Administrative Decisions Tribunal New South Wales Medium Neutral Citation: Knop v Chief Commissioner of State Revenue [2012] NSWADT 157 Hearing dates: 29 and 30 November 2011 and 1 December 2012, submissions closed 16 February 2012 Decision date: 07 August 2012 Jurisdiction: Revenue Division Before: M Hole, Judicial Member Decision: The decision is set aside. Catchwords: Duties Act - unencumbered market value Legislation Cited: Duties Act 1997 Administrative Decisions Tribunal Act 1997 Taxation Administration Act 1996 Valuation of Land Act 1916 Cases Cited: Spencer v The Commonwealth (1907) 5 CLR 418 Maurici v Commissioner of State Revenue (NSW) [2003] HCA 8; (2002) 212 CLR 111 Secretary of State for Foreign Affairs v Charlesworth Pilling & Co [1901] AC 373 Molyneux & Vermeesch v Chief Commissioner of State Revenue [2011] NSWADT 117 Category: Principal judgment Parties: Ian Reginald Knop and Gay Ruth Bolin-Knop (Applicants) Chief Commissioner of State Revenue (Respondent) Representation: Counsel Ms P Lane (Applicant) Ms M Carpenter (Respondent) Robertson Saxton Primrose Dunn (Applicants) Crown Solicitor (Respondent) File Number(s): 116033 REasons for decision 1The applicants have filed this application in the Tribunal in respect of a decision made by the respondent by way of disallowance of an objection to the assessment of dutiable value of $2.5m in respect of a property at Palm Beach ("the subject property") made on 10 February 2011. Chronology 2On 24 December 2009 a transfer of the subject property was executed from Ralston Cottage Pty Ltd to Ian Reginald Knop and Gay Ruth Bolin-Knop for the sum of $1.5m. Ralston Cottage Pty Ltd is a company incorporated in Victoria and the company is trustee on behalf of Ralston Cottage Unit Trust. The unit holders of the trust are Baron Knop Holdings Pty Ltd atf (as trustee for) Ian Knop Family Trust as to 30% interest, Ian R Knop as to 35% interest and Gay Knop as to the remaining 35%. 3On 3 March 2010 the transfer was stamped under application id/transaction No 5769264 via the in-house Electronic Duties Return system. 4On 18 March 2010 the respondent wrote to the applicants giving Notice of Investigation. A copy of the valuation upon which the applicants had relied upon was requested. 5On 22 March 2010 the applicants forwarded to the respondent a copy of the valuation certificate ("valuation certificate") from Stamp Duty Valuations Pty Limited dated 21 December 2009 and signed by Mr W L Dobrow ("Dobrow"). 6On 23 March 2010 the respondent requested that Dobrow provide full details of the comparable sales and other sales evidence upon which he had relied to base his valuation. 7On 5 April 2010 forwarded the sales evidence relied upon by him to the respondent. 8On 12 April 2010 the respondent wrote to the applicants informing the applicants that the respondent had received the evidence relied upon by Dobrow and the respondent would obtain a detailed valuation. The Office of State Revenue asked the Valuer General "to prepare a detailed valuation report of the property." as per the letter dated 12 April 2010. 9On 27 May 2010 the respondent obtained a valuation of the subject property from Ms Kerry Waterhouse ("Waterhouse"), registered valuer, Valuation Services Land and Property Management Authority. Ms Waterhouse valued the market value of the subject property to be $2.5m ("the Waterhouse valuation"). 10On 27 May 2010 the respondent issued a Notice of Assessment with the dutiable value of the subject property shown as $2.5m. The assessment included an amount of additional duty plus an amount of the valuation cost. 11On 22 July 2010 the applicants lodged an objection to the Notice of Assessment. The applicants provided a valuation by Mr Beau Bowen ("Bowen") of Quadrant Real Estate Valuations ("the Quadrant valuation"). Bowen valued the subject property at $1.8m being a fair market valuation for stamp duty/valuation dispute purposes. The objection by the applicants also included critical comments in relation to the Waterhouse valuation. 12In response to the criticism by the applicants of the Waterhouse valuation on 27 September 2010 the Respondent requested a critique to be made by Paul Goldsmith ("Goldsmith") Valuation Manager Government Clients Valuation Services LPMA. The critique was a "desktop review" of Waterhouse and Bowen's valuations. 13On 11 November 2010 Goldsmith provided a critique to the respondent. 14A report prepared by the "Review Officer RAS", an officer of the Respondent, dated 4 February 2011 provides a précis of 2 of the 3 valuations and critique and a comment that: "It should be noted the photo titled 'balcony view' in the Quadrant valuation appears not to be a true representation of the view from the balcony. It is suspected that the true view from the balcony would show a filtered or even a good ocean view of Lion Island, Broken Bay and Barrenjoey headland as the accompanying photo sheet 4 taken 18/7/2010 & ground floor photographs 1, 5 and 6 taken 18/7/2010 upstairs clearly shows these filter views. With respect to the issue of 'subdivision' of the Property, as mentioned the legal description of the Property is lots 4 and 5, section 9 in DP 14048, the title reference is Auto-Consol 5486-215. I rang Pittwater Council who advised Council approval would not be required for the 'subdivision' of the Property, as far as Council is concerned the Property consists of two separate and distinct titles, even though the Property is contained under the old system land title auto-consol situation. Being sold individually without intervention of the Council. The owner would only require approval for the demolition of the improvements already on the Property. Alternatively, the owner could erect two separate residences that could be sold or retained. It appears the issues raised regarding a subdivision scenario are unfounded. The unencumbered value or market value is the estimate amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The current use of an asset may not reflect its optimal value. Optimal value is defined as "the most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property." In other words market value should be assessed at the 'highest and best use' of the asset." 15On 10 February 2011 the respondent wrote to the applicants advising that the objection was disallowed. On 5 April 2011 the applicants filed this application in the Tribunal. Evidence 16The Tribunal directed the parties/valuers on 11 May 2011 to confer and file and serve a joint report by 6 July 2011. The joint report was ultimately filed on 13 September 2011. 17Dobrow of Stamp Duty Valuations Pty Limited prepared the initial certificate of value for the applicants dated 21.12.2009. Dobrow has prepared two affidavits for these proceedings dated 10 June 2011 and 6 July 2011. 18Waterhouse of Land and Property Management Authority prepared a valuation as part of the investigation process dated 21 December 2009. 19Bowen of Quadrant Estate Valuations prepared a valuation dated 22 July 2011. 20Goldsmith of Land and Property Management Authority prepared a critique of the Waterhouse and Quadrant valuations dated 11 November 2010. The critique noted that the Waterhouse valuation was "on basis of kerbside inspection". The critique further noted in respect of the Waterhouse valuation: "All sales have been analysed to show a deduced land value by way of removing the added value of improvements". "The report then bases the valuation on two blocks of land being worth $1,350,000.00 each less a 5% discount for an inline sale, demolition costs and rounding" "The Quadrant valuation relied on the direct comparison method of valuation and summation method. The report lists key issues as land size, views, improvements located towards the centre of the two lots and condition of improvements, risk and state of the market and post GFC. The direct comparison method of valuation a range of $1,400,000 to $2,200,000 is suggested with a market value of $1,800,000 adopted. The summation method estimates $1000 - $1100 per square metre and adds the improvements value. I consider the actual breakup of the land component and improvements to be unclear however a market value of $1,740,000 is suggested. The third approach is hypothetical development of the property based on a gross realisation of between $2,000,000 to $2,800,000 after full renovation at a cost of $400,000. It appears a gross realisation of $2,400,000 has been adopted less costs totalling $544,000. A market value of $1,850,000 has been adopted. As a result of the three methods of valuation a market value adopted is $1,800,000." Goldsmith observes in the critique that: "The summation method of valuation is considered to be of little benefit whilst the range adopted in the hypothetical development scenario is considered to be too broad and again lacks explanation." "Effectively the LPMA valuer has applied a land value of $1,250,000.00 per lot after deductions, which appears well supported by....evidence." Further that: "... there is a complete lack of analysis, valuation rationale and comparison of market evidence to the subject property in the Quadrant valuation ... . On the other hand the LPMA valuation is considered to contain strong analysis, valuation rationale and comparison of market evidence to the subject property. After reviewing the above two valuation reports I consider the LPMA valuation of $2,500,000 to be fair and reasonable." 21Mr T Webster ("Webster") prepared a valuation included in his affidavit dated 9 June 2011. 22Bowen of Quadrant Estate Valuations has prepared two affidavits filed in these proceedings dated 9 June 2011 and dated 11 July 2011. 23Webster of T S Webster & Associates has prepared an affidavit filed in these proceedings dated 9 June 2011. 24Webster, Bowen and Dobrow prepared a joint report filed 13 September 2011. 25Webster and Bowen prepared a schedule of sales as adjusted on 30 November 2011. This schedule being a valuation analysis chart was prepared for the assistance of the Tribunal and set out a comparison of factors in relation to eleven properties. 26The stamp duty assessed pursuant to the in-house Electronic Duties Return system was on the certificate of valuation prepared by Dobrow on 21.12.2009. The stamp duty payable on the transfer assessed by the respondent was on an amount being the fair market valuation as contended in the Waterhouse valuation as confirmed in the critique being for a value of the subject property as at 24 December 2009. 27Five attempts have been made to value the subject property being: (i) valuation certificate given by Dobrow dated 21 December 2009 supported by the comparable sales and other sales evidence provided by him to the respondent on 5 April 2010; (ii) the Waterhouse "kerb side valuation" dated 27 May 2010. She was not given an opportunity to demonstrate the accuracy of her assessment. Her assessment was subjected to analysis by the applicant's experts: The Waterhouse valuation prepared on behalf of the respondent disclosed six (6) suggested comparables and refers to the "most appropriate method to value the subject property is via the Direct Comparison Approach". Noting regarding the subject property: "The property is on two separate titles of land which makes it very desirable to large number of purchasers. Firstly there is the purchaser who would retain and update the house giving them a large parcel of usable land on a corner location with a northerly aspect with possible filtered ocean views from a second storey. Secondly there is the purchaser that would buy the property and demolish the improvements and have two separate parcels both with good access, good building land, and possible views from the second storey. The sales evidence shows that a block of land approximately 700m2 in Ralston Road with a northerly aspect and good ocean views is worth approximately $2,000,000. Land in nearby Bynya Road which is a busier road, with an easterly aspect with no views is worth between $950,000 and $1,150,000. Sales of land in Cynthea Road and Ebor Road where it is possible to get only distant or filtered water views but an inferior location range between $1,150,000 and $1,350,000. As we have not been able to physically inspect the improvements so we cannot determine their condition. The improvements are substantial approximately 300m2 and require upgrading but to a particular purchaser the improvements do add value but it is difficult to quantify. Given the purpose of the valuation we have taken the conservative approach and determined the value on a land value only." "2 Blocks of Land @ $1,350,000 each = $2,700,000 Less a 5% discount for an inline sale = $2,565,000 Less a demolition (costs estimate $20,000) = $2,545,000 Value say $2,500,000" (iii) Goldsmith provided a critique of the valuation by Dobrow and the Waterhouse valuation. His critique did not provide a valuation of unencumbered value of the dutiable property. He provided an opinion that he "considered" the LPMA valuation to be "... fair and reasonable". (iv) a valuation prepared by Bowen was provided to the respondent on 22 July 2010; and (v) Webster provided an affidavit dated 9 June 2011 wherein he provided a valuation of the subject property. 28The Waterhouse valuation was included in the section 58 documents provided to the Tribunal. 29The Goldsmith critique of the Waterhouse and Quadrant valuations and a copy of this is included in the section 58 documents. 30The three valuers, Dobrow, Bowen and Webster, were examined before the Tribunal. Following further directions by the Tribunal the two valuers Bowen and Webster were required to give evidence concurrently. 31The Applicants obtained a valuation from Bowen which indicated a higher value than that ascribed by Dobrow. 32The Tribunal was assisted by the comprehensive evidence given by Dobrow and subsequently that of Bowen and Webster given concurrently. Legislation 33Section 21 of the Duties Act 1997 ("Duties Act"): "what is the "dutiable value" of dutiable property? 21 what is the "dutiable value" of dutiable property? (1) the "dutiable value" of dutiable property that is subject to a dutiable transaction is the greater of: (a) the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration), and (b) the unencumbered value of the dutiable property. (2) the "dutiable value" of dutiable property transferred by way of foreclosure is the unencumbered value of the dutiable property and not the value of the debt secured by the mortgaged property. (3) the "dutiable value" of a business asset to which section 28 applies is to be determined in accordance with that section. (4) the "dutiable value" of a partnership interest referred to in section 29 is to be determined in accordance with that section. (5) the "dutiable value" of leased property transferred by way of a lease is taken to be the amount of the premium paid or payable in respect of the lease." 34Section 63(3) of the Administrative Decisions Tribunal Act 1997 ("ADT Act"): "Determination of review by Tribunal 63 Determination of review by Tribunal ... (3) In determining an application for the review of a reviewable decision, the Tribunal may decide: (a) to affirm the reviewable decision, or (b) to vary the reviewable decision, or (c) to set aside the reviewable decision and make a decision in substitution for the reviewable decision it set aside, or (d) to set aside the reviewable decision and remit the matter for reconsideration by the administrator in accordance with any directions or recommendations of the Tribunal." Submissions 35Both the representative of the applicants and the respondent have provided substantial written submissions to the Tribunal which have been most helpful. Applicants' submissions 36The applicants have submitted that the Tribunal must consider the matter on the merits which requires that the Tribunal make the "correct and preferable decision" having regard to all the material then before it including relevant factual material and applicable written and non written law. 37The applicants submitted that pursuant to s63(3) of the ADT Act the Tribunal could decide to affirm the reviewable decision, vary the reviewable decision, set aside the reviewable decision and make a decision in substitution for the reviewable decision or set aside the reviewable decision and remit the matter for reconsideration by the administrator. 38The applicants responded to the suggestion by the respondent that the Tribunal was bound to adopt a valuation of one of the valuers and could not come to its own conclusion by referring to the provisions of s63 ADT Act and section 101 of the Taxation Administration Act 1996 ("TAA") which provides that a court of tribunal may do one of five separate things including the making of an assessment or other decision in place of the assessment or decision to which the application relates. 39The applicants cited section 305 of the Duties Act and submitted that the text of that section does not require the Chief Commissioner to adopt a value contained in a valuation, but provides for the assistance of the Chief Commissioner by valuation evidence. 40It was submitted that the Tribunal is entitled to be assisted by the valuation reports and such other information as is relevant to determining the question of the dutiable value. It was submitted that the Tribunal may make an estimate if it considers that the value of the subject property can not be exactly assessed. 41The Tribunal must have regard to Revenue Ruling DUT12. 42It is submitted that the proper role of the Tribunal is to evaluate the factual basis for the expert opinion and the theoretical basis on which that opinion is reached but may not depart from the evidence given at hearing to introduce considerations derived from the Tribunal's own expertise. 43The applicants and the respondent referred substantially to the ordinary legal principles governing the valuation of land as set out in Spencer v The Commonwealth (1907) 5 CLR 418 ("Spencer"). Particularly the quote per Griffiths CJ at 432: "In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ... but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject land at the relevant time, and from that point of view, to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce the vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together." And per Isaacs J at 441: "To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property." 44The applicants submitted that in the absence of any direct determination of land in the actual market place, such as an auction of the very parcel of land which is under consideration, the most effective guide to the value of a particular piece of land is to be obtained from the use of sales of comparable properties subject to any adjustments necessary to take into account differences between those properties. 45The applicants drew attention to Maurici v Commissioner of State Revenue (NSW) [2003] HCA 8; (2002) 212 CLR 111 ("Maurici"). It was submitted that if a valuation is unreasonably selective in confining the range of comparable sales too narrowly, or too broad in that it includes sales which do not truly compare with the hypothetical sale of the subject property then the figure arrived at as the estimate of value is likely to be distorted as a result and not fairly represent the unencumbered value of the subject property. 46The applicants submitted that: "The assumptions to be made in arriving at evaluation is that the hypothetical buyer and hypothetical seller are both assumed to be acquainted with the land and knowledgeable about the circumstances which might affect its value and that this includes its situation, character, quality, proximity to conveniences, its surrounding features, the then present demand for the land, and the likelihood of a rise or fall for whatever reason in the amount to which one could fix." This list was described by the Privy Council in Secretary of State for Foreign Affairs v Charlesworth Pilling & Co [1901] AC 373 at 391. 47The applicants submitted that there appeared to be common ground between the applicants and the respondent that: "(a) The highest and best use of the subject property is as a residence on a large block of land, rather than for development as two vacant building lots. (b) The direct comparison method of determining value is the most appropriate to deploy in determining value. (c) The meaning of "unencumbered value" is that which is described in s.23 Duties Act." 48The applicants then provided written submissions in respect of each of the items referred to in paragraph 48 above, then generally and drew particular attention to issues relevant to the subject property. For ease of comparison of these each of the items will be considered by way of indicating in each paragraph a segment being the submissions by the applicants and a segment being the submissions by the respondent. These comparisons are set out at paragraphs 60 to 70 inclusive. 49The applicants submitted that taking into account the evidence given by the valuers then the opinion and evidence of Bowen for the purposes of assessing stamp duty is no more than $1.8 million. That the reasoning of Bowen is logical and deals with the difficulty in adjustment between the subject property and the properties to which it is to be compared to in a rational way with recognition that there would be a limited number of direct properties that could be compared. The applicants submitted that Webster's opinion, by attributing a far greater weight to land size, does not provide a logical explanation for the valuation attributed by him to the subject land. 50The applicants written submission included the following comments: In relation to Webster's valuation and evidence: Webster described the subject property as of "unique design, verging on idiosyncratic" and conceded that the property was "different to many of the other homes up there" describing the general area of the property. "All of Mr Webster's comparable sales require adjustments to determine the market value of the subject property because of the improvements, aspect and topography of the properties the subject of those sales." "Mr Webster's experience is undoubted, but it is submitted that the exercise undertaken with the valuation matrix suggests that his approach to valuing the property is unreliable in several respects: a. The first respect was that he was attracted personally to the property, and although he denied any special attribution of value based on personal taste, his analysis may have strayed from that required by the Spencer test in his identification of the hypothetical purchaser to minimise the importance of views in the market, and over-emphasise the elements of topography and land size in reaching his conclusions in relation to the comparison with other properties. b. The second respect was that his personal knowledge and understanding of Council policies, and their application, made him overconfident in accepting that attributes of the property (such as its lack of views) could be corrected and improved upon to produce a more attractive proposition to a hypothetical purchaser. It led him to seek to give evidence outside his area of valuation expertise, and to become argumentative when challenged. c. The third respect was that his concession about the highest and best use of the subject property as a residence on a large block was imperfectly carried through to his consideration of the elements of value as demonstrated in the valuation matrix chart. His emphasis on topography and land size meant that he gave significantly less weight to the importance of views in the market, and in the light of the nature of the market, being one with a high proportion of luxury residences and holiday homes, that emphasis is misplaced. d. Finally, Mr Webster failed to distinguish between facts and assumptions in his valuation report.............. which makes it difficult to assess statements such as occur ............ "all of the [comparable] sales are for properties with varying or no views", and the assertion (discussed above) that the views from the property "could be improved by the pruning of shrubs/trees close to the northern boundary"." In relation to Bowen's valuation and evidence: "Mr Bowen used a direct comparison approach, but supported that with checks based on a summation method and an improved land method. His initial valuation produced a figure of $1.8 million, and on his summation method (using an estimate of $1,000-$1100 per sq metre) reached a figure of $1,765,500. It is noted that he used a figure of 1,491 sq m, but this is the figure that appears in relation to the land in some official records such as Valnet. At $1000 per sq m, the base land value is calculated to be $1.491,000, and adding improvements of value $200,000 a figure of $1,691,000 is obtained. It appears that Mr Bowen has adopted a midpoint ($1,050 per sq m) and multiplied it by his perceived land area, then added the $200,000 improvements to reach the figure in his report. His development model based on a renovation cost of $400,000 (which is not unrealistic given the age and condition of the improvements) and deducting that cost, and fees, interest, and profit costs (approximately $150,000) from the midpoint of an ultimate sale price of $2 million to $2.8 million produces his figure of $1.85 million." "It is noted that Mr Bowen was not prepared to add and deduct sums from the comparable properties as Mr Webster did, but instead used a method that sought to neutralise the distorting effect of both views and land size, so as to provide a proper basis for comparison of the comparable sales. It is noted that this exercise, admittedly artificial, produced a range of values for the subject property between the figures of $1,586,909 (derived from Sale 5) and $2,284,506 (derived from Sale 8). It is not suggested that the process undertaken is unhelpful for this reason. Rather, it indicates that the subject property is unusual because it has features that set it apart from many residences in Palm Beach, such as the absence of views, and a larger than normal block of land, as well as idiosyncratic improvements in an older style, and any attempt at a clinical or mathematical comparison between the subject properties and other properties in the locality is likely to produce discrepancies. " "Mr Bowen candidly testified that the exercise of undertaking the valuation had been a difficult one, and he had adopted a trial and error method in selecting a depreciation value that gave the least irrationally high or low results. As it is, it is noted that Mr Bowen's values do not reach as high as those derived by Mr Webster, and the midpoint of the derived values that he obtained is very close to the range of values obtained in his original valuation report." "For these reasons, it is submitted that Mr Bowen's analysis ought to be accepted by the Tribunal, bearing in mind the difficulties attending valuing a property which is not easily directly comparable with others in the location, and which does demand a degree of inexactitude in making that comparison." "Mr Bowen was criticised in cross-examination for his oversight in signing off on the joint expert report for a value of $1.85 million for the subject property. Mr Bowen explained this as an oversight, and adhered to his original valuation of $1.8 million in oral evidence. Respondents submissions 51The respondent submitted that the applicants bear the onus pursuant to section 100(3) of the TAA to prove that the unencumbered market value of the subject property as at 24 December 2009 is $1.8 million. The respondent submitted that the correct unencumbered market value of the subject property as at 24 December 2009 is $2.4 million in substitution for the figure of $2.5 million in the respondent's notice of assessment dated 24 May 2010. 52The respondent submitted that it would be inappropriate for the Tribunal to determine a figure somewhere between the two expert witnesses as to do this the Tribunal would need to make adjustments to comparable sales in a manner different to the adjustments already made by the expert witnesses. Further that although the Tribunal has power to remit the matter pursuant to s101 TAA there would be no utility in following that course of action. The Chief Commissioner is not a valuer and the Chief Commissioner has formed the opinion on the unencumbered market value of the subject property based on the valuations of registered valuers by reference to Waterhouse, Webster and the critique by Goldsmith. 53The respondent submitted that Spencer's case was the seminal case in respect of valuation law. 54The respondent submitted that the paragraph cited above at paragraph 42 above is relevant. The respondent submitted that these are the critical passages. 55In reference to the request by the Tribunal to provide assistance concerning the concept or meaning of "unencumbered value" and in response to that both Bowen and Webster were requested to comment on what unencumbered value means and they responded: Bowen: "For example, a mortgage might be on title, it's sort of a restriction, it can be viewed as - it's not your problem, you're .... looking at the land as if those things have been taken care of." Webster: "Disregarding any covenants that might be on the property, any mortgages that might be on the property, they would be the two principal issues that I would set aside." 56The respondent submitted that the Tribunal can be satisfied that there is directly comparable sales evidence available. The applicants have cited the case of Maurici in respect of comparability of sales. Maurici concerned a property subject to the Valuation of Land Act 1916 ("VLA") and section 6A(1) provides: "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." 57The respondent submitted that Maurici concerned the valuation of the unimproved value of an improved parcel of land in an area on the basis of scarce unimproved parcels of land in the same locality. "The court said that the respondent was not entitled to ignore reasonably contemporaneous sales of improved land and that such sales, particularly in the case of a scarcity of vacant land could not be disregarded" at para [19]. The respondent submitted that Maurici's case is of no assistance in respect to the subject land as there are sufficient numbers of sales that could be considered as comparable and attention was drawn to the valuation analysis chart provided by Bowen and Webster in relation to eleven properties where both Bowen and Webster relied on three of those common sales. 58The respondent submitted that of the eleven sales included in the Valuation analysis chart prepared there were sales that Bowen had steered clear of although those sales should be included and taken into account in terms of comparable sales evidence. 59For ease of comparison the items where submissions have been made by both the applicant and respondent will be considered by way of indicating in each paragraph a segment being the submissions by the applicants and a segment as set out at paragraphs 60 to 70 inclusive. 60The respondent referred to the Waterhouse valuation and commented that it was not a flaw in her analysis in that she had not physically inspected the improvements and that the fact that Webster had conducted an external/internal inspection and it is his valuation to be relied on then the omission of her making an internal investigation has no relevance. Comparison of submissions relating to specific items 61Highest and best use A. The applicants submitted that the highest and best use of the subject property was as a residence on a large block of land which was comprised of two separate building lots. R. The respondent initially considered that the highest and best use of the land was to consider it as two vacant lots of land after the demolition of the residence on the subject property. However following the viva voce evidence had come to the view that the highest and best use of the subject property was for a home on two allotments and Webster his opinion to adopt the first of his three options which moved his valuation from $2.7 million to $2.4 million, it was accepted that the highest and best us of the subject property was as a residence on a large block of land. 62Direct comparison method A. The applicants submitted that there were sufficient sales of comparable premises to be able to form an opinion with a recourse to a summation method or notional unimproved value. The applicants submitted that the deduced land value, referred to by Webster, referred to his approach to the valuation of the subject property on a hypothetical development model, and as he has apparently accepted that the highest and best use is as a residence on two allotments then deduced land value is not of assistance. A table was prepared by Bowen and Webster and they were cross examined on that table; the applicants submitted that Bowen did not add or deduct elements but took his value at a point within a range of comparable properties. R. The respondent submitted that the Tribunal can be satisfied that there is directly comparable sales evidence available. The applicants have cited the case of Maurici in respect of comparability of sales. Maurici concerned a property subject to the Valuation of Land Act 1916 ("VLA") and section 6A(1) provides: "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." The respondent submitted that Maurici concerned the valuation of the unimproved value of an improved parcel of land in an area on the basis of scarce unimproved parcels of land in the same locality. "The court said that the respondent was not entitled to ignore reasonably contemporaneous sales of improved land and that such sales, particularly in the case of a scarcity of vacant land could not be disregarded" at para [19]. The respondent submitted that Maurici's case is of no assistance in respect to the subject land as there are sufficient numbers of sales that could be considered as comparable and attention was drawn to the valuation analysis chart provided by Bowen and Webster in relation to eleven properties where both Bowen and Webster relied on three of those common sales. 63Unencumbered value A. Following a request by the Tribunal the applicants submitted: "Section 23 of the Duties Act simply provides that the property must be valued free of encumbrances. The word "encumbrance" is not defined in the Duties Act. Recently, in Chief Commissioner of State Revenue v Centro (CPL) Limited [2011] NSWCA 325, the Court of Appeal adopted an agreed position between the parties to that appeal that an "encumbrance" was to be understood as excluding a lease, in accordance with the opinion of the High Court in Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245 ([44]) that "unencumbered" in the expression "unencumbered value of the property" as it appeared in s.66 Stamp Duties Act 1920 (NSW) is used "not in a loose sense but to refer to security interests in, or charges or other liabilities which attach to, the property in question." The subject property is unencumbered in that sense." R. The respondent agreed with the analysis by the applicants' representative. 64General approach A. The applicants submitted that the value to be determined by the Tribunal ought to reflect the market value for which the applicants are liable to duty. Therefore the approach should be to determine a hypothetical price conservatively, on the basis of the actual situation and a realistic view of its place within the market. R. The respondent referred to Spencer's case as the seminal case in respect of valuation law and drew attention to the comment therein: 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' . The respondent also referred to s21(1)(b) Duties Act which requires that the value be the unencumbered value of the subject property. 65The Global Financial Crisis ("GFC") A. The applicants submitted that the GFC which occurred during the period October 2008 to late 2009 was still affecting the market as at the relevant date in late 2009. The joint expert report agreed that the GFC affected the market and that the impact of that was still there in 2009, that the GFC operated through 2009 to depress values in the area of the subject property and that subsequently the market improved in 2010. The applicants submitted that Bowen agreed that the top end of the market where the subject property is located had suffered a greater impact from the GFC. The applicants also submitted that the area of the subject property was significantly affected by the GFC as it is a premium market where purchasers with high wealth were attracted to properties in the area. Further this resulted in a significant slump from mid 2008 to at least mid 2009 and that there were indications that early in 2010 there were signs of the market improving. R. The respondent submitted that there is no real issue concerning the GFC as the comparable sales are the critical evidence that the Tribunal needs to consider and that the impact of the GFC is reflected in the comparable sales. 66Views and can they be improved A. Bowen and Webster considered that the existence of views or access to views was one of the key value attributes for purchasers and vendors in the area that the subject property is located. Photographs were provided to the Tribunal in relation to the views. The applicants submitted that the subject property had, as referred to by Bowen, filtered or restricted views and that he did not think these views could be improved. R. Views Bowen and Webster agreed that the subject property does not have any views that would warrant a premium in the market. The evidence discloses that Bowen and Webster have relied on sales in close proximity to the subject property with no or limited views. Webster's evidence was that the subject property has filtered ocean views from the property heavily filtered Barrenjoey and Pittwater views from the property. Webster's evidence is that pruning of trees and shrubs within or close to the northern boundary of the subject property would improve the ocean views from the property. Webster noted an application could be made to the local council in respect of trees and shrubs on the nature strip adjoining the subject property. The respondent submitted that the local council "will not consider application for the removal of trees including bushland on public land solely for the purpose of improving views from properties in the locality. Any pruning for additional solar access will be required to be approved with the costs of these works being incurred by the applicant.". The respondent submitted that there could be pruning under 10% on private property and that an application for pruning for 10% on public land could be made. The respondent submitted that the opinion of Webster in relation to the views available should be preferred to those of Bowen. The respondent submitted that the issue of views and pruning of trees was a diversion and the subject property does not have any views that would warrant a premium in the market. The respondent submitted that Webster and Bowen agreed that the subject property does not have any views that would warrant a premium in the market. 67Proximity to beach and surrounding development A. The applicants submitted that one of the additional key value attributes for purchasers and vendors in the area of the subject property included the proximity to the beach and the surrounding development to the subject property. The applicants submitted that these additional attributes were subject of cross examination in relation to the comparison of elements of value and drew attention to the comment by Webster that "views and improvements were the main attributes while proximity to the beach adds value". The applicants submitted that these two additional attributes should not be consigned more than minimal or no weight in determining the correct or preferable valuation. R. The respondent drew attention to Webster's viva voce evidence in response to consideration of photographs provided to the Tribunal and in response to a question concerning one of those photographs said: "I guess I must point out in this too because at some point I assume we'll be talking about the tree preservation order, that photo sort of highlights again that unless you're on the beach at Palm Beach or you've got a steep block in front of you no view is protected. All of that - pretty much all of that view could go from the growth of trees over the years." 68Other elements relevant to value A. The expert valuers were requested to complete a matrix of comparative sales of particular properties in the area of the subject property that were mentioned in the joint report. The result of the provision of this matrix drew attention to three further elements affecting the valuation of the subject property being improvements, land size and the topography and aspect of the site. The sales evidence were dealt with in the matrix individually and referred to seven different other properties in the area. The specific area of the subject property was taken into consideration by Bowen on the basis that the positioning of the improvement on the subject land prevented consideration of it as two individual lots. Further attention was drawn to the possibility of the availability of usable land rather than merely considering the size of the land area. Attention was drawn to the tree preservation order in existence in the area of the subject property and that the highest and best use of the subject land was as a residence on a large lot as referred to previously rather than as a development lot for two properties. R. The respondent initially was of the view that the highest and best use of the subject land would be as potentially two lots that could be individually developed after demolition of the existing improvement. The respondent agreed with Webster that the possible potential use in that way may not be the highest and best use after taking into account the costs of development and realisation of that potentially higher value. 69Improvements A. The applicants submitted that both Bowen and Webster agreed as to the description of the house. There was some disagreement between them as to any monies that would need to be spent to bring the property up to a standard whereby a value could be ascribed to it for the purposes of a purchaser. In the joint report of the valuers' filed on 13 September 2011 a summary of Bowen's opinion includes an estimated that "the improvements are sizable however would require considerable work/costs to bring them up to a good standard" and further that "the subject property is considered less attractive in the marketplace when compared to a property that does not need the same level of renovation, repairs and maintenance" and made an estimate of $400,000.00. R. The respondent relied on the evidence concerning the repairs required to the subject property as adduced by Webster vive voca which was related to his personal experience in renovating his home and suggested a finite figure of approximately $30 to $50,000.00. The respondent referred to the estimation by Bowen of the repairs required and as to what was included in that figure. The respondent submitted that Bowen's response did not sufficiently set out what repairs would be required 70Land size A. As part of the provision of the matrix of comparable sales provided Bowen took at the differences in land size are using the land size being 1,656.7m2. R. The respondent agreed that the land area is as stated 71Topograghy and two titles A. The applicants submitted that the subject property is comprised of two titles. The highest and best use of the subject property was submitted to be as a residence on a large block of land rather than for development as two vacant building blocks and that this is supported by the valuation of Bowen. R. The respondent agreed that the highest and best use was as a residence on a large block of land rather than for development as two vacant building blocks. Webster commented that a "prudent purchaser would pay over and above ... and look at demolishing the house and building two dwellings". 72The applicants submitted that taking into account the evidence given by the valuers then the opinion and evidence of Bowen for the purposes of assessing stamp duty is no more than $1.8 million. That the reasoning of Bowen is logical and deals with the difficulty in adjustment between the subject property and the properties to which it is to be compared to in a rational way with recognition that there would be a limited number of direct properties that could be compared. The applicants submitted that Webster's opinion, by attributing a far greater weight to land size, does not provide a logical explanation for the valuation attributed by him to the subject land. Reasons 73It is unnecessary for the Tribunal to make an assessment or valuation in place of one of the valuations supplied by way of evidence notwithstanding the provisions of s63 TAA. The reliable written and viva voce evidence provided to the Tribunal by Webster and Bowen which was fiercely and peaceable fought out between those two valuers with the assistance of Dobrow allows a decision to be made. Webster and Bowen supplied the Tribunal with a Valuation analysis chart (also referred to as a matrix) which distilled their opinions with reference to seven properties after elimination of 12 other properties originally referred to in the Joint Report. This was further distilled to three properties that were all included by both Webster and Bowen as directly comparable being sales numbers 3, 5 and 19. This decision has been made solely on the evidence provided to the Tribunal. 74Following further evidence given by those two valuers it became clear that there were only three properties that could be described as possibly directly comparable. Those three comparable sales led to the conclusions as drawn by Bowen in his valuation. Webster drew on the comparable sales that he had relied on otherwise which led him to the valuation made by him. The bases of the valuation made by Bowen are preferred to that of Webster. 75The question is in as much as any determination is made based on an inexact science whether the analysis of the comparable sales could reliably be reflective on the value of the subject property. It is also observed that a comparable sale can only be where there is little or clearly definable variation between the subject property and the sales to which it is being compared. In relation to the subject property it is clear to the Tribunal that there is no property that is clearly comparable; therefore in view of the inexact nature of valuation of property as a science the degree of speculation in relation to the "hypothetical transaction" that is being considered in this matter is increased. However with the assistance of Bowen and Webster's evidence and the Valuation analysis chart prepared by them a decision can be made as to the preferable valuation. 76The incidence of the GFC was an acknowledged phenomenon that occurred and must be taken into account in terms of the comparable sales which in themselves would reflect the GFC to an extent depending upon the particular properties. Reference was made to articles attached to the joint report by Dobrow however no weight has been attached to these articles. 77When consideration is given to the cost of repairs that would need to be undertaken then the figure given by Webster has been drawn from his own personal experience however there is no basis given as to how the figure was arrived at. Webster indicated that the figure he indicated was not one that would bring the property up to a presentable standard as it could be lived in at the time and then brought up to standard over time and the first amount that would be needed was approximately $30 -50,000.00. Webster did provide a list of items that would need attention. Bowen indicated that his allowance for repairs took into account the items that would be required to bring the property up to standard and estimated an amount of $400,000.00. 78The respondent has used a practice relating to documents that require stamping where a valuation certificate is supplied by a registered valuer in the absence of supporting evidence at the time that the certificate is supplied. The reliance on such a certificate in the absence of the comparable evidence being supplied places the respondent in the position where further action needs to be taken to seek out the evidence required. The officer of the respondent has to critically analyse a single piece of paper which does not have with it the sufficient forensic information to establish whether in fact a further investigation of the valuation should be undertaken. In this case the valuer had supplied the valuation certificate and immediately supplied the comparable sales information to the respondent on request, there can be no suggestion that the certificate was supplied by the valuer in the absence of that comparable information. The further situation is that once that material had been supplied by the valuer following the certificate a request was made to a Government department to supply an "independent" valuation of the property. The chronology of this matter describes that an unfortunate number of valuations were required and includes a critique over the period March 2010 to February 2011. This activity is related to attempting to place a hypothetical value on a property by use of an imprecise science. It is necessary in some circumstances to adjudicate these matters. 79It is clear from the comments by Judicial Member A Verick in Molyneux & Vermeesch v Chief Commissioner of State Revenue [2011] NSWADT 117 that each adjudicator who is required to consider issues in the extreme between negative effects and positive effects, what is a comparable sale and the way in which a valuation is arrived at will usually be considering speculations being made of market forces. In this matter the Tribunal has the benefit of five "valuations" however there are at least two different styles of valuations in those valuations; one the traditional direct comparison method and the summation method. Any adjudication in these circumstances must necessarily either refer the matter back to the parties for an assessment to be made or alternatively come to the view that one or other of the valuations is to be preferred. The Tribunal is not in a position to come to a separate valuation as the Tribunal stands in the shoes of the decision maker and the Chief Commissioner can not make a valuation. 80The two valuers agreed as to the following issues: Land Use - highest and best use was as at the relevant date Land area - as shown on the title records Three properties were directly comparable There were no encumbrances The GFC was relevant to the extent that it was reflected in the comparable sales being within that timeframe. There were no views that should be considered. There was no proximity to the beach. The topography. The two valuers disagreed as to the amount that would be required to bring the subject property up to a reasonable standard. It is considered that in view of the list of items set out by Webster that his estimate is insufficient. The estimate given by Bowen is to be preferred. 81It is unnecessary to consider the issue of trees and views as Webster agreed there was not a view to be taken into account and trees grow over the years. Similarly the issue of pruning or sculpting existing trees is not to be considered as the property must be valued with the conveniences and inconveniences that exist at that time. 82The valuation as set out in the Quadrant Valuation as summarised in the critique particularly as set out at paragraph 19 discloses the summation method used by Bowen and then when the Valuation analysis chart was subjected to the concurrent evidence given by him and Webster direct comparison was extracted which permitted a decision to be made. The three comparable sales that support the Quadrant valuation are those referred to as sales numbers 3, 5, and 19. 83The applicants bear the onus of proving their claim and have sought to do by provision of the Quadrant valuation. They have discharged that onus. The unencumbered value of the subject property as at 24 December 2009 is as set out in the Quadrant valuation being $1,800,000.00. Decision The decision of the Chief Commissioner of State Revenue dated 10 February 2011 is set aside. The unencumbered value of the subject property as at 24 December 2009 is as set out in the Quadrant valuation. ********** 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. Decision last updated: 07 August 2012