Title Land Tax - Report of Royal Commission on the Method for determining the Unimproved Value of Land held under Crown Leases
Source Both Chambers
Date 10-06-1925
Parliament No. 9
Tabled in House of Reps 10-06-1925
Tabled in Senate 11-06-1925
Parliamentary Paper Year 1925
Parliamentary Paper No. 11
System Id publications/tabledpapers/HPP032016007648_21


Land Tax - Report of Royal Commission on the Method for determining the Unimproved Value of Land held under Crown Leases

1925.

THE PARLilliENT OF THE COJ\tlJ\ilONWEALTH OF AUSTRALIA.

R E P O R T

OF THE

R O Y. A L C O M MI S SI O N

ON TliiE

FOR DETERMINING THE lJNIMPROVED V A'L UE OF LAND HELD UNDER CROWN LEAS ES,

TOGETHER "\VITH APPENDICES.

Presentedby Command; ordered to be printed, lOth J1me,1925.

[Cost of Paper :-Preparation, not given; 855 copies ; approximate cost of and publishing, £69.]

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Printed and Published for the GOVERNMENT of the CoMMONWEALTH of AUSTRALIA by H. J. GREEN, i _ i . . Government Printer for the State of Victoria.

No. ll.-F.l7208.-PmcE Is. 9n.

COMMONWEALTH OF AUSTRALIA.

GEORGE V. by the Grace of God, of the United Kingdom of Great Britain and Ireland, and of the British Dominions beyond the Seas King, Defender of the Faith, Emperor of India.

TO Our Trusty and Well-beloved WILLIAM WARREN KERR, G.M.G., G.B.E., JOHN JoLLY, MAURICE BoYCE DuFFY.

GREETING:

KNOW YE that We do by these Our Letters Patent, issued in Our name by Ottr Governor-General of Our Commonwealth of Australia, acting with the advice of Our Federal Executive Council, and in pursu2nce of the Constitution of Our said Commonwealth, the Royal mmissions Act 1902-1912, and all other powers him thereunto enabling, appoint you to be Commissioners to inquire into and report upon the method which should, in view of the decision of the Parliament of the Gom1nonwealth that the taxation imposed on lessees' estates

in Grown leases under the Land Tax Assessment Act 1901-1916 should be collected, be adopted for determining, upon the basis laid down by the Act, the unimproved value of the land held under such leases.

AND WE APPOINT YOU, the said WILLIAM WARREN KERR, Esquire, to be the Chairman of the said Commissioners. AND WE REQUIRE you with as little delay as possible to report to Our Governor-General of Our said Commonwealth ·the result of your inquiries into the matters entrusted to you by these Our Letters Patent.

IN TESTIMONY WHEREOF We have caused these Our Letters to be made patent and the Seal of Our said Commonwealth to be thereunto affixed.

(SEAL.)

WITNESS Our Right Trusty and Well-beloved HENRY WILLIAM, BARON FoRSTER, a Member of Our Most Honorable Privy Council, Knight Grand Gross of Our Most Distinguished Order of Saint Michael and Saint George, Our Governor-General and Commander-in-Chief in and over Our Commonwealth of. Australia, this twelfth day of July in the ye.ar of Our Lord One thousand nine hundred and twenty-four, and in the fifteenth year of Our Reign.

FORSTER, Governor-General.

By His Excellency's Command, LL. ATKINSON, for Prime Minister.

Entered on record by me, in Register of Patents, No. 25, page 272, this seventeenth day of July, One thousand nine hundred ami

twenty-four.

P. E. DEANE.

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Introductory.

Restricted Scope of Inquiry.

Brief Historical Review.

INDEX

Variations in Department's Method of Valuation.

Commissioner's Reasons for Adoption of Method of Capitalization of Average Net Returns.

The Pastoralists' Views.

Comments by the Knibbs Commission.

Comments by the Royal Commission on Taxation.

Evidence before this Commission.

A!ldress by Counsel for Pastoralists.

Selling value of the Lease suggested as a basis of the Tax.

Average of Average Net Returns Method.

Allowance for Onerous Conditions.

Valuation of each Parcel of Land.

Allowance for Weight of Land Tax.

Allowance for Magnitude.

Subdivisional Value.

Right of Resumption as determining lease Tenure.

Land Tax General Order 816.

Provisions of the Act specially related to this Inquiry.

What is the best evidence of Values ?

The method of Valuation recommended for Adoption.

Reappraisement of Rents.

Recoupment of loss of Capital on Improvements.

Should 1914-1915 Valuations be adopted for .all years?

Must value be determined as at date of Lease ?

Board of Appeal.

Does the Act set an impossible task?

Publication of Land Tax Office Orders.

COMMONWEALTH OF AUSTRALIA.

REPORT OF THE COMMISSI 0

INTRODUCTION.

To His Excellency the Right Honorable HENRY WILLIAM, BARON FoRSTER, a Member of His Majesty's Honorable Privy Council, Knight. Grand Cross of the Must Distinguished Order of Saint Michael and Saint George, Governor-General and Commander-in-Chief of the Commonwealth of Australia.

MAY IT PLEASE YouR ExcELLENCY:

We, Commissioners appointed by Royal Letters Patent to inquire into and report upon-The method which should, in view of the decision of the Parliament of the Common­ wealth that the taxation imposed on lessees' estates in Crmvn leases under the Land Tax Assessment Act 1910-1916 should be collected, be adopted for

determining, upon the basis laid down by the Act, the unimproved value of the land held under such leases, have the honour to report as follows :-2. Mr. John Jolly, who was originally appointed as one of the Commissioners, was present

at all sittings of the Commission, both private and public, up till the 26th August, 1924, on which date he resigned his Commission for the reasons set out in a letter addressed by him to the Prime Minister. 3. Our first meeting was held on the 14th July, 1924. The first public sitting at which

evidence was given took place on the 21st July, 1924. The last witness examined appeared before us on the 4th September, 1924. The final public sitting of the Commission was held on the 8th September, 1924, when Mr. Owen Dixon, 'K.C., appearing on behalf of the Graziers' Vigilance Committee (which represents all the Pastoralists' Associations in the various States) addressed us.

4. In all 25 public sittings were held and twelve witnesses were examined. 5. The Departmental witnesses were :-Mr. Robert Ewing, Federal Commissioner of Taxation, Melbourne. Mr. W. J. Lambert, Senior Valuer, Federal Taxation Department, Melbourne.

Mr. A. Dunn, Senior Valuer, Federal Taxation Department, Adelaide. Mr. C. H. Richards, District Valuer, Federal Taxation Department, Adelaide" Mr. W. J. Gore, Senior Valuer, Federal Taxation Department, Sydney. Mr. Edward Byrne, District Valuer, Federal Taxation Department, Sydney. Mr. Herbert Valentine Franklin, Senior Valuer, Federal Taxation Department,

Brisbane. Mr. A. H. Smith, District Valuer, Federal Taxation Department, Brisbane. In addition, evidence was given by :- . · .

Mr. C. W. Reid, General Manager, Beltana Pastoral Co. Ltd., South Austmlw,. Mr. Murray ClaphD,m, Manager, Australian Estates and Mortgage Co. Ltd., Melbourne. :Mr. Edmund Jowett, Grazier, William-street, Melbourne. Mr. J. S. Eastwood, Public Accountant (Melbourne) and Official Representative of the

Graziers' Vigilance Committee. 6. In addition to the oral evidence, we have received and given full consideration to a large volume of correspondence and official memor1:mda, besides carefully studying the reports of the Royal Commission on the Taxation of Leasehold Estates in Crown Lands and the Royal

Commission on Taxation, and informing ourselves as to the evidence given before these Commissions relative to the subject of our inquiry. 7. Early in our inquiry a Questionnaire (see Appendix I.) was prepared and submitted primarily to the Taxation Departmental Valuers. Adaptations of the Questionnaire formed the

basis of correspondence with others who for various reasons were unable to appear before us, but whose special experience warranted the expectation that their opinions on the particular matters referred to them might be of assistance to us. 8. Mr. J. 1:5. Eastwood, in addition to tendering direct evidence, attended the public sittings of the Commission as the o:fftcial representative of the Graziers' Vigilance Committee, and, by permissionr tonk part in the examination of witnesses.

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Mr. W. J. Lambert, Senior Valuer for Victoria for the Federal Taxation Department, similarly represented the Taxation Department at five of the public sittings of the Commission. 9. Within a few days of our appointment we addressed letters to several representative pastoralists and others who had appeared as witnesses before the Royal Commission on Taxation of Leasehold Estates in Crown Lands (Sir George Knibbs, Cha,irman), informing them of the scope of our inquiry, and asking if they wished to submit any evidence to us either in modification or B.mplification of that tendered before the former Commission, which, it was pointed out, was available to us and need not be repeated. At the same time similar letters were sent to 38 firms, companies, and associations representative of pastoral interests throughout Austra.lia as well as to taxpayers' associations in five States. _

The replies, for the most part, disclosed a disinClination on the part of the recipients to tender fresh evidence, and in the case of the pastoral companies, in the majority of instances the matter was referred by them to the United Graziers Association for joint action.

RESTRICTED SCOPE OF INQUIRY.

10. It will be observed that by the terms of reference our inquiry is somewhat restricted. We are to inquire into and report upon the method which should be adopte9, for determining the unimproved value of the land held under Crown leases, but the determination of such unimproved value must be upon the basis laid down by the Land Tax Assessment Act 1910-1916. In other words, any method recommended by us must not involve an amendment of the relevant provisions of the Act.

BRIEF IDSTORICAL REVIEW.

11. Before discussing in detail ·the sections of the Act reJevant to the subject of our investigations, we deem it desirable to briefly review the which h,ave led up to

the present inquiry. This is necessary in order that the difficulties which surround the question may be adequately realized; and the nature and effect of our recommendations fully appreciated. ·

12. Under the original Land Tax Assessment Act 1910, the owner of a leasehold estate under the laws of a State relating to the ·aJienation or occupation of Cro-wn la_ nds or relating to mining (not being a perpetual lease without revaluation or a .lease with a right of purchase) was not liable to assessment or taxation in respect of the ·estate. But by section 3 of the amending Act (No. 29 of 1914) "the ambit of liability in respect of Cro\V-n lessees has been greatly extended. The earlier policy was to include only such lessees as had either the practical or the potential status of but at the same

time to abstain from taxing them as ·full freeholders; until in the -case of the potential freeholder his interest matured into actuality. But now lessees . with no right even potentially to the freehold are made liable according to the value of their estates." -13. The extracts from the Fifth, Sixth, ·seventh, and Eighth Annual Reports of the Commissioner of Land Tax dealing with the question of the Taxation of Crown Leaseholds, which are quoted in the succeeding paragraphs, will, it is thought, serve to indicate in a condensed and convenient form the official attitude at successive periods in respect of the principal matters of

dispute _ between Crown lessees and the Taxation Department from the inception of the tax in 1914, and the circumstances under which at the present time (over fifteen months after the cessation of the impost) these differences still remain ·unsettled. 14. Commissioner's Fifth Annual Report.-The Commissioner, in his Fifth Annual Report (year 1914-1915), dated 14th August, 1917, says:- _ .

Valuation of Crown Leases.-The Department recognized there were considerable difficulties connected with the valuation of Crown leases. In the first place, the law requires that the value of the leasehold estate should be the capitalized value of the difference between the rent paid under the_ lease and 4-i per cent. of the freehold unimproved value of the land. The determination of the unimproved value of the .land has given rise to much diffumce of opinion between leaseholders and the Department. The majority of Queensland leaseholders very early took the view that the unimproved value of the land was the rent reserved under the lease capitalized at 5 per cent. If correct, this would been a very simple solution of the difficulty, but twenty ti'mes the rent did not produce consistent results. fixmg of rentals for Crown leases was not done at one nor have rents fixed in later years necessarily been

based to those fixed in earlier years. Amended State legislation in regard to Crown lands has from time to

trme produced differences in the rents demanded by the Crown, so that the capitalization of the rents paid, at 5 per cent., cannot be accepted by the Department as the correct method of ascertaining the unimproved value of the land. The Department takes the view that under the law the proper method of arriving at the freehold unimproved value of leasehold estates in lands held from the Crown under pastoral leases is set out hereunder :-

Pastoral Leases.

In all the valuation of lessees' leasehold estates in pastoral leases must be based upon the freehold urumproved value of the land. The freehold value of the land must be arrived at in the same manner, wherever possible, as if the land is in fact freehold. _

The use to which the land may be put by virtue of the lease must be tal"tL t.11 be the best use to which it could be put, unless the lease agreement permits some other and better use being made of it.

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The selling price of the land used for pastoral purposes must be ascertained from the normal economic rental value based upon average carrying capacity, and this should be ascertained, wherever possible, by comparison with sales of freehold lands of similar character put to similar use. When valuing improvementson leasehold lands for the purpose of ascertaining the freehold unimproved

value, the rules laid down for application to ordinary freehold lands should be applied, but the allowance for improvements should be on the most liberal basis possible consistent with reasonable unimproved values. · · ·

The basis of capitalization of costs should be 5 per cent. in all cases. The calculation of the value of improvements should not be complicated by paying attention to a lessee's tenant rights in improvements. Those rights exist only because the land is held under lease. They cannot have any bearing on the freehold value. They have, however, a material bearing on the selling

value of a leased property in case the lessee in possession desires to sell. Assessments have, accordingly, been made on this basis. In addition to the basis for ascertaining the unimproved value of the land, discussions have taken place with leaseholders as to the period over which the capitalization of rents should be made. Leaseholders who hold land from

the. Cr?WD; subject to possible or probable resumption after the expiration of fixed periods, maintain that the cap1tahzatwn should not extend beyond the period of probable resumption. ' Another point raised is that the rent under the lease should have regard to the provision for reappraisement of Crown rents.

On both these points the Department's view differs from that of the taxpayers. The departmental view is that the rent should be capitalized for the full period of the lease as stated in the lease, and that the law does not permit any departure from the current rent under the lease. In connexion with the period of the lease, it is recognised that if really takes place, it will be necessary to adjust past assessments in the light of that fact, and make refunds ;

but such adJustments cannot be made in an:icipation. Objections have been lodged in Queensland and South Auatralia by pastoral lessees, and one lease-holding company in South Australia has as}i:ed that its objection, which has been disallowed by the Department, shall be treated as an appeal and referred to the High Court for judgment. An effqrt will be made in connexion with this appeal to

bring before the Court all the points in dispute between the Department and Crown lessxs generally in connexion with the basis of valuation: A number of the objectors in Queensland have recently accepted the departmental freehold valuations on which the values of their leasehold estates were based, and have withdrawn their objections.

In consequence of the number and great areas of Crown leaseholds, unsettled conditions, and the limited valuation staffs maintained by the Department, the inspection of those properties which have been returned by leaseholders has not yet been completed.. Considerable progress has, however, been made in that direction, and finality is expected by the end of the present calendar year.

The general question of valuations and assessments of leasehold estates in Crown lands is receiving special consideration.

15. Attention ·is specially invited to the extracts quoted in the precedi.."flg paragraph which describe what was, in the departmental view, the rrorer method of arriving at the freehold unimproved value. of leasehold estates in land11 held from the Crow11 under pastoral leases, and to the statement that assessments (presumably in respect of the year under review, viz., 1914-15) have been made upon the basis laid down.

16. We reserve for the present comment upon the Department's views on the subject of the proper method of dealing with leases which are held subject to the right of resumption by the Crown as to whole or part. (See paragraphs 228 to 236.)

17. With respect to the reference made to the objection lodged by a lease-holding company in South Australia, and the request that its objection should be treated as an appeal and referred to the High Court for judgment, in answer to an inquiry r.s to whether or not the " "

case is the one alluded to, the official reply indicates that it is, but that the reference to the H1gh Court in ·the Commissioner's Report should have been to the Supreme Court.

18. We are of opinion that had the expressed intention of the Commissioner in 1917, in connexion with this appeal, to bring before the Court " all the points in between. the Department and Cro\vn lessees generally in connexion with the basis of ?een giVen ·full effect by carrying that appeal to the High Court, many of the legal questiOns

concerning which to-day there still remains grave have been authontat1vely

settled, and innumerable causes of friction and differences of oprn1on between Department and · Crown lessees would long since have been removed.

19. Commissioner's Sixth Annual Report.-In his Sixth Annual Report (year 1915-16), dated 7th November, 1918, the Commissioner states:- .

Valuation of Crown Leases.-The first assessments of values of lessees' estates in Crown leaseholds were recently issued as part of the assessment for the financial year 1914-15. . .

The basis of the assessment was fully explained in the Fifth Annual Report. 'l'he arn.ved. at _upo11 that basis have in many instances given rise to strong objections by pastoralists. The ground. t\l the obJectiOn m all cases is that the basic principle in the law is wrong, as the results arrived at generally very greatly exceed the actual sum paid for the lease over and above the prices paid for live stock and improvements. . .

Three appeals to the courts exist. One part is heard by the Supreme Court, of South to be dealt with by the Supreme Court of New South Wales ; and the third is in suspense pendmg the declSlons 1n the other two cases.

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20. The Curnamona Case.-,.-Allusion need only be made to the cases of appeal referred to in the Report. The one which, at the time, was part heard by the Supreme Court of South Australia, is the case of Rymill v. Federal Commissioner of Taxation (commonly referred to as the " Curnamona " case). This was an appeal against the assessment of Curnamona station, a leasehold property comprising an area of 782 square miles. The term of the lease was for 42 years from the 1st January, 1904, the rent being £234 12s. per year . . .The Canowie Pastoral Company returned the freehold value of the land at £5,213, and a re-assessment by the Department placed a value of £33,365 on the land included in the lease and £20,922 on the lessee's estate. The assessment W9,s later reduced to £26,032 value of the land, and lessee's estate £15,472. The appellant contended that the value of the land did not exceed £5,213. Held, applying the principle laid down in the case of Fisher v. Deputy Commissioner of Taxation, that the value of the land was not worth more than £5,213, and the lessee's estate in it had no taxable value. The judgment of the Court (Murray, O.J.) which was not given till 22nd January, 1919, is recorded in extenso in the Commissioner's Seventh Annual Report, page 223 et seq.

21. Our comments upon the principle of valuation adopted by the Court in this instance will be made later in our Report. In the meantime attention is invited to a reference to the case in the Commissioner's evidence before the Royal Commission on Taxation of Leasehold Estates in Crown Lands on 13th June, 1919 (page 222 of the Minutes of Evidence). Mr. Ewing said :-

Mr. C. N. Murphy, in his evidence on pages 20 and 21 of the transcript, refers to the judgment recently given by the Supreme Court of South Australia on the unimproved value of " Curnamona " Crown leaseholds, and he states he understands the Department has decided not to appeal against the judgment. I wish to state that all arrangements for appeal were being made, but owing to an unfortunate misunderstanding on the. part of one of the officers, the time for lodging the notice of appeal was allowed to pass. The judgment is, however, of course, being applied to the particular assessment that was before the Court, but it will not be applied in any other assessment except by direction of the High Court. In my opinion, the judgment is entirely at variance with the principles expressed in all valuation judgments by the High Court. I merely wanted to make the departmental attitude clear in that case. It was a misfortune and it would have been well had that particular judgment been challenged at the time.

3853. By Mr. Allan.-You can appeal next year if you so desire 1-Yes; there is the annual right of appeal I do not know what the assessment will be for this year. 3854. By Mr. Benjamin.-Would he be assessed on the same valuations as appealed from ?-I cannot say that.

In answer to our inquiry as to why no subsequent appeal was lodged in this case, the Commissioner wrote us on 6th October, 1924, as follows:-Curnamona Case. In reply to your letter of 3rd October instant relative to the above matter, the reason why no subsequent appeal was made in this case was, that as the Department had no definite basis to work upon _in eonnexion with the valuation of Crown leaseholds, it was considered necessary to follow the judgment until the basis of valuation of Crown leaseholds had been definitely settled.

The judgment was given by the Supreme Court of South Australia on 22nd January, 1919. It will be remembered by the Royal Commission that the Treasurer of the day had suspended the payment of Land Tax on Crown leaseholds in March, 1918, pending consideration of the future policy of the Government as to whether Land Tax should or should not be levied upon the unimproved value of lessees' estates in Crown leaseholds.

In view of that position, it was not reasonably possible for the Department to take such action as would have brought a further appeal before the Court. 22. The Dunumbral Case.- The appeal case referred to in the Report as "about to be dealt with by the Supreme Court of New 8outh Wales" is one known as the "Dunumbral" case. With regard to this case on 18th September, 1924, we addressed the following inquiry to the Taxation Department:-

We shall be glad if you will furnish us with the fullest information as to the circumstances governing the determination of the Taxation Department in advising the taxpayer that if heaskedfor an adjournment the Department would not oppose the request. Willyou supply us with dates of (a) lodging appeal, (b) request by Taxpayer to Treasurer that instructions should be given to withdraw the case, (c) the date any such instructions were given to the Department, and the nature of those instructions.

We should like also to know if it is still possible for that appeal to be gone on with, and if so, what steps are necessary to ensure the hearing of the appeal. 23. From the official reply it appears:-(1) That the Commissioner was requested by memorandum from the Secretary of the

Department of the Treasury, 31st May, 1919, to take the necessary action to postpone the appeal. (2) That on 31st May, 1918, the Commissioner telegraphed to the Deputy Com­ missioner, Sydney, "Treasurer desires Dunumbral Appeal postponed. Arrange

postpone six weeks." (3) That 6th June, 1918, was the date fixed for the case to be heard. C4) That on 5th June, 1918, on application of Crown Solicitor, the hearing was postponed until the sittings commencing 2nd September, 1918. {5) That on 20th August,1918, on application of respondent, the hearing was further

postponed until the sittings commencing 25th November, 1918.

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(6) That on 20th November, 1918, on application of appellant, the hearing was postponed indefinitely, either party to be at liberty to have case restored to list upon fourteen days' notice. (7) That in each of these applications consent to adjournment -vvas recorded by the

other party.

In referring to this information the Commissioner wrote:-the above, it will be apparent that the Appeal can be proceeded with whenever either party desires, but

far as this Department is concerned, any action to prosecute this or any other Crown leasehold appeal will be held

m .abeyance pending the consideration by the Government of the Report to be made to it by your Commission, unless this or any other taxpayer in the meantime forces an appeal into the Court, in which case the Department must, of course, contest the appeal.

24. Commissioner's Seventh Annual Report.-In his Seventh Annual Report (years 1916-17 to 1919-20), dated 18th May, 1921, the Commissioner states:-.Valuation of Grown Leases.-In December, 1918, the Government appointed a Royal Commission, consisting of Messrs G. H. Knibbs, C.M.G., F.S.S., Commonwealth Statistician,

H: A .. G. J.P., President Land Appeal Court of New South Wales; and H. 0. Allan, V1ctonan Lands Department, for the following purposes :-(a) to inquire into the incidence of that portion of the Commonwealth law which imposes a tax upon the owners of leasehold estates in Crown lands;

. (b) to report whether such tax has been arranged upon an equitable basis, having regard to the fact that freehold lands are subject to tax as provided by Com­ monwealth law; (c) to report whether some other method of taxa,tion of leasehold estates in Crown

lands should be adopted and, if so, what that ehould be; (d) to report generally upon such tax and its applictJ,tion. The principles of· valuation and their application by the Department were subjected to searching inquiry by the Commission, and the land-owners' representatives who appeared before the Commission. The Commission in its Report upheld the Department.

The Commission recommended several alterations in the law for the purpose of endeavouring to provide for what the Commission considered were special features connected with outlying country used by pastoral lessees for pastoral purposes. The Government has announced its acceptance of one of these proposals, and the further consideration of the remainder. .The accepted proposal is that the value of the lessee's.estate should be thesum obtained by capitalizing the net difference between the economic rent (4l per cent. of the unimproved freehold value of the land) and the rent reserved by the lease on the basis of 8 per cent. compound interest. The economic rental for the land has not been altered from 4l per cent. of the freehold unimproved value of the land. In an arithmetical sense, therefore, the proposal is not an accurate one, as it results in a lower capital sum than the technically correct sum. In that respect, however, it provides an arbitrary allowance for a number of contingencies which could not be provided for otherwise.

Tax on Grown Leaseholds.-The tax on lessees' estates in Cro,vn leaseholds is being assessed, but is not being collected. The amounts outstanding in this respect are approximately as follows. The exact amount cannot be stated, as the total amount of tax outstanding includes Land Tax due by some tax­ payers who are applying for relief from tax owing to drought and similar conditions:-

1914-15 . . . . . . . . . . £258,043* .

HH5-16 157,075

1916-17 164,973

1917-18 204,201

1918-19 1919-20 23,790

Grand Total £844,301

This tax has remained outstanding under a verbal direction to me by the Right Honorable W. A. ·watt, P.C., when Treasurer, pending an investigation by a Royal Commission into the taxation of lessees' estates in Crown leaseholds. ·The Report of the Royal Commission was submitted in 1919, and the Acting Treasurer at that time, the Honorable A. Poynton, M.P., announced in his Budget Speech that the Government had decided to accept the recommendation of the Royal Commission to amend the Land Tax Regulations, so as to permit the calculation of a lessee's estate by capitalizing the difference between the rack rent of the land and the rent paid under the lease at 8 per cent. compound interest instead of 4l per cent., as at present.

• This amount is incorrect, and should have been stated as being £58,043 (see paragraph No. 25). The grand total should therefore read, £644,301.

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Up to the present the Regulations have not been amended in this respect. The question of collecting the outstanding tax is under consideration by the Treasurer. 25. The Commissioner's Eighth Annual Report.-The Commissioner's Eighth Annual Report (years 1920-21, 1921-22, and 1922-23), dated 30th June, 1924, contains a brief reference only to the tax on Crown leaseholds. An error in the Seventh Annual Report in the amount of this tax stated to be outstanding in respect of the yearl914-15 is corrected. Schedule No. 3 of the Report shows the total amount of Land Tax and fine outstanding as at 30th June, 1921, 1922, 1923, and 1924. The Commissioner states that "the bulk of the outstanding tax in each year represents assessed but uncollected taxon the unimproved values of leasehold estates in Crown lands." The total tax and fine outstanding as at 30th June, 1924, is stated to be £2,114,914. It is further remarked that " collection of this particular tax for all years prior to the financial year 1923-24 is now proceeding."

26. Commissioner's communication to Treasurer, June, 1924.-0n the 19th June last the Commonwealth Treasurer (Dr. Earle Page), in a Ministerial Statement made ·in the House of Representatives, read a lengthy communication received by him on the 17th June, 1924, from the Commissioner of Taxation on the subject of the taxation of Crown leaseholds, and at the close of his Statement announced the Government's intention to appoint the present C()mmission to investigate the matter and determine a basis of valuation. (See Hansard No. 11, 21st June, 1924, pages 1425 to 1429.)

27. It is unnecessary to quote the Commissioner's communication to the Honorable the Treasurer at length, but the following is a brief summary of the salient points which relate to the subject ofour inquiry. · 28. The Commissioner referred to the Taxation Department's method of arriving at the

unimproved value of land held . under lease from the CJ,'own by ascertaining· its probable sale price by comparing each particular leasehold property with .freehold lands in the district, or the State, which were of similar character, and put tosimilar use, and which has been the subject of sale and by making allowance, as far as possible, for all disadvantages from which the subject land suffered in comparison with the, basic land. _ The Commissioner pointed out that in consequence of the objection of many .lessees to the fee -simple value attributed to the land by the Department, the Commission was appointed, and tha.t he had recommended before that Commission that the rate of capitalization of the difference between t4e economic and

reserved rents should be on the basis of 8 per cent. tables of _calculation instead of 4f per cent. tables, because he thought the consequential reduction in the values oflessees' estates might thus provide more or less adequately for many factors in the valuation of CroWn leases on a freehold basis which might not, or could not, readily be. taken consideratwn. in the. Department's method of arriving at the probable selling price of the fee-Bimple of the lands. The Knibbs -Commission's recommendation tha,t the proposed course should be followed wa.s, in view of the

great importance of the question at issue, submitted for the consideration of the Government then in office, but no action was taken by the Government except to refer the whole of the subject of the taxation of Crown leases to the· Royal Commission . on Taxation · appointed in September, 1920. The Commissioner went on to saJthat·as experience.had shown the impractica­ bility of ascertaining the true value of most of the leasehold land by taking sale prices of freehold lands as a basis, especially when great distanceseparated the sold from the subject lands, and grep,t variation existed in climatic influences, the Commissioner, in November, 1920, introduced an additional basis of valuation for such lands, viz., the capitalization of net returns ofthe subject lands at the percentages which the average net returns from the sold lands bore to the capital

invested in the sold lands. · .

No revaluations of the fee-simple values of Crown leaseholds were undertaken by the Department during the period of suspension of payment of the tax. A consolidation of the existing rules regarding valuation (General Order 816) was issued in booklet form to valuers in July, 1922. ·

In practice valuation by capitalization of net returns of a subject property by reference to the average percentage which the net returns of sold properties boreto the capital invested in them was found to involve considerable difficulty on account of the variations of the percentages in the case of the sold properties. __

The Commissioner of Taxation considered that one uniform percentage for the pm:pose should be adopted for all cases, and, after inquiry and much consideration, he decided during the first quarter of the calendar year 1923 to adopt . 8 per cent. Capitalization of average net returns on an 8 per cent. basis was adopted for two reasons:-

(1) It was considered by a fairly representative pastoralist .as representing the fair average net return which would be expected from a freehold pastoral property. (The Commissoner was informed quit.e reeently that a similar viow wa,s held by other representative pastoralists.)

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(2) Examination of the net returns for ten years up to 1919 to invested capital, in a typical case of a pastoral country, showed 7· 6 per cent. on the average.

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Immediately Parliament decided, in August, 1923, that the tax should be coliected for past years, the Commissioner directed Deputy Commissioners to review valuations of Crown leases on the basis of the capitalization of average net returns at 8 per cent. simple interest. Shortly after­ wards, however, three Deputy Commissioners reported that examination of the average net returns to inv0sted capital over the period 1911 to 1915, inclusive, in the case of several freehold properties in their States, indicated an average annual net return of from 9 per cent. to 10 per

cent. on invested capital. . ·

The Commissioner of Taxation then decided that the period was the most reasonable one to adopt to ascertain average net returns for purposes of all subsequent valuations of Crown leaseholds. It was also the period for whieh reliable data was available. In May, 1924, the Commissioner of Taxation decided to capitalize average net returns on

a 10 per cent. baf2is instead of 8 per cent. The new method of aseertaining the fee-simple value of the land has resulted in substantial reductions in the former departmental valuation of Crown leaseholds.

29. The Government's Announcement in 1920.-The Honorable the Commonwealth Treasurer, when bringing the. Commissioner's communication before the House of Hepresenta­ tives, made reference to the Knibbs Commission's recommendation that 8 per cent. tables of calculation should.be substituted for the existing 4! per cent. tables of calculation which are used under the lease and the economic rent, and stated:-

" The Treasurer of the day, the Honorable A. Poynton, in his Budget speeeh 1919-20, which is reported on page 20 of the Hansard record, announced that the Government had decided to give effect to the Royal Commission's recommendation • on this point, but that was not done."

30. Commissioner's Statement supplemented in Evidence.-When appearing before us the Commissioner supplemented the statement summarized in paragraph 28 by informing us:-(1) That collection of tax due to the inclusion of Crown leaseholds which become taxable under the 1914 Act was deferred by an instruction issued to Deputy

Commissioners on the 15th March, 1918. (2) That on the 8th December, 1919, the Secretary to the Treasury was asked to ascertain .whether the capitalization at 8 per cent. (as recommended by the Knibbs Commission and announced as having been accepted by the Govern­

ment) was to be retrospective, but no reply was ever received. (3) That the tax imposed on Crown leaseholds still remained in suspense and the work of valuation proceeded somewhat intermittently. (4) That on the 31st July, 1922, owing to the difficulties experienced by the valuers

in the various States and reported by the Deputy Commissioners, the latter were instructed not to proceed further with the work of valuing Crown leaseholds in the manner prescribed by Order 816. (5) That on the 11th December, 1923, following on the decision of Parliament that

tlie tax on Crown leases assessed for past years should be collected, all Deputy Commissioners were instructed to demand outstanding tax due on Crown leases as soon as their value had been arrived at in accordance with the instruction of 29th October, 1923. NOTE.-This instruction described the m

applied, and is more particularly referred to in paragraph 154 of this Report. ·

(6) That on the 14th April, 1924, following represent::J,tions to the Treasurer, Deputy Commissioners were instructed to allow to Crown leaseholders eighteen months in which to pay the tax based on revised valuations .. (7) That on the 18th June, 1924, they were instructed not to Issue further assessments

or revised valuations. On the appointment of this Royal Commissi9n all action in this direction was suspended.

VARIATIONS IN DEPARTMENT'S METHODS OF VALUATION.

31. It has been impossible within reasonable limits to more than trace in barest outline the chequered history of the tax on Crown leaseholds, but it is appropriate in addition to what has already been said that further reference be made to the departmental change of view on the question of the method of valuing land held 1mder lease from the Crown upon the basis laid

down by the Act.

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32. Before doing so, however, it is necessary to point out that both before and subsequent to the issue of Land Tax General Order 816, the departmental procedure in the valuation of Crown leasehold land discloses some variations in the several States. The Commissioner handed us a statement setting out the position, and the method or methods of valuation adopted in each State. A summary of this statement appears as Appendix II. to this Report.

33. It may be explained that as a result of discussions at a conference of Deputy Commissioners and Staff Valuers, held in Melbourne in March, 1917, main rules were framed for application throughout Australia to secure uniformity in the methods app1ied by the Department for ascertaining the unimproved values of lands. These rules, ill the form of G.O. 816, were originally issued on 15th June, 1917, and a consolidation of the existing rulings regarding valuation, still known as Order 816, was issued jn booklet form to valuers in July, 1922.

34. Official change Commissioner's Evidence in 1919.-When appearing before the Knibbs Commission in June, 1919, the Taxation Commissioner, in answer to the question (No. 3868)_:_Do you think the present system of land tax in your Department, and the method of arriving at the valuation, is the best that could be devised ?-replied "I think so." When asked a little later on (Question 3968) if he would like to say anything about the difficulty of discovering the freehold value of leaseholds from other freeholds, Mr. Ewing replied "I cannot appreciate the difficulty." The chairman then said (Question 3969).-" You do not believe there is a difficulty?" The answer was, "No more difficulty than there is in ascertaining the value of a. far distant freehold from sales of freehold lands.'" In reply to Question 3982 Mr. Effing remarked," Mr. Benjamin [who appeared before the Knibbs Commission as representative of the legislative committee of the Pastoral Associations] has stated that there are some features connected with valuations which the departmental valuers have not allowed for. I wish to say in this regard that valuers who have made the actual inspection and valuation of properties

have, in fact, considered every possible feature connected with a property, but in measuring them in comparison with basic lands, they have found that, in the case of some feature, no special allowance was necessary." And 'Yhen dealing with the subject of appointment of a Valuer­ General in each State (Question 3729) Mr. Ewing said, "A Valuer-General could not apply any other principles of valuation than those at present applied, as they are those which have been definitely laid down by the Courts for valuations of land."

35. This evidence is somewhat. qualified by the Commissioner's statement in his recent communication to the. Honorable the Tre::tsurer (see paragraph 28 of this Report), viz., that the reason for his recommendation to the Knibbs Commission that the rate of capitalization of the difference between the economic and reserved rent should be on the basis of 8 per cent. tables of calculation instead of 4! per cent .. tables was that he "considered the consequential reductio:1 in the values of lessees' estates might thus provide more or less adequately for many factors in the valuation of Crown leases on the freehold basis, which might not, or could not, readily be taken into consideration in the method which had been followed in arriving at the probable selling price of the fee-simple of the lands." Mr. Ewing's evidence on this point is recorded in Minutes of Evidence (Question 3818, page 219), and on page 37 of that Commission's

Report.

36. Other Departmental Evidence.-The following extracts from the evidence of other departmental witnesses before the Knibbs Commission will indicate the· strong support they gave to the departmental method of valuation, the principles of which are embodied in G.O. 816.

37. Mr. A. F. Twine (then assistant Federal Commissioner of Taxation):-In view of the fact of your close association with the valuing branch of the Taxation Department, does the system now adopted commend itself in its entirety to you, as one experienced in valuing, so far as New South Wales is concerned ?-Yes.

In connexion with the disabilities for which allowances are made in order tq estimate the freehold value of lands somewhat remote from lands the. value of which is known, do you feel that on the whole, the method is sufficiently iiberal in its allowances, and that, on the whole, it gives a close approximation of what would be considered the true value ?-I think it does.

' Would you say that you had a reasanable opportunity of judging that matter from your eonnexion with the Department ?-My opinion has to be qualified, for this reason, that I have not inspected the leasehold areas. So that you estimated from general considerations ?-Yes. (Questions 3667, 3668, 3669, and 3670.)

38. Mr. H. V. Franklin, Staff Valuer, Federal Taxation Office, Queensland:-Are you satisfied with the general instructions given in that order ?-I am satisfied with the general principles. I think they are the most equitable we can get under the Act as it stands. ·

When you say that they are "the most equitable we can get under the Act as it stands," there appears to be a sortofimplication in your answer that the order is not absolutely perfect ?-I valued under a different system altogether before I came to value under the Act. I had to find an average basis. For many years, in valuing fol' the State, I valued on a different basis to the one we are following now.

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Whi<;h do you think is the better system 1-The present. It is more scientific. Apartfrom any restrictions or limitations imposed by the Act, if you were going to embark on a valuation would you prefer to go on your own or on the principles you have laid down at the present time. Which

would give the .fairest result 1-I think you get a more perfect result under the present system. It is more scientific than the system under which I valued before. Are you quite satisfied with the method laid down in Order 816 ?-Yes, so far as the principle of the thing goes. That order is largely the result of various conferences we have had. There are certain little alterations that should

be made ina State like Queensland, as compared with Victoria Qr New South Wales, where they have many more freeholds than we have. (Questions 2825, 2826, 2827, 2828 and 2831.)

39. Mr. R. P. Cowen (temporary Valuer in the service of the Federal Government):­ Can you suggest any improvement on the present method of valuation 1-No, I have heard many discussions . o,n.it, but I do not know any method which is more equitable than the present one. (Question 3192.)

40. Mr. W. J. Lambert (at present Senior Valuer for Victoria), of the Federal Taxation Department, whose experience in valuing country lands was gained in Western Australia over a period extending from 1907 to 1920, and whose experience in respect of Crown .leaseholds was from 1915 to 1920, before us was asked, "Do you think that Order 816 contains all the necessary Mr. Lambert's reply was, "Yes, I cannot think of any that are omitted." (Page 286.)

41. It is not easy to follow the workings of the official mind on the subject of valuation of Crown lands held under pastoral leases. . ·

42. It would appear that in the first instance the Department determined upon what was considered as the proper method of valuation (see paragraph 14). This method was with increasing experience of the practical work of valuation, and in the light of several Court judgments gradually elaborated and embodied in the rules which constitute G.O. 816.

43. Assessment made on different bases.--Assessments in respect of lessees' estates in Crown lands seem to have been made upon-( a) the basis of one or 'other of the methods of valuation set out in the statement which constitutes Appendix 2 of this Report ;

(b) the basis of taxpayers' own valuations ; (c) the basis at first laid down by the Department (paragraph 14); and (d) the basis prescribed under G.O. 816 which apparently first took definite shape in 1917.

44. Departmental Disabilities.-There is little doubt that the work of the Department has suffered in continuity and effectiveness in respect both of valuation and assessment as they relate to Crown leases by-(a) the non collection of outstanding tax under the instructions of the then Treasurer

in March, 1918 ; (b) the subsequent appointment of the Royal Commission on Crown Leaseholds; (c) the failure to give effect to the recommendation of that Commission with respect of the altered capitalization rate after the announcement of its acceptance by

the Government ; (d) the absence of any clear indication of Government policy up till the decision of Parliament, in August, 1923, that the tax should be collected.

45. Official comments indicate confusion.--The confused condition of things is indicated by the following official comments on the position :-1. Mr. Franklin (Staff Valuer, Queensland), when before the Knibbs Commission in May, 1919, said, in answer to the question by Mr. Allan- ·

To make valuations of Crown leaseholds, do you act on General Order 816 ?-Not invariably. We had started making valuations before Order 816 was issued. We generally followed the principles of the Order, which was the outcome of the Melbourne Conference, of which I was a member. General Order 816 was not issued until the 15th June, 1917. I have not made any

valuations myself for three years, except an odd check one when I have gone out specially to make it. In reply to Mr. Benjamin, who asked-" Have any valuations been made in compliance with Order 816 since 15th June, 1917 ?" the same witness said-Yes. We have practically

amended all our valuations in accordance with that order, or as many possible. In some instances it has been impossible to do so yet because of the fact that we have been unable to get the value of the improvements. When we knew the Royal Commission was coming along we shut down on this work. (Questions3140 and 3141.) 2. The Commissioner, in his Fifth Annual Report (year 1914-15), spoke of nssessments

having been made on the basis then laid down by the Department (see paragraph 14 iOf this Report).

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3. In 1919 the Commissioner told the Knibbs Commission that the judgment of the Court of Australia in the Curnamona case was "of course being

applied to the partiCular assessment that was before the Court, but it will not be applied in any other assessment except by direction of the High Court. In my opinion, the judgment is entirely at variance with the principles expressed in all valuation judgments by the High Court." (QutJstion 3852.) · 4. The Commissioner stated to. us that subsequent to the presentation .of the Report

of the Knibbs Commission---'" the work of valuation proceeded somewhat intermittently." _ _ · ·

5. In his communication to the Honorable the Treasurer in June last the Commissioner stated that in November, 1920, he introduced an additional basis of valuation ; that in February, 1921, Deputy Commissioners were instructed to apply that method of valuation to the classes of land referred to; that experience of its working indicated from time to time the necessity for of it; and

that no revaluations of the fee-simple values of Crown leaseholds were undertaken by the Department during the period of suspension of payment of the tax, because it was not known what decision would come

to in regard to the continuance or discontinuance of the tax on these properties. . ·

6. Mr. Ewing further explained that after Parliament decided in August, 1923, that the tax should be collected he directed • Deputy _Commissioners to review valuation of Crown leases on the basis of the capitalization of average net returns at 8 per cent. simple interest; and that in May, 1924, he decided to capitalize average net returns on a 10 per cent. basis instead of 8 per cent., and that that substitution was suggested only to try to provide in some way for the unknown contingencies affecting the leasehold ·landsJ which could n9t be adequately measured by the comparative system of valuation formerly adopted.

These unknown contingencies are, however, fully in the average net returns from the properties over a period of years. ·

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46. Definite information sought.-In order that the position might be clarified we sought the following information from the Commissioner:- · ·

1. Were all original assessments made on owner's valuations 1 2. Were any assessments made by the Commissioner in respect of any leases returned by owner as being non-taxable 1 3. In respect of what years w-as tax collected and

( a) Owners' valuations. (b) Default assessments. (o) Departmental check valuations.

4. Upon what date was collection of tax· suspended? Was suspension general th:roughoutAustralia, and has suspension of collection been continuous .. 1 5. Have default or other assessments been issued to protect the Department up to termination of Act 1 6. :S:as a general intimation of suspension of collection been made to all taxpayers and that payment need not

be made for the present 1 7. What are the circumstances in respect of holding back appeal cases or case at the instance o£-(a) the Department; (b) any taxpayer.

8. To what extent and for what period Departmental check valuations have been made ?

. 47. The information contained in the officiaLreply (see Appendix Ill.} discloses that owners' valuations as furnished in a large number. of returns in respect of lessees' estates in Crown lands reveal a taxable interest either in individual leases or in aggregation With · other leasehold or freehold lands; and further, that considerable amounts have been paid in tax on lessees' estates in Crown lands both when these estates have been assessed on owners' valuations and when assessed on departmental check valuations. ·

48. Conclusion drawn from the facts disclosed.-AlloWing full margin for those cases in which lessees have accepted departmental valuations Without questi(;m, or in which lessees have paid tax under protest or have felt aggrieved at what they considered excessive assessment, the fact that in so many instances lessees' own valuations have disclosed a taxable interest, and that appeals agains-t assessment either have not been lodged or have not been pressed to a final issue, affords strong ground for the assumption that the Crown has not, in the majority of cases, exacted

the full economic rent for the leased lands (though the contrary assumption has been strongly urged), and that the departmental estimates of the unimproved value of land held under lease from tl.le Crown have not always been excessive. The facts afford at least prima facie evidence that t'n.;:- departmental methods of valuation of leasehold lands upon the basis laid down by the are 1 t fundamentally unsound.

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REASONS FOR ADOPTION OF METHOD OF CAPITALIZATION OF AVERAGE NET RETURNS.

49. In response to a request by us the Commissioner presented in evidence a written statement setting out the reasons which led him to ascertain the unimproved value on a freehold basis of pastoral lands leased from the Crown by ascertaining an average net return from the land and capitalizing it at 10 per cent. simple interest.

In this statement Mr. Ewing said :-" The principal reasons which led to the adoption of the a hove-mentioned method of ascertaining the unimproved value of pastoral land leased from the Crown were:-1. A conviCtiOn that the methods previously adopted by the Departmental Valuers in New South

Wales, Queen,sland and South Australia were generally ineffective for making due allowances for all kinds of differences whiCh might exist between an "outback" leasehold property which was being valued and the freehold properties which had been the subject of sale and from which standards of unimproved value had been deduced for application to the lands being valued.

· 2. That there was an· absence of sales of comparable freehold lands-( a) in Queensland after 1914; and (b) in South Australia for all years from 1910 onwards. Note.-There have been sales of freehold lands in New South Wales from which it would be possible to deduce unimproved values which, when suitably modified, might be used as standards valuing those leasehold lands which are situated principally about midway between the Eastern and Western Land Divisions of the State.· This result, however, necessarily postulates a satisfactory measurement of disadvantages of the leasehold lands compared with the standard freehold lands.

3. The differences between the methods followed in South Australia and those followed in New South Wales, Queensland, and Western Australia. · 4. The fact than an average of net returns ascertained for a property, assuming average efficient management, reflects all the advantages and disadvantages associated with the property. The unabbreviated statement appears as Appendix JV. 50. Comments on Commissioner's reasons.-The .first reason, viz., that the methods previously adopted in three States were generally ineffective for making due allowances for differences between an outback leasehold property and the sold basic properties, is amplified later in the statement when the opinion is expressed that district valuers had not adequately measured disadvantages especially of outback pastoral properties, either through over-sight of essential

points, or on account of the insurmountable difficulties associated with the problem. The opinion is further expressed that the nature of the difficulties was the principal cause of the apparent ineffective measurement 0of the disadvantages. These conclusions were, it is pointed out, the outcome of conferences during the past three or four years with senior and district valuers in the States mentioned

51. The evidence submitted to us by the departmental witnesses has not made clear the precise reasons which led to the doubts now expressed as to the effectiveness of the Department's former methods of valuation. As has already been shown, exactly the contrary conviction was strongly held and vigorously defended. The question naturally arises, what is held to constitute

ineffectiveness in this connexion? Is the fact that the unimproved fee-simple land values as determined by the Department have greatly exceeded in many cases those arrived at by taxpayers regarded as conclusive evidence of ineffectiveness of method? Have the number of objections lodged against assessments led to the conclusion that departmental valuations are excessive, and that therefore the basis of these valuations must be fundamentally unsound, or has there been any unconscious preference for the new method because it seems to promise on the whole lower valuations? ·

52. No evidence has been submitted that would justify the substitution of the proposed new method for either the basis laid down in G.O. 816 or the direct method as applied by the Supreme Court of South Australia in the Curnamona judgment. The proposed new method is, in our opinion, neither scientific nor equitable, and does not conform as closely as do either of the

other methods to the basis laid down by the Act. Moreover there is reason to believe that in some measure such method will rest upon data which, being confidential, could not be used before a Court of Appeal. 53. A growing dissatisfaction with, and a decreasing confidence in the thoroughness of the

Department's methods of valuation or in the application by valuers in individual cases of essential principles ]aid down in G.O. 816, may have had some justification not sufficiently demonstrated to us ; but whether this is so or not there has been, in our opinion, an excessive desire to provide by rule for every contingency that may arise in the process of valuation, and an over-anxiety to ensure strict uniformity in practice.

54. This possibly has had the effect of crippling initiative and preventing a sufficiently free exercise of independent judgment on the part of valuers. It is unreasonable to expect that rules for valuing can be drafted with such extraordinary fulness and foresight as to anticipate and adequately provide for every circumstance that may arise in the inspection of a property or an examination into the net income derived therefrom over a number of years.

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55. The valuer's problem involves more than the mere mechanical observance of more or less rigid rules however skilfully framed. He must rely to some extent upon his own experience, draw his own inferences and form independent judgments in respect not only of the land itself and the management of the business, but also as to the relevancy or otherwise of many facts elicited in the course of his investigation. The rules formulated for the guidance of valuers should

be clear as to principle, and while full enough to require a high standard in the often difficult task of valuation should permit of the exercise and expression of the valuer's considered views on many points, concerning which his special training and experience may peculiarly fit him to form a reliable judgment.

56. In this connexion the following comment by the Privy Council, in Secretary of State for Foreign Affairs v. Charlesworth, Pilling & Co., is. pertinent:-It is qmte true that in all valuations, judicial or other, there must be room for inferences and inclinations ofopinion whwh, being more or less conjectural, are difficultto reduce to exact reasoning or to explain to others.

Everyone who has gone through the process is aware of this lack of demonstrative proof in his own mind, and knows that every expert witness called before him has had his own set of conjectures, of more or less weight according to his experience and personal sagacity. In such an inqmry as the present, relating to subjects abounding with uncertainties and on which there is little experience, there is more than ordinary room for such guess work; and it would be very

unfair to require an exact expositwn of reasons for the conclusions arrived at.

57. G.O. 816 is not the final word in valuation; it has been added to from time to time, and is capable of further expansion, but after a careful study of its various provisions we are of opinion that on the whole the compilation is a painstaking effort to lay down a sound and intelligent method of valuation of land for taxation purposes. It evinces an evident desire to interpret correctly the requirements of the Land Tax Assessment Act.

58. The second reason.-With regard to the second reason given for the change of method viz., the absence of sales of comparable freehold lands-(a) in Queensland after 1914 ; and (b) in South Australia from 1910, it might be naturally supposed that in order to appropriately meet the position indicated the Department would have adopted the direct method applied by the Supreme Court of South Australia in the Curnamona case, at least till an opportunity was taken of testing its soundness

by an appeal to the High Court. 59. It is, in our opinion, a matter of regret that by over-sight the for appeal in this case was lost-and that subsequent circumstances, referred J:,o by the Commissioner (paragraph 21), have not favoured a reference on the issue in question to the final authority, the High Court.

60. Tlu- third reason advanced in favour of the proposed method viz., the differences between the methods followed. in South Australia and those followed in New South Wales, Queensland, and West Australia, is not very convincing. The differences in the varying methods referred to lie more in detail than in principle and were not greater than mightreasonably have been expected in the iuitiation of the laborious and difficult task imposed upon the Department by the Act. These methods have not been successfully challenged in the Court except in the one instance, and the circumstances in that ease would not apply generally. In addition, while numerous objections have been lodged against assessments based upon these methods, and many have not yet been dealt with, a considerable number of differences between taxpayers and the

Department have been settled and the resultant tax collected. 61. The jmtrth reason advanced for change of method is ''the fact that an average of net returns ascertained for a property, assuming efficient management, reflects all the advantages and disadvantages associated with the property." Separated from their context these words of the Commissioner of Taxation are noteworthy and indicate an approximation of view to that expressed by Isaacs and Gavan Duffy, JJ., in Fisher's case in the following extract from the Judgment:-

When ascertaining the unimproved value of a station property such as this, which has been for yearscan improved and working concern, the practical, and really the only way, at least in the majority of instances, is to find first of all, from its present condition and its history, its fair·carrying capacity, of course taking into consideration among its characteristics all existing improvements. That is what any practical man desirous of would do. Having got the carrying capacity as a basis--so many sheep or cattle to so many acres-the prospective buyer has fixed the . intrinsic character of the station itself as a money-making machine. But before he can say what price he is willing to

give for it, the extrinsic circumstances have to be examined and appraised-as the situation of the property relatively to markets, aU taxation, the state of trade, current prices, further and so on. .so the prospective buyer arrives at a price for the improved property as it stands. Then this has to be reduced to urumproved value. All you have to do is to make an allowance by way of deduction for the absence of internal characteristics of improvements. Imagine they are non-existent, but displace nothing else. •

62. This passage from the Judgment of the Full High Court was quoted with approval by Murray, O.J., and the principles enunciated were applied by him in the Curnamona case. But the Commissioner's words have to be interpreted in their relation to the average of average net returns method, which he proposes to adopt. As this method forms the. subject of criticisrp.

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later in our Report, nothing further need be said at this stage except that under that method the basis of valuation is not the capitalization of the average ascertained net returns (in the ordinary acceptations of the term) of the individual subject property but the capita1ization of an assumed average return based upon the average net returns of a number of properties. Hence the fact alleged in the fourth reason cannot rightly be advanced as an argument in support of a

method which ignores the basis upon which the alleged fact apparently rests. 63. There does not seem to us to be in the Commissioner's various statements upon the subject a clear line of demarcation between the additional basis of valuation introduced by him in November, 1920, viz., "the capitalization of net returns of the subject lands at the percentages

which the average net returns from the sold lands bore to the capital in the sold lands," and the method set out in his order of 29th October, 1923, which indicates the manner of arriving at the average of average net returns which are to be regarded as representing the average net return which an average lessee might reasonably be expected to derive from his land per unit of stock carried." We have assumed in the review in the immediately preceding paragraphs of the statement of reasons and directions to Deputy Commissioners that the newly adopted method of the Commis­

sioner is the one that has come to be known more explicitly as the average of average net returns method. This method is examined in some detail in paragraphs 153 to 168 of this Report.

THE PASTORAUSTS' VIEWS.

64. As our investigation has been directed to the determination of the method which should be adopted for determining, upon the basis laid down by the Act, the unimproved value of the land held under lease from the Crown, we sought to inform our minds fully as to the views of those immediately concerned. As will be seen, however, we did not receive much help in the present inquiry from the pastoralists or their representatives in

the direction of the submission by them of any constructive scheme for the solution of the problem set by the terms of our reference. The evidence tendered us on behalf of pastoralists was chiefly of either a destructive or negative character. In this respect it differed from a good deal of the evidence submitted to the previous Commissions which dealt with the subject of the

taxation of Crown leaseholds. 65. In the present instance where the adoption was urged of any procedure which modified or differed in entirety from that of the Department, it was made clear that any such variation in practice was approved only for application in assessments up to the date of the

suspension of the collection of the tax in 1918, from which date it was submitted the section of the act relating to Crown leaseholds should be repealed. 66. The Graziers' 1918 Resolution.-When appearing before us Mr. Murray Clapham, acting chairman of the Committee of the Graziers' Federal Council, handed to us a resolution presented

on 8th April, 1918, to the Honorable W. A. Watt (then Treasurer) by representatives of Crown leaseholds. The resolution reads :-That, as representatives of New South Wales, Queensland, South Australia and Victoria, we unanimously affirm that the unimproved value of a Crown leasehold should be taken to mean the capital sum that the unexpired term of

such Crown leasehold may be expected to realize if ofiered 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, and made or acquired by the owner or his predecessor in title, had not been made. 67. By courtesy of the Department of the Treasury, we were furnished with a copy of an

official memorandum dated the 8th April, 1918, setting out the substance of what was said at the interview with the Treasurer. It was stated at that interview inter alia that the views of the deputation were endorsed by the whole pastoral industry throughout Australia ; that the contention of the pastoralists was that the value of a leasehold estate for purposes of taxation

should be taken at its fair selling value in the open market ; that any departure from that simple rule only led to absurdity in results ; and that the. Commissioner of Taxation was obliged by law to work along an impossible line because he is required to ascertain a freehold selling value for land which never can be freehold.

68. It was admitted that in some cases in New South Wales in which leasehold lands are adjacent to freehold lands it is possible to calculate the probable selling value of the land, assuming the land were freehold, because the lands are to an extent comparable. It was considered the position was entirely different in the case of lands far removed from freehold

lands, and situated in districts which can never become freehold. It was thought impossible for either a practical pastoralist or the Taxation Department to ascertain a freehold selling value for such lands. Instances were cited of several leasehold estates which had been sold for amounts very much below the departmental assessment of the leasehold estates, and it was argued that

any basis of calculation which will produce results entirely foreign to market values must of necessity be wrong. · 69. The Pastoralists' Representations before the Knibbs Commission.-The Royal Commission on Taxation of Leasehold Estates in Crown Lands presented its Report in 1919.

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The printed volume of Minutes of Evidence given before that Commission includes as exhibits A and H a statement of the case for owners of Crown leases prepared and submitted by Mr. WiUiam Benjamin, who appeared as the representative of the legislative committee of the Pastoralists' Associations, and a letter received by the Chairman of the Commission from the Honorable James Ashton, M.L.C .

. 70. With the representations in these communications in respect of the incidence of the tax, involving, as that issue does, questions of policy, we are not in the present inquiry concerned.

71. On the question, however, as to whether such tax has been arranged upon an equitable basis, certain aspects of the problem of valuation were discussed which it is of interest and importance to note. Mr. Benjamin's contentions in this regard were briefly 1. That the difficulties in arriving at the freehold value of large areas in outlying dry

districts are almost insuperable. 2. That due regard has not been made by the Department to all the factors and matters that should be taken into account in arriving at the freehold value of leased lands. 72. Mr. Ashton submitted ;-

1. That a tax on a lessee's interest on a Crown leasehold would be justified only where it formed part of a system for the taxation of wealth generally. 2. That if it be taxable, the only conceivably reasonable basis upon which to levy the tax is exchangeable value; that, after considering this question for several

years, he felt eonvinced that there. is no satisfactory solution of the difficulty except by taxing leaseholds upon their market values just as freeholds are taxed on their market value. 73. Mr. Benjamin tendered a further to the Commission in reply to the inquiry whether there are any means of arriving at the freehold value of Crown leased lands, in the course of which he said :-

The basis from which I have worked is the law with regard to values as set out in the Federal Land Tax Assessment Act 1910-16, and the decisions on that law by the various courts that 4ave dealt with questions of values in cases before them. Human nature being varied, values are largely a matter of opinion, and that being the case, it at once becomes apparent that the question is one of great difficulty, and the possibility of arriving at anything like perfection is remote,

but it does not follow that an attempt to arrive at a workable basis is altogether hoJ:leless. . . . . . . . . It will be seen that the first thing to do in ascertaining the value of land (whether actually freehold or presumed to be freehold) used for pastoral purposes is to find from the present and past history of the property what as an average is its safe carrying capacity of stock to the acre. But for practical purposes some standard of value is required as a starting point from which to then proceed. In the case of Macdonald v. Deputy Commissioner of New South Wales

(20 C.L.R., p. 231) on appeal by the Commissioner from the decision of Mr. Justice Ferguson, of the Supreme Court of New Sou,th Wales, the High Court held tha!, in ascertaining the improved value o_f pastoral land, the value of land which; situated as \]leland in question (Mungi Bundi) is, would carry one sheep tp the acre may properly be taken as the standard value. The rate adopted by Mr. Justice Ferguson for Mungi Bundi, near Moree (carrying one sheep to the acre), as the standard value (of such land) was £3 5s. per acre.

The proposition of ascertaining the freehold improved value of any pastoral land seems, therefore, to resolve itself into the following proposition :'-1. Ascertain the " carrying capacity" of the land. 2. If the carrying capacity is less or more than one sheep to the acre, assuming for the time that the property

under consideration is similar in every way to the standard property, then the standard' value of 65s. per acre for sheep to the acre country must be decreased or increased in accordance with same. 3. The value thus arrived at must now be further decreased or increased according to the variation of the property under consideration from the property used as the standard. 4. In this connexion the comparison should be made as to the variation in'--

(a) Situation with regard to natural advantages, such as river frontages, &c. (b) Situation with regard to distance from market, &c. (c) Situation with regard to removing stock in time of drought. (d) Rainfall. (e) Liability to drought, fire, and flood. (j) Character of the soil and feed thereon.

(g) Size of property to be held for profitable use. (h) Number and character of improvements to be maintained. (i) Taxation if the property is aggregated with other lands. (j) Existence of noxious vermin and weeds, and the necessity of keeping them under subjection. (k) Obtaining and maintaining a water supply. . .

(l) Cost of materials for improvements and other goods that may be required. (m) The difficulty in obtaining a suitable supply of competent labour. (n) Area to be worked to provide the pasture for sheep. (o) Working expenses and other outgoings. ·

(p) The risks to which the capital invested in the business is subject, and the returns to be expected on the capital. (q) The competition among buyers for large areas as against smaller ones.

991

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Having had regard to all the above-mentioned factors and such other as w,ill, no doubt, occur to a practical man the improved value can be fixed, and from that value can then be deducted the value of the improvements: the ascertamment of which does not present very great difficulty. The resulting sum will be the" unimproved value." .· It may be said that it is all very well to point out the factors to be taken into consideration, arriving first at the

improved value, but how is anyone to make due allowance for such factors. Values of land are in every case entirely a of opinion, and a practical man, buying land either with a fre ehold or leasehold tenure, can always say what Is prepared to pay, and while he may not consciously value each factor bearing on the property he is buying, he

still does so unconsciously. I have myself neither the practical knowledge or experience to enable me to point out how much should be allowed for each variation of the standard, but I feel sure that while it appears an extremely difficult matter, there are men who have the necessary knowledge and experience to express an opinion, not alone upon the factors that should be taken into consideration, but upon the value that should be assigned to each of them.

. Every practical man in considering the exact value as freehold to be attributed to any land, will have in his mmd as a standard (not necessarily the standard pointed out herein) some property with which he is well acquainted. It will be seen, therefore, that to apply the theoretical basis outlined herein would result in so many varying standards being adopted that, as a matter of practical business, it is evident that the arrival at the freehold value of leased land is almost an impossibility. (Question 427.)

74. In his closing address to the Commission in June, 1919, Mr. Benjamin remarked:-If Parliament in its wisdom, insists that Crown leaseholds be taxed, I contend that, on the very strong evidence before the commission, the tax should be based on the " Selling Value " of the lease. To do so would be to bring the taxation of leaseholds into conformity with the scheme of valuation under the law, which is based, and rightly so, on

what a willing buyer would under reasonable terms and conditions give a willing, but not too anxious, seller. . • . . As to the ascertainment of the value of the leased land as if it were in fact freehold, I submitted to the Commission what, in my opinion, the law requires to be considered by the valuers when arriving at the freehold value of pastoral land. The taxation officers have stated that they are in entire accord with the proposition put by me. But, however

true and perfect the method and law may be theoretically, the evidence before the commission shows, I submit, that it is utterly impossible for any human being to accurately apply the factors to be regarded when actually making a valuation. Many of them cannot be measured monetarily ; they partake more of a mental measurement of value, which can only be the result of long experience.

It is submitted that the Department's instructions to valuers should be enlarged with more detailed statements of the factors to be considered when making valuations, that more close and careful study be made of all the factors by the valuers, and that a more generous view be taken in making allowance for them than the evidence has shown has so far been done. The importance of arriving at equitable freehold values for leased lands cannot be stressed too strongly

because the Commission is aware that if these values are wrong or inequitable, then the whole superstructure built upon it to ascertain the value of the Crown lessee's leasehold interest in the land must fall to the ground and give, as a consequence, an entirely erroneous result.

75. Mr. Ashton was asked in the course of his examination, "Admitting that some particular leasehold has a goodwill value, what do you think would be a suitable method of determining a nominal freehold value corresponding thereto 1" Mr. Ashton's reply was:-1 do not know of any in the case of some leaseholds. Take land in the extraordinary wastes of country in the Western Division of New South Wales, Queensland, the Northern Territory, South Australia and Western Australia. I say it is absolutely beyond the wit of man to put a freehold value on millions and million,s of acres in that country.

(Question 1732.)

76. Later, Mr. Ashton expressed the opinion that:-There has never been a freehold value in the Northern Territory or far out in the western districts of Queensland, or far out in the west of New South Wales, and the nearest freehold values to them might just as well be in another country so as r(lflecting their values are concerned. (Question 1736).

COMMENTS BY THE KNIBBS COMMISSION.

77. The 1919 Commission in the course of its Report made the following comments on the evidence:-It was alleged that in the outback country at least rent reserved to the Crown is, relevant

circumstances are taken into account, really the full economic rental. Hence of valuatiOn whiCh gave a freehold value higher than that deduced from such rental was deemed by them to be mvalid. . A large number of witnesses affirmed that it was impossible to attribute a freehold value to leasehold lands for the reason, among others-(a) that there were no sales of comparable freehold lands similarly. or identically

and conditioned as to tenure, characteristics, and usage; and (b) that a large portwn of the Austrahan States no person, having due regard to the salient facts, would think of as freeholds pastoral

The evidence showed that some taxpayers had at least no senous obJectwn to the taxatiOn of leaseholds, If the leaseholds were not aggregated with freeholds (see Q. Evidence: Mr. !· M. Niall). that they

recognized that the imposition of a tax on the lessees would net mvolve hardship If mterest was

appropriately ascertained (see also Q. 856). Mr. L. A. Addison, a property salesman, South Austraha (see Q. 959), states that he thinks" pastoralists as a whole recognise that they should pay a tax; and a manager of a large pastoral company (Mr. Rymill, Q. 1012) held the opinion " . that there would no hardship " provided

values were equitably fixed, Mr. W. J. Young, the General Managerof the Pastoral Company, while objecting to taxation bot.h on fre.eholds and states that does '· leaseholds and freehold:s

are in a totally different category m respect of the pnn01ple progressive taxatwn, and Mr. \I_ICkery (Q: 246?A). an opinion to the same effect, viz., that while " land taxatwn both freehold and leasehold lS wrong myrmCiple, if the imposition of the tax is to continue, as inevitable, should a fai.rproport.lon of the tax."

It is worthy also of note that Mr. G. R. Lmton (Inspector of Statwns for the ScottiSh Australian Investment Company lQ. 3276), considers that "freeholders are treated worse than leaseholders." ·; 0

;'i

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COMMENTS BY THE ROYAL COMMiSSION ON TAXATION.

78. The following comments on the evidence on the taxation of lessees; estates in Crown leaseholds are made in the Commission's Fourth Report (Land Taxation), dated 3rd March, 1922. It was argued on behalf of Crown leasholders that, even after making all allowances for such matters as distance from market, defective means of transit, difficulty or excessive cost of removing stock in time of drought, extra cost of management owing to low carrying capacity of the country, diminution in value of stock due to comparative unsuitability of the land, &c., it is practically impossible to determine freehold value, upon which rests the computation of the taxable interest in a leasehold. Indeed, some witnesses go so far as to say that Crown leaseholds, apart from the live stock and improvements (if any) upon them, h3:ve no definite value at all. This contention appears to have arisen largely out of the practice followed in sales of pastoral leaseholds. Such sales are very commonly upon the

" walk-in-walk-out " basis, the' price being frequently expressed in a lump sum or in terms of the unit of sheep or cattle upon the holding, the improvements and the value of the lease being included in the lump sum or price per head. Another reason leadmg some pastoralists to regard the idea of freehold value as inappliQable to leasehold areas, particularly the more remote areas, is that much of the grazing Country held under lease from the Crown would remain unoccupied if occupation were permissible only on terms of purchase.

EVIDENCE BEFORE THIS COMMISSION.

. 79. Mr. C. W. Reid, General Manager of the Beltana Pastoral Company Ltd., of South Australia, in the course of his evidence said :- ·

In regard to the unimproved value of leaseholds, unimproved country in the far north has practically no value. If by any stretch of imagination, a normal unimproved value could be attributed to such country, I can see no method of arriving at it.

Mr. Reid was not acquainted with the method of the Taxation Department in valuing pastoral lands, and was not in a position to make any comparison between the departmental practice in this regard and his own. 80. Mr. Murray Clapham, Acting Chairman of the Committee of the Graziers' Federal Council, brought under our notice the following resolution which was passed at the Annual Conference of the New South Wales Graziers Association in May, 1923:-

That this Conference is strongly of opinion that the imposition of the Federal Land Tax upon Leasehold Estates in Crown Lands is unjustifiable, and,further, that any attempt to enforce the collection of arrears of such taxation would have a d,isastrous effect upon the pastoral industry. For the foregoing reasons this Conference desires to urge the Commonwealth Government to immediately amend the Federal Land Tax Act in such a way as to exempt Leasehold Estates in Crown Lands from its operation, and also to make such exemption retrospective.

Mr. Clapham further stated that his committee claims that the taxation on Crown lease­ holds should be abolished for the reason that it is impossible of assessment. 81. It will be seen that Mr. Clapham in his advocacy of the abolition of the tax ab initio went further than Mr. Eastwood, who advocated the repeal of the Act so far as it relates to Crown leaseholds as from the date of the suspension of the tax.

82. Mr. Clapham reiterated his disagreement with Mr. Benjamin's advocacy (before Knibbs Commission) of the adoption of "selling values" of leases as a basis of taxation if there must be taxation on Crown leaseholds. · . 83. On the question of the incidence of resumption, Mr. Clapham referred to. the com-pulsory resumption by the Crown of the Burnett lands in Queensland, and the restriction under the Act by which the maximum amount. of compensation payable to the dispossessed Crown tenants was 4s. per beast of carrying capacity per annum for the unexpired portion of the lease, and stated he knew leaseholders who suffered a very serious loss by that compulsory resumption.

84. With respect to recent notification by the Queensland Government of intention to resume certain other leases, though so far the resumptions have not been proceeded with, Mr. Clapham thought the fact that the embargo stands on these leases has a depressing effect on their value, and causes uncertainty and anxiety in the minds of lessees.

85. In the case of a lease in which the Crown has the explicit right of resumption of part at varying dates, Mr. Clapham expressed the opinion. that the proper course would be for the Department to reflect the liability to resumption in. the original assessment. . 86. Mr. Clapham considered that with the liability of leaseholders to re-appraisement of rentals assessment for taxation -is impossible; and that, speaking generally, in Queensland the

full rental is being paid for Crown leaseholds. · · 87 .. With regard to valuation of pastoral leasehold properties, Mr. Clapham stated that his company was accustomed to leave their valuers. unfettered in practical affairs and did not supply . them with valuation forms. .

88. Mr. Edmund Jowett, grazier, expressed the view that "owing to the uncertainties attached· to Crown leases, there is no possibility of obtaining any reasonable accuracy in assessments. It must, therefore, be capricious in its . incidence, and harsh and unjust in its Mr. Jowett further contended that "it· has been more than ever demonstrated

that it is impossible to arrive with any degree of accuracy at an estimate of the freehold value

of a One may say, here is a piece of freehold land, and here is a Crown lease.

They are by they may be the same, or the difference, if any, may be allowed for;

but that pomt of VIew fails to take into consideration the essential differences between a Crown and a freehold. Those differences have become very much more marked and apparent

the last few They arise from what may be termed the three R's, namely, the

of the re_visiOn or re-appraisement of rents, the of resumptions, and the

questiOn of value of improvements." (Page 1148.)

89. In IllustratiOn of his contention Mr. Jowett cited a case in which the rent was reduced from 20s. 6d. to lls. 9d. and added- ' . . I do not wish to infer that the valuers adopted incorrect methods of valuing the lease, because I think that they adopted the only they could adopt under the Act. I do not say one word against their methods, although they valued a place whiCh was not worth anything at all at £6,300. Then in 1923 the rent of my Drummondslope lease was reduced to lis. 9d. I have before me a copy of the report of the Knibbs Commission, showing the valuation by the Federal Taxation Department of the unimproved value of Drummondslope at £14,720. That was because they considered that the Queensland Government had not charged me enough rent. The unimproved value must have some meaning. The Department charged my interest at £4,579, so that they assumed that the Crown had not charged me enough rent when they charged me 20s. 6d. (Page 1150.) 90. In reply to the question," Do you think it is impossible to arrive at the unimproved value of a piece of land, irrespective of the question as to whether it is leasehold or freehold ? " Mr: Jowett replied, "No, I do not think it is," but he did not think it possible to arrive at the value of a block of land by comparison with a freehold value because the tArms whiCh the lands are held are totally different. He regarded the three uncertainties­revlSlon of rents, resumption, and residual value of improvements-as impossible of measurement . . 91. Mr. J. S. Eastwood, in his representations o"n behalf of pastoralists, specially directed attentiOn to the evidence of, in all, twenty witnesses who appeared before the Knibbs Commission. The following extracts are taken from that evidence:-92. Mr. C. R. Murphy a holder of small freeholds in the western district of Victoria, said­I know of no reasonable or just method by which leaseholds in the dry districts can be valued as freeholds. (Q. 94.) 93. Mr. A. G. Rymill, manager of the Canowie Pastoral Company, was asked, " Do you think any Crown leases have what may be called a freehold value?" His reply was, "That is a difficult question to answer. There may be a freehold value there, Yes." He was also asked, "How would you arrive at a determination of the freehold value ? " anC!. replied, " I can only follow the Chief Justice's method as laid down by him in that tecent case about it [Curnamona. Case]." (Questions 999 and 1000.) · 94. Mr. Rymill was also asked," Are you perfectly satisfied with the principle laid down by the Chief Justice in that case for the determination of the value ? " He replied, "Yes, perfectly." (Question 1010.) 95. Later on Mr. Rymill, in his reply to the question, " Do you say that the selling value should be the basis of taxation ? " said-" Yes, that is correct. May I add it practically comes back to what the Chief Justice fixed as his method. In comparing his method, to we would expect to get from Curnamona, our own estimate is practically coincident." 96. Mr. W. G. Duncan, M.L.C., a South Australian pastoralist, expressed the view that " if leaseholds are to be subject to Federal Land Tax, which I submit they should not (if the pastoral industry is to extend), to my mind the only possible way-and the way laid down in the Act-,-is to base that valuation on 'selling values.'. In the past the practice has been to guess at the freehold value (to do so accurately is an absolute impossibility), and from the guess calculate the lessee's interest." (Question 1066.) 97. Mr. W. J. Young, General Manager for the Australian Pastoral Company, in the course of his evidence said he did not know the process of ascertaining the freehold value of leasehold land. He had' no process, and had never come across a person who had .. He not think it possible to arrive at the unimproved value of leasehold land by the nea.rest freehold lands as a basis, as there were so many factors to be taken mto consideratiOn. (QuestiOns 1860 and 1861.) . He did not offer any suggestion as a substitute to the departmental rr;ethod of valuatiOn, adding, " I do not want to make any proposition by means of which might put a tax upon my land, because I do not think it wquld be right. . . . . I do not thmk there should be any tax on land of any description whatever. I object just as strongly to a tax on freehold as I do to a tax on leasehold." (Questions 1865 and 1873.) . __ 98. Mr. Young also expressed the opinion that undoubtedly carrymg capacity wo;Ud give an idea of the value of the land; and in answer to the questwn, "Could the TaxatiOn Commissioner arrive at a freehold value by the number of sheep that the property would in the year that be had to value? " Mr. Young said, "Yes; but it. becomes a ca:p1tal .tax; It. 1s not a land tax then; it ceases to be a land because you are taxmg a man on his capital. You are taxing a man for his fences, water, and the improvements he has made on the property. The unimproved value follows the improved value." (Questions 1879 and 1880.)

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99. Mr. Thomas Vincent thought it " absolutely impossible to fix an approximately correct unimproved value on Crown leases as he knew them. No man can estimate the various and constantly changing conditions. The advantages and disabilities can only be arrived at through profit and loss over a period." (Question 1949.) Asked if his argument was that there is no ·unimproved value in. a leasehold at all, Mr. Vincent said, " We cannot deny that there is some." (Question 1984.) •

100. Mr. Robert McDonald, land and financial agent, formerly Chief Surveyor for New South Wales, and Under Secretary for Lands, and at one time Western Lands Commissioner, was asked, "Do you think there is an ascertainable freehold value of land in the Western Division ?" His reply was, " Certainly there is a great deal of it, unless in the very bad Mallee country." (Question 2458.) Asked "How do you think the value of the freehold could be ascertained ?" Mr. McDonald said, "Freehold is exactly the same character of country as leasehold. There is no difference as regards the character of the land. It could not be appraised unless there were sales to guide one under the principle laid down in the Act, the capabilities of the country over a great period of years would have to be ascertained, the cost of improvements, management, and that sort of thing would have to be deducted."

101. Mr. Colin James McMaster, Chief Commissioner of Western Lands, New South Wales, was quite satisfied that it is impossible to arrive at the true unimproved value of the greater part of the lands the Western Division. (Question 2485.) 102. Mr. Eastwood quoted from the evidence of departmental witnesses before the Knibbs Commission in which the departmental system of arriving at the freehold unimproved value of land held under from the Crown was upheld, also from the findings of that Commission which expressed a majority decision that the departmental methods are in the main sound and with very little modification can be made to give satisfactory results. From this view, it was pointed out, one Commissioner dissented.

103. The evidence of departmental witnesses before the Knibbs Commission was contrasted by Mr. Eastwood with the departmental evidence submitted to us, and the Commissioner is quoted as having "frankly and fairly" admitted the defects in the previous departmental methods which had been stressed by pastoralists.

104. It was also claimed that in arriving at the unimproved value of the land for the purpose of calculating the lessees' interest three important matters have not been taken into account, viz. -1. Weight of land tax.

2. Magnitude. 3. Dislocation. 105. It was also asserted that the following factors in the determination of lessees' interests had not allowed for in any of the assessments, viz. :- ·

1. Resumptions. 2. Onerous conditions. 3. Reappraisements. 4. Depreciation on improvements not inuring to the b'enefit of the lessee at

termination of lease.

106. Mr. Eastwood criticized the proposed average of average net returns method emphasizing the difficulties that would attach to obtaining reliable information on account of the varying methods adopted by graziers in respect of live stock values and numbers at the beginning and end of each accounting period. He further pointed out the doubts expressed by the departmental valuers as to whether the proposed method would prove more economical than the former methods, and as to whether the 10 per cent. rate of capitalization can be equitably applied· to the whole of Australia. For these reasons, and for the reason that the Department would not be in a position to disclose to objecting taxpayers the information upon which a valuation rests, he condemned the scheme.

107. Mr. Eastwood claimed for the Crown tenants in Queensland that there is no taxable equity in the leases in that State.

108. 'Mr. Eastwood's representations closed with the statement that the lessees, after the most careful consideration, were unable to suggest any scheme whereby the unimproved value of the lessee's interest can be ascertained in accordance with the provisions of the Land Tax Act, and we were asked to find-

(a) That on the basis laid down by the Act it is impossible in the vast majority of cases to determine the value of a lessee's interest in Crown leaseholds ; (b) That the unimproved freehold value of a large area of Australia is unascertainable;

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(c) That the average of averages system advocated by the departmental witnesses is impracticable ; (d) That since the Federal Land Tax Act was amended to include Crown leaseholds the operation of the Land Act Amendment Act of 1920 (Queensland) has

removed all Crown leaseholds in Queensland from the taxable area ; and (e) That as 80 per cent. of the suspended tax is in respect of Queensland leaseholds and cannot be recovered, the section of the Act relating to Crown leaseholds be repealed as from the date of the suspension of the tax.

109. We do not regard the questions embraced in (a), (d), and (e) as coming within the scope of our inquiry.

110. When under examination, Mr. Eastwood was asked what was intended to be conveyed by the claim that it was impossible to arrive at the unimproved value of land leased from the Crown for the purpose of the Act. In reply Mr. Eastwood said:-Dealing with your question seriatim, it is, in the first place, suggested that Parliament was wrong in adopting the basis which it has ad9pted; that the basis was one to be applied originally in the case of lands which were at the same time freehold, the values of which could be reasonably ascertained, and that when the Act was amended to deal w'1th the large areas of Crown leaseholds the definition made (we sayi t required amendment) was not taken into account. In the second place, we say that the evidence before this Commission shows that the departmental values were clearly wrong, and we say that is so. In the third place, we say that the land may or may not have a freehold value, but we think, in view of the large areas and the policy of the State Government, that it has no freehold value for the purposes of taxation. Fourthly, we think it is beyond the skill and ingenuity of any valuation branch to establish a correct freehold improved value of those leasehold lands.

There are some cases where leaseholds join freeholds, and I will not say as to those that a system could not be applied, but they are so very few, and the mass is so far away from these freeholds, that we say the many should not be penalized by an artificial method because it is capable of being applied in the case of a very limited number.

111. Mr. Eastwood, in the course of examination, agreed that the evidence tendered by the departmental valuers disclosed considerable care and skill (page 1068) ; he adhered to the opinion that, for the most part, basic sales, or comparable sales of freehold lands were not available to the Department, and that where they were available the disabilities of the subject lands were incapable of measurement and expression in £ s. d. When asked his opinion of the

method of valuation embodied in G.O. 816, assuming these two difficulties could be overcome or eliminated, he said, " Of arriving at freehold values under Order 816 I think that is a sound method. There may be divergences of opinion on detail, but the order shows evidence of great care, and it seems to be a reliable method of arriving at values." (Page 1069.)

. 112. On the question of allowance in respect of magnitude, Mr. Eastwood had no suggestion to offer, but agreed that the reasons for the allowance given by the expert valuers seemed to be good. He thought the problem was one that had to be dealt with by the expert on the spot, o'n the presupposition that the area could not be handled in smaller parcels. (Page 1087.)

113. Mr. Eastwood was unable to indicate any definite minimum area to which the allowance for magnitude should apply, nor had he any opinion to offer as to the percentage allowance that should be made, or how such allowance was to be measured. These were all, he thought, part of the valuer's problem. (Page 1092.)

114. On the question of "dislocation" Mr. Eastwood thought that "the evidence of the experts seemed to have been well considered and very reasonable." He could not su.ggest how the disability of dislocation can be measured, but thought it " probably could be estimated by an expert valuer." (Page 1094.)

115. Mr. Eastwood claimed that, so far as is known, no allowance has been made in any assessment in respect.· of onerous conditions, though . Deputy had been instructed to do so-adding, " We are not at present making any representatiOns as to how that allowance should be made." (Page 1100.)

116. A further claim was made by Mr. Eastwood that an allowance should have been made to provide for the recoupment of the whole of the lessee's capital which was expended on improvements not inuring to him at the. termination of the lease less depreciation and whatever amount he may receive by way of purchase or compensation.

117. In the course of Mr. Eastwood's examination a number of questions arose upon which we asked for a considered opinion, or for further information from the witness.

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118. To some of these requests Mr.- Eastwood replied by letter on the 2nd and 28th October, 1924. From these letters we quote the following :-. Method of arriving at net returns Committee feels that as the net returns of individual lessees available to the Department are, in the majority of instances, the figures submitted for State or Federal Income Tax purposes ·such information is misleading and inaccura,te for the following reasons :-

(a) An Income Tax return is compiled on a different basis from a return of net income . . . . • . (b) Where a taxpayer keeps no books of account but relies on his memory and his bank books, his Income Tax returns cannot be considered a reasonable and proper basis for arriving at the" net return." (c) Livestock.-It is possible that in any given district some of the taxpayers will adopt the market value

basis and others the average cost price basis, and there will thus be no harmony for the purpose of arriving at a general average. Such being the case, my principals feel that the adoption of a net returns basis would be most unsatisfactory and would not give correct results. On going more fully into the matter of the compilation of a skeleton form for ascertaining the returns from the pastoral property, I regret to state that I find it almost impossible to devise a form that would be suitable for universal adoption such as is the case for Income Tax purposes . . . . . .

It is of course possible from 'inspection of books and records to ascertain the various avenues of income and the various purposes for which payments and outgoings are made or incurred. This is the method, subject to the artificial restrictions of the Income Tax Assessment Acts, which is for the purpose of the levying of Income Tax, but which does not, and cannot in anyway, give any indication as to the true value of the subject land.

I regret that I cannot help the Commission by suggesting a skeleton form for general application that would assist the Commission in laying down any rules for the guidance of Valuers in ascertaining the value of land based on such form or the information contained therein. Average of Averages.-It is claimed that quite apart from tbe difficulty of arriving at the net returns of the individual, the proposition that the average of all district averages should be taken is open to grave objection because of the different methods employed in working the various properties and of the difierences in the capacities of the

various owners. The varying methods of carrying on pastoral businesses-such as breeding, dealing, the raising of stud sheep­ and a combination of these methods, together with the wide differences in business management, stock, country, the capacity of individuals, and many other factors which cannot be reduced to a common basis, seem to me to preclude the earning value of any particular area of country being determined from general averages comprising such widely different bases.

"Ournamona" Judgment.-·! was asked by your Commission to criticize this judgment. After discussion with my principals and most careful thought the view is taken that this should be regarded as a special case. This is indicated by the evidence of the Commissioner of Taxation before the first Commission, where he stated that he would have appealed had not the time been allowed to lapse. My principala feel that as the matter of the method of taxing Crown Leaseholds is now sub judice, they would not feel justified in venturing to criticize the

judgment of the Supreme Court of South Australia. . [Note.-The following is an extract from Mr. Eastwood's evidence respecting this judgment:­ Question.-That suggests one possible method which, at any rate, found acceptance from the Chief Justice of the South Australian Supreme Court. Have you any opinion to give us why that method should be considered, and do you think it could be applied

Answer.-I do not think it could .. Question.-Would you like to consider a criticism of that method, and give us your opinion at a later date Answer.-Yes. Question.-The Commission would like you to give us the benefit of your opinions as to the more general or universal adoption of the method used in that case, rather than the method of comparison by sales, or as to whether this method could be usefully adopted in the case where comparable basic land sales are not available

Answer.-I will attend to that.] Constitution and powers of Appeal Board.-The feelings of my principala are that the requirements of the Land Tax Assessment Act, so far as they applicable to Crown Leaseholds, cannot be carried into effect, and under these circumstances they feel that an Appeal Board would be useless. On their behalf I have to state that it is considered that an impossible task has been assigned to the Commissioner in the assessment of Crown Leaseholds, and that no good

will result from the appointment of an Appeal Board.

119. Address by Counsei.-At the close of our public inquiry Mr. Owen Dixon, K.C., on behalf of the graziers of Australia, addressed us at length.

120. Brief reference may be made to some aspects of the many-sided problem with which we have to deal upon which we do not find ourselves in accord with the views expressed by Mr. Dixon.

121. The use of State Valuations.-Taking these in the order in which they were dealt with by Mr. Dixon, there is first the question of the use by the Commissioner of Taxation of valuations made by or for any State or any State authority. ·

122. Sections 17 and 18 of the Land Tax Assessment Act read :-17.- (-1.) The Commissioner may, if, as, and when he thinks fit, make or cause to be made valuations of any land. (2.) The Commissioner may obtain aJJ.d use as valuations, or for the purpose of preparing valuations, an valua+i()us made by or for any State or any authority constituted under a State.

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18. From the returns and valuations so made, if any, and from any other information in his possession, or from any one or more of those sources, and whether any return has been furnished or not, the Commissioner shall cause assessments to be made for the purpose of ascertaining the amount upon which land tax shall be lfWied.

123. Mr. Dixon in dealing with these sections of the Act said:-It is to be noted, and it is rather important in this connexion, that he [i.e., the Commissioner] has to use the valuations of his own valuers and any valuations made by or for any State or any authority under a State, which he likes to treat as material in informing his mind of the fact. By those means he has to get at the unimproved value

of the land, and the improved value in the case of leaseholds." (Page 1172.)

124. Later Mr. Dixon incidentally refers to the same matter in the following words :-In the next place, the leaseholds themselves are subject to re-valuation by the State, and, logically if the re-valuation is carried out on anything approximating to the principles which are understood to prevail in Queensland there ought to be no taxable value. If the Act directs the Commissioner to take State valuations into consideration,

and State valuations are made, they are not (at any rate here in Victoria) considered in the case of Queensland to be unduly favorable to the leaseholder, and it would be quite in conformity with the direction contained in the Act itself if the Commissioner started off with the prima facie assumption that they were right. In truth there could be no taxation of these leaseholds, ".if the State re-valuation was really effective. (Page 1212.)

125. Mr. Dixon in these words seems to imply that it is obligatory on the part of the Commissioner to take into consideration valuations made by or for any State or authority constituted under a State. 126. We take the view that under Sub-section (2) of Section 17 the use for any purpose by the

Commissioner of such valuations is optional and not mandatory.

127. This view accords with that expressed by the High Court. In the case Nathan v. The Commissioner of Land Tax, Mr. Justice Isaacs in delivering judgment said:-By section 17 of the Land Tax Assessment Act 1901-1911, the Commissioner is empowered to make valuations of land. He is also empowered, but not bound, to obtain and use State valuations. Section 18 says that from these and from returns and from any other information in his possession, or from any one or more of these sources, he shall

cause assessments to be made for the purpose of ascertaining the amount upon which land tax is to be levied.

128. In the case Duncan v. Others (19 C.L.R. 551), Griffith, C.J., said:-Another matter to which the learned Judge -paid some attention-quite independently of the others-was the fact that the State valuation of the same land was £5 per acre. He· thought he was entitled to regard that as evidence in the case. I do not think that he was. The Commissioner was entitled to look at that valuation, because for one reason

the statute says so. The duty of the Commissioner is to ascertain in the best way he can what he thinks is the value of the land, just as any person required to form his opinion is entitled to inform his mind in the best way he can. But when the matter comes before a Court, the Court must have regard to the rules of evidence. The facts upon which the Commissioner has informed his mind cannot be considered by the Court, unless brought before it by proper and

admissible evidence. I think, therefore, that the State assessment was not admissible in the case as evidence of the value of the land.

129. In the same case Mr. Justice Isaacs said :-Another question of law is as to the admissibility ofthe valuations for State land tax as evidence of the correctnes or incorrectness of the Commissioner's valuation. Iu my opinion, the State valuations are not admissible for that purpose. Section 17 {1) of the Act says:-" The Commissioner may if as and when he thinks fit make or cause to be

made valuations of any land." Section 17 {2), under which these valuations were admitted by the learned Judge is as follows :-" The Commissioner may obtain and use as valuations or for the purpose of preparing valuations any valuations made by or for any State or any authority constituted under a State."

These are the only purposes fQr which State valuations may be used according to the terms of the section. That is all preparatory. It is only up to the stage" of valuation. And the provision is obviously to save unnecessary trouble and expense in employing valuators. But it is one thing to say that the State valuation may be used as a convenient method of preparing the valuation, and it is quite another thing to say that the State valuation, even when rejected

by the Commissioner, shall be evidence-and as-the learned Judge thought, most reliable evidence-of the value of the land. Again, if the learned Judge's decision were not independent of the weight which he attached to the State valuations, I should think it would not be sustainable." 130. Individual consideration of the individual parcei.-Mr. Dixon in the course of

argument emphasizing the necessity for individual consideration of the individual parcel of land by persons well acquainted with it said:-The unfortunate fact is that the criterion set by the Act is a criterion which every taxing officer is loth to comply with to its full extent."

This statement seems to imply a disinclination on the part of the Taxation Department to determine unimproved land values for the purposes of taxation upon reports of its valuers after detailed personal inspection of individual properties but tbis implication is not justified by the facts disclosed in evidence.

131. Has land a freehold value if no purchaser fortheoming?-Mr. Dixon quoted an opinion expressed by Mr. H. A. G. Curry, the dissentient Commissioner, recorded in paragraph 13, page 40, of the Report of the Knibbs Commission. The quotation reads :-Your Commissioner (Mr. Curry) desires also to say that the task of ascribing a freehold value to lands which if offered for sale, would not find a willing purchaser, seems to him a very hazardous one."

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In referring to these words Mr. Dixon said:-When he (Mr. Curry) says :-".the task of ascribing a freehold value to lands which, if offered for sale, would not find a willing purchaser," he has at once negatived any value whatever. If he is !'ight (and I do not say for one moment one way or the other) in supposing that no purchaser would be forthcoming at all, these is no hazard about it. You have simply got the answer " There is no value."

132. We cannot subscribe to this contention in view oftheopinionexpressedbyGriffith, O.J.

133. In the judgment of the High Court in the case Spencer v. The Commonwealth (C.L.R. vol. 5 page 431), His Honour said:-. 'rhere is, no doubt, much land in many places the value of which per acre is as definitely fixed as the price of wheat or sugar. But in the case of a new port, in a new State, where the area of land is limited, and each piece differs in many of its characteristics from the rest, it is impossible to apply any; such rule. Bearing in mind that value implies the existence of a willing buyer as well as of a willing seller, some mod1fication of the rule must be made in order to make it applicable to the case of a piece of land which has any unique value. It may be that the land is fit for many purposes, and will in all probability be soon required for some of them, but there may be no one actually willing at the moment to buy it at any price. Still it does not follow that the land has no value. In rpy judgment the tes c of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring " What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price, but not desirous to sell ? " It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with.the subject at the relevant time and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.

134. In the Judgment of the High Court on Appeal in the case Duncan and others v. Commissioner of Land Tax (19 C.L.R., 551, 553), the Chief Justice also said:-The underlying idea is that the land is to be treated as converted into money as on the day as of which the assessment is made, so that a realized capital sum takes the place of the land. That, of course, assumes a hypothetical purchaser. It does not mean that you are to inquire whether there was at that time a purchaser in existence, who would have been willing to buy the particular piece of land . . . . . •

The theory of the hypothetical purchaser does not, therefore, assume the existence of a person actually willing to buy.

135. Mr. Dixon's suggested solution of the problem.- One suggestion made by Mr. Dixon in the course of his address does not, in our opinion, offer any practical solution of the difficulty which confronts the Taxation Department in valuing some Crown leaseholds if regard be paid to the principle of aggregation in the Land Tax Assessment Act. ·

136. Mr. Dixon said:-I v enture to suggest to the Commission that, from a practical point of view, the valuer need not be instructed to carry out this very difficult task, but that he should, as a practical instruction, be told " When you have come to the concluoion from _your preliminary considerations (those that I have mentioned) that there is not going to be any tax resulting from a varnation of this land, in other words, that the person is not going so far to prefer .the fee-simple to the leasehold tenure as to give a price sufficient to bring about the operation of Section 28 (3) you can drop it and proceed no further. That would save a lot of difficulty.

137. Mr. Dixon, however, went on to sa.v :-If, however, he comes to the conclusion that the proper application of these principles may very well lead to taxability, he will then proceed to give some very definite opinion as to what, firstly at the datil when the lease was granted by the Crown, and, secondly at the 30th June a person would be likely to give, and I would suggest to this

Commission that his opinion can best be founded upon a consideration of what is in fact, given for similar leaseholds in the market, and that, really, when you get down to bedrock, except by. ascertaining or forming an opinion as to what is really given for leaseholds of a similar character, there is no way of valuing these. When dealing with land which is saleable upon different t enure, instead of going far away ·to the Mitchell River and computing on some hypothetical basis what is the earning capacity of land, and capitalizing it, surely the easiest and most obvious way of adjusting these two matters, of bringing these two things into relationship is to find out what is given for uniform or similar land of another tenure, and then make proper allowances for the difference in tenure, by a proper consideration of the rent reserved ; by the added sum which is given for the lease when it is sold, if any, and by capitalization of that rent for the real period of the lease, not for its nominal period. My suggestion is that individuals conversant with dealing in this commodity can, by taking into consideration a multitude offactors, which they are fairly well accustomed to, bring about a valuation more or less accurate, but a valuation which will, in nearly every case be entirely different to that which the Commissioner has been rather suggesting as the possible result. (Pages 1211 and 1212.).

138: Further developing this suggestion Mr. Dixon said:-I therefore suggest to the Commissioner that the real solution of the problem is to ascertain what is given in substance for leaseholds, whether it is nothing or something-just starting from some notion of the value of the land, and then ascertaining the fee-simple value by just allowances for the difference in va.lue of t enure and, of

in the preliminary stages inquiring whether you will get anybody to buy the fee-simple, havmg regard to the ta::c whiCh is inv9lved in it, and having regard to the condition of leasehold t enure, and being able to desert the country m case of drought, and various other advantages, and also weighing the disadvantages such as the liability of resumption without proper compensation for fixtures. Probably there are numerous other disadvantages more or less tnvial,

but no one can deny that, considered simply as a tenure a fee-simple tenure is a far safer one and more than a leasehold No one can deny the advantagEs of the tenure considered (Page. 1214_)

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139. Mr. suggested solution examined.-Mr. Dixon's suggested solution of the problem is expressed in somewhat vague terms. He apparently suggests that the correct method of determining the unimproved freehold value of a Crown leasehold is first to ascertain its selling value as a leasehold and then to add to that amount the capitalized rent reserved to the Crown,

the result giving the unimproved freehold value.

140. This process, however, could only give an unimproved value for a limited tenure, viz. :-the unexpired period of the lease; and it may fairly be assumed that a fee-simple-that is an in-perpetuity-value will be greater than a limited tenure value.

141. Mr. Dixon's suggestion led us to explore its possibilities. We have, however, been unable to discover that the suggested solution of the valuat·ion problem is a reliable or practical one. If the selling value (the price paid for the leasehold) and the rent reserved to the Crown were the consideration payable for an unrestricted use of the land for the unexpired term of the lease

(that is to say for an occupancy free from all conditions as to improvements, re-appraisement or resumption, &c.), then the sum of the price paid for the lease and the capitalized rent would be an indication of the unimproved value of the land for the unexpired period of the lease; but there would still remain the difficulty of converting that sum into the freehold value.

142. The only method of conversion would be to reduce (at the appropriate rate of interest) the amount paid for the lease to the equivalent annual sum that would be payable over the unexpired period of the lease, and to add to that annual sum the reserved rent, so as to arrive at the annual unimproved value of the property.

143. Having ascertained the annual unimproved value by this process, the annual unimproved value could be converted into its capital equivalent by using the appropriate rate of interest as the factor, and that capital sum would represent the unimproved freehold value of the leasehold land.

144. The appropriate rate of interest referred to in the immediately preceding paragraphs would need to be the average percentage rate of net profit over a term of years disclosed by analysis of returns of sold freehold properties comparable by locality and similar use with the leasehold land.

145. But in addition to the question of the rate of interest great difficulty and uncertainty would arise in applying this method due to the varyi:ng circumstances governing the price paid for a leasehold interest. For example, the sale· of a lease may be governed by fortuitous circumstances, and the leasehold may be subject to re-appraisement or resumption, &c., and although allowance may be made by the purchaser to meet these and other contingencies, such allowance, being wholly dependent upon the judgment or skill in bargaining of the individual purchaser is incapable of standardization; an.das (apart from the question of tenure) most leases

contain restrictions or conditions from which the fee-simple is free, we do not consider that the selling price of a restricted lease provided a sound basis for arriving at the value of an unrestricted lease. We are, therefore, unable to recommend the adoption of the suggested method.

THE "SELLING VALUE" OF THE LEASE SUGGESTED AS A BASIS OF THE TAX.

146. It was repeatedly urged by pastoralists before the Knibbs Commission that the tax on Crown leaseholds should be based on the selling value of the lease. (See pages 22 and 23 of that Commission's Report, and paragraphs 95 and 96 of this Report.) 147. Witnesses divided in opinion.-Witnesses before that Commission were divided in

their opinions on the subject. Though the proposal found strong support from some it was condemned with equal force by others, amongst whom was the Commissioner of Taxation. (Q.3864.) 148. The Knibbs Commission's View.-The Knibbs Commission regarded the suggested method as invalid, and, in addition to urging a number of objections against it, considered that

"the method really suggests that the basic principle of a land tax, viz., that it should be based on the actual freehold value of the land, should really be wholly eliminated." 149. Would the suggested basis involve amendment of the Act ?-As we wished to assure ourselves as to whether or not such a scheme, if approved, could be adopted without involving amendment of the Land Tax Assessment Act, we sought the opinion of the Solicitor-General upon the question of the permissibility of a wider interpretation than the generally accepted one of certain definitions in the Act.

150. Questions to the Solicitor-GeneraL-Our questions to the Solicitor-General were :-, (1) In view of the fact that the Land Tax Assessment Act originally excluded lessees' estates in Crown leal'PR from its operations (original Section 29), and in view of the possibility when the Amending Act No. 29 of 1914 extended its operations to include lessees' estates in Crown leases, that the significance of and necessity for consequential

28

alterations in the text of Sections other th.en Section 29, may not have been fully realized, would it be permissible to seek to interpret the spirit of the Act and the intention of Parliament in the light of the new conditions created by the extention of the scope of the Act 1 Specifically, would it be permissible to read the definitions of " Improved Value " and " Unimproved Value " in Section 3, when applied in relation to Crown land as meaning or implying the capital sum which the right of lease (instead of the fee-simple) of the land might be expected to realize if offered for sale on such reasonable terms and conditions as a bona fide seller would require ?

It is recognized that such reading may do violence to the words of the Act, but in this instance if, in view of the 1914 amendment of the Act referred to above, the extended meaning previously indicated may, by reasonable implication, attach to the words, may such extended meaning be adopted ? (2) Does the definition of the unimproved value of a lease or leasehold estate in land in Section 28 (3.) (a) when read in conjunction with the definition of "Unimproved Value" in relation to land in Section 3 make it obligatory to arrive at the value of a leasehold estate in Crown lands by determining the "Unimproved Value" of the land on a freehold basis 1

Note.-Attention is directed to the frequent use in Sections 27, 28, and 29 of the terms" Unimproved Value of the leasehold estate" and "Unimproved value of the lease" and to the fact that when these Sections were originally drafted leasehold estates in the Crown lands (which become taxable under the 1914 Amendment Act) were not taxable.

151. The Solicitor-General's Opinion .-The Solicitor-General's reply was as follows:-The Act of 1910 defined" improved value" and" unimproved value" in relation to land, in terms based upon the sale value of the fee-simple. It dealt with the valuation of leasehold estates in two ways, according as the lease was made after (Section 27) or before (Section 28) the commencement Of the Act. By Section 29, Crown leases (with certain exceptions) were

exempt. The Act of 1914 amended Section 29 in such a way as to exclude what may for short be called pastoral leases from the exemption ; and also amended Section 27 in such a way as to make Crown leases, whether made before or after the commencement of the Act of 1910, assessable under Section 28, Section 27 may now, therefore, in this connexion

be excluded from consideration. Under Section 28, the owner of a leasehold estate of land is deemed to be the owner of land of an unimproved value equal to the unimproved value of his leasehold estate ; and -for the purpose of the section the unimproved value of a leasehold estate is defined as 4! per cent. of the unimproved value of the land, less the annual rent reserved by the lease, calculated for the unexpired term of the lease in the prescribed way.

It is therefore necessary, in order to arrive at the unimproved value of the leasehold estate, to ascertain the unimproved value of the land. I can set> in the Act no indication of an intention that the definition in Section 3, which provides a fee .simple basis for the unimproved value of land, should not apply; and I think, therefore, that it does apply. Thatistosay, as a basis for determining the unimproved value of a Crown leasehold, it is necessary to determine the sum which the fee-simple of the land, if offered for sale without improvements, might be expected to

152. In view of the above opinion of the Solicitor-General we do not consider it necessary to further discuss the merits and demerits of the suggested scheme.

AV:E:RAGE OF AVERAGE NET RETURNS MEmOD.

153. The principal reasons which led the Commissioner to adopt this method of determining the unimproved value on a freehold basis of pastoral lands leased from the Crown are quoted and commented upon in paragraphs 49 to 63 of this Report. (See also Appendix IV.)

154. The manner of its application.-The manner in which it is proposed that the method should be applied is set out in an official order dated 29th October, 1923. This order reads as follows:-Assessment of Crown Leaseholds.

1. For the purpose of dealing with valuations of Crown Lands in cases in which the basis of assessment through unimproved values in dispute with taxpayers, it is proposed to endeavour to arrive expeditiously and economically at freehold values for the leased lands in the following manner :-2. From the annual net returns of as large a number as possible of properties in the same district as the cases in dispute and carrying on the same class of business with the same class of stock, the average net returns over as long a

period as possible will be ascertained for each property in the district and reduced down to a unit of stock carried; 3. The average of the average net returns thus ascertained will be calculated and these will be regarded as representing the average net return which an average lessee might reasonably be expected to derive from his land per unit of stock carried.

4. This average applied to the carrying capacity will be capitalized at 8 per cent. so as to arrive at the total capital investment in the business which would yield the net return mentioned. 5. From the total of the capital investment thus ascertained there will be deducted­ (1) The value of live stock required to yield the average net return;

(2) the value of plant ; and (3) improvements on the property. 6. Any residue will represent the capital value of the unimproved land as an opportunity for carrying on th., business, subject, however, to the incidence of Land Tax for which a reduction may be necessary. ·

7. The provisi0us of the Act will then be applied .to calculate the value of the lessee's est.ate,

1 fJ 01 .. \ .,_ ·· .. • 1'

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8. For example, assume that the total average net return is 5s. 6d. per sheep area and that there are 20,000 sheep = £5,500 per annum. Capitalized at 8 per cent. the net return represents a capital investment of . . £68,750 Deduct-Live stock at, say, an average of 15s. per head

Plant Improvements

Unimproved value of the land as an opportunity if free from Land Tax Allowance for weight of tax or magnitude

Economic unimproved value

Value of the leasehold estate-Assume the rent is £500 per annum The rack rent fixed by law is 4! per cent. of £36,000

Annual rental benefit to the lessee Assume the lease has 20 years to run-Present value at 4! per cent. of rental benefit for 20 years-1120x 13· 298*

Statutory deduction

The assessable value of the lessee's estate in this lease is The tax on this assessable value plus super-tax= £63 plus 12 = £75.

£15,000 1,000 11,600

27,600

£41,150 5,150

£36,000

£500 1,620

£1,120

14,893 5,000

£9,893

13 ' 298 (the multiplier in thls case) is shown in the prescribed t ables for .calculation of values as the prese nt value of £1 for 20 years@ 41 %·

155. The Commissioner when being examined on the foregoing Order explained that when the average net returns of a given district were ascertained in accordance with paragraph 1 of the the average of those average net returns would be made applicable to the property in the

most favoured situation in the district; and that in the case of other properties less favorably situated the average would be subject to reduction according to the disclosed disabilities of such . properties when compared with the most favorably situated property. 156. In illustration of this process the Commissioner cited an instance in which an effort

was made to apply the system in a certain district in Queensland where it was found that the average of average net returns was 15s. 7d. per unit of stock carried. This average then became the assumed rate of return for the properties situated at rail head, and other properties distant from rail head were reduced according to the measure of disadvantage disclosed in comparison.

In this district were two properties showing returns of 32s. and 6s. 5d. per head respectively. The 32s. property was reduced to the average of averages, i.e., 15s. 7d., and the 6s. 5d. property, being below the average of averages (when discounted by distance and other disadvantages), was allowed to remain at 6s. 5d. because in this case the department was not in ·a position to prove inefficient management. The justification for the reduction in the ·former case from 32s. to

15s. 7 d. was found in tile fact that the higher return was due to some fortuitous or exceptional circumstances. The Commissioner stated that both these properties were included for the purpose of arriving at the average ·of average net returns, but the Queensland valuers subsequently explained that because of their exceptional nature they were not taken into

account in fixing the average to be applied to the district. 157. In further explanation of the scheme the Commissioner stated that the average was arrived at by taking the average net returns per unit of stock carried from each property, adding them together and dividing the result by the number of properties, but subsequently this statement

was modified to the extent that in fixing the average the total net returns from all the properties were added together and the total so arrived at was divided by the number of the total stock carried on all properties. 158. The Commissioner and the departmental valuers admitted that the method was an arbitrary one and that it would have the effect of arbitrarily reducing the return to be used as

the basis of valuation in a district below the net actual returns of the individual properties. To illustrate how the proposed method in effect reduces the total returns of a district

for the purposes of valuation and tax assessment, the following examples are subinitted :-Carrying Capacity. Average return per Average Annual Station. No. of Stock. Unit of Stock carried. Return.

s. d. £

A. . . . . . . . . 100,000 6 0 30,000

B. . . .. . . . . 75,000 5 3 19,687

c. . . . . . . . . 40,000 5 0 10,000

D. .. . . . . .. 90,000 4 6

-- ... ,.-20,250 ,-

Total . . . . .. 305,000 .. 79,937

-··--- ·- __ _ _.... ..

Average of averages for district, 5s. 3d. (approximately).

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Thus Stations A. and B. would be assessed on the basis of a return of 5s. 3d. per head (the average for the district) or upon an assumed total annual return of £3,750 less than the actual returns, while properties C. and D. would be assessed on the basis of their actual returns because these are less than the average. This would be the effect in a case where the properties included in the average are similarly situated and are otherwise comparable; but in the case of properties not similarly situated in respect of distance from rail or market the discrepancy becomes more marked. The following table illustrates this :-

Station. Distance from Rail.

Carrying Capacity. No. of Stock. Average Return, Annual. Average Per Read.

£ s. d.

E. . . .. . . At rail head .. . . 200,000 60,000 6 0

F. . . .. . . 50 miles . . . . . . 50,000 13,750 5 6

G. . . .. . . 80 miles . . . . . . 100,000 25,000 5 0

H. .. . . . . 100 miles . . . . .. 200,000 40,000 4 0

I. . . .. . . 75 miles . . . . .. 80,000 20,000 5 0

All Stations .. . . .. . . .. . . 630,000 158,750

The average for the district (in this case approximately 5s.) becomes the average return applicable to property E. at rail head, the return in this case being reduced by approximately 1s. per head.

160. If it be assumed that in the illustrations in the preceding paragraph, the lower rate of net returns per unit of stock carried in certain instances is due to inefficient management, it will be seen that the effect of the scheme is not only to assess the less efficiently managed properties at the figure disclosed by their actual net returns (when these are below the average), but to arbitrarily reduce the returns of the more efficiently managed properties because the actual returns of both classes of property are used to arrive at the average net return.

161. Nor is this all, for, as has been shown, the scheme must of necessity reduce the aggregate values in a district. A scheme of land valuation deduced from net returns which seeks to eliminate the question of good and bad management by making a concession in the one case while disregarding it in the cannot claim to be either equitable or scientific. ·

162. Its Alleged Simplicity and Economy.-It is claimed for the scheme that it will enable values to be determined expeditiously and economically. But inasmuch as the scheme involves a comparison of individual properties with the most favorably situated property in the district after the average of averages is arrived at, it also involves the measurement of disadvantages which calls for the exercise of skill and care on the part of valuers. While this measurement of disadvantages may be freer from difficulty and doubt when the com_parable properties are all within the boundaries of a given district than where they are more widely separated by distance and circumstance, it is problematical whether the proposed method of valuation in practice will prove less costly than the one it is proposed to replace. The gain of expedition and economy

(even if they were assured) could in no wise compensate for the sacrifice of equity which is inevitable. 163. For the purpose of arriving at a true average of net returns for a district it is obviously wrong to average the returns from a fully developed property with those of one only partially developed, or those of a property favorably situated in respect of rail or market facilities with one not so situated ; or to bring into the average both poor land and good land enriched by a natural watershed. The effect of such a process has already been made evident. If it be contended that the net returns from a property reflect all the disadvantages of that property, it cannot be held that they will do so when they are varied as the result of averaging them with

those of other similar properties. 164. Even if it were sought by adjustment of returns to bring all the properties in a district to a common distance from rail head before averaging their net returns there would still remain the other differences between the properties which would require to be equalized in order to arrive at the actual average of average net returns. To do this would involve just as much investigation and just as accurate a measurement of disadvantages as the original method of valuation applied

by the department, with no guarantee of either reduced cost or greater accuracy. 165: If the practice be followed as outlined by the Department's Queensland valuers, viz., that of eliminating from the average such properties as showed exceptional returns, either high or ]ow, an additional complication will be added for it will be always a matter of controversy as to the precjse point at which a given return is to be rightly regarded as exceptional.

l. 3

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166. Two other difficulties in connexion with the average of average net returns method may be briefly referred to. The first would arise in fixing the geographical boundaries of a district in which the average net return is to be ascertained; in determining the number of eligible properties therein whose net returns are to be included in the average; and in fixing the years in respect of which the returns are to be used.

167. The second difficulty is one which we are of opinion is likely to prove fatal to the scheme should it be brought into operation. It relates to the use made by the department of taxpayers' income tax returns in arriving at the net returns from a property and so at theaverage of average net returns of a district. In view of the provisions of the Income Tax Assessment

Act, it is very doubtful if such information, though available to the Commissioner of Taxation, could be publicly disclosed in court 'in substantiation of departmental figures and estimates. This feature of the proposal was incidentally referred to in paragraph 52 of this report and was adversely commented upon by Mr. Eastwood (paragraph 106) and by Mr. Dixon (page 1203).

168. For the reasons indicated we do not recommend the adoption of the average of average net returns method for determining upon the basis laid down by the act the unimproved value of land held under lease from the Crown. We may point out, however, that the information gained by the Taxation Department

in its investigation of the net returns from leasehold pastoral properties may be usefully applied as an internal check by valuers in forming their judgments in respect of the unimproved value of comparable land. ALLOWANCE FOR ONEROUS CONDITIONS.

169. Sub-section (3) of section 28 of the Land Tax Assessment Act 1910-1916 reads as follows:-(3) For the purposes of this section-(a) the unimproved value of a lease or leasehold estate in land means the value of the amount (if any) by

which 4t per centum of the unimproved value of land exceeds the annual rent reserved by the lease calculated for the unexpired period of the lease at H per centum according to the calculations based on the prescribed tables for the calculation of values : Provided that the Commissioner may from time to time, if he thinks fit, alter the rate per

centum upon which the calculations in this section are based ; \b) rent, in the case of a lease of improved land, means so much of the whole rent as bears to the whole rent the proportion which the unimproved value of the land at the date of the lease bore to the improved value :

Provided that, where onerous conditions for constructing buildings, works, or other improvements upon the land, or expending money thereon, are imposed upon the lessee, or where any fine, premium, or fore-gift, or consideration in the nature of fine, premium, or fore-gift, is payable by the lessee, the Commissioner may assess the amount (if any) which ought, for the purposes of this section, to

be added to the value of the rent in respect thereof, and the value of the rent shall be deemed to be by that amount accordingly;

(c) the owner of a leasehold estate includes the lessee of land for life under a lease or an agreement for a lease.

170. This sub-section defines (in (a)) the term "the unimproved value of a lease or leasehold estate in land," and provides (in (b) ) that the Commissioner may assess the amount (if any) which ought to be added to the value of the rent reserved by the lease in respect of onerous conditions imposed upon the lessee.

171. Allowance in respect of onerous conditions was the subject of repeated representations made to us, as well as to the two previous Commissions which had to deal with the question of the taxation of Crown leaseholds. 172. While the process of fixing this allowance is, in a literal sense, distinct from that of

determining the unimproved value of the land held under lease, it will be readily realized that the two matters are closely and vitally related inasmuch as they represent two essential processes in the assessment of the tax on the leasehold estate. Correct assessment of the tax­ that is, assessment in accordance with the provisions of the Act-is the object in view. That

object can only be obtained if both processes are correctly carried out. 173. A correct freehold unimproved value of the land may be arrived at, but if certain additions to the reserved rent as provided for by the Act are not made, or are inadequately made, it is clear that the difference between the reserved rent and the economic rent (as prescribed by the Act) will be greater than. it should be and the resultant taxable interest (if any) unfairly increased. It is conceivable that the non-allowance of additions to the reserved rent in respect

of onerous conditions in accordance with section 28 sub-section (3.) (b) might in some instances bring into the taxable field leasehold estates which would otherwise have disclosed no taxable interest.

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174. The Commissioner of Taxation in his evidence before the Knibbs Commission said:-" Up to the present no allowances have been made to Crown lessees on account of onerous conditions. In September, 1916, I altered the previous practice of the Department, which had not allowed any deduction under the heading of " Onerous Conditions " ; but owing to the appointment of the Royal Commission soon afterwards, and to the fact that payment of tax -on assessments of Crown leaseholds had been deferred pending the decision of the Government on the general question, the altered practice of the Department has not yet been applied. If the principle of the present law is continued the altered practice will, of course, be applied, and allowances for onerous conditions as defined in section 28 (3.) (b) of the Act will be granted." (Question 217.)

! 75. In this statement " September, 1916" should, we think, read "about September, 1918," as Land Tax Order No. 871, which was issued on 28th August, 1918, contains the following rulings :-"The. fourth paragraph of Order 855 is cancelled, in so far as it limits the application of the High Court

decision in the Coal Cliff Collieries case. The usual conditions upon which a lease is granted are, (1) that rent, rates, and taxes shall be paid, (2) that the premises shall be kept in proper repair, and (3) that at the expiration of the lease the premises shall be yielded up in as good order-subject to fair wear and tear-as at the commencement. Such conditions are not onerous, though anything further may usually be considered so.

There is onerousness in a covenant which binds the lessee to do something which will increase the value of the property on its return to the landlord; as, for example, clearing land or putting up additional buildings in which he has no tenant right. But there is nothing onerous in a requirement to merely maintain existing improvements ; in such a case the landlord gets back only what he leased out, and the actual rent paid represents the total benefit derived by him.

The principle affirmed by the Court should be applied wherever the lessee is required by the lease to improvements upon the land, or to expend money thereon for other than ordinary maintenance purposes."

176. A later Land Tax Order (No. 903) was issued on the 23rd January, 1920. This Order reads :-1.:1.125/N.S.W. 5. LAND TAX ORDER No. 903.

Subject : Onerous conditions. Index: Onerous conditions-Allowance under section 28 (3) (b). Headings: Allowance in Pastoral Leases to be made in all assessments to date. Principle expressed in Order 871 to stand.

At the recent conference of Deputy Commissioners, the question of what constitutes an onerous condition was considered. It was agreed by the Conference that the principle expressed in Order 871, regarding what constitutes onerous conditions, should be adhered to, both as regards leases of city land and broad acres.

Discussion then ensued on a point raised by the Commissioner, viz., whether any further deduction for onerous conditions should be allowed in those cases in which the reason for the onerous conditions is reflected in the un­ improved value of the land. The Conference agreed with the view that in any case in which a freehold unimproved value of land has been arrived at after allowance for the presence of features which depreciate the value and which are covered by a condition

in a lease for the removal or alteration of the feature, e.g., the control or eradication of pests, the allowance under section 28 (3) (b) proviso in respect of expenditure in terms of the condition of the lease should be-(1) The difference between 4! per cent. on the amount allowed in arriving at the unimproved value, and the actual average annual expe.aditure required or incurred under the covenant in those cases in

which the necessity for the annual expenditure still exists; (2) Where the necessity for the annual expenditure under the lease has ceased the allowance should be the sinking fund required to recoup the balance of the total of the expenditure not previously allowed for in an assessment." Please give effect to the decisions given above. The allowance for onerous conditions in respect of pastoral leases must be made in all assessments to date.

Read with Order 897.

177. The Land Tax Order 897 referred to in the Order quoted in the paragraph appears as Appendix No. V.

178. We are of opinion that if e:ffect be given to the Office Orders referred to in the preceding paragraph in all assessments of lessees' estates in Crown lands at least one ground of legitimate objection on the part of Crown lessees will be removed.

179. In this connexion it is of interest to note a comment by Isaacs, Du:ffy, and Rich, JJ., in the Apperley case, reported in full in the Commissioner's Third Annual Report. In this case the Crown was not the landlord, and the reference in the extract is to the proviso to sub-section (b) of section 28 of the Act.

" the proviso, which makes allowance for special circumstances, states expressly to what obligations they are to apply, and we have no power to ex.tend them. If the tenant is under the " onerous conditions " (in other words the burdensome obligations) enumerated, thn Commissionllr's powers of allowance arise. If those stated conditions exist, they may or may not give the landlord

a larger share of the land than is represented by the actual rent The Commissioner then is under .an

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obligation to consider the circumstances, and if he finds that in his opinion the landlord does or will receive a larger share of the land than is represented by the rent, or a more valuable piece of land than he has let, then the Commissioner is to estimate the capital value of the additional value, and add it to the capitalized value of the rent already deductible. Pro tanto that increases the taxable liability of the lessor by reducing that of the lessee.

But the Commissioner is not left at large as to the nature of the onerous obligation to be so considered. It is not every obligation which in fact inures to the landlord's benefit that he is to consider, but only those obligations enumerated. And a covenant to repair is not, in our opinion, within those terms."

VALUATION OF EACH PARCEL OF LAND.

180. Section 11 of the Land Tax Assessment Act reads:-" (1) Tax shall be payable by the owner of land upon the taxable value of all the land owned by him, and not exempt from taxation under this Act. (2) The taxable value of all the land owned by a person is-

(a) in the case of an absentee-the total sum of the unimproved value of each parcel of the land; (b) in the case of an owner not being an absentee-the balance of the total sum of the unimproved value of each parcel of the land, after deducting the sum of Five thousand pounds. (3) Every part of a holding which is separately held by any occupier, tenant, lessee·, or owner shall be deemed to be a separate parcel."

• 181. This section of the Act contains two important definitions. The first defines what under the Act, is the taxable value of all the land owned by a resident taxpayer and an absentee taxpayer respectively (sub-section (2.) ). The second sets out what constitutes a separate parcel of land (sub-section (3.) ).

182. The second definition is of importance in the ascertainment of the unimproved value of the land for the purposes of taxation. In all cases the total unimproved value of each parcel of the land has to be ascertained. This aggregate value is, for the purposes of the Act, subject to a deduction of £5,000 in the case of a resident taxpayer.

183. The departmental practice is embodied in a statement which appears in the Second and Third Annual Reports of the Commissioner, and in rule 4 of Order 816. 184. The reference in the Second and Third Annual Reports appears under the heading, ''Notes on departrnental practice in cases constantly arising in adrninistration," and reads:-

PARcEL.

"A parcel of land, for the purposes of land tax, is a portion or aggregation of practically contiguous portions in the same ownership, provided that no other person occupies or leases any part of it, or holds any part of it by way of mortgage." ·

185. Rule 4 of Order 816 reads :-VALUING IN PARCELS.

"The law requires that each parcel of land shall be valued separately. A parcel of land may .be taken to be-( a} any area of land which is separately let or leased out by the owner;* .

(b) Any area of land belonging to one owner which is held by a mortgagee in_ possession, and which, if valued in the owner's assessment, would be treated as one parcel or part of one parceL (c) Any area of land separated by distance from, other land of the same owner and not reasonably essential to the other lands for purposes of use and occupation.

· (d) Subject to (a), (b), and (c) above, all lands owned by one person and contiguous to each other or separated only by fences, roads, public reserves, or water-course, and used by the owner or another person for the purposes of any business or treated by the owner as one area." . 186. When the Commissioner of Taxation appeared before the Royal Commission on Taxation

in 1920 (that is before the present Order 816 was made available) he handed that Commission type­ written copies of what were called "Main Rules for Valuation of Land for Land Tax Purposes," concerning which this Commission was informed that though the verbiage was subject to revision they might be taken as being a substantially correct record of the departmental practice. The majority of these rules reappear as part of Order 816 in their original form, some in an amended form. Amongst the latter is the foregoing Rule, No.4, in which there was originally an additional

subdivision which reads :-(e) in the case of land subject to lease, the lr,nd included in each separate lease document must be valued as a separate parcel. 187. In examination before that Commission Mr. Ewing said:-"The Court has never yet been called upon to determine the meaning of the words that I have read with regard to a parcel [i.e., Sec. 11, Sub-Section (3.) ]. ,

· The Department has been acting along lines that have generally met with the approval of land-owners by taking a p!lrcel to mean one property worked as a whole. That is in most cases. If, however, the Court should ho;d that a parcel means land included in one I do not know at present what effect that would have on the incidence of taxation. In 13ome cases it might increase the tax, while in other cases it might reduce it."

•It waa explained to u.S in evidence that the term "owner" is used in (a) in a restricted serue. It refers exclusively to a private owner, and not to the Crown. F.17208.-3

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iSS. The departmental practice was further explained by Mr. W. J. Lambert (Senior Valuer) in his evidence when dealing with the subject of allowance for weight of land tax. Rule No. 45 of Order S16 (which sets out the adjustment to be made when ascertaining net returns) states, inter alia:-

"In allowing land tax, the deduction should be the tax payable on the whole of the land used by the occupier for the purposes of his business as one parcel as defined in rule 4 (d)." (See preceding paragraph.)

Mr. Lambert, speaking of this clause, said:-"It meant that an aggregation of parcels was to be taken at the rate of tax applicable to the lot, and not to any particular parcel. If there were seven leases in a run the tax was to be calculated on the total value of the seven leases, and not on the respective value of the one lease. Being a graduated tax, there would be a distinct difference.

As I have explained before, the Department does not interpret the provision in that way in respect to farming properties. I know a property of 2,000 acres which is made up of 40-acre blocks. As a farm of 2,000 acres it is a workable proposition, but as 40 acres it would be qlj.ite impossible." Question.-But the 40-acre blocks are freehold areas?

Answer.-Yes, separate titles. The lawyers say that a separate title is a separateholding. Legally speaking, they say that a separate title constitutes a separate holding. · . Question.-Do you know whether there are any qpinions of the Attorney-General to that effect? Answer.-I do not think that there are any in writing, but I know that the Crown Solicitor expressed the opinion in my presence during a discussion which we had in 1917.

The way in which the Department has interpreted the provision is to aggregate the blocks which are touching • one another, and worked as one property. Question.-Perhaps you can ascertain for us whether the definition of "parcels" in the rules is in accordance with a Crown Law decision, or whether it is merely a departmental interpretation ?

Answer.-I should say that it was a departmental interpretation. This crops up as a valuer's problem. In the case of a big property held in several leases, great difficulty is created in valuing each lease separately. For instance, the water may be so distributed that one property is unable to carry stock at all. It may be served with water from an adjoining block. The matter came up emphatically for a decision, and it was decided that until the Court directed otherwise a property would be valued as a going concern.

Ques£ion.-Then take the case of an extensive freehold property which the owner has leased in four or five blocks to different tenants. Under sub-section (3.) of section 11 of the Act, each of those is a separate parcel? Answer.-Yes. Question.-So that you would value and weight each of them individually?

Answer.-Yes. Question.-Consequently, in the case of land let by a private owner, you are treating it differently from the same land let by the Crown ? .

Answer.-Yes, that may be so."

1S9. Mr. Lambert later set· out his understanding of the position in a statement he handed in, which reads:-" A holding is all the land a man owns in Australia. For instance it may comprise :­ (1) a block of land in Collins-street, Melbourne;

(2) a property in Brisbane ; (3) a station property in New South Wales, comprising several leases worked as one property; (4) a farm in Gippsland comprising, say, 2,000 acres represented as to registration at the Titles Office by seven different Crown grants.

This man's holding is deemed to contain four separate parcels, separately held by the owner from the Crown. If the owner elects to create further holdings by any occupier, tenant, or lessee, these also are deemed to be separate parcels."

190. A suggestion that the Department was acting under legal advice in its view as to what constitutes a separate parcel of land, was conveyed in a remark made by Mr. Lambert under examination to the effect that in a case of dispute which did not reach the Court " this phase of the matter was discussed with counsel assisting the Department in the preparation of the case for the Court, and the advice was that we should take the contiguous land as one parcel."

191. Mr. Lambert further stated :-We have tried to get what we call substantial justice ; whether we have succeeded or not is a matter for the Courts to say."

192. When appearing before the Royal Commission on Taxation in August, 1922, the Commissioner of Taxation said:-"Land-owners may hold a number of leases under separate leasehold documents of title, and they may associate those leasehold lands in one area to be worked as one property. I have not been able to get any satisfactory assistance or advice as to whether there is a separate parcel for each separate lease title, or one parcel for the aggregation of the leases. Especially is it difficult when the periods of the leases vary. We have to try and get it on an average.

It is possible that part oi its value may be due to its association with opher lands. I would be inclined to think that separate value would tend to reduce the tax. It is difficult to know what is the proper thing to do. What we have done is to treat them as on-a parcelifused as 1uch by th& owner. That is the best we can do under the circumstancei."

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193. Subsequent to the public sittings of the Commission, we addressed the following inquiry to the Solicitor-General (Sir Robert Garran) :-Many pastoral properties consist of Crown lands held under various separate leases. Does section 11 of the Larlif: Tax Assessment Act 1910-1916 require in all such cases, even when the lands comprised in the several leases are

contiguous to each other and are worked as one property, that the land comprised in each lease shall be deemed to constitute a separate parcel, and as such to be separately

194. The Solicitor-General's reply is as follows :-1 do not see how the facts that the lands comprised in several leases are contiguous and worked as one property affect the operation of sub-section (3.) of Section 11.

. In my opinion that sub-section requires that the land comprised in each lease shall be treated as a separate parcel Irrespective of the considerations above mentioned.

195. Though the present practice of the Department in respect of "a separate parcel" of land does not appear to have been challenged in any Court, that practice tin the light of the Solicitor-General's opinion) seems to rest upon an incorrect interpretation of the Act.

196. An alteration of departmental procedure to conform with the present legal opinion both as to what constitutes a separate parcel, and to the necessity of valuing each parcel separately would no doubt in many cases present considerable difficulties, and frequently involve alterations in the values arrived at under the present method. In some instances the aggregate unimproved

value of the land might be materially reduced, in others increased; but unless the practice of the Department is based on legal authority, finality in assessment cannot be assured, nor can there be any certainty in many cases as to the correct allowance to be made in respect of weight of land tax.

197. We are of opinion that the practice of the Department should conform with the opinion of the Crown Law Department.

ALLOWANCE FOR WEIGHT OF LAND TAX.

198. That in arriving at the unimproved value of the land for the purpose of calculating the lessees' interest the Commissioner had not taken into account the weight of land tax was the subject of complaint before us by the pastoralists' representative.

199. In the course of his evidence before us the Commissioner of Taxation said :-Under the old method there has never been any deduction on account of the weight of land tax. Esp,ecially in the Queensland cases, there was no alteration of the valuation. Our Chief Valuer Lambert has· )Ilentioned to me that in his opinion the old values would necessarily have to be materially reduced by the allowance of the weight of land tax, that they could not be maintained at their old standard, even assuming their accuracy otherwise.

200. Presumably as a result of the judgment of the Supreme Court of South Australia in the "Curnamona" case the departmental practice has now been amended in this respect.

201. In the course of his judgment in the" Curnamona" case Chief Justice Murray said:-Having now fixed the " intrinsic character " of Curnamona proper as a money-making machine, the next step is to consider the extrinsic circumstances which would operate on a prospective buyer's mind. The most important, and the easiest to calculate, is taxation. Mr Justice Isaacs and Mr. Justice Duffy, in Fisher's case, expressly say "all

taxation" which clearly covers, and must have been intended to cover, income tax as well as land tax, for the purchaser would know that both taxes would have to be paid before the money that went into his pocket could be regarded, in a business sense, as profit.

202. The following departmental instruction in respect of allowanee for weight of tax was issued in May, 1921:- ·

Calculation of Land Tax Payable on the Subject Land.

As the value of the subject land will not have been ascertained at the time the average net returns from it are being obtained, it will be necessary to act in the following manner:-The sale price of the basic standard land as a going concern in conjunction with the average net return therefrom · (after deduction of land tax on the basic land) will disclose the percentage of net return from the investment.

'

The average net return from the subject land before making any debit for land tax will be known. It is to be presumed that the buyer of. the basic land would accept the same percentage of net return from the investment in . the subject land as from the basic land. If the average annual net return from the basic land represented 10 per cent. on the total amount invested in it, it is presumed that the total capital investment in the subject property would be

ten times the average annual net return. From that total sum it would then be necessary to deduot live atock, plant and improvement•, in order to obtain the relilidual unimproved value of the land.

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.· · Ian? tax payable on the residual unimproved value of the land (iess the statutory exeinptimi of £5,000)

obtamable the R;eady Reckoner. The amount by which this unimproved value of the land (and

mmdentally the totalmvestment Ill the property) would be reduced on account of the land tax will be calculated in the following manner :-Basic sale pmperty-Average annual net return (after deducting land t.ax), Ss. per sheep area.

Total sale price for the whole property as a going concern, £4 per sheep area. Rate per cent. of net income to investment, 10 per cent. Subject land-Average annual net return before debiting land tax, say, 6s. per sheep area.

Capital investment on a 10 per cent. basis as in the case of the basic land is £3 per sheep area. Total area is, say, 10,000 sheep areas £30,000

Deduct live stock, say . . £10,000

Improvements on land, say 5,000

15,000

Unimpt"oved value of the land £15,000

Land Tax on this-£76 13s. 4d. per annum-1.226d. in the£. (The Statutory Exemption of £5,000 has been deducted before tax is calculated.) If this amount of tax on the unreduced unimproved value capitalized at 10 per cent. (the percentage shown above) were deducted from the " unreduced unimproved value of the land" it would leave a net unimproved value less than the true unimproved value.

The effect of such a method would be particularly pronounced in the case of a subject property having a large unimproved value. ·.. For example a property with an" unreduced unimproved value" of, say, £290,000 would yield a net unimproved value of £176,750, which would be considerably below the true net unimproved value of £208,556.

To calculate the true net unimproved value the following course is essential :-Find the amount of land tax on the " unreduced unimproved value." In the present case the tax averages 1.226d. per£ on £15,000 and this rate represented in decimals of £1 is £.0051. Multiply£ .0051 by 10 (10 per cent. being the percentage of net return to capital in the basic sale) and the rt>..sult is£ .051. -

Now add 1= £1.051. The reason why one is added is that the method described results from the application of an algebraical formula to ascertain the true land tax to be allowed for, on the true net unimproved value. The unknown quantity equals one plus something else. The something else in the present case is £ .051.

The true net unimproved value of the land is then obtained by dividing the "unreduced unimproved value" (£15,000 in the present case) by the result of the formula. In the present case the result is £15,000 divided by £1.051 .. · £14,271

The land tax on this amount at 1.226d. is £72 ISs. This tax capitalized at 10 per cent. 729

£15,000

The true land tax on £14,271 is £69 5s. 6d. This amount capitalized at 10 per cent. gives £693 as against the allowance made of £729 which is therefore liberal to the taxpayer. .

Example-Suppose the " unreduced unimproved value " to be £80,000. Land tax on this amount (viz., on £75,000) is £1,875. This tax represents a rate of 5 .625d. in the£, viz., (£1,875 divided by 80,000). This rate-expressed as a decimal of a £-is £ . 0234 Multiply£ .0234 by 10 = £ .2343 Add 1 £1.2343

80,000 divided by £1.234 = 64,810 £64,810

Tax on £64,810 at 5 .625d. in£ = £1,518 19s. 9d. This tax capitalized at 10 per cent. = £15,190 15,190

£80,000

The true land tax on £64,810 is £1,252 19s. 7d. This amount capitalized at 10 per cent. gives £12,530 as against allowance of £15,190, is therefore liberal to the taxpayer.

203. A,n extract from the evidence of the Senior Valuer for Victoria (Mr. Lambert) will further illustrate the operation of this allowance :-The biggest disturbing factor is the allowance of weight of land tax. In many cases it is cutting the value almost in half. That arises out of the Curnamona decision. We do not allow weight of tax in connexion with property that can be sub-divided and sold. If a man wants to escape the tax he can .sell half of it or all of it, but on those areas which are right out where we cannot argue a sub-divisional potentiality, you must allow the weight of tax, in fairness. If you suppose a freehold value you must assume a freehold liability. I will give an illustration which will bring it home fairly clearly. There was the sale of freehold of, say, 1,000 sheep capacity in Queensland. That will show a capital value of £3 per acre. Practically it pays no tax, state or federal. Adopting that basis and applying it to an 80,000 sheep proposition at £3 per acre the state and federal tax per sheep area amounts to 4s. and the return per sheep to 6s., leaving 28. to the owner and 4s. to the two Governments. If you calculate the weight of tax it comes to this, that you reduce your values to the extent that the two•Governments get 2s. and the owner gets 4s. That is, you reduce your 60s. sheep area to 408. He gets his 10 per cent. on the 40s. which is 4s., and the tax amounts to 2s. (Pages 232, 246 and 247.)

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204. The object in making an allowance for "weight of land tax" is apparent. The allowan.ce is designed, in the case of difference in value, to effect the necessary adjustment between the basic and subject lands so as to ensure that the value of a subject area as determined by the department will be such as would permit of a purchaser of the fee-simple earning on his capital invested in the business the same net return as that disclosed by the sales of the basic lands .. .

205. Thus if the basis of valuation was a sold area, the unimproved value of which ·was £5,000 on which no federal land tax is payable, and the subject area for valuation was an area four times the size and of similar quality in every respect to the sold area, the value of the subject area would not be four times £5,000 but an amount somewhat less because the "allowance for weight of tax " on the more valuable area would be deducted, so that the percentage o£ return

to capital invested would be the same in both cases after paying all state and federal land taxes. 206. In the case of lands of similar aggregate value to the sold lands which are used as the basis of yalue no allowance is made as the sale price reflects the tax liability of lands of that value.

207. In the application of this allowance the converse should also apply, i.e., ifthe basic sales evidence is of lands of higher value than the subject lands then the weight of tax on the sold lands should be added to the sale price before comparison is made with the lands of lesser value. 208. It will be observed that the amount allowed for weight of land tax in the case mentioned in the departmental instruction quoted in paragraph 202 is higher than the actual amount of land tax capitalized, hence the taxpayer is allowed a deduction from the unimproved value

of his land of an amount in excess of the actual tax liability. .

209. We are of opinion that the allowance in no case should exceed the actual tax liability.

ALLOWANCE FOR MAGNITUDE.

210. Reference will be found in paragraphs 104 and 113 to representations made to us in respect of allowance for magnitude. 211. It was claimed in Mr. Eastwood's evidence-in-chief that " the sale price of a very large property must necessarily be influenced by the restricted field 9f buyers willing to pay out large sums of money for land, stock and improvements," and that "this factor does not appear

to have been taken into account by the valuers unless it is measured in some allowance which has been made, and, up to the present, not disclosed as such." (Page 972.) 212. Senior Valuer Lambert considered the method laid down at present, i.e., allowance of weight of land tax,. allows fully for any consideration of magnitude. When asked if he would allow something in addition to land tax for magnitude he replied, "Absolutely, no," and expressed the opinion that" No property could be better valued for magnitude than by the weight of land tax," and that" the land tax more than adequately measures it." (Pages 917 and 918.)

213. Prior to the adoption of the rule providing for allowance for weight of land tax, the departmental practice was expressed in rule 53 of Order 816. 214. That rule required that attention should be paid to the difference, if any, between the total investment in the subject land compared with that required by the basic land, and imposed

upon the valuer the duty of inquiring into the circumstances so as to arrive at the proper discount, if any, to be allowed on the larger investment.

215. The rule reads-DISCOUNT ON LARGE COMPARED WITH SMALL INVESTMENTS.

When deducing the probable selling value of a subject land from a on sales of lands,

attention should be paid to the difference, if any, between the total investment m the subJect land compared mth that required by the basic land. . . . .

It may be assumed for the present, that in cases in which the mvestment mvolved m a subJect pro:?erty exceeds that for a basic property by any considerable amount, the probable purchasers for the would be less than the number for the basic property, and that rt IS that actual P:Ice which

be given for the subject land would be less than the amount ascertamed by stnct anthmetical companson on the basis of net returns of both properties. . . . .

The valuer may find evidence that as high or even pnces I_>er beast area have gr':en caprtal

propositions compared with small capital propositions, notwithstandmg the amount of capital mvestment mvolved. In such a case of course, no discount would be permissible on the larger investment compared with the smaller. In cases it may be found that sales reflect some discount in this connexion. It will be the duty of the valuer to inquire carefully into the circumstances of all such cases, so as to arrive at the proper discount, if any, to be allowed.

216. In considering the claim for allowance for as .well as for weight of tax we have borne in mind the fact that the Commonwealth Land Tax 1s lev1ed on a graduated scale. 2F. We are of opinion that no allowance should be wade in respect of magnitude in addition to for weight of land tax;.

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SUBDMSIONAL VALUE.

218. Closely re1ated to the question of magnitude is that of suitability for subdivision, a factor which is dealt with in rules 14-18 of Order 816. 219. The reference made in rule 14 (quoted in paragraph 241) to the opinions expressed by the High Court in the Duncan case, does not, in our opinion, convey their real significance. In the course of the judgment in that case Griffith, O.J., said:-

The contention for Commissioner now is that that theory [the theory ofthe hypothetical purchaser] does not connote a single purchaser ; but that you must take into consideration the possibility of there being a number . of persons-2, 5, 10 or 100-who would have been willing amongst them to buy the whole of the land. The two hypotheses are entirely different. The hypothesis of a willing purchaser assumes, as I have shown, ability as well as

willingness to buy. An hypothesis which assumes an indefinite number of purchasers able and willing amongst them to buy the whole of the land in separate parcels is quite a different thing, and is not the hypothesis made by the Act . . . . . . A man may think that he may get £3,000 for a parcel of land at once. He may also think that, if he subdivides the land, and offers very liberal terms, speculative buyers will be likely to g:ve a. nominal price amounting to a great deal more £3,000. But, on the whole, he may come to the conclusion that £3,000 in hand is more than the present value of what he would probably get by selling on credit after taking all these contingencies into account. Nevertheless, I agree that the probability of being able to sell the whole at once on such terms is an element to be taken into consideration ; but I think it is no more. For instance, in the case of a city property, a reasonable man might expect to obtain a higher price by selling in two parcels instead of in one, and if an ordinary vendor would do so, the fact

might very fairly bfl take into consideration, not as a matter of law, but as a matter of fact, in considering the value of the land. This only shows that the possibility of a subdivisional sale and the probability of there being a number of purchasers who amongst them would buy the whole of the land, are relevant, but not conclusive circumstances. The statute, in my opinion, contemplates a sale of the whole of the land on the day as of which the valuation is made.

220. In the s{l.me case Isaacs, J., said-The interpr-etation put upon that [the definition in the Act of Unimproved valueJ by the learned Judge from whom this appeal comes was that it does not include a possible subdivisional sale by the owner. He thought that it meant necessarily a sale of the whole land in one block. In my opinion, that is a wrong construction. There is one vendor, but the interpretation section says nothing about one purchaser. The whole of the land is, for the purpose of the section, assumed to be disposed of in fee-simple by the vendor. But it does not connote that the only potentiality

to be considered is one purchaser who is able and willing to take the whole of the land uno ictu. That would reduce the range of competition, and very materially effect the unimproved value of the land.

221. It is of interest that in the Payne case (a recent Victorian case heard before Mr. Justice Macfarlan) the appellant relied upon the reasons given by the Chief Justice and Mr. Justice Rich, .while for the Commissioner of Taxation certain expressions used by Mr. Justice Isaacs were relied upon. In commenting upon this fact, Mr. Justice Macfarlan said-

If I had to determine the matter as a matter of law, I should prefer the view apparently taken by the Chief Justice and Mr. Justice Rich.

. 222. As indicated in rule 14, the conclusion drawn by the Commissioner of Taxation from the opinions of the majority of the High Court in the Duncan case is that in the case of land suitable for subdivision its sale value may be taken as the total amount which the owner cou1d expect to get by selling the land in subdivision on his own account on reasonable terms and conditions.

223. The position appears to be that while the Chief Justice thought the subdivisional value was an element to be taken into consideration, Mr. Justice Isaacs went somewhat further, and was of opinion that the subdivisional selling price might be taken as the value so long as the terms and conditions of sale were of such a character as to fairly represent a cash equivalent.

224. Mr. Justice Macfarlan's decision in the Payne case appears to have been based upon the probability that in that particular instance the. owner would, in preference to subdividing the land himself, have sold in one lot at such a figure as would admit of subsequent subdivisional profit to the purchaser.

225. These several judicial views do not appear to be mutually exclusive. 226. In our opinion where the valuer can prove the existence of a market for the land in subdivision, and has convincing evidence that all the land could be sold in subdivision as at the date of valuation on reasonable terms and conditions, the Commissioner of Taxation is justified in adopting the subdivisional value as the basis of assessment.

227. We are further of opinion that a valuer is justified in regarding the subdivisional value of land as an element likely to influence the mind of a buyer and so to enhance its value beyond what may be. termed the present utility value ; and that the measure of such enhancement is a valuer's problem.

RIGHT OF :QESUMPTION AS DETERMINING THE LEASE TENURE. 228. It was stated by the Commissioner of Taxation- in evidence before the Knibbs Commission · that one of the grounds of objection lodged against assessments of Crown leaseholds was that areas subject to resumption by the Crown should be excluded from the area for a.n value is being obtained, as from the date .of probable

resumption. (QuestiOn 211.) ·

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229. To this contention the Commissioner replied-The liability to resumption of the whole or part of a leasehold estate does affect its market value, but the Q.epartmental practice of revising all . past assessments upon the resumption of any part of a leasehold property so as to the period of the lease of the resumed area on the actual period during which it was held fully provides, in my opm10n, for equitable adjustment in such cases. (Question 216.)

230. At a later stage the Commissioner further stated-In regard to the problem connected with the liability to resumption of a part of the leasehold areas, I be prepared to recommend an amendment of the law to provide that the tenure of that portion of the lease which is liable to without compensation should be deemed to cease upon the date when the liability to resumption and that if the lessee continues in possession of that portion after that date he should be regarded as

occupymg 1t on sufferance. At the present time the department deems him to have a lease for the full period for whic lease was granted, subject to an amendment of the assessment for past years so as to calculate the lessee's estate

any area for the period during which he actually occupied it. The reason for this practice was that

mformatwn was given to my predecessor to show that in very many instances the Crown never exercised its power of resumption. I think the present departmental practice should continue in the case of liability to resumption with compensation. (Question 3836.)

231. In his closing address to the Knibbs Commission Mr. Benjamin said-As the Commissioner of Taxation recognises that under the terms of resumption set out above the lessee has no lease in the true sense of the resumable portion after the time of resumption has arrived, and has intimated that he is to recommend an amendment of the law to provide clearly, and without ambiguity, that the tenure of that

portion of a lease which is liable to resumption without compensation should be deemed to cease upon the date when the liability to resumption materializes. I ask the Commission to recommend accordingly. (Question 3981.)

232. The Knibbs Commissio:Jf dealt with this subject at some length in paragraph 2 of Section IV. of its Report, and, while endorsing the opinion of the Commissioner quoted in paragraph 230, did not recommend that in its present form it be given effect. The Commissioners thought it would be better to allow for resumption rights as a disability in the same way as allowances are

made for other disabilities.

233. Reference has been made in paragraphs 83, 84, 85 and 88 to representations on the subject made to us by Mr. Clapham and Mr. Jowett.

234. For our further guidance on the issue we sought the opinion of the Solicitor-General. We asked-In the cases of leases from the Crown in which the Crown has the explicit right of resumption as to parts at varying dates, would it be competent for the Taxation Department to treat the tenure of the lessee's estate as being limited

to the period or periods of assured occupancy of such parts by the lessee 1 For example, in the case of a lease for 42 years in which the Crown has the right of resumption of a specified portion of the land-say one-fourth--at the end of seven years, would it be correct at the outset to regard the tenure of the lease as being for seven years in respect of the whole area, and for 35 years in respect of three-fourths of the area?

The Solicitor-General's reply was-I assume that the specific proposal mentioned would assume a seven years' tenure a8 to the whole, and a 35 years' further tenure as to three-quarters of the leased land. I see no statutory objection to the proposal, but in the event of the Crown not exercising its right of resumption the tenant would enjoy a 35 years' tenure of a quarter of the land

without assessment in respect thereof.

235. We are of opinion that for the purposes of Land Tax Assessment in the cases of leases from the Crown in which the Crown has the explicit right of resumption without compensation as to part or parts at specified dates the tenure of the lease in respect of such part or parts should be treated as being limited to the period or periods of assured occupancy by the lessee.

236. The Solicitor-"General pointed out in his reply a position which would arise in the specific example given in our question, viz., that "in the event of the Crown not exercising its nght ·of resumption the tenant would enjoy a 35 years' tenure of a .quarter of the !and without assessment in respect thereof." We consider that position is one whiCh from the

circumstances that from the beginning of the eighth year onwards the area m questiOn would be held under a permissive occupancy.

GENERAL ORDER 816.

237. We do not consider it necessary for the purposes of our inquiry to publish the Departmental Order 816 in extenso. 238. As has been explained, the Order consists of a number of rules (79 in all) for the guidance of the Valuers of the Taxatior. These rules certam well­

defined principles ]aid down by the Department as the basis of land valuatiOn for the purposes of the Federal Land Tax. They have been modified and added to from time to time as the result of experience, and as has seemed necessary to the Commissioner in the of legal and in view of various decisions of the Courts on the subject of land valuations; and they w1U no doubt be further amended and added to in the future.

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239. It would be a matter of surprise if the rules were entirely free from· error and were not in some respects open to criticism, dealing as they do with so complex a subject as the valuation of freehold and leasehold land, upon which there will always be wide differences of opinion.

240. We have elsewhere in our Report expressed disagreement with some of the Department's methods of valuing, but on the whole we regard Order 816 as a painstaking effort to lay down sound lines for valuing land in conformity with the requirements of the Land Tax Assessment Act.. (See also paragraph 57.)

241. We have quoted some of the rules in Order 816 in thecourse of our Report. The following additional extracts from the Order, and the subjoined list of some of the principal topical headings therein, will serve to further indicate the general scope and purpose of the Rule I.-The law assumes a sale of the subject land, and the Department is required to ascertain the price that a willing buyer would have to pay a willing seller, each having a full knowledge of the subject land and its potentialities and willing, but not anxious, to do business with the other.

Rule 2.-The best evidence from which to deduce t}Je value of a property is the average price at which similar in the same district have been sold in the open market. Such sales form the basis of the departmental

valuations and are to be applied in accordance with the rules set out hereafter. Rttle 3.-Alllands are to be valued as freehold in possession and as if unencumbered, and only after prior careful inspection. VALUATION oF CRowN LEASES.

Rule 5.-In all cases the value of a Crown lease must be ascertained upon the assumption that it is freehold land. The freehold value of the land must be arrived at according to the rules applicable to actual freehold land, but if the conditions of the lease place restrictions on the use of the land embraced within the lease the freehold value must be arrived at having full regard to such restJ;icted use.

VALUEs oF LAND SUITABLE FOR SuBDIVISION.

Rule 14.-If the land is suitable for subdivision, but is not subdivided, the opinions expressed by the majority of the High Court in the case of Duncan v. Deputy Commissioner of Taxation, South Australia, may be applied, namely, that its sale value may be taken as the total amount which the owner could expect to get by selling the land in subdivision on his own account on reasonable terms and conditions. The valuer must be in a position to prove that a market exists for the land in subdivision and that the whole of the land could be sold without delay, otherwise subdivisional value cannot be taken as the value of the land. No deduction is to be made in respect of possible profit to the owner on the subdivisional sales in such cases. ·

Comparable Bales. (6-13.) Ascertaining Unimproved Values by the Direct Method. (19-20.) Ascertaining Unimproved Values from Improved Values. (21.) Method of Analyzing Basic Sales. (22-28.) Carrying Capacity-How Ascertained. (32-34.) Ascertaining Net Returns. (35-36.)

Net Returns affected by Fortuitous Circumstances. (37.) Excess Improvements. (40-41.) Live Stock Values. (42-43.) Adjustments to be made when Ascertaining Net Returns. (45.) Allowance for Losses by Drought, &c. (46.) Bales of Stock to avoid Drought Losses. (47.) Information required Respecting Subject Lands. (48-49.) Comparison by Proportion. (51.) Comparison other than by Proportion. (52.) Discount of Large Co:J;llpared with Small Investments. (53.) Example of Summarizing Analyses and Comparing. (54-57.) Valuing Improvements. (60-61.) Timber Treatment. (62.) Interest Allowance on Unimproved Value. (63-65.) Influence on Values of Depreciating Factors. (69-70.)

PROVISIONS OF THE LAND TAX ASSESSMENT ACT SPECIALLY RELATED TO THF SUBJECT OF OUR INQUIRY.

242. Section 29 of the Act renders the owner of a leasehold estate in Crown lands liable to taxation according to the value of his estate, provided the lease is for a term longer than one year. The section Notwithstanding anything in the last two preceding sections, the owner of a leasehold estate under the laws of a State or part of the Commonwealth relating to the alienation or occupation of Crown lands or relating to mining (not being a perpetual lease or a lease with a right of purchase or a lease of land to be used for pastoral, grazing, or cultivation purposes, or a homestead lease or a mining lease or a timber lease) shall not be liable to assessment or taxation in respect of the estate, and the owner of a leasehold estate under any such laws for a term not greater than one year certain shall not be so liable :

Provided that in the assessment of the unimproved value of a lease the value of any metals or minerals or other rights reserved to the Crown shall be excluded.

243. Sub-section (3.) of section 27 provides that a Crown lessee shall be assessed and liable to tax as if the lease were made before the commencement of the Act.

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244. The sub-section reads-Notwithstanding in this section, where the owner of the fee-simple is exempt under sections thirteen or forty-one· of this Act from taxation in respect of the land or the lease is a lease from the Crown, a lessee of the land shall he assessed and liable for land tax as if the lease were made before the commencement of this Act and not otherwise.

245. Section 28 deals with the liability and assessment of the owner of a leasehold estate under. a lease made or agreed to be made before the commencement of the Act and defines the term" the unimproved value of a lease or leasehold estate in land." By section 27 sub-section (3.) a lease from the Crown is deemed to have been made before the commencement of the Act. Sub-sections (2.) and (3.) of section 28 read-

The owner of a leasehold estate in land, under a lease made or agreed to be made before the commencement of this Act, shall be deemed to be, in respect of the land, the owner of land of an unimproved value equal to the unimproved value (if any) of his estate ; but if he has, before the commencement of this Act, entered into an agreement to make or granted a lease of the land, he shall be entitled, during the currency of that lease, to have the unimproved value (if any) of that lease deducted from the unimproved value of his estate: ·

Provided that where the owner of the leasehold estate has, within three years before the commencement of this Act, been the owner of a freehold estate in the land, he shall be assessed and liable to land tax as if his leasehold estate had been under a lease made after the commencement of this Act. (3) For the purposes of this section-

(a) the unimproved value of a lease or leasehold estate in land means the value of the amount (if any) by which four and a half per centum of the unimproved value of land exceeds the annual rent reserved by the lease, calculated for the unexpired period of the lease at four and a half per centum, according to the calculations based on the prescribed tables for the calculation of values :

Provided that the Commissioner may from time to time, if he thinks fit, alter the rate per centum upon which the calculations in this section are based; (b) rent, in the case of a lease of improved land, means so much of the whole rent as bears to the whole rent the proportion which the unimproved value of the land at the date of the lease bore to the

improved value : Provided that, where onerous conditions for constructing buildings, works, or other improvements upon the land·, or expending money thereon, are imposed upon the lessee, or where any fine, premium, or fore-gift, or consideration of the nature of fine, premium, or fore-gift, is payable by the lessee, the Commissioner may assess the amount (if any) which ought, for the purposes of this section, to be added to the value of the rent in respect thereof, and the value of the rent shall be deemed to be increased by that amount accordingly ; (c) the owner of a leasehold estate includes the lessee of land for life under a lease or an agreement for a

lease.

246. Section 3 of the Act contains the two following definitions :-Unimproved value, in relation to land, means the capital sum which the fee-simple of the land might be expected to realize 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 and made or acquired by the owner or his predecessor in

title had not been made. " Value of improvements " in relation to land, means the added value which the improvements give to the land at the date of valuation irrespective of the cost of the improvements : Provided that the added value shall in no case exceed the amount that should reasonably be involved in bringing the unimproved value of the land to its improved value as at the date of assessment.

247. Section 11 (3.) is the subject of special comment in paragraphs 180 to 197. 248. It will be seen by reference to the provisions of section 28 of the Act quoted above that the owner of a leasehold estate in land is deemed to be the owner of land of an unimproved value equal to the unimproved value (if any) of his estate ; and that the unimproved value of a leasehold estate in land means the value of the amount (if any) by which 4i per cent. of the unimproved value of land exceeds the annual rent reserved by the lease, &c. 249. These provisions necessitate regard being paid to the defin:tion in the Act of " Unimproved value" in relation to land as quoted above, and that definition necessitates the valuation of lands held under lease from the Crown as though they were freehold, and sets the problem.

WHAT IS THE BEST EVIDENCE OF VALUES? 250. In a written statement furnished to the Royal Commission on Taxation in 1920, the Commissioner of Taxation said-The High Court which has dealt with valuations of land for purposes of taxation or resumption has ruled that the best evidence of the value for which one area of land could be sold is the actual price realized upon the sale of comparable lands suitable for similar use.

When the subject land is unimproved, its probable selling value is deduced from the amounts for which comparable unimproved lands have been sold, if available. If there are no such sales, the probable S'3lling value of the land is arrived at from the unimproved value deduced from sales of comparable improved land. 251. Amplifying this paragraph under examination the Commissioner said-

The law assumes these lands [outback leasehold properties] to be saleable as freehold and it is the duty of the department to ascertain that selling value. The department obtains the selling values of land which has not been the subject of sale by comparing these lands with comparable lands which have been the subject of sale and by a process of deduction and general calculations we arrive at approximately the selling value. You see we take the property as

a business proposition. We say what is it worth as a business proposition or that that is a business proposition and there is a comparable business proposition sold for so much. It is all a question of comparison. (Page 187.)

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252. The Comm:esioner's statement further explained the departmental practice. in the following terms :-When the subject land is improved, its unimproved value is deduced in accordance with rules laid down by the High Court, i.e., by deducting from its probable selling value in its improved condition, the value of the improvements to the property.

The probable selling value of the improved property is arrived at from the amounts for which improved properties ?f gene!al quality and use have been sold. For the purpose of this comparison of values the department takes mto consrderatwn the average net return from the land, assuming of course it has been put to its best use. The average net return is taken for as long a period as possible, up to ten years.

The incidence of the tax is materially affected by the deduction on account value of improvements which must be made from the capital value of an improved property. The original definition of " value of improvements " reads :- '

" In relation to land means the added value which the improvements give to the land at date of valuation irrespective of the cost of the improvements." Land owners contended that this meant that from the present day capital value of the improved property there should be deducted the difference between it and the original cost of the land. To prevent the possibility of the success of such a contention, the definition was altered by Parliament to read-

" Value of improvements, in relation to land, means the added value which the improvements give to the land at the date of valuation irrespective of the cost of the improvements : Provided that th added value shall in no case exceed the amount that should reasonably be 1·nvolved in bringing the unimproved value of the land to its improved value as at the date cf assessment."

The words in italics explain the limitation imposed by Parliament to this deduction. The amount which would reasonably be involved in effecting the improvements on any property is the principal subject of discussion between the taxpayers and the department. The capital value of the improved prope:ty is the first important consideration, but its determination does not give rise to as frequent dispute as does the deduction on account of value of improvements.

The High Court has held that the "present-day" cost (cost at 30th June then last past) of replacing existing necessary improvements in their existing condition (physica.I and useful) is to be regarded as the amount of the deduction to be allowed in respect of improvements."

THE METHOD OF VALUATION RECOMMENDED FOR ADOPTION.

253. The first step.-Of primary importance in determining the value of a pastoral property is the ascertainment of its carrying capacity. 254. In the Morrison (Killingworth) case, heard before the Full High Court, Mr. Justice Isaacs said-

Some evidence was given ag to the unimproved value of the land as a single unconnected fact, that is, apart from its present condition, its history, and the improvements, regarding it in fact as in its original primeval condition. UnJess I were driven to it as the only available means of arriving at some solution, I should be altogether indisposed to accept that evidence, becanse it is eminently ansatisfactory to me, and appears to be altogether haphazard. . . In such a case as the present, and certainly as applying to this particular estate, there is a much better method available namely to get the improved value first, and then arrive at a value of the improvements within the meaning of the Act, and that is the method which I think is much more satisfactory in the present case. . . . In that view, the first thing to do is to determine its fair carrying capacity, because when that is done other considerations, though still elastic and to a large extent indefinite, become reducible to practical limits. When you once get its carrying capacity you have to a large extent a solid basis from whence to proceed.

255. In the Fisher case, Isaacs and Gavan Duffy, JJ., stated-.-When ascertaining the unimproved value of a station property such as this which has been for years an improved and working concern, the practical, and really the only way, at least in the majority of instances, is to find first of all from its present condition and its history its fair carrying capacity.

256. In ascertaining the carrying capacity of a pastoral property, the valuer should first of all apply his knowledge of the country and supplement his general information by investigating the recorded history of the property to be valued as well as the records of similar properties preferably (though not of necessity exclusively) in the same district. He should also take special cognizance of such other information gained in the course of his inquiry as seems relevant and likely to affect· his final judgment.

257. By Rules 32, 33, and 34 of Order 816 the departmental valuers are instructed as follows:-32. Where books of record are available, these should be inspected over a period of ten years ending on 30th June for which the valuation of the land is being made, or for such shorter period, if any, which will refect the fair average

carrying capacity. 33. The stocks on hand at the beginning and end of each year, the stock shown by the shearing tallies or mustering records and by purchases and sales, with dates of purchase and sale, are to be aRcertained, and from these figures the average carrying capacity for each year is to be calculatEd.

34. Where books of records are not available, the valuer is to collect the fullest possible information fiOm thl' land and in the locality upon which to base an opinion regarding tl1e carrying capacity.

:l58. Rule 46 purports to make provision by allowance for the effect upon carrying capacity and net returns through drought.

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259. The second step.-Having ascertained the. carrying capacity, the next step should be to determine a beast area value for the subject property. In this process the valuer may determine the value per beast area--l. By direct comparison with sold comparable freehold areas, due allowance

being made for all disadvantages. · 2. By (a) estimating what the average net profit per beast area of the subject land should be under normal management; · and (b) capitalizing that profit at the appropriate rate of interest. 260. It is considered that wherever practicable it would prove an advantage, and afford a safeguard against error, if the valuer tested the results arrived at under ·one method by applying

the other. 261. In the application of method 2, as defined in paragraph 259, the valuer's estimate should be reviewed and checked in the light of the available records of the subject property, as well as the returns from similar properties.

- 262. The adoption by the valuer of either or both methods will call for the use of the fullest available information and the exercise of the same care as in the case of ascertaining the carrying capacity of the land. 263. It is essential that in any direct comparison of the subject land with another property

in order to ascertain the value per beast area of the former, the comparison should be with freehold properties which have been the subject of sale and have so established a market value-the point at which buyer and seller would come together. 264. In those cases in which the valuer considers that it is not practicable to rely upon the method of direct comparison and to measure the disadvantages of the subject property effectively, sales of freehold lands nearest to the subject land and used for similar purposes should be analyzed in order to ascertain the rate of interest earned by the sold properties. The rate of interest disclosed by these sales would determine the rate of interest to be used for

capitalizing the net returns from the subject land. It is considered that the rate of interest disclosed by sales would afford a reliable indication as to the return an intending purchaser would expect to receive upon his investment. 265. In the Curnamona case, Murray, O.J., used 10 per cent. as the interest ·rate for

capitalization, and the following extract from his judgment indicates the method adopted :-I may say that the most critical question in the whole inquiry is what rate of interest a prudent purchaser would expect on his investment. The smaller the rate, the more he could pay for the land. I have given him 10 per cent., which I consider to be the absolute minimum ; but it is doubtful whether he would be satisfied with that rate, as the risks are very great. If, as might easily happen, he failed to make any profit the first year, he would require 20 per cent.· in the second; and if he only made 5 per cent. in that year, he must have 25 per cent. in the following year, and so on. What has mainly led me to decide on 10 per cent. is that I regard the carrying capacity I have determined on, while

not too low, as reasonably safe. If I had accepted the evidence for the respondent, I should have increased the rate to at least per cent., because it is clear that there would be greater difficulty in maintaining an average of 40 sheep to the mile than 33, and more uncertainty in making 5s. per head net profit than 4s . 8d. 266. In the determination of a rate of interest that would be looked for by a purchaser

definite evidence of rates of interest actually earned and disclosed by sales of lands that are put to similar use is in our opinion a more reliable guide than an estimate unrelated to established facts. Moreover, arising out of the definition in section 3 of the Act (which provides a fee-simple basis for the unimproved land), there is the necessity for relating the returns of the subject leasehold property with those o c comparable freehold lands. (See also paragraph 246.) We

therefore consider that the rate of interest to be used as the factor for the capitalization of the net returns of the subject property should be that disclosed by sales of land nearest to, and put to similar use as, the subject lands. 267. Capitalizing Disadvantages.-We were informed by the Commissioner of Taxation in

evidence that" Order 816, issued in 1917, laid it down as a general rule that disadvantages should be measured on a basis 5 per cent.," and that " There was no deep analysis of the proposition at that time by the Department." To the question, "But there was a disregard of the rate of interest which might be expected to be earned on the property as a whole ? " the Commissioner replied "Yes," and added, "No one would challenge it, but would rather support it because it would work out to the advantage of the land-owner. At a later stage I seriously contemplated altering the 5 per cent. to 10 per cent., but I did not continue on that line, because I thought the

other scheme of net returns would cover it all." (Pages 38 and 39.) 268. Senior Valuer Lambert in his evidence said, " I will now read from the amended Land Tax Order No. 816, issued on November, 1918-It will be noted that capitalization of the disadvantages has bef'n made at 10 per w ent. This has done because it is asserted by pastoralists generally that they expect an average return of 10 per cent. on their _investments. When, therefore, they are judging a property, they usually capitalize the probable net returns at

10 per cent. In these circumstances the only proper course of measuring the disadvantages of one property with another is to capitalize them at 10 per cent. (Page 232.)

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269. We are of opinion that the same rule should be adopted in respect of capitalizing disadvantages as we recommend in the case of capitalizing net returns, i.e., that the factor for capitalizat:on should be the rate of interest disclosed by analysis of the sales of freehold lands with which comparison is be.ng made. .

. 270. We therefore recommend that the following general principles should be observed in the valu.ation of improved Crown leasehold areas in order to determine their freehold unimproved value:--1. Ascertain the carrying capacity of the land by reference to all available

information and by the exercise of the valuer's expert knowledge. 2. Compare the subject land with sold freehold areas and allow for disadvantages, which should be capitalized at the appropriate rate of interest. From the improved value deduct the amount properly attributable to the value of the improvements.

3. Estimate the ,net earning per beast area of the subject land under normal management and normal conditions. Check the estimate by reference to records of the property and the valuer's knowledge of similar properties. Then capitalize at appropriate rate of interest, and eliminate value of stock and improvements. The appropriate rate of interest to be used should be that disclosed by sales of freehold land nearest by distance and put to similar use as that of the subject area.

4. Compare the results of 2 and 3, and if any great variation adopt 3 as the more reliable in accurately reflecting disadvantages. ·

271. Relation of Leasehold Subject Lands with Sold Freehold Lands essential.-It is apparent that no value can be ascertained without some appropriate measure; that the most appropriate measure in the case of land is market value, and that market value is disclosed by sales.

272. It is equally clear that the definition in the Act of " Unimproved value " requires, in the course of valuation of land held under lease from the Crown, a relation of the subject lands with sold freehold lands as the basic lands. Hence arises the necessity for basing the departmental estimate of the unimproved value of a subject property either upon evidence of the sale price of comparable freehold areas, or upon the percentage of net profits to capital invested in freehold

lands put to the same use as the subject property.

273. Ascertaining Net Returns.-The practice of the Taxation Department in ascertaining the net returns from a property that has been improved is set out in Rules Nos. 35 to 49 of Gen.eral Order 816 and is in general harmony with commercial practice.

27 4. It is the custom of the Department to employ men with business and accountancy experience in investigating returns. ·

275. Consideration is given in the Rules to matters that necessitate adjustment in the accounts such as for example :-Fortuitous circumstances, Management,

Unnecessary Improvements, Live Stock Values, Losses by Drought, &c.

276. The only Rule that calls for special comment is Rule 45, which provides, inter alia, for adjustment in respect of rates and taxes applicable to the land. The Rule provides that allowance is to be made for all rates and taxes except income tax. ·

277. The question of allowance for land tax has been dealt with in paragraphs 198-209 of this Report.

278. In the" Curnamona" case Chief Justice Murray, after quoting Isaacs and Duffy, JJ., in the Fisher case, said-" ' all taxation ' clearly covers and must have been intended to cover income tax as well as land tax." This interpretation of the view expressed by the two High Court Judges led Chief Justice Murray to allow as a deduction the amount payable in respect of income tax when arriving at the net returns from the land, the valuation of which was the subject of the appeal heard by him.

279. One difficulty in respect of such allowance may be pointed out. The amount of income tax attributable to the income earned from any property would vary according to the financial circumstances of the taxpayer. Obviously the rate of tax would be appreciably greater if the taxpayer h!ld considerable sources of income other than from the returns of the property being valued.

1 17.·

45

280. No claim was made before us that income tax should be included in the allowance made in ar:iving at th.e net returns from a property, nor did we receive from the Pastoralists' the assista:nce asked for in the elucidation of that part of our inquiry which

had relatiOn to questiOn of net returns. It will be seen by reference to paragraph 118 of our Report that, m October, Mr. Eastwood wrote to us on the subject of the method of arriving at net returns as follows :-" On going more fully into the matter of the compilation of a skeleton form for ascertaining the returns from the pastoral property, I regret to state that I find it almost impossible to devise a form that would be suitable for universal adoption such as is the case for income tax purposes. . . . I regret that I cannot help the Commission by suggesting a skeleton. form for general application that would assist the Commission in laying down any rules for the guidance of valuers m ascertaining the value of land based on such form or the information contained therein."

. 281. yv e are of opinion that payments in respect of income tax should not enter into the cdculatwn of net returns for the reason that income tax is a charge upon the income of a person after the income, in respect of which the tax is levied, has been earned and ascertained, therefore cannot rightly be treated as an expenditure incurred in the production of the

mcome.

RE-APPRAISEMENT OF RENTS.

282. It was contended by witnesses before us-1. That owing to liability of Crown Lessees to re-appraisement of rentals, the taxation of the lessees' interests was impossible ; 2. That re-appraisement or revision of rents was one of the uncertainties attached to Crown Leases which was incapable of measurement, and which rendered impossible any reasonable accuracy in assess­ ments ; and 3. That re-appraisement was one of the factors in the determination of lessees' interests which had not been allowed for in any of the assessments.

283. It is necessary to remember always that under the provisions of the Land Tax Assess­ ment Act the unimproved value of land held under lease from the Crown has to be determined upon a fee-simple basis. The rent payable under the lease, therefore, does not affect the unimproved value of the land, qua land, but is an important factor in the determination of the unimproved value of the lessee's estate. The rent payable to the Crown only comes into the calculation of the lessee's interest after the unimproved value of the land has been ascertained upon the basis laid down

by the Act. 284. There was no suggestion made in evidence as to how a contingency such as re-appraise­ ment of rent could be measured at the date of valuation. The rent of a Crown leasehold property is, sometimes, decreased on re-appraisement, and the view may be advanced that in whichever

direction-upward or downward-the rent is subsequently altered, the alteration reflects a proportionate change in the unimproved value of the land, and that there is, therefore, litt)e, if any, variation in the value of lessee's interest other than that which is due to its measurement in relation to the unexpired term of the lease.

285. Be that as it may, we are of opinion that allowance in respect of re-appraisement of rent cannot· be made by way of a deduction from the unimproved value of the land, and is practicable only when a rent variation is no longer a contingent liability under the lease, but has become actual.

RECOUPMENT OF LOSS ON CAPITAL EXPENDED ON IMPROVEMENTS.

286. The claim was made before us on behalf of pastoralists, that some allowance should be made in the determination of a lessee's estate in Crown lands for the capital lost in improvements (apart from depreciation), by reason of the amount received by way of purchase .or compensation at the termination of the lease being less than the then depreciated cost of the Improvements.

287. In most pastoral Crown leases there are tenant rights in the improvements to the extent that the lessee is paid for improvements at the termination of the an.amount to their value to the incoming tenant. In many the value. to mcommg tenant Is not

equal to the depreciated cost, hence the loss for whiCh allowance IS claimed. 288. This claim is similar in character to that made in respect of re-appraisement of rent. The possible loss of capital expended on improvements does not in any way affect the unimproved value of the land as a freehold, and the only manner in which an of this could

be made is by adding a sum to the reserved rent to cover the contmgency when calculatmg the lessee's interest. 289. By sub-section (3.) (b) of section 28 of the Land Tax Assessment Act, additions may be made to the value of the reserved rent only in respect of onerous conditions for constructing buildings works or other improvements upon the land, or expending money thereon, imposed upon the' lessee, 'or where any fine, premium, or fore-gift, or consideration in the nature of fine,

premium, or fore-gift, is payable by the lessee.

I

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I

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46

290. Apart, therefore, from the impracticability of accurate measurement of such a contingency as the loss of capital expended on improvements, there is no provision in the Act for an allowance to provide against such cc ntingent loss.

SHOULD 1914-1915 VALUATIONS BE ADOPfED AS THE BASIS OF THE TAX ON CROWN LEASEHOLDS FOR ALL YEARS, VIZ., 1914 .. 1923 ?

291. In evidence the Commissioner of Taxation was asked, "For assessments for later years running up to 1920, 1921 and 1922, would the valuation of from 1911 to 1915 be a fair thing to go by ? " · The Commissioner replied : " I thought so, for the reason that it leads up to the present· day method, the analysis of the average of average net returns. I was confronted with.this: not only had prices of produce gone up, but·the cost of improvements had gone up tremendously, and one had to be set off against the other. In some of the calculations that were made in that respect we found that they did reasonably balance each other. So that ·the increased cost of making improvements could be ignored just as the increased prices of produce could be ignored." (Page 15).

292. The following additional extracts from the Commissioner's evidence will afford further indication of his intentions in this regard:-Question.-Generally speaking, it has been found impracticable to make the valuations more frequently than once in three years

Answer.-Yes, having regard to the circumstances. Question.- In the case of Crown leaseholds, it has not even been 'attempted 1 Answer.-You must remember for the last six years the payment of the tax has been in suspense, and we did not know what Parliament would do ; therefore we suspended practically all our work. What I have suggested is that the system of valuation which I have introduced lately should be applied to all years, and that will involve the acceptance of valuations based upon an average of net returns for the five years from 1911 to 1915. That is really. what it boils down to.

Question.-Ignoring the whole of the war period Answer.-Yes, ignoring the whole of the war period as abnormal. Question.-Would you adopt that basis in dealing with city lands Answer.-No; because the conditions are altogether different with city land. (Page 61.)

· · Later the Commissioner sa;id :-We are trying to get a settled unimproved value which might be applied for a fairly long period. We had no evidence to show that unimproved values had increased or decreased since 1914, and we had not sufficient sales to show that they had varied during the war up to the date when Parliament exempted these leaseholds, the idea being to apply a common unimproved value throughout the whole period. (Page 158.) .

Recognizing the difficulties that might arise from the adoption of his suggestion the Commissioner considered" it might involve legislation to maintain the value for the whole period." (Page 161.) Senior Valuer Lambert was asked :-

Would you think, if these earlier values were made to. apply to the whole period ending 1923, it would be, generally speaking, fair to the taxpayer? ·

His reply was:-Up to 1919 I should say it was demanding full measure from the taxpayer, and for later years it would be favorable to him. (Page 279.) 293. The question of applying unimproved values determined by the Taxation Department as at 30th June, 1914, or 1915, in assessments of lessees of Crown lands in respect of each of the years of the currency of the Tax on Crown Leaseholds is one which presents some difficulty. In view of the absence or scarcity of sales during the greater part of the period embraced by the tax ; the suspension of the work of valuation by the Taxation Department; and the increase in the value of improvements, but the difficulty should not be insuperable in view of the valuation work already done, and the information recorded by the Department.

294. On the general contention of the Commissioner of Taxation that in relation to pastoral properties the ad':'ance in the prices of _produce since is in with the

increased cost of Improvements, the evidence was not conclusive. The probability appears to be that, speaking generally, the unimproved value of pastoral leasehold lands in, Australia has not decreased during the last ten years. Where sales or reduction of Crown rents do not afford evidence of decrease in values, no injustice would be inflicted upon taxpayers by the adoption, as the basis of assessment in the latter years of the tax period, of the unimproved values determined in respect of the earlier years by the method of valuation we recommend.

295. We are of opinion that unimproved land values should re111ain constant for taxation purposes only sales upon which such value_s rest unchanged. Should sales

indicate a material rise or fall m such values, the valuatiOn of subJeCt lands should be altered to accord with the sales evidenr,e.

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47 .

296. cir.cumstances in respect of the tax on Crown leaseholds permitted, the depart­ mental valuatiOns, m our opinion, should have been subjected to a triennial revision in the light of all available evidence.

297. As the currency of the tax has expired, a periodical review of the valuations at intervals of not three years is not possible-but an effort should be made by the Taxation Depart­ ment to give effect to the principle of triennial review as far as may be practicable by a close scrutiny of all sales evidence as at say, the 30th June, 1917, and 30th June, 1920.

298. eviden?e available at those dates reflect an alteration in unimproved land values, the eXIstmg valuatiOns should be amended "in accordance with such evidence.

MUST VALUE BE DETERMINED AS AT DATE OF LEASE?

Mr. Owen Dixon, K.C., in the course of his address to us, stated that it was necessary

to ascertam the value of an improved leasehold property at the date of the lease in order to ascertain the proportion of the reserved rent that applies to the unimproved land. 300. Section 28 (3.) (b) of the Land Tax Assessment Act provides that--Rent, in the case of a lease of improved land, means so much of the whole rent as

bears to the whole rent the proportion which the unimproved value of the land at the date of the lease bore to the improved value. 301. The difficulty in ascertaining the value of leasehold areas as at the date of the lease, particularly in those cases where leases were taken up many years ago, would be considerable; but upon inquiry we found that the difficulty is practically non-existent.

302. Our inquiries elicited the following information:-New South Wales.

There is no record in the New South Wales Taxation office of a Crown lease where it has been necessary to make the allocation. In leases granted by the Western Lands Board the Crown has no interest in the improvements on the land. In respect of leases granted by the Department of Lands, such as Settlement Leases, Improvement Leases, Scrub

Leases, &c., there are only a few old leases which were leased on rental to cover both the land and the improvements. Rentals are now based on the uilimproved value only, any improvements on the land being paid for by the lessors as a rule by instalments. South Australia.

As a general rule the rent of Crown leases in this State is attributable solely to the unimproved value of the land leased. This applies to :-1. All pastoral leases. •

2. Right of purchase and perpetual leases (without revaluation of rent) of lands" originally " alienated from the Crown. 3. Right of purchase and perpetual leases of land situated in pastoral areas. 4. All perpetual leases not subject to revaluation of rent.

5. Miscellaneous leases, e.g., scrub leases, selectors' leases, water leases, &c. (Note.-These leases are not frequently met with in Land Tax assessing, and their value is inconsiderable.)

Queensland.

In this State the Crown does not grant any improved leases, but determines· its rent on the unimproved basis under section 125 of the Consolidated Land Act 1910-1920. Any improvements which may have been effected by any prede­ cessor are paid for as tenant rights under sections 123 and 124, and their value is recovered from the incoming lessee, selector, or purchaser.

W este·m Australia.

There are no instances in Western Australia of lands leased out by the Crown in an improved state for which it is necessary to make an allocation of rent as provided under section 28 (3) (b) of the Land Tax Assessment Act.

Taxation Department Central O.ffice.

So far as assessments that are issued from the Central Office are concerned no instances can be recalled for which an allocation of rent has been necessary.

BOARD OF APPEAL.

303: 'rhe adoption or a comparatively simple and inexpensive method of procedure in dealing with objections and appeals in respect of the taxation of Crown leaseholds such as would be afforded by the appointment, on the lines recommended by us in paragraph 310, of a Board of Appeal under the Land Tax Assessment Act, is, in our opinion, desirable.

304. As will be seen by reference to the subjoined extracts from their respective Reports, two Commissions have already strongly approved of the appointment of a Board of Appeal under the Land Tax Assessment Act.

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305. The representative of the informed us by letter that "it is considered that an impossible task has been assigned to the Commissioner in the assessment of Crown leaseholds, and that no good will result from the appointment of an Appeal Board." (See paragraph 118).

306. A review of the present position and of the evidence of many witnesses does not lead us to share the view expressed by Mr. Eastwood, that no good will result from the appointment of an Appeal Board ; nor to concur in the consideration upon which that view is based.

307. On the subject of a Board of Appeal the Knibbs Commission remarked (see paragraph 9, section (iv) of that Commission's Report) :-· Opinions were freely expressed by witnesses as to the desirability of the establishment of a Board of Appeal to which dissatisfied Crown leaseholders might make their appeals against valuations, and thus have their objections expeditiously and economically dealt with instead of having to bring them before the High Court, as is usually now the case. · Without doubt, appeals to a High or Supreme Court necessarily entail much expenditure and cause considerable

delay. The majority of the witnesses thoroughly favour the appointment of a special body of experts to act as a Board in each State. Only one witness advocated the retention of the present regime, whilst another suggested that the appeal should be only to the Full Court of each State. . .

In the opinion of your Commissioners it would be an advantage to h-ave such a Board, and they recommend its appointment by legislative enactment.

308. On the same subject the Royal Commission on Taxation inits Fourth (Land Taxation) Report, section xxvii, wrote:-716. The evidence submitted on the question of the appointment of a Board of Appeal under the Land Tax Assessment Act disclosed as great unanimity of opinion in support of the proposal as that manifested in relation to the establishment of a similar tribunal under the Income Tax Assessment Act. We are satisfied that the reasons justifying the constitution of the Income Tax Appeal Board are equally cogent with respect to the appointment of a Board of Appeal under the Land Tax Assessment Act. · ·

717. Under section 44 of the Land Tax Assessment Act a taxpayer may appeal against any assessment by the Commissioner of the High Court, the Supreme Court, or a county or district court of a State, or such other court as is specified in that behalf by proclamation, on the ground that he is is not liable for the tax or any part thereof or that the assessment is excessive. There is a natural unwillingness on the part of many taxpayers to incur the delay; trouble, expense and publicity of legal proceedings against the Taxation Department. In the administration of so technical and complex a measure as the Land Tax Assessment Act, many grounds of dispute between the taxpayer and the Department must inevitably arise. We are of the opinion that if taxpayers were access to an independent tribunal (having a simple and inexpensive procedure) for the settlement of these disputes, it would do much to allay the existing irritation and discontent on the part of taxpayers.

718. The following extracts from our First Report in respect of the Board of Appeal under the Income Tax Assessment Act are quoted as being equally appropriate to a Board under the Land '!,'ax Assessment Act­ " 151. The Commission approves of the view generally expressed by witnesses on the subject, that the Board's decisions as to matters of fact should be final."

" 152. It is considered that it should be the duty of the Commissioner to· forward an objection to his decision to the Board when requested to do so by any dissatisfied taxpayer within 30 days of the receipt by him of such request." ·

"153. The parties should have the right to appear 'before the Board inperson, or by representative." " 154. With a view to discouraging appeals to the Board on unimportant issues or on frivolous or unreasonable grounds, it is suggested that the appellant should be required to deposit a prescribed fee at the time of lodging an appeal. In the event of the Board considering the appeal frivolous or unreasonable, the Board shall have the power to order the forefeiture of the whole or part of the fee." 721. We therefore recommend-

!. That the existing Taxation Appeal Board appointed under the Income Tax Assessment Act. and any subsequent or additional Board of Appeal similarly appointed be empowered to hear and adjudicatein matters of appeal under the Land Tax Assessment Act. 2. That it shall be competent for the Board of Appeal to adjudicate (in respect of Land Taxation) upon matters which involve questions either of law or of fact; that in respect of questions. of fact the Board's decision shall be final, but that in respect of questions of law an appeal should lie from the Board to the High Court or to the Supreme Court of a State. · · · · ·

3 . . That in those instances in which (prior to the constitution of the Board of Appeal)-(!) notice of appeal to a court has been given in accordance with section 44 of the Act, but the case has not come on for hearing ; (2) objection againt assessment has been lodged but no decision has been given by the Commissioner, the Act should provide that taxpayers shall have the option of transferring their appeal or objection, as the case may be, to the Appeal Board.

309. We are in complete accord with the opinion expressed by the Royal on Taxation in paragraph 717, and with the recommendations made in paragraph 721 of that Commission's Report.

310. We therefore recommend-That the existing Taxation Appeal Board appointed under the Income Tax Assessment Act and any subsequent or additional Board of Appeal similarly appointed be empowered to hear and adjudicate in matters of appeal under the Land Tax Assessment Act. ' ' -

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IN THE ASSESSMENT OF CROWN LEASEHOLDS DOES THE ACT SET AN IMPOSSIBLE TASK? .

311. A reference to the numerous extracts from the evidence which are to be found throughout our Report will indicate that many witnesses would answer this question affirmatively, though indiVidual opinions have been expressed with varying degrees of emphasis, and in many instances, not without qualification. ·

312. The tenor of our general observations, opinions expressed and of recommendations made throughout our Report will already have indicated that from the evidence submitted, and facts disclosed in the course of our inquiry, we are of opinion that the determination of the unimproved value of land held under lease from the Crown, upon the basis laid down by the Act is not an impossible task, though it is-for reasons that are apparent-often a difficult one.

313. We invite attention to a statement submitted to the Knibbs Commission in 1919 by the Commissioner of Taxation. In the course of examination before that Commission, Mr. Ewing was asked:-What evidence have you available as to cases where a value has been definitely assigned to the goodwill of the leasehold, or to the unimproved value of the leasehold qua leaseholds

The Commissioner's reply was:-I produce a statement showing a few cases in which a value has been definitely assigned to the goodwill of an unimproved lease. This statement refers to Queensland, Western Australia, South Australia, and New South Wales. It is not exhaustive, it is only indicative:-

Crown Leaseholds .

. Comparative statement showing in respect of certain Crown leaseholds, the leasehold interest as disclosed by the sale, together with the leasehold interest as calculated under section 28 of the Land Tax Assessment Act 191().,..16-

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15

16 17 18 Hl 20 21 22 23 24 25 26 27 28 29

1

2

3

4

5

6

7

8

9

10 11

F.17208.-4

Lease Number. Date of Sale.

QUEENSLAND.

.. I 9th October, 1917 1 4th June, 1914 ..

;. lOth March, 1915 ..

" "

"

" "

"

" " 12th August, 1918 .. 1st July, 1915 1916 1st July, 191<1 19th May, 1916 9th July, 1917

Leasehold Interest as disclosed by. the Sale.

£ 8. d.

38,415 0 0

16,711 0 0

19,202 0 0

3,Hll 0 0

15,919 0 0

27,246 0 0

24,251 0 0

11,344 0 0

9,500 3,405 3,202 3,781

4,321 1,568 2,464

15th March, 1918 6,588

813 0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

7th September, 1916 23,000

24th May, 1916 14,000

1st November, 1918 . . II 38,483

2nd November, 1916 5,000

. . 11th September, 1917 10,000

l

ist February, 1917 180

23rd April, 1917 . . 4,781

24th March, 1916 1,200

31st March, 1919 . . 2,602

25th October, Hll5 1,200

April, 1917 3,500

.. 1 3rd April, 1918 . . 1,750

, 15th December, 1915 3,400

WESTERN AUSTRALIA. December, 1912 . . 9,000 0 0

5th 1915 1,700 0 0

30th June, 1916 . . 2,380 0 0

November, 1916 . . 7,485 0 0

30th June, 1914: . . 3,080 0 0

30th June, 1916 . . 1,400 0 0

May, 1918 3,210 0 0

:30th November, 1912 4,354 0 0

30th June, 1917 . . 933 0 0

30J,h November, 1913 3,500 0 0

April, 1916 3,250 0 0

:lO!.h .Tnne; 1918 . . 3,000 0 0

15th June, 1916 . . 1,400 0 0

Leasehold Interest as calculated by the Department.

£ d.

33,881 0 0

18,696 0 0

34,779 0 0

0

39,013 0 0

59,908 0 0

44,403 0 0

8,569 0 0

16,141 0 0

18,119 0 0

9,509 0 0

3,537 0 0

1,158 0 0

4,999 0 0

1,882 0 0

2,165 0 0

4,142 0 0

6,392 0 0

41,902 0 0

18,252 0 0

38,172 0 0

9,029 0 0

11,327 0 0

21,829 0 0

4,969 0 0

1,593 0 0

8,101 0 0

1,707 0 0

1,133 0 0

4,867 0 0

2,647 0 0

16,486 0 0

1,833 0 0

2,544 0 0

5,121 0 0

3,171 0 0

624 0 .0

4,090 0 0

'4,614: 0 0

983 0 0

4,786 0 0

4,088 0 0

2,066 0 0

1,277 0 0

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CRowN LEABli:HoLDs-continued.

Leasehold Interest Leasehold Interest

Lease Number. Date of Sale. as disclosed by the as calculated by the

· Sale. Department.

£ 8, .d. £ s. d:

SOUTH AUSTRALlA.

1 11th January, 1912 7,963 0 0 4,664 0 0

2

{ 24th March, 1911 } 3,150 0 0 1,149 0 0 8th November, 1917 3 .. 24th March, 1911 .. 8,180 0 0 2,575 0 0 4 { 21st November, -1911 } 5:882 0 0 7,536 0 0 September, 1912 .. NEW SOUTH WALES.

VALUE OF IMPROVEMENTS.

1 .. 1915 3,280 0 0 1,857 0 0

2 1915 7,495 0 0 7,992 0 0

3 1916 4,920 0 0 3,017 0 0

4 1916 55,794 0 0 51,321 0 0

5 1918 28,162 0 0 33,440 0 0

6 1918 5,700 0 0 5,802 0 0

The New South Wales figures of values attributed to lessees' estates in purchase prices have been arrived at by deducting departmental values of improvements on the sold leases from the sale price where the latter was for land and improvements only. None of the New South Wales cases cited represents a "walk-in-walk-out" sale. (Questions .3824-5.)

314. We also invite · attention to the Departmental return relating to Valuations, Assessments, Collection, and Suspension of Tax .on Crown Lea.seholds which appears as Appendix No. III. of this Report.

315. This return shows that tax has been collected upon owners' valuations, in many as well as upon Departmental Check Valuations.

316. Even though it may be found necessary in the light of our several recommendations to revise many of the existing valuations and assessments the work of valuation of Crown leaseholds already carried out by the Department affords, in our opinion, strong presumptive evidence that the task set by the Act in relation to the assessment of Crown leaseholds is not an impossible one.

317. In the course of correspondence the following of:licialopinions have been expressed upon the question as to whether buyers would be forthcoming if . large pastoral leasehold areas were offered for sale as freehold on reasonable terms and conditions. ·

. . .

The Under Secretary, Department of Public Lands, Brisbane, wrote under date 8th October, 1924-No land can now be sold in Queensland on freehold tenure, but if the freehold of sheep country were offered for at the present time on reasonable terms and conditions, it would be readily sold.

The Under Secretary, Department of Lands and Survey, Perth, wrote under date 3rd October, 1924-I beg to inform you that there is no provision in the Land Act of this State to enable the Government to submit any land held under past.()rallease publicly as freehold, nor does the Act allow private offers to be received for the purchase .()£ any pastoral lease as freehold. Under the circumstances, it is impossible for me to . reply to the question asked in

paragraph 3 of your letter of the 8th idem with any degree of certainty, but there is no doubt that if the land were submitted for sale on reasonable terms and at a suitable price, buyers would be forthcoming.

PUBUCATJON OF LAND TAX ·.oFFICE ORDERS.

318. We invite attention to :section XXIX. (Office Orders) of the Fourth (Land Tax) Report ()f the Royal Comm.ission on Taxation, which appears as Appen{}iX No. VI.

We understand the Taxation Department has and . made available to the publie Land Tax Orders issued since the publicatiot:t of that Report· in ]922. thus in part giving effect to the recommendations contained in the section referred to.... · .

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51

ACKNOWLEDGMENTS.

We desire to appreciatively acknowledge the courteous and willing assistance given us in the course of our inquiry by the Commissioner of Taxation and other Departmental Officers. The labour involved in the preparation of evidence returns and other official data called for by us. has been considerable, and in every instance there was an evident disposition to facilitate

investigations.

We also desire to thank -the Solicitor.:.General of the Commonwealth (Sir Robert Garran) for his helpful. guidance on the several matters referred to him for opinion. In addition, grateful acknowledgment of courteous help is due to many correspondents throughout Australia, both official and private, to Mr. J. L. Menzies, who was originally

appointed Secretary to the Commission, but who was almost immediately transferred to other

12th December, 1924.

We have the honour to be, Your Excellency's most obedient servants,

W. WARREN KERR, Chairman. M. B. DUFFY.

52

APPENDIX I.

QUESTIONNAIRE.-ROYAL COMMISSION ON THE VALUATION FOR TAXATION OF CROWN LEASEHOLDS. _- ..

1. State particulars of your experience in valuing country lands and pastoral properties, and the States in which your experience was gained. 2. What has been the length of your service for the Taxation Department ? · 3. Describe the methods which have been adopted by you in valuing pastoral properties-freehold and leasehold.

State charly as to each of thesemethodswhether (a) it is, as it stands, correct and reliable; (b) in what way:and for what reason it is not reliable; (c) would any modification-and if so what-make one of these quite reliable. 4. In the valuation of pastoral properties for purposes other than taxation does the practice of outside valuers differ materially from the methods laid down in the departmental rules (Order 816) ? If the answer is in the affirmative, state what in your opinion are the chief points of variance.

5. In the sale of Crown leasehold properties as going concerns, is it your experience that a definite value is attributed to the goodwill by both partiescto the transaction. If so, how is that value arrived at ? 6. If in your opinion reliable inference as to value can be deduced from the estimates or proved return from the subject lands, what rate of interest on capital might be reasonably looked for by a purchaser of Crown leaseholds. On what do you base your opinion ?

7. In determining the unimproved value of land held under lease from the Crown, are there in your opinion factors other than those mentioned in Order 816 which should be taken into account. If so, what are they? 8. When average net returns are used as a factor in valuing Crown leasehold land, what period should be taken to arrive at the average ?

9. State what in your opinion are the principal factors in the determination of the unimproved value of pastoral land, in the order of their importance. ·

10. What in your opinion are the advantages and disadvantages of the method of arriving at the value of Crown leasehold land by capitalizing the average of average net returns at an agreed upon percentage as compared with the method prescribed under Order 816 ? Is it your opinion that this method would ensure equitable taxation? 11. Define what is, in your mind, the exact meaning of the term" Comparable Land." In your opinion, to what extent may there be divergence between subject and basic land before they cease to be comparable for practicable purposes?

12. The following method has .bee:r1 proposed for determining the actual freehold value of leasehold land, viz.:-(1) Ascertain the " carrying capacity" of the land. (2) If the " carrying capacity " is less or more than one sheep to the acre, assuming for the time that the

property under consideration is similar in every way to standard property, then the standard value per acre for sheep to the acre country must be. decreased or increased in accordance with the same. (3) The value thus arrived at must now be further decreased or increased according to the variation of the property under consideration, from the property used as the standard. (4) In this connexion the comparison should be made as to· the variation in-

( a) Situation with regard to natural advantages, such as river frontage, &c. (b) Situation with regard to distance from market, &c. (c) Situation with regard to removing stock in time of drought. (d) Rainfall. ·

(e) Liability to drought, fire and flood. (j) Character of the soil and feed thereon. (g) Size of property to be held for profitable use. (h) Number and character, and improvements to be maintained.

(1:) Taxation if the property is aggregated with other lands.

(j) Existence of verlJ!.in and noxious weeds, and the necessity of keeping them under subjection. (k) Obtaining and maintaining a water supply. (l) Cost of materials for improvements and other goods that may be required. (m) The difficulty in obtaining a suitable supply of competent labour. (n) Area to be worked to provide the pasture per sheep. (o) Workings, expenses, and other outgoings. (p) The risks to which the capital invested in the business is subject, and the returns to be

expected on the capital. (q) The competition among buyers for large areas as against smaller ones.

Do you consider the foregoing method accurate and complete? If not, correct and supplement it. 13. What method do ,YOU consider should be adopted in valuing leaseholds under which the ·Crown has the 1ight of resumption as to separaJ<) parts at varying dates I ·

53

APPENDIX II.

METHOD OF VALUATION OF PASTORAL CROWN LEASEHOLD LAND ADOPTED IN THE SEVERAL STATES.

NEw SouTH WALES.

In this, as in all States, le_asehold land has been treated as freehold in order to arrive at the unimproved value. value has been arrived at m exactly the same way as freehold, sales of comparable sold lands being taken as a basis, and values deduced therefrom in accordance with the instructions contained in General Order 816 due allo'Yance being made for any disadvantages such as distance from rail head, cost of droving, situation with to distance from market, &c., including removal of stock in time of drought, &c.

The method of arriving at the unimproved value of a sold property is illustrated by the following :-21,000 acres at 60s.-purchase price . . . . . . . . . . . £63,000 0 0

Improvements-Fencing £4, 180 plus 5 per cent. It years £4,441 5 0

Timber treatment. £11,210 plus 5 per cent. 4 years 13,452 0 0

Clearing £600 plus 5 per cent. one year, structural £3,425 plus 5 per cent. one yea!" 4,226 5 0

2l per cent. four years (£63,00().........£22,119 lOs., £40,880 lOs.)

Unimproved value

£22,119 10 0 4,088 1 0

26,207 11 0

£36,792 9 0

The valuer ascertains from the data available particulars of stock actually carried on the property with a view of arriving at its correct carrying capacity. The average value of a number of coiDtparable sold properties is then applied to the leasehold, the carrying capacity of which will have also been obtained by the valuer; in arriving at the value of the leasehold the valuer is required to take into consideration all possible disabilities under which it may suffer as compared with the basic sales.

The method above referred to is the only method which has actually been applied. There have been no variations, although certain investigation work has been carried out in connexion with the proposal to use net returns from the land as a basis of valuation. ·

QUEENSLAND.

1. The general principle adopted in Queensland before G.O. 816 was issued, was to fix a standard of valuation from sales of comparable land, and established values from valuations issued by the Taxation Department and accepted by the owners. In the case of pastoral holdings the comparison was made from the fair average normal carrying capacity of the land; and the eatage value per beast area was determined for certain localities, deductions

being made for droving, trucking, carriage, &c., which was left to the discretion of the valuers, as a valuer's problem to determine in the locality. In many instances these valuations were check values from known normal agistment rates capitalized at 5 per cent. to find the improved value from which was deducted the fair value of the improvement!! in their state of preservation as at date of valuation, plus 5 per cent. extra for the period it was considered would

be required to effect them if they were non-existent. 2. Some variation was pennitted in cases where it was considered that valuers could best ascertain their comparison from established unimproved sales of unimproved land, instead of sales from land improved, and in these cases it was customary for the valuers to make an allowance in the reduced carrying capacity to the extent that they considered the improvements had increased the capacity above the normally improved country.

In some instances where the lands were situated in very remote parts of the State and valuations were urgently required (e.g., when runs had been sold and the vendors desired an assessment) tentative valuations were applied which were based on State Lands Department reports and official stock returns or on the number of stock declared in the sales, on an annual agistment rate capitalized at 5 per cent. simple interest.

4. The eatage rates referred to above which represented the value of a sheep or beast area reflected the land tax liability as existing at the dates of the various sale transactions employed, which sales were effected prior to 1914. Values arrived at under this method were adopted for years 1914 onward to 1917, as there were no further comparable sales of pastoral freeholds in Western Queensland from which a basis for the later· years could be obtained. By

adopting these uniform valuations for the years in question no other factors affecting values such as variations in gross returns or increased land taxation had been taken into account, nor was the size of a parcel of and allowed to influence its per acre value either as an original or an accumulation of titles treated as one parcel. 5. SnbRequent to 1917 the provisions of General Order 816 were applied in arriving at unimproved land

values. 6. This order provided for the valuation in the first instance of Crown leasehold land on a freehold basis, by comparison with sold freehold lands, comparison to be measured by relative earning powers. The difficulty of making such a comparison became apparent when values were required for years subsequent to the sales before

referred to, for these transactions did not reflect the altered conditions existing in later years. A further difficulty presented itself as a result of the inability to obtain net profits for a longer period than five years prior to. 1914, and in some instances reference had to be made to income tax in the absence of other records. In VIew of the above the Commissioner directed that a comparison of net profits of subject and basic lands could only be made on the

period ending 1914, and where no net profits were availabL on subject land, the average of average net profits for the district could be applied to individual properties for the purpose of comparison with basic lands. F.17208.--5

I'

I

;'L

i

I

:I

:·I '.i:

54

7. The Commissioner further directed that valuations thus arrived at for 30th June, 1914, should be applied for years subsequent to 1914 (where no comparable sales. for the latter years are available) unless there was some other of a permanent nature which should be taken into consideration, such as the State Land Tax in Queensland and the mcreases in the Federal Land Tax. The only advantage which is permitted of any increase in net profits would be as a set-off against any increase in the costs of improvements. The weight of taxation as affecting land values has been measured by a formula furnished by the Commissioner.

8. On the 30th August, 1923, the Commissioner directed .that valuations of Crown leases be made by the capitalization at 8 per cent. of the average of average net profits. ·

9. At a Conference in Brisbane on 7th May, 1924, the Commissioner was advised that the average of average net returns on sold freehold sheep properties to 30th June, 1914, showed 9 per cent. on the capital invested, these properties were all favorably situated in an attractive portion of the State, and the capitalization of their own net profits at 8 per cent. would result in a higher value than the purchase price, and a higher rate of capitalization than 8. P.er cent. was recommended to him for application, more particularly for properties remotely· situated. The CommiSsiOner decided that the rate of capitalization should be 10 per cent. throughout.

These instructions have been carried out as far as possible until receipt of the Commissioner's instructions

suspendmg opel,, ti ns pending the repo of the Royal Commission. ·

SOUTH AUSTRALIA.

. I. In July, 1915, a start was made to value these leases-Departmental Order No. 816 not being then in existence. In 1915 the local Deputy Commissioner considered that the best method of valuation was to proceed from the conclusions of values to be drawn from certain known sales of pastoral properties in 1911-1912. These sales were of two stations, (1) Culnina, and (2) Outalpa. !These pastoral properties were of very great extent, and were sold in subdivision.

2. The lands to be valued were approximately in three districts, viz. :­ (1) North-Eastern (sheep). (2) Northern (sheep or cattle-mainly cattle). (3) Western (sheep). The Culnina and Outalpa sales were in the North-Eastern district and being adjacent to the railway (Adelaide to Broken Hill) were considered particularly useful for the purpose of deducing conclusions as to values under the most favorable conditions, i.e., at a rail head.

3. The district valuers inspected the properties. They took the sale value as the proved capital value­ adding to the sale value certain .amounts, being liabilities to the Crown taken over by the buyer. Note.-These liabilities were the amounts owing to the Crown for Crown interests in improvements on leasehold lands.) The valuers valued the tangible improvements, and included in•such value an allowance for interest on the constructive cost of such improvements, i.e., structural improvements in the nature of buildings, fences, and water. The valuers also estimated the total amount of interest which would be lost to the buyer on the capital outlay during the period necessary to bring the unimproved land to the improved condition at the date of sale-i.e., an allowance for what is known in Departmental Land Tax Order 816 as" measure of expectation." From the adjusted capital value as abovementioned, the valuers deducted the value of the tangible improvements, plus the "measure ·of expectation," and the balance or residue was deemed to be the unimproved value of the land, and was expressed at so much per acre or square mile.

4. At the same time as the calculations abovementioned, the valuers, as practical men having a knowledge of the sheep pastoral business, estimated on the spot what in their opinion was the annual profit per sheep. 5. North-Eastern District.-Being possessed of the deduced unimproved value (i.e., as leaseholds) per acre or square mile of the Culnina and Outalpa properties., the same valuers proceeded to value the other properties in the North-Eastern district. The "other" properties were inspected for the precise purpose of making comparisons with Culnina and Outalpa under the headings of (a) carrying capacity, (b) marketing facilities, and (c) water facilities­ with special reference not only to existing water, but to respective prospects of water supplies. (Note.-At this time no valuation for the improvements on the " other " properties was made, the valuers concerning themselves with a calculation of the unimproved value of the " other " properties, and basing such valuation upon a direct comparison of the three features mentioned above, i.e., carrying capacity, marketing facilities, and water facilities.)

6. Officially the valuers were not instructed to make for the " other " subject properties an estimate of the annual profit per sheep as they had been instructed to make for the Culnina and Outalpa properties, but although · there is no direct evidence in the reports of the valuers, it is understood that they did make for the "other'·' properties an estimate of the annual profit per sheep and used such estimates in checking the results arrived at after measuring the comparisons mentioned above. .

7. The values as determined above were adopted in the assessments and generally speaking have either been objected to or appealed against. In certain cases; and subsequent to the inspections above, further inspections were made to determine the value of the improvements, using the Departmental Land Tax Order 816 for necessary rules. 8. Northern District.-Following the actions as to the North-Eastern district as abovementioned, a valuer was specially selected for his knowledge of pastoral properties (sheep and cattle). This valuer, having absorbed from the reports of the North-Eastern valuers their standards of unimproved value and annual profit per sheep,

proceeded to a certain station in the Northern district known as "Wilgena." This valuer had been the manager and subsequently the owner of "Wilgena" Station, and acting on sucl1 knowledge he determined for the Wilgena station (a) the unimproved value per square mile, and (b) the annual profit per sheep. Working from the Wilgena results or standards, and proceeding on the same lines as used by the North-Eastern valuers, this valuer made a valuation of the unimproved value of the Northern district, i.e., concerning himself with unimproved value only, and making no valuation of improvements. These values were carried into assessments, and generally speaking

were either objected to or appealed against. 9. Tfe8tern District.-For the Western district, the same Northern valuer, using the same information ItS deduced from Wilgena as abovementioned, valued certain of the more Northern lands of the Western district. The remaining lands in the Western district were valued by one of the North-Eastern valuers, using his Culnina and

Outalpa standards, and his other valuations in the North-Eastern district, together with the particular knowledge gained by him as an owner of pastoral properties in the Western district. Each of these two valuers concerned himself with only the unimproved value, mak-ing no valuation of the improvements.. These •·alues were carrie

55

10. Re Capitalizing of net returns.-For certain taxpayers the details have been taken out under the heading Qf average annual net returns. No valuations, however, have been made on this basis, nor have any conferences been held with taxpayers with a view to settlement of objections and appeals on this basis. 11. Re Curnamona appeal case, Supreme Court, S.A. (1917).-In connexion with the general question of valuing

pastoral leases, it is perhaps proper to mention that in this State there has been one important appeal, i.e., Curnamona pastoral station. This station is situated in the North-Eastern district, as mentioned above, and was valued (as -above mentioned) on the basis of the Culnina and Outalpa standards. The Judge rejected the Department's valuation, and substituted a valuation based on the capitalizing factor, but stated that he would have been prepared to use a

capitalizing factor as high as 12t per cent. The case is also noteworthy in that the Judge definitely rejected as evidence the Culnina and Outalpa sales, basing his rejection on the irrelevancy of those sales. In short, the Judge .a.pparently considered that the true principle of valuing the Curnamona property was the capitalizing of the annual net returns.

WESTERN A USTRALIA.

Lands the subject of pastoral leases were valued after consideration of sales of land . in the freehold areas, .a.nd the returns that these lands might be expected to yield. The values applied to the districts containing the pastoral leases are on such a basis that each property may be expected to return 10 per cent. per annum of the capital ireehold value fixed by the Department.

TASMANIA.

1. Departmental valuations have been made in this State without variation on one basis only, viz. :­

First class Second class Third class

s. d.

10 0 per acre. 7 6 " "

5 0 " "

2. This basis of valuation was adopted after full consideration by the valuers and upon the advice of the Lands Department, which divides the leasehold-lands into the three classes mentioned. 3. Leasehol

4. In most cases the leasehold land is held in conjunction with freeholdings. It is situated. ch1efly .and mountainous localities, and its value is practically restricted to the owners of the freehold land m connexwn With which it is used. 5. The amount of tax attributable to the Crown leasehold estate is under £200. The approximate total area -of Crown leases held by taxpayers is 339,000 acres, the total leasehold estate being about £23,000. .

6. All valuations on account of Crown leaseholds so far as this State is concerned have been finalized and ..assEWJments made and accepted by taxpayers.

lh

:; I

; 1

' ' ;

,::1' .. . ,

I

Question.

N0. l.——Were all original as-sessments made on owners’ valuations

No. 2.—Were any assessments Yes. made by the Commissioner in respect of any leases re-

turned by owner as being

non-taxable

able

N0. 3.—In respect of What

years was tax collected and on what basis (a) aexs valuations

(5')) Default 91%;: s: uents (6)1)epa1tmental check I hold estate based on previOus return i

valuations values

(a) ()n departmental check vuizmtion on

Central and Victoria.

Tax was collected—— (a) On owners’ 1914—22 (1)) On default assessment only to the extent

of the. tax on an. equal amount to a leasc-

valuations for all

DEPARTMENTAL RETURN RELATING TO VALUATIONS, ASSESSMENTS, COLLE

With few exceptions Crown leases were included in original assessments on owners’ values if there were any estate on such values

In many cases there was no leasehold

estate on owners’ values, but the application of departmental valuation made the leases tax-

years

assessments issued prim to application of direction to suspend tax issued on 15th March, 1918. The years affected were—— 1914—15, approximately 27 per cent. of

tax on departmental valuavtiong col-

lected; 1915—16, approximately 10 per cent. of tax on departmental valua-

tion collected; 1916-17, approximately 2; per cent. of tax on departmental

valuation collected

N0. 4.——-Upon what date was collection of tax suspended, was suspension general

throughout Australia, and

has suspension of collection been continuous

N0. 5.—-Have default or other Yes.

assessments been issued to

protect the Department up to termination of Act

No. 6.—-Ha,s a general inti-mation of suspension at col-

lection been made to all

taxpayers and that payment need not be made for the

present

No. 7.—-What are the circum-stances in respect of holding back appeal cases or cases at the instance of—

(a) the Department (b) the taxpayer

No. 8.——T0 what extent and. for What period departmental Primary. Secondary. Toml. in ea(h 0f Periods—

check valuations have been ——

made Check (1)) Beteen gate of ( ) S' D t f

CI 0 :k . Cl: atk Valuatim s .. l .ssue 0 c 1nce a e 0

Assess- Vallliu- Assess- Valeua- Assess- applied.l 2' (aififilslflfetndte G.O. 816 in 1917 and Suspension of

manta. tions ments. (ions ments. exrluq (‘ 0 8l in 1917 Date of Tax in 1918 up to

applied. applied. secondary " ' ‘ ' First Suspension of present, Date.

luterosts. Tax in 1918.

. (a) 72 280 43 Disre- 115 280 147 assessments ap- 72 assessments ap— 1,698 assessments

gavrded plied in 65 returns plied in 34 returns applied in 383

(b) 101 531 17 ,, 118 531 returns

(a) 1,368 5,988 736 I 2,104 5,988

1,541 6,799 796 2,337 6,799

(b) Number of check valuations applied in assessments and which were

based upon comparison of subject lands with basic sales without

reference to net returns from either or both basic sales on subject _

lands . . .. . . . . 4,728

Number of check valuations in assess-ments as result of capitalizing

average net returns at 8 per cent. '

simple interest . . 5

Number of check valuations applied in assessments as result of

capitalizing average net returns at 10 per cent. simple interest . . Nil

Number of check valuations made from other data. . . . . 2,066

Total . . 6,799

"F 17205.-6

Départmental valuations of Crown leases has not yet been applied to assessments for

_ 1922—23

Where departmental valuation has been applied in Crown leases the taxpayer has received an intimation that tax need not be paid until

further advised

(a) When an appeal is lodged taxpayer is asked to

defer action pending determination of the

basis of valuation of Crown leases

(b) If a taxpayer requests that action be deferred such is agreed to

i ' . ' 0 -t- '

New South Wales.

All original assessments were not made on owners’ values

Some assessments made in respect of leases returned by owner as being non-taxable

Number of Cases where Tax is Outstandingv and Tax has been Paid.

‘ Departmental

Default Msessmonts. (heel C

‘ Vfll‘lf 1710113.

Q E

()ut- ' ‘ . Out-

lL-ar. ! Bald. standing. 'standing. P‘Ud' standing; I'ai1.l staudlnn '

1914—15 284 12 3 2 4 90 67

1915—16 297 13 6 8 10 87 80

1916—17 270 15 4 6 9 117 113

1917—18 256 22 5 9 20 101 138

1918—19 245 23 9 1 19 20 85 160

1919—20 258 27 2 .. 10 12 92 162

1920—21 234 44 2 1 3 11 51 177

1921—22 234 45 2 l 2 4 35 170

1922—23 178 3 ' 1 1 27 90 ‘ 108

I

Number of Assessments which Issued on Owners' Valuations and

Departmental Check Valuations.

Owners’ Departmental

Year. Valnauons. “mfg”.

1914—15 . . 296 157

1915—16 . . 310 167

1916—17 . 285 230

1917-18 . 278 239

1918-19 . . 268 245

1919—20 . . 285 254

1920—21 . 279 228

1921—22 . 279 205

1922-23 . 286 117

Default Assessments.

1920—21 . . 17

1921—22 ..' 9

1922-23 . . 5

.1917—18 .. .34 1918—19 .. 49 1919—20 .. 24

1914—15 . . 9

1915—16 . . 24

1916-17 . . 19

Direction to suspend tax was given on 15th From 23rd March, 1918, to 12th May, 1922, in all assessments

Malch,1913, since which date suspension has I

been continuous ‘

issued, including Crown leases on departmental values

Increasing rmners’ values, taxpavels were mfox med that additional tax due to departmental valuation might be de-

ferred pending further notification. From 12th May, 1922,

until 12th December, 1923, taxpayers were informed that

Whole of amount of tax due to inclusion of Crown leases

(whether 011 owners’ or departmental values) may be deferred. From 12th December, 1923, to present, in any assessment, which issued on departmental valuation increasing owners’ values, taxpayers were informed that additional tax due

departmental valuation may be deferred pending further notification

Default and other assessments havé been issued to protect the Department up to termination of Act

issued, each taxpayer was notified of amount of tax which

might remain in suspense

Nil

. Four “ases held ove1 at taxpayer’s

‘ ment’ 3 Iknblm

m 0 request to await Govern-

N umber of Department 11 (‘heck Valuations applied to Assessments

. ,

A general intimation was not given taxpayers, but, as assessments

APPENDIX No.1H,

—_

Queensland.

_.___._____..__.

Yes

Tax was collected on the basis of owners’ valuations for the years 1914—15, 1915—16, and 1916-17. Tax

was also collected on departmental check valuations for the same years“ In both cases the collections

wele made in respect of assessmen s which were issued prior to the and of March, 1918. While tax ’—

collected in lespect of these years, there is, nevertheless, some tax Ohntstanding for the same years. Assessments for these years were ade befoxe and aftel March, 1918, when instructions were received

to defe1 Crown lease taxation payments. There 13 evidence of some dcfault assessments having been

issued and tax havimr been collected for 1915— 16 and 1916—17. It Is a (tifficult matter now to trace ‘

default assessments prior to 19th .une,1916, because before the issw: of Land Tax Order No. 796 i

it was not the practice to indicate 0 assessments that they were defaul't, ones when such was the case I

s

\

Collection of tax was suspended from the end of March, 1918, so far as the extra tax was due to depart-

mental valuations applied to Crown leaseholds. The Assistant Commissioner’s instructions in Land

Tax Order No. 854 were interpreted as having the intention of deferring the increase of tax resultant ,

upon the departmental valuation c Inpared with the owners’ valuation. However, in May, 1922, the Commissioner by memorandum, N . M.229/ 15, directed that all Crown leasehold tax should be deferred.

From about the middie of May, 1 22, suspension of payment of tax, due to the inclusion of Crown

leases in assessments, has been con‘innou»

The Department has also been protected by the non-inclusion of leasehold interests in Generally yes. at. at a. disadvantage by reason of section 21 (2) of the Land Tax some assessments, and thereby is Assessment Act

Yes. Subject to the modification set out in answer to No. 4

(a) The Department has not pursue action in relation to appeals, because of the unsettled basis of

Crown lease valuations -

(b) The indeterminate attitude of th Department as to basis of valuatiton which IS known to taxpayers has influenced their attitude. typical example of the attitude IS expressed 1n the following com-

munication from a taxpayer :— Ishould be obliged if you would kindly hold the appeal over in

regard to the freehold value placed by you on the leased lands, pending the decision of the

Government- in reference to the rmethod of valuing Crown leases for ’baxation purposes ”

Number of Assessments made on Owners’ Valuations 0f Leases which were not altered because—-

Number of Departmental Check Valua 0113 applied to Assessments in each of Period —

(1)) Between Date 0% Issue of (2) Check Valuation 2. (a) 'Prior to Date (c) Since Date Of (1) Check: Valuations was not made and applied ‘ G.O. 816 in 1917 and Suspemion of , . . . . 0f lswe of . . (.onhlrmed w1thln PeriodG.0. 816 in 1917. 1. Date 01. Tax In 1918 up to Owner 5 Values. of Two Years fixed by Bush Suspensnon of present Date. Section 21 of ActTax in 1918. ‘ _ ' 732 340 6,211 (of this num- 156 97

her 125 and 142,

total 267) are on

‘ 8 per cent. and 10.

per cent. net profit basis respectively-

{

N0.

AITION AND SUSPENSION 0F TAX ON CROWN LEASEHOI-D—S.

South Australia.

Substantially the assessments have been made solely on departmental valuations

Yes. In majority of cases the leases were returned

by owners as of little or no unimproved value

1914—15 1915~16 1916—17 1917—18 1918—19 1919—20 1920—21 1921—22 1922—23

Total

——.1

k

I

Owners’ { Default

Vain Itions. l Ass: sum uts.

!

— I i

\Na Hi iPaid. EAs (ssed

4

Col‘ ection of Tax on Specified Basis

£

'é9 28

67

£ _ £

3

18 97 11 40

.. 22

Nfl .

19 19 191

l

I

1)( p11 tn-enta] ! (he(‘ K

1* V aluatirms.

éPaifz. Assessed. ‘1 mid.

i

53 £ £

.. 7,195 7,103

3 7,019 6,126

18 5,183 3,656

97 3,793 2,030

Nil 3,848 459

1 3,738 652

Nil 3,717 383

. . 3,130 131

1,483 39

119 39,106 20,579

April, 1919, suspension continuous since that date. .

Yes.

is in course

Yes, by special notice, i.e., an explanatory letter with

each assessment. First suspension in April, 1919 ; continuous since that date

Generally most. of the cases'cannot be said to have

been held back specifically at the instance of either the Department or taxpayers, but were held up by inaction of bot-h parties, such inaction arising from

Either depart-mental or owners’ values have been calculated (and where tax results have

issued) in all cases; revision of these assessments

a tacit understanding to await developments

Number of Departmental Check Valuations applied to

Assessments in each of Periods—

2. (a) Prior to Date

of Issue of

G.0. 816 in 1917.

118

(b) Between Date of

Issue of

G.O. 816 in 1917 and Date of First Suspension of

Tax in 1918.

37

( :) Since Date of

Suspension of Tax in 1918 up to

present Date.

393

Western Australia.

All original assess-ments 1n respect of Crown leases were made on depart-mental check

valuations

Yes. Several owners included Crown

leases but showed no values. Upon check valuation being applied the leases were pro-bably taxable

(a) Nil I (b) Nil

Yes.

—l (c) All assessments

issued on check

values, and up to

end of 1921 no

notice of suspen-

sion was given

Practically Whole of assessments on

Crown leases is-

sued up to and

including 1921—22 Without reference to suspension.

The letter allowing suspension of pay-ment accom-

panied the last of 1921—22 and whole of 1922—23 assess-ments

Original assessments have issued against all taxpayers

owning Crown

leases

Intimation of

suspension given in last cases of 1921— 22 assessment and whole of 1922—23

assessment

No appeals held back for either of rea-

sons stated

Number of

Departmental Check Valuations applied to Assessments in each of Periods.

All Crown leaseholds were check valued prior to issue of

Gr.0. 816 in 1917

Tax '

5(3.

Tasmania.

No

Taxpayers rarely showed any

value to these

leaseholds, leav-ing it to the

Department to fix a value

(a) Departmental check valua-

tions all years

to 1922—23

\V as never suspended .

Original ments

assess-.

No. All tax has

been paid

None held back

r

57

1 31

APPENDIX IV.

STATEMENT PREPARED FOR THE ROYAL COMMISSION ON THE TAXATION OF CROWN LEASEHOLDS BY THE COMMISSIONER OF TAXATION OF THE REASONS WHICH CAUSED HIM TO DIRECT DEPUTY COMMISSIONERS TO ASCERTAIN THE UNIMPROVED VALUE ON A FREEHOLD BASIS OF PASTORAL LANDS LEASED FROM THE CROWN, BY ASCERTAINING AN AVERAGE NET' RETURN FROM THE LAND AND CAPITALIZING IT AT 10 PER CENT. SIMPLE INTEREST.

" The principal reasons which led to the adoption of the l:tbove-mentioned method of ascertaining the unimproved value of pastoral land leased from the Crown were :- ,

(I) A conviction that the methods previously adopted by the departmental valuers in New South Wales, Queensland, and South Australia were generally ineffective for making due allowances for all kinds of differences which might exist between an " outback " leasehold property which was being valued and the freehold properties which had been the subject of sale and from which standards of unimproved value had been deduced for application to the lands being valued. (2) That there was an absence of sales of comparable freehold lands :­

(a) in Queensland after 1914 : and (b) in South Australia for all years from 1910 onwards.

Note.-There have been sales of freehold lands in New South Wales from which it would be possible to deduce unimproved values which, when suitably modified, might be used as standards for valuing those leasehold lands which are situated principally about midway between the Eastern and Western Land Divisions of the State. This result, however, necessarily postulates a satisfactory

measurement of disadvantages of the leasehold lands compared with the standard freehold lands. (3) The differences between the methods followed in South Australia and those followed in New South Wales, Queensland, and Western Australia. (4) The fact that an average of net returns ascertained for a property, assuming average efficient manage­

ment, reflects all the advantages and disadvantages associated with the property."

The conviction that the methods previously adopted by the departmental valuers in New South Wales; Queensland and South Australia have been ineffective for making due allowance for the advantages and disadvantages referred to above, was the result of a number of conferences which I had at vari?us times during the past three of four years with Senior and District Valuers in the States mentioned on the general subject of valuations for all classes o£ land, both freehold and leasehold. These discussions had led me to the belief that District Valuers had not adequately

measured disadvantages, especially of " outback" pastoral properties, either through oversight of essential or on account of the insurmountable difficulties associated with the problem, when its solution was attempted by way of varying a standard of unimproved value to fit the condition of a subject property. I formed the opinion that the nature of the difficulties was the principal cause of the apparent i!leffective measurement of the disadvantages.

I concluded, therefore, that some more effective method of providing for all contingencies associated with an "outback" pastoral property was necessary so as to arrive at the correct amount which a hypothetical purchaser could afford to give for the property if he was purchasing it on a freehold basis. It was considered that if pastoral lands leased from the Crown were thrown opento freehold acquisition, a purchaser would not be likely to base hi& purchase price upon the price which other persons may have given for freehold pastoral lands situated in more favored parts of the State, but rather upon his estimate of what he could afford to give for the land, having regard to its probable average net, returns.

The actual amount of purchase price which a purchaser would give would depend entirely upon his idea of the percentage which the net returns should bear to invested capital. This percentage would probably vary amongst the purchasers, put it is probable the variation might not be considerable. It was considered that, apart from any fortuitous gain, the average net returns of a property under average

efficient management would reflect all the contingencies associated with these pastoral leases and render unnecessary any further attempt by the Department to measure the capital value of disadvantages for deduction from the standard unimproved value of sold properties far removed from the subject land. Therefore, given a satisfactory percentage which the average net returns might be regarded as bearing to invested capital, the calculation of an unimproved value of the land on a freehold basis would present no difficulties.

Before this method of arriving at an unimproved value on a freehold basis was adopted, very many discussions took place within the Department regarding-(a) the practicability of obtaining an average net return for a pastoral property ; and (b) the rate per cent. at which the net return should be capitalized.

In regard to the net returns, the Queensland and South Australian Branches of the Department made special investigations of pastoralists' books in a number of cases, and in some, the actual net returns were obtained for a number of years past. The periods of years varied according to the state of the accounts ; they ranged from about five years up to fifteen years in one case.

In other instances it was not possible to ascertain the net returns as the particular properties were being worked in conjunction with other. lands, although they were separ11.ted from them by considerable distances. In those cases the average net returns were estimated on the assumption that the subject lands were being treated as separate and distinct pastoral properties put to their own particular best use without reference to any other peoperty.

Tn regard to the rate per cent. at which average net returns should be capitalized, I would refer the Royal ColUilllssion to my memorandum addressed to the Treasurer in which I state, that I first selected 8 per cent. as the basis of this capitalization on account of information which I had gathered from one or two representative ail to what might be reasonably regarded as a fair percentage return on capital invested in freehold pastorAl properties.

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Verbal and tentative instructions had been given to Deputy Commissioners in Queensland, New South Wales and South Australia to prepare to arrive at unimproved values by the capitalization of net returns at 8 per cent. simple interest, and these instructions were confirmed by a written direction issued on 29th October, 1923. Soon afterwards it became apparent that the Department would be called upon by some lessee taxpayers to defend its assessments in the Court, and steps were taken to make a close analysis of all evidence in support of both· the net

returns adopted as a basis, and the rate per cent. at which they should be capitalized. This analysis caused Deputy Commissioners in Queensland and South Australia to. draw attention to the fact that 8 per cent. simple interest could not apparently be fully supported by evidence which. the Department had to put before the Court. This evidence indicated that the net returns of the properties being dealt with required to be capitalized at approximately 10 per cent. simple interest. .

It was also represented by the Acting Deputy Commissioner for South Australia that all appeals against South Australian assessments of Crown leaseholds would be made to the Supreme Court of South Australia, and that they would certainly be decided on similar lines to those followed by Chief Justice Murray in the Curnamona case. In the circumstances it was felt that so far as South Australian pastoralle1:.ses were concerned, there was no alternative to capitalization of net returns at 10 per cent. simple interest.

A similar position was indicated by the evidence submitted from Queensland. Seeing that the Commonwealth Constitution forbids the Commonwealth by any Act or Regulation relating to taxation, to discriminate between States, the mentioned left no alternative to the adoption of 10 per cent. simple interest as the rate for capitalization of net returns throughout the Commonwealth.

As previously stated in my evidence, the sales of land in Western Australia which were taken as the standards of value for valuing other lands in the State, show that the estimated net returns of the sold lands represent 10 per cent. on the invested capital.

APPENDIX V.

LAND TAX ORDER No. 897.

Commonwealth of Australia. Federal Commissioner of Taxation, Post Office Buildings, Bourke and Elizabeth-streets,

Deputy Federal Commissioner of Taxation. Melbourne, 16th September, 1919.

LAND TAX.

Case :-A taxpayer is the holder of a scrub lease which contains the following onerous conditions :-(a) The lessee shall effectually destroy all noxious scrub or noxious trees on at least one-half (i.e., about 21,500 acres) of the scrub area of about 43,000 acres, and on such parts of such scrub area as the Minister shall approve; and shall keep the estimated area of 8,900 acres of good pastoral country

free from all vermin, noxious scrubs, and suckers during· the whole term of the lease. All timber suitable for splitting or sawing shall be carefully preserved. (b) The work of cleaning shall be commenced by the lessee within three months from this date, and shall be done systematically on blocks of not less than 100 acres nor less width than 20 chains, and shall

be proceeded with at the rate of not less than 3,000 acres per annum. (c) The lessee shall, within three months from the commencement of the lease, take such steps as in the opinion of the Minister are reasonably effective to destroy rabbits and other noxious animals, and shall continue to do so during the whole term of the lease and any extension thereof. (d) The lessee shall fence the external boundaries of the lease as near such. boundaries as practicable. The

position of such fence shall be approved by an officer of the Department and shall be of the following description :-A substantial dog-proof and rabbit-proof fence with wire netting attached, the netting shall be six {6) inches in the ground and three (3) feet out of the ground,. and shall be of 12! inch mesh and 17 gauge ; panels are to be 16 feet with one batten and the netting shall be firmly attached to two {2) No. 8 black wires. Two {2) barbed wires shall be securely fixed above the netting. The fence shall be 4 feet 6 inches high. All subdivision fences where necessary shall ·be of the same description or of such a character as to effectively serve the purposes of a subdivision

fence.

The expenditure on these conditions for a period of seventeen years has been £8,831 or an average of £519 per annum and the question has been raised whether the £519 should be added to the reserved rent for the purpose of · applying section 28 {3) {b) proviso.

Decision:-G.O. 753 refers to scrub selections in Queensland which contain conditions that the selectors shall ring-bark and destroy growing timber, the cost being deemed to be in lieu of rent except during the last ten years of the currency of the lease.

The Order lays down the rule that in cases of this nature the total cost to 30th June then last past of the operations referred to should be ascertained and an average annual expenditure for the expired period of the lease should be regarded as the rent reserved by the lease and payable at 30th June last past. The principle of this Order should be applied in these cases.

R. EWING, Commi!:!Sioner of Taxation.

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APPENDIX VI.

SECTION XXIX. OF FOURTH (LAND TAX) REPORT OF THE ROYAL COMMISSION ON TAXATION.

OFFICE ORDERS.

724. In our Third Report, pages 170-1, we drew attention to the fact that the numerous Office Orders relating to the Commonwealth Income Tax Assessment Act had not yet been codified and made available to taxpayers, and we recommended the publication of those Orders for the benefit of the public at the earliest possible moment. The reasons which justify the public issue of the Office Orders in the case of the Commonwealth Income Tax Assessment

Act apply with equal force to the publication of Office Orders issued under the Land Tax Assessment Act. A large number of these Orders have been made available to the Commission, and were of considerable assistance to us in our detailed study of the Act. Our examination of them confirms the view expressed by a number of witnesses, that the publication of the Orders would be in the public interest. Many of the Orders, as supplied to us, contain the names of the taxpayers upon whose cases the Orders were based. These names should in our opinion be deleted before

publication of the Orders. Our recommendations (paragraph 590, Third Report) in respect of Income Tax Office Orders, appear to us appropriate also in respect of the Orders issued under the J,and Tax Assessment Act.

725. We therefore recommend, in respect of the Orders issued and to be issued under the Land Tax Assessment Act:-(1) That the existing body of Office Orders affecting the general practice of the Department be published at the earliest possible moment, and he offered for sale to the public at a moderate cost.

(2) That all such Office Orders subsequently issued be made accessible to taxpayers as soon as issued. (3) That, with a view to securing wide publicity, the daily press in each capital city be furnished with copies of all such Office Orders as soon as issued. (4) That all such Office Orders be purchasable at each Commonwealth Taxation Office at a moderate cost.

(5) That facilities be provided free of charge at each Commonwealth Taxation Office for the perusal by taxpayers of all such Office Orders as are operative. (6) That all such Office Orders be made to apply to all assessments affected thereby relating to the current year of assessment. (7) That, when the volume of Office Orders is published, a public notification be made that within twelve

months from the date of publication (or such further period as the Commissioner may allow) any taxpayer may apply for an alteration of his assessment for any previous year, where the is based upon an Office Order the contents of which were not available to the taxpayer at the time of the original assessment. (8) That, to meet cases where a claim for refund of tax would be apparently sustainable under any Office

Order which has been cancelled before the publication of the volume of Orders, for twelve months after the publication of that volume, such cancelled Orders shall be available for perusal by taxpayers at the Taxation Office in each capital city and that during that period taxpayers have the same right of application for alteration of their assessment for any previous year arismg

out of the provisions of any such Order as they would have in respect of published (current) Orders.

Printed and Published for the GOVERNMENT of the COMMONWEALTH of AUSTRALIA by Il. J. GovernmenT · Printer for the State of Victoria.