Taylor v Roads and Maritime Services - [2016] NSWLEC 138 - NSWLEC 2016 case summary — Zoe

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Taylor v Roads and Maritime Services

[2016] NSWLEC 138

Land and Environment Court (NSW)|2016-10-20|Before: Pain J

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At a glance

Source facts

Court

Land and Environment Court (NSW)

Decision date

2016-10-20

Before

Pain J

Catchwords

[2009] HCA 41 Attard v Transport for NSW (2014) 205 LGERA 396
[2013] NSWLEC 212 Hua v Hurstville City Council [2010] NSWLEC 61 McDonald v Roads and Traffic Authority (NSW) (2009) 169 LGERA 352
[2009] NSWLEC 105 Sydney Water Corporation v Caruso (2009) 170 LGERA 298

Source

Original judgment source is linked above.

Catchwords

[2009] HCA 41 Attard v Transport for NSW (2014) 205 LGERA 396[2013] NSWLEC 212 Hua v Hurstville City Council [2010] NSWLEC 61 McDonald v Roads and Traffic Authority (NSW) (2009) 169 LGERA 352[2009] NSWLEC 105 Sydney Water Corporation v Caruso (2009) 170 LGERA 298

Judgment (27 paragraphs)

[1]

SOLICITORS: Slater & Gordon Lawyers (Applicant) Clayton Utz (Respondent) File Number(s): 2016/00163431

[2]

Compensation payable following compulsory acquisition of blueberry farm

The Applicant's land at 34 Kangaroo Trail Road Corindi Beach was acquired on 19 December 2014 under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (the Just Terms Act) by the Respondent the Roads and Maritime Services (RMS) for the Ballina upgrade to the Pacific Highway. The Applicant has appealed to this Court pursuant to s 66 of the Just Terms Act seeking a larger amount of compensation for the acquired land than the value determined by the Valuer-General during the acquisition process. I thank Acting Commissioner Parker for his assistance in this matter.

[3]

Land Acquisition (Just Terms Compensation) Act

The Just Terms Act relevantly provides: 3 Objects of Act (1) The objects of this Act are: (a) to guarantee that, when land affected by a proposal for acquisition by an authority of the State is eventually acquired, the amount of compensation will be not less than the market value of the land (unaffected by the proposal) at the date of acquisition, and (b) to ensure compensation on just terms for the owners of land that is acquired by an authority of the State when the land is not available for public sale, and (c) to establish new procedures for the compulsory acquisition of land by authorities of the State to simplify and expedite the acquisition process, and (d) to require an authority of the State to acquire land designated for acquisition for a public purpose where hardship is demonstrated, and (e) to encourage the acquisition of land by agreement instead of compulsory process. (2) Nothing in this section gives rise to, or can be taken into account in, any civil cause of action. Part 2 Acquisition of land by compulsory process Division 4 Miscellaneous provisions relating to acquisition … 34 Former owner's right to occupy land until compensation paid etc (1) A person who was in lawful occupation of land immediately before it was compulsorily acquired under this Act and to whom compensation is payable under this Act is entitled to remain in occupation until: (a) the compensation is duly paid to the person, or (b) the authority of the State makes (in accordance with any other provision of this Act) an advance payment of not less than 90 per cent of the amount of compensation offered by the authority, or (c) the authority of the State makes (in accordance with any other provision of this Act) a payment into the trust account kept under Part 3 of not less than 90 per cent of the amount of compensation offered by the authority, whichever first occurs. (2) Any such person is entitled to remain in occupation of any building that is the person's principal place of residence, or the person's place of business, for 3 months after it is compulsorily acquired, even though the person has ceased to be entitled to remain in occupation under subsection (1). However, if the Minister responsible for the authority of the State is satisfied that the authority requires immediate vacant possession of land, the authority is entitled to immediate vacant possession even though the 3-month period has not expired. (3) The terms on which a person remains in occupation of land that has been compulsorily acquired under this Act are, in the absence of agreement, such reasonable terms as are determined by the authority of the State (including terms as to the rental to be paid and the restrictions on the use of the land). The Residential Tenancies Act 2010 does not apply to that continued occupation. (4) Any such unpaid rent or other money due to the authority of the State may be set off against the compensation payable under this Act. Part 3 Compensation for acquisition of land Division 4 Determination of amount of compensation 54 Entitlement to just compensation (1) The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land. (2) If the compensation that is payable under this Part to a person from whom native title rights and interests in relation to land have been acquired does not amount to compensation on just terms within the meaning of the Commonwealth Native Title Act, the person concerned is entitled to such additional compensation as is necessary to ensure that the compensation is paid on that basis. 55 Relevant matters to be considered in determining amount of compensation In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division): (a) the market value of the land on the date of its acquisition, (b) any special value of the land to the person on the date of its acquisition, (c) any loss attributable to severance, (d) any loss attributable to disturbance, (e) solatium, (f) any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired. 59 Loss attributable to disturbance (1) In this Act: loss attributable to disturbance of land means any of the following: (a) legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land, (b) valuation fees of a qualified valuer reasonably incurred by those persons in connection with the compulsory acquisition of the land (but not fees calculated by reference to the value, as assessed by the valuer, of the land), (c) financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs), (d) stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired), (e) financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharged mortgage), (f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition. …
Section 54 of the Just Terms Act specifies that a person is entitled to just compensation having regard to all relevant matters in Pt 3. The Court is acting as the judicial valuer in this case, see Sydney Water Corporation v Caruso (2009) 170 LGERA 298; [2009] NSWCA 391 at [3], [35], [146] and [150] and Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority (1991) 24 NSWLR 156. As a general principle in determining compensation doubts should be resolved in favour of a more liberal estimate, see Commissioner of Succession Duties (South Australia) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358; [1947] HCA 10 at 374.
The town planning evidence of Mr Connelly engaged by the Applicant was not disputed. The acquired land is zoned RU2 Rural Landscape, E2 Environmental Conservation and SP2 Infrastructure under the Coffs Harbour Local Environmental Plan 2013.

[7]

Applicant's evidence

The Applicant's affidavit sworn 28 August 2015 was read in the proceedings. His affidavit attests to his family's history in the Corindi Beach area and its operation of the acquired land. Mr Taylor purchased the acquired land from his father in 1995 and in 2010 established a blueberry farm. In addition to his farming operation Mr Taylor is employed as Farm Operations Manager for Costa Exchange Pty Ltd (Costa) which owns and runs a large blueberry and raspberry farm at Corindi Beach.
In September 2010 the Applicant planted a 1ha patch of blueberries comprised of three varieties: "OPI", "390's" and "42's". In September 2012 the Applicant planted a further 3ha patch of blueberries comprised of only the OPI variety that had produced the highest yield of the three varieties in the 1ha patch. The Applicant operated the business as a sole trader with no full time employees, employing fruit pickers on a seasonal basis. He did not own any trademarks, business names or domain names. The harvest period for blueberries commences in May with the peak harvest period in September and October. In the financial year of acquisition (2015) the acquired farm produced and sold 65 tonnes of blueberries.
In July 2013 the Applicant and his wife entered into a contract to buy the adjoining property from his father for a purchase price of $1.4 million, with the intention of establishing a blueberry farm. Under the contract the Applicant's father was entitled to remain in occupation until six months after the completion of the sale on 10 June 2015. After the acquisition date the Applicant and his family remained in occupation on the acquired land for a rent of $300 per week payable to the RMS. The Applicant ceased to operate the blueberry farm after the date of acquisition.
Had his previous farm not been acquired, the Applicant would have planted a further 2ha of the OPI variety of blueberries in September 2015. The cost of planting the 2ha patch was estimated to be $209,716. The 2ha patch was expected to produce a small amount of fruit in the 2017 financial year, its first harvest season.
To summarise, at the date of acquisition, the acquired blueberry farm had a 1ha area in the fifth year of the growth cycle, a 3ha area in the third year of the growth cycle and the Applicant had plans to plant a further 2ha area the year after acquisition. At the time of swearing his affidavit the Applicant had an intention to plant a 4ha patch on the replacement farm but had not yet done so. As was evident from the view and oral evidence, the Applicant planted 4ha of OPI variety blueberries in September 2016. This patch is expected to start producing marketable and profitable volumes of fruit in the 2018 financial year.

[12]

(i) Period over which loss of profits should be assessed

Mr White assessed the profits foregone from the date of acquisition until the date that the farm on the relocated land would reach approximately the same level of fruit production achieved by the business on the acquired land in the financial year of acquisition (65 tonnes). Relying on Mr McPherson's evidence of blueberry yield, the acquired farm's production of 65.62 tonnes in the financial year of acquisition would be approximately achieved on the replacement farm in financial year 2019, a period of four financial years. Mr White did not forecast profit figures beyond 2019 as that was the date that he considered relocation had occurred and there was no more loss thereafter.
Mr White was cross-examined on the 10 year cycle of a blueberry crop. He agreed that a crop that takes one to two years to establish and produces on a steady period up and a steady period down over 14 years is more valuable than a crop that has the same establishment period and has a steady increase and then decrease over only 10 years. Mr White agreed that by (financial year) 2019 the acquired farm would have entered into a period of decline whereas the replacement farm would be in a period when it has not yet reached peak production.
Dr Ferrier's approach ultimately relied on at the hearing was outlined in the joint report and encapsulated in Exhibit 2. Dr Ferrier contended that the cyclical nature of blueberry farming should be reflected in the assessment of loss of profits, with early cycle capital expenditure buying blueberry plants offset by mid cycle revenue from the sale of harvested blueberries. Reflecting the staggered planting on the acquired land, Dr Ferrier forecast cash flow from a series of planting cycles in order to capture the overlapping nature of capital expenditure and sales revenue from the respective areas of blueberries, to that point in the future when the present value of the cash flow became nominal. In his report, Dr Ferrier adopted a period of 50 years and, in Exhibit 2, a period of 20 years which reflected two growth cycles of 10 years.
In forecasting the profit from the sale of harvested blueberries, Dr Ferrier forecast the yield from the 1ha and 3ha parcels and the tonnage sold with revenue arising before making deductions for depreciation, picking and packing and commission. Having forecast the profits from the sale of harvested blueberries, Dr Ferrier then deducted the capital cost of blueberry plants at the date of replanting at the agreed rate of $104,000 per hectare in order to forecast net profits. Over the 20 year forecast period for the acquired land, Dr Ferrier forecast a total net profit of $11,205,988 (Exhibit 2).
Dr Ferrier adopted the same approach to the cyclical planting and harvesting of blueberries on the relocated land over the same period of 20 years, forecasting a total net profit of $11,898,673.
To derive the present value of the loss of profits, Dr Ferrier then deducted the net profit expected from the relocated land from the net profit forecast for the acquired land on an annual basis before discounting each annual net profit (or loss) figure at the rate of 29.5%. While, over the 20 year period, the total net profit from the relocated land exceeds the total net profit from the acquired land, the effect of discounting on later years results in a net loss of profits with the present value being $1,310,383 (Exhibit 2).
Dr Ferrier was cross-examined on the relevant period for assessment of loss of profits and asserted the relevant period to be the time taken for the Applicant to get to where he would have been (assuming a repeated cycle of blueberry planting and harvesting) rather than where he was at the date of acquisition (being around 65 tonnes of blueberry production), refuting that such a longer period approach was simply intended to neutralise losses and so reduce the compensation payable to the Applicant. Dr Ferrier was presented with a range of possible scenarios for the development of the acquired and relocated blueberry farm (Exhibits F, G, H) with which he did not agree.

[15]

Loss of profits assessed for four year period

Costs in s 59(1)(f) includes losses, as held for example in Caruso at [186]. Costs and/or losses incurred in re-establishing a business carried out on acquired land elsewhere can be claimed under s 59(1)(c) and (f). In Hua v Hurstville City Council [2010] NSWLEC 61 the tenant who ran a family bakery business on the acquired land obtained compensation for relocation costs of the business elsewhere under s 59(1)(c). In George D Angus Pty Ltd v Health Administration Corporation (2013) 205 LGERA 357; [2013] NSWLEC 212 the applicant obtained compensation for costs of relocation of a doctor's business under s 59(1)(c), and compensation for profits lost as a result of the relocation of the business under s 59(1)(f). In El Boustani v Minister Administering the Environmental Planning and Assessment Act 1979 [2012] NSWLEC 266 disturbance for relocation of a tomato growing business including loss of profits was allowed under s 59(1)(f).
The RMS does not dispute that loss of profits should be compensated but disagrees with the Applicant about the amount that should be paid. No timeframe for the assessment of financial costs under s 59(1)(f) is specified. The precise argument concerning the period over which loss of profits should be assessed for the purposes of s 59(1)(f) does not appear to have arisen previously and needs to be considered in light of the words of the provision. The terms of s 59(1)(f) refer to any other financial costs reasonably incurred or that might reasonably be incurred relating to the actual use of the land as a direct and natural consequence of the acquisition. The established principles of statutory construction require that the plain and ordinary meaning of the words be applied in their statutory context, as stated in numerous decisions such as Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 at [47].
The reference to "actual" and "direct and natural consequence" in s 59(1)(f) suggests the timeframe envisaged is within a reasonable period of contemplation. The actual use of land was emphasised in Blacktown Council v Fitzpatrick Investments Pty Ltd [2001] NSWCA 259 by Stein J at [5]: "the favoured construction gives the expression 'actual use' work to do. While physical use is not required, something which is only a potential future use would fall short of 'actual use'", cited with approval in George D Angus at [105]. While Blacktown was addressing a different scenario of what constituted an actual use of land, for example, whether land banking was a use of land the focus on actual use informs my approach to the loss of profits period. Immediately after acquisition the Applicant did, and continues to, suffer an actual loss of profits as a result of the disruption to his blueberry farming business. If the period of the loss of profits is the achievement of the level of production of 65 tonnes from the date of acquisition, the losses incurred in that period are the direct and natural consequence of the acquisition. The time to re-establish the new blueberry farm of 4ha and return to the level of production of 65 tonnes is four financial years.
The RMS submitted that in a business with a cyclical nature like a blueberry farm the effect of that cycle must be considered on both the old and the new farm to determine what the extent of the Applicant's loss is. The loss was characterised as the cost of bringing forward the replanting process on the replacement land and a period of greater profit. The focus of the RMS case is the blueberry plant cycle which underpins the Applicant's business rather than the time taken to produce 65 tonnes of fruit. The business cycle of a blueberry farm is particularly apparent because of the growth characteristics of the plants.
In the first growth cycle on the replacement land, the Applicant does have a potentially longer profit cycle than on the acquired land because he has 4ha of OPI blueberry plants, which are high yielding, on a newer growth cycle than he had on the acquired land. Because they were planted later these plants will be potentially profitable for a longer period in the first cycle than the blueberries that were on the acquired land, as identified in the table at par 23 of the RMS's written closing submissions using data from Exhibit 2 to compare the old and new farms. Over time however the blueberries on the acquired farm would have proceeded through the usual growth cycle and been relatively more profitable than the replacement farm depending on the respective stages of the growth cycles on the respective farms. The two growth cycles are not synchronised and therefore periods of profit and loss are overlapping with no logical endpoint. This suggests a difficulty in determining over what period to compare the two farms.
The rationale for Dr Ferrier stopping his analysis at 20 years in Exhibit 2 was to consider the period of two blueberry growth cycles of 10 years and/or that point in the future when the present value of the cash flow becomes nominal (see par 25 above). I note that in the joint experts' report, Dr Ferrier adopted a period of 50 years to reflect more cycles of blueberry plant growth and a point in the future when the present value of the cash flow becomes nominal. In Exhibit 2 the replacement farm is slightly more profitable over the 20 year period on the numbers forecast. The point at which the present value of cash flow becomes nominal could have been at an earlier point than the twentieth year as the selection of that figure is subjective. Earlier years have figures which could be considered nominal, for example, $11,472 in 2025 and $4,786 in 2031. Whatever the time period selected the two farms are on different cycles and therefore loss and profits are at different levels, as reflected in Exhibit 2 where negative as well as positive returns are identified for both farms. The selection of 20 years appears somewhat arbitrary apart from being at the end of two growth cycles and is a long time away from the 2015 financial year of acquisition. It is distant from the immediate short term actual loss of the Applicant resulting from the acquisition.
The RMS argued that blueberry farming is different to other horticultural crops given the growth cycle of the plants over 10 years. Blueberries are certainly different to annual crops or other crops which may produce more uniformly over a growth cycle. Most horticultural businesses are likely to be cyclical to some degree with ups and downs in profit and loss.
The Applicant is operating a small business. The Applicant's claim is driven by the date of acquisition over which the Applicant had no control. Had that date occurred at a different, less profitable, part of the growth cycle of the blueberry farm the claim for loss of profits would be correspondingly less.
The Applicant has not re-established his blueberry business on the replacement land in exactly the same manner it was conducted on the acquired land, where it consisted of a 1ha plot, followed later by a 3ha plot, with consequently differing yields and profits given the blueberry growth cycle. The Applicant has replanted a total of 4ha which means that his profitability is expected to return to the pre-acquisition level sooner than if he had undertaken the same planting model as on the acquired land. The difference is illustrated by Exhibit H, a table which shows that under the 1ha/3ha approach the level of profitability on the replacement land would be achieved in 2021 rather than 2019. This evidence suggests the Applicant is not obtaining a windfall in relying on the approach of Mr White.
The RMS' approach also appears to penalise the Applicant for essentially mitigating his loss by establishing another blueberry farm as soon as he could.
These matters all suggest that the appropriate period for assessing the Applicant's loss of profits is the four financial years it takes to achieve production of 65 tonnes of blueberries on the replacement farm.

[16]

(ii) Discount rate

Mr White considered it was not appropriate to discount the future profits beyond the time value of money in calculating forward four years of profit as a lump sum now. In his original report, Mr White stated that whilst it is generally accepted that past performance is no guarantee of future performance, measurement of past performance generally provides a good basis for determining scale, capacity, yields and pricing on the basis that it is known with certainty and capable of accurate measurement.
In utilising historic net profit per tonne as the basis for projecting future profits foregone Mr White made 12 general assumptions based on there being no material adverse change in that timeframe. Mr White's opinion was that the 12 following matters are not likely to occur: (1) material changes in the competitive and operating environments in which the Applicant operates; (2) significant deviation from current market expectations of Australian and international economic conditions; (3) material changes in legislation, tax legislation, regulatory requirements or government policy that would have a material impact on the financial performance or cash flows, financial position, accounting policies, financial reporting or disclosures of the Applicant; (4) material changes in key personnel or recruiting personnel; (5) material industrial strikes, employee relations disputes or other costs, liabilities or claims; (6) material adverse impact in relation to litigation; (7) material acquisitions, disposals, restructurings or investments otherwise than as contemplated; (8) material changes to the Applicant's structure; (9) significant disruptions to the continuity of the Applicant's operations or other material changes to the business; (10) major weather events that may materially impact on the operations of Taylor; (11) material amendment to any material contract, agreement or arrangement relating to the Applicant's business and intellectual property; or (12) material change in suppliers.
Mr White considers that the agreed price of $10.34 per kg already accounts for any business risk. Mr White's opinion is that the term deposit rate, being the rate that the amount of compensation paid would be invested as at the date of acquisition, is the appropriate discount rate. He adopted the Commonwealth Bank term deposit rate of 2.5%.
In cross examination Mr White was asked about his decision not to adopt a discount rate beyond the discount for the time value of money to take into account risks to future profits. With respect to the possibility of a large hail storm damaging a crop, Mr White's opinion is that the netting above the crop would protect the crop and manage the risk. Mr White stated that there is no risk of any weather event between 2015 and 2019 that could have an impact on the profitability of the business, as it would be able to be managed. Mr White was taken to Exhibit 3, a news article about a hail storm in September 2015 in the Corindi area. Mr White stated that the hail stones shown in Exhibit 3 are large enough to be kept off the crop by netting. Mr White agreed that on a hypothetical basis a change in government policy that would impact on labour costs could be a risk.
Mr McPherson the Applicant's blueberry expert was cross-examined on the factors that go into yield and profit forecasting in the blueberry industry. He agreed that labour costs, union disputes, weather conditions and competitor actions are all inherent risks to the Costa blueberry business. In re-examination, Mr McPherson gave evidence that no worker or union dispute had had an effect on the productivity of the business in his experience. He stated that a major weather event can have a material effect on the productivity of the business, such as a hail storm which he stated can happen in any given year, depending on the timing of the event in relation to the harvest season. Mr McPherson stated that if such an event occurs, it does not eliminate the ability of a farm to be productive for the balance of the harvest year. On the effect of competitors coming into the market, Mr McPherson gave evidence that the consumption rate of blueberries has grown in step with the additional volumes being produced. Globally and nationally Mr McPherson stated that the blueberry market is growing faster than any other product in produce.
The Applicant was recalled to give oral evidence in reply to the Exhibit 3 news article about a hail storm. The Applicant stated that he was in Corindi at the Costa farm on 18 September 2015 the date of the storm and that he remembers it. He gave evidence that of Costa's blueberries that were under the footprint of the hail storm, only those that were outside of nets were damaged. The acquired farm was just outside the footprint of the storm. The Applicant stated that if it had been under the storm, the netting that covered the whole 4ha plantation would have protected the crop.
Dr Ferrier's evidence is that the expected future profits are subject to all of the risks of the future operation of the blueberry farming business considered over 20 years. Dr Ferrier contended that such risks included general risks in the economy and market risks, specific risks in the blueberry farming industry and risk attached to the size of the Applicant's business. Dr Ferrier contended that there were no sales of blueberry farms that could be analysed to derive a discount rate for adoption in the valuation of the business and that there were no applicable rules of thumb. Accordingly, Dr Ferrier contended that the discount rate had to be constructed as the sum of a risk free rate plus an allowance for each of market risk, specific risk and size risk. Dr Ferrier applied a discount rate of 29.5% based on reasoning set out in par 5.16 of his original report as follows: Taking into account the matters identified in AASB 13 [Australian Accounting Standards Board 13 Fair Value Measurement], I consider a reasonable pre-tax discount rate would be as follows: % Risk-free rate (note 1) 3.0 Market risk premium (note 2) 6.1 Size premium (note 3) 5.0 Specific risk premium (note 4) 8.0 ---------- Total after-tax rate 22.1 Tax effect at 30% (note 5) 9.5 ---------- Total pre-tax discount rate 31.6 Rounded to 32%

[17]

Note 1: For the risk-free rate I have adopted the 10 year bond rate as at 19 December 2014, as published by the Reserve Bank of Australia. Note 2: The market risk premium refers to the return above the risk-free rate which has been achieved over the long term from an investment in a balanced portfolio of listed company shares. Recent available information indicates a risk premium in Australia (at July 2015) of 6.11% (source: Damodaran Online: Data for discount rate estimation http://pages.stern.nyu.edu/~adamodar/). Similarly, a fact sheet published by IPART [Independent Pricing and Regulatory Tribunal] in August 2014 indicates a market risk premium of 8.1% for 40 days (at 31 July 2014) and a premium of 6.0% for 10 years (see Annexure G to this report). I have adopted 6.1% as an appropriate estimate of the market risk premium as at December 2014. Note 3: The size premium recognizes that there is increased risk associated with a smaller entity when compared to larger diversified listed public companies (from which the market risk premium is derived). Studies such as Pratt, Reilly and Schweihs (Valuing a Business: The Analysis and Appraisal of Closely Held Companies, McGraw Hill, 2000), and Annin ('Is there still a size premium?" - Ibbottson Associates) suggest appropriate risk adjustments for size would be between 4.35% and 5.78%. As the Taylor blueberry farm is significantly smaller than a listed entity, I have adopted a 5% size premium. Note 4: The specific risk premium reflects my assessment of the additional risk associated with the identified cash flows (above that of a balanced portfolio of listed company shares). This premium allows for the increased risk brought about by factors such as the long-term nature of the cash flow forecasts, the significant risk of an oversupply in the blueberry industry (see Annexure H to this report) and business risks specifically associated with the blueberry farming industry, including risks associated with adverse weather events, insects and other pests, and the availability and cost of itinerant labour at harvest time. The choice of specific risk premium is necessarily subjective although, based on my experience, the derived total pre-tax discount rate of 32% is consistent with rates of return required for an investment in a small business which generally range from 20% to 50%. Note 5: The market risk premium of 6.1% (see Note 2) is derived from studies of the share market which establish the difference between the market returns and the risk-free rate. As market returns are measured on the basis of the after-tax income of listed companies, the resultant rate is an after-tax of return. As the expected cash flows from the blueberry farm are expressed in pre-tax terms, it is necessary to adopt a pre-tax discount rate. To convert the after-tax rate to the pre-tax rate I have applied the company tax rate of 30%.

Dr Ferrier further explained: 1. that the market risk premium reflected the risk premium for a diversified portfolio of listed company shares that he had then applied to the subject business which comprises an undiversified single unlisted asset; 2. that the specific risk premium was a subjective assessment by himself to reflect the long term nature of the cash flow forecasts, the significant risk of oversupply in the blueberry industry (contrary to the evidence of Mr McPherson) and risks associated with blueberry farming including adverse weather events, insects and pests and the availability and costs of itinerant labour; and 3. that the size premium reflects the increased risk associated with a smaller entity when compared to larger diversified listed public companies from which the market risk premium is derived..
Following the joint conferencing process, Dr Ferrier adopted a discount rate of 29.5% which is the 32% from his original report with 2.2% deducted for inflation.
Dr Ferrier was cross-examined on the tax status of the risk free rate and the market risk premium in the table extracted above in par 50. Dr Ferrier stated that the 3% risk free rate is pre-tax, but the combination of the risk free rate and the market risk premium (together 9.1%) is an after tax figure. Dr Ferrier was questioned on his decision to adjust the 3% risk free rate when it is a pre-tax figure. He stated that the 9.1% is in total post-tax even though the 3% risk free rate is pre-tax and therefore it is correct to adjust the total figure of 9.1% for tax. Dr Ferrier's opinion is that a size premium should be applied because small businesses are riskier than the large listed companies which provide the starting point for working out a reasonable discount rate. It was put to Dr Ferrier that the small size of the Applicant's farm makes it less risky than a listed company, and that because blueberry farming is so profitable it would be ill-advised to diversify the business. Dr Ferrier stated that smaller companies generally have a higher return which generally means higher risk, and maintained that it was appropriate to discount for the higher risk of smaller businesses. Dr Ferrier was questioned on his assumption that matters such as the availability and costs of itinerant labour, insects and pests, oversupply in the market and weather events presented risks to the Applicant's business. He confirmed his written evidence that they are all risks that need to be taken account in the specific risk premium, which is a subjective figure.

[20]

Time value of money sufficient discount rate

As I noted in par 22 above, a discount rate reflects the market risks and specific risks in achieving a future cash flow, including the time value of money. The discount rate and the period of time over which loss is assessed are related. Shorter periods potentially have lower risk and therefore require a lower discount rate.
I have determined that the period of assessment of loss of profits is four financial years from the financial year in which the date of acquisition occurred which is relatively short and reduces the period of any potential risk. By the date of the hearing, 1.5 financial years of the 4 financial year period for the assessment of the loss of profits had already passed with no evidence that any of the risk factors identified by Dr Ferrier would have had an impact on the business on the acquired farm. This reduces the risk of not achieving the forecast cash flow on the acquired farm as only 2.5 financial years remain before the replacement farm achieves a production of 65 tonnes. This considerably shorter period than the already short four year period further reduces the need to apply a discount rate to the forecast profits.
In relation to the 12 risks identified by Mr White in his report, matters 4 to 12 concern risks specific to the Applicant's business. In relation to weather (matter 10) evidence of minimal or nil risk from hail damage to a crop was provided by the oral evidence of the Applicant in relation to a specific hail event in September 2015. Blueberry plants under netting were not damaged by that event. Mr McPherson's evidence is that he has never experienced any difficulties with labour hire during his extensive career in the industry (matters 4 and 5); Mr McPherson's evidence is also that the market for blueberries continues to grow in step with increases in supply (matters 9 and 11). The Applicant is the only key person in the business which he runs as a sole trader and there appears to be no risk that he will go elsewhere or change his existing successful business model (matters 4, 7 and 8). Damage from pests is a potential risk, which can be managed with pesticides as identified in the New South Wales Department of Primary Industries material tendered as part of Exhibit B, the tender bundle. Apart from the generic risks identified for all businesses by Mr White in his report (matters 1 to 3), the specific risks for this business appear minimal to nil in the 2.5 year timeframe I am considering from the hearing date. I accept Mr White's evidence that all potential risks are very likely to be managed in the relevant timeframe.
In relation to Dr Ferrier's adoption of a discount rate of 29.5% the primary difficulty in accepting his approach is that I do not consider the risk should be considered over a 20 year period. The much shorter time frame of 2.5 years from the hearing is a far less risky proposition. In relation to the adjustments made by Dr Ferrier in reaching 29.5%, the large market risk premium of 6.1% (see Note 2 extracted above in par 50) reflects the risk premium for a diversified portfolio of listed company shares as identified in an Independent Pricing and Regulatory Tribunal (IPART) fact sheet that Dr Ferrier then applied to the subject business, an undiversified single unlisted asset. Essentially Dr Ferrier is attempting to compare matters which are not comparable, limiting the usefulness of the market risk premium applied to a small blueberry farm in northern New South Wales.
The size premium of 5% (see Note 3 extracted above in par 50) appears large. Dr Ferrier did not adequately explain why a business that is as highly profitable as blueberry farming with limited apparent risks would require such a large size premium. For the reason already stated in relation to market risk above his approach of considering large diversified companies and comparing these to a small non-diversified blueberry farm is not comparing comparable matters.
Dr Ferrier stated that the (very large) specific risk premium of 8% (see Note 4 extracted above in par 50) was a subjective assessment by him to reflect the long term nature of the cash flow forecasts, the significant risk of oversupply in the blueberry industry and risks associated with blueberry farming including adverse weather events, insects and pests and the availability and costs of itinerant labour. I have found above in par 58 that I do not accept that these risks are at all likely to occur in the next 2.5 years. There is no need to apply a specific risk premium.
Dr Ferrier did not support his assessment of his discount rate with a secondary method of assessment, such as the analysis of other business sales of blueberry farms, fruit farms of any sort or small horticultural business of any nature nor through the application of any rule of thumb. Dr Ferrier's oral evidence was that he had asked Mr Lunney land valuer for advice about blueberry farm sales but no advice was provided due to a lack of sales evidence. It is surprising that data more befitting the type of business conducted by the Applicant even if not for blueberry farms could not be located and applied.
As I am not applying Dr Ferrier's discount rate it is unnecessary to determine whether his approach to the "tax effect at 30%" (see Note 5 extracted above in par 50) should apply.
I accept the Applicant's submission that the discount rate of 24% Mr White adopted in assessing the future maintainable earnings in chapter 6 in the joint report is not directly comparable with the exercise undertaken by Dr Ferrier. It became unnecessary for the Applicant to rely on that approach as a result of agreement reached in the course of the hearing and it was not explored in any detail. I note that in El Boustani and George D Angus the loss of profits period under consideration was also relatively short and that discounting of the cash flow was not proposed in either matter.
I do not accept that discounting of a four year potential cash flow (loss of profits) is required other than for the time value of money. Concerning the time value of money, Mr White adopted a rate of 2.5% pa, being a "term deposit interest rate" reflecting an investing rate of interest foregone. Dr Ferrier adopted a risk free rate of 3.0% pa, being the RBA 10 year bond rate as at 19 December 2014 (see Note 1 extracted above in par 50) reflecting a borrowing rate of interest.
As I understand it, the time value of money, in part, reflects that return which Mr Taylor might have received had he invested his money other than in the relocated property. Had Mr Taylor sought a low risk investment opportunity, a Commonwealth Bank term deposit would have been appropriate. Adopting a borrowing rate for the time value of money is not appropriate. The assumption I make is that Mr Taylor will be investing that money. I accept Mr White's assessment of 2.5% pa for the time value of money as the discount rate.

[21]

(iii) Proposed 2ha cannot be considered

Part of the Applicant's claim includes the benefits from planting in the future a 2ha parcel on the acquired land. The Applicant gave evidence that he intended to plant an additional 2ha of blueberries in September 2015, the year after acquisition. The Applicant submitted that it was antithetical to the agreed approach of the business valuers (being the present value of future loss of profits) to ignore one source of expected profits from the business on the acquired land being the fruit to be produced from the 2ha parcel. The fact that the 2ha parcel was not planted at the date of acquisition is irrelevant. As the 2ha would have produced fruit in the period between the date of acquisition and the date at which the replacement farm achieved a yield of 65 tonnes, profit expected to be derived from the 2ha parcel is properly included in the loss of profits claim. The planned 2ha parcel was as much a part of the Applicant's business as anything else, and his evidence that he would have planted it is unchallenged.
The RMS submitted that to take into account the proposed 2ha area in this way meant that 6ha of blueberry farm was effectively being considered when there was only 4ha at the date of acquisition. This is not an "actual use" of the land for the purpose of s 59(1)(f), following Stein JA in Blacktown at [5]. The 2ha did not actually exist at the date of acquisition and is not part of either the farm being relocated or the actual profits which are lost. Further, there is really no loss at all, because as the Applicant conceded in submissions, the opportunity to expand on the replacement farm has not been lost.
As already identified in my finding on the period of loss, s 59(1)(f) directs attention to the actual use of land, as found by Stein JA in Blacktown at [5] cited with approval in George D Angus at [105]. The necessary focus on actual use of land supports the RMS' approach which I accept. The Applicant cannot claim loss of profits relating to the additional 2ha parcel planned.
My finding results in the reduction of the lost profits that the Applicant is able to claim. The parties can advise of the final amount able to be claimed in light of this finding in due course.

[23]

DA fees for replacement house/connection of utilities on replacement land not claimable (s 59(1)(c))
There is a house on the replacement land purchased by the Applicant. The Applicant claims the costs of DA fees for a new house on the replacement land. The costs of building a new house are not claimed. The cost of connecting utilities to the new house is also claimed. McDonald v Roads and Traffic Authority (2009) 169 LGERA 352; [2009] NSWLEC 105 at [91], [119] is cited as supporting this part of the claim. This decision was overturned on appeal but not in relation to this point.
The RMS submitted that the value of the house and infrastructure (utilities) were captured in the market value compensation determined under s 55(a). The claimed costs are not costs reasonably incurred (or might reasonably be incurred) relating to the relocation of the Applicant. If the Applicant is entitled to claim these costs it would logically be able to claim the cost of the new dwelling but this is not claimed. McDonald is distinguishable on its facts as it was only a partial acquisition whereby the acquired land included the improvements. The residue land to which the applicant moved was vacant.
Each case must be determined on its own facts and, as the Respondent identified, the circumstances in McDonald were different. At issue is whether the particular costs in issue claimed under s 59(1)(c) by the Applicant are financial costs reasonably incurred in connection with his relocation. Costs for relocation of the blueberry farm business have been agreed at $416,000. The costs in dispute relate as I understand it to relocation to a new house yet to be built on the replacement land which already has a house on it. The existing house I presume has utilities connected as the Applicant's father lived there for a lengthy period. The Applicant has not provided any evidence to establish why the DA fees for a new house on the replacement land and the cost of utility connection to that new house should be paid as compensation under s 59(1)(c). As the RMS submitted, the Applicant was paid market value for the substantial house with utilities connected on the acquired land. To pay the amounts sought as relocation expenses appears to be double-dipping in the absence of any evidence to support the claim.
I find that the DA fees and utility connection costs in relation to the replacement land are not claimable as compensation by the Applicant.

Taylor v Roads and Maritime Services

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Cases Cited (16)

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