Inquiry into Land Valuation in the Australian Capital …...INQUIRY INTO LAND VALUATION IN THE AUSTRALIAN CAPITAL TERRITORY i Committee membership Dr Deb Foskey MLA Chair Ms Karin

S T A N D I N G C O M M I T T E E O N P U B L I C A C C O U N T S

Inquiry into Land Valuation in the Australian Capital Territory

M A R C H 2 0 0 8

Report 13


I N Q U I R Y I N T O L A N D V A L U A T I O N I N T H E A U S T R A L I A N C A P I T A L T E R R I T O R Y

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Committee membership

Dr Deb Foskey MLA Chair

Ms Karin MacDonald MLA Deputy Chair

Mr Richard Mulcahy MLA (until 12 February 2008)

Mr Brendan Smyth MLA (from 12 February 2008)

Secretariat support

Secretary: Andréa Cullen (until June 07)

Hamish Finlay (from August 07)

Research assistance: Giselle Wansa

Administration: Lydia Chung

Contact information

Telephone: (02) 6205 0136

Facsimile: (02) 6205 0432

Email: [email protected]

Post: GPO Box 1020

CANBERRA ACT 2601

Website: www.parliament.act.gov.au


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Resolution of appointment1

The Legislative Assembly appointed the Standing Committee on Public Accounts on

7 December 2004 to:

(i) examine:

(A) the accounts of the receipts and expenditure of the Australian Capital Territory and its authorities; and

(B) all reports of the Auditor‐General which have been presented to the Assembly;

(ii) report to the Assembly any items or matters in those accounts, statements and reports, or any circumstances connected with them, to which the Committee is of the opinion that the attention of the Assembly should be directed;

(iii) inquire into any question in connection with the public accounts which is referred to it by the Assembly and to report to the Assembly on that question; and

(iv) examine matters relating to economic and business development, small business, tourism, market and regulatory reform, public sector management, taxation and revenue and sustainability.

1 Legislative Assembly for the ACT, Minutes of Proceedings, Tuesday 7 December 2004, p. 12.


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TABLE OF CONTENTS

Committee membership .......................................................................................... i Secretariat support ................................................................................................... i Contact information .................................................................................................. i Resolution of appointment ...................................................................................... ii

R E C O M M E N D A T I O N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V

G L O S S A R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V I I

1 I N T R O D U C T I O N A N D C O N D U C T O F I N Q U I R Y . . . . . . . . . . . . . 1 Referral of the inquiry ...........................................................................................1 Terms of reference ................................................................................................1 Conduct of the inquiry...........................................................................................2 Structure of the report...........................................................................................2 Acknowledgements ...............................................................................................3

2 L A N D V A L U A T I O N I N C O N T E X T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 What is a land valuation system?.........................................................................5 Ad valorem property taxation...............................................................................6

3 L A N D V A L U A T I O N B A S I S A N D P R O C E S S I N T H E A C T . . 9 Current basis and process...................................................................................11 Improving the current basis and process ..........................................................12

4 L A N D V A L U A T I O N C H E C K S A N D B A L A N C E S . . . . . . . . . . . . 1 7 Professional standards...........................................................................................17 Accuracy in land valuations....................................................................................18

5 L A N D V A L U A T I O N I N F O R M A T I O N & C O M M U N I C A T I O N

2 4 Information on land valuation methodology ....................................................24 Information on objections and appeals process ...............................................24

6 L A N D V A L U A T I O N A S A B A S E F O R L A N D T A X . . . . . . . . . 2 4 Impact of land tax rates on the housing rental market ..........................................24

7 C O N C L U S I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4


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RECOMMENDATIONS

RECOMMENDAT ION 1

3.8 The Committee recommends that the ACT Government ensure that

any future contracts for the determination of land values for rating and land

tax purposes be given to a single organisation to ensure consistency of

valuations in the ACT.

RECOMMENDAT ION 2

4.4 The Committee recommends that the ACT Government consider

requiring that land valuers practicing in the ACT be members of a relevant

professional body.

RECOMMENDAT ION 3

4.21 The Committee recommends that the ACT Government consider the

replacement/upgrade of the current Computer Assisted Valuation System

and that appropriate statistical measures be incorporated into the new

software so that component checks can be carried out throughout the

valuation process.

RECOMMENDAT ION 4


relativities between individual blocks in an area are regularly reset by a

programme of regular manual revaluations of suburbs. Where, in the course

of standard valuations, it becomes clear that developments in a suburb may

have changed relativities, the changes should be flagged, investigated and

the suburb revalued manually at the time of the next annual revaluation.

RECOMMENDAT ION 5

5.29 The Committee recommends that the ACT Government reviews the

information that it provides to property owners at the time of valuation and

via ACTRO’s website about valuations and the objections/appeals process,

with a view to making it more user-friendly.

RECOMMENDAT ION 6

5.40 The Committee recommends that the ACT Government require the

Commissioner of Revenue to initiate a review of the valuations of

comparable properties when an objection uncovers a significant error of

valuation.


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RECOMMENDAT ION 7

6.43 The Committee recommends that the ACT Government investigate a

range of ways of using land tax as a lever to increase the supply of

affordable housing.


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GLOSSARY

ACT Australian Capital Territory

API Australian Property Institute

ACTRO ACT Revenue Office

AAT Administrative Appeals Tribunal

AUV Average Unimproved Value

AVO Australian Valuation Office

CAVS Computer Assisted Valuation System

FC Fixed Charge

P Percentage

RFT Request for Tender

NSW New South Wales

NZPI New Zealand Property Institute

REIACT Real Estate Institute of the ACT

UE Unit Entitlement


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1 INTRODUCTION AND CONDUCT OF

INQUIRY

Referral of the inquiry

1.1 Under the ACT Legislative Assembly’s Standing Orders2, the Standing Committee on Public Accounts (the Committee) has the power to self refer inquiries and resolved to conduct an inquiry into the Australian Capital Territory’s (ACT) land valuation system.3

Terms of reference

1.2 The Committee’s terms of reference were to inquire into, and report on, the valuation of land in the ACT to determine the clarity, efficiency, equity, accountability and transparency of:

a) criteria and methods used for determining the value of improved and unimproved land;

b) quality controls used to achieve accuracy in land valuations;

c) professional standards required of the people conducting valuations and criteria for selecting the valuer(s);

d) criteria (including frequency) and processes for checking the accuracy of valuations;

e) criteria and processes for resolving errors and disparities in valuations;

f) information provided to landholders on the basis for determining valuations;

2 In the ACT, the Standing Committees are established by Assembly resolution and governed by standing orders. 3 7 December 2005.


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g) impact of claims of commercial‐in‐confidence on accountability and transparency;

h) impact of land tax rates on the housing rental market;

i) information provided to landholders on the data required and the processes for appealing against assessments of land value; and

j) equity between landholders – information provided to other landholders in the area/suburb in the event that an adjustment is made to the valuation of a local property following a successful appeal.

Conduct of the inquiry

Advertisement

1.3 The Committee wrote to community, business and public sector stakeholders inviting them to lodge written submissions to the inquiry, and also advertised the inquiry in the Canberra Times, Chronicle and City News on Saturday 4 March, Tuesday 7 March and Thursday 9 March 2006 respectively.

Submissions

1.4 The Committee received ten submissions, including five supplementary submissions. The individuals and organisations who lodged submissions are listed at Appendix A.

Public hearings

1.5 The Committee held public hearings on 5 April, 13 June, 14 June, 30 August, and 17 and 29 November 2006. Witnesses who appeared before the Committee at public hearings are listed at Appendix B.

1.6 The Committee met on 28 February 2008 to discuss the Chair’s draft report, which was adopted on 18 March 2008.

Structure of the report

1.7 The Committee has not attempted to produce a definitive work on land valuation in the ACT and its terms of reference do not delineate such a task.


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Instead, the Committee has produced a streamlined report that attempts to examine and reflect on several key themes that became apparent over the course of the inquiry based on the evidence it received.

1.8 Some of the main themes to emerge during the course of the inquiry were:

A perceived lack of confidence held by members of the community in the land valuation system’s fairness and equity, due to a lack of easily accessible information about a complex process.

The difficult nature of land valuation and the need for various checks and balances to guard against errors.

The debate about the most appropriate type of valuation system for the ACT.

1.9 The Committee’s report is divided into three parts and covers the following main topics:

Part 1 – Background to the inquiry

Chapter 1 – Introduction and conduct of the inquiry

Chapter 2 – Land valuation in context

Part 2 – Land valuation in the Australian Capital Territory

Chapter 3 – Land valuation basis and process in the ACT

Chapter 4 – Land valuation checks and balances

Chapter 5 – Land valuation information and communication

Chapter 6 – Land valuation as a base for land tax

Part 3 – Summary and conclusions

Chapter 7 – Committee conclusions

Acknowledgements

1.10 The Committee thanks all those who contributed to the inquiry by making submissions, providing additional information and appearing before it to give evidence.


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2 LAND VALUATION IN CONTEXT

2.1 Land values are widely used bases for:

land tax – valuation of land plays a critical role in the calculation and implementation of any land tax;

determination of rates; and

equitable distribution of financial grants to the States/Territories – land valuations are provided to the Federal Government.

2.2 According to the Commissioner for Revenue:

‘In the ACT currently we only have one valuation system to cover both the rates and the land tax. In terms of, I guess, cost efficiencies, it is much better in a small jurisdiction to have one base. Also, I guess, as we are the two levels of government in other jurisdictions, you may well find that the local government which raises the rates could have a different valuation system, much more easily than a single level of government’.4

2.3 Given the impact that land valuation has upon liability for land tax and rates, the Committee considers it is a subject of public interest. The Committee acknowledges that valuations provide the raw data for decision making and the challenge is to develop land valuation methods that are workable, fair and transparent.

What is a land valuation system?

2.4 A valuation ‘system’ is a process for identifying the absolute and relative worth of an asset. Various approaches have been used in different stages of economic development and under different economic systems.5

4 Transcript of evidence, 17 November 2006, p. 68. 5 Munro‐Faure, P., ‘Sustainable Development and Land Administration Infrastructure Reforms: the Role of Markets and Land Valuation Systems – Agenda for Change?’, Paper presented at the UN‐FIG Conference on Land Tenure and Cadastral Infrastructures for Sustainable Development, October 1999, p. 4.


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2.5 The most pervasive general approach is related to the market value of real estate, although there are many variations on this matter in practice.

2.6 World Bank estimates have suggested that the capital value of real estate constitutes half to three quarters of a nation’s wealth (the less domestic capital and the less developed the economy, the higher the proportion). It therefore follows that real estate is likely to be the largest class of asset in most economies. Its efficient use and management is one of the keys to successful economic development.6

2.7 Since real estate is held by entities in a market economy context there are many reasons for its market valuation, because these values form the basis of decisions about asset retention, utilisation of capital, company valuation and use of property as collateral.

2.8 The reasons for market valuations may be divided broadly into:

those that fulfil market requirements, such as those for sale, purchase, rent, insurance, mortgage, inheritance and divorce; and

those that fulfil requirements laid down by statute, such as those for taxation and compulsory purchase compensation.

2.9 As a consequence valuations for different purposes may follow different formats, employ different criteria and methods, and result in different estimates of value.

Ad valorem property taxation

2.10 The phrase ad valorem is Latin for ‘according to value’. Property ad valorem taxes are a revenue raising procedure, based on the assessed value of property related to a scale of charges defined by statute within a specified time frame. These taxes are a major source of revenues for many state and municipal governments.

6 Munro‐Faure, P., ‘p. 3.


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2.11 In the case of municipal property taxes, property owners have their property assessed on a periodic basis by an assessor. The assessed value of the property is then used to compute an annual tax, which is levied on the owner by his or her municipality. Ad valorem taxes such as this are incurred through ownership of an asset, in contrast to transactional taxes such as sales taxes, which are incurred only at the time of transaction.

2.12 The Committee understands that property tax is a fiscal tool aimed primarily at the raising of sustainable revenue to meet a range of expenditures. As with all taxes, however, property taxes can be subject to exemptions and rebates as governments seek to combine revenue raising with other objectives. The clearest example of this is the exemption of owner occupied homes from land tax in most jurisdictions of Australia. From a taxation policy perspective, such exemptions reduce the efficiency, equity and simplicity of the tax. Taxation experts have called for the removal of such exemptions to broaden the tax base and increase “horizontal equity”.7

2.13 There is debate about how efficient land tax is. In its favour is the supply of land being largely fixed and the tax being difficult to evade8. However it is also considered to result in a larger deadweight loss (loss to the economy from every dollar of tax raised) than some other taxes such as payroll tax9. While it could be considered to be progressive, as those owning more valuable land pay more tax, some research suggests that property taxes (including both land tax and rates) tend to impact more heavily on younger households and first home buyers.10

7 Wholley, Tapper & Borshoff,, “Review of West Australian State Taxes – Land Tax”, Murdoch University Electronic Journal of Law, 1994, p 10.

8 Warren, Neil, Benchmarking Australia’s Intergovernmental Fiscal Arrangements, New South Wales Treasury, 2004, p xxxiii and p 61.

9 Access Economics,”Economic Propsects for the ACT” p 27. 10 Gabbitas, O and Eldridge D, Directions for State Tax Reform, Productivity Commission, May 1998, p 161‐163


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3 LAND VALUATI ON BASIS AND

PRO C ESS IN THE AC T

3.1 Land is valued for a number of reasons and this report focuses primarily on the valuation of land to provide a comparative index for calculating property taxes and rates. Valuation for rating and taxing purposes involves interpreting the market and subtracting or adding various adjustments, according to the method prescribed in each State or Territory. The market is interpreted by using comparable market sales of land.

3.2 Land in the ACT is subject to a formal valuation process for two purposes:

levying land tax

rates which are payable to the Territory Government.

3.3 All land in the ACT is owned by the Commonwealth.11 The ACT Government is responsible for the management of territory land on behalf of the Commonwealth and has the right to grant a lease for such land for a renewable period of 99 years.12 In practical terms there are now few differences between ACT leasehold land and freehold land in other jurisdictions, particularly for residential leases (commercial and rural leases have no automatic right of renewal and rural leases are usually granted for only 50 years). While legally the only land owner in the ACT is the Commonwealth with everyone else being lessees, for ease of understanding this report refers to “owners” rather “lessees” throughout.

3.4 General rates are levied on property owners to provide funding for a wide range of municipal services to the ACT community.13

11 Section 125 of the Constitution states, “The seat of the government of the Commonwealth shall be determined by Parliament and shall be within territory which shall be granted to or acquired by the Commonwealth and shall be vested in and belonging to the Commonwealth.”

12 The Australian Capital Territory (Planning and Land Management Act 1988 s29. 13 ACT Department of Treasury, ACT Revenue Office, Rates 2005‐06, June 2005.


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3.5 The ACT valuation approach appears to avoid many of the problems identified in New South Wales by the NSW Ombudsman which resulted from a large number of different contractor valuers undertaking valuations for the Valuer‐General. The NSW Ombudsman found that the public servants responsible for managing the various contract valuers were inadequately trained and resourced to ensure that the valuations provided consistency across NSW’s 173 local government valuation districts. The contract valuers, even though they had a procedures manual to follow, used different methods to adjust sales for time (ie how long before the valuation date the sales data is sourced from), had wide variation in how close benchmark properties were to median property values in their area, used differing methods to calculate movements in values and had poor understanding of the statistical measures intended to check for accuracy and uniformity. This resulted in concern that there was wide variation in property valuations across NSW. 14

3.6 The NSW Ombudsman noted that some of the varying methodologies used by the contract valuers could be defended as they were not wrong in principle but their application by some valuers and not others created problems.

3.7 The ACT has one group of professionals, currently the Australian Valuation Office (AVO), undertaking the valuation process. This eliminates large amounts of variation in the determination of the value of components required in the overall valuation process. During the course of the inquiry the AVO was awarded by tender a contract for a further five years as ACT valuer. While a strict oversight of multiple contract valuers could overcome many of the problems indentified by the NSW Ombudsman, in a jurisdiction the size of the ACT, a single contract is less resource intensive and prone to fewer errors.

RECOMMENDATION 1


any future contracts for the determination of land values for rating

and land tax purposes be given to a single organisation to ensure

consistency of valuations in the ACT.

14 NSW Ombudsman, Improving the quality of Land Valuations issued by the Valuer‐General, 2005.


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Current basis and process

Criteria and methods used for determining the value of improved and

unimproved land

3.9 In the ACT, land valuation occurs through the use of the Mass Appraisal System. This process involves assessing multiple properties at a given date using systematic and uniform methods that allow statistical review and analysis of the results. In accordance with The ACT Rates Act 2004 which requires valuers to assess unimproved value for rating purposes15 and these values are to be redetermined annually16.

3.10 Residential areas are grouped according to common features shared by the different localities. Sales of comparable properties on or around the relevant date are analysed to derive a land value for the sale properties. A block within a locality that, due to its characteristics, is considered to be representative of other grouped properties is selected as a benchmark property within the Computer Assisted Valuation System (CAVS).

3.11 For non‐residential properties in suburban Canberra the approach is similar to residential properties with properties of like lease purposes in an area grouped together for valuation. Specialised properties in suburban Canberra and properties in metropolitan Canberra (in particular Civic) are however valued on an individual basis. The development conditions and other characteristics of the lease are considered.

3.12 Essentially the rating system in the ACT has two components for standard properties: a fixed charge (FC) and a valuation‐based charge for each rateable property. Each property is liable for both the fixed and valuation based charge. The valuation based charge is calculated using a rating factor, or percentage (P), and the average of the last three years’ unimproved land values of the property (AUV). There is no liability for the valuation based charge on the first $22 000 of the AUV. Therefore the formula is FC+ (AUV ‐$22 000) x P.17

15 Section 6 (2) 16 Section 10 (1) 17 ACT Department of Treasury, ACT Revenue Office, Rates 2005‐06, June 2005.


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3.13 For unit properties in the ACT, rates for units that are part of the registered Unit Title Plan are calculated similarly to other properties. Each unit is liable for the fixed charge (FC), in addition to the valuation based charge. The valuation based charge for each unit is calculated using the average of the last three years’ unimproved land values (AUV) of the entire Unit Title Plan, which is multiplied by the individual unit entitlement (UE). The rating factor of percentage (P) is then applied to the individual unit portion of the AUV that exceeds $22 000. If the valuation based charge of the individual unit portion of the AUV is $22 000 or less, there is no liability for that component. Therefore the formula is FC + (AUV x UE ‐ $22 000) x P.18

3.14 Finally, it is worth noting that in the ACT, the fixed charges (FC) and rating factors (P) vary depending on whether the property is residential, commercial or rural. In 2005‐06, the FC for residential, commercial and rural properties respectively was $392, $496 and $52 and the P was 0.3622%, 1.1527% and 0.2008%.19

Improving the current basis and process

3.15 According to the NSW Ombudsman:

‘Mass valuation systems are used throughout the world and are an economic and logistical necessity. The component system of mass valuation is capable of producing estimates within a reasonable margin of error for the majority of properties, and is theoretically a self‐correcting system so that it should converge to the true values over time’.20

3.16 The approaches employed in property taxation globally vary greatly. The two most common forms of property taxation are the improved capital value and the site value of the land excluding improvements (unimproved value).

18 ACT Department of Treasury, ACT Revenue Office, Rates 2005‐06, June 2005. 19 Australian Local Government Association, ‘The collection of property rates in Australia – a state by state description, 2005. 20 NSW Ombudsman, Improving the Quality of Land Valuations Issued by the Valuer General, October 2005, p. vii.


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Improved capital value

3.17 The tax base under improved capital value systems is the assessed value of the land and improvements. In most cases the property or land will be used to its optimum, but instances do arise where the existing use of property is not its most profitable, eg agricultural land on the periphery of urban areas. The capital value approach captures the value of the property at its current level of development.

3.18 Associated, however, with improved capital value systems are a number of problems. Lack of reliability and currency of sales information is a feature of some property market systems. This is to some extent related to the professional and ethical standards related to the assessors/valuers and their academic and practical qualifications. Improved capital value systems can also act as a disincentive to development, discouraging investment, construction and employment. Long‐term studies in South Africa have indicated that improved value systems discourage investment21

Unimproved land value

3.19 The unimproved value system is a form of capital value taxation in which improvements to the land are not considered. This approach is of interest because of its potential in improving the efficiency of urban land use. It has been argued that since only land is taxed, the owner will have the incentive to develop the land to its most efficient use. As the tax is based on the immobile factor of production it encourages intensive use of the land.

3.20 One of the disadvantages of the unimproved land value approach relates to the valuation of unimproved land when most sales in an area are for improved land, which is the case in established suburbs. The lack of unimproved land sales requires valuers to extract the value of land from improved value sales. This approach of deducting the value of improvements makes site valuation less objective and more prone to error than improved property valuation, which can rely directly on sales data.

21 Bill Stibbe & Godfrey Dunkley, Land Reform and Taxation, 1997, p 2.


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3.21 The unimproved value system has some advantages. As improvements are not considered in valuations there is no need for regular inspections of buildings to record. This means that the process is less demanding and can be undertaken with shorter revaluation cycles. . This reduces the cost of the process compared to the improved property valuation system.

Average unimproved value vs. improved value systems in the ACT

3.22 The Committee considered whether alternative processes and methodologies of land valuation would benefit the Canberra community. Numerous bodies have proposed the use of the improved value system to be adopted over the unimproved value system22, while others have reiterated their preference for the Average Unimproved Value (AUV) system, with adjustments to the current system to increase equity among all landowners.

3.23 As similarly highlighted in the Inquiry into the Rates and Land Tax Amendment Bill 200323 by the ACT Legislative Assembly, some public submissions supported a rating system where rates were calculated using an improved value of a property as the most equitable rating system24. Basing a rates system on the calculation of improved values takes into account the value of the building structure on a homeowner’s parcel of land. It is also more closely linked to an individual’s income and their capacity to pay their rates. The improved value system is used in Western Australia, South Australia, Victoria and Tasmania.

3.24 The ACT Government’s response to the above mentioned inquiry claimed that the use of a rating system based on improved values would not be better than the unimproved value system contained in the Bill. This was based on factors such as the cost of valuations and administration, compliance costs, possible increased objections levels, disincentive for people to renovate or to optimise land use. Further, the response pointed out that only a minority of councils

22 Submission No. 8, Australian Valuation Office, May 2006, pp12‐15 23 Standing Committee on Public Accounts , Fifth Assembly, Report No 5 24 Standing Committee on Public Accounts, Transcript of Evidence, 4 June 2003, p 34 and p 54


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across Australian jurisdictions and internationally use the improved value system as the AUV is seen to possess inherent superior features25.

3.25 ACTCOSS also raised concerns at that time about the ACT government’s use of the rates tax stating that it was a socially inequitable way to raise revenue as the amount paid in rates was not linked to the ratepayer’s capacity to pay26.

25 Government Response to the Standing Committee on Public Accounts, Report No 5, Inquiry into the Rates and Land Tax amendment Bill 2003, 19 June 2003, p 4.

26 Standing Committee on Public Accounts, Inquiry into the Rates and Land Tax Amendment Bill 2003, June 2003


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4 LAND VALUATION CHECKS AND

BALANCES

4.1 Any land valuation is likely to contain a margin of error, whether this be because of differences in views held by individual valuers, statistical anomalies, problems with available data or other limitations. It is important, therefore, that any valuation system has checks and balances that will correct errors and minimise problems caused by assumptions made necessary by a lack of relevant data.

Professional standards

4.2 Land valuation is a technical task requiring high level qualifications. The Committee understands that the ACT Revenue Office (ACTRO) specifies in its contracts with valuers the requirement that valuers hold appropriate professional qualifications. However, unlike NSW, Queensland and Western Australia, the ACT does not require registration for valuers. The Australian Property Institute (API) stated that, for commercial reasons, all valuers who operate in the ACT are members of their institute. Membership of the institute requires completion of a course at university level and two years of training under supervision27.

4.3 The issue of professional qualifications was raised in a submission28 to the Committee. The Committee notes that ACTRO’s contract requirements provide a degree of reassurance about professional standards for government valuers, although it does not apply to commercial valuers. The Committee accepts that a full registration system for valuers in the ACT may be unnecessarily cumbersome but believes that formalising the requirement for membership of a relevant professional body (and/or recognising registration in another jurisdiction) would provide added confidence in the standard of valuation in the ACT.

27 Transcript of Evidence, 30 August 2006, p. 45. 28 Submission No. 5, April 2006, p2


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RECOMMENDATION 2

4.4 The Committee recommends that the ACT Government consider

requiring that land valuers practicing in the ACT be members of a

relevant professional body.

Accuracy in land valuations

Issues relating to the enduring fixing of relativities

4.5 Mass appraisal valuation relies upon “benchmark blocks” to determine changes in values in a particular area. Surrounding blocks in the area are placed in a hierarchy relative to the benchmark block. For example a block closer to amenities than the benchmark block would have a higher relativity than one less favourably located. A submission to the Committee claimed that these relativities were essentially fixed and noted that:

‘This enduring of relativities, not known to ratepayers, takes no account of changes in the area and its environment over the years’.29

4.6 The submission referred to examples such as the impact of altering traffic patterns and the increased density of development as not being reflected in changes in relativities between blocks. Further, it referred to the impact of declaration of heritage areas stating that:

‘AVO valuers in the ACT apparently have no guidance on the issue and dismiss it as ultimately a market factor’.30

4.7 In its submission the AVO commented that:

‘Although analysis of comparable sales will highlight local value variations, the Valuer will review factors likely to change the existing value relativities before checking the newly determined unimproved values.

The determined land values are checked for relativity between each of the localities within a suburb and then between adjoining suburbs to ensure that

29 Submission No. 6, April 2006, pp. 2‐3. 30 Submission No. 6, April 2006, p. 3.


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there is consistency based on the sales evidence and the experience of the Valuer.

An experienced Senior Valuer supervises and reviews the analysis process’.31

4.8 The Committee is of the view that the AVO takes account of the relativities, not only from the comparable sales evidence but also using the experience and knowledge of the valuers. These relativities are considered both between localities within a suburb and between adjoining suburbs. If a leaseholder does not agree with the analysis of the comparable sales evidence and the determined improved value, it can be challenged through the objection process. The Committee understands that the AVO confirmed in its submission that the enduring of relativities is taken into account by those undertaking the mass valuation process. That is they use their professional judgements to take account of these issues.

Analysis of sales data and consequent impact on valuation

4.9 In determining valuations the best evidence of the market is obtained from sales of similar properties transacted close to the base date of 1 January each year. From a statistical perspective the more sales of a similar nature in the same or similar locations the valuer has available, the better the data base. When there is a significant variation in sales in a particular location, including ‘outlier sales’, or sales at the extreme of the range of sales being considered, the outlier sales are removed from the data set and only “mid –range” sales are used for comparison purposes. If these sales cannot be removed from consideration, for instance if the apparently extreme instances are some of the only sales in an area, then the valuer will use his professional training and acquired expertise to identify the reasons as to why these are outliers and adjust the values accordingly, if required.

4.10 In cases where sales are not ‘at arms length’ such as those between family members, the valuer should also take account of this and either omit the sale from the data base or adjust it to take account of its nature.

31 Submission No. 8, April 2006, p. 4.


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4.11 The Committee understands that while there can be problems with particular sales, there is an expectation that the valuer would take account of this, even when using the mass valuation approach. The Committee is aware that statistically based quality control measures have been developed which can be used to determine discrepancies in the valuation process. In its submission to the inquiry, the AVO recognised the importance of statistically based quality control measures when referring to their computer assisted valuation system (CAVS). Evidence to the Committee indicates that the current CAVS does not incorporate such quality control measures.

4.12 In its submission, the AVO stated:

‘The CAVS can be designed to incorporate statistical tests of accuracy and consistency and provide assurances of the reliability of the data assessed’.32

4.13 The Committee was disappointed to hear that the current CAVS does not have such computer quality control mechanisms in place.

4.14 During the inquiry the ACTRO was conducting an open tender process to identify a suitably qualified service provider to provide valuation services of property for rating and taxation purposes in the Territory from 1 January 2007. The Committee was interested to ascertain whether the Request for Tender (RFT) specified the introduction of the computer base quality control mechanisms discussed above.33

4.15 A representative of the ACTRO advised that there were provisions in the RFT assessment criteria for the contractor to provide quality assurance about its valuations.34 When the Committee sought further clarification as to whether the introduction of computer based quality control mechanisms had specifically been requested, it was told:

‘yes, we have, but not specifically’.35

The Committee remains unclear as to what this means.

32 Submission No. 8, April 2006, p. 33 Transcript of evidence, 17 November 2006, pp. 74‐75. 34 Transcript of evidence, 17 November 2006, pp. 74‐75; Submission No. 9, May 2006, p.15. 35 Transcript of evidence, 17 November 2006, p. 75.


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4.16 The Committee understands that the introduction of automated valuation or computer assisted mass appraisal processes is normal practice in many municipalities and requires both investment by the relevant government and a lead time for implementation.

4.17 Nothwithstanding that the initial investment in a more modern Computer Assisted Valuation System may be costly, as a means of ensuring that ACT ratepayers can be confident of the reliability and equity of the valuations upon which the ACT rating system is based, the Committee is of the view that consideration should be given to investing in a more modern CAVS.

4.18 The Committee notes, however, that a fully automatic CAVS still requires the professional opinions/inputs of the valuer to adjust component values, including factors likely to change the existing value relativities.

4.19 The Committee is of the opinion that relativities should be regularly reset by revaluing one or more suburbs manually while the remainder are valued by computer program as previously described.36

4.20 Further, where changing relativities are recognised, for example access controls in local streets and rezoning, they should be flagged by valuers, investigated and the precinct or suburb revalued manually at the time of the next annual revaluation. Because of the lack of unimproved sales in the ACT, valuers need to analyse improved sales to deduce the underlying unimproved value.37

RECOMMENDATION 3

4.21 The Committee recommends that the ACT Government consider the

replacement/upgrade of the current Computer Assisted Valuation

System and that appropriate statistical measures be incorporated into

the new software so that component checks can be carried out

throughout the valuation process.

36 Submission No. 8, April 2006, pp. 5‐6. 37 Submission No. 8, April 2006, pp. 5‐6.


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RECOMMENDATION 4


relativities between individual blocks in an area are regularly reset by

a programme of regular manual revaluations of suburbs. Where, in

the course of standard valuations, it becomes clear that

developments in a suburb may have changed relativities, the changes

should be flagged, investigated and the suburb revalued manually at

the time of the next annual revaluation.

Time parameter/date applied to fix valuations

4.23 When selecting comparative sales data, ACT Treasury suggests choosing sales three months either side of the valuation date of 1 January. The Committee understands that in this case there is a six month time window from which sales can be chosen. In a rapidly rising real estate market, sales in October may be underpriced if used as improved values at 1 January, while those in March may be overpriced, with the opposite occurring in a falling market. If sales were fairly evenly spread over the six month period the over priced and underpriced values may ‘cancel themselves out’.

4.24 In practice valuers often have to go outside this six month period to get sufficient comparative sales38. If a comparative sale is used which took place nine months from the 1 January valuation date, then consideration should be given to adjusting the sale price for time. This is particularly important in a rapidly rising (or falling) market.

4.25 The Committee is of the view that the timing of sales which are used for comparative purposes needs to be clarified. While the suggested ‘window’ for sales to be used is three months either side of the valuation date of 1 January, sales well outside that window have been used. Consequently all sales should be adjusted to a value as at 1 January to account for the impact of time on value. This is particularly important in a rapidly rising (or declining) real estate market when sales some months from the 1 January valuation date are used.

38 Nicholls, Prof Des, Issues Relating to Land Valuation in the ACT, October 2006, p4


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The valuation of improvements

4.26 When determining the unimproved value of the land, the valuer looks at the sale of comparative unimproved blocks around the valuation date and/or the improved value based on comparative sales. In the latter case the value of the improvements must be determined to arrive at an unimproved value.

4.27 To determine the added value of the improvements the valuer assesses the remaining life of these improvements from the sale price to determine the unimproved value.

4.28 A submission to the Committee questioned the ‘vagaries of differing valuers’ judgements about the value of improvements’, including the use of depreciated values of improvements.39 In support of this claim, the submission referred to the NSW Ombudsman’s report. The Committee notes that in that report the reference to differing approaches used by valuers to the valuing of improvements was generally as a result of the NSW Valuer General using different firms of contractors throughout the state to determine unimproved values, including the value of improvements.

4.29 The Committee understands that the system adopted in the ACT would be expected to be more resilient to such variations than those experienced in NSW and highlighted by this submission. This is because there is only one group (the AVO) undertaking the valuation process. Consequently it would be expected that the AVO would be using the same methodology, including the same replacement cost data and the same depreciation rates, to determine the value of improvements.

4.30 The approach used for the determination of improvements currently used in the ACT is one which is accepted practice in valuation and is used elsewhere in Australia, the United States, and the United Kingdom.

Statistical measures of consistency

4.31 The Committee is of the view that the current ACT valuation methodology as applied to the determining of unimproved values for rating and land tax is

39 Submission No. 6, April 2006, pp. 3‐4.


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deficient compared to some jurisdictions, both within Australia and overseas, in the use of computer software for the checking of accuracy and consistency of valuations, and for the provision of the reliability of the data used to determine unimproved values. This was recognised by the AVO in its submission40. The Committee understands that the AVO current CAVS does not allow for the production of commonly accepted statistical measures used to check and confirm outcomes. The Committee is of the view that this is a clear deficiency which needs to be fixed.

4.32 The Committee notes that the NSW Valuer General has adopted three measures of consistency, namely the coefficient of dispersion, the mean value price ration and the price related differential which are widely used around the world. In addition the Committee understands that there are other descriptive statistics which have been identified in the AVO submission41 and which should be evaluated as appropriate measures to incorporate as part of the quality control procedures. These include mean percentage error, median difference and percentage of high valuations.

4.33 In addition to these measures there are other useful statistical measures which should be considered. For example in the NSW Ombudsman’s Report, reference is given to the Procedure Manual for Contract Valuers which requires those determining values (contractors) to:

‘…keep their components under scrutiny and to utilise a statistical check to flag those components that may be fracturing due to too wide a spread in values. …The manual requires that contractors investigate any component where there are wide variations in value range identified by QRANGE and QRP statistics. The QRANGE or inter‐quartile range captures the value spread within the middle 50% of values within a component. This range can be expressed as a percentage of the median to get a relative measure by calculating the QRP, which is the QRANGE divided by the median multiplied by 100. A QRP above 50% indicates a high range of variation within a component and the possible need for further identification of properties that may be in the wrong component or that should be individually valued. The procedures manual says “the acceptable measure for the QRP is less than 50%. Components with a QRP

40 Submission No. 8, April 2006, p, 7 41 Submission No. 8, April 2006, p, 5.


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statistic above 50% should be scrutinised to ensure that they consist of comparable properties” ‘.42

4.34 The Committee understands that the referred to QRANGE and QRP statistics are also useful in checking anomalous values. As previously discussed there are a number of statistical measures that could be used. These would need to be evaluated and an appropriate subset chosen for adoption.

4.35 The Committee is of the view that the introduction of statistical measures will not be resource intensive or expensive to implement. The AVO has recommended updating its CAVS, which the Committee strongly supports. The replacement system could have all the statistical checks built in so that when data is entered the checks are done automatically.

42 NSW Ombudsman, p. 36.


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5 LAND VALUATION INFORMATION &

COMMUNICATION

5.1 Information available to the public about the method of valuation used to value their land, how it has been applied, and the manner in which it is communicated, is a vital component of any land valuation system. Many of the difficulties that arise with information and communication are partly the result of the complexity of the system under which valuations are made and the complexity of the mass valuation methodology that produces them.43

5.2 Further, the NSW Ombudsman commented:

‘It is clear that many people are having difficulty coming to grips with the complexities of land valuation. The heightened interest in property as a means of wealth accumulation and security has driven and in turn been driven by a significant amount of information about property prices and the real estate market available through the media and the Internet. This information has not necessarily clarified land valuation for rating purposes in the minds of the public’.44

5.3 Several submissions to the inquiry called for an increase in the amount of information about the valuation process available to the public. In particular, greater clarity was sought regarding the objections and appeals process, and more information regarding methodology.

5.4 The Committee is of the view that the ACT Government needs to put greater effort into providing the public with a clearer understanding of valuation, and that proper communication is important for ensuring public faith in the system. The Committee welcomes ACTRO’s openness to assisting property owners with their questions,45 but considers that clearer written information is required, including on their website.

43 Walton, J., ‘Report of Inquiry into Operation of the Valuation of Land Act’, NSW Government, October 1999, p.8. 44 NSW Ombudsman, p. vii. 45 Transcript of Evidence, Friday 17 November, p. 19.


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Information on land valuation methodology

5.5 In its submission, the Government commented that:

‘Individual ratepayers are advised annually of the valuation methodology along with their review rights and contact telephone numbers to seek further information if required. The public are kept fully informed through the Commissioner’s Schedule. Information relating to valuations is also available on the ACTRO [ACT Revenue Office] website’.46

5.6 The Committee understands that a range of information is provided to landholders on the data required and the processes for appealing against assessments of land value. This includes Valuation Notices, Assessment notices and brochures provided by the ACTRO which are issued annually to all ratepayers. This information explains the revaluation process and lists objection and appeal rights available to landowners under the Taxation Administration Act.47

5.7 This material does not prescribe the evidence required by the Administrative Appeals Tribunal (AAT), as the ACT RO considers that is a matter for the AAT. However, the ACTRO provides some information about appeals to the AAT and the AAT contact details in a Statement of Rights brochure which provides information on objections and appeals. This brochure is accessible from the ACTRO website.48

5.8 The valuation notices issued by the Commissioner for Revenue specify the re‐determined values and advise of the statutory requirements relating to the making of an objection.

5.9 The notices also contain information about the method used in arriving at valuations stating that the values have been assessed independently by a qualified contract valuer but officially determined by the Commissioner for Revenue. Each block of land is said to have been assessed according to the available sales evidence of similar blocks of land. Where possible the sale price of vacant land in the area was used as comparison with adjustments

46 Submission No. 9, May 2006, p. 20. 47 Submission No. 9, May 2006, p. 24. 48 Submission No. 9, May 2006, p. 24.


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made for individual differences between them. Where there had been no sales of vacant land in an area, or a comparable area, the sales of improved properties had been relied upon after the value of improvements had been deducted.

5.10 The valuation notice also states that a copy of a valuation schedule which lists the unimproved values of all rateable properties in the ACT is available for inspection at specified locations.

5.11 In an Administrative Appeals Tribunal (AAT) decision, the Tribunal commented that inspection of a schedule of the kind referred to in the information sections of the valuation notices:

‘…would only enable a comparison to be made of the valuations determined for other blocks of rateable land used for the purposes similar to that of an objector’.49

5.12 Further, the Committee notes in Blanchard v Valuer‐General of New South Wales (unreported, Land Valuation Court of NSW, 11 June 1965), Else‐Mitchell J, said:

‘It is impossible and quite illogical, to attempt to attach a valuation by comparing it with another valuation. The difficulty involved in such an attempt is that one has no definite starting point, since either valuation, or both, may be incorrect. If that method were adopted, it would therefore be necessary for the Board to examine not merely the value of the subject property, but also the valuation which is to be compared with that of the subject property and there would be no end to such a procedure’.

5.13 The Tribunal further concluded that the information given by the Commissioner for Revenue:

‘…to rate payers and the information offered to be made available for inspection is unhelpful to any rate payer contemplating a challenge to the determination of the unimproved value of his/her land. Unless the comparable sales evidence said in the valuation notice to be the basis of the respondent’s determination is exposed to prospective objectors, their capacity to submit an informed objection satisfying the statutory requirement to be full and detailed is likely to be limited and based on speculation. The absence of such information is also likely to

49 ACTAAT, Chapman & Morgan Pty Ltd v Commissioner for ACT Revenue [2005] ACTAAT 28 (18 November 2005), p. 11.


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unnecessarily encourage the lodging of appeals to the Tribunal, the procedures of which can compel the provision of such evidence’.50

5.14 The Tribunal recommended that consideration be given by the Commissioner for Revenue to:

‘…prospective objectors being provided with access to comparable sales evidence or other evidence upon which the relevant determination of unimproved value was determined and advice as to the means by which access to such information may be obtained be included in valuation notices’.51

5.15 In a submission to the Committee, the Commissioner for Revenue commented that

‘…it should be noted that there are approximately 131,000 ratepayers in the ACT. As unit holders can only object to the UV of the unit title (not the 29,000 individual units), about 102,000 ratepayers (99,500 residential and 2,500 non‐residential) have the right of objection and are therefore potential objectors. Determinations of UV are made using a mass appraisal system. The sales, on average around 6 to 10 per suburb, used by the AVO to calculate values in an area are unlikely to be directly comparable with the particular block subject to objection. Consequently it is only when an objection is received that the sales comparable to the block in question are extracted’.52

5.16 The Commissioner for Revenue further commented that the Tribunal’s recommendation to:

‘…provide specific sales evidence to each potential objector is impractical and prohibitively expensive given the number of ratepayers in the ACT and the small number of objectors’.53

5.17 In the case of rates payable under the Rates Act 2004, the AAT also commented that:

‘…an assessment of the quantum of liability is determined by reference to information gathered by the taxing authority at the expense of tax payers,

50 ACTAAT, Chapman & Morgan Pty Ltd v Commissioner for ACT Revenue [2005] ACTAAT 28 (18 November 2005), p. 11. 51 ACTAAT, Chapman & Morgan Pty Ltd v Commissioner for ACT Revenue [2005] ACTAAT 28 (18 November 2005), p. 12. 52 Submission No. 9, May 2006, p. 24. 53 Submission No. 9, May 2006, p. 24.


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unlike some other taxing arrangements which depend upon information provided by the tax payer for the making of an assessment. Aside from any statutory requirement to do so, notions of ordinary fairness suggest that the information relied upon by the respondent in determining the unimproved value of rateable land should be identified and made available for inspection by prospective objectors’.54

5.18 In its submission to the Committee, the Government noted that the mass appraisal system used to produce the Commissioner’s determination:

‘…does not use comparable sales for each individual block. It does use a calculation of an average change in UVs for each area…the relevant issue is whether the determined value of each block is supportable using the acceptable valuation methods. It does not matter what procedures are followed to calculate the determined figures but it does matter that the figures can be supported. Consequently an efficient (and cost effective) system of mass appraisal can be used to provide the allocation of value to each property as long as it can be supported on objection and appeal’.55

5.19 The Government further commented that:

‘…the mass appraisal system can only show a value for each block. Adjustments are automatically made to values of blocks in the system for factors including location, size, level, aspect and increase or decrease in land value for an area. It is not possible to calculate, and not relevant to the defence of the determined value, to attribute a dollar value to each factor’.56

5.20 The Committee noted that the Government and the AAT seemed concerned that a large number of property owners could appeal against their valuation.

Information on objections and appeals process

5.21 In its submission the Government told the Committee:

‘The basis for valuation and the objection process is well publicised and every assistance is given to potential objectors by ACTRO staff, in conjunction with

54 ACTAAT, Chapman & Morgan Pty Ltd v Commissioner for ACT Revenue [2005] ACTAAT 28 (18 November 2005), p. 12. 55 Submission No. 9, May 2006, p. 26. 56 Submission No. 9, May 2006, p. 26.


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the valuers. An independent person other than the decision maker deals with all objections’.57

5.22 The Committee was interested in whether the ACTRO believed that if objectors and appellants had more support and information to assist with their appeals the figures on revisions to unimproved valuations would change significantly. In response, the Commissioner for Revenue stated:

‘I suspect not. Currently, if people have any problems with their valuation, in the case particularly of residential properties, people usually contact the revenue office and the staff in the revenue office would not only assist them through what the objection process is but also assist in the provision of information to them. One of the things under the act is that you can only lodge an objection to a property value within 60 days of the valuation being informed to you and there is no discretion to extend that. So in some cases people actually lodge an objection to protect their rights before they have actually considered everything to do with the actual valuation on that case. But we find that quite a few actually withdraw once they have got the information from the revenue office and quite a few do not proceed because of the amount of information that we can provide’.58

5.23 The Committee sought clarification on the information publicly available to assist with raising a query or lodging an objection about a land valuation. In response the Commissioner for Revenue stated:

‘If you wanted to raise a query about your land valuation with the revenue office, the revenue office would provide you with the method of calculation for the valuations and it would also provide the level of information that you need to understand which properties had been used and how that fed into the process, and also information on how to access what the unimproved values are, as well as helping you through the process. We are very happy for people to object. It is not as if we would try to discourage anyone from objecting to their land valuation’.59

5.24 Provision for review of a decision determining the unimproved value of a parcel of rateable land is contained in the Taxation Administration Act 1999.

57 Submission No. 9, May 2006, p. 19. 58 Transcript of evidence, 17 November 2006, p. 64. 59 Transcript of evidence, 17 November 2006, p. 65.


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5.25 Section 100 of the Taxation Administration Act 1999 provides for the making of an objection to an assessment by a taxpayer. It is a requirement of the Taxation Administration Act 1999 that the grounds of any objection are to be stated fully and in detail. The burden of showing that an objection is sustained lies with the applicant.

5.26 Section 104(1) of the Act requires the Commissioner for Revenue, in the circumstances of these cases, to consider the objections made by the applicant to the determinations of the unimproved values of the subject sites and to allow the objections in whole or in part or disallow them. If the objection is not upheld, the Commissioner for Revenue is required to give a written explanation for disallowing the objection in whole or in part.

5.27 A right to apply to the AAT to review a decision of the Commissioner for Revenue made under section 104(1) is conferred by section 107(1) of the Taxation Administration Act 1999. Section 108(1) of the Taxation Administration Act 1999 provides that, on appeal to the AAT, the applicant’s and the Commissioner for Revenue’s cases are not limited to the grounds of appeal.

5.28 A successful objection only affects the individual property that is the subject of the objection. Submissions noted that this may lead to inequity as comparable properties are not adjusted to match the adjustment to the property that was the subject of the objection60. In some cases the error may be specific to the individual property but, given the nature of the mass valuation system, it may have wider implications. The Committee believes that when a valuation error is discovered through the objection process, either by the Commissioner of Revenue or the AAT, it should trigger a review of the valuations in comparable properties to ensure that the error is corrected wherever it is present.

RECOMMENDATION 5

5.29 The Committee recommends that the ACT Government reviews the

information that it provides to property owners at the time of

valuation and via ACTRO’s website about valuations and the

60 Submission No. 5, May 2006, pp 2‐3.


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objections/appeals process, with a view to making it more user-

friendly.

RECOMMENDATION 6

5.40 The Committee recommends that the ACT Government require the

Commissioner of Revenue to initiate a review of the valuations of

comparable properties when an objection uncovers a significant error

of valuation.


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6 LAND VALUATION AS A BASE FOR

LAND TAX

6.1 The valuation of land plays an important role in the implementation of any land tax. This is because land tax is applied on the value of land determined by the Valuer‐General. The determined land value is used to calculate rates and taxes.

6.2 In short, land tax is a form of taxation on a component of wealth to the extent that wealth is captured by the unimproved capital value of land. The tax is progressive in that those with more valuable land holdings pay a larger proportion of the total tax burden.61

6.3 Essentially land tax is a general revenue measure that is used by the Government to provide a range of services. The Productivity Commission

notes that “a broad‐based property tax [is a] desirable tax on efficiency grounds — a given amount of revenue can be raised more efficiently than using other forms of taxation.”. Measures which broaden the scope of the tax make its implementation more efficient and equitable62.

6.4 The Committee acknowledges that, because of its limited application, it is sometimes claimed that land tax fails as a general‐use policy instrument. Accordingly, it is claimed to be only partially successful in redistributing wealth.63

6.5 In Australia, each of the six States and the ACT levy land tax, the Northern Territory does not. The rates of taxation vary between each State and Territory.64

61 Fiedler, M., ‘An Evaluation of the Australian Land Tax System’, The Valuer & Land Economist, November 1997, pp. 723‐729. 62 Gabbitas, O and Eldridge D, p 156 63 Fiedler, M., ‘An Evaluation of the Australian Land Tax System’, The Valuer & Land Economist, November 1997, pp. 723‐729. 64 Smith, S., NSW Parliamentary Library Research Service, Briefing Paper No 5/05: Land Tax: An Update, April 2005, p. 1; Fiedler, M., ‘An Evaluation of the Australian Land Tax System’, The Valuer & Land Economist, November 1997, pp. 723‐729.


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6.6 Land tax has been assessed on all non‐residential property in the ACT since 1987. In 1991 all residential property that was not the owner’s principal place of residence became liable to an annual land tax charge. The driver for the introduction of land tax on some residential property came from the Commonwealth Grants Commission finding that the ACT was not putting sufficient effort into revenue raising by way of land tax.65

6.7 In the ACT, from 1 July 2004, the legislative basis on which land tax in the ACT is imposed, assessed and paid changed with the commencement of the Land Tax Act 2004 which is administered under the provisions of the Taxation Administration Act 1999.66

6.8 Land tax is imposed under the Land Tax Act 2004 and the marginal rates used to calculate land tax are determined by disallowable instrument under section 139 of the Taxation Administration Act 1999.67

6.9 Generally, land tax applies to all rateable commercial properties, any residential properties that are rented, and residential properties owned by a trustee or a corporation regardless of whether they are rented or not.68

6.10 Land tax liability is assessed quarterly for all properties and is based on the status of a property on 1 July, 1 October, 1 January and 1 April (liability dates). Land tax is assessed for a whole quarter and there is no daily pro‐rata of land tax liability within a quarter.69

6.11 Quarterly land tax assessments for 2005‐06 are based on the Average Unimproved Value (AUV) that includes the 2003, 2004 and 2005 unimproved land values of the property. The AUV is determined under the Rates Act 2004 and is used to calculate both land tax and rates.70

65 Submission No. 9, May 2006, p. 21. 66 Smith, S., NSW Parliamentary Library Research Service, Briefing Paper No 5/05: Land Tax: An Update, April 2005, p. 21. 67 Taxation Administration Act 1999; Land Tax Act 2005; ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005.

68 Land Tax Act 2005; ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005. 69 Land Tax Act 2005; ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005. 70 Rates Act 2004; Land Tax Act 2005; ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005.


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6.12 A number of individuals and organisations have called for the abolition of land tax, some arguing that land tax reform could promote affordable private rental housing.

6.13 According to Fiedler, this argument is based on:

‘…the assumption that the claimed deficiencies of the land tax outweigh its positive features. The strongest arguments for its abolition are its limited applications, its wide‐spread exemptions, the difficulties created for low‐income earners in paying the tax and the administrative costs. Though valid, these detractions are outweighed by the addition of the wealth component to the equity of the tax system, its significant revenue yield, its relative simplicity and a measure of efficiency. If abolished the question remains as to what tax will replace it…’.71

6.14 The ACT has a relatively narrow tax base. The Territory’s revenue raising effort, taking into account its relative capacity, is in line with the Australian average. By comparison, however, the ACT Government claims that the Territory’s expenditure on state‐type services has been around 20 to 25 per cent higher than the Australian average since self‐government.72

6.15 In its 2006‐07 Budget, the ACT Government introduced new sources of revenue and revenue alignment with other jurisdictions.73 Approximately 2% of the ACT’s total revenue comes from land tax.

6.16 Land tax assessments in 2006‐07 will be based on the most recent AUV that incorporates the 2006 unimproved land value. The land tax marginal rates that apply in 2005‐06 will remain unchanged and will continue to apply in 2006‐07. The estimated outcome from land tax revenue in 2005‐06 is $58.098 million and in 2006‐07 land tax revenue is estimated to increase to $63.776 million74 because land tax reflects the growth in property values.75

71 Fiedler, M., p. 726. 72 ACT Government, Budget 2006‐07, Budget Paper No. 3, p. 39. 73 ACT Government, Budget 2006‐07, Budget Paper No. 3, p. 39. 74 ACT Government, Budget 2006‐07, Budget Paper No. 3, pp. 44‐45. 75 ACT Government, Budget 2006‐07, Budget Paper No. 3, pp. 42‐43.


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6.17 According to the ACT Government’s 2006‐07 Budget the difference between revenue raised from land tax based on an estimated outcome 2005‐06 and budgeted for 2006‐07 is a variation of 10%.76

Impact of land tax rates on the housing rental market

6.18 The degree to which land tax can be passed on as higher rents is difficult to determine. Land tax has been in place in the ACT for non‐principal place of residence since 1991 and is therefore likely to be “priced in” to the rental market. Other factors, particularly supply and demand factors, also influence rents.

6.19 A submission from a private citizen recommended that a more equitable land tax system would result from the removal of land tax on tenanted properties and the raising of rates. Further, it was also suggested that consideration be given to waiving land tax on rental properties below a determined level in order to encourage landlords to keep rental prices at a minimum.77

6.20 In the ACT, owners of residential property that is rented are liable for land tax on that property. This also applies to boarding houses and multiple dwellings, including dual occupancies and granny flats that are rented. Rent can include cash, services or any other valuable consideration earned in respect of a property for which any tenancy arrangement exists.78 Further, residential properties owned by a trust or a corporation are liable for land tax, even if they are not rented.79

6.21 In its submission, the Government stated:

‘At current rates, land tax is unlikely to have a major impact on the housing rental market. The share of residential properties owned by investors has remained broadly stable over the past decade. Because land tax is a deductible expense, the cost of land tax is partly offset by lower income tax paid by investors. The overall impact on renters is also reduced to the extent that house prices reflect the level of land tax in the ACT. Finally, the residual effect of land

76 ACT Government, Budget 2006‐07, Budget Paper No. 3, pp. 42‐43. 77 Submission No. 2, February 2005. 78 ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005. 79 ACT Department of Treasury, ACT Revenue Office, Land Tax 2005‐06, June 2005.


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tax is shared between property owners and renters, with the actual proportions determined by conditions in the rental housing market.’ 80

6.22 In evidence, the Real Estate Institute of the ACT (REIACT) identified land tax as a key factor behind the low take‐up of Canberra residential investment properties and its consequent impact on affordable housing stating:

‘…the Real Estate Institute of the ACT is more concerned with the land tax issue than the way properties might be rated…Our feeling is that land tax has a very detrimental impact on affordable housing…as land taxes increase and have increased, there is a very strong disincentive for people to invest in residential investment property. As a result, we are not seeing the rental pool growing.

Flowing on from that, we are experiencing very low vacancy rates and very high rents. Yet even with the high rents there is not a very attractive return flowing to the investor. This is exacerbated by the fact that we have a very attractive stock market at the moment and a change to the superannuation regulations. These are causing some people to sell investment properties and tip the proceeds into a super fund. We also have a bit of a problem with interest rates, which obviously impact on the housing market generally.

The area the government has very direct control over, and probably the area which has the greatest impact on rents, is land tax. Obviously, the flow‐on is to low‐income families and also to first home buyers. If they are paying a lot more in rent, it is much more difficult for them to save a deposit’.81

6.23 In an opinion piece in the Canberra Times, the ACT Treasurer refuted the REIACT’s claims that land tax was a key factor behind the low take‐up of Canberra investment properties stating:

‘There is no denying that Canberra is experiencing a period of considerable strain in the residential rental market. But the Real Estate Institute’s claims that too few Canberrans are buying investment properties because of low returns, and that the bogey is land tax, are not borne out by the facts.

The fact is that the investor share in the ACT housing market has remained stable for many years–including since the introduction of land tax on residential properties. Investment properties make up about 20 percent of the residential

80 Submission No. 9, May 2006, p. 23. 81 Transcript of evidence, 29 November 2006, pp. 88‐89.


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property stock‐ about the same proportion as when the tax was introduced in 1991’.82

6.24 Subsequent to this opinion piece, the Chief Minister is reported to have further advised that the value of Canberra’s property investment market increased by 4.6 per cent in 2006, a faster growth rate than in most other Australian states and territories.83

6.25 According to the Government, land tax is a deductible rental property expense for income tax, reducing the overall cost to investors.84 The Chief Minister stated:

‘The fact is, Canberra investors have generally enjoyed very substantial capital gains over recent years, and it is worth bearing in mind that most are able to claim land tax as an eligible deduction for Commonwealth income tax purposes, reducing the impact for those in the top marginal tax rate by about half’.85

6.26 In response the REIACT told the Committee:

‘This is an interesting thing. The advice I have is that most of the people that own investment properties are not very wealthy people. In Canberra they are middle‐aged public servants in the main, who seek to build a bit of wealth and a bit of a superannuation nest egg by investing in residential property.

It is true that if you are highly geared, or if you are geared to any level—that is, if you have any level of debt—the interest will be deducted against income’.86

6.27 The Committee also understands that the ACT does not require owners to aggregate the values of their properties in determining land tax, something according to the Chief Minister that quickly pushes investors elsewhere in the country into higher tax brackets.87 The Committee was interested to know whether this is a disadvantage or an advantage to the investor. In response, the President of REIACT commented:

82 Stanhope, J., ‘Let’s put the property market in perspective’, Canberra Times, 10 October 2006, p. 11. 83 Mannheim, M., ‘Hopes Stanhope will cut land tax’, Canberra Times, 27 January 2007. 84 Submission No. 9, May 2006, p. 21; 85 Stanhope, J., ‘Let’s put property market into perspective’, Canberra Times, 10 October 2006, p. 11. 86 Transcript of evidence, 29 November 2006, pp. 96‐97. 87 Stanhope, J., ‘Let’s put property market into perspective’, Canberra Times, 10 October 2006, p. 11.


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‘I think that in New South Wales you are at a disadvantage if you own a lot of property. The fact is that the majority of people will own one investment property. There are not too many people who own multiple investment properties. That is the point. It might be that there are some advantages to a small group of people to invest in the ACT versus somewhere else. But it is a bit like saying it is really bad in the ACT but in some areas it is worse. It does not make it good for the ACT’.88

6.28 REIACT noted that the vacancy factor was approximately one per cent in the ACT, the lowest for a number of years and commented that if the vacancy rate goes below that, rents will skyrocket.89 The consequence of very high rent is that many people are unable to find affordable housing in the ACT. Low income earners are directly affected as are people saving for a house deposit.90

6.29 While land tax is a function of land value, according to the REIACT it would not be difficult to administer it as a function of the rent.91 REIACT suggests a fairer way to assess land tax would be as a percentage of rental income.92

6.30 According to REIACT, the way land tax is levied makes it an inequitable tax:

‘To assess it on land value is not very fair. The fact that you might have a high land value does not translate into a high income. The condition and size of the house will be a much greater factor in the rent that would be generated. I think a fairer way to assess land tax would be to say, “We are going to take a percentage of your rent”… I think that would be a much fairer way of assessing it. At the moment there is an amazing discrepancy. You might find that some properties are paying less than 10 per cent of their rent in land tax and others might be paying 90 per cent’.93

6.31 The Managing Director of Maloney’s the Property Managers, Canberra’s second largest property‐management company, was reported as suggesting

88 Transcript of evidence, 29 November 2006, p. 91. 89 Transcript of evidence, 29 November 2006, p. 92. 90 Transcript of evidence, 29 November 2006, p. 92. 91 Transcript of evidence, 29 November 2006, p. 93. 92 Transcript of evidence, 29 November 2006, p. 92. 93 Transcript of evidence, 29 November 2006, p. 92.


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that land tax could be set at 10 per cent of market rent, which would be determined by a registered valuer.94

6.32 The Committee notes the difference in the two proposals with the REIACT proposing actual rent as a basis for land tax and Maloney’s suggesting market rent as determined by valuers. A careful examination would be needed of both options to determine the advantages and disadvantages of each approach.

6.33 The Committee understands that the Government has dismissed proposals to levy land tax as a percentage of rental income on the basis that landlords could not be trusted to declare the rental amount they were receiving and there would be under‐the‐table agreements between landlords and tenants.95

6.34 The Committee notes that subsequent to its appearance, REIACT commented that reducing the tax burden on property investors was the only way to deal with the Territory’s rental shortage. Further, REIACT was quoted as warning:

‘…that nothing short of abolishing all of the taxes would resolve the problem quickly, saying territory taxes and the GST collectively comprised up to 40 per cent of the cost of a new Canberra home’.96

6.35 The Committee understands that the extent to which land tax can be passed on as higher residential rents will be determined by the interaction of demand and supply the relationship between the rental market and the home purchase market, and the ACT and Commonwealth income tax system.

6.36 According to the Government, any residual impact of land tax is shared between property owners and renters, with shares determined by the relative elasticity of rental property supply and demand (price elasticity is an economic measure of the responsiveness of demand and supply to changes in prices).97

6.37 The Committee heard evidence from the real estate industry that currently demand is relatively price inelastic (that is there is little reduction in the

94 Thistleton, J., ‘Home rents soar as investors leave property market’, Canberra Times, 30 September 2006, p. 4. 95 Thistleton, J., ‘Home rents soar as investors leave property market’, Canberra Times, 30 September 2006, p. 4; Transcript of evidence, 29 November 2006, p. 92.

96 Mannheim, M., ‘Hopes Stanhope will cut land tax’, Canberra Times, 27 January 2007. 97 Submission No. 9, May 2006, p. 23.


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demand for rental properties as the price of rent goes up) and as a consequence the burden of land tax falls mainly on the renter.98

6.38 The Committee was interested in the Government’s view on the significance of land tax rates on the housing rental market in terms of both the high average rental figures in the ACT and the vacancy rate in terms of the role it may play in either discouraging people or pricing people out of the ACT market. In response the Commissioner for Revenue stated:

‘There is no evidence in the percentage of residential properties subject to land tax that land tax has had an impact. Around 20 per cent of all residential properties in the ACT since the introduction of the present land tax system have remained land taxable...to me the land tax has remained static in terms of the percentage. From our perspective, the amount of land tax has remained static as a percentage of the residential’.99

6.39 The Committee sought clarification on whether the ACT Revenue Office takes into account, in administering, introducing or recommending taxes to the Government, the impact they might have beyond efficiency and value. The Committee was told that the social impact on families, disadvantaged groups and the like of high levels of land tax is considered.100

6.40 Public submission number 2 recommended a more equitable land tax system would result from the removal of Land Tax on tenanted properties and the raising of rates for everyone. Alternatively, if the suggestion was impractical, it was suggested that land tax on properties with rentals below a determined level should be waived in order to encourage landlords to keep rental prices at a minimum.

6.41 The Australian Housing and Research Institute (AHURI) has concluded that there are a range of barriers to increased private sector investment in affordable housing and without government intervention to offset these

98 Submission No. 9, May 2006, p. 23. 99 Transcript of evidence, 17 November 2006, p. 65‐66. 100 Transcript of evidence, 17 November 2006, p. 66.


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barriers, housing affordability for low and moderate income households will continue to decline101.

6.42 The Committee is aware of views that property taxes are a contributor to the housing affordability crisis and need to be reconsidered. Arguments have been made that the abolition of land tax is feasible and alternatively that it could be applied in a way that would increase the stock of affordable housing.

RECOMMENDATION 7

6.43 The Committee recommends that the ACT Government investigate a

range of ways of using land tax as a lever to increase the supply of

affordable housing.

101 AHURI Research & Policy Bulletin, Issue 13 September 2002


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7 CONCLUSION

7.1 The Committee wishes to thank all of the organisations and individuals that participated in the inquiry. The Committee recognises the significant commitment of time and resources required to participate in an inquiry of this nature and the Committee is grateful that it was able to draw on a broad range of expertise and experience in its deliberations. The Committee notes that it has adopted many of the recommendations, or variations thereof, suggested by participants as recommendations for this report.

7.2 The Committee has made seven recommendations in relation to its inquiry into land valuation in the ACT.

Dr Deb Foskey MLA

Chair

18 March 2008


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Documents

Inquiry into Land Valuation in the Australian Capital …...INQUIRY INTO LAND VALUATION IN THE AUSTRALIAN CAPITAL TERRITORY i Committee membership Dr Deb Foskey MLA Chair Ms Karin