Graham Trilby Pty Limited v Valuer-General

Bronzel v State Planning Authority (1979) 44 LGRA 34 Halwood Corporation Ltd (Scheme Administrator Appointed) v Roads Corporation (1995) 89 LGERA 280 CASES CITED: McGeoch v Federal Commissioner of Land Tax (1929) 43 CLR 277 Pamalco Pty Ltd v Minister Administering the National Parks and Wildlife Act 1974 [No 3] (1991) 71 LGRA 441 RK Morgan Holdings Pty Ltd v Melbourne & Metropolitan Board of Works (1992) 77 LGRA 102

TEXTS CITED: Douglas Brown, Land Acquisition, (5th ed, 2004) Alan Hyam, The Law Affecting the Valuation of Land in Australia, (3rd ed, 2004)

APPLICANT Mr M Seymour SOLICITORS Hunt & Hunt LEGAL REPRESENTATIVES: RESPONDENT Ms A Pearman SOLICITORS Crown Solicitor

JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES

JUDGMENT Jagot J: 1 This is an appeal under s 37 of the Valuation of Land Act 1916 (the Act) against the Valuer-General's valuation of lot 161 in deposited plan 1007387 at Cattai Creek Drive, Kellyville. The applicant contends that the land value of lot 161 at the base date of 1 July 2005 is $10,500,000 from which amount there should be a substantial deduction under s 14L of the Act (allowances for profitable expenditure). The Valuer-General contends that the land value is $14,300,000 and that no deduction should be made from that amount under s 14L of the Act. The appeal is to be determined in accordance with the provisions of the Act. Under these provisions the Court may confirm or revoke the decision to which the appeal relates, make a decision in place of the decision to which the appeal relates, or remit the matter to the Valuer-General for determination in accordance with the Court's finding or decision (s 40(1)). The applicant has the onus of proving its case (s 40(2)).

2 Recording some uncontentious facts assists in understanding the competing positions of the parties. All factual references below involve the situation as at the base date of 1 July 2005 unless otherwise indicated.

3 Lot 161 is a large parcel of some 16.48 hectares. It has an irregular shape adjoining residential development to the south and Cattai Creek to the north. Lot 161 is the residue parcel left from a subdivision of three other lots owned by the applicant. The applicant subdivided the adjoining land into house lots and carried out all civil works usually associated with residential subdivision (clearing, earthworks, roads, drainage and the like). Lot 161, as the residue parcel, remained undeveloped. It has street access available via two roads created as part of the subdivision of the adjoining land (Georgia Terrace and Amy Hawkins Circuit). Because residential development on the adjoining land abuts lot 161 at a number of locations it is apparent that services (such as water, sewerage, electricity) must extend, in effect, to the boundary of lot 161.

4 Lot 161 is affected by two zones under the Baulkham Hills Local Environmental Plan 2005 (the LEP). The LEP was published in the NSW Government Gazette on 26 August 2005. The valuers giving evidence (Mr Barlow and Mr Maunsell) operated on a common assumption that the LEP was certain and imminent at the base date of 1 July 2005 and would have been seen by the parties to the hypothetical sale posited by s 6A of the Act as regulating the use of lot 161. 76,804 m2 of land is within the Residential 2(b) zone. The residentially zoned land is in two parts adjoining the existing residential development. 87,996 m2 of land is within the Open Space 6(a) zone.

5 The 2(b) zone encourages development of a predominantly single dwelling, low-density character. It is common ground between the valuers that the residential land within lot 161 is ripe for subdivision and residential development. It is zoned for that purpose and, by reason of the development of the adjoining land, has road frontages and services available at the boundary. The valuers agreed that the land within the 2(b) zone could yield a residential subdivision of 52 lots with each lot fronting the open space area incorporating a large asset protection zone to deal with bushfire risk. The hypothetical subdivision accepted by both valuers as a reasonable representation of the development potential of lot 161 shows lots greatly varying in size. The range is from 560m2 to a very large lot of 7297m2. There are three other large lots of over 3000m2. A number of lots are in the 700 to 900m2 range with at least as many at or exceeding 1000m2 (the larger lots incorporating the asset protection zones).

6 The land within the 6(a) zone is part of the Cattai Creek Conservation Area. Cattai Creek is the major creek in the area connecting to the Hawkesbury River. The Council's contributions plan under s 94 of the Environmental Planning and Assessment Act 1979 (the EPA Act) authorises the collection of funds for the acquisition of an open space corridor along the creek. The LEP supports these provisions with an acquisition clause (cl 44) in the following terms: (1) The owner of any land within Zone 5 (a) and lettered on the map "Community Facility" or "Local Drainage" or any land within Zone 6 (a) may, by notice in writing, require the Council to acquire the land. (2) On receipt of such a notice, the Council must acquire the land if: (a) the land is included in a program for the acquisition of land by the Council current at the time of receipt of the notice, or (b) the Council is of the opinion that the owner of the land will suffer hardship if the land is not acquired within a reasonable time, but the Council is not required to acquire the land if it might reasonably be required to be dedicated as a condition of consent to a development application. (3) Until the land referred to in subclause (1) is acquired by the Council, a person may, with development consent, carry out development on that land. (4) Such a consent may be granted subject to conditions requiring either or both of the following, with or without the payment of compensation by the Council: (a) the removal of the building or work for which consent is granted, (b) the reinstatement of the land or removal of any waste material or refuse. (5) In considering whether to grant consent as referred to in subclause (3), the consent authority must take into consideration: (a) the effect of the proposed development on the cost of acquisition, and (b) the imminence of acquisition. (6) Land acquired under this clause may be developed with development consent for any purpose, until such time as it is required for the purpose for which it was acquired. 7 Lot 161 is not included in a program for acquisition by the Council. According to the Council lot 161 would not be placed on the program other than as part of a proposed development. Once on the program, acquisition would be a matter for negotiation between the owner and the Council. The s 94 contributions plan (section 5.1) provides that the Council generally will not accept the dedication of land identified for public purposes in lieu of the payment of monetary contributions payable under the plan. Instead, the Council requires payment of the full monetary contribution owing on development, with the value of land to be acquired the subject of separate negotiations.

8 The valuers' evidence assumed that the open space land on lot 161 had no potential for any development pending its acquisition by the Council. It also assumed that the parties to the hypothetical sale under s 6A would treat the open space land as unsuited to development, requiring negotiations with the Council for acquisition under cl 44 of the LEP. Neither party challenged those assumptions and I accept them. It is also relevant to note that, when negotiating with the Council about the value of the open space land, its topography (it is steep in parts, falling to the creek), heavy vegetation cover, and proximity to the creek would all tend to suggest limited development potential if the open space purpose is disregarded as required by s 56(1)(a) of the Land Acquisition (Just Terms Compensation) Act 1991.

9 The Valuer-General ascertained the land value of lot 161 under s 6A of the Act for the base date of 1 July 2005 in the sum of $13,800,000. The Valuer-General deducted from that land value an allowance under s 14L(1)(b) for profitable expenditure in the sum of $656,000, giving a net land value of $13,144,000. The applicant lodged an objection on 14 March 2006 asserting that the land value was too high. The applicant proposed a land value of $11,000,000 noting that the market had decreased over the last two years (that is, between 2004 and 2006). The Valuer-General responded on 3 April 2006 noting the base date of 1 July 2005, that the objection was not supported by any information such as comparable sales evidence, and gave the applicant an opportunity to submit such material.

10 On 13 September 2006 the applicant submitted a valuation report to the Valuer-General in support of the objection and expanded the objection to include other base dates. The present appeal is limited to the base date of 1 July 2005. The other appeals have been adjourned pending the outcome in this appeal. Mr Barlow, valuer, prepared the valuation report lodged in support of the objection. He assessed the land value of lot 161 in the sum of $4,000,000. Mr Barlow valued lot 161 using the residual method. On the basis of a hypothetical 48 lot subdivision Mr Barlow determined a gross realisation of $17,000,000 ($16,000,000 for the residential land and $1,000,000 for the open space land). After deducting all development costs (including a cost of over $8,000,000 identified as a special infrastructure contribution) Mr Barlow's residual method resulted in a negative land value of ($2,200,000). This led Mr Barlow to conclude that lot 161, despite the fact that it contained nearly 7.7 hectares of residentially zoned land, was not a subdivision parcel. Accordingly, he concluded that the highest and best use of lot 161 was as a single large home site with potential for subdivision when circumstances improved. Mr Barlow then used a direct comparison approach with the sale of rural home sites (presumably in a rural zoning) to deduce a land value of $4,000,000.

11 The applicant initially adopted this position (that is, a value of $4,000,000) in the appeal. In its original points of objection dated 30 May 2007 the applicant contended for a land value determined by direct comparison with sales of rural home sites. On 18 July 2008 the applicant amended its points of objection by reference to Mr Barlow's valuation report in the appeal. By the time this report came to be prepared (in February 2008) Mr Barlow was aware that the development cost of over $8,000,000 for a special infrastructure contribution was incorrect. This changed Mr Barlow's view of the highest and best use of lot 161 from a large single home site into a parcel ripe for subdivision.

12 Mr Barlow had also conferred with Mr Maundrell by this time agreeing on the subdivision potential of 52 lots. Mr Barlow accepted Mr Maundrell's gross realisation of $22,325,000 (which includes GST using the margin scheme) and otherwise agreed profit and risk, agent's commission percentage, legal costs per lot, s 94 contributions, a contingency rate, a total development and selling period of 24 months, and the rate of interest. This led Mr Barlow to rely on the residual method to assess an amended land value for the residential land of $8,300,000. To this he added $1,476,000 for the open space land, giving a total land value of $9,776,000. The value of $1,476,000 is the amount the valuers agreed the developer of lot 161 would need to pay in s 94 contributions. In Mr Barlow's view a developer would treat the open space land as having a value equivalent only to the developer's liability for monetary contributions under s 94 of the EPA Act on the basis that the whole of the open space land could be dedicated to the Council with its value offset against the liability under s 94.

13 Following a further joint conference between Mr Barlow and Mr Maundrell Mr Barlow agreed that the treatment of interest in his residual analysis was incorrect. This caused Mr Barlow to further amend his residual analysis to extract a land value for the residential land of $9,000,000 or a total land value (when the value of the open space land is added) of $10,476,000 (which Mr Barlow rounded to $10,500,000).

14 Mr Barlow's report in the appeal also contained a direct comparison analysis that he used as a check to his approach to the residential land (by residual analysis) and open space land (by offsetting the liability under s 94). He considered direct comparison suitable as a check method only for two reasons. First, in his experience developers of en globo parcels do not buy land on a $ rate per m2 basis but carry out a residual analysis. Secondly, the comparable sales were not particularly comparable as there was a vast difference in the average lot size in the hypothetical development of lot 161 (average lot size of 1477m2) compared to the average lot sizes on the sales (between 493 and 648m2).

15 As to the residential land, Mr Barlow analysed sales of 5 en globo parcels for residential development in the Kellyville area. He excluded consideration of certain sales in Castle Hill that were also available on the basis that Castle Hill was a superior location compared to Kellyville. After adjusting for a falling market between the sale dates and the base date Mr Barlow noted the $ rate achieved per m2 (a range of $207 to $300 per m2) but based his analysis on the $ rate achieved per lot (a range of $132,000 to $196,000 per lot; although in fact Mr Barlow's report shows a rate of $209,000 per lot for the sale at Rosebery Road). Mr Barlow considered this consistent with the average $ rate per lot his residual analysis showed for lot 161 disregarding the open space land ($173,077).

16 As to the open space land, Mr Barlow considered two sales of open space near lot 161 sold to the Council. Mr Barlow considered these difficult to analyse as they were not ordinary market transactions and involved much smaller areas. Nevertheless he considered his value (which equated to $17 per m2 for the open space land) consistent with the rates of $77 and $99 per m2 shown by the sales.

Mr Maundrell's approach to the value of lot 161 17 Apart from the correction of arithmetical matters and a willingness to exclude a sale in each of Castle Hill and Glenwood from consideration, Mr Maundrell's approach to the value of lot 161 remained consistent. Mr Maundrell described lot 161 as located in the northern part of a highly sought after suburb in which good quality residential homes have been established. He shared Mr Barlow's view that the market had fallen since its peak in December 2003. Unlike Mr Barlow, Mr Maundrell considered that sales of en globo parcels in the suburb and adjoining suburbs (appropriately adjusted having regard to achievable price expectations and the characteristics of lot 161) were the best direct evidence of value. Mr Maundrell disagreed with the use of the residual method as a primary basis for valuation when comparable sales were available. He considered the residual method inherently less reliable than direct comparison. Mr Maundrell did not accept an approach to the comparative exercise based on average lot sizes as the agreed subdivision potential of lot 161 contained a small number of very large lots that would distort the average. Mr Maundrell considered that yield and lot sizes were matters for which an experienced valuer could make adjustments to give a reliable result based on direct evidence. He also did not accept that developers buying en globo land disregarded $ rates per m2 for developable land. Developers had to compete for land on this basis irrespective of their intended development product.

18 Mr Maundrell relied particularly on 6 sales (4 in common with Mr Barlow at Kellyville and 2 at Castle Hill). Having regard to the valuation purpose, Mr Maundrell resolved doubts in the applicant's favour and analysed the sales adjusted for time and the constraints on lot 161 (particularly the need for large asset protection zones on some of the lots, but also all other site features) as showing a range (as adjusted) between $135 and $147 per m2. He adopted the lowest rate ($135 per m2) for lot 161 resulting in a land value for the residential land of $10,388,540.

19 Mr Maundrell adopted the same direct comparison approach for the open space land. He analysed the same 2 sales of open space land near lot 161 as Mr Barlow (at $77 and $102 per m2). He made an allowance for size (giving a value of $60 per m2). He then made a further deduction of 25% on account of the risk and delay in dealings with the Council. This gave a rate for the open space land of $45 per m2 (or a value $3,959,820).

20 Accordingly, Mr Maundrell valued lot 161 in the amount of $14,328,360 (rounded down to $14,300,000).

21 Mr Maundrell used the residual method as a check only for the residential land. He carried out an analysis of three hypothetical developments (the agreed 52 lot yield, a 60 lot yield containing 20 single home lots and 40 small integrated housing lots, and a 50 lot yield with the one lot containing open space dedicated to the Council and 49 saleable lots). These analyses, in Mr Maundrell's view, supported his conclusions based on direct comparison. For the agreed 52 lot subdivision, Mr Maundrell's residual analysis showed a land value for the residential land of $9,810,900 (or an average of $188,671 per lot or $127.7 per m2 over the residential land).

22 Using the agreed 52 lot subdivision as a base Mr Maundrell and Mr Barlow identified the following differences in their residual analysis (leaving aside their methodological dispute).

23 First, on top of the subdivision costs of $85,000 per lot Mr Barlow made a separate allowance for professional fees ($265,200) and advertising and promotional fees ($223,250). Mr Maundrell considered that all of these costs would be part of the $85,000 per lot subdivision costs.

24 Secondly, Mr Barlow deducted from his gross realisation the full amount of the GST that would be payable under the margin scheme ($1,211,243) before making the further required deductions. He considered this appropriate because the other costs deducted were exclusive of GST (when, in fact, GST would be payable other than on s 94 contributions). If GST were added the costs would be higher than represented. Further, any tax credits the developer accrued could not be set off against the GST payable on the margin because it would already be "banked" and could not be used twice. Mr Maundrell considered this approach inaccurate. Mr Maundrell explained that a residual analysis is a static representation of a development (in contrast, I interpolate, to the dynamic representation in a discounted cash flow approach). The developer would accrue tax credits on the development costs paid (excluding s 94 contributions). Those credits would not be dealt with at all in the residual analysis unless offset against the GST payable on the margin. Hence, calculating the GST on the development costs and deducting that amount from the GST payable on the margin gave a better representation of the developer's real position than Mr Barlow's approach.

25 One preliminary observation is appropriate. Both valuers prepared a table of adjustments showing each sale and a % adjustment for each factor they considered relevant. Both observed that they had reached their conclusions before preparing these tables but prepared the tables on the basis of instructions that the Court required them. The Court's practice and procedure does not require these tables to be prepared. To the contrary, tables with such detailed % adjustments tend to obscure rather than illuminate a valuer's reasoning because they involve working backwards from a conclusion reached on the whole of the available material. Tables setting out detailed % adjustments have been criticised in other decisions (for example, RK Morgan Holdings Pty Ltd v Melbourne & Metropolitan Board of Works (1992) 77 LGRA 102 at 108 and Pamalco Pty Ltd v Minister Administering the National Parks and Wildlife Act 1974 [No 3] (1991) 71 LGRA 441 at 454). Concerns about tables of this type are well founded.

26 A convenient starting point for the methodological dispute is the observation of Wells J in Bronzel v State Planning Authority (1979) 44 LGRA 34 at 38 that: …this Court should be slow to reject any method that, in expert hands, is capable of yielding a result within bounds that are not unreasonable. The limitations of every method must, of course, always be kept clearly in mind. I am of the opinion that the approach likely to result in the most direct and reliable resolution of the outstanding differences between the valuations is to consider the particular features of each valuation that are capable of yielding to adverse criticism.

27 That having been said it is well recognised that, if comparable sales are available, direct comparison has repeatedly been identified as the "conventional valuation technique" (see, for example, the summaries in Alan Hyam, The Law Affecting the Valuation of Land in Australia , (3rd ed, 2004), at 126 - 141 and Douglas Brown, Land Acquisition , (5th ed, 2004), at [4.9]). The basis for this preference is obvious - if comparable sales are available then they represent direct evidence of the market's evaluation of all of the variables that a valuer must otherwise account for by a subjective opinionative process in the residual or hypothetical development approach. This proposition underscores why the fact that developers buying en globo parcels may routinely use a residual analysis to determine land value is an insufficient reason (at least considered in isolation) to disregard or place little, if any, weight on comparable sales.

28 Mr Barlow accepted that all of the Kellyville sales involved a similar location to lot 161. His concern about comparability was based on achievable lot sizes. Insofar as this concern arose from comparing average lot sizes, I accept Mr Maundrell's evidence that the average size for lots within lot 161 is distorted by the presence of one exceptionally large lot (over 7000m2) and three very large lots (over 3000m2). Hence, average prices per lot are likely to be an unreliable guide to value in this case. I accept also that an experienced and careful valuer such as Mr Maunsell (who provided thorough and readily understood written and oral explanations for all of his conclusions) is capable of providing reliable evidence about the adjustments (even substantial adjustments) that need to be made to the residential sales to take into account the constraints burdening lot 161.

29 Mr Maundrell's direct comparison approach resulted in a rate per m2 for the residential land of $135 (or $200,000 per lot). Mr Maundrell's residual approach yielded a lesser value ($9,810,900 or $127 per m2 or an average of $188,671 per lot). I am satisfied that Mr Maundrell's conclusions are to be preferred to those of Mr Barlow.

30 First, the sales evidence. I note that: (1) The Castle Hill sales (7 Banks Road and Old Castle Hill Road) are in a better location than lot 161. Both sites are far smaller than lot 161 (9409m2 and 4.9 hectares) and thus involve less risk for a developer, although the larger sale had some development issues including steep topography in parts, a watercourse and restricted development area (with development potential ultimately resolved through an appeal to this Court). Adjusted for time the sales show $268 and $300 per m2 respectively. On a per lot basis (9 and 63 lots respectively) the sales show $280,000 and $237,181 respectively.

(2) The Fyfe Road, Kellyville sale (lot 27) is a good corner site but in a less desirable location than lot 161 in terms of quality of surrounding development, outlook and ambience. It is far smaller than lot 161 (21,240m2 of residential land and 2600m2 of open space land). No time adjustment is required (the sale being in July 2005). The sale shows $247 per m2. On a per lot basis (38 lots with an average size of 559 per m2) it shows $155,263.

(3) The sale at 78 Acres Road, Kellyville is easy building land but does not enjoy the location and ambience attributes of lot 161. Again, however, it is a far smaller site of 2.723 hectares. Adjusted for time the sale shows $280 per m2. On a per lot basis (42 lots with an average size of 648m2) it shows $182,142.

(4) The sale at President Avenue, Kellyville also does not enjoy the location and ambience attributes of lot 161. Again, however, it is a far smaller site of 1.626 hectares that was developed with adjoining land. Adjusted for time the sale shows $293 per m2. On a per lot basis (33 lots with an average lot size of 493m2) it shows $160,606.

(5) The Parkway, Beaumont Hills sale involves a site of 10.12 hectares. The sale is in a good location reasonably equivalent to lot 161 with an outlook to the west. Mr Maundrell considered the sale generally inferior because of the western exposure and a distant view over retail/industrial development. On balance I consider the land not materially dissimilar to lot 161. However, its development potential was obviously different. The developer has chosen to develop the land for 168 lots. That density bears no resemblance to the potential of lot 161 and the achievable rate per lot reflects the density. Adjusted for time the sale shows $220 per m2. On a per lot basis (168 lots with an average lot size of 602m2) it shows $132,559. The 52 lots that development of lot 161 will yield will be far superior.

31 I consider Mr Maundrell's adjustments and adoption of the lowest rate shown by the range of sales (of $135 per m2) reliable. The adjustments reasonably reflect the relativities of the sales to lot 161. The adoption of the lowest rate in the range resolves doubts in the applicant's favour.

32 Second, the overall reliability of the valuers' evidence. Mr Barlow initially concluded that lot 161 had no immediate subdivision potential because of a particular development cost that turned out to be wrong. While valuers are entitled to rely on instructions about various issues this is a case where: - (i) the applicant's original objection asserted a value of $11,000,000, (ii) the applicant is an experienced developer, and (iii) the applicant in fact developed the adjoining land which, presumably, would have been subject to similar development costs. Mr Barlow's initial analysis shows that the residual approach involves a higher risk of reaching unrealistic results than the direct comparison approach. The sensitivity of residual approach to incorrect inputs is also evidenced by the fact that, despite the valuers having agreed the rate of interest, Mr Barlow's later acceptance that his treatment of the agreed interest rate was inappropriate led to a $700,000 difference in land value (from $8,300,000 to $9,000,000).

33 Third, and with this in mind, the issues of development costs and GST.

34 Mr Maundrell thought the development costs of about $130,000 per lot on one of the Castle Hill sales (which had slip problems) extraordinarily high. Mr Lyons (the applicant's managing director) identified subdivision costs for the development of the adjoining land of $3,211,459. The development consent for the subdivision of the adjoining land involved 54 lots (according to the s 94 contributions in condition 26). This equates to subdivision costs (excluding advertising and promotional fees) of about $60,000 per lot (or less if the special infrastructure payment is only partly attributed to the adjoining land). Development costs of $85,000 per lot excluding professional and advertising fees seem unrealistic. I also agree with the concern Mr Maundrell raised about the way Mr Barlow has included the s 94 contributions amount in the base figure from which the allowances for professional fees (6%), advertising and promotional fees (1%), and contingencies (8%) have been calculated. The monetary contributions payable under s 94 have been agreed between the valuers. They are a known cost. That cost should not be included in the base amount from which other allowances are then derived.

35 The GST issue has to be seen in context. The residual analysis is intended to represent the steps a developer would take to work out what they were willing to pay for land. It is, as Mr Maundrell said, a static representation of a dynamic process. Mr Maundrell accepted that his approach did not reflect the reality of what in fact would occur (with GST amounts being paid and claimed throughout the process). Nevertheless Mr Maundrell's approach recognises that a developer can offset GST through the life of the development. Mr Barlow's approach factored in the whole of the GST payable on the margin (thus reducing the starting point for the residual analysis) and made no allowance for any GST offset. I thus prefer Mr Maundrell's approach to this issue. Even if this were not the case, the issue is of marginal materiality given my conclusions above.

36 On the whole of the evidence I am satisfied that I should adopt Mr Maundrell's land value for the residential land ($10,388,540).

37 Fourth, the open space land. The difficulty with Mr Barlow's primary approach to the open space land is that it assumes the buyer of lot 161 will treat that land as having the same value as the s 94 contributions payable on development when the Council's s 94 contributions plan specifies that the Council will not adopt this offsetting approach. Mr Barlow's secondary approach relied on the same two sales of open space land as Mr Maundrell. Mr Barlow also observed that these sales were not particularly reliable as the Council was the buyer and the size of the acquired land so small in comparison to the 87,996m2 of open space on lot 161. He thought it most unlikely that a buyer would pay nearly $4 million for land that could not be used and only had one ultimate buyer (the Council) in circumstances where the delay in Council acquisition could be 5 to 10 years. Mr Barlow noted the holding costs for these periods would be substantial (about $1.65 million over 5 years and $3 million over 10 years). Given the terms of the LEP, Mr Barlow anticipated that the buyer would have significant difficulties with the Council about the acquisition of the open space. Mr Maundrell, in contrast, thought the open space so central to the Council's planning that the negotiations and acquisition would occur once development was proposed. Mr Maundrell considered his deductions from the values achieved on the open space sales sufficiently accounted for size, delay, and risk.

38 The concerns raised by Mr Barlow about the open space land cannot be lightly dismissed. The sales are of portions of open space of 5417 m2 and 8425m2 at prices of $460,445 and $926,750 respectively. Although I accept Mr Maundrell's reduction for size to $60 per m2 I consider his further 25% reduction for the time and risk factors too low having regard to the size of the open space and the lack of any capacity of the buyer to require acquisition unless and until the land is placed by the Council on the acquisition program or the Council forms an opinion on hardship. As Mr Maundrell said, the land will not be placed on a program until the development application (or possibly consent) stage is reached. This could mean that a buyer has to hold the open space for many years. Mr Barlow's approach (to equate the value of the land to the s 94 contributions payable and no more) is too extreme; but I am satisfied that the allowance for delay and risk should be in the order of about 50% to take into account the very large area of open space and the terms of the acquisition clause in the LEP. This gives a value for the open space land of $2,639,880.

39 For the reasons given above I consider that the land value of lot 161 at the base date of 1 July 2005 is $13,028,420.

40 Section 14L is in the following terms: (1) For the purpose of ascertaining the land value of any land, the Valuer-General is to ascertain a reasonable allowance for profitable expenditure by the owner, occupier or lessee in respect of: (a) any effective land improvements on or appertaining to the land, and (b) any visible and effective improvements which, although not on the land, have been constructed: (i) for the purpose of supplying water to the land, or (ii) for the purpose of draining the land, protecting the land from inundation or making some other provision for the more beneficial use of the land. (2) In the case of a stratum, the Valuer-General is also to ascertain a reasonable allowance for profitable expenditure by the owner or occupier on any visible and effective improvements which, although not in the stratum, have been constructed exclusively for the benefit of the stratum. (3) An allowance for profitable expenditure is to be calculated on the assumption that: (a) the allowance is being calculated at the date by reference to which the land value is being determined, and (b) any improvements that have been taken into account for the purpose of ascertaining the land value of the land were in existence at the date referred to in paragraph (a). (4) An allowance for profitable expenditure is to be entered in the Register of Land Values in respect of any land value to which it relates.

41 Section 14L has to be understood in the context of the meaning of "land value" (s 6A) and "land improvements" (s 4(1)) as follows: 6A(1) 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. 4(1) Land improvements means: (a) the clearing of land by the removal or thinning out of timber, scrub or other vegetable growths, (b) the picking up and removal of stone, (c) the improvement of soil fertility or the structure of soil, (d) the restoration or improvement of land surface by excavation, filling, grading or levelling, not being works of irrigation or conservation, (d1) without limiting paragraph (d), any excavation, filling, grading or levelling of land (otherwise than for the purpose of irrigation or conservation) that is associated with: (i) the erection of any building or structure, or (ii) the carrying out of any work, or (iii) the operations of any mine or extractive industry, (e) the reclamation of land by draining or filling together with any retaining walls or other works appurtenant to the reclamation, and (f) underground drains.

42 The provisions of s 14J (the requirement to deduct the amount of any allowances in determining land value), s 14M (the exclusion of the allowances in certain circumstances for the purposes of the Land Tax Management Act 1956), and s 14Q (allowances where profitable expenditure has been apportioned across more than one land owner) also assist in understanding the operation of s 14L.

43 The evidence does not disclose any improvements on the land. It follows that the question under s 14(1)(a) is whether the applicant has proved any profitable expenditure on any effective land improvement appertaining to the land. The question under s 14(1)(b) is different because there is no requirement that the improvements be on or appertain to the land.

44 A land improvement is one appertaining to land if the improvement, while not on the land, nevertheless belongs to the land ( McGeoch v Federal Commissioner of Land Tax (1929) 43 CLR 277 at 294 - 295 and Halwood Corporation Ltd (Scheme Administrator Appointed) v Roads Corporation (1995) 89 LGERA 280 at 296).

45 The applicant's evidence appeared to assume that the subdivision and associated civil works on the adjoining land constituted land improvements appertaining to lot 161. This argument involved the following steps: - (i) lot 161 is the residue parcel from the subdivision of three other lots owned by the applicant, (ii) the applicant developed the adjoining land by way of residential subdivision, including all civil works usually associated therewith, (iii) the residential subdivision of the adjoining land gave lot 161 direct road and services frontage and thereby increased the land value of lot 161, and (iv) a reasonable allowance in the order of 50% of the subdivision costs for the adjoining land (and more for the cost of a special contribution for sewerage and water services) should be made.

46 Leaving aside the sewerage and water payment, the evidence primarily consisted of a schedule of costs incurred by the applicant to subdivide and make the adjoining land suitable for residential development. The adjoining land was cleared, cut, filled, and had roads and services constructed through it (I infer to the boundary lot 161). However, all of those works were required for the subdivision and future development of the adjoining land.

47 For s 14L(1)(a) to apply the land improvement must be either on or appertain (that is, belong) to lot 161. This sense of appertaining is identical to that appearing in s 6A(1) itself. Civil works essential for the subdivision and development of land are not on and do not appertain to adjoining land merely because they involve proximate urban development and the characteristics (roads, drainage and the like) which urban development brings. For a land improvement to appertain to land something more is required. The discussion in McGeoch at 290 assists in identifying why the applicant's schedule of subdivision costs incurred in subdividing the adjoining land fails to identify any land improvement appertaining to lot 161. Knox CJ and Dixon J said: In the legislation in Australia imposing tax on the unimproved value of land we think it is clear that the subject matter sought to be taxed has always been that part of the value of the land at the relevant date which has been commonly described as the "unearned increment." The value at any given date of any given parcel of land has been considered as including two factors, namely, (1) the portion of the value at the relevant date attributable to improvements on or appertaining to the land made by the owner or his predecessors in title and (2) the portion of the value at such date attributable to extrinsic circumstances, such as public roads or railways, increased settlement in the neighbourhood, public services brought within reach and other causes not brought about by the operations on the land of successive occupiers.

48 The development of adjoining land without more, even if by the same owner, is an "extrinsic circumstance" of the land required to be valued. The circumstances referred to by the applicant (the two stage subdivision and the roads and services forming part of it that abut lot 161) do not alter this characterisation. Section 14Q, referred to by the applicant, also does not alter this conclusion. The applicant submitted, by analogy to s 14Q, that the cost of the subdivision of the adjoining land could be apportioned between the adjoining land and lot 161. Section 14Q involves improvements on or for the benefit of differently owned parcels. It does not remove the requirement under s 14L(1)(a) for the land improvement to appertain to lot 161. The applicant's evidence does not identify any land improvement in fact on or appertaining to lot 161. Hence, there can be no profitable expenditure by the applicant in respect of any such land improvement.

49 Section 14L(1)(b) does not require the improvement to be on or appertain to the land being valued. It relates to profitable expenditure by the owner in respect of any visible and effective improvements which have been constructed for the purpose of supplying water to the land or for the purpose of draining the land, protecting the land from inundation or making some other provision for the more beneficial use of the land. Consistent with my approach to s 14L(1)(a) above, I do not consider that s 14L(1)(b) operates with respect to mere adjoining urban development even if by the same owner.

50 The applicant's evidence identified one expense that related to lot 161. Mr Lyons said that the Rouse Hill Infrastructure Corporation used the applicant's payment of $1,324,900 on 4 September 1994 as part of the funds to construct a sewage treatment plant and provide a dual water supply. Further, this payment related to the development potential of the whole of the parent parcel, including lot 161. Insofar as the evidence permits any explanation of the payment, I understand Rouse Hill Infrastructure Corporation to be a private corporation established to facilitate the provision of services to the Rouse Hill development area. Accordingly, the applicant must have been one of many owners who paid money to the Rouse Hill Infrastructure Corporation to facilitate services provision necessary for the urban development of land within the area.

51 The construction of a water and sewage treatment plant to service an entire area is not a land improvement appertaining to any individual parcel of land. Hence, insofar as this payment may have resulted in underground drains (see sub para (f) of the definition of land improvement), a fact not apparent one way or another on the evidence, it cannot fit within s 14L(1)(a). The payment, however, is one that (at least in part) was for the purpose of the supply of water to lot 161 (s 14L(1)(b)(i)). It also was for the purpose (at least in part) of providing sewerage services to lot 161.

52 I do not accept the respondent's argument that expenditure can only become "profitable expenditure" once income has been made by the expenditure (in this case, by developing and selling subdivided parcels from lot 161). I infer that the applicant's payment to Rouse Hill Infrastructure Corporation guarantees lot 161 water and sewerage services on development. The availability of these services (making lot 161 ripe for subdivision) materially increased the value of lot 161. In this sense, the expenditure was profitable as soon as it was made or, at worst, as soon as the water and sewerage services came on line (and, I infer, they must have been constructed to permit the development of the applicant's adjoining land, amongst many other parcels).

53 I also do not accept the respondent's argument that the applicant's payment was not one in respect of the relevant class of improvement but, rather, was in respect of paying a fee or contribution to Rouse Hill Infrastructure Corporation for that entity then to make its own expenditure on some improvement. As the applicant submitted, the phrase "in respect of" involves a broad spectrum of potential connection, with the required degree ultimately determined by context. In this case, Mr Lyons' evidence supports inferences that: - (i) the applicant paid Rouse Hill Infrastructure Corporation, (ii) the Corporation pooled payments from owners, (iii) the Corporation built the required water and sewerage infrastructure, (iv) in consideration for the payment, water and sewerage services were made available to the adjoining land to enable its residential development and will be made available to lot 161 once it is developed, and (v) but for the payment, lot 161 would not have water and sewerage services available to it. I consider this demonstrates profitable expenditure by the applicant (being the owner) in respect of visible and effective improvements which, although not on the land, have been constructed for the purpose of supplying water and sewerage services to the land. Although I have not in fact observed these improvements, the evidence indicates that they are visible (Mr Lyons described the construction of a new sewage treatment plant and dual water supply from the pooled payments) and effective (because the valuers assumed that water and sewerage services are available to lot 161 and based their valuations on that assumption).

54 Accordingly, I accept that the payment for the provision of water and sewerage services to lot 161 is within the scope of s 14L(b)(i) and (ii). The next issue is determining the reasonable allowance in respect of that expenditure. The applicant claimed 61.4% of the total payment of $1,324,900 to Rouse Hill Infrastructure Corporation (or $813,488.60) based on comparing the area of residential land in stages 1 and 2. The applicant's assumptions for comparison, however, appear to be incorrect. The evidence indicates that the applicant made the payment on the basis of 14.4 hectares of land available for residential development in total (stages 1 and 2) and not 14.4 hectares in stage 2 alone (as Mr Lyons assumed). Stage 2 (or lot 161) contains 76,804 m2 within the Residential 2(b) zone. This indicates that lot 161 represented about 53% of the total payment to Rouse Hill Infrastructure Corporation. 53% of that payment is $702,197. Each of the comparable sales also had water and sewerage services available. Hence, that benefit to development potential is embedded in the comparable sales. In these circumstances I consider that $702,197 is a reasonable allowance under s 14L(1)(b) of the Act.

55 One final observation is appropriate. In closing submissions the Valuer-General argued for a nil allowance under s 14L without adducing evidence as to how the allowance of $656,000 under s 14L(1)(b) of the Act had been calculated. If the Valuer-General intends to make submissions that the result of an appeal under s 37 should be a determination of a higher land value or a lesser allowance then the Valuer-General should inform the applicant of that intention at the earliest possible opportunity and in the clearest possible terms; otherwise fairness requirements may preclude upholding these submissions. This observation is of no consequence in the present appeal because I have determined a lesser land value and higher allowance than the Valuer-General.

56 For these reasons I make the following orders: (1) The appeal is upheld.

(2) The land value of lot 161 in deposited plan 1007387 at Cattai Creek Drive, Kellyville (the land) is determined under s 6A of the Valuation of Land Act 1916 to be $13,028,420 at the base date of 1 July 2005.

(3) Determine the amount of an allowance for the land under s 14L(1)(b) of the Valuation of Land Act 1916 in the amount of $702,197. ****************************

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