PROPERTY TAXATION
david hornby
The elements under this standard are:


The modern tax on immovable property (the property tax) has old ancestry, being one of earliest forms of taxation. Although its popularity in Australia has waned in recent times in favour of the income tax it is still the most important tax at the local level of government. This part will give an overview of property taxation in Australia, compare taxes on immovable property with other taxes under the criteria of "good taxation", consider the relative merits of improved property taxes versus the land tax and the necessary assumptions and criteria for an efficient property tax system.

TAXES ON IMMOVABLE PROPERTY (PROPERTY TAXES   AN OVERVIEW

Australia and New Zealand are among the few nations in the world to employ a land value system for property tax purposes whereas most other western countries use an improved value system (either lump sum or annual value). Improved value is the market or present value of land including all improvements thereon but subject to certain assumptions necessary for mass valuation purposes. For example, the building is assumed to be NOT subject to rent control. However, the populous states of Australia have embraced a land value system largely through the ideas of Henry George who advocated a tax on the unearned increment (Progress and Poverty, 1879).

Australia and New Zealand development of the land value system has been under the influence of a court system that has laid down the proper use of sale prices, defined market value, and methods of valuation for over 80 years. For example, the "definitive" statement on the most suitable sale evidence for the determination of market value is still the High Court decision; Spencer v The Commonwealth (1907) 5 CLR 418 .

The relative importance of property taxation in Australia can be gauged by comparing taxation revenues for Australia (1999-2000) in the diagram below.

Income tax dominated with 58.35% of the total while goods and services was the next highest at 20.72%. Taxes on immovable property accounted for only 4.30% and other property at only 4.93%.

The ratios for all revenue was as follows:

payroll: 6.22%
income: 58.53%
goods and services: 20.72%
use of goods & services: 5.48
immovable property: 4.30%
other property: 4.93%

Source: ABS 5506

Of total taxation revenue the Commonwealth collected the lion’s share at 77.7%, the states a distant second at 19.2% and local government which is largely dependent on property taxes at only 3.1% in 1999-2000. Taxes on immovable property fell from 4.46% of total revenue in 1998/1999 to 4.30% in 1999/2000.

TYPES OF TAXES ON IMMOVABLE PROPERTY

Taxes on immovable property consist of 2 types:

• municipal rates
• land taxes.

Municipal rates are those property taxes collected by local councils throughout Australia and account for about 72% of the total taxes on immovable property in 1999-2000. The next largest are land taxes (taxes at state level on land values). These account for the remainder at about 28%.

For the period 1998/1999 to 1999/2000 revenue from taxes on immovable property increased in all states except NSW where the decrease was attributable to a reduction in land tax from 1.85% to 1.7% on 31/12/1999. A fall in land taxes by the Queensland Government was dues to the increase in the general rebate for land tax from 5% to 15% in 1999/2000.

Revenue from land taxes rose in Victoria and Western Australia reflecting the growth in taxable land values.

Source: ABS 5506

AD VALOREM TAXES

An ad valorem tax is one that is proportionate to a value. Therefore, a property tax based almost solely on the value of land is an ad valorem tax.

CADASTRE

A cadastre is an official register of the quantity, value, dimensions, and ownership of real estate at either local or national level. It is usually shown on a cadastral map showing land parcels or polygons uniquely identified in space and with manmade information. The importance of the cadastre for an efficient mass valuation system has been underestimated by a number of commentators on property taxation.

CAPITAL VALUE

The term capital value is sometimes used for mass valuations. It is the improved present or lump sum value as opposed to an annual or rental value. It is not a good term as "capital" refers to a measure in monetary terms that is already covered in the word "value". That is, "worth" is a component of "value".

FISCAL CADASTRE

A fiscal cadastre is a cadastre designed for property tax purposes. That is, it includes those factors required for implementation of a property tax system such as legal description, dimensions, location of boundaries, ownership, description of improvements, and land use.

PRAIRIE VALUE

Prairie Value is the value assuming that not only is the subject land vacant but also, so is the surrounding infrastructure. However, this is the wrong approach as only the subject site is considered as being vacant so that all external services such as roads, electricity, water, and sewerage are "as is" and available to the land - McGeoch v Fed Comm (1929) 43 CLR 277; Tetzner v CSR (1956) 14The Valuer 477 [1958])50; Comm of Rail v VG (1962) 10 LGRA 20; 16The Valuer 512.

DETRIMENTS TO THE LAND ("'WORSEMENTS")

Not all of man's activities result in an improvement to the land, In some cases the land may deteriorate from its original condition for example, by erosion. Such detriments are taken into account when determining the land value - Kiddle v Dep Fed Comm of Tax (1920) 27 CL R 316.

GENERAL VALUATION

The general valuation is the normal revaluation of properties within a local area at the periodic interval for property tax purposes. For example, a general valuation for urban lands is typically, completed every 2 years.

MASS VALUATIONS

Mass valuations are statutory valuations for property tax purposes. Because the statutory body such as the Valuer General is required to expedite a large number of valuations, it is necessary to define the value to incorporate a number of assumptions so as to allow for its efficient and economic determination. That is, a statutory valuation definition is used.

PERIODIC INTERVAL

The period between General valuations.

RATE(S)

A property tax at local level. In this part, the term property tax includes rates. Rates is often used to describe an ad valorem taxation system, as it is necessary to strike a rate in the dollar to obtain the required amount of revenue.

SITE VALUE

Site value in this part is the same as land value. That is, the value of land assuming no manmade improvements but including land or ground improvements. It is sometimes used to describe the value of a site with uneconomic improvements.

VALUATION LIST OR ROLL

The fiscal cadastre showing ownership, land values and property taxes prepared by the valuing authority (eg the Valuer General). It is the official list of values used by a local council to determine the required "rate in the dollar so as to obtain sufficient funds for local council purposes.

UNENCUMBERED FEE SIMPLE IN POSSESSION

The subject land is assumed to have a "clean" title so as to expedite the carrying out of mass valuations. The NSW Royal Commission considered this assumption as follows:

If the submissions were conceded it would be necessary to value every estate or interest. This would create difficulties in valuation far greater than any which may now apply in the determination of the hypothetical fee simple"   para 73.

Land Value requires an unencumbered fee simple in possession value. That is, the owner is assumed to have full freehold title without any encumbrance and is entitled to vacant possession for example, without the encumbrance of a mortgage - Langford v WLC (1959) 15 The Valuer 374.

Although private restrictions on title are ignored any general or public control is taken into account - Royal Sydney Golf Club v The Comm of Tax (1957) 91 CLR 610. Therefore, town planning controls are taken into account as well as general government policy.

THAT THE IMPROVEMENTS HAD NEVER BEEN MADE
The definition of land value under the NSW legislation is as follows:

VALUATION OF LAND ACT 1916 - SECT 6A
6A LAND VALUE
(1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner’s predecessor in title had not been made.
(2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that:
(a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and
(b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used,
but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made.

(3) Notwithstanding anything in subsection (1), in determining the land value of any land, being land in relation to which, at the date to which the valuation relates, there was a water right:
(a)the land value shall include the value of the right, and
(b) it shall be assumed that the right shall continue to apply in relation to the land.

In section 6A(1) where it states -

....assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner’s predecessor in title had not been made.

- in Toohey’s case this was interpreted as follows:

What the Act requires is really quite simple. Here is a plot of land; assume that there is nothing on it in the way of improvements, what would it fetch in the market"   Tooheys v VG [1925] AC439.

Therefore, when applying this criterion to licensed premises such as a hotel, the licence cannot be part of the land value as the hotel building is necessary to obtain a hotelier's licence. Under the Queensland legislation the licence is expressly excluded in the definition of improvements.

See 2000 amendments to the Valuation of Land Act 1916.

ANALYZING IMPROVED SALES TO OBTAIN LAND VALUE

Although the improvements are considered never to have existed it is proper to determine the land value from improved sales by subtracting the value of the improvements from those sales - James v VG (1942) 7 The Valuer 132. This method is expressly allowed in the
Queensland legislation.

More recently in Maurici v Chief Comm of State Revenue (2003) HCA8, the High Court criticised the Valuer General for not using improved to find land values in Hunters Hill. Instead the valuer had relied solely on available unimproved values. The problem indicated by the Court was that the method adopted was “..unduly selective”. They put the proposition that if there were only one vacant land sale in Hunter Hill, the rating valuer would determine all the unimproved values for the suburb from that sole sale. And later “….he was unreasonably selective in ultimately confining himself to two sales of scarce vacant land for the purposes of comparison”.

The Court said that to be fair the sales used must be a reasonably representative group of comparable sales and a group of sales cannot be representative if it does not go beyond sales of scarce vacant land.

The crux of the High Court’s argument is that improved sales “…cannot be disregarded. The contrary approach is required by the Act”. Tetzner although applicable when assessing a particular sale does not preclude a wide choice of the sales to be used.

The High Court also stated:

“And whilst it is true that s6A is intended to apply to each valuation made under it, its statutory operation in relation to all valuations, that is, all pieces of land to be valued, is another factor which cannot be ignored, and requires that a scarcity of vacant sites not be the determinant factor in valuations made under the Act”

The Court also made this curious statement:

“And whilst it is true that s6A is intended to apply to each valuation made under it, its statutory operation in relation to all valuations, that is, all pieces of land to be valued, is another factor which cannot be ignored,…”

It would appear that the court is prepared to interpret s6A by taking into account some overriding or overarching purpose of the Act. This would appear to be contrary to the law previously applicable which is to interpret express provisions of the Act only. For example, Tetzner’s case.

THE IMPROVEMENTS MUST REPRESENT THE HIGHEST AND BEST USE OF THE LAND

When analysing improved sales to find land or unimproved values the sale land use must be highest and best use otherwise an erroneous answer will result - Horn v Sunderland Corp (1941) 2K826. If the improvements are not the highest and best use, the sale price can still be used to find land value after an appropriate reduction for the cost of removal of the uneconomic buildings. This is known as site value and such sales are important evidence of value in the highly developed and expanding areas in most Australian cities.

SPECIAL ADAPTABILITY

It was stated above that the licence part of the value of licensed premises is to be ignored when determining land value. However, the land may have some special quality or adaptability for the licensed use, in which case, it becomes part of the land value. For example, a drivein theatre site - Peelmont v VG (1965)19 The Valuer 384.

UNEARNED INCREMENT

The popularity of the land value system in Australia followed the writings and lectures given by the American philosopher/economist, Henry George towards the end of the 19th century. George argued that there was only a need for one tax; a land tax, as it compensates the government/society for the unearned increment in land value. The unearned increment as opposed to the earned increment is that part of the land value that has been caused by the expenditure of government or the general expansion of the economy.

EXAMPLE

If the government builds a school near residential lands then generally, those lands will rise in value as a result. The government should tax such capital gains enjoyed by the owners as they have been caused by public expenditure and therefore, are "unearned". Compare such a windfall profit with a landowner who builds a house on his/her land that is, the land has increased in value because of his/her expenditure (earned increment).

According to George and a number of researchers, a tax on the unearned increment alone, if sufficiently large, will force landowners to develop vacant land, thus reducing speculation and the price of land because of the increase in supply. Further, by not taxing improvements, such a tax encourages the development and improvement of buildings.

Australia, being a federation of states includes many local options and differing state laws. Local governments throughout Australia levy a property tax on either the unimproved value, land value or site value, improved value, assessed annual (improved) value or a combination thereof.

However, because of the influence of Henry George, the trend has been towards land values, a logical and necessary development of the unimproved value concept. The allegiance to a land value system in Australia is particularly strong in the Eastern States. For example, in an intensive examination of the land value system in Australia, Bronson Cowan made the following comments:

Special attention was paid to this subject during the field investigations on which these studies were based. No case was found where a municipality had reverted to the taxation of Improvements, even in part, as the result of a depression. During the course of 60 years of experience with site value taxation, Australia and New Zealand passed through several depressions. These included the world wide depression of 1929 1934. While land values underwent considerable declines during these periods, their tendency has been to show continuous increases. These increases have been such as to indicate that, given sound municipal administrations, they tend to provide a constantly expanding source of municipal revenue  (Bronson Cowan, 1958, 9).

See
property taxation across Australia

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