approved nursing home on premises owned by him would be likely to enjoy an economic advantage over the appellant, or over such a purchaser, in 1984 if approval of that nursing home as an approved nursing home had been first given after 1972 : the more recent the time as at which the value of land and buildings was first ascertained, for the purpose of computing the scale of fees, the less the effect, generally, of currency depreciation on the allowance made for a return on the investment of land and buildings. But the inequality which such a comparison discloses does not in my opinion demonstrate such unreasonableness that no reasonable person could have exercised the power of fee scale determination in accordance with a policy involving such an inequality. The application of the policy will, if currency depreciation may be regarded as a permanent economic phenomenon, result in a generally progressive diminution of the economic benefit to the proprietor of his investment of land and buildings in the business for 506 long as each investment continues. There is no evidence on which to conclude that it is unreasonable to regard currency depreciation as a permanent economic phenomenon in this country. Every proprietor of an approved nursing home which has been conducted since its first approval by the freehold owner of the premises will suffer the same process of diminution, if the currency continues to depreciate, and the circumstance that at any particular time the degree of diminution will be unequal as between those proprietors whose premises were first approved at different times does not in my opinion establish unreasonableness of the policy. Ali those proprietors will experience, until they cease to be proprietors, a similar process of diminishing return on their investments of land and buildings, unless the policy were to be changed, and none of them therefore could claim that the application of the policy had subjected him to a greater disadvantage than others of them. There 1s, however, an inequality which the application of the policy produces and for which a reasonable person could not in my opinion find a justification in the evidence adduced on the hearing of the appellant's application. If the appellant had in 1984 leased the premises to another person and had sold the nursing home business to that person, the scale of fees in respect of the nursing home would not have been increased, whatever the amount of rent reserved under the lease. But the scale of fees in relation to a nursing home first approved under Part V of the Act after the decision of the Full Court of this court in Howells v. Nagrad Nominees Pty. Ltd. (1982) 43 A.L.R. 283 would, if the proprietor at the time of first approval were a lessee of the premises, have included an allowance for the rent, either the rent actually payable or a reasonable rent based on current market value, whichever was the less. When in consequence of currency depreciation or relative appreciation of the land or buildings the reasonable rent thereafter increased, allowance for the increase would be made in the scale of fees, if that rent did not exceed the rent actually payable. A proprietor who is the freehold owner of the premises cannot, according to the policy, receive by increase of the scale of fees any compensation for the effect of currency depreciation on the return on his investment of land or buildings, nor any benefit deriving from a relative appreciation of the real value of those economic commodities. A proprietor who is the lessee of the premises, on the other hand, may receive, according tao the policy, an increase in the scale of fees in consequence of an increase in the rent of the premises which has in turn been a consequence either of such a depreciation or of such an appreciation, if the premises have been continuously conducted as a nursing home since its first approval under Part V by a proprietor who 1s lessee of those premises. The explanation, given in evidence by a Departmental officer, of the different consequences for freeholders and lessees was that rent paid by a lessee was regarded as a cost necessarily incurred by the lessee in providing nursing home care in the nursing home and should therefore be taken into consideration in the determination of the scale of fees, notwithstanding the deletion of reference in the Act to such costs. The only explanation offered on behalf of the respondents of the refusal to extend the same consideration to rent paid by a lessee of premises which had been previously conducted as an approved nursing home by the freehold owner was that it was not considered appropriate to allow an increase in the scale of fees which was a consequence of the disposal by the freeholding proprietor of either a freehold or a leasehold estate an the premises. The discriminatory effect of the application of the Departmental policy, as between freehold owners of premises who, like the appellant, are proprietors when approval is first given and freehold owners whose premises are leased to the proprietors when approval is first given, might be justified as an intended or an unavoidable consequence of considerations entirely reasonable. Or so I would be prepared to suppose. For all I know there may be good economic or political reasons for discouraging freehold owners of nursing home premises from themselves conducting nursing homes on their own premises. But no intention to effect such a discouragement was acknowledged by those who have spoken for the respondents in this proceeding. Neither by evidence nor by submission has any reason been suggested to my mind for that discrimination, except the reason that the cost to the community of nursing home care is by reason of the application of the policy less than it would be if the fee scale of every leased nursing home was so calculated as to allow for recoupment by the proprietor of so much of the rent payable as did not exceed the reasonable rent ascertained by reference to, inter alia, the current value of land and buildings. No reason has appeared, from the evidence or by submission, why the burden of sparing the community expense should be so unequally apportioned between the freehold owners of approved nursing home premises which were first approved on the application of an owner and the freehold owners of such premises which were first approved on the application of a lessee. A reasonable person exercising the statutory power could not in my opinion justify the inequality by reference to the circumstance that those who are favoured are not subjects of the exercise of the power : that the scale of fees determined 1s not a scale of fees that they may charge, nor a scale of fees in respect of services they will render. The provision of land (including buildings), the provision of chattels and the provision of labour are all three essential for the provision of nursing home care and + =, 10. the statutory power cannot in my opinion be reasonably exercised without regard to the economic interests of those who provide any of the three. Further, all freehold owners of approved nursing home premises are potential competitors, within geographical limits, in the market for leasehold interests in such premises. The discriminatory effect of the application of the Departmental policy must confer a marked advantage in that market on those whom the policy favours. The inequality of financial henefit which different classes of owners of approved nursing home premises derive under Part V of the National Health Act 1953 is a direct consequence of the application of a policy in accordance with which the power of determining the appellant's scale of fees was exercised and no reason has appeared to me in justification of that inequality. My conclusion is that the exercise of the power in conformity with the policy was so unreasonable that no reasonable person could have so exercised the power. Therefore I agree that the appeal should be allowed. 12 July, 1985 [ i - - -