Recent Land and Environment Court rulings suggest that landowners of contaminated or heritage constrained land may have been paying higher rates and land tax than necessary based on inflated land valuations, where the Valuer-General has applied the wrong valuation methodology or assumptions. In some cases, site owners may lodge appeals or objections against a determination by the Valuer-General or a rates notice by a local council.
Valuation where there's site contamination
Owners of contaminated land in NSW should make sure that they are paying rates and land tax based on valuations which take into account the existence of site contamination, following a Land and Environment Court decision on 16 April 2015 (Challenger Listed Investments Limited v Valuer-General (No. 2)  NSWLEC 60).
One of the roles of the Valuer-General is to determine "land values" pursuant to the Valuation of Land Act 1916, for rating and taxing purposes. The land valuation exercise required by the statute is a highly artificial one. It requires the Valuer-General to determine the unimproved value of the “fee-simple”, stripped of any improvements. It involves a hypothetical sale of something which does not exist in the real world.
Section 6A(2) of the Valuation Act contains some assumptions which the Valuer-General must apply in determining land values – essentially:
- that the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates; and
- that improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used.
In the Challenger case, the Valuer-General had determined the land value of an industrial site in Yennora NSW, owned by Challenger, at approximately $7.5 million, while Challenger contended that the land had a nil value.
The site had been declared "significantly contaminated land" by the Environment Protection Authority pursuant to section 11 of the Contaminated Land Management Act 1997.
In arriving at its land value, the Valuer-General ignored the existence of contamination, in accordance with its policy guideline "Identification and Valuation of Contaminated Land". That policy states that contaminated sites which are operational (or that have an "existing use"), are to be valued on the basis that the existing use of the site could continue in perpetuity, and that as a consequence, no allowance is to be made in the land value for the detriment caused by (or remediation of) any contamination.
Applying the Court of Appeal's construction of section 6A in Valuer-General v Fivex Pty Ltd  NSWCA 53, Justice Pepper held that the Valuer-General's policy was wrong, having misconstrued the operation of and assumptions under section 6A.
Justice Pepper's decision confirms that the Valuer-General must take into account the effect of contamination (including likely costs of remediation) as a matter of fact. It does not matter, for the purposes of the valuation exercise in section 6A, that the contamination was a detriment caused by the use of the improvements (even though their existence was required to be disregarded).
While there is no definition of "contaminated land" in the Valuation Act, "contamination of land" is defined in the Contaminated Land Management Act 1997 as the presence in, on or under the land of a substance at a concentration above the concentration at which the substance is normally present in, on or under land in the same locality, being a presence that presents a risk of harm to human health or any other aspect of the environment.
The Valuer-General's policy offers a considerably more narrow definition of "contaminated land", namely "a property which is identified or recorded, by a local or state government authority as being contaminated or is widely known to be contaminated." Although in the present case, the existence of a declaration by the Environment Protection Authority meant that there was no dispute as to the fact of the contamination, it would appear unlikely that the Valuer-General's preferred definition would survive if challenged.
Valuation where there are heritage restrictions
Section 14G of the Valuation Act, together with the general valuation principles in section 6A(1) (explored above), set out a similarly artificial statutory scheme for valuing heritage restricted land. Section 14G(1) prescribes assumptions the VG must apply, while section 14G(1A) prohibits the VG making deductions for heritage issues outside the discrete assumptions in section 14G(1).
In Oriental Bar Pty Limited v Valuer-General  NSWLEC 59, the applicants argued that the land values of their heritage-restricted properties should be lower. The parties' extensive disagreement stemmed in large part from their different approaches to the application of the general principles in section 6A(1) and their interaction with the heritage assumptions in section 14G(1).
In this matter, the applicants considered the correct valuation approach should consider section 6A(1) first in isolation, meaning that the selection of comparable sales should not be limited to comparables with heritage restrictions. Once comparables were selected using the general principles under section 6A(1), the applicants argued the assumptions required by section 14G(1) should then be applied in adjusting those sales. Interestingly, this approach resulted in the applicants selecting comparable sales with values three times higher than the Valuer-General's comparable sales. While this may initially appear counterintuitive (because an applicant generally prefers lower values to reduce rates), following large deductions made as a result of the assumptions in section 14G(1), a lower final value was reached. However, this methodology might not always produce the lowest result.
Conversely, the Valuer-General argued that the interaction between sections 6A(1) and 14G(1) should operate from the onset so that the highest and best use is restricted to a property's existing heritage restricted use. As a result, comparable sales should be selected which also suffer heritage restrictions.
In her decision, Justice Pain confirmed that the Valuation Act does not specify a particular valuation approach and, provided the assumptions required by section 14G(1) are made, more than one valuation approach could be appropriate. However, she ultimately preferred the applicants' approach to valuation since it was both theoretically in accordance with the statutory scheme (which requires precise application of its terms) and was also consistent with the approach taken in Krisgay Pty Ltd v Valuer-General  NSWLEC 600 in making a heritage valuation under the Heritage Act 1977. However, despite accepting the applicants' valuation methodology, Justice Pain considered that the sales actually selected by the applicants were not in fact suitably comparable.
Justice Pain also considered separately the treatment of comparable sales which enjoyed the benefits of development consents. The applicants sought a downward adjustment of 10% when comparing a sale to the subject if at the time of sale it benefitted from a development consent. However, she considered that section14G required the Valuer-General to assume there were no legal impediments to continuing the existing use of the subject land – this impediment would exist if there was no development consent on the subject land. Accordingly, she considered no adjustment to take into account development approvals or existing use rights benefitting a comparable rate was warranted.