CITY OF ADELAIDE v CITY OF PORT ADELAIDE ENFIELD No. SCCIV-99-1093 [2001] SASC 207

OLSSON J. I agree with the reasons of Debelle J and the orders that he proposes.

DEBELLE J. This is an appeal from an assessment of the value of land for rating purposes. The land is used for the disposal of waste.

The Corporation of the City of Adelaide ("the Adelaide City Council") owns a substantial parcel of land at Wingfield. It comprises some 94.2 hectares. The Adelaide City Council operates the Wingfield Waste Management Centre ("WWMC") on that land. It is a major centre for waste disposal in the metropolitan area of Adelaide. The WWMC is a division of the Adelaide City Council. The land is within the area of the City of Port Adelaide Enfield ("the Port Adelaide Council").

On 13 July 1999 the Port Adelaide Council, for rating purposes, adopted a value of $18,000,000 for the value of the land. Pursuant to s 173(1)(b) of the Local Government Act 1934, the Adelaide City Council appealed to the Land and Valuation Court against the valuation. A judge of that court allowed the appeal, holding that the value was $4,900,000. From that decision, the Port Adelaide Council appeals to this Court.

The value of this land for the purpose of rating is its capital value: s 170(1) of the Local Government Act. Section 5 of the Local Government Act defines "capital value" to mean capital value as defined by the Valuation of Land Act 1971. Section 5 of that Act defines "capital value" in these terms:

" 'capital value' of land means the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realise upon sale, but if the value of the land has been enhanced by trees planted on the land (other than commercial plantations), or trees preserved on the land for the purpose of shelter or ornament, the capital value must be determined as if the value of the land had not been so enhanced."

It is common ground that only the first part of that definition is relevant. Section 5 of the Local Government Act also defines "land". The meaning includes, among other things, all buildings and structures on land and all other improvements to land. The relevant date for the assessment of value is 13 July 1999.

Portion of the land is subject to a lease to EDL Operations (Wingfield) Pty Ltd from 9 October 1994 to 3 April 2016. It is common ground that the land to be valued excludes the land subject to that lease.

The land has been used for the purpose of dumping rubbish for a long time. The Adelaide City Council purchased the land from the Commonwealth of Australia on 15 September 1986 for $1,700,000. Before then, the Adelaide City Council had leased the land from the Commonwealth. From 1974 to 1987 WWMC was operated by private contractors. Since 1987 the Adelaide City Council has operated the facility pursuant to a licence held, first, under the Waste Management Act 1987 and, when that Act was repealed, pursuant to a licence under the Environment Protection Act 1993. Land cannot be used to dispose of large quantities of waste unless a licence is held under the Environment Protection Act.

The landfill operations are conducted by the Adelaide City Council with the assistance of contractors. The Council collects all tipping charges and employs a site supervisor and gatehouse operator. The contractors provide machinery and their operators. The machinery includes one or two bulldozers, a landfill compactor and water cart. The contractors also provide a traffic director and a labourer and any additional staff who may be required. The persons on the site are under the direction of the site supervisor employed by the Adelaide City Council. The improvements on the site include transportable buildings used as gatehouse buildings, offices, a lunch room, a weighbridge and security fencing. There are other improvements. It is unnecessary to consider the improvements as they were not relevant to any of the valuations.

On 6 May 1999 the Wingfield Waste Depot Closure Act 1999 ("the Closure Act") came into operation. Section 6 of the Closure Act provides that no licence is to be granted, renewed or varied under the Environment Protection Act so as to authorise the use, after 31 December 2000, of the WWMC as a depot for the reception or disposal of waste, unless the operator of the WWMC has prepared, and the Minister has adopted, before the first anniversary of the commencement of the Act, a Landfill Environmental Management Plan in relation to the WWMC. If that occurs, the Environment Protection Authority must, on application by the operator, grant or renew a licence authorising the use of the WWMC as a depot for the reception and disposal of waste, but the licence must not authorise the use after 31 December 2004 of the WWMC as a depot for the reception (except for recycling or waste transfer purposes) or disposal of waste.

The Closure Act also requires that the Landfill Environmental Management Plan must restrict the height of the solid waste landfill (including any capping material covering it) so that, after subsidence, it does not exceed 27 metres. The Act provides for a timetable for the preparation of guidelines by the Environment Protection Authority for the Landfill Environment Management Plan, and for public consultation in relation to the plan submitted, response by the operator and an opportunity to amend the plan before formal adoption by the Minister.

The WWMC therefore has a limited life as a depot for the reception and disposal of waste. In accordance with the requirements of the Closure Act, the appellant has prepared a Landfill Environmental Management Plan, and the time for public comment had expired shortly before the hearing of this appeal. Thus, as at 13 July 1999 (the date of the valuation) the Closure Act had been passed but there was no certainty that the use of the land as a depot for the reception and disposal of waste would continue after 31 December 2000. However, there was a prospect that it would continue until 31 December 2004 if, within the required time, the Minister were to approve a Landfill Environmental Management Plan.

For present purposes, it is unnecessary to examine the consequences of the Closure Act as all valuers proceeded on the footing that the licence to WWMC would terminate on 31 December 2004.

Mr Smithson was the valuer engaged by the Port Adelaide Council. He considered that the appropriate method of determining the capital value of the land was on the basis of a discounted cash flow to the appellant as operator, assuming continued filling of the available airspace until closure and, thereafter, use of the site for passive recreation with portions used for recycling and possibly also as a waste transfer station. He assumed certain filling rates for the life of the depot to 31 December 2004 and estimated dumping charges per tonne for various types of fill. He took into account the likely operating, rehabilitation and post-closure monitoring costs. By that method he was able to calculate likely cash flows to the appellant for the remainder of the project which he capitalised at a discount rate to reflect the risk inherent in the cash flow. He therefore presumed that a purchaser would be buying the property as a cash flow proposition, and that the purchaser of the land would also acquire the licence. On this basis, he initially valued the capital value of the land at $18,000,000. That was the value adopted by the Port Adelaide Council for rating purposes and it is that value against which the Adelaide City Council had appealed.

When preparing his valuation, Mr Smithson did not know the actual receipts and expenditure of WWMC and had to rely on a number of assumptions. He therefore qualified his report. Later, he was supplied with actual financial information as to the operation of WWMC. He prepared an amended valuation from an amended discounted cash flow. In his amended valuation he reduced his assessment of value to $12,000,000.

Ms Carolan was engaged by the Adelaide City Council to comment on Mr Smithson's valuation and, in particular, the discounted cash flow method. Her instructions did not require her to comment on the utility of the discounted cash flow method as compared with any other method of valuation. Her assessment of value, using the discounted cash flow method and using the comparable sales in Victoria as a check, was $7,500,000. Later, the parties agreed that, if the discounted cash flow method was a correct method of valuing the land, the capital value as at 13 July 1999 was $11,000,000.

The Adelaide City Council instructed Mr Maloney as its valuer. He adopted a different method of valuation. He placed emphasis on the fact that the capital value was to be related to the unencumbered estate of fee simple in the land and that the interest of the registered proprietor was separate and distinct from the party that was carrying out the landfill operations on the site. He believed that the hypothetical purchaser was an investor who, in return for payment of royalties, would permit another to operate the waste disposal activities. Although those two interests were combined in the case of the activities conducted by the Adelaide City Council on this site, Mr Maloney was concerned only to value the interest of the hypothetical purchaser as the owner of the site and not the interest of the notional operator. He accepted that the highest and best use of the land was for the reception and disposal of waste, but that, in addition to any residual value that the land might have, the value to the owner of an unencumbered estate in fee simple was represented by the present capital value of the income stream, that is to say, the royalties able to be obtained by the registered proprietor in its capacity as a landlord from the landfill operator as tenant. That produced a rather different (and lower) result than that arrived at by Mr Smithson and Ms Carolan. His initial valuation was $2,530,000, but by the time of the hearing of the appeal he had adjusted this in the light of further information to $3,815,000.

Mr Smithson also prepared a valuation on the same basis, valuing the land at $6,800,000.

It was common ground that the capital value of the unencumbered fee simple of the land required an assessment of what the land might reasonably be expected to realise upon sale: Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 per Isaacs J at 440 - 441, and that the highest and best use of the land was as a site for waste disposal. Both valuers would have preferred to use comparable sales as a method of valuation. However, it was common ground that there was a lack of comparable sales in South Australia which would assist. Thus, when preparing their valuations, both Mr Smithson and Mr Maloney primarily relied on the revenue that the land would be capable of generating but they differed as to the method by which they determined the value from that revenue. Mr Smithson also used the comparable sales in Victoria as a check on his discounted cash flow method.

It should be noted that, in addition to agreeing that the licence to WWMC would not terminate until 31 December 2004, there was no dispute before the judge below that the capacity of the subject land to receive waste was 4,750,000 cubic metres.

The judge preferred the approach of Mr Maloney. However, he amended Mr Maloney's valuation by increasing the rate of the royalties which would be received and adjusting the capitalisation rate which Mr Maloney had adopted. The judge's assessment resulted in a value of $4,900,000.

The Port Adelaide Council appealed on a number of grounds but abandoned some on the hearing of the appeal. In the result, the Council's appeal is limited to the contention that the judge erred in valuing the land by reference to the royalties likely to be received by the hypothetical purchaser. Instead, the Council says, the judge should have accepted the discounted cash flow method used by Mr Smithson. In support of that proposition, the Port Adelaide Council says that the most likely hypothetical purchaser would be a person who intended to be both the owner of the land and the operator of the landfill business.

The definition of "capital value" has already been quoted. It is not necessarily the market value of land as the market value might in some instances reflect the benefits or burdens, as the case may be, of a lease. What must be assessed is the market value of the land unencumbered by a lease or any other burden. The land at Wingfield is not subject to a lease or to any other kind of encumbrance. The capital value will therefore be its market value.

As was noted in the evidence, one factor which, among others, affects the market value of land is its capacity to produce income. Plainly, it is not the only relevant factor. In some cases, the capacity to produce income will be of less significance than in others. For example, as a general rule, when valuing rural land, comparable sales will be the primary method of valuation. But the comparable sales which will be used will reflect the potential use of the subject land and those sales will, in turn, reflect the capacity to produce income. So land used for viticultural purposes will, as a general rule, have a higher value than grazing land in the same area.

The value of this land essentially derives in its capacity to produce income from being used for the purpose of waste disposal. Thus, both valuers ascribed a relatively nominal value to the land and both valuers valued the land by reference to the income it was capable of generating. That income will differ according to the manner in which the land is used.

The only evidence to assist the judge was the valuations from Messrs Maloney and Smithson and their oral evidence as well as Ms Carolan's valuation. Her valuation was tendered by the Adelaide City Council but she was not called. The judge was entitled to rely on it.

There was a good deal of evidence concerning the identity of the hypothetical purchaser. In both his valuation and in his oral evidence, Mr Maloney said that it would be an investor who would contract with a third party to operate the waste disposal business in return for a royalty payment. Mr Smithson's view was that the hypothetical purchaser would come from a class of person which included both investors of the kind identified by Mr Maloney and persons who were operators of sites for the disposal of waste and who would use the site themselves for waste disposal. I will respectively call them passive investors and owner-operators. The kind of person who might be the hypothetical purchaser was important because it affected the ultimate assessment of the value of the land. Mr Smithson believed, for reasons which will become apparent, that a purchaser who intended to be an owner-operator would pay more for the land than a passive investor. That proposition was not in dispute. The dispute concerned the identity of the hypothetical purchaser.

The judge held that the hypothetical purchaser would be a passive investor who would allow another to operate the waste fill business in return for payment of royalties. He rejected Mr Smithson's valuation because he believed it begged the question as to what was being sold and, hence, begged the question as to the correct method of valuation. His reason for doing so was that the hypothetical purchaser was purchasing an unencumbered estate in fee simple in the land and not the business. That conclusion appears to overlook the fact that, although the purchaser is buying the land only, the value of the land will reflect its capacity to produce income. It does not necessarily mean that the royalty method adopted by Mr Maloney is correct or that it is necessary to reject the discounted cash flow method. The judge therefore rejected the discounted cash flow method and, instead, decided that the correct approach is to value the royalties likely to be received by the passive investor and to apply an appropriate capitalisation rate to that revenue. He said:

"60 A number of instances were given in evidence where the activity of waste disposal is carried on by an entity separate from the landowner. That was done in respect of this land prior to the purchase of the land by the appellant. It is currently done at a number of waste disposal sites in South Australia, although in only a few of such cases was evidence available as to the royalty fee payable to the landowner. Nevertheless, the fact remains that it is a reasonably common practice for the landowners and the waste disposal operators to be separate, if sometimes related, entities.

61 There was evidence given of some sales of waste disposal sites in Victoria which sales may well have been to operators, although the evidence of the identity of the operators was far from certain.

62 The fact is that the legislation governing the activity of waste disposal contemplates the existence to separate land ownership from the ownership of the business carried out on the land. It might be different if the grant of a licence under the EP Act were conditional upon the licensee also being the owner of the estate of fee simple in the land but that is not the case.

63 For these reasons I reject Mr Smithson's basis of valuation calculated on the discounted cash flow expected to be received by the appellant as operator. Although he made the point in evidence that a passive investor would not be prepared to pay as much for the land as an operator would, that begs the question as to what is being sold. If the appellant were to sell the land and the licence, it would obviously attract a higher price than if it sold the land but retained the licence. In this regard I prefer the evidence of Mr Maloney that the correct approach is to value the royalties likely to be received by a hypothetical purchaser and to apply an appropriate discount factor to arrive at the net present capital value of that sum. To that must be added, as both valuers agree, the present residual value of the land once the waste disposal activity ceases."

The judge then stated that his reasoning was consistent with the views of the High Court in Turner v Minister for Public Instruction [1956] HCA 7; (1956) 95 CLR 245. He then concluded:

"65 In my opinion the same reasoning is applicable to valuation of land for rating purposes where some profitable activity is carried out on the land. What is to be valued is the land on sale to the hypothetical purchaser, not the capital value of the business carried out on the land. That approach is also consistent with the view taken by Wells J in a slightly different context in Harry v Valuer-General and State of SA (1975) 36 LGRA 319."

The judge proceeded to value the land by capitalising the royalties likely to be received by the hypothetical purchaser. For the reasons which follow, the judge erred in his finding as to the nature of the hypothetical purchaser with the consequence that he also erred in rejecting Mr Smithson's approach.

Before proceeding further, I note that the judge's reliance on Harry v Valuer-General is misplaced. That decision deals with the nature of the estate and not with the method by which value is determined. I note also that the decision in Turner v Minister for Public Instruction (supra) does not support Mr Maloney's approach. The relevance of that decision is only to ensure that a deduction for profit as well as risk is made. I return to that question later in these reasons.

The judge had earlier in his reasons identified the issues for determination as being whether the discounted cash flow method or the royalty method was the correct method by which to value the land and, if the latter, whether Mr Maloney or Mr Smithson had correctly assessed the royalty and the capitalisation rate. With respect, that approach was not entirely correct. The first question was to identify the likely hypothetical purchaser because that would bear upon the method of valuation. The next question was which of the two methods of valuation would be likely to produce the more correct result. If the discounted cash flow method is used, it will, for reasons identified in the evidence, be necessary to make adjustments to it.

Although the hypothetical purchaser is not purchasing the business, he is purchasing land for the express purpose of earning an income from waste disposal. The income generated will reflect the manner in which the hypothetical purchaser puts the land to use. The passive investor will be content with a regular income in the form of royalties. The owner-operator will be able to generate a substantially higher income. Although that income will be reduced by operating costs, there will be a resulting profit in an amount which is higher than the amount of the royalties which would be paid to the passive investor. That profit is higher because the person who pays the passive investor a royalty is also deriving profits from the land. In a perfect world, or more accurately in a perfect market, the value of the land would be the same whether one valued the land by the royalty method or by the discounted cash flow method with appropriate deduction. But the reality is that, for the reasons which appear later, the owner-operator is likely to pay a higher price for the land.

The judge's reasons proceed on the footing that the likely purchaser will be a passive investor and not an owner-operator. The judge relied on what he said is the experience in South Australia to support that conclusion. He found that it was a reasonably common practice for the land owner and the waste disposal operator to be a separate entity. However, the evidence showed that a number of waste disposal sites in South Australia were owned by companies which, though separate entities, were related to the operators. It showed that, in South Australia, in the case of the subject land and other land used for waste disposal, although the owner and operator of each site were often different companies, both companies were often in the same group. Either one company controlled the other or they were related companies both being controlled by a common owner. The position was similar in Victoria. The evidence identified seven sales of land in Victoria for waste disposal from June 1996 to September 1999. Six of the seven purchasers were operators of waste disposal businesses.

However, the question is not whether there are more owner-operators than passive investors who will be likely to purchase land for waste disposal. Instead, it is whether both owner-operators and passive investors will be potential purchasers. The evidence quite clearly established the latter. The evidence as to the position in both this State and Victoria was objective and uncontroverted evidence. The judge should have relied on it and found that the persons likely to purchase the land included both owner-operators and passive investors.

The fact that likely purchasers include owner-operators invalidates Mr Maloney's approach and the judge's reliance on it. Mr Maloney's approach is encapsulated in the following extracts from his valuation report:

"Following extensive deliberations and acknowledging that a waste landfill site comprises an underlying real estate asset upon which or in which waste materials are placed, I have concluded that my valuation is to assess the Capital Value of the land within the said Title assumed to be in the hand of a Registered Proprietor separate and distinct from the party that is carrying out the dumping and filling works on that land. ...

My investigations have shown that the Licence issued pursuant to the provisions of the Environment Protection Act 1993 is issued in relation to the operation of the landfill enterprise on the property and is a Licence issued to and held by the Operator and not necessarily the Owner of the real estate. As a separate and distinct Business Unit within the structure of the Adelaide City Council, the 'Wingfield Waste Management Centre' operates and conducts its own enterprise at Wingfield and keeps its own set of 'books' as a Landfill Operator, and therefore I am satisfied that I must address only the interest of the Owner of the real estate and not the Operator of the business operating on that real estate.

Accordingly, I have resolved to disregard the Licence issued under the Environmental Protection Act 1993 in the making of this assessment other than to acknowledge that its continued existence in the hands of the Operator does in fact provide for the time being at least, a meaningful guide as to what might represent the 'Highest and Best Use' of the said real estate asset."

The flaw in this reasoning lies in Mr Maloney's conclusion that he should value only the interest of the owner of the land without regard to the fact that the owner may also be the operator of the business. This conclusion fails to have regard to the evidence that the Adelaide City Council is itself operating a waste disposal business on this site through WWMC and to the evidence as to the other sites in South Australia and in Victoria where owners and operators as related companies own the land and operate the business. The conclusion that it is necessary to address only the interests of the owner of the real estate begs the question of what is the value in the hands of a purchaser. Although WWMC runs as a business of waste disposal for the Adelaide City Council and holds the licence to do so under the Environment Protection Act, it does not necessarily follow that a valuation must separate the interests of the owner and operator in the way Mr Maloney suggests. It does not follow that a distinction must be drawn between those two interests. As Mr Smithson said, a passive investor would not be prepared to pay as much for the land as an owner-operator. As will be seen, the owner-operator has the capacity to earn a higher income from the land than the passive investor and the owner-operator will determine how much he is prepared to pay for the land by reference to the profit likely to be derived from the land. Mr Maloney's approach fails to address that fact in a satisfactory way.

Mr Maloney's fundamental premise, both in his valuation and in his oral testimony, was that it was irrelevant to enquire whether owner-operators would purchase the land and to consider whether they would pay a price higher than the passive investor. While that approach might be valid in valuing land used for other purposes, it fails to have regard to the special, if not unusual, characteristics of this land. There is no one method of valuing land which has universal application.

In para 62 of his reasons, the judge also places some emphasis on the terms of the Environment Protection Act which is the legislation governing the activity of waste disposal in this State. It is not entirely clear what His Honour means. If he is stating that the Act requires that the owner of the business will be a different person from the owner of the land on which the business operates, he is in error. The operation of the Act in relation to licences is similar to other licensing legislation such as the Liquor Licensing Act 1997 which permits both owners of premises as well as tenants to be licensed to sell liquor. Both owners of land and operators who are permitted to occupy the land are entitled to hold a licence under the Environment Protection Act. If the judge is stating that the Act contemplates that an operator who is not an owner may hold a licence, he is correct. However, it is equally correct that an owner of the land may also hold the licence. There is nothing in the Act which prevents an owner-operator from obtaining a licence and, to that extent, the Act is of no real consequence when valuing the land.

For these reasons, the judge has erred in excluding owner-operators as likely purchasers.

The next question is whether owner-operators would be likely to pay a higher price for the land than a passive investor. If they will, the judge has erred in adopting Mr Maloney's approach. The price for the land does not represent only the value of the land itself but also the ability to earn income from the land. That was common ground. Both valuers therefore determined value by reference to the revenue derived from the land, albeit by different methods. Both valuers also proceeded on the footing that the value of the land essentially resided in its capacity to earn income. Without that, the land had little value. That was confirmed by evidence concerning the sale of land formerly, but no longer, used for waste disposal and called the Cleanaway Depot. Some 20.7 hectares was sold for $25,000, only about $1,208 per hectare. The land was to be used as a waste transfer station.

In pure theory, the owner-operators and the passive investor would pay the same price. The land has the same intrinsic value and each is able to derive an income from the business of waste disposal on the land. However, the reality is different. Different methods of assessing value by reference to revenue derived from a business on the land are likely to produce different values. Thus, in this case, the capitalisation of the royalty stream resulted in the judge's assessment of $4,900,000 (Mr Maloney and Mr Smithson having assessed it at $3,815,000 and $6,800,000 respectively). The difference in the assessments based on the royalties received by a passive investor resulted from differences in the assessment of the royalties to be received in the appropriate rate of capitalisation. The discounted cash flow method resulted in an assessment of $11,000,000. A difference in excess of $5,000,000 is remarkable and cannot simply be explained by the differences in the two methods. It is necessary to examine the discounted cash flow method and consider how it assists in determining price.

The discounted cash flow method values the land by valuing the business conducted on the land. It is, in truth, the value of the land and the profits derived from conducting a business on the land. That is demonstrated by Mr Smithson's evidence as to the manner in which he made his valuation. He calculated the revenue and expenditure over the known life of the Wingfield dump based on the revenue and expenditure of the WWMC. He then discounted those calculations back to a present value, the discount rate reflecting the risks inherent in the cash flows, in particular, revenue. His assessment allowed for the cost of the land itself and for the costs of closing the site, rehabilitation costs and other costs to be incurred after the site had closed. That realised what he believed to be the price an owner-operator would pay for the land. Significantly, the valuation assumes, as Mr Smithson acknowledged, that the purchaser would obtain a licence for the land. In that sense, it is a valuation of the price which would be paid for the land and the business with a licence to carry on that business. It is not, therefore, an assessment only of the price to be paid for the land.

The discounted cash flow method is useful for valuing shares and other assets: see generally, S J Brown, Investment Decisions: Discounted Cash Flow and Other Valuation Methods in Litigation, Journal of Banking and Finance - Law and Practice (1991) Vol 2, p 4. It is also useful when valuing land to be used either as a quarry or as land to be used for waste disposal and, in particular, the latter. As already mentioned, land used for waste disposal usually has little intrinsic value, particularly if already used for that purpose. As the value of the land lies in the ability to earn income from the land, the price of the land is essentially determined not by any intrinsic value of the land but by the use to which the land can be put and the income derived by the owner of the land from that use, be that income royalties or, in the case of the owner-operator, profit.

As mentioned earlier, the income to be derived from the land is, of course, often a factor affecting value. It has a particular significance in a case such as this where little capital expenditure is required to operate the business. In this case, both valuers ignored the relatively insignificant improvements on the land. In addition, the evidence shows that the necessary equipment can be hired. In other words, land used for this purpose is able to generate revenue without significant costs in addition to the purchase price. If purchased by the owner-operator, the discounted cash flow method has a particular utility. It is, however, generally recognised that care should be taken when using the discounted cash flow method and the resulting valuation should be checked against other methods of land valuation: see, for example, the comments of Wells J in Emerald Quarry Industries Pty Ltd v Commissioner of Highways (No 2) (1976) 18 SASR 438 at 445. A judgment must be made as to value and the result checked against other available evidence of value. In this case, notwithstanding that he primarily relied on the discounted cash flow method, Mr Smithson used the sales of comparable land in Victoria as a check. Ms Carolan also used those Victorian sales as a check.

The discounted cash flow method is useful in cases such as this where there is a finite life of the business and the income and expenditure are known. It is also useful when valuing a business such as this which is a going concern. It is less useful when other assets or capital expenditure are involved. But the evidence is that little, if any, capital expenditure is required to operate the business. The method is also useful because the quantity of fill which can be dumped on the site is known. The purchaser is not simply buying the land. He is buying the land with the capacity, subject to obtaining a licence, to run a like business earning like profits. The utility of the discounted cash flow method is emphasised by the fact that the land has a relatively low value of itself.

Other factors which point to the utility of the discounted cash flow method in the particular circumstances of this case are:

(1) the hypothetical purchaser would be buying land already used for waste disposal;

(2) as the use was an existing lawful use of land, the purchaser would not have to obtain planning approval;

(3) the purchaser could himself conduct the business subject to obtaining a licence;

(4) the purchaser would be aware that the site is the largest landfill site in the Adelaide metropolitan area taking about 55 percent of metropolitan Adelaide domestic waste and 50 percent of commercial and industrial waste from the Adelaide metropolitan area;

(5) there are a diminishing number of operational landfill sites in the Adelaide metropolitan area;

(6) the site is close to the Adelaide central business district and therefore has a local, as distinct from personal, goodwill which attaches to the land and enhances its value: cf. Commonwealth v Reeve [1949] HCA 22; (1949) 78 CLR 410;

(8) the purchaser would have been able to gain access to the accounting records of the vendor; and

(9) the operation of the dump required little capital expenditure because it was not necessary to incur substantial costs to establish the business such as the cost of buildings in that plant and equipment would be hired.

By reason of the factors listed in paras (1) to (9) above, there were few risks attached to the operation of the business. The only risk would be in obtaining a licence and, before purchasing the land, a prudent purchaser would have made enquiries to determine the likelihood of obtaining a licence. But it must be acknowledged that the discounted cash flow is a valuation of the business including the licence.

Although Messrs Smithson and Maloney have used different methods of valuation, that fact does not explain why there is such a remarkable divergence between their assessments of value. The difference between them exceeds $7,000,000. The difference between the agreed result by the discounted cash flow method and the judge's assessment is about $6,000,000.

The difference can, in part, be explained by the fact that the discounted cash flow method values the licence which must be obtained under the Environment Protection Act to operate the business. An allowance must therefore be made for the cost and risk of obtaining that licence. There was little helpful evidence on that issue. Subject to that qualification, the two methods of assessment should in theory produce relatively similar results. But even allowing for the cost and risk of obtaining a licence, there would still be a very substantial divergence between the two assessments of value.

The difference between the assessments of value can only be explained by the fact that the discounted cash flow method values the business as well as the land. Nor is it explained simply by the fact that the passive investor who receives royalties leaves the risk of operating the business to the operator whereas the owner-operator bears the risks himself. The discounted cash flow method adopts discount rates which reflect the risks inherent in the operation in the same way as the rate of interest adopted for the capitalisation of a royalty income.

The difference between the two assessments of value might also be explained by the fact that the owner-operator is in a position to earn higher profits from the land than the passive investor. An owner-operator will, in all likelihood, be in a position to pay a higher price for the land than the passive investor. The fact that the owner-operator may choose one company to own the land and lease it to another related company is of no consequence, since that is a decision which, in all likelihood, has been influenced by other factors such as taxation. But for reasons noted below, the difference is likely to be little.

Neither the methodology of the discounted cash flow method nor the rationale for that method was explained to the judge in any detail. One question is whether allowance should be made for a profit as well as risk in running the business. Would the owner-operator pay a price for the land equal to the amount calculated by the discounted cash flow method? When assessing the value of land suitable for subdivision on the basis of a hypothetical subdivision, allowance must be made for both profit as well as risk in effecting the subdivision: Turner v Minister for Public Instruction. Should some allowance be made for profit when using the discounted cash flow method? In other words, there is a difference between the value of the business and the price to be paid for the land on which the business will be run. As Mr Douglas Brown points out in his text Land Acquisition (4th edition) at para 4.16, a prudent purchaser concerned not to overlook ordinary business considerations would base his price, not on the net return, but upon a figure somewhat lower than the net sale price of the land in subdivided form. If he did not, he would be paying as much for the land as he believed he would be receiving for it when subdivided. In my view, an allowance for profit should be made. The difficult question is how much that allowance should be.

The potential purchasers will themselves determine the income potential of the land in running a waste disposal business on the land. In doing so, they will use in their calculations their own individual discount rates. A range of factors will affect the discount rates that each purchaser will apply. They will be determined by characteristics peculiar to each purchaser. Mr Smithson's discount rate is a reasonable assessment but it is the discount rates which each potential purchaser adopts which will ultimately determine the price.

In addition, the price will depend on who else is in the market and bidding. The owner-operator not only has to pay a sufficient price to outbid a passive investor but must also compete with other owner-operators in the bidding process. The potential purchasers are likely to include more than one owner-operator, so the price will, nevertheless, have to exceed what another unchallenged owner-operator would pay. Thus, the price is not simply what an owner-operator would have to pay to outbid a passive investor but what he would have to pay to outbid other owner-operators. In any event, the price must be less than as assessed by the discounted cash flow method to allow for the risk of obtaining a licence. All these factors show that the discounted cash flow method is but a guide. In the ultimate result, a judgment must be exercised.

As stated above, the fact that there is such a substantial discrepancy between the values reached by capitalising royalties and the discounted cash flow method suggests that the owner-operator is in a position to pay a higher price than the passive investor. Because there is an increasing shortage of sites for waste disposal in South Australia and, in particular, a shortage of sites close to the central business district, the likelihood that the hypothetical purchaser would be an owner-operator and pay a price higher than the value determined by an assessment based on royalties is increased. That is a further reason why the judge should not have relied on Mr Maloney's valuation.

For these reasons, the judge's assessment of value is in error. It is necessary to determine what the value should be. There is sufficient evidence available for this Court to discharge that task.

For the purpose of determining value, I have had regard to the valuations of Ms Carolan and Mr Smithson, and, in particular, to their comments as to the utility of the sales in Victoria. Ms Carolan, whose valuation was prepared for the Adelaide City Council, believed that, given the lack of evidence of comparable sales in South Australia, it is reasonable to have regard to comparable sales in Victoria which, in her view, are a useful guide having generally similar ranges of gate charges, operating costs and environmental restrictions. Both Ms Carolan and Mr Smithson used the same seven sales. Mr Smithson had evidence of some earlier sales but did not rely on them.

One method of comparing the sales which both valuers adopted was to determine the price paid for the capacity of the site to take fill, that is to say, the price per cubic metre of air space to be filled. Both valuers agreed on the resulting analysis. The sales in Victoria ranged from $1 per cubic metre to $3.33 per cubic metre. Of the seven sales to which both valuers referred, one can be put to one side. It was a sale which did not proceed to completion. The following table shows the agreed analysis, excluding the sale which both valuers discounted.

The first four sales are part of a single transaction with the vendor continuing to occupy parts of the sites and, in particular, part of the site of sale 2. What is apparent is that sales of sites which can be used for disposal of municipal waste show a price ranging from $2.22 to $2.50 per cubic metre. These sites are not necessarily operating. In the case of sale 5, the site was not licensed. Sale 3 should be discounted because it is substantially smaller than the other sites and, in particular, substantially smaller than the site at Wingfield. In all of these sales, the purchaser was liable to pay closure costs, which include the cost of rehabilitating the site. A purchaser of the land at Wingfield would have a like obligation.

The most comparable in size of these sales is sale 2. It also has the advantage of being close in time to the date of valuation of the land at Winfield. If a price of $2.22 is applied to the area to be filled at the Wingfield site (4,750,000 cubic metres), the price is $10,545,000. That is less than the agreed value as assessed by the discounted cash flow method. There is no evidence to assist in determining to what extent the value as assessed by the discounted cash flow method should be reduced to allow for the cost and risk of obtaining a licence. A reduction of $1,000,000 equates to nine percent. There is no evidence which indicates whether that is a sufficient allowance. I think it desirable to approach the matter conservatively and to increase the allowance for the costs and risk of obtaining the licence. In addition, an allowance must be made for the fact that the owner operator is not likely to pay an amount equal to the value of the business. I would therefore make a reduction of $2,500,000. On that basis, the value of the land at Wingfield is $8,500,000 or about $1.84 per cubic metre. The Victorian sales suggest that is a conservative value. I am encouraged to adopt it.

For these reasons, I would allow the appeal. I would vary the order made by the judge below and substitute in para 1 of his order $8,500,000 in place of $4,900,000. I would hear the parties as to the costs of this appeal and the costs of the hearing before the judge below.