Land and Environment Court of New South Wales CITATION : Tomago Aluminium Company Pty Limited v Valuer General [2010] NSWLEC 4 APPLICANT Tomago Aluminium Company Pty Limited PARTIES : RESPONDENT Valuer General FILE NUMBER(S) : 31286 of 2008 CORAM: Pepper J - Parker AC KEY ISSUES: VALUATION OF LAND :- appeal from Valuer General's land value assessments - industrial land - appeal dismissed Land and Environment Court Act 1979 ss19, 40 LEGISLATION CITED: Valuation of Land Act 1916 s 37 Port Stephens Local Environmental Plan 2000 CSR Ltd v Hornsby Shire Council (2004) 57 ATR 201 CASES CITED: Holcim (Australia) Pty Ltd v Valuer-General [2009] NSWLEC 225 Hornsby Shire Council v Commissioner of Taxation [2008] AATA 1060 DATES OF HEARING: 6-8 October 2009 DATE OF JUDGMENT: 22 January 2010 APPLICANT Ms S Duggan SOLICITORS Hunt and Hunt LEGAL REPRESENTATIVES: RESPONDENT Mr M Hall SOLICITORS Crown Solicitors Office JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES Pepper J Parker AC 22 January 2010 31286 of 2008 Tomago Aluminium Company Pty Limited v Valuer General JUDGMENT Introduction 1 This is an appeal by way of application by Tomago Aluminium Company Pty Limited ("the applicant"), under s 37 of the Valuation of Land Act 1916 ("the Act"), against the land value assessed by the Valuer General ("the respondent") in respect of the property known as the Tomago Aluminium Smelter, Tomago Road and Pacific Highway, Tomago ("the subject property"). 2 The land value of the subject property at 1 July 2007 ("the base date"), was assessed by the applicant at $23,500,000 and by the respondent at $48,200,000. Although the respondent tendered valuation evidence that the land value was approximately $60,000,000, which was higher than the statutory assessment, the respondent does not submit that the statutory assessment set out in the Notice of Determination should be increased. 3 The subject property and five comparable sale sites were the subject of an on-site and external inspection on 6 October 2009, followed by a hearing in Court on 7 and 8 October 2009. 4 I gratefully acknowledge the assistance of Acting Commissioner Parker who was present during the hearing of this matter and attended the site inspections referred to above. Summary of Decision 5 For the reasons given below the appeal is dismissed. Statutory Framework 6 The appeal is brought under s 37(1) of the Act, which provides that: Any person entitled under Part 3 to object to a valuation may appeal to the Land and Environment Court if the person is dissatisfied with the Valuer-General's determination of any such objection to the valuation concerned (whether or not the person was the objector). 7 "Land value" is relevantly defined in s 6A of the Act as follows: (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. 8 The term "land improvements" is defined in s 4 of the Act to mean: Land improvements means: (a) the clearing of land by the removal or thinning out of timber, scrub or other vegetable growths, (b) the picking up and removal of stone, (c) the improvement of soil fertility or the structure of soil, (d) the restoration or improvement of land surface by excavation, filling, grading or levelling, not being works of irrigation or conservation, (d1) without limiting paragraph (d), any excavation, filling, grading or levelling of land (otherwise than for the purpose of irrigation or conservation) that is associated with: (i) the erection of any building or structure, or (ii) the carrying out of any work, or (iii) the operations of any mine or extractive industry, (e) the reclamation of land by draining or filling together with any retaining walls or other works appurtenant to the reclamation, and (f) underground drains. 9 Sections 26 and 27 of the Act make provision for the valuation of land which, whilst comprising separate parcels, is held in single ownership. Such was the case in the present Notice of Valuation. 10 Where notice is received of the valuation, an objection to the valuation may be made to the respondent, who must determine the objection (s 33-35C of the Act). 11 If a person is dissatisfied with the determination of an objection, an appeal may be lodged with the Land and Environment Court (s 37 of the Act and s 19(b) of the Land and Environment Court Act 1979). Section 40 of the Act describes the power of the Court on appeal: (1) On an appeal, the Land and Environment Court may do any one or more of the following: (a) confirm or revoke the decision to which the appeal relates, (b) make a decision in place of the decision to which the appeal relates, (c) remit the matter to the Valuer-General for determination in accordance with the Court's finding or decision. (2) On an appeal, the appellant has the onus of proving the appellant's case. 12 Section 40(2) provides that the applicant has the onus of proving its case on appeal. The consequence of this provision is that in practical terms Tomago, as the applicant, has the onus of establishing that the valuation put forward by it through its expert is correct. The Subject Property 13 The subject property comprised Lot 15 DP258020, Lot 3232 DP618103 Lot 70 DP634535, Lot 301 DP634536, Lot 3 DP808004 and Lots 2, 3, 4 and 5 DP1043561. 14 The subject property comprised an area of approximately 507 ha, including approximately 319.41 ha of constrained land and approximately 187.59 ha of unconstrained land. 15 The unconstrained land was a large site of which approximately 99.59 ha was used for the operation of the Tomago Aluminium Smelter, approximately 71 ha comprised land adjacent, suited for industrial sub-division but impacted by past sand mining, together with a separate parcel of approximately 17 ha comprising industrial development land adjacent to the Pacific Highway. 16 The unconstrained land was freehold, was of irregular shape, required little fill and had frontage and access to both the Pacific Highway and Tomago Road (a secondary road). 17 The highest and best use of the subject property was use for industrial purposes. Location 18 The subject property was located approximately 200 kms north of the Sydney CBD and approximately 20 kms north of the City of Newcastle, in an area characterised by industrial uses. Planning 19 The subject property was zoned 4(a) Industrial General under the Port Stephens Local Environmental Plan 2000, a zoning within which use for a range of industrial purposes is permissible with development consent. The Evidence 20 In their joint report dated 24 September 2009 both Mr Anthony St Leon and Mr Robert Dupont agreed that the land value of the constrained land as at the base date was $4,000,000. This was accepted by the parties in a Statement of Agreed Facts filed on 16 June 2009. 21 The value of the balance of the land having an area of 187.59 ha, the unconstrained land, remains in dispute. The scope of the dispute may be summarised as follows: Determination $ psm Total VG's determination in Notice of Valuation $9.49 psm (on the assumption the whole of the land has the same value) $17,802,291 Main industrial land (in use as a smelter: 99.59 ha) $11 psm Valuation of Mr Anthony St Leon Main industrial land (subdivision area: 71 ha) $5 psm $19,604,900 Pacific Highway industrial land (vacant land: 17 ha) $30 psm Valuation of Mr Robert Dupont $30 psm $56,277,000 22 Mr St Leon, a registered valuer, relied upon a valuation of the subject property dated 28 August 2009, and gave expert evidence on behalf of the applicant. Mr St Leon concluded that the land value of the subject property was $23,500,000 as at the base date, comprising approximately $19,600,000 for the unconstrained land. 23 Mr Dupont, a registered valuer, relied upon a valuation of the subject property dated 16 September 2009 (with an addendum dated 30 September 2009), and gave expert evidence on behalf of the respondent. He concluded that the land value of the subject property was $60,000,000 as at the base date, comprising approximately $56,000,000 for the unconstrained land. At the hearing, however, the respondent informed the Court that it was not relying on Mr Dupont's valuation but was relying on the statutory assessment. 24 The respondent did not distinguish between unconstrained and constrained land and adopted an amount approximating $9.49 psm for the entire site. 25 For the unconstrained land, Mr St Leon attributed $10,950,000 (approximating $11 psm) to the land used for the operation of the smelter, $3,550,000 (approximating $5 psm) to the land adjacent suited for industrial subdivision but impacted by past sand mining, and $5,100,000 (approximating $30 psm) to the separate parcel of land adjacent to the Pacific Highway. 26 For the unconstrained land, Mr Dupont attributed an amount approximating $30 psm, adopting the same rate for the land used for the operation of the smelter as the land adjacent suited for industrial subdivision, but impacted by past sand mining, and the separate parcel of land adjacent the Pacific Highway. 27 Both Mr St Leon and Mr Dupont agreed that direct comparison was the appropriate method of valuation. I accept this methodology. 28 Mr St Leon and Mr Dupont also agreed on four common comparable sales at: (a) 67 Maitland Road, Hexham ("the Hexham site"); (b) 39 Tomago Road, Tomago ("the first Tomago site"); (c) 140 Tomago Road, Tomago ("the second Tomago site"); and (d) Pacific Highway, Tomago ("the Pacific Highway site"). 29 Mr Dupont submitted one further comparable sale at Kooragang Island, Newcastle ("the Kooragang Island site"). 30 The applicant also filed and served three reports in the proceedings (in addition to the valuation evidence), namely: (a) the report of Mr Rob Player dated May 2009 – a town planner. He concluded that in anticipation of the current and future intended zoning of the site to be general industrial for the foreseeable future albeit with significant environmental constraints affecting the site, only 37 per cent of the subject property could be developed for industrial purposes while the remainder of the site would be reserved as environmental protection/buffer areas and non-developable regeneration/open space area; (b) the report of Mr John Travers dated 12 May 2009 – an ecologist. He opined on the environmental constraints present on the subject property relating to ecological, bushfire and riparian/water constraints and concluded that parts of the land were subject to significant constraints but did have the potential for development; and (c) the report of Mr Arthur Love dated 31 March 2009 – a geotechnical engineer. He gave evidence of the constraints on development of the subject property and concluded that: the historical presence of the coal mine imposed severe restrictions on development of the area of the site affected by the mine thereby reducing its value for any purchaser (although in his oral evidence Mr Dupont contradicted this opinion, stating that the defunct coal mine imposed limited restrictions on development); the presence of a number of water pipelines restricted access to some portions of the subject property and restricted its development; and the significance of the historical sand mining on portions of the subject property was that the cost of development in sand mined areas significantly increased the cost of development and decreased the value of the land affected by previous sand mining. 31 The evidence in these further reports was not traversed by contrary evidence filed by the respondent, and the authors of the reports were not required for cross-examination. 32 While not the subject of any considered submissions by the applicant, the reports were relied upon by Mr St Leon as a basis for the analysis in his report. Consideration of the Comparable Sales Evidence 33 The comparable sales were considered in the context of determining the land value of the unconstrained land. 34 The principal area of dispute between the valuers arose from the disagreement as to the comparability of such relevant sales and what adjustments were required to be made to those sales to render them directly comparable. 35 A secondary area of dispute was that whereas Mr Dupont included GST as part of the full market price of the comparable sales on the basis that it was part of the negotiated price between willing but not anxious parties, Mr St Leon did not because in his opinion, the GST was a tax additional to the land value and therefore separate to it. 36 The zoning of each of the comparable sales was similar to that of the subject property. 37 Having regard to the title, site area, shape, requirement for fill, frontage and access, the five comparable sales were compared with the subject property as follows: (a) first, the Hexham site was comparable to the subject property in terms of its title and site area. It was superior to the subject property because of its regular shape. However, it was inferior in terms of location (being some distance from the subject property), in terms of frontage and access (having principal frontage to a railway line), and in terms of a potentially extensive requirement for fill. Furthermore, there was considerable disagreement between the valuers as to the composition of the purchaser transaction consideration, but agreement that the nature of the purchaser's business would particularly benefit from the rail access afforded by the site. Having regard to the likely special purchaser characteristics of this transaction, I consider that the sale was of very limited relevance; (b) second, the first Tomago site was comparable to the subject property in terms of its title, its irregular shape, its frontage to Tomago Road, its limited requirement for fill and its location (adjacent to the subject property). It was superior in terms of site area, being considerably smaller than the subject property. In my view, the sale was an indirectly relevant comparable sale; (c) third, the second Tomago site was comparable to the subject property in terms of its title, its site area, its frontage to Tomago Road and its location, being close to the subject property. It was superior in terms of its site shape (being triangular), but it was inferior to the subject property in terms of requiring extensive fill. Accordingly, I am of the opinion that the sale was an indirectly relevant comparable sale; (d) fourth, the Pacific Highway site was comparable to the subject property in terms of its title and location (being close to the subject property). However, it was superior to the subject property as it was a considerably smaller site, had a more regular shape, had extensive frontage to the Pacific Highway and required little, if any, fill. I consider that the sale was an indirectly relevant comparable sale; and (e) finally, the Kooragang Island site, submitted by Mr Dupont alone, was comparable to the subject property in terms of its irregular shape. It was superior to the subject property because it was a smaller site with a waterfront frontage and it was closer to Newcastle. However, it was inferior to the subject property in terms of its title (being leasehold), and the requirement for extensive filling. Having regard to the very limited comparability of this sale to the subject property, I consider the sale to be of very limited relevance. Summary of Comparable Sales 38 In my opinion, there were no directly relevant comparable sales. 39 The comparable sales at the two Tomago sites and the Pacific Highway site were indirectly relevant comparable sales. 40 The comparable sales at the Hexham site and the Kooragang Island site were of such marginal relevance they provided limited assistance to me and I have not considered them further. Adjustments 41 As the respondent did not adopt the valuation amount determined by Mr Dupont but adhered to the valuation given in the Notice of Valuation, I have not considered Mr Dupont's analysis of comparable sales further given that the onus is on the applicant to prove that its valuation is correct. 42 The analysis of Mr St Leon may be summarised as follows. First, he analysed the sales of small parcels of land at the first Tomago site (11.65 ha) to indicate a rate of $35.60 psm and at the Pacific Highway site to indicate a rate of $31.43 psm. Then he adopted a rate of $30 psm for application to the 17 ha parcel of the subject property fronting the Pacific Highway. 43 Second, Mr St Leon analysed the comparable sale of the 114.88 ha site at the second Tomago site to indicate a rate of $2.56 psm, adjusted to $2.95 psm to reflect the passage of time. Using this rate, Mr St Leon then adopted a rate of $11 psm for the 99.59 ha used for the operation of the smelter and $5 psm for the 71 ha of land adjacent suited for industrial subdivision but impacted by past sand mining. Findings 44 In Holcim (Australia) Pty Ltd v Valuer-General [2009] NSWLEC 225 Biscoe J described the process of adjusting for differences in comparable property sales as follows (at [31]): [31] The basis for the valuers' valuation assessments is the sales comparison method. Accepted valuation practice permits adjustments for differences, such as in location, area and time to enable valuers to have comparable values which, following adjustment, account for the various differences with the subject property. Such adjustments are generally based on a reasoning process drawing on the skill and experience of the valuer and are undertaken to derive an opinion of value through a deductive process. Because properties are rarely identical, adjustments for differences are obviously necessary but caution is required through making as few adjustments as possible, in a consistent manner, to ensure the reliability of the comparable sale when related to the subject property. Too many adjustments potentially render the comparable sale unsafe to rely upon. Caution is therefore required where large adjustments are to be made. Reflecting the significant roles of skill, experience and personal assessment in the adjustment process, the scope for differences in the quantum and direction of adjustment between valuers can be considerable. 45 To this it may be added that it is necessary to make explicit adjustments for differences so that the adjustment process is sufficiently logical. An implicit process comprising a single adjustment, rather than separately itemised and reasoned adjustments, risks rejection for want of transparency. 46 As stated above, Mr St Leon's analysis of the indirectly relevant comparable sales led him to conclude that the land value of the unconstrained land approximated $19,500,000 as at the base date. Of this Mr St Leon attributed $5,100,000 (approximating $30 psm) to the separate parcel of land adjacent to the Pacific Highway, $10,950,000 (approximating $11 psm) to the 99.59 ha of land used for the operation of the smelter and $3,550,000 (approximating $5 psm) to the 71 ha of adjacent land suited for industrial subdivision but impacted by past sand mining. 47 However, in his analysis Mr St Leon did not, in my view, provide a sufficiently detailed and transparent explanation for the reasoning process for adjustment: (a) for each of the variables differing between the comparable sales and the subject property; (b) for each of the variables differing between the rate of $2.95 psm for the second Tomago site and the rate of $11 psm applied to the land used for the operation of the smelter; and (c) between either of the rates described above in (b) and the rate of $5 psm adopted for the adjacent 71 ha of land suited for industrial subdivision but impacted upon by past sand mining. 48 Having said this, I consider that the first Tomago site is comparable to the Pacific Highway parcel of the subject property in all aspects except size and frontage to the Pacific Highway. A downward adjustment for size is therefore more likely to be greater than an upward adjustment for location, resulting in an overall downward adjustment of Mr St Leon's analysed rate of $35.60 psm, which would support his adoption of $30 psm for the Pacific Highway parcel of the subject property. 49 The Pacific Highway site is comparable to the Pacific Highway parcel of the subject property in terms of Pacific Highway frontage and title. A downward adjustment for more regular shape and limited fill requirements is likely to be greater than an upward adjustment for site area, resulting in an overall downward adjustment of Mr St Leon's analysed rate of $31.43 psm, which further supports his adoption of $30 psm for the Pacific Highway parcel of the subject property. 50 Accordingly, I find that Mr St Leon's assessment of $5,100,000 for the separate parcel of land adjacent to the Pacific Highway is supportable by the comparable sales provided. 51 But because I do not consider that Mr St Leon provided a sufficiently detailed explanation of the reasoning process for adjusting each of the variables differing between the comparable sale at the second Tomago site analysed to a rate of $2.95 psm, the adopted rate of $11 psm for the 99.59 ha of land used for the operation of the smelter, or the rate of $5 psm adopted for the adjacent 71 ha land suited for industrial subdivision but impacted by past sand mining, I cannot accept the remainder of his valuation analysis. 52 First, I do not accept the rate of $2.95 psm analysed from the comparable sale at the second Tomago site in Mr St Leon's analysis because while the second Tomago site was comparable in area, location, frontage and title to the portion of the subject property used for the operation of the smelter, it was not comparable to the subject property in terms of regularity of shape and the requirement for filling, for which adjustment is required. While a downward adjustment for regularity of shape would in all likelihood be offset by an upward adjustment for the extensive filling required, Mr St Leon did not provide evidence, such as an engineer's estimate or quote, to support the likely quantum of adjustment for such filling. In the absence of such evidence, I find the upward adjustment of 273 per cent given by him to be beyond the upper bounds of reasonableness of adjustment in this case. 53 Second, while I accept that most of the adjustments to the rate of $2.95 psm analysed from the comparable sale at the second Tomago site to derive $11 psm are applicable to the industrial subdivision portion of the subject property, in my opinion further adjustment is required for the decreased site area and is likely to be required for the capital expenditure associated with remedying problems arising from historic mining in order to permit development of the industrial subdivision portion. 54 Mr St Leon did not provide evidence to support the likely quantum of adjustment for either site area based on comparable sales of vacant land parcels of different sizes at around the same date, or the likely capital expenditure required to fill the site. In the absence of such evidence, an upward adjustment of 69.5 per cent from $2.95 psm or a downward adjustment of 54.5 per cent from $11 psm to derive $5 psm cannot be justified and is beyond the upper bounds of reasonableness of adjustment in this case. 55 It therefore follows that while I accept the $30 psm for the Pacific Highway parcel of the subject property (17 ha), I do not accept the $11 psm for the 99.59 ha of land currently used for the operation of the smelter or the $5 psm for the 71 ha of subdivision area. The corollary of this finding is that I do not accept the valuation determined by Mr St Leon and thus the applicant. GST 56 In relation to the GST issue, the applicant relied upon the decision of Hornsby Shire Council v Commissioner of Taxation [2008] AATA 1060 in support of Mr St Leon's position. 57 By contrast, the respondent referred the Court to CSR Ltd v Hornsby Shire Council (2004) 57 ATR 201 at [15]. 58 In Hornsby Shire Council, the Tribunal held that there was a "supply" for the purpose of GST in respect of a compulsory acquisition of the quarry from CSR Ltd, by the council, and therefore, the council was entitled to an input tax credit for the consideration paid. In so doing the Tribunal distinguished CSR Ltd on the basis that in determining the compensation payable, the case was of limited relevance in determining the issues before it (at [55]). 59 In CSR Ltd, the issue before the Court was whether the Valuer General's determination of compensation for the compulsory acquisition of land owned by CSR Ltd by the council included GST. The council maintained that it did and deducted $12,300,000 from its compensation payment to CSR Ltd. The Court stated (at [15]-[16] per Gzell J): [15] In view of this finding, it is unnecessary for me to determine whether there was a separate GST component in the determination of market value. In my view there was not. As the Valuer General said, the market place has adjusted to the imposition of GST and imbedded it in the market value of land. The test of the price that a willing purchaser would have had to pay to a vendor not unwilling, but not anxious to sell in Spencer v The Commonwealth (1907) 5 CLR 418 was been enshrined in the Land Acquisition (Just Terms Compensation) Act 1991 (NSW), s 56(1). If the vendor must pay GST on the consideration for sale, that impost will be included in the price the purchaser would have pay. Thus the market value of the land was $25,000,000 and not $22,700,000 plus GST. [16] In Pebruk Nominees Pty Ltd v Woolworths (Victoria) Pty Ltd (2003) 54 ATR 156 at 160-161; 2003 ATC 4932 at 4935, Blow J in contrasting the Australian GST system with comparable systems overseas said that the Australian GST was in the same category as British VAT and New Zealand GST. In effect, it provided that the price paid by a consumer comprised 2 components – the value of a taxable supply, and the GST on that taxable supply. I regard that passage as but a description of the structure of the impost and not authority for the proposition that market value is less than the GST inclusive price paid for a supply in the open market. If his Honour did intend to state that conclusion then, with respect, I disagree. If the market commands a payment of $550 to purchase a video recorder at $500 plus $50 GST, I am of the view that the market value of the video recorder is $550. 60 Given my findings concerning the indirect comparability of the sales evidence, the resolution of whether GST ought to be a separate component in the determination of market value is sufficiently immaterial as to be unnecessary. If it were necessary to decide, however, in my view, it is not. As the respondent submitted, and as Mr St Leon conceded in cross examination in relation to at least one of the comparable sale sites (the Hexham site), the price inclusive of GST is the consideration for sale which a willing purchaser would have to pay a vendor not unwilling but not anxious to sell. It therefore logically forms part of the market price of the land and so becomes evidence of its value. Conclusion 61 Having regard to the totality of the evidence the applicant has not discharged its onus of proof. The application must therefore be dismissed. Orders 62 The orders of the Court are: (1) the application is dismissed; and (2) the exhibits are returned. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.