Land tax bonanza!

On 18 December 2018, the Victorian Civil and Administrative Tribunal (VCAT) handed down its decision on ISPT Pty Ltd v Melbourne CC & Valuer General Victoria [2018] VCAT 1647, determining on application of the law, that the site value of the land as $1 on 1 January 2016 for 338 – 352 Bourke Street, Melbourne, commonly known as the Melbourne General Post Office (‘Melbourne GPO’).

After this landmark decision, the same law is also being used by other landlords with buildings listed on the Victorian Heritage Register, in an effort to reduce their land tax obligations. Some of the affected buildings/sites include but are not limited to The Block Arcade Myer Emporium, David Jones (ie, Buckley and Nunn Limited building) at 300 Bourke St, Batman Hill Hotel on 623 Collins St, Argus Building at 300 La Trobe Street.

It is important to note that there are currently more than 12,000 valuations for land included in this State heritage register in Victoria, with around 5,000 in the City of Melbourne.

What is the $1 Law?

Section 2(8) of the VL Act requires that the site value of any rateable land upon which there is a building included in the Victorian Heritage Register, must allow for an artificially reduced valuation when compared to the unaffected market value that would otherwise arise, if the land was not heritage affected. The intention being to reduce the statutory valuation-based rates and taxes that would otherwise apply to land upon which there is a heritage-registered building.

Where does it apply?

The ‘$1 Law’ is found in section 2(8) of the Valuation of Land Act 1960 (‘VL Act’), a special provision that governs the valuation of land that includes a heritage-registered building. The VL Act is used in Victoria for the assessment of land tax.

The operative sections of this $1 Law

In brief, s 2(8) requires the valuation to be calculated on the basis set out in sub-paragraphs (a), (b) and (c). These three sub-paragraphs refer to different parts of the land. The valuation is required to determine the site value of the land as a whole.

Section 2(8)(a)(i), (ii) and (iii) provides that in relation to site value, the unimproved land can ultimately only be used for its existing purpose and with the existing improvements, and no other improvements. The consequence is that the valuer must still assume the land is vacant, but with its potential development and use confined by the existing building and the purpose of which it is being used.

Section 2(8)(a)(ii) assumes that the unimproved land can ultimately only be used for its existing purpose and with the existing improvements. The section does not mandate or preclude a valuation method which uses a derived cost of development as one of its inputs – provided that the underlying assumption in the sub-paragraph is met, That is, the assumed development is constrained by all three parts of s 2(8)(a), and the valuation approach must necessarily assume the same development and use as it currently exist.

The underlying legislative intent of s 2(8) was not material in the Melbourne GPO Case, instead it was the actual interpretation and application of s 2(8), in particular s 2(8)(a)(ii) that was one of the key issues in dispute.

How did section 2(8) became the $1 Law?

The valuation method used in s 2(8) was contested in the VCAT hearing. The valuer for ISPT used a hypothetical development approach and two check methods which arrived at a nominal site value of $1 on 1 January 2016. VCAT found the approach legally permissible and acceptable, although not ideal for heritage site valuation where there are no comparable sales. Furthermore, the valuer provided a reasoned basis for all the inputs used in the approach.

On the other hand, the valuer for the Valuer General Victoria (VGV), on behalf of the Melbourne City Council used two methods: rent differential and piecemeal approaches, and arrived at a site value of $29,100,000 and $26,375,000. The rent differential approach from the Valuer was not known to be used or accepted in Victoria or elsewhere. In short, it entailed the use of greater subjective and possibly not supportable inputs.

Who can use the law?

Section 2(8) of the VL Act governs land valuation that includes a building on the Victorian State Heritage Register.

The winners and losers

Clearly, the landlords associated with the 12,000 valuations for land included in this State heritage register in Victoria, will make every effort to make use of this piece of law. This may mean the Victorian Government stands to lose out on its land tax takings. Perhaps the State Government is advised to consider amending/repealing this section in an effort to ensure that this law is not mis-used by the affected landlords.

This article was co-authored by Bill Leung, HLB Mann Judd Melbourne.