By Bryan Kavanagh and David Collyer

This week’s game-changer, the Property Taxes paper by Grattan Institute has a minor error on land valuation that needs correcting before it becomes a gift to the opponents of reform.

Grattan is acutely aware that on this topic they are treading ground with an illustrious history. They have travelled the long, hard way to learn the least-harmful taxes are on land and land-like bases.  We welcome them to the economic high ground, where we have been sitting all this time.

On valuations, Grattan CEO John Daley and Senior Associate Brendan Coates observed:

“A progressive (land tax) rate compounds the administrative complexities of taxing unimproved capital values; unimproved values are hardest to determine accurately where land values are highest, and hence the consequences of disputed valuations are worth more.


“The recent shift towards capital improved values for council rates in some states reflects difficulties in determining the unimproved value of land, especially in dense urban areas where there are few, if any, market sales of unimproved land.

It isn’t always easy to value central city properties in slow years with few or no sales of vacant sites, but a competent valuer will always be able to accurately determine the value of a site.

A locality with no sales evidence is a locality that doesn’t exist!

It’s usually barristers – as in NSW a few years back when a commercial objection to a site valuation went to the Supreme Court – and economists, who confect these alleged Site Valuation ‘problems’.

Apparently, Westfield Doncaster contest their land tax valuation every year – it’s just good business practice, and will likely get them a tax cut.

Erudite professors of economics in the USA – usually with an anti-land tax barrow to push – claim land values can’t be split out from improved sales in densely built places, but valuers in Australia, New Zealand and South Africa have been doing just that for 120 years – in the case of Australia, producing a land value on every site.

This is where the ABS gets their data on Australia’s total land value.

The ‘residual building value’ method, subtracting the depreciated value of the building from the sale price is one method, or the ‘hypothetical development’ method, where a vacant site is notionally developed to its highest and best use, then the cost of the buildings, borrowing costs (interest over the development period), and rates and land tax, etc., is deducted to derive land value is another.

These methods are quite straightforward for experienced valuers.

The shift to Capital Improved Values (rating land and buildings) in Victoria might have reflected to a small degree the difficulty in CBD areas to come up with a land value (although the City of Melbourne prefers to rate on NAV rather than CIV, and the ‘hypothetical development’ method deals with the situation of insufficient sales evidence), but it is more likely a political move to advantage owners of  vacant or underdeveloped sites, where SV makes them play the game or sell.

Do not underestimate political influence, which has also interfered in the SV rating states of Queensland and New South Wales to levy “minimum rates”, the effect of which is to have owners of less valuable sites (on the minimum rate) subsidise owners of more valuable sites. The mayor of Gold Coast City Council, the late Ron Clark, actually boasted several years ago that some 80% of his municipality was on the minimum rate.

If Daley & Coates wants more information on land valuation, they could do no better than read Estimating Land Values by Ted Gwartney.   Just don’t let vested interests pretend the valuation process is hard or inaccurate.