Focus: Valuation of land – new retrospective amendments
24 February 2010
In brief: The Queensland Government recently introduced contentious new legislation into Parliament which has sparked concern in a property industry still feeling the effects of the global financial crisis. Partner Bill McCredie (view CV) and Lawyer Eve Lynch report.
- The impetus for the Bill
- Determining the unimproved value of improved land
- Applying the 'market approach'
- Applying the 'deduction approach'
- New 'adjustment factor'
- Objections and appeals
How does it affect you?
- Industry expectations are that the legislation, if passed, will trigger an uplift in unimproved land values for land tax purposes while substantially diminishing the rights of landowners to challenge an unimproved valuation in the Land Court.
The impetus for the Bill
The new legislation – the Valuation of Land and Other Legislation Amendment Bill 2010 – is being promoted by the State Government as an essential measure to override the recent judgment of the Queensland Court of Appeal in protracted proceedings concerning the unimproved valuation of the Pacific Fair Shopping Centre under the Valuation of Land Act (Qld) (the VL Act).1
In those proceedings, the Court of Appeal affirmed the earlier judgment of the Land Appeal Court2 that held that in determining the unimproved value of improved land, the Chief Executive (of the Queensland Department of Environment and Resource Management) is required under the VL Act to disregard the added value of any leases, but is not entitled to disregard an element of risk in the development process.
The Land Appeal Court's judgment was based on the relevant provisions of the VL Act currently in force and the subject of a previous retrospective amendment by the Queensland Government in March 2008.3 The court confirmed that the effect of the 2008 retrospective amendments was that while the past trading history of the land must be taken into account in an unimproved land valuation, the amendments did not entitle the Chief Executive to value the land 'as developed'. In those proceedings, the court was satisfied that, in disregarding the existence of the leases, any added value of the past trading history of the land was insignificant.
The Court of Appeal's judgment was a considerable win for the property industry in Queensland, particularly for the owners of shopping centre land subject to major tenancies or highly improved commercial and industrial land.
The Bill proposes substantive amendments to the VL Act that will reverse the Court of Appeal's decision. It is the Government's position that the Bill will affirm historical valuation practice; however this is highly contentious. In any event, the Bill proposes substantive amendments to the VL Act outside the scope of disputed issues in the Pacific Fair proceedings.
Determining the unimproved value of improved land
The unimproved value of land in Queensland is the higher of the value adopted using the 'market approach' and the 'deduction approach'.
The market approach is the capital sum that the land, disregarding improvements, might be expected to realise on the market. The deduction approach is the sum obtained by deducting the value of the improvements from the improved value of the land.
The Bill, if passed, will have implications for the application of both methods of valuation under the VL Act. These amendments will have retrospective application to valuations in force at any time on or from 30 June 2002. It is the Government's position that these amendments will validate previous valuations and, to date, there has been no indication by the State of an intention to retrospectively amend any previous valuations no longer in force. The retrospective amendments will, however, affect all pending objections and appeal proceedings.
Applying the 'market approach'
If passed, the Bill will amend the definition of 'unimproved value' in the VL Act to require the value of leases and agreements for lease (including any instrument that enhances the value of the land) to be accounted for in assessing the unimproved value of improved land. The Bill also confirms that in applying the market approach, development of the land is to be treated as essentially 'risk free' and no deduction is to be made for goodwill, a profit and risk allowance or development premium for the realisation of the use of the land.
The practical effect of the proposed amendments is that, in applying the market approach, land will be valued 'as developed' but assuming no physical improvements exist.
Applying the 'deduction approach'
The effect of the Bill will be that in applying the deduction approach, the total deduction allowed for the value of improvements will be capped at the depreciated value of the improvements, as recorded in the owner's books of account, with an allowance made for 'holding costs'.
'Holding costs' will be limited to the tax and interest cost of applying funds for the construction of the physical improvements and holding the land during the construction period for the improvements. Further, no escalation in construction costs after the date of valuation will be allowed in assessing the value of the improvements using the deduction approach.
The industry position is that the deduction should be allowed on the basis of the replacement value of the improvements, not the depreciated value. The cap has the potential to significantly affect valuations of land where the depreciated value of the physical improvements is particularly low in relation to the total value of the land.
New 'adjustment factor'
The Bill will amend the VL Act to allow the Chief Executive to apply an adjustment factor to unimproved valuations in those years where an annual valuation is not undertaken.
The adjustment factor is to reflect market fluctuations and may only be applied where there has been a market fluctuation of 10 per cent or greater. Prior to fixing the factor, the Chief Executive must seek submissions from relevant stakeholders. The adjustment factor must be published by the Chief Executive on the Department's website before 31 March of each year.
There will be no appeal right under the VL Act for a decision of the Chief Executive to apply an adjustment factor to an unimproved valuation.
Objections and appeals
The Bill proposes significant overhaul of the objection and appeal process in the VL Act.
The objection process will be significantly more onerous for landowners, with objections to be fully particularised (including particulars of comparable sales, the replacement and depreciated cost of improvements and the improved and unimproved values contended for) and supported by any valuation reports and depreciation schedules. Notwithstanding these prescriptive requirements, the time for making an objection will remain the same as it is presently (45 days after issue of the valuation notice).
Failure to meet these requirements will result in an invalid objection and no right of appeal to the Land Court (the Land Court will have no discretion to hear an appeal where an objection is invalid). Importantly, the grounds of any subsequent appeal will be confined to the grounds relied upon in the objection.
Accordingly, if the Bill is passed, it will be crucial for landowners to obtain early expert advice (including a valuer, town planner, quantity surveyor and lawyer) to ensure that any objection is validly made and the issues are stated as broadly as possible.
Footnotes
- Chief Executive, Department of Natural Resources and Mines v Kent Street Pty Ltd [2009] QCA 399.
- Kent Street Pty Ltd & Ors v Department of Natural Resources and Mines [2008] QLAC 0221.
- Valuation of Land Act Amendment Act 2008 (Qld).
For further information, please contact:
- Bill McCrediePartner,
Brisbane
Ph: +61 7 3334 3049
Bill.McCredie@aar.com.au - Tony DaviesPartner,
Brisbane
Ph: +61 7 3334 3250
Tony.Davies@aar.com.au - Paul NewmanPartner,
Brisbane
Ph: +61 7 3334 3514
Paul.Newman@aar.com.au
