FEDERAL COURT OF AUSTRALIA Decleah Investments Pty Ltd and Prince Removal and Storage Pty Ltd as Trustees for the PRS Unit Trust v Commissioner of Taxation [2018] FCA 717 Appeal from: Decleah Investments Pty Ltd and Anor as Trustee for the PRS Unit Trust and Commissioner of Taxation [2017] AATA 2418 File number: VID 1409 of 2017 Judge: STEWARD J Date of judgment: 22 May 2018 Catchwords: TAXATION – goods and services tax – appeal from a decision of the Administrative Appeals Tribunal setting aside objection decision and increasing GST and administrative penalty payable – calculation of GST payable under margin scheme – valuation on an "as is" basis – whether an approved valuation for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (Cth) Legislation: A New Tax System (Goods and Services Tax) Act 1999 (Cth) ss 9-75, 75-10, 75-35, 195-1 Administrative Appeals Tribunal Act 1975 (Cth) ss 39, 44 Income Tax Assessment Act 1936 (Cth) Income Tax Assessment Act 1997 (Cth) Cases cited: Brady King Pty Ltd v Federal Commissioner of Taxation (No.2) (2008) 220 FCR 284 Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (No.4) [2015] FCA 1092 Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (2017) 251 FCR 40 Friends of Leadbeater's Possum Inc v VicForests [2018] FCA 178 Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315 Housing Commission of New South Wales v Falconer [1981] 1 NSWLR 547 Jagroop v Minister for Immigration and Border Protection [2014] FCAFC 123 Kennedy v Federal Commissioner of Taxation (2008) 168 FCR 566 Repatriation Commission v Hill (2002) 69 ALD 581 Spencer v Commonwealth (1907) 5 CLR 418 Walker v Wilson (1991) 172 CLR 195 Date of hearing: 26 April 2018 Date of last submissions: 9 May 2018 Registry: Victoria Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 36 Counsel for the Applicant: Mr J Korman Solicitor for the Applicant: Belleli King & Associates Counsel for the Respondent: Mr C Sievers Solicitor for the Respondent: ATO Dispute Resolution ORDERS VID 1409 of 2017 BETWEEN: DECLEAH INVESTMENTS PTY LTD AND PRINCE REMOVAL AND STORAGE PTY LTD AS TRUSTEES FOR THE PRS UNIT TRUST Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: STEWARD J DATE OF ORDER: 22 MAY 2018 THE COURT ORDERS THAT: 1. The appeal be allowed with costs. 2. The decision of the Administrative Appeals Tribunal dated 1 December 2017 be set aside. 3. The parties file, within 14 days, the orders that they agree ought to be made to reflect the reasons for decision published this day, or, if agreement cannot be reached, written submissions limited to eight pages, concerning the orders for final disposition of this appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT STEWARD J: 1 The applicant taxpayer appeals to this Court from a decision of the Administrative Appeals Tribunal (the "Tribunal"), which had set aside an objection decision made by the respondent (the "Commissioner") on 12 November 2015, and which had substituted its own decision increasing goods and services tax and administrative penalty payable. 2 The applicant was a developer of land who had purchased property in Pakenham prior to the introduction of A New Tax System (Goods and Services Tax) Act 1999 (the "GST Act"), which came into effect from 1 July 2000. It has since subdivided and otherwise developed the land, progressively selling lots, and for that purpose applied what is called the "margin scheme" provisions of the GST Act. 3 The margin scheme is an exception to the usual way of calculating liability under the GST Act. In simple terms, rather than accounting for the gross amount payable for a taxable supply, the scheme provides that the amount of GST on a supply of real property, or like interest, is 1/11 of the "margin" for the supply. The "margin" is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property or like interest. To obtain the benefit of the margin scheme, the taxpayer and the purchaser of the land, or like interest, must agree in writing that the scheme applies. Once applicable, the purchase of the land or similar interest is not a creditable acquisition. As such, the scheme is directed at developers selling houses, and the like, for domestic consumption. 4 The scheme of the GST Act is not to tax increases in the value of land that have taken place before 1 July 2000 upon the land being sold thereafter. Rather, it taxes increases in the value of land that take place after that date and which are realised on the making of a taxable supply. To achieve this, in general terms, the margin is calculated as being the amount by which the consideration for the supply exceeds an "approved valuation" of the land as at 1 July 2000. Here, the applicant obtained its valuation. The Commissioner obtained his own. The valuers disagreed about the value of the applicant's land. Below, the Tribunal rejected the applicant's valuation in sufficiently striking terms such that it increased the GST payable and, on its own motion, the penalties payable to 50% for recklessness. The applicant now appeals to this Court. Grounds of Appeal 5 The applicant relied upon the following grounds of appeal, as amended with the leave of the Court at the hearing: 1. The Tribunal erred in failing to make any finding of fact as to what manner of making a real property valuation is required by the relevant professional standards recognised in Australia. 2. The Tribunal erred in failing to: a. first determine what manner of making a real property valuation is required by the relevant professional standards recognised in Australia, and b. then determine whether the applicant's valuation was made in a manner that was not contrary to that required manner 3. The Tribunal erred in failing to take account of the following relevant matters in determining whether the valuation in question was an approved valuation for purposes of Determination MSV 2005/3 Method 1, and Determination MSV 2009/1 Method 1: a. evidence given by the expert and professional valuer retained by the respondent to the effect that the relevant valuation was made in a manner not contrary to the professional standards recognised in Australia for the making of real property valuations; and b. evidence given by the applicant's valuer to the effect that he had been instructed by the Commissioner's representatives to carry out his valuation on the basis of actual prices received and actual costs incurred post-1 July 2000. 4. The Tribunal erred in taking account of the written opinions expressed by Wayne Lonergan and Alan Hyam in determining whether the valuation in question was an approved valuation for purposes of Determination MSV 2005/3 Method 1, and Determination MSV 2009/1 Method 1, in circumstances where the applicant was not given a reasonable opportunity to inspect the documents containing those written opinions and where neither had been called as experts by either party, neither had given evidence on oath, neither had made themselves available for cross examination, and the applicant had no notice that the Tribunal would rely on that evidence. 5. The Tribunal erred in failing to take account of the following relevant matters in determining whether the applicant failed to take reasonable care and whether the applicant was reckless in making the relevant Business Activity Statements: a. the expert and professional valuer retained by the respondent was of the opinion that the relevant valuation was made in a manner not contrary to the professional standards recognised in Australia for the making of real property valuations; b. the opinion referred to in sub-paragraph (a) was communicated to the applicant prior to the applicant's alleged mis-statement of its BAS obligations; and c. the evidence given by the applicant's valuer to the effect that he had been instructed, in the presence of the applicant, by the Commissioner's representatives to carry out his valuation on the basis of actual prices received and actual costs incurred post-1 July 2000. 6. The Tribunal erred in taking account of the following irrelevant matters in determining whether the applicant failed to take reasonable care and whether the applicant was reckless in making the relevant Business Activity Statements: a. the applicant's failure to "sack" its valuer on the basis that his valuations were consistently rejected by the Commissioner; b. The applicant's valuer's failure to make the relevant valuations in accordance with the Commissioner's written instructions; c. the quantum of the valuation; d. the fact that significant damages and penalties would flow from an understated GST liability; and e. the fact that the discounted cash flow method "plainly" requires a prospective guess as at the valuation date. In essence, the applicant's case was that the relevant legislative scheme does not leave the issue of value to be decided at large. Rather, it is sufficient if the valuation obtained is in accordance with the requirements of the Commissioner (as to which see below). It contends, amongst other things, that the Commissioner's valuer here conceded that the applicant's valuation was in accordance with applicable standards, and that the Tribunal erred in law in not considering or taking into account that evidence. The Margin Scheme 6 It is necessary to set out the key provisions of the GST Act before considering the Tribunal's decision below and the applicant's suggested errors of law. Sections 75-10(1) and (2) of the GST Act provide: (1) If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11 of the margin for the supply. (2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question. 7 Section 75-10(3), applicable here, provides: (3) Subject to section 75-11, if: (a) the circumstances specified in an item in the second column of the table in this subsection apply to the supply; and (b) an approved valuation of the freehold interest, stratum unit or long-term lease, as at the day specified in the corresponding item in the third column of the table, has been made; the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease. 8 Section 75-10(3) then sets out a table, which I need not reproduce, it being agreed between the parties that the applicable date for the purposes of s 75-10(3)(b) is 1 July 2000, that being the date for determining the value of the applicant's land. 9 Section 75-35 is critical. It provides: (1) The Commissioner may, by legislative instrument, determine in writing requirements for making valuations for the purposes of this Division. (2) A valuation made in accordance with those requirements is an approved valuation. 10 The Commissioner, has, over time, made three determinations pursuant to s 75-35, with the last two, for the purposes of this appeal, relevantly using the same language. The determinations prescribe different methods for the valuation of land. Here, the parties agree that "Method 1", as described in the most recent determination made by the Commissioner, is engaged. A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1 describes "Method 1" in these terms: The requirements for making valuations as determined by the Commissioner for the purposes of Division 75 11. A valuation of the interest, unit or lease made in accordance with the requirements set out by the Commissioner in this determination is an approved valuation of that interest, unit or lease. 12. The Commissioner has determined the following requirements for making valuations for the purposes of Division 75. Method 1: valuation by a professional valuer 13. For a valuation by a valuer to be an approved valuation for the purposes of Division 75 that valuation must be made in accordance with the following requirements: (1) the valuer must be a professional valuer; (2) the valuation must be in writing; (3) the valuation must determine the market value of the interest, unit or lease at the valuation date; (4) the valuation must be made in a manner that is not contrary to the professional standards recognised in Australia for the making of real property valuations; (5) the valuation must include a signed certificate which specifies: (a) a full description of the property being valued; (b) the applicable valuation date; (c) the date the valuer provides the valuation to the supplier; (d) the market value of the property at the valuation date; (e) the valuation approach and the valuation calculation; and (f) the name and qualifications of the valuer; (6) if the interest, unit or lease has been supplied by the Commonwealth, a State or a Territory; and (a) the supplier has held the interest, unit or lease since before 1 July 2000; (b) there were no improvements on the land or premises in question as at 1 July 2000; and (c) there are improvements on the land or premises in question on the day on which the taxable supply takes place, the valuation must be made as if no improvements had been made at the date of the taxable supply; and (7) the valuation must be made by the time specified in clauses 21 to 23 below. 11 A "professional valuer" is defined in the determination as follows: Professional valuer means: (1) a person registered or licensed to carry out real property valuations under a Commonwealth, a State or a Territory law; or (2) a person who carries on a business as a valuer in a State or a Territory where that person is not required to be licensed or registered to carry on a business as a valuer; or (3) a person who is: (a) a member of the Australian Property Institute and accredited as a Certified Practicing Valuer; or (b) a member of the Royal Institution of Chartered Surveyors and accredited as a Chartered Valuation Surveyor; or (c) a member of the Australian Valuers Institute and accredited as a Certified Practicing Valuer. 12 I make the following observations about the legislative scheme: (1) First, the definition of "margin" in s 75-10(3) does not relevantly refer to the extent to which the consideration for a given taxable supply exceeds the market value of land as at 1 July 2000. Rather, it is calculated by reference to the amount by which that consideration exceeds "that valuation". That "valuation" is a reference to "an approved valuation" that "has been made". The use of the word "an" directs attention to a particular valuation prepared in an approved way that has taken place. The margin is calculated with reference to the figure contained in that valuation. It follows, that in my view, the issue of valuation is not at large. The question for determination is whether the valuation relied upon is an "approved valuation" as defined and not whether that valuation is or is not correct. (2) Secondly, legislative context supports that conclusion. Where in the GST Act Parliament has made the presence of a correct valuation part of the criteria for liability, it has used different language. Thus, s 9-75(1) provides: (1) The value of a taxable supply is as follows: where: "price" is the sum of: … (b) so far as the consideration is not consideration expressed as an amount of money--the GST inclusive market value of that consideration. The "GST inclusive market value" is then defined is the dictionary in s 195-1 in these terms: "GST inclusive market value" of: (a) consideration in connection with a supply; or (b) a thing, or a supply or acquisition of a thing; means the market value of the consideration or thing, without any discount for any amount of GST or luxury car tax payable on the supply. Plainly, in order to correctly ascertain the value of a taxable supply where the consideration is not expressed in monetary terms, a taxpayer must correctly value what is supplied, as an objective fact. Similar examples of such statutory language may be found in the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth), and they have given rise, from time to time, to considerable, sometimes notorious, disagreement about the market value of particular items of property or services supplied: cf Chevron Australia Holdings Pty Ltd v FCT (No.4) [2015] FCA 1092 and on appeal (2017) 251 FCR 40. (3) Thirdly, there is the presence within the legislative scheme of s 75-35. Conferring upon the Commissioner a power to determine the requirements of a valuation supports the proposition that Parliament did not intend to render at large the issue of value. Rather, the issue of value is to be regulated by the Commissioner who has the power to define the standards or rules he considers should be applied in order for a valuation to be approved. (4) Fourthly, and critically, the extent to which a valuation constitutes an "approved valuation" turns first upon the identification of the "requirements" specified by the Commissioner for the purposes of s 75-35, and secondly, upon the meaning, for the purposes of that section, of the phrase "in accordance with". That phrase delimits the relationship a valuation must have with those "requirements". Recently, Mortimer J usefully summarised the authorities concerning the phrase "in accordance with" in Friends of Leadbeater's Possum Inc v VicForests [2018] FCA 178. At [202] and [203] her Honour said: 202. The applicant, and the interveners, all submitted the phrase "in accordance with" meant "consistently with", "in conformity with" or "in compliance with". They submitted that was also how the phrase was used elsewhere in the Act. I agree. 203. The applicant and interveners referred to authorities dealing with other statutory schemes where the phrase has been given a meaning that carries with it the need for more than a connection between two matters, but rather a need for conduct to be compliant. The applicant relied on Ramsay v Sunbuild Pty Ltd [2014] FCA 54; 221 FCR 315, a decision dealing with the use of the phrase in ss 501 and 502 of the Fair Work Act 2009 (Cth), where the phrase was held (at [95]-[96], Reeves J) to mean "in conformity with", or "consistently with". The applicant also relied on Re LA [1993] FCA 62; (1993) 41 FCR 151, where Gray J – again in an industrial context – held (at 158) that the requirement in reg 98(1)(a) of the Industrial Relations Regulations 1989 (Cth), that an application to the Federal Court be made "in accordance with Form 11" meant the application had to be made "in complete agreement with" the Court's form. The State relied on Ramsay v Sunbuild and Re LA, referring also to Walker v Wilson [1991] HCA 8; 172 CLR 195 at 208, where Deane, Dawson, Toohey and McHugh JJ gave the phrase the same meaning. In a different legislative context, the phrase "in accordance with" has been held to mean "not inconsistently with": Walker v Wilson (1991) 172 CLR 195 per Brennan J (as his Honour then was) at 200. In my view, it is unlikely that Parliament intended here that a valuation which was only "not inconsistent with" the Commissioner's requirements could constitute an "approved valuation". Rather, in the context of an Act imposing taxation, the phrase "in accordance with" probably means "in conformity with". (5) Fifthly, in my view the "requirements" specified in MSV 2009/1 are spartan in nature. They are also vague. That makes compliance with them an easier task. Looking at the requirements specified in par [13] of MSV 2009/1, there is no dispute that the applicant's valuer was a "professional valuer" as defined; his valuation was in writing; and he directed his mind to determining the market value of the land as at the required valuation date, namely 1 July 2000. However, the parties are in disagreement as to whether the valuation was made "in a manner" not contrary to professional standards. MSV 2009/1 does not identify what those standards might be; nor did the Tribunal below identify the standards that are applicable. The phrase "in a manner" is important. It is directed at the way in which a valuation is to be undertaken and identifies "the professional standards" as the repository of what measures and methods are to be used. In my opinion, different valuers may conclude that the same land bears different market values as at the same date but nonetheless each resulting valuation may have been made in a manner not contrary to professional standards. Each will then be an "approved valuation". For example, valuers using the discounted cash flow method may use different rates of discount and accordingly value land differently. Each valuation would nonetheless be an "approved valuation". Whether a valuation has been made in a "manner" contrary to professional standards would, in each case, be a matter to be determined by expert opinion. (6) Sixthly, it is open to the Commissioner to promulgate more detailed requirements if he is concerned about the quality or reliability of "approved valuations" that are used by taxpayers. Valuing property is a notoriously subjective process. It is no easy thing to find valuers who agree with each other about the value of a given asset on a given day. In my view, it is open to the Commissioner to specify particular methods of valuation for real property or different interests in real property, and to require, by way of illustration, that particular discount rates for the time value of money be used in the case of the discounted cash flow method. As already mentioned, MSV 2009/1 presently does not refer to any particular methodology for valuing land in Method 1. (7) Seventhly, mere ostensible compliance with professional standards would be unlikely to be a sufficient adherence to Method 1. Substantial compliance is required. To use the language of administrative law, a valuation that is so unreasonable that no reasonable valuer could have made it, could not be an "approved valuation". A valuation that applied a standard irrationally, or deployed absurd or fanciful reasoning, would not be one which complied with professional standards. But outside such extremes, s 75-35 and MSV 2009/1, in my view, contemplate considerable latitude in the formation by valuers of different opinions about the value of a given interest in land. (8) Eighthly, the foregoing is supported by the decision of this Court in Brady King Pty Ltd v Federal Commissioner of Taxation (No.2) (2008) 220 FCR 284. That case concerned an earlier, and different, version of MSV 2009/1. Middleton J emphasised that the issue for determination is whether a given valuation had been made in conformity with the Commissioner's requirements. In that case they had not. At par [30] his Honour said: However, just because another valuer may come to a different valuation figure does not mean that the valuation relied on may not be in compliance with the requirements of s 75-10(3) and the Determination. Within any valuation there will be matters of subjective judgement undertaken by the professional valuer based upon his or her expertise and experience. (9) Ninethly, it was my understanding that this approach to ss 75-10 and 75-35 was not disputed by the parties, although the impression I had was that the Commissioner would prefer a greater ability to impugn valuations he considers to be incorrect. The Decision Below 13 Below, the applicant's valuer employed in 2009 a discounted cash flow methodology to value the land as at 1 July 2000 (this valuation was updated immaterially in 2015). However, instead of examining the land as it was on 1 July 2000, with its then zoning and conditions, and then predicting possible future cash inflows and outflows to determine the likely net cash over a period of years, he used instead the actual outflows and inflows that had occurred since 2000 to the date of his valuation. In his calculations he assumed a 2% contingency expense and a 20% profit and risk allowance which he believed was an accepted rate of return on investment for developers. He explained his analysis of risk in the following terms: Risk- I believe that as at 1st July 2000 the risk of the project was low due to plans to develop the land prior to 1st July 2000 and I was provided with the Engineer's file on the 21st November 2007, which supports my understanding that the project, to develop this property commenced prior to the 1st July 2000. Plans are attached dated 1993 created 495 housing lots. These documents show that it was a lengthy process of negotiation and design to arrive at a plan that was acceptable to Council and with the owner, that created 600 lots plus Open Space Contribution. Most of those negotiations were prior to the 1st July 2000 and thereby reducing the developer's risk at that point in time. Council's plan to fund a sewer link, running close to this property further reduced the developers risk and plans were well under way to create a subsequently approved 600 lot subdivision and land had been set aside and approved by Council for Public Open Space. The developer is also a Registered Builder and the project is a source of land for other profit streams from the sale of house and land packages and therefore would reduce the profit and risk allowance as other builders would also be interested in this project. Further, the prospect of a Compensation Claim for the reduction in value of the land due to the freeway noise is in my opinion, attractive. The Commissioner did not agree with this approach. The Tribunal member condemned it sharply. Each was of the view that a discounted cash flow methodology can never use, or almost never use, the actual cash flows from the date of valuation; under that methodology a valuer can only ever use predicted cash flows. How a valuer was to undertake this purely hypothetical exercise in 2009 for the purposes of ascertaining value in 2000 is not readily apparent to me. The valuer cannot, for example, physically inspect the land in its state in 2000 when completing a valuation in 2009. He or she, presumably, may in practice have difficulty in excluding from their analysis the actual trends and movements in value since 2000, in order to re-create what might have been their predictive ability all those years ago. The benefit of hindsight is not easy to resist. But I am no valuer, and a means of valuing land at a historical time is a matter for expert valuation opinion. In that respect, and perhaps importantly, the Commissioner's valuer gave evidence that there existed no specific standard for valuing land under the margin scheme. 14 At the hearing, I gave leave for the parties to file and serve written submissions on the question of what authorities exist concerning the use of the discounted cash flow methodology to value real property at a particular time well into the past. Both parties filed submissions, unable in each case, to find authorities concerning that issue. The Court is grateful for the assistance they gave. The Commissioner referred to the well-known judgment of Hope JA in Housing Commission of New South Wales v Falconer [1981] 1 NSWLR 547, where his Honour said, in the context of a different methodology for valuing land at 558 - 559: I do not consider that the Court would be entitled to credit the prudent purchaser with an exact knowledge of what increases in building costs would be between 1974 and 1977 and 1981; what would have to be determined is what would be the attitude of a prudent person in the hypothetical circumstances which the cases have described; but the actual increases could be looked at in confirmation of what the hypothetical purchaser, properly advised at the time of the resumption, would have foreseen. The extent to which foresight coincided with or approached fact must be a question of fact – assuming there is evidence to support a conclusion – but it seems impossible to conclude that a purchaser in 1974 could predict what building costs would be seven years later. 15 The Commissioner also relied upon the even more well-known judgment of Isaacs J (as his Honour then was) in Spencer v Commonwealth (1907) 5 CLR 418 at 440 - 441: In the first place the ultimate question is, what was the value of the land on 1st January 1905? All circumstances subsequently arising are to be ignored. Whether the land becomes more valuable or less valuable afterwards is immaterial. Its value is fixed by Statute as on that day. Prosperity unexpected, or depression which no man would ever have anticipated, if happening after the date named, must alike be disregarded. The facts existing on 1st January 1905 are the only relevant facts, and the all important fact on that day is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was to be adapted. 16 Of course, the particular issue here concerns the compliance or non-compliance of a particular valuation with professional standards. As already mentioned, that is a matter to be determined in accordance with the expert evidence. 17 As it happens, it would appear that the applicant's valuer adopted his methodology here because he thought that this was what the Commissioner wanted him to do, following a meeting he had had with certain officers. They had asked him to do an "as is" valuation which he believed required him to use the actual expenditure and receipts incurred from 1 July 2000 to the date of the valuation. His account of his meeting with the Commissioner's officers was not challenged below. Whether his understanding of those instructions was mistaken, is not an issue I need to, or can, address for the purposes of this appeal. 18 Without identifying what "professional standards" existed to inform the content of par [13] of MSV 2009/1, the Tribunal concluded that there were "serious problems" with the methodology adopted by the applicant's valuer. It first rejected his understanding of the term "as is". It then consulted two books about how to undertake a discounted cash flow valuation, one of which was referred to in the reasons for decision only for the first time. At par [65] the Tribunal member said: The point which needs to be made in this case is that the literature and cases to which I have referred above regarding use of the discounted cash flow methodology in the valuation of an asset make it clear that the methodology involves assessing the value of an asset at a date which precedes any development of the asset, be it by way of subdivision or the building of structures upon that land. In other words, that valuation is based on an as is basis at the valuation date by estimating the value of those factors which would increase or decrease the present value at some future point in time; coming to a conclusion about the risk of those events occurring or not occurring; and applying that risk factor to the valuation at the date of valuation. In this case, Mr Gibson has not applied that process. In fact, he has operated in reverse, thereby removing all allowances for risk, taking known increases in the value of lots of the original land following subdivision as well as the expenses in subdividing those lots. There is no risk factor involved. At par [66] the Tribunal member concluded as follows: The flawed nature of Mr Gibson's valuation methodology must necessarily result in a valuation that does not comply with either MSV 2005/3 or MSV 2009/1. That is because, even if the discounted cash flow method met the standards recognised in Australia for making real property valuations, because he has misapplied the methodology, his valuation is not in accordance with professional standards and is worthless. Given the serious misapplication of the discounted cash flow methodology, no purpose is served in examining whether Mr Gibson's valuation can be said to comply with International Valuation Standards. It simply cannot. [my emphasis] 19 With respect, it would appear that the Tribunal member has misunderstood the legislative scheme. The issue for determination was whether the applicant's valuation was made in a manner not contrary to professional standards. If it was, it would constitute an "approved valuation" made "in accordance with" the Commissioner's requirements. In contrast, the issue for determination was not whether a given methodology, which "met the standards", had been "misapplied" as such, and had not been made "in accordance with" those standards. The issue is not whether the valuation, on its merits, was "worthless." The mere misapplication of professional standards to given facts may not affect the capacity of a valuation to qualify as an "approved valuation", save in the limited ways I have set out above. Of course, it may be the case that the Tribunal here correctly concluded that there had been a misapplication of the discounted cash flow method. That is not an issue for this Court to decide. It should be a matter for expert evidence whether, for the purposes of undertaking a purely historical valuation of land using the discounted cash flow method, actual cash flows should or should not be considered. Unsurprisingly, references to this method in textbooks may take place in the context of describing contemporaneous, as distinct from historical, valuations of land. 20 I observe in passing that the parties had in the past entered into a deed of settlement concerning the application of the margin scheme to the land in question here. As part of the settlement, the parties agreed upon the value of that land. The terms of settlement included the following: 2.7 The Commissioner acknowledges that: ... 2.7.2 the valuation of $17,051 per lot sold will not be applicable to tax periods on or after the tax period ended 31 March 2006, unless the taxpayer holds a supporting valuation of the land that complies with requirements under Division 75 of the GST Act. ... 3.2 The taxpayer acknowledges that: ... 3.2.2 the Commissioner will not be required to accept any valuation per lot sold for tax periods on [or] after the tax period ended 31 March 2006 unless the taxpayer holds a supporting valuation of the land that complies with the requirements under Division 75 of the GST Act... 21 The Tribunal member found, at par [69], the following: Given that I have found that the valuation provided by Mr Gibson in August 2014 was not an approved valuation and therefore did not comply with the requirements of Division 75 of the GST Act, I find the provision in the Deed of Settlement does not require the Commissioner to maintain a valuation of $17,051 per lot after 31 March 2006. A similar statement was also made at par [107]. These statements should not have been made. The Tribunal's opinion about the efficacy of the deed of settlement has no force of law precisely because it is not a court of law: Kennedy v Federal Commissioner of Taxation (2008) 168 FCR 566. Error Below 22 I now return to the applicant's grounds of appeal. Ground 5(a) was that the Tribunal had erred in not taking into consideration evidence given by the Commissioner's own valuer concerning whether the applicant's valuation had been made in a manner not contrary to professional standards. The Commissioner's valuer had been asked by the Commissioner a series of questions about the applicant's valuation report (called the "Fifth Report") including the following: (a) Are there professional standards recognised in Australia (Professional Standards) for the making of real property valuations? If so, please state what these professional standards are and whether they are the same as those cited in your 21 January 2010 opinion? (b) Has the Fifth Report been completed in a manner that is contrary to any such Professional Standards? If it has, please explain in detail why, including a description of any contraventions of any such Professional Standards. 23 The Commissioner's valuer gave these answers: Yes, there are Professional Standards/Guidelines, but no Standards specific to Margin Scheme Valuations. In this regard Valuers have been guided by legal advice. Valuer's are governed by the Australian Property Institute (API) and guided by the Australia and New Zealand Valuation and Property Standards 2007, which have been published by the API and Property Institute of New Zealand (PINZ). Reference to International Standards 3 Section 4.4 Valuation Reporting Sub Section 3.0 Definitions, defines a Valuation Report as: A document that records the instructions for the assignment, the basis and purpose of the valuation, and the results of the analysis that led to the opinion of value. A Valuation Report may also explain the analytical processes undertaken in carrying out the valuation, and present meaningful information used in the analysis. Valuation Reports can be either oral or written. The type, content and length of a report vary according to the intended user, legal requirements, the property type, and the nature of and complexity of the assignment. I highlight the word "may" as being critical to the preparation of a report, as it does not state that the Valuer "must" explain or include specific supporting information. The extent of the content is left to the Valuers discretion. …. It appears, in my opinion, that the Fifth valuation report addresses the requirements pursuant to the Professional Standards definition of Valuation Report. I do state however that in my opinion there are areas which are deficient and require further clarification. [my emphasis] 24 None of this expert evidence, in particular the observation made by the Commissioner's valuer that the applicant's valuation report addressed the requirements of the professional standards, was considered by the Tribunal member in his reasons for decision. Those standards were the "Australian and New Zealand Valuation and Property Standards 2007". Instead, all that is said by the Tribunal about this report is contained in the last two sentences of par [18]: Mr Murray also provided a separate report to the ATO giving his opinion about the third and fourth reports provided by Mr Gibson. It is, effectively, a critique of those reports given the significant disparity between the figures arrived at by Mr Murray and Mr Gibson. With respect, that observation misses a material point of the report. 25 Before the Tribunal, the Commissioner's valuer was cross-examined by counsel for the applicant. He agreed that different valuers might regard differing methods as appropriate to use to value the same asset. This can be seen in the following exchange: I will refer to them just as property standards or valuation standards. What I want to ask you is you would agree that there's no one objectively appropriate method or technique of valuation?---Yes, I agree. And you would agree that different valuers might regard different methods as the appropriate method to use?---Certainly, yes. And each of those valuers might disagree with one another. One might consider (a) is appropriate and not (b); the other might consider (b) is appropriate and not (a). Would you agree with that?---Certainly. And both of them are not acting contrary to the valuation standards?---That's correct. The Commissioner's valuer also agreed in cross examination that a valuer might have regard to directions given to him or her by others. This can be seen in the following exchange: One of those factors might be, as I've said, the valuer's own personal skills and abilities?---Certainly. And one of them might be directions that are received as to be object of valuation?---That's correct, yes. So that in a case, let's say, [where] valuation is being performed through the Tax Department, instructions received from the Tax Department might cause a valuer to regard one method as appropriate which another, not receiving those instructions, might not regard as appropriate?---That's correct, yes. And really from the point of view of the standards, they would all be appropriate?---Could well be, yes. 26 Then the following exchange took place in which the Commissioner's valuer again expressed his opinion that the applicant's valuation was made in accordance with professional standards: You stated in your expert report that in your opinion that there were aspects of the actual report that was prepared that required further clarification?--­Yes. But if we're focusing now on the – not the way it was reported, but the actual valuation, would you say that that was made in a manner that was contrary to the valuation standards?---Not contrary to the standards, no. 27 In my view, in the context of the legislative regime I have described above, the opinion of the Commissioner's valuer that the applicant's valuation was not made in a manner contrary to professional standards was a decisive matter. Yet, as the applicant points out, it is not referred to at all by the Tribunal below. In re-examination, counsel for the applicant gallantly tried to remedy the matter – but without success. In the following exchange the Commissioner's valuer again confirmed his view that the applicant's valuation complied with professional standards: You were asked a question about whether the – you described the fifth valuation was made in accordance with the standards. In your report at page 2 the question was: Has the report been completed in a manner that is contrary to such professional standards? And your answer is: … It appears, in my opinion, that fifth valuation report addresses the requirements pursuant to the professional standards definition of valuation report. I do state, however, that in my opinion there are areas which are deficient and require further clarification. So is what you're saying is [in] a matter of form the valuation complied with the standards?---No. I'm basically saying it does not not comply. I think after I reviewed the latter affidavit or further statement from Mr Gibson, one of my major concerns was in relation to the instruction and the comments within the earlier reports. And he further clarifies in relation to this meeting with the ATO representatives and relies upon that as the basis of the assessment. One of the major – as I see it, one of the major statements within a valuation report is the – clearly states out the conclusions and that it is not misleading. My understanding of Mr Gibson's report, it is very definitive on how he has actually done the assessment, and basically he has emphatically stated how he has done it. 28 The answer given – "I'm basically saying it does not not comply" – whilst perhaps lacking in eloquence, nonetheless conveyed the basal view of the witness that the applicant's valuation complied with applicable professional standards. In my view, this was fundamental evidence that should have been considered by the Tribunal, but was not. In that respect, and contrary to the submission of the Commissioner, and reading the reasons as generously as one can, this evidence was not considered at par [72] of the reasons below. 29 Failing to have regard to cogent evidence is a breach of the standards of procedural fairness, and an error of law for the purposes of s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). As the Full Court of this Court said in Repatriation Commission v Hill (2002) 69 ALD 581 at [59]: ... This decision cannot be the subject of an appeal under s 44 (1) of the Administrative Appeals Tribunal Act 1975 ("AAT Act"), unless, in making it, the Tribunal has acted otherwise than in accordance with the law. If a tribunal falls into an error of law "which causes it to identify a wrong issue, to ask itself a wrong question, to ignore relevant material, to rely on irrelevant material or, at least in some circumstances, to make an erroneous finding or to reach a mistaken conclusion, and the tribunal's exercise or purported exercise of power is thereby affected, it exceeds its authority or powers": see Craig v State of South Australia (1995) 184 CLR 163 at 179. An error of law of this kind may support an appeal under s 44 of the AAT Act on a question of law: cf The Hospital Benefit Fund of Western Australia Inc v Minister for Health, Housing and Community Services (1992) 39 FCR 225 at 231-232 per Wilcox, Burchett and French JJ. cf Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315 at [227] 30 If the evidence had gone no further than this, I would have allowed the appeal and have set aside the Commissioner's objection decision dated 12 November 2015. But, the evidence before the Tribunal was not so straightforward. That is because the applicant's valuer at one stage conceded in cross-examination that his valuation was at odds with the professional standards identified by the Commissioner's valuer, but then in re-examination he gave further evidence that he thought that it did satisfy those standards. The exchange that took place in cross-examination is as follows: Can I then take you to 3.2.8, it says the phrase: "… wherein the parties had each acted knowledgeably and prudently …" presumes that both the willing buyer and the willing seller are reasonably informed about the nature and characteristics of the property, its actual and potential uses, and the state of the market as of the date of valuation. And then prudence, skipping one sentence: Prudence is assessed by referring to the state of the market at the date of valuation, not with benefit of hindsight at some later date. Isn't it the case that your as-is model utilises hindsight?---Yes. So would you say that your as-is model is not consistent with the descriptions of these words from the standards? As you were instructed to do by the ATO - - - ?---Correct. - - - that that model is not consistent with these standards?---Correct. Then in re-examination, the following exchange takes place upon the witness being taken to another part of the standard: Can you see 6.1.10 down the bottom? See down the very bottom, left and right-hand side is page numbers?---Yes. 6.1.10?---Yes. If you look, you will see it says 5.25.2. Can you see that?---Yes. And it starts with the words, "A subdivision development technique"?---Yes. Can you see that?---I can, yes. I want you to read – I will read it out. It says: A subdivision development technique may also be applied to land valuation. This process entails projecting the subdivision of a particular property into a series of lots, developing incomes and expenses associated with the process, and discounting the resulting net incomes into an indication of value. Would you say that's the discounted cash flow method?---Yes, I would. Is that the method that you applied?---Yes, it is. And that requires valuation on an as-is rather than as-was basis?---Yes. 31 Once again, none of this material would appear to have been considered by the Tribunal in its reasons for decision, even though it was directly relevant to the critical issue before it. In my view, ignoring the evidence of the Commissioner's witness, both in chief and in cross-examination, is sufficient to justify the allowance of this appeal and the setting aside of the Tribunal's decision. But the conflicts in the evidence set out above are not capable of resolution by me and, accordingly, it is appropriate that the proceeding be remitted back to the Tribunal to be heard in accordance with law. I shall return to the issue of the particular form of relief that should be ordered. I should add that, on this evidence, the Court is unable to accept the submission of the Commissioner that I should find that the applicant's valuation was so absurd or irrational that I should decide that it was made in a manner contrary to professional standards. The Commissioner's own expert evidence does not support that characterisation of the valuation. 32 It is unnecessary for me to consider the other grounds of appeal relied upon by the applicant as they did not affect the relief that should be granted. I should, however, mention that, in my view, the Tribunal wrongly referred to the textbook "The Valuation of Businesses, Shares and other Equity" by Mr Lonergan (4th edition, 2003). Neither party had referred to, or mentioned that textbook. Nor had either party been informed by the Tribunal of its intended reliance upon it. The book features prominently in the reasons for decision: see pars [56] to [59]. The applicant submitted that the use of this book constituted a breach of s 39 of the Administrative Appeals Tribunal Act 1975 (Cth). That provision provides: (1) Subject to sections 35, 36 and 36B, the Tribunal shall ensure that every party to a proceeding before the Tribunal is given a reasonable opportunity to present his or her case and, in particular, to inspect any documents to which the Tribunal proposes to have regard in reaching a decision in the proceeding and to make submissions in relation to those documents. In Jagroop v Minister for Immigration and Border Protection [2014] FCAFC 123 the Full Court of the Federal Court said at par [59]: The second limb of s 39(1) of the AAT Act required the AAT, if it proposed to have regard to the documents in reaching its decision, to give the parties a reasonable opportunity to inspect those documents and to make submissions in relation to them. The terms of s 39(1) were described by Sackville J in O'Sullivan v Repatriation Commission (2003) 128 FCR 590; 74 ALD 407; [2003] FCA 387 at [56] as "unequivocal". Sackville J considered that s 39(1) "reflects a clear statutory policy that a party should have an opportunity of inspecting documents that may play a part in the AAT reaching a decision and should also have the opportunity to make submissions on those documents": at [45]. 33 In my view, the Lonergan textbook played "a part in the [Tribunal] reaching a decision" here. Notwithstanding the persuasive ability of counsel for the Commissioner, I am not satisfied that the Tribunal had regard only to authorities in rejecting the applicant's valuation. I refer to the first sentence of par [65] of the reasons below, set out above. It is self-evident from that sentence that both the authorities and "the literature" formed a part of the process of reasoning. In my opinion, the Tribunal erred by not giving the parties the opportunity to make submissions about the Lonergan textbook, both with the respect to its content and the potential expertise of its author. It also erred in relying upon untested opinion. 34 Because I have decided to set aside the Tribunal's decision, I need not address the applicant's attack on the Tribunal's finding about recklessness. If it matters, there was some force in the Commissioner's submission that the applicant had not discharged its onus of proof on this point. 35 Before me, the applicant submitted that the form of any relief that might be ordered would depend upon what grounds of appeal, if any, might be accepted by me. I therefore direct the parties to file and serve within 14 days, either agreed final orders, or written submissions setting out what final orders I should make. In particular, I ask the parties to give consideration to the question of whether the matter should or should not be remitted to a differently constituted Tribunal and whether it should be remitted for a full re-hearing, or a hearing limited to the use of evidence, including oral evidence, already given. 36 I order that: (1) the appeal be allowed with costs; (2) the decision of the Tribunal dated 1 December 2017 be set aside; and (3) the parties file, within 14 days, the orders that they agree ought to be made to reflect the reasons for decision published this day, or, if agreement cannot be reached, written submissions limited to eight pages, concerning the orders for final disposition of this appeal. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Steward. Associate: Dated: 22 May 2018