New Rating Assessments Commencing Year 2000
By Robin Hocking
The majority of Municipal Rating Valuations in the State of Victoria have recently been reviewed with values as at the 1st January 2000. There are many Properties where the rating assessments require a detailed examination of the legislation, and extractive industry sites, and landfill sites are among those properties that deserve special investigation.
The Municipal Valuer is obliged to “return” three separate assessments being:
Net Annual Value (NAV) – The hypothetical rental return that the property would obtain if offered for lease to the open market.
Capital Improve Value (CIV) – The amount for which the property could be sold between parties whom are fully conversant with all matters affecting the value of the land. The Value is to include improvements (being those generally considered to be fixed to the land) but excluding moveable and mobile equipment e.g.. Workshop equipment and portable plant.
Site Value (SV) – The amount for which the property could be sold between parties who are fully conversant with all matters affecting the value of the land – assuming the land is without improvements – that is no fencing, buildings, haul roads, power, telephone, fixed and mobile plant and I believe, Work Authorities.
Definitions of the three separate assessments used in Victoria are set down in legislation and as a consequence these values tend to be artificial. The Act proposes hypothetical situations and the definition of Site Value requires a quarry to be valued on the assumption that all improvements had not been made. This conjures up the image of a quarry without internal access roads, fencing, power, telephone, haul roads, plant and machinery, and in my opinion, without a Work Authority. The Work Authority does not run with the land and is often issued to a party who is not the landowner. The Work Authority has a separate value of its own.
An example of the split up of values is the following scenario, which is a real and not uncommon situation:
A farmer leases part of his freehold farm, on a separate title, to a quarrying company. In exchange the landowners may for the purpose of this argument receive a royalty of 60 cents per tonne and the past three years operation indicates annual average sales of 100,000 tonnes per annum, being the equivalent royalty of $60,000 per annum.
It is assumed the leasing agreement with the farmer is standard for the industry and provides the operator a security of tenure for 30 years. The quarry operator obtains an Extractive Work Authority in his company name.
A second quarry working a similar deposit in the same area is held on freehold land by another operator and has recently been sold to one of the major companies for $2,800,000 including fixed plant.
The local Municipal Valuer obtains the records of the sale of the second quarry and elects to value both operations with a Site Value of $2,000,000 i.e.. $2,800,000 less plant and machinery $800,000. This results in a potential land tax account in excess of $60,000 per annum.
The farmer and owner of the first property dies and his Estate offers the freehold title containing the quarry for sale. The purchaser acknowledges a 30 year lease with an income of approximately $60,000 per annum and purchases that freehold title as an investment for the sum of $480,000 i.e.. a return of 12.5%.
The question arises as to what is the true Site Value of these two “identical” quarries. Is it $480,000 or is it $2,000,000? The effect on the Land Tax assessment will range between $5,000 per annum up to $60,000 per annum.
I believe the sale of the first quarry for the sum of $480,000 is a better representation of Site Value than the sale of the second quarry at $2,000,000. The sale of the first quarry meets the definition of Site Values.
The sale of the first property for the sum of $480,000 does not include the value of the Work Authority, however, it does acknowledge the existence of the Work Authority. It is noted that if there were no Work Authority there would be no royalty income.
The sale of the second parcel of land includes the value of the Work Authority which was transferred at the time of sale to the new operator. This sale would need to be analysed to produce a Site Value. Legislation and Court precedence infers that there is not a direct link between the Site Value and the Capital Improved Value. The Courts have stated that it is not accurate to firstly arrive at the Capital Improved Value and to then deduct the value of improvements to arrive at a Site Value. The Courts have determined that to arrive at a Site Value it is necessary to stand back and make estimates on what price the market would pay for that particular parcel of land, knowing that it is without improvements and that the best use of the land is probably for a Quarry.
In my opinion, the three rating assessments i.e.. NAV, CIV and SV are hypothetical and the definitions often produce unreal circumstances when compared with the actual marketplace. The three assessments are defined separately and have no relationship to each other, with the exception that the Net Annual Value shall not be less than 5% of the Capital Improved Value. This is not usually insignificant.
An extractive industry site is not easily assessed for rating Purposes. In the knowledge that the current assessments are all being revalued there is the need for close scrutiny of the values contained in the most recent Rating Notice. The rate payer has the right to object to the assessments within two months of first receiving the rate notice, and this opportunity should not be overlooked.
A Special Note:
It must be acknowledged that the figures in relation to royalties and selling prices in this article are hypothetical and the figures should not be attributed to any particular quarry site without an in-depth investigation into the relevant market conditions.
It must also be noted that land tax is not payable on all quarries. Land Tax can be exempt on some sites with other properties with a site value less that $85,000 being free of Land Tax.
If you would like further information or assistance on valuations phone the author Robin Hocking of C J Ham and Murray Pty Ltd on 9670 7108 being CMPA preferred suppliers who contributed this article to guide you in this important area.
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