Social Security and Veterans' Affairs (Miscellaneous Amendments) Act 1986 (No. 106 of 1986), para. 6(1)(a)

Acts Interpretation Act 1901, s.8

Spencer v. The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418

Re Ronald Beaumont Reynolds and Secretary, Department of Social Security, S.85/199 (2932)

McDonald v. The Deputy Federal Commissioner of Land Tax N.S.W. [1915] HCA 54; (1915) 20 CLR 231

(1) that the decision under review be affirmed for the

period 11 July 1985 to 23 June 1986;

(2) that the decision under review be varied as from 24

June 1986 in that the value of the whole of the

applicants' property contained in Certificate of

Title Register Book Volume 1872 Folio 95 is to be

disregarded pursuant to sub-para. 6AA(1)(a)(ii) of

the Act.

This is an application for review of a decision of a delegate of the Secretary to the Department of Social Security reducing the applicants' Age Pension following the application of the "assets test" under the Social Security Act 1947 ("the Act").

2. The decision the subject of review is a decision of 4 April 1986 taken by a delegate of the respondent to reduce the applicants' age pension as from 11 July 1985 having regard to a valuation undertaken in relation to the applicants' principal home at Ascot Park. This property is registered in the name of the male applicant, Mr Woodhouse. The delegate determined that the area of land surrounding the applicants' home was in excess of the average area of land adjacent to other dwelling-houses in the locality and, on the basis of the valuation undertaken, ascribed a figure of $65,000 to the excess curtilage. This amount was included within the value of the applicants' property for the purposes of s.6AE of the Act, being the pension reduction amount, and their pension was reduced accordingly.

3. The major issue which arises for consideration in this review concerns the value, if any, that should be placed on the excess area of land surrounding the applicants' principal home, having regard to s.6AA of the Act.

4. At the hearing, the applicants were unrepresented, and the respondent was represented by Mr A. Thelander. Oral evidence was given by Mr Woodhouse, and the respondent called a valuer from the Australian Taxation Office, Mr Crowhurst. The other evidence before the Tribunal consisted of the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (the "T documents"), and further exhibits tendered by both parties, including a document setting out various methods of valuation posed by Mr Crowhurst.

5. The respondent put forward the following method for assessing the value of excess curtilage in support of the valuation of $65,000 for the applicants' property. It was submitted that the starting point is an assessment of the market value of the whole property from which (in the absence of there being any relevant charge or encumbrance secured over the property) the market value of the principal home is to be deducted (see sub-para. 6AA(1)(a)(i)). The amount remaining is the value of the property to be taken into account for the purpose of the assets test. We accept the methodology adopted up to that point, which methodology was accepted by the Tribunal in the decision in Re Ronald Beaumont Reynolds and Secretary, Department of Social Security, S.85/199, (2932).

6. The real issue, however, concerns the methodology to be used in assessing the market value of the whole of the property, as well as the market value of the principal home. In summary, the respondent submitted that the market value of the whole of the property should be assessed on the basis of its "highest and best use". In relation to the applicants' property, this required a value to be ascribed on the basis of the hypothetical demolition of the dwelling-house and the erection of 8 home units. The value per unit site was estimated at $20,000, thereby giving the whole property a market value of $160,000. From this value, a figure of $75,000 (being the estimated market value of the principal home), was deducted, leaving $85,000 as the value of the excess curtilage. Nevertheless, the delegate, in arriving at his figure of $65,000, accepted a valuation of the property as a whole at $140,000 on the basis of 7 home unit sites at $20,000 each, because this was a more beneficial interpreta tion to the applicants (see para.21 hereof). It is to be noted that the value of the principal home included the value of the existing dwelling-house and a one-quarter acre block of land (being the average area adjacent to other dwelling-houses in the locality).

7. The applicants disagreed with the respondent's method of valuation. They resented their property being assessed on the basis of demolition of the dwelling-house and erection of home units. Further, Mr Woodhouse believes that the market value ascribed to the whole property by the respondent is excessive. Mr Woodhouse gave evidence that he had put the property up for public auction on 25 August 1985, and the highest bid received was only $117,500. Shortly after the auction they received a verbal offer of $120,000 and on 28 November 1986, a written offer of $115,000.

8. The facts giving rise to this review are as follows. The applicants are husband and wife. Mrs Woodhouse was granted an Age Pension as from 9 August 1984, and Mr Woodhouse as from 2 May 1985. On 2 January 1946, Mr Woodhouse purchased the property as a vacant block of land. The property is situated at Ascot Park in the Adelaide metropolitan area and is contained in Certificate of Title Register Book Volume 1872 Folio 95. Mr Woodhouse subsequently built a house on the property in which he and his wife have lived to the present time. The block is approximately two-thirds of an acre in area (2,632.8 m2). The allotment is an irregular shape with five sides because it is situated on a bend in the street. All adjoining blocks are one-quarter acre in area. The applicants' irregularly shaped allotment is merely the residue after the land in the area was subdivided into regular one-quarter acre allotments. The applicants' property has a road frontage of approximately 72 feet (21.96 m), whilst the nearby blocks have approximately 60 feet (12.5 m) frontages. Therefore, at the time of the subdivision, it would not have been possible to subdivide the applicants' block further and maintain a 60 feet frontage.

9. There are other similarly irregular shaped allotments at the eastern end of a number of streets in the locality. However, the majority of blocks in the area are one-quarter acre blocks.

10. The dwelling-house in which the applicants live is situated close to the roadway and nearer to the western boundary. The balance of the property contains various sheds, trees and shrubs with a large area of lawn. The applicants bought the larger-than-average sized allotment because they wanted somewhere for their children to play. Their grandchildren now play there. The whole of the property is used by the applicants for domestic purposes.

11. This matter came on for hearing prior to the amendments effected to the Act by the Social Security and Veterans' Affairs (Miscellaneous Amendments) Act 1986 (No. 106 of 1986), which received the Royal Assent on 27 October 1986. We will consider first, however, the legislation as it existed prior to the amendments contained in Act No. 106 of 1986.

12. Sub-paragraph 6AA(1)(a)(ii) of the Act provides that, in calculating the value of the property of a person for the purposes of the Act, there shall be disregarded, if the person is a married person, the value of any right or interest of the person in relation to the one residence that is the principal home of the person or the person's spouse.

13. Sub-section 6AA(3) provides, inter alia, that the "principal home" of a person shall include a reference to the dwelling-house together with the private land adjacent to the dwelling-house not exceeding 2 hectares in area. Sub-section 6AA(3), however, was qualified by sub-s.6AA(4) which provided:

"(4) Where the area of private land adjacent to a

dwelling-house exceeds substantially the average area

of private land adjacent to other dwelling-houses in

the same locality, so much only of the first-mentioned

area as the Secretary determines in writing not to be

in excess of the average area shall be taken into

account for the purposes of paragraph (3)(a)"

14. Sub-section 6AA(5) defined "private land" for the purposes of sub-ss.(3) and (4) as a reference to "land used primarily for private or domestic purposes" in association with the dwelling-house.

15. In this matter, it was submitted by the respondent, and the Tribunal agrees, that the average area of private land adjacent to dwelling-houses in the locality of the applicants' dwelling-house is one-quarter acre.

16. It was the policy of the respondent prior to the recent amendments contained in Act No. 106 of 1986 that, unless the area of a dwelling-house together with the adjacent property was twice the average area of private land adjacent to other dwelling-houses in the locality, the value of the land in excess of the average area would not be taken into account. Applying that policy in relation to the applicants' property, twice the average area would be half an acre. As the applicants' allotment is two-thirds of an acre in area, it is still substantially in excess of the average area. It was on this basis that the respondent took into account the value of the applicants' property in excess of a quarter acre.

17. Subsequent to the respondent advising the applicants of the reduction in their pensions having regard to the excess curtilage surrounding their home, the applicants decided to purchase another house property and put their house at Ascot Park up for auction. Consequently, the applicants entered into a contract to purchase a property at Reynella (being a semi-rural area) of a similar size to their Ascot Park property. That contract was not made subject to the sale of the Ascot Park property. The applicants believed that, as the average area of allotments in the Reynella area was larger than one-quarter acre, the whole of the Reynella property which they intended to purchase would be disregarded under the assets test. Unfortunately, the highest bid received by the applicants at public auction on 25 August 1985 was $117,500, the reserve price being $160,000. The applicants did not accept that price. After the auction, a subsequent verbal offer of $120,000 was made. The applicants decided, however, not to proceed with the sale in view of the marked difference between the original valuation by the Australian Taxation Office of $160,000 and the offers received. As a result of the failure to sell their house, they had no available funds to enable them to complete the sale of the property at Reynella and a forced sale of the latter property resulted in them being some $4,000-$5,000 out of pocket.

18. The applicants believe that they have been badly disadvantaged as a result of the "assets test". They never wanted to sell their property and only attempted to do so because of the effect that it had on their pension entitlement.

19. At the hearing, oral evidence was given by Mr Crowhurst, who is the Supervising Valuer at the Australian Taxation Office. He is a Fellow of the Australian Institute of Valuers and has been a Supervising Valuer Grade III for approximately 10 years. He has had extensive valuation experience including work in private industry as a real estate valuer before joining the Australian Tax Office. Mr Crowhurst gave evidence as to the value of the applicants' property at Ascot Park as at June 1985, relying on a valuation undertaken by him on 26 September 1986 (Exhibit R1).

20. Mr Crowhurst valued the whole of the applicants' property on the basis of its highest and best use which he considered to be for home unit development. He said in evidence that the applicants' property is in an area which is zoned "Residential 2" under the Local Council Regulations, being a zone primarily accommodating detached dwellings on individual allotments, and semi-detached dwellings with row dwellings or residential flat buildings of medium density in suitable areas. He said that under the Zoning Regulations, the applicants' property, being 2,623.8 m2 in area, would accommodate up to 8 home units. Further, having regard to a number of comparable sales of home unit sites in the surrounding areas, Mr Crowhurst estimated the value of the applicants' property per unit site as $20,000, giving a market value of the whole property on the basis of its highest and best use of $160,000.

21. As previously mentioned, the delegate gave a more beneficial assessment of the market value of the applicants' property of $140,000. He calculated this value based on an earlier valuation undertaken by an officer of the Australian Taxation Office in late 1985 (T49). In that valuation report, a number of methods of valuing the subject property were set out. The delegate adopted the valuation based on the erection of 7 home units on the allotment at $20,000 per unit site. From this figure was deducted $75,000 for the value of the dwelling-house and one-quarter acre of land, leaving the figure of $65,000 for the excess property. Mr Crowhurst considered that the figure of $75,000 was also a beneficial assessment, having regard to comparable sales of similar houses on one-quarter acre allotments in the locality.

22. Mr Crowhurst gave evidence that in calculating the market value of the applicants' property, he had regard to the following principles of valuation. First, that in obtaining a market value of real estate, one has to assess the value which a willing buyer and a not unwilling seller would give for the property. Secondly, one bases a valuation on the highest and best use of the property. Thirdly, offers to sell and offers to purchase a property are not evidence of its value, and fourthly, a market value can be obtained in the absence of a demand for a property.

23. Mr Crowhurst was also questioned by the Tribunal as to the relevance generally of bids received at public auction as an indication of market value and, in particular, in relation to the bids received at the auction of the applicants' property in August 1985. He gave the following evidence:

"Q: Do you regard auctions that do not reach reserve

or reach below what people have previously

assessed property at to be what the market value

of the property is at that time? --- No, not

necessarily. The market value can only be

determined by a comparable sale or an actual sale

of the property. The definition of "market

value" is very, very restricted. Under that

definition it is not a forced sale, it is not an

over urgent sale. It is purely a voluntary

negotiation between a vendor and a purchaser both

aware of all circumstances affecting the property

and both willing to negotiate without undue

pressure in any shape or form.

Q: Could you say that for the purposes of this

particular house its market value as indicated by

an auction was $120,000? --- No.

Q: Have you got any explanation as to why it did not

reach $160,000 which is what you valued it at?

--- No, I have not. The only thing I can assume

is that there was no purchaser at that time

prepared to pay more than $120,000 for the

property.

Q: Did it indicate anything to you about the

property for which units could be placed on so

far as the market was concerned? --- It did

concern the developer's statement that most unit

developers were not interested in surveying

further properties. They had sufficient stock

and the state of the market at that time with

high interest rates, with uncertainty over

government taxes, the repeal of the negative

gearing arrangements, that people just did not

know where they were going. They were not

prepared to do more investment.

Q: Do you think that some adjustments should be made

to a value of property for the purposes of units

when it may have a notional value based on

comparable sales which were successful but there

should be some money for some value set aside for

the chance of it not being successful? I have not

put that very well but to produce the value on

the basis that it might not be successful? ---

Yes, I understand what you are saying. What we

have to look at is at what price would a prudent

owner be prepared to sell the property. If he is

in a situation where he has to sell the property

he will obviously have to accept the best offer

at that date. Now, that puts it in the place of

a forced sale and that is not considered by us to

be market evidence. It certainly is evidence

that that is the best price the property will

bring at that time but if a person is in the

position where he is not forced to sell the

property, he is better advised to hold on until

the economy improves and the market improves and

there is a demand again for sites and he can

relate what he considers to be the true worth of

the property. Again, if people cannot do that

and there is any evidence of forced sale then

just on pure fairness we adopt those sales and we

say, even though we do not consider them to be

representative of the definition of market value,

we accept them because that is what is happening

in the market. As yet, that has not occurred.

There has been one instance of a forced sale that

I am aware of.

Q: I have a bit of trouble with your language when

you talk about the owner should stay there and

not sell it until such time as he can get his

true value. I thought one of the things about

market value was that it fluctuated having regard

to demand? --- It does, but it is defined by what

would a prudent vendor be prepared to dispose of

the property to a prudent purchaser, both aware

of all factors affecting the property. In all

practice, unless it is a mortgagee sale, unless

financially the people just cannot carry on and

have to quit the property, what they do and what

I do and what most other people do is not sell at

that time but wait until there is a demand for

the property and sales occur upon which they know

the value of their property."

(transcript, pp.26-28)

24. As to whether or not there had been a diminution in the value of domestic properties over the period from July 1985 until September 1986 (being the date of the valuation), Mr Crowhurst replied that there had been a 20% drop in property values over that period. He added, however, that the value of the applicants' property would not necessarily be reduced by that amount, as he believed the true value per unit site of the subject property to be $23,000, rather than $20,000, and that in discounting the value to $20,000, he had hopefully taken into account the reduced state of the market.

25. As to the valuation of the dwelling-house and notional one-quarter acre block, in his valuation report, Mr Crowhurst valued this at $75,000, again on the basis of comparable sales of similar properties.

26. We interpolate here to note what appears to be a contradiction in the approach to valuation adopted by Mr Crowhurst in valuing the applicants' property as a whole in comparison with the method used to value the dwelling-house and notional one-quarter acre block. In the first instance, the method adopted was the "highest and best use test", whereas in the second instance, the property was valued on the basis of its existing use. Two questions are therefore raised: first, whether the highest and best use of the dwelling-house and notional one-quarter acre block is its existing use and, second, if it is not, whether the Act requires the dwelling-house and curtilage disregarded to be valued by reference to its existing use, in which case, two different methods of valuation have been used for assessing the residual value of property to be taken into account for the purpose of the assets test.

27. It appears, however, that this contradictory approach can be justified on the wording of sub-para. 6AA(1)(a)(ii) of the Act which requires a value to be ascribed to ".... any right or interest .... in relation to .... the principal home" which, by virtue of sub-s. 6AA(3) includes the "dwelling-house" and the private land adjacent to that house not exceeding 2 hectares. In order to ascertain this value, therefore, the Act would seem to require that one have regard to the existing use of the property as a single dwelling-house which is not necessarily its highest and best use. In many cases, therefore, a lesser market value for that portion of the property may result than if it was valued on the basis of its highest and best use, and so a greater value for the residue.

28. We will now turn to consider the respondent's submissions. Mr Thelander submitted that the principles which should be applied in obtaining the market value of a property for the purposes of the Act should be those espoused by the High Court in Spencer v. The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 which were those adopted by Mr Crowhurst in his valuation of the applicants' property. In Spencer's case, Griffith CJ (at p.432) applied the following test:

"In my judgment the test of value of land is to be

determined, not by inquiring what price a man desiring

to sell could actually have obtained for it on a given

day, i.e., whether there was in fact on that day a

willing buyer, but by inquiring 'What would a man

desiring to buy the land have had to pay for it on

that day to a vendor willing to sell it for a fair

price but not desirous to sell?'"

"To arrive at the value of the land at that date, we

have ... to suppose it sold then, not by means of a

forced sale, but by voluntary bargaining between the

plaintiff and a purchaser, willing to trade, but

neither of them so anxious to do so that he would

overlook any ordinary business consideration. We must

further suppose both to be perfectly acquainted with

the land, and cognizant of all circumstances which

might affect its value, either advantageously or

prejudicially, including its situation, character,

quality, proximity to conveniences or inconveniences,

its surrounding features, the then present demand for

land, and the likelihood, as then appearing to persons

best capable of forming an opinion, of a rise or fall

for what reason soever in the amount which one would

otherwise be willing to fix as the value of the

property."

29. Later at p.441, Isaacs J referred in turn to the case of The Queen v. Brown (1867) LR 2QB, 630 in which Cockburn CJ said (at p.631):

"A jury, whether the dispute be as to the value of

land required to be taken by the company, or as to the

compensation for damages by severance, in assessing

the amount to which the landowner is entitled, have to

consider the real value of the land, and may take into

account not only the present purpose to which the land

is applied, but also any other more beneficial purpose

to which in the course of events at no remote period

it may be applied, just as an owner might do if he

were bargaining with a purchaser in the market. That

is the mode in which the land would be valued."

30. This Tribunal adopts the principles of valuation stated by the Court in both Spencer's case and The Queen v. Brown (supra) as being appropriate in obtaining the market value of property for the purposes of the Act (see Re Reynolds (supra)). In particular, both cases are authority for the propositions that in assessing market value one must both ascertain the highest and best use of the property and assess the price that a desirous buyer would pay to a willing but not anxious seller to purchase the property.

31. As to whether or not the evidence concerning bids received at public auction of land and subsequent unaccepted offers to purchase should be regarded as evidence of its market value, we consider that the judgement of the High Court in McDonald v. The Deputy Federal Commissioner of Land Tax (NSW) [1915] HCA 54; (1915) 20 CLR 231 is authority for the proposition that only concluded contracts are admissible as evidence of value. At p.239 the Court said:

"When the matter has reached the point of a concluded

contract, there has been a definite concrete fact

established, which not only evidences value, but to

some extent helps to create or modify it. Where an

owner has actually parted with his land for a fixed

sum and a buyer has parted with his money for the

land, a clear event has arisen, which, based on the

ordinary instincts and impulses of human nature,

indicates a consensus of opinion between two adverse

parties in the community respecting the value of

similar lands."

(See also "Land Valuation and Compensation in Australia" by R.O. Rost and H.G. Collins, 3rd edn. (1984) at pp.84ff.)

32. As to whether a demand for property is required in order to determine a market value, we are of the view that the cases of Spencer (supra) and R. v. Brown (supra) are adequate authority for the proposition that demand is not required.

33. Applying the above principles to the facts of this matter, we do not consider the highest bid received at public auction in August 1985 of $117,500, nor the subsequent verbal and written offers to purchase for $120,000 and $115,000 respectively, are indicative of the market value of the applicants' property. Furthermore, we consider that accepted principles and methods of valuation stated in the above cases must be applied for the purpose of assessing the value of the whole of the applicants' property. However, the Act seems to suggest that those principles be modified for the purpose of calculating the value of certain property under the Act, in particular, the value of the applicants' dwelling-house and associated curtilage which is disregarded pursuant to s.6AA of the Act.

34. As previously mentioned, sub-paras.6AA(1)(a)(i) and (ii) specifically require that a value be ascribed to the "principal home" of the person which, by virtue of sub-s.6AA(3), includes the dwelling-house and adjacent private land not exceeding 2 hectares (as modified by sub-ss.(4) and (5)). In ascertaining that value, the Act requires that one look to the existing use of the property, which may not necessarily be its highest and best use, however, that is the item which must be valued. Therefore, there may be instances in which the Act may require modification to the accepted principles of valuation, in particular, the notion of the highest and best use of land. In all other aspects, however, general valuation principles apply to the assessment of the market value of a pensioner's interest in the principal home under sub-paras. 6AA(1)(a)(i) and (ii).

35. At the hearing, it was submitted by Mr Thelander that the Tribunal should affirm the decision under review, assessing the value of the excess property at $65,000. We note that Mr Crowhurst valued that residue at $75,000 in his report which he confirmed in his evidence. The Tribunal considers that, based on the beneficial nature of the legislation, the delegate's value of $65,000 should be accepted.

36. For these reasons, we therefore consider that prior to the amendments to the Act effected by the Social Security and Veterans' Affairs (Miscellaneous Amendments) Act 1986 (No. 106 of 1986), the decision under review should be affirmed.

37. Turning now to the effect of the amendments to the Act as contained in Act No. 106 of 1986. By virtue of para.5(1)(a) of the amending Act, sub-s.6AA(4) of the Act is repealed with effect from 24 June 1986 (see sub-s.2(4)). Act No. 106 of 1986 received the Royal Assent on 27 October 1986 which was after the hearing of this matter, but before this Tribunal's determination. As a consequence of this amendment, the respondent sent a letter to the Tribunal dated 10 November 1986 in the following terms:

"2 On 27 October 1986, the Social Security and

Veterans' Affairs (Miscellaneous Amendments) Act, No.

106 of 1986 received the Royal Assent. By sub-sections

2(4) and 5(1) of that Act, it is provided

that sub-section 6AA(4) of the Social Security Act

1947 is repealed with effect from 24 June 1986.

3 It is apparent, therefore, that as from that date,

the value of Mr Woodhouse's property at 55 Fifth

Avenue, Ascot Park, is to be entirely disregarded for

the purposes of the assets test. This is because:

(a) the property is his principal home;

(b) the property does not exceed 2

hectares in area; and

(c) the land is used primarily for private

or domestic purposes in association

with the principal home.

4 The Department has advised Mr Woodhouse of the

above and is recalculating the pension rates

applicable to him and his wife from 24 June 1986. The

Department does not propose to review its actions

prior to that date."

38. The respondent also sent a letter to the applicants which stated as follows:

"As a result of a recent amendment to the Social

Security Act, your property at Ascot Park will not be

taken into account in calculating the rate of your

pensions. This is because the property is less than 2

hectares in area and is used primarily for private or

domestic purposes in association with your principal

home.

The amendment has been backdated to 24 June 1986.

Consequently, as from that date, your pension

entitlement will be reassessed and any arrears owing

will be paid to you as soon as possible. The period

before 24 June 1986, however, is not affected by the

amendment and the Department's calculation of your

rate of pension for that period is still considered to

be correct and in accordance with the requirements of

the Act."

39. We concur with the respondent that the amendments affect the applicants' pension as from the date the relevant section repealing s.6AA(4) came into effect, namely, 24 June 1986, and not prior to that date. This interpretation is in keeping with s.8 of the Acts Interpretation Act 1901 (Cth.).

40. We also agree with the respondent's statement that, as from 24 June 1986, the whole of the applicants' property at Ascot Park should be disregarded pursuant to para.6AA(1)(ii) of the Act, it being land used primarily for private or domestic purposes which is adjacent to their dwelling-house and does not exceed 2 hectares in area. Therefore, as from 24 June 1986, the applicants' pension entitlement is to be assessed disregarding the value of the whole of the applicants' house property at Ascot Park.

(1) that the decision under review be affirmed for the

period 11 July 1985 to 23 June 1986;

(2) that the decision under review be varied as from 24

June 1986 in that the value of the whole of the

applicants' property contained in Certificate of

Title Register Book Volume 1872 Folio 95 is to be

disregarded pursuant to sub-para.6AA(1)(a)(ii) of

the Act.