The Cohen family, holders of The Block Arcade in Collins Street Melbourne, must meet a massive rise in State Land Tax after the Valuer-General’s biennial land revaluation. Their 2017 tax bill is $450,000, up from $30,000 last year.

According to the AFR, the Cohens will object to the valuation.

The Block Arcade, built 1890-93, is a particularly handsome Boom version of a French Renaissance style retail arcade, a gorgeous jewel set in the centre of Marvellous Melbourne. Its exuberant romantic style makes it a cultural and social icon. It was classified in 1973 by the National Trust and placed on the Victorian Heritage Register, protecting it from demolition or alteration.

Investors attach a high premium to historically significant buildings – and this is one of Melbourne’s finest.

The Block has large building maintenance costs and heavy letting expenses managing fussy super-premium tenants. The gross rental yield is very low; the net yield would be minute. This is a vanity investment of the first order.

Land valuation of this site is difficult.

Market valuation is no help. The Cohens paid around $80 million for the property in 2013, but dividing this value between a fastidiously maintained classified heritage building and the land underneath is hard.

The Block cannot be removed and replaced by the 100 story building this prime location would otherwise command. The current use is the highest and best available under the building’s heritage constraints and the land price must reflect this.

Working backwards from the tax schedule on a single holding basis, last year’s $30,000 land tax bill valued the land underneath at $3,222,000; the current $450,000 at $18,889,000.

A valuer would say they are both likely correct – the overwhelming majority of the value is in the building while the land value is severely compressed by the heritage restrictions.

The Retail Tenancies Act 2003 prevents the Cohens from passing on the land tax to retail tenants – quite rightly. Land tax is on holders, not users.

Even at the higher figure, the Cohens are paying very little on this unique site. Heritage restrictions that limit development options directly impact land values and land tax liabilities.

The other lesson here is in valuations themselves. All Australian states value land every two years. In times of fast rising or fast falling land prices, annual valuations would mean land tax’s useful automatic stabilizer function could help moderate booms and busts. Prosper Australia recommends annual revaluations of at least high value sites to keep values and tax closely aligned.

Annual revaluations need not be expensive. Valuers have well-established Computer Assisted Mass Appraisal techniques and any revaluations would still be based on genuine sales evidence.

Land holders unhappy about land tax should look in the mirror. Paying this tax is entirely voluntary: no one forces them to hold land – in the Cohen’s case, very valuable land indeed.