The test of land value
22Fundamentally, the test of 'land value' must focus upon the words of s 6A(1) of the Valuation Act. I will return to consider the critical part of the subsection in due course.
23Both parties accept that in determining the "value of land", the relevant principles to be applied are those articulated in the judgment of the High Court in Spencer v The Commonwealth of Australia [1907] HCA 82; 5 CLR 418. The principles there articulated have been accepted as relevant to the application of s 6A(1): Commonwealth Custodial Services Ltd as Trustee for the Burwood Trust Fund; Trust Company of Australia Ltd v Valuer-General [2006] NSWLEC 400; 148 LGERA 38 at [13]. The Company placed particular reliance upon the judgment of Sir Samuel Griffith in Spencer where the Chief Justice said (at 432):
"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?" It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together."
24Reliance is also placed upon a passage from the judgment of Isaacs J in Spencer, that passage being cited with approval by McHugh J in Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; 199 CLR 413. In the latter case McHugh J said at [49] - [50] (omitting citation of authority):
"49. Value is determined by forming an opinion as to what a willing purchaser will pay and a not unwilling vendor will receive for the property. In determining that value, there must be attributed to the parties a knowledge of all matters that affect its value. Those matters will include the predicted impact of future events as well as the experience of the past and the rates of return on other investments. As Isaacs J pointed out in Spencer v The Commonwealth:
"We must further suppose both to be perfectly acquainted with the land, and cognisant 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." (emphasis added.)
50. The market for the property is, therefore, assumed to be an efficient market in which buyers and sellers have access to all currently available information that affects the property."
That passage from the judgment of McHugh J was, in turn, adopted by the High Court in Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority [2008] HCA 5; 233 CLR 259 at [51].
25Having identified the principles that inform the determination of the value of land, the Company contends that a sale price of land inclusive of GST does not represent or afford evidence of the value of land to the vendor. It submits that this is so because the GST component of the sale price is received by the vendor as the holder of the tax to be remitted to the Australian Tax Office. Underlying the submission is the general hypothesis that a vendor will be liable to pay GST and as a consequence that liability will be reflected in the price at which the vendor is willing to sell the land. For the purpose of the submission, emphasis is upon the amount which the vendor would receive from the proceeds of sale once the liability or GST is paid. Thus, so it is submitted, the "value" of the land is evidenced by the price received, net of GST.
26Applying the provisions of the GST Act, as earlier summarised, to the principles articulated in Spencer, the Company submits that the following principles can be established:
(i)assuming that the vendor of a property is registered for GST, that vendor is liable to pay that tax on all taxable supplies it makes in the course of business, including the sale of real property which constitutes a taxable supply (if not sold as a going concern);
(ii)as the vendor is only the collector of GST on behalf of the Australian Taxation Office, the GST component of the sale price does not represent value to the vendor;
(iii)on the assumption that the purchaser is also registered for GST, the purchase of the property is a "creditable acquisition" entitling the purchaser to an input tax credit with the result that the purchase price is "not a cost to the purchaser and does not therefore represent what the purchaser has to pay for the property, applying the test in Spencer's case" (Company's written submissions at [35]).
27Apart from the application of the Spencer principles to the consideration of GST as a component of a sale price, the Company relies upon the evidence of its experts. Mr Blackwell, the Company's expert valuer, states that when negotiating the sale of property, particularly commercial property, the parties to transactions are conscious of the incidence of GST upon their transaction. From a valuation perspective, it is usual for him, as a valuer, to "interrogate" sales transactions used as comparables for the purpose of valuation, in order to determine whether there was a GST component in the price paid. This interrogation often involves making inquiries of at least one of the parties to the transaction.
28Mr Blackwell stated that the need for interrogation of parties to a transaction arises by reason of the observations of Isaacs J in Spencer, as it forms part of the information about which vendor and purchaser are assumed to be "perfectly acquainted" (Spencer at 441). If GST is a liability that the vendor must bear then, so he contends, the quantum of that liability should be deducted so as to determine the sum "realised" by the vendor "at the end of the transaction". In oral evidence, Mr Blackwell said (Tcpt 19: 18-20):
"Basically what I can bank or what I can take home. I apply that as just a very pragmatic and simple definition of what realised may mean to me."
29That evidence succinctly summarises the approach of Mr Blackwell that is more fully explained in Section 5 of each of his expert reports received into evidence (Exhibit A: Tabs 8 and 18). As those reports indicate, Mr Blackwell's experience with parties to transactions for the sale and purchase of self-storage facilities reveals that both vendor and purchaser take account of the GST payable by the vendor and the input tax credit received by the purchaser in negotiating the price paid for the transaction. This has the consequence, so he opines, that the "value" of the land reflected in that transaction does not include GST. It reflects neither the net amount received by the vendor nor the net liability of the purchaser in paying the price nominated in the contract for sale.
30Mr Blackwell further contends that by reason of the assumptions required to be made in accordance with s 14G(1) of the Valuation Act, the hypothetical sale transaction for the purpose of determining land value must be between parties selling and buying a self-storage facility which is a business enterprise. His experience has been that parties to transactions of that kind have always been registered for GST, thereby reinforcing the need to determine the land value net of any GST component. All of the comparable sales agreed between Mr Blackwell and Mr Hill as applicable to determine the land value of the properties had involved parties that were GST registered. However, it was acknowledged by Mr Blackwell that of the seven transactions considered for direct comparison, two had involved the sale of self-storage facilities as a going concern, with the consequence that no GST was payable.
31In cross-examination, the standard form of contract for sale used for real estate transactions in this State was shown to Mr Blackwell. The standard provisions of the contract that address GST, assuming that a liability for GST is acknowledged, require an indication as to whether GST is payable in full and, if not, the extent of liability for that tax. While not professing expertise as to the form of contract, Mr Blackwell acknowledged the provision and the possibility that the extent of liability for GST may be less than 10 percent. As a consequence, when addressing comparable sales, it would be necessary to interrogate the parties to determine the extent of GST liability. He further stated that when addressing a comparable sale, the appropriate question to ask was whether the full 10 percent was payable by the vendor.
32Mr T Windle is a partner in a national firm of chartered accountants. He presently heads his firm's "national indirect tax practice" with a number of years experience in the operation of the GST Act. He was called on behalf of the Company.
33The comparable expert called by the Valuer-General was Mr C Lockhart. Mr Lockhart is a practising solicitor who specialises in property transactions, particularly those involving the sale and purchase of land for commercial purposes. In so doing, Mr Lockhart frequently advises upon the preparation of special conditions for, and the incidence of, GST that may be payable on such transactions.
34The purpose of the evidence given by Mr Windle and Mr Lockhart was to explain the operation of the GST Act upon real estate transactions. They acknowledged that the GST Act contained definitions of both "price" and "value". The value of a supply for the purpose of the GST Act does not include GST: s 9-70 GST Act.
35As might be expected in evidence explaining the operation of the GST Act as it applied to real estate transactions, the area of disagreement between Mr Windle and Mr Lockhart was narrow, at least as relevant to the issue to be decided in the present appeals. The areas of both agreement and disagreement between them are usefully summarised in a joint report (Exhibit C). By reference to that joint report, it is sufficient for present purposes to notice two matters of agreement. First, they acknowledge that there may be sales of real estate where the GST component of the price (assuming that the vendor is making a taxable supply) is an actual cost to the purchaser because the purchaser, having no obligation to be registered under the GST Act receives no input tax credit. GST may also become a cost under what is described as the margin scheme provided for in the GST Act.
36In their agreed position reflected in Exhibit C, the experts also provided examples of circumstances in which there would be no GST payable by the vendor on the price received for the sale of land. Those examples include:
(i) a sale by a vendor carrying on an "enterprise" but not required to register for GST because the turnover of the enterprise does not exceed $75,000 (for most entities) or, in the case of charities, does not exceed $150,000, and
(ii) a sale of real estate as part of a going concern.
37For these reasons, they acknowledge that the identity of the supplier or vendor, is relevant to determine the obligation of the vendor to be registered for GST purposes and the liability of that vendor in a given transaction.
38The one matter upon which Mr Windle and Mr Lockhart disagreed was as to the "convention" in preparing contracts for sale in differentiating between the "price" and the component for GST. It was the experience of Mr Windle who, although residing and practising in Queensland, claimed considerable experience in advising upon New South Wales real estate transactions potentially involving a GST liability, that the price identified in the contract is expressed to be GST exclusive, with special conditions inserted for the "grossing-up" for GST, requiring an additional payment by the purchaser to the vendor commensurate with that tax. Mr Lockhart indicated, from his experience, that if the sale involves a taxable supply, the price stated on the contract is expressed to be inclusive of GST, leaving standard Condition 13 in the standard form of contract for the sale of land in this State as "pro-forma or replaced and modified by a Special Condition that provides for alternatives if the sale should not be a taxable supply."
39It is unnecessary to resolve the disagreement as to "the convention". I have no reason to disbelieve either expert and I accept that the manner described by each of them for addressing the sale of land involving a taxable supply will be reflected in a given transaction, depending upon the advice given to and accepted by the parties to that transaction. Whichever course is taken does not, to my mind, bear upon the "land value" to be determined conformably with s 6A(1) of the Valuation Act.