Newsflash: Property Council of Australia makes a reasonable point

The Property Council of Australia is a powerful lobby group known for ignoring truth and reason in its appeals for support from all levels of government.  The PCA’s latest battle surrounds the proposed amendment to the Valuation of Land Act 1944 (the Act), which will clarify a number of definitions for determining the ‘unimproved’ value of commercial buildings – a value upon which land tax liabilities and local government rates are calculated.

(As a strong proponent of land taxes I should be paying particular attention to the necessary practicality of  valuing unimproved land.)

The property lobby sees this Bill as a tax grab due to the likelihood of higher land valuations, and they have mustered plenty of support from other industry associations to stop it getting passed.

What follows is a brief analysis that suggests the Bill is quite unworkable, that the PCA has actually raised real issues with the practicality of the Bill, and also suggests extreme incompetence by the Queensland government.

To be clear the changes to Valuation of Land Act 1944 proposed in the Bill are outlined in my previous post.

The exaggerated claims by the PCA and their coalition from here, here and here include;

1.     That these changes will affect mum and dad investors, farms, shopping centres, CBD locations and more – virtually anyone who pays land tax. (if you own commercial property - the heartstring appeals from mum and dad investors is a bit over the top)

2.     They will massively increase the cost of living and doing business in Queensland (only if net State tax revenues increase as a result and are not used for the public benefit)

3.     We know the proposed changes will destroy property values and capital investment in Queensland (same response as 2)

4.     And contrary to the Government's claim, the Bill will have an effect on residential properties by increasing the value of residential land (only if residential leases add value to the property, which they generally do not)

5.     This Bill makes the ‘un’ in ‘unimproved value’ redundant. But instead of dropping the ‘un’ the State wants to re-write the dictionary so that the word unimproved actually means improved (the State can make a term mean whatever it wants in legislation, as it usually does).

However, they make a strong and valid case against unimproved valuations having consideration of commercial leases while not incorporating a profit and risk factor when making comparisons to improved sites.

The Queensland Government has a slightly different take on the matter (available here and here).  They claim that a recent Court of Appeal decision led to uncertainty about the inclusion of certain items, such as leases and goodwill, which are used to determine the 'highest and best use' of land if it were sold in today’s market. They claim these changes will confirm the valuations previously issued on or from 30 June 2002 and provide certainty for the future.

There is no theoretical problem with the inclusion of leases in the ‘unimproved’ valuation.  Instead the problem rests on the workability of this method.  One valid theoretical justification for the inclusion of commercial leases rests on the assumption that the purpose of unimproved values is to determine the value of the title to the property - that piece of paper that grants rights from the State to the property owner.  Because commercial leases are recorded on the property title the benefit they give the property owner should be considered.  

Further, a lease or agreement for future rental of a building still to be constructed may increase the value of a vacant block prior to any construction work.  In this way, the value of the land is affected by the lease without the need for the improvement.  A market valuation of an identical site without the lease would also include the discounted future value of hypothetical leases (as sites with a highest and best use for development should be valued with recognition of potential future income), and whether or not an actual lease would increase or decrease this figure is not certain.

The alternative, and much more sound theoretical position, suggests leases should not be included.  If the purpose of unimproved values to value the rights vested to the property owner by the State, then they should be excluded, as the licences on the title are simply records that improve security of contracts upon land.  This is unlike water licences (which are also attached to land and require improvements to be realised), as water licences are a right granted to the owner from the State.

The recent Pacific Fair case is the most recent case to consider the inclusion of leases in the unimproved value.  The decision in this case was based on the fact that leases imply improvements, and if the State wanted them to be included they would have specified such requirements in the Act.  The Bill has been prepared as a response to this decision (maybe the Government just doesn't want to admit that mistakes were made in some valuations?).

Now on to the main problem at hand.  To implement the new Bill the State would need to know the intricate details of all commercial property leases across the State.  It is difficult enough to value a single building knowing all the current leases and conditions.  It is a mystery how the Queensland government proposes to accomplish this feat for every commercial building in the State on a regular basis.

The second unworkable part is the exclusion of a profit and risk factor when deducting the cost of buildings to make a comparison to improved sites.  Apart from being a little extreme, this allowance means the end result of the ‘unimproved’ valuation is simply a market valuation minus construction costs.  Clearly it is costly and unworkable to determine market valuations for all commercial buildings, nor does such a method meet any theoretical arguments for a land tax.

So, does this mean we should start trusting the PCA?  Probably not.  I'll continue to consider  any of their claims on its own merit.

Finally, is the State simply stupid, or is the Bill part of an intentional negotiation strategy with the property lobby?  On this question I am torn, as I have seen evidence of both utter stupidity and extreme cunning from the State government (but I have on good authority that stupidity should be the default position).