VALUATION AND LAND TAX ISSUES – An Australian

Perspective

Vancouver 2004 Ports Valuation Workshop

Robert Craig

25 June 2004

OVERVIEW

• Background• Port Taxes• Valuations for annual reporting• Other port challenges

Australia

Western Australia

NorthernTerritory

SouthAustralia

Queensland

New SouthWales

Victoria

Tasmania

Adelaide 743 k••Perth 3462 k

Darwin 3750 k•

•Melbourne•Canberra 660 k

•Sydney 908 k

•Brisbane 1726 k

•Hobart 687 k

Port of Melbourne Corporation• Corporatised entity, established by Statute (Port Services Act 1996)• March 1996 – June 2003

– Melbourne Port Corporation

– Victorian Channel Authority

• July 2003– Port of Melbourne Corporation

• PoMC includes channels and land management

• Landlord model port• Following 1996 port reform no longer has direct operational role

Corporate Structure and Accountability

Appointed by Minister

Appointed by Board

• Minister of Transport•Strategic State Port Planning

•Department of Treasury• Corporate Planning approval• Sets required rate of return• Annual reporting monitoring

•ESC – Pricing regulation• ACCC

• Price monitoring of tugs, stevedores• Regulates Steam Ship company conferences•Does not permit pricing arrangements between Ports

160 Employees

Elected by State

Minister of Transport

PoMC Board

CEO

Executive

160 Staff

Treasurer

Port of Melbourne Trade

Dry Bulk3,341,183

6%

Liquid Bulk4,808,532

9%

Break Bulk - o ther6,228,864

11%

Containerised37,884,566

67%

Break Bulk - Auto3,874,977

7%

PoMC Statistics

Melbourne Vancouver• Area 497 hectares 460 hectares • Asset value - Total A$810 million $564 million

- Land A$503 million $340 million• Revenue A$113 million $103 million • Expenditure A$95 million $72 million • Dividends A$9 million $4 million • Land Tax A$10 million $55 million

Total Taxes Paid by PoMCType of tax Comments Government

Amounts paid YTD

29/5/04

Income tax The Corporation is subject to the National Tax Equivalent Regime. Inaccordance with this legislation, the Corporation is required to payto the Consolidated Fund, amounts determined to be equivalent to theamounts that would be payable by the Corporation if it was subject tothe Commonwealth income Tax Assessment Act 1936. Income tax(current rate is 30%) is regarded as an expense and calculated on thePoMC’s operating profit beforeincome tax.

Federal $11,474,000

Good & Services Tax (GST)

Legislation has been enacted by the Federal Government to introduce a Goods and Services Tax (GST) which is a broad based consumption or value added tax imposed on the sale or provision of most goods and services consumed in Australia. GST is levied at the rate of 10% and applies to most goods and services commissioned in Australia.

Federal $5,672,000 (net)

Fringe BenefitsTax (FBT)

The Fringe Benefits Tax (FBT) Assessment Act 1986 enables tax to beLevied on non-cash benefits being provided to employees. FBT is aFederal tax administered by the Australian Taxation Office (ATO). FBT ensures that tax is paid on those fringe benefits provided in place of, orin addition to, salary or wages of employees.The current FBT rate is 48.5%.

Federal $251,000

Total Taxes Paid by PoMC – Cont.

Type of Tax Comments Government

Amounts paid YTD

29/5/04

Payroll Tax Payroll tax must be paid to the relevant State Government for all labour related employees, generally the 7th of each month. Each State Government forwards a Payroll Tax Return form, which is to be completed and returned together with the payment.Each Australian State Government annually reviews and advises on their respective payroll tax percentage. The current Victorian payroll rate is 5.25%.

State $604,000

Land Tax The Land Tax Act imposes an annual tax on the total unimproved value (greater than $150,000) of all land owned in Victoria on 31 December of the year preceding the year of assessment. The actual amount of Land Tax payable is calculated by selecting the appropriate tax rate from the scale of tax rates and applying this figure to the total unimproved value of all land you own, excluding any exempt land.

State $10 millionapprox.

Generally paid by tenants direct to Council. Port of Melbourne is covered by 4 Councils however Melbourne City Council covers approx. 90%. Calculated using NAV.

CouncilMunicipal Rates

$2.5 millionapprox.

Statutory ValuationsCapital Improved Value (CIV)

The sum which land, if it were held for an estate in fee simple, and unencumbered by any lease, mortgage or other charge, might be expected to realise at the time of valuation if offered for sale on any reasonable terms and conditions which a genuine seller might in ordinary circumstances be expected to require.

Net Annual Value (NAV)

The estimated annual value of the land or 5% of the capital improved value of the land, whichever is the greater.

Site Value (SV)The sum which the land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or other charge, might in ordinary circumstances be expected to realise at the time of the valuation if offered for sale on such reasonable terms and conditions as a genuine seller might be expected to require and assuming that the improvements (if any) had not been made.

Land Tax

• Introduced in 1960’s – minor impact• Now one of the biggest issues facing the

Victorian property industry• Based on site value (set by municipal valuer)• Uses an equalisation factor (set by Valuer

General)

Land Tax Assessment Process• Melbourne City Council values

every 2 years

• 2 year lead time before SRO uses municipal valuation. Therefore SRO apply an “equalisation factor”

• Equalisation factor set by Valuer General

• Unimproved value for ALL

Municipal Valuation• CIV• NAV• Site Value

State Revenue Office• Site value plus EqualisationFactor = Unimproved Value

Unimproved value + SRO land tax scale = Land Tax assessment

land (aggregated) owned in State of Victoria other than primary residence

Land Tax Scale• Aggregates land holdings• Two tier system

– Multi holding– Single holding

• PoMC pays multi-holding but currently recovers single holding

• Government reducing top rate of 5c/$ to 3c/$ by 2009

• Equates to $1 billion State wide saving over next 5 years

Unimproved Value

From To Fixed

Plus X cents in dollar

$0 $149,999 nil nil

$150,000 $199,999 $150 0.1

$200,000 $539,999 $200 0.2

$540,000 $674,999 $880 0.05

$675,000 $809,999 $1,555 1.0

$810,000 $1,079,999 $2,905 1.75

$1,080,000 $1,619,999 $7,630 2.75

$1,620,000 $2,699,999 $22,480 3.00

$2,700,000 and over $54,880 5.00

Objection Process

• Can object to valuation but only on the basis of municipal rate and valuation notice

• Cannot appeal– Rate in $– Equalisation factor

• Objection within 2 months of receipt of Council rate and valuation notice

• If disallowed there is a right to appeal

Port of Melbourne Land Tax Assessment

2004 2009 estimateUnimproved Value

$202,950,000 $253,000,000 (1)

Multi-holding $10,067,000 $7,700,000

Single-holding $5,913,000 $5,200,000

Non-recoverable $4,154,000 $2,500,000

(1) Assumes 4.8% p.a. land value escalation over 5 years

Implications for Port of Melbourne

• Total tax is approximately 10% of revenue• $ 4.1 million is not currently recovered

from tenants• Land Tax impacts on Melbourne’s

competitiveness and that of our tenants

Land Tax Litigation• Section 2AA amendment to Valuation of Land Act• Legislation amended in mid 1996 • Part of Port Reform process and privatisation of two

Victorian ports– Portland– Geelong

• Section 2AA broadened the scope of improvements to be disregarded when assessing site value of port land

• However does not seem to have been applied by any Victorian municipalities

• PoMC is appealing for correct application of legislation• Portland and Geelong ports have also raised this issue

Land Tax Appeal– Disputed Issues

• What is Port Land?• What are “ancillary works”?• How should parcels of land be valued, (as

a whole or in separate parcels)?• How far back can we appeal?

Process• Preliminary issues

– What years can be appealed?• Main case

– To be heard in late 2004/early 2005– Possible reduction in site value $219 M to zero - $20 M– Possible reduction in land tax from $10 M to $1 M

• Valuer General has intervened• No Government intervention to date• State Supreme Court action involves significant

costs

Valuation for Annual Reporting• Every year • Land value only• Same valuer from 1997 to 2000

– Reputable– Consistency– However risk over prolonged period

• Therefore we re-tendered and appointed different valuer in 2001

• We chose not to instruct on how to do valuation. We simply required that the valuation was to be consistent with Government guidelines.

Result• Variation compared to previous year of $60 M!• New valuer had no regard to comparative sales –

capitalised passing rents only. Previous valuer had regard to both (“fair value” methodology).

• Victorian Valuer General was asked to comment on approaches – both arguably acceptable but preferred former valuation methodology.

Lessons

• Consistent approach will always be a risk• therefore we need to clearly instruct

valuers• and we appointed the Valuer-General to

“project manage” our valuation process to achieve an arms length and consistent process

Other Big Port of Melbourne Issues

1. Channel deepening2. Port Security to ensure IMO compliance3. Pricing for 1 and 2!

Questions

Robert CraigExecutive General Manager CommercialPort of Melbourne CorporationTelephone: +61 3 9628 7575Cell phone: +61 407 282 586Email: robert.craig@portofmelbourne.com