BETWEEN : WESTERN AUSTRALIAN MEAT MARKETING COOPERATIVE LIMITED

Valuation of land - Gross rental value - Capital value - Highly specialised property - Abattoir - Whether capital value could not reasonably be determined by sales method - "Summation" method - Unimproved value plus depreciated replacement cost of improvements - Whether "straight line" or "reducing balance"/"diminishing value" method of depreciation appropriate

State Administrative Tribunal Act 2004 (WA), s 27(1), s 27(2)

Valuation of Land Act 1978 (WA), s 4(1), s 18, s 19, s 32, s 33, s 36A

Gross rental value of Lot 3 on Diagram 42266, Lot 3 Great Southern Highway, Katanning as at 1 August 2003 was $265 000

Respondent : Mr M Palandri (Public Sector Employee)

Burswood Nominees Pty Ltd v Valuer General (2000) 23 SR (WA) 206

Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2002) 212 CLR 111

Metro Meat Limited and Valuer General (LVTWA, Appeal No 8 of 1984 ­ 1985, 19 November 1984, unreported)

R K Morgan Holdings Pty Ltd v Melbourne and Metropolitan Board of Works (1992) 77 LGRA 102

St Martins' Centre Pty Ltd v Valuer General (2003) 30 SR (WA) 218

1 Western Australian Meat Marketing Cooperative Limited required the Valuer General to refer the valuation of gross rental value of an abattoir property to the Tribunal for review. The company argued that the valuation was incorrect in two respects.

2 First, it adopted a summation methodology which involved adding the unimproved value of land to the estimated replacement cost of improvements. The company contended that, as comparable sales were available, a sales methodology for valuation was open and was required to be adopted.

3 Second, it adopted a "straight line" approach to calculating physical depreciation of improvements, whereas a "reducing balance" or "diminishing value" approach should have been adopted.

4 The Tribunal determined that the sales methodology was not open, as the amount which the land could be reasonably expected to obtain on sale could not reasonably be determined on the evidence. The Tribunal also determined that the Valuer General was correct in adopting a straight line approach to depreciation.

5 The Tribunal reduced the valuation, but only to the extent recommended in the Valuer General's evidence based on a reconsideration of the estimated replacement cost of improvements.

6 These proceedings involve a review under s 33 of the Valuation of Land Act 1978 (WA) (Act) of the Valuer General's determination of gross rental value as at 1 August 2003 in respect of Western Australian Meat Marketing Cooperative Limited's (WAMMCO) property at Lot 3 on Diagram 42266 which is known as Lot 3 Great Southern Highway, Katanning (land). The land has an area of approximately 142 hectares and comprises a large, small stock abattoir complex. The majority of improvements were constructed when the site was first developed as an abattoir in 1973. The buildings are well-maintained to meet export meat standards.

7 Section 18 of the Act states that "for the purposes of a general valuation, the Valuer-General shall determine, or cause to be determined, with respect to rateable land, the gross rental value ... so far as that value is required by a rating or taxing authority for the purpose of assessing any rate or tax ...". Section 32 of the Act entitles any person liable to pay any rate or tax assessed in respect of land, who is dissatisfied with a valuation made by the Valuer General in relation to that land, to object to the valuation on the ground that the valuation is not fair or is unjust, inequitable or incorrect, within 60 days after the issue of an assessment by a rating or taxing authority of any rate or tax on the basis of the valuation. An objection to a valuation is required to "set out fully and in detail the grounds of objection and the reasons in support of those grounds of objection": Act s 32(2)(c). The Valuer General is required to consider any objection and may either disallow it or allow it, wholly or in part: Act s 32(7).

8 Section 33 of the Act provides that any person who is dissatisfied with the decision of the Valuer General on an objection may, by notice, require the Valuer General to "refer the valuation to the State Administrative Tribunal for a review". Section 36A(1) states that, upon a review by the Tribunal on a referral under s 33, the Tribunal may consider grounds in addition to those stated in the notice of objection and reasons in addition to those previously given by the Valuer General; see also State Administrative Tribunal Act 2004 (WA) (SAT Act) s 27(1).

9 As the Land Valuation Tribunal (former Tribunal) recognised in Burswood Nominees Pty Ltd v Valuer General (2000) 23 SR (WA) 206 at [7], the gross rental value of rateable land may be determined under the Act in three ways, namely:

"(i) the gross annual rental that the land might reasonably be expected to realise if let on a tenancy from year to year upon condition that the landlord was liable for all rates, taxes and charges thereon and insurance and other outgoings necessary to maintain the value of the land;

(ii) where the gross rental value cannot reasonably be determined [by] the method referred to in subpar (i) hereof, the "assessed value" of the land (being the prescribed percentage, namely, five per cent) of the capital amount which [an] estate [of] fee simple in the land might reasonably be expected to realise upon sale; [or]

(iii) where the capital amount which [an] estate [of] fee simple might reasonably be expected upon sale cannot reasonably be determined, the gross rental value is to be [the "assessed value", that is five per cent of] the sum of, first, the unimproved value of the land and, secondly, the estimated replacement cost of improvements to the land after making such allowance for obsolescence, physical depreciation and other such factors as are appropriate in the circumstances. (See [definitions of "assessed value", "capital value" and "gross rental value" in] s 4(1) of the Act [and reg 3 of the Valuation of Land Regulations 1979 (WA)].)"

10 The term "improvements" is defined in s 4(1) of the Act to mean "the value of all works actually effected to land, whether above or below the surface", including fixtures, but excluding "machinery, whether fixed to the land or not". However, the Act does not prescribe the method for calculating physical depreciation of improvements.

11 It is common ground that the gross rental value cannot reasonably be determined in this case by the method identified by the former Tribunal in par (i) of the passage set out above. As abattoirs are generally owner-operated, comparable market rentals are not available so as to determine the gross annual rental that the land might reasonably be expected to realise if let on a tenancy from year to year.

12 The two key issues in this review are:

(i) whether the capital amount which an estate of fee simple in the land might reasonably be expected to realise upon sale cannot reasonably be determined (with the result that the gross rental value of the land cannot be determined in accordance with the so-called "sales" method identified by the former Tribunal at par (ii) of the extract set out above, and must be determined in accordance with the so­called "summation" method identified at par (iii) of the extract); and

(ii) if the gross rental value must be determined in accordance with the summation method, whether physical depreciation should be calculated on a "straight line" approach, or on a "reducing balance" or "diminishing value" approach.

13 For reasons set out below, the Tribunal has determined that, on the evidence, the capital amount which an estate of fee simple in the land might reasonably be expected upon sale cannot reasonably be determined, and that, accordingly, the gross rental value of the land must be determined on the summation method. The Tribunal has also determined that the correct and preferable decision in this review involves the use of straight line depreciation, rather than a reducing balance or diminishing value approach: SAT Act s 27(2).

14 In these reasons, we will at first set out important aspects of the factual background to the review and the competing methodologies and valuations advanced by the parties, before considering the two key issues in turn.

15 On 19 November 1984, the former Tribunal published reasons for determination in relation to an appeal brought by Metro Meat Limited, which then owned the land, under s 33 of the Act as it then stood, against the Valuer General's disallowance of its objection to the determination of the gross rental value of the land at $157 000: see Metro Meat Limited and Valuer General (LVTWA, Appeal No 8 of 1984 ­ 1985, 19 November 1984, unreported). The former Tribunal considered that, as there was no evidence of rents of similar properties, the gross rental value of the land could not reasonably be determined in accordance with the first method identified at par [9] above. Although some evidence of sales of abattoir properties was presented, the former Tribunal considered that it was "inconclusive", and that, accordingly, the capital amount which an estate of fee simple in the land might reasonably be expected to realise upon sale could not reasonably be determined. The former Tribunal, therefore, proceeded to determine the gross rental value of the land on the basis of the summation method.

16 The former Tribunal considered that it could "draw some direction from ... other sales in country areas" (although "there was no evidence to support the accuracy of these figures") which indicated "that the sale prices of this type of property are generally lower than the replacement cost less physical depreciation": at page 7. Evidence given by the State Manager of Metro Meat also indicated that the abattoir was operating at approximately 60 per cent of its capacity. The former Tribunal considered that the evidence supported a contention "that an economic obsolescence factor does exist and should be taken into account", and that it "would point to a 40% depreciation factor being an appropriate allowance for this economic obsolescence". It allowed the appeal and determined the gross rental value of the land at $110 000.

17 On 30 July 1999, WAMMCO entered into an asset acquisition agreement with Metro Meat, under which WAMMCO agreed to purchase the land, buildings, plant, equipment, stock and other assets of Metro Meat associated with its abattoir on the land and a second abattoir at Linley Valley. According to a letter from Clayton Utz, WAMMCO's solicitors on the purchase of the abattoirs, to the Registrar of Titles dated 24 February 2000, the total price paid for the acquisition, namely $5 470 000, "was based on specified employee liabilities assumed by [WAMMCO] at settlement". The Clayton Utz letter stated that the "fair market value" of the land component of the acquisition was "agreed" between the parties prior to settlement to be $2 300 000. Although it appears that a valuation of the properties was not provided to the Registrar of Titles, the nominated land value was accepted for the purposes of registration of the transfer. A valuation of the properties purchased by WAMMCO was not produced to the Tribunal. Moreover, it is unclear from the Clayton Utz letter what the "agreed" "fair market value" of the land in question in these proceedings was.

18 On 2 April 2002, Kelvedon Pty Ltd purchased the Linley Valley abattoir land from WAMMCO for $522 500.

19 In accordance with s 18 of the Act, the Valuer General undertook a general valuation of all rateable land in the Shire of Katanning as at 1 August 2003. The Valuer General discarded the "agreed" "fair market value" of the land and the Linley Valley Abattoir referred to in the Clayton Utz letter, for reasons including:

"• Difficulty in analysing the sale price as it included another small abattoir and liabilities of the vendor company."

20 The Valuer General also considered that sales of other abattoirs were "distressed" and not comparable. In consequence, the Valuer General considered that the capital amount that an estate of fee simple in the land might reasonably be expected to realise upon sale could not reasonably be determined, and that the gross rental value of the land was only able to be determined on the summation method. The Valuer General assessed the unimproved value of the land at $250 000 and the estimated replacement cost of improvements at $11 195 434. After depreciating the improvements on a straight line basis and deducting a further 15 per cent from the depreciated replacement cost to allow for under-utilised capacity/economic obsolescence, the gross rental value was calculated as the assessed value, that is five per cent of, the capital value of $6 100 000, namely $305 000.

21 On 2 August 2004, the Shire of Katanning gave WAMMCO a rate notice in accordance with s 6.41(1) of the Local Government Act 1995 (WA). On 10 September 2004, WAMMCO objected, in accordance with s 32 of the Act, to the Valuer General's determination of the gross rental value of the land, on the basis that the land had been valued by Mr Mark Klenke of AON Valuation Services at $3 720 000 as at 30 June 2004. Five per cent of Mr Klenke's valuation was $186 000. WAMMCO, therefore, contended that the gross rental value of the land is $186 000. WAMMCO submitted a copy of Mr Klenke's valuation in support of its objection.

22 In the executive summary of his valuation report, Mr Klenke stated as follows:

"In determining the current fair value of the subject property, the summation method of valuation was adopted. This method values the property by establishing a market value for the land component of the subject property and to this adding the depreciated replacement cost of the structural improvements located upon the land.

This method is recognised by the Australian Property Institute as the preferred method of establishing the fair value of specialised properties such as the subject property. This is due to the fact that such properties rarely sell on the open market and when such sales do occur they either form part of a continuing business, or when the owners are in financial distress."

23 In his valuation, Mr Klenke assessed the unimproved value of the land at $200 000, rather than $250 000 as determined by the Valuer General, and the replacement cost of improvements at $14 780 850, that is over three­and­a­half million dollars more than the Valuer General's estimate. However, Mr Klenke employed a reducing balance depreciation approach, rather than a straight line depreciation approach. He did not deduct a further percentage from the depreciated replacement cost to allow for under­utilised capacity, as had the Valuer General. Principally because of the different depreciation approach adopted by Mr Klenke, his summation capital value of the land and, therefore, the summation gross rental value, was approximately 39 per cent less than that determined by the Valuer General.

24 By letter dated 8 December 2004, Mr Geoffrey Fairclough, a certified valuer employed by the Valuer General, advised WAMMCO that its objection had been investigated, and that the gross rental value had been reduced to $285 000 as at 1 August 2003. The letter advised WAMMCO that if it was dissatisfied with the decision, it could require the matter to be referred to the former Tribunal.

25 WAMMCO subsequently required the Valuer General to refer the valuation of the gross rental value of the land to the Tribunal, in accordance with s 33 of the Act, on the basis that it was "dissatisfied with the method of calculation used to arrive at the value of the property". On 4 February 2005, the Valuer General referred the valuation to the Tribunal for a review.

26 After the commencement of the proceedings, Mr Fairclough recommended a further reduction of the gross rental value of the land from $285 000 to $265 000. This valuation was arrived at on the basis of the same methodology and approach as that previously employed by the Valuer General, but involved a recalculation of the estimated replacement cost of improvements.

27 Mr Klenke, who represented WAMMCO and gave evidence in its case, adopted a completely different methodology and approach to the determination of gross rental value of the land from that which he utilised in determining the fair value of the land in his valuation report which was relied on by WAMMCO in support of its objection. In short, whereas in his earlier valuation report Mr Klenke adopted the summation method of valuation, rather than the sales method, because abattoir properties such as the land "rarely sell on the open market and when such sales do occur they either form part of a continuing business, or when the owners are in financial distress", in his evidence and submissions on behalf of WAMMCO he adopted the sales method. His evidence included the following:

"Based on our experience [AON Valuation Services] contents [sic] that the actual sale of the subject property in October 1999 and other market transactions of comparable abattoirs throughout Australia is the best evidence of market value. [AON Valuation Services] contents [sic] that although the transacted sale prices of abattoirs may appear to the unexperienced [sic] as being too difficult to analyse, once a knowledge of the industry has been obtained, these sales can be analysed, and from this analysis, a clear pattern of value can be established."

28 Mr Klenke contended that the most effective means of comparison between abattoirs is throughput, typically expressed as the number of "small" and "large" stock processed per single shift day. He considered that "one sheep, goat or fallow deer processed equals a single 'small'" and that "it is generally agreed that one 'large' is equivalent to between six to eight 'smalls'". In undertaking his analysis of abattoir sales, he adopted a "conversion factor" of one "large" animal to seven "small" animals. Mr Klenke also made an assumption, based on what he described as AON Valuation Services' "experience in valuing abattoirs" and "a standard industry allowance", that one­third of the stated price for an abattoir is attributed to the land and buildings and that two­thirds of the price is attributed to plant and equipment. He said that "based on the experience that [AON Valuation Services'] staff has and the land and buildings and plant and equipment qualifications of Mark Klenke, such an allocation appears to be reasonable". However, no primary or empirical evidence was put forward to support this quite critical assumption on which Mr Klenke's evidence was based.

29 Mr Klenke relied on five abattoir sales which he contended were sufficiently "comparable" so as to be able to determine gross rental value on the basis of the sales method. These included three South Australian abattoir sales, a sale of an abattoir in Waroona, Western Australia, and the sale of the subject land in 1999. Of the three South Australian sales, only one was generally contemporaneous with the valuation date in question. The other sales occurred four to five years before the valuation date. The Waroona sale and the sale of the subject land occurred approximately four years before the valuation date.

30 Based on his assumptions of a "conversion factor" of one "large" stock to seven "small" stock, and that one­third of the stated price is attributable to land and buildings, while two­thirds is attributable to plant and equipment, Mr Klenke converted the sale price of each of the five abattoirs into a value per "small" stock head processed. The value per head derived by Mr Klenke varied significantly from $118.05 per head to $301.52 per head. In the case of the sale of the subject land in 1999, Mr Klenke assumed that the "fair market value" which had been "agreed" between Metro Meat and WAMMCO prior to settlement of the sale of the two abattoirs was, in fact, the capital amount for the fee simple of the two abattoirs. Based on their respective throughputs, he allocated the "agreed" value of the two abattoirs as $1 012 000 for the Linley Valley abattoir land and $1 288 000 for the land in question in these proceedings. Based on this approach, the subject abattoir produced the lowest value per head of $118.05.

31 Mr Klenke stated that AON Valuation Services had undertaken "a brief review of the strengths and weaknesses of the Katanning abattoir". The strengths of the abattoir are its size, efficient layout, level of maintenance, and location in Katanning, which provides access to the majority of the State's sheep flock. The weaknesses of the abattoir are that it is only a single-chain small stock abattoir. Based on this general assessment of strengths and weaknesses, Mr Klenke considered "that an appropriate rate per head for the subject property would be in the order of $210". Based on the "comparable" sales on which he relied, $210 per head equates to a capital value of $756 000, and therefore, a gross rental value of $37 800.

Can the capital amount be reasonably determined on the sales method?

32 For each of four reasons, the Tribunal considers that the capital value of the land cannot reasonably be determined on the sales method advocated on behalf of WAMMCO.

33 First, there is a serious question as to whether the sales relied on by Mr Klenke are "unaffected by any abnormal influence that would deprive the sale of weight as a criterion of value": St Martins' Centre Pty Ltd v Valuer General (2003) 30 SR (WA) 218 at [17]. In Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2002) 212 CLR 111, the High Court of Australia recognised, at [16], that in land valuation, "the traditional, and usually unexceptional method is to seek out relatively contemporaneous sales of comparable properties between parties at arm's length, unaffected by special circumstances, such as, for example, a strong desire by a purchaser to buy an adjoining property, and to use those sales as a yardstick for the valuation of the relevant land" (emphasis added).

34 Mr Klenke did not address, either meaningfully or at all, the point which he so clearly made in his first valuation, namely that abattoir properties "rarely sell on the open market and when such sales do occur they either form part of a continuing business, or when the owners are in financial distress". Mr Fairclough considered that sales of other abattoirs are "distressed" and not comparable. He maintained that "the few, infrequent sales Australia-wide are often associated with forced sales at the end of contracts or due to poor management which affect the demonstrated sale price available for analysis". Moreover, the Clayton Utz letter indicates that the purchase price paid by WAMMCO for the two abattoirs in 1999 "was based on specified employee liabilities assumed by [WAMMCO] at settlement". This is consistent with Mr Klenke's (original) view that the infrequent sales of abattoir properties on the open market are often on an ongoing business basis.

35 Second, as noted earlier, Mr Klenke's evidence and argument was premised on an assumption that "a standard industry allowance" is that one-third of the stated price for the purchase of an abattoir is attributed to land and buildings, whereas two-thirds of the purchase price are attributed to plant and equipment. As also noted earlier, no primary or empirical evidence was presented to the Tribunal to establish this critical assumption.

36 Third, although, in most cases, the best evidence of the value of land is a recent, arm's length sale of the land itself, there are significant difficulties in analysing and utilising the sale price of the subject land in 1999. As noted earlier, although the Registrar of Titles accepted Metro Meat's and WAMMCO's agreed position prior to settlement that the fair market value of the two abattoir properties was $2 300 000, no valuation evidence was produced to support that agreed position. Further, it is apparent from the Clayton Utz letter that the overall purchase price was affected by the assumption of employee entitlements by WAMMCO. Finally, the agreed land value of $2 300 000 related to two different properties. Although Mr Klenke sought to divide the price between the properties on the basis of relative throughput, there is no evidence that the parties to the transaction determined the price on that basis. Mr Klenke could have called an officer of his client to establish how the $2 300 000 agreed land value was determined, but he did not do so. Moreover, even assuming that $2 300 000 properly reflected the value of the fee simple of the two properties, the fact that WAMMCO sold the Linley Valley abattoir land for $522 500 in April 2002 suggests that Mr Klenke's attribution of $1 012 000 to that property in October 1999 is too high.

37 The fourth reason why the capital value of the land cannot reasonably be determined on the sales method is that there are a large number of adjustments which would need to be made when applying the sales evidence of other abattoirs relied on by Mr Klenke to take into account points of difference between the evidence and the land. As Mr Fairclough observed, the necessary adjustments include:

(ii) the proximity of the properties to the nearest ports;

(iv) business considerations such as rating and taxing regimes, particularly when comparing South Australian and Western Australian abattoirs; and

(v) proximity of the nearest ports to export markets.

38 Furthermore, as the former Tribunal noted in St Martins' Centre Pty Ltd v Valuer General (supra), at [21], "land should not be valued without regard to provisions and effect of any legislative or planning restrictions". This is all the more significant when reliance is placed on sales in a different jurisdiction. Finally, some allowance might also be required to reflect the dates of the sales relied on. As noted earlier, four of the five sales occurred four to five years before the valuation date in question.

39 It is also instructive to bear in mind Gobbo J's caution in R K Morgan Holdings Pty Ltd v Melbourne and Metropolitan Board of Works (1992) 77 LGRA 102 at 108:

"It will be seen that there are a large number of adjustments made in each case. Each adjustment is a matter of judgment with a potential for error. The figure arrived at is designed to relate the sale parcel to the subject land so as to make the eventual rate reflect the various differences between the sale land and the subject land. The rate arrived at after such a process therefore has an illusory appearance of certainty and accuracy about it."

40 Mr Klenke did not question the need to make the adjustments referred to by Mr Fairclough. In his evidence, Mr Klenke only provided information in relation to one of the adjustment factors, namely location, although this was rather generalised. The Tribunal cannot, therefore, even begin the adjustment process, with its inherent potential for error identified by Gobbo J, on the evidence presented to it.

What method of depreciation should be adopted?

41 As noted earlier in these reasons, the method of depreciation adopted by the Valuer General in the original determination of gross rental value of the land, and by Mr Fairclough in his evidence in these proceedings, is the straight line approach, whereas, in his original valuation, Mr Klenke adopted the reducing balance or diminishing value approach. Both approaches assume that improvements have the same useful life. The straight line approach assumes that improvements physically depreciate at the same rate each year of their useful life. For example, a thirty­year­old asset with an estimated lifespan of 50 years and a ten per cent residual would be physically depreciated by 54 per cent using the straight line approach.

42 In contrast, the reducing balance or diminishing value approach to depreciation involves a much higher physical depreciation in the early years of the lifespan of an improvement. Thus, a thirty­year­old asset with an estimated lifespan of 50 years and a ten per cent residual would be physically depreciated by 75 per cent using the reducing balance method of depreciation.

43 Under the heading "Arbitrary assessments of accrued depreciation", R O Rost and H G Collins state in Land Valuation and Compensation in Australia (3rd Edition, 1984), at 124 ­ 125, as follows:

"Although the straight line method is a simple way of allowing for the physical depreciation of plant and equipment, it is likely to give erroneous results if applied to the valuation of buildings and many other improvements, particularly those on rural properties. One weakness is that physical life expectancy rather than the economic life of the item becomes dominant. Another weakness is the assumption that depreciation proceeds at a steady and regular rate throughout the expected life. Nevertheless the straight line method in allowing for depreciation of improvements as well as plant and equipment is widely used in accountancy practice, where it is treated as an item of periodic cost. In valuation practice, however, its use in respect of buildings is justified only in locations where it is supported by market transactions.

Another arbitrary formula is that known as the 'diminishing value method'. ...

The diminishing value method is favoured by the Taxation Department in respect of certain improvements where the taxpayer does not elect to use the prime cost method, but it has no place in land valuation practice."

44 It is common ground that, notwithstanding Rost and Collins' statement that the straight line method of depreciation is only justified in localities "where it is supported by market transactions", it has been used by the Valuer General in this State in all capital value based assessments of gross rental value since the commencement of the Act in 1979. It is in the public interest that consistent valuation methodology and approach is employed, unless the methodology or approach in question is shown to be legally or factually incorrect. In this case, Mr Klenke conceded that "you can put a strong argument for either method at the end of the day", although he considered that "whatever method is chosen, it should reflect market activity". Mr Klenke considered that Mr Fairclough's valuation, including his adopted method of depreciation, did not "reflect the general level of sales evidence", namely the "comparable" sales of abattoir properties he identified and relied on.

45 The Tribunal is satisfied that the straight line method, consistently applied by the Valuer General for a quarter of a century, is appropriate and preferable to the reducing balance or diminishing value method in the circumstances of this case. It was Mr Fairclough's unquestioned and uncontradicted evidence that the subject abattoir premises are required to be maintained to a high standard to meet regulatory requirements. In light of this evidence, and the public interest in consistent decision­making, the straight line method of depreciation, which assumes a constant rate of depreciation over useful life, is appropriate. Moreover, Rost and Collins' concern, which Mr Klenke shared, that a weakness of the straight line method of depreciation is that physical life expectancy, rather than the economic life of the item, becomes dominant, is arguably not apposite in the context of the Act. In the definition of "capital value" in s 4(1), the Act distinguishes between an allowance for "physical depreciation" and an allowance for "obsolescence". It is arguable, therefore, that the term "depreciation" in the Act excludes considerations of "obsolescence". However, in any case, the concern is adequately and practically addressed by the Valuer General's additional allowance for under-utilised capacity/economic obsolescence. In contrast, the reducing balance method, which Rost and Collins consider "has no place in land valuation practice", would produce an artificially low depreciated value after the initial period of useful life.

46 Mr Klenke's qualification to his concession that, while either approach is arguable, the adopted method "should reflect market activity", is relevantly misconceived. The summation method of determining gross rental value, of which an allowance for physical depreciation forms part, is only applicable in circumstances where gross rental value cannot reasonably be determined based on market activity, whether in terms of rental value or (five percent of) sale value. The Tribunal has found that gross rental value cannot reasonably be determined in this case based on market activity. It is misconceived to criticise a result on the basis that it does not reflect a "market" which cannot reasonably be relied on.

47 Although, in his original valuation which utilised the summation method, Mr Klenke had determined a lower unimproved value of the land and a higher estimated replacement cost of improvements than that determined by the Valuer General, he was ultimately prepared to adopt the Valuer General's assessment of unimproved value and replacement cost of improvements for the purposes of the review.

48 The Tribunal has found that the capital value of the land cannot reasonably be determined on the sales method. Under the Act, the gross rental value must, therefore, be determined on the basis of the third method identified at par [9] above, namely five per cent of the capital value through the summation method. The Tribunal has also found that the appropriate basis of allowance for physical depreciation is the straight line method historically used by the Valuer General.

49 WAMMCO has not, in its evidence or submissions, questioned any other aspect of the valuation the subject of this review. In particular, WAMMCO has not questioned the Valuer General's adoption of a 15 per cent allowance for under-utilisation or economic obsolescence.

50 The Tribunal accepts that the methodology employed by Mr Fairclough in his determination of the gross rental value of the land is consistent with the Act and is appropriate. Accordingly, the correct and preferable decision in relation to the review is that the gross rental value of the land as at 1 August 2003 is $265 000.

1. The review of the Valuer General's valuation in relation to the gross rental value of the land in Lot 3 on Diagram 42266 known as Lot 3 Great Southern Highway, Katanning is upheld in part.

2. The gross rental value of the land in Lot 3 on Diagram 42266 known as Lot 3 Great Southern Highway, Katanning under the Valuation of Land Act 1978 (WA) is $265 000 as at 1 August 2003.

I certify that this and the preceding [51] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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MR D R PARRY, SENIOR MEMBER