In a significant outcome for the property industry in Queensland the State recently backed down on some of the changes it had proposed to the Valuation of Land Act 1944 (the Act) which would have had sweeping ramifications for the value of improved property throughout Queensland.
Benefits conferred by a development approval and other intangible assets such as goodwill, leases, agreements for lease and licences form a significant part of the value of a going concern.
In assessing the unimproved value of land for the purpose of levying land tax and rates, however, the Act has long required that a valuer treat any improvements as if they "did not exist"1. Notwithstanding recent claims by the State Government that in undertaking that valuation exercise "…the value of intangible improvements, such as the value of the development approval and the agreements for lease have not been deducted from the value of the land"2, a proper undertaking of that valuation exercise required that a valuer treat benefits conferred by a development approval and other intangible assets such as goodwill, leases, agreements for lease and licences as if they did not exist.
In more recent years, the State in valuing some of the larger shopping centres began to rely on a previously largely unused provision of the Act which allowed a valuer to use "the deduction method" of valuation, whereby the value of improvements are deducted from the improved value to ascertain the unimproved value of a particular parcel of land3. One of the difficulties associated with that process, however, involved the treatment of intangible assets.
In 2003, with that very issue in mind, the Act was amended by the Valuation of Land Amendment Act 2003 to introduce the concept of intangible assets. In particular, the definition of improvements was amended to include intangible improvements, which in turn were defined to include nonphysical improvements such as leases, licences, goodwill associated with the purpose for which the land was being used and the market advantages associated with brand name.4
In October 2007, after protracted litigation between the Department and several of the major shopping centre owners, the Land Appeal Court handed down its decision in PT Ltd & Anor v Chief Executive, Department of Natural Resources and Water  QLAC 0077. In that decision the Land Appeal Court determined that in calculating the unimproved value of improved land, the valuer is to treat all improvements (including intangible improvements) as if they did not exist as at the date of the valuation. Significantly, the Land Court also noted that it was the role of the valuer to also consider the risks and costs associated with developing the notional vacant parcel of land. At paragraph 57, the Land Appeal Court held:
"…the valuation exercise required under Section 3(1)(b) for the subject land requires a valuer to proceed on the basis that, as at 1 October 2002, the improvements (including intangible improvements) did not exist and had never existed. However, the land is to be otherwise valued having regard to the environment in which it does exist. Relevantly for the subject land, that would include the services and amenities available to the land, any favourable and unfavourable statutory and/or local government rights or restrictions and, of particular importance in this case, the demographic features likely to influence the ability to attract an appropriate customer base and mix of tenants. Any potential the notionally vacant land has for a regional shopping centre should and must be taken into account, but that potential should not be treated as proved and effectively cost and risk free by reference to the past trading history of the site. In this context it is important to note that the reference to statutory and/or local government rights should not be seen as a reference to development approvals (DA's). "
With respect to development approvals, at paragraph 73, the Land Appeal Court held that:
"…there is no reason why, as a matter of principle, a benefit conferred by a DA could not constitute an intangible improvement…."
As a result of the Land Appeal Court's decision the unimproved value of the particular parcel of land reduced from $112,000,000 to $34,000,000.
In early 2008, the State government withdrew its appeal to the Court of Appeal against the Land Appeal Court's decision and on 26 February 2008, introduced into Parliament, the
Valuation of Land Amendment Bill 2008 (the Bill).
The Explanatory Notes to the Bill stated that the Bill simply amended the Act to:
- repeal, with retrospective effect, the concept of intangible improvements in the Act;
- clearly define unimproved value to recognise the existing use of the land or highest and best use;
- introduce a formula for the valuation of the unimproved value for nominated large shopping centres; and
- clarify the awarding of costs of appeals against valuations.
The State government was at pains to suggest that the proposed changes were not radical, that the Bill was "simply designed to ensure that property valuations can be carried out in the same way that they have always been done in Queensland"5 and represented nothing more than a "business as usual"6 approach that simply confirmed the methodology that had been used by the Department for many years.
Critics of the proposed amendments, however, were justifiably concerned.
Put simply, critics of the Bill rightly contended that the Bill represented nothing more than a significant departure from the valuation principles previously applied in assessing the unimproved value of land. Contrary to the State's assertions, the Bill would have impacted on all types of property (including retail, commercial, industrial, tourist, residential and rural land) and would have effectively introduced a form of business tax by including the risk of obtaining the various approvals and bringing a property to its developed state (the development profit) in the unimproved value.
Of particular concern was the way in which the Bill required that the unimproved value of improved land be assessed with any approvals in place and include any increase in value connected with the making or use of an improvement on the land. Significantly the Bill also provided that there was to be no risk in realising or continuing an existing use on the land. In doing so, the Bill was in effect overturning the Land Appeal Court's decision and was including the risk and profit component of a development within the unimproved land value.
The implications of the proposed amendments were enormous in terms of land tax and general rates alone. In relation to retail properties for example, the increases that followed as a result of a rise in land valuations would have been borne by superannuation funds (as investors) and tenants (following rent reviews). In turn, increased charges would have threatened the viability of small businesses which form an important part of the retail industry.
On 13 March 2008, in response to extensive lobbying from industry organisations, the State introduced amendments to the Bill during the final debate on the Bill.
The amendments to the Bill as passed remove the previous requirement in the Bill that the unimproved value of improved land was to include any increase in value connected with the making or use of an improvement on the land and that in assessing the unimproved value there was to be no risk in realising or continuing an existing use on the land.7
Although the value of unimproved land is now to be assessed with any approvals in place (previously under the Act the correct approach was to assess the unimproved value of the land on the basis that the land could be used for its present use but with the requisite approval for that use yet to be obtained i.e. valuers were required to make an allowance for the time and cost involved in obtaining a development approval) the Act will no longer be amended to provide that there is to be no risk in realising or continuing an existing use on the land.
While the amendments are a significant outcome for the property industry in Queensland, members of that industry will anxiously await the release of the next round of statutory valuations (due in March 2008).
The long term effect of the Bill (as passed), however, remains unknown. Many critics of the Bill (as passed) will remain concerned as to its effect. By repealing the amendments made in 2003 which recognised the concept of intangible assets, for example, the State may have left it open to later argue that because certain intangible improvements (such as leases, licences and goodwill) are not specifically included within the definition of improvements, they are not to be treated as if they "did not exist" in assessing the unimproved value of improved land.
1 Section 3(1)(b) of the Valuation of Land Act 1944
2 Page 2 of the Explanatory Notes to the Valuation of Land Amendment Bill 2008
3 Section 3(2) of the Valuation of Land Act 1944
4 Section 6(5) of the Valuation of Land Act 1944
6 Second Reading Speech, page 334
7 In preparing this paper the author has relied on the Daily Hansard as the Bill (as passed) was not yet available
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