LAND TAX IN VICTORIA

Over the last few months a number of members have raised concerns with the Secretariat regarding Land Tax and its implications on their business. Two members of our association with considerable experience in this area were approached for their comments. The following is the first of two articles that will discuss this complex issue. ROBIN HOCKING from CJ Ham & Murray Pty Ltd provides a view on Land Tax.

A BUSINESS & LAND VALUATION PERSPECTIVE

Land Tax in Victoria is in broad terms, applicable to all property in the State as at 31st December in the year prior.

Every land owner in Victoria has a potential liability for Land Tax, but important exemptions:

• Principal Place of Residence – PPR;
• Primary Production Land – PPL;
• Mines;
• Charities; and others.

A change of use to land will potentially remove an existing exemption, resulting in a revised Land Tax assessment. As an example; farming land with a PPL exemption and partly used for quarrying will lose the PPL exemption over the quarry area.

The assessment of Land Tax is a variable rate in the dollar based on the Site Value of the land in accordance with the Municipal Rate Notice. The Site Value is intended to be the value of the bare land without improvements or goodwill without the Work Authority and excluding plant and equipment. The Site Value needs to acknowledge the zoning and the Planning Permit which allows for an extractive industry.

At all times the Land Tax relies on the Municipal assessment of the Site Value. A rate payer cannot object to the State Revenue Office to the values used for Land Tax purposes, but can object to the Council to the values assessed by the Municipal Valuer usually within 60 days of receiving the Rate Notice.

When the above matters are considered, questions need to be answered:

• Does the quarry operator own or lease the land?
• If the land is leased, does the operator reimburse the land owner for Land Tax?
• If the quarry operator reimburses the land owner for Land Tax, is it on a single holding basis (which it should be)?
• Who owns the Work Authority? – this can be a separate asset not subject to Land Tax.
• If the land is leased, who holds the information on the geology, the volume of the reserves, volume of sales, selling prices and operating costs?
• If the land is owned by the quarry operator – is there information available relating to the quantity and quality of the reserves?
• What is the remaining life of the quarry and is there an impending substantial reclamation liability?
• What is the amount of the Reclamation Bond?

When all of the above queries are considered, there remains one very important question:

What would the land sell for as at the date of the Municipal Valuation, (generally 1st January in every second year), if that land was offered for sale for an unconditional cash price, without the Work Authority, and possibly with little geological information relating to the resource volumes, while always acknowledging there is an existing Planning Permit and a Work Authority?

An answer to the above question will raise other questions:

• How much information can the Municipal Valuer demand at the time of completing his valuation?
• How far back in time can the State Revenue Office (SRO) go if they deem it is necessary to reassess a Land Tax commitment?

In my opinion, there is a grey area as to how much information can be legally demanded by the Municipal Valuer, and also as to how far back the SRO can go if there is a reassessment. These two questions are likely to require legal opinion, and I use the following example to emphasise my concern.

EXAMPLE

When land occupied by GMH or Toyota is valued, I do not expect the Municipal Valuer to enquire as to how many cars are manufactured and sold, as to what price they are sold at, as to what costs are involved, and by deduction what profit is being made by GMH or Toyota. In this example, the land will be zoned for industrial purposes and will have a value derived from the sale of other industrial parcels.

I am certain GMH or Toyota would object to providing commercially sensitive information relating to costs and profits, and similarly I believe the extractive industry should also object to providing that information.

If the GMH/Toyota example is expanded, the following may not be too far wrong.

Vehicle sales – 30,000 per annum
Average selling price – $20,000
Turn over (guess) = $600,000,000
Site Value (guess) – $30,000,000
Land Tax – $632,475
Land Tax as a % of turn over – 0.105%

A quarry example –

Turn over (guess) – 2,000,000 tpa @ $14.28/t = $2,000,000
Site Value (guess) – $3,000,000
Land Tax – $24,975
Land Tax as a % of turn over – 0.83%

The above example suggests the hypothetical quarry would be paying almost eight times the Land Tax as a proportion of turn over if compared to the GMH/Toyota example.

I therefore argue that turn over and profits is not an acceptable method to arrive at a Site Value or a Capital Improved Value.

The Valuer-General has issued revised guidelines dated August, 2011 for all Municipal Valuers assessing quarries and landfills. The revised guidelines have been updated to reflect my earlier concerns on the proposed methodology. Those guidelines refer to the capitalisation of earnings before interest and tax as one of three acceptable methods of assessing a Site Value.

EXAMPLE

The Valuer-General’s guidelines refer to a method to arrive at a Site Value by capitalising a royalty income, if the quarry is operated on leasehold land. In general terms I agree with that methodology, and see no reason why that same method cannot be used to assess land owned and operated by the quarry owner. An example would be:

Life of quarry – Assume in excess of 20 years
Sales per annum, say 150,000 tonnes
Average selling price, say $13.50 per tonne
Royalty rate, say 7% of the ex-bin price = 94.5 cents/t
Royalty payment – $141,750 pa
Capitalisation rate, say 12.5% (for a secure well run quarry)
Site Value based on royalty income $1,134,000
Land Tax for 2012 – $4,047

Land Tax will be more serious when the Site Value of the quarry is say, $15,000,000 with a Land Tax bill for $294,975 per annum.

To summarise, I recommend all quarry operators, large and small, carefully check their Municipal Rate notices, and any ability to obtain an exemption from Land Tax for at least a portion of their land.

NOTES

• The Site Value of your quarry should be assessed as if it was sold without a Work Authority on a cash unconditional contract.
• The Site Value can be assessed on the basis of a hypothetical royalty.
• The life of the quarry is an important part of the assessment of value.
• The value of plant and equipment and other improvements must not be included in the Site Value.
• The amount of the Reclamation Bond and the conditions of the Reclamation Plan, plus any outstanding reclamation liabilities must also be considered.

Land Tax is becoming an ever increasing and important cost to all quarry operators. We must remember the State Government is short on cash and the State Revenue Office will not give away many concessions.

It should also be noted that mining is exempt Land Tax. The quarrying industry appears to be the only industry directly associated with land and earth resources that are subject to Land Tax.

The writer will welcome the opportunity to discuss Rating Valuations and Land Tax concerns with members of the CMPA.

Robin H. Hocking FAPI.
Certified Practising Valuer – (Reg.No. 1113 – 1971)
Licensed Estate Agent and Auctioneer
C.J. Ham and Murray Pty. Ltd.

The CMPA would like to thank Robin and Michael Hocking from C.J. Ham & Murray Pty Ltd for their article on Land Tax.

The second article on Land Tax – ‘A Legal Perspective’ by Andrew Lumb, a Solicitor from Nevett Ford Melbourne Pty Ltd will be in the next edition of Sand & Stone.

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