Apperly (Public Officer of the Australian Mutual Provident Society) v Federal Commissioner of Land Tax [1914] HCA 13; (1914) 17 CLR 535 (20 March 1914)

Apperly (Public Officer of the Australian Mutual Provident Society) Appellant; and The Federal Commissioner of Land Tax Respondent.

This case raises the question of the construction of the provisions of the Land Tax Assessment Act 1910-1911 relating to the taxation of leasehold property. The general scheme of the Act, as is well known, is to tax the owner—that is, the owner in fee. But in respect of land leased before the commencement of the Act an exception was introduced, no doubt on the ground that in the case of such leases it might be that the owner was not deriving such full benefit from his land as he would obtain if the lease had been made under the present altered circumstances. The legislature thought it fair that in such cases there should be an apportionment of the burden of land tax between owner and lessee, and the scheme adopted was to divide the burden as nearly as possible in proportion to the respective values of the interests of the freeholder and lessee. The rules for effecting that division are contained in sec. 28. The total amount of the land tax payable to the Crown is not increased. That depends on the unimproved value of the land. The apportionment of it between the owner and the lessee is the question dealt with. The first rule laid down is that the owner of a freehold estate in land which was leased before the commencement of the Act is to be entitled during the currency of the lease "to have the unimproved value (if any) of the lease deducted from the unimproved value of the land." The expression is not very felicitous; but I think it means, to have the value of the enjoyment of the land, regarded as unimproved land, for the term of the lease deducted from the total unimproved value of the land. The next rule is that the owner of a leasehold estate under a lease made before the commencement of the Act is to 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." Again the expression is not very felicitous; but it means, I think, the owner of the land, regarded as unimproved land, for an estate equal to his estate therein. There is, therefore, an apportionment to be made of the total unimproved value of the land between the owner and the lessee; the idea being that each shall bear what fairly falls to him—the lessee, so far as he enjoys the unimproved value of the land, paying land tax in respect of it, and the owner, so far as he is deprived of the enjoyment of that unimproved value, not being charged with land tax upon it.

Then comes a provision for the purpose of working out that idea. Sub-sec. 3 of sec. 28 provides that "For the purposes of this section—(a) the unimproved value of a lease or leasehold estate of land" (which should be read as I have suggested) "means the amount by which the part of the unimproved value of the land corresponding to the unexpired term of the lease exceeds the value of the rent reserved by the lease"—which I understand to mean the amount by which the proportion of the value of the land regarded as unimproved land for an estate corresponding to the unexpired term of the lease exceeds the value of the rent reserved by the lease,—"according to calculations based on the prescribed tables for the calculation of values." Two cases are therefore provided for. The land when let may have been improved or unimproved. One case is as between landlord and tenant of land which at the time the lease was made was unimproved; the other, when it was improved. The section goes on to say, "(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." It is to be remembered that the legislature is dealing with old leases. If when the land was originally leased there were no improvements upon it, then the proportion which the unimproved value of the land at the date of the lease would bear to the improved value would be the whole, so that in that case there would be no apportionment. But if at that time the land had been improved the rent would have to be apportioned, and it is only such proportion of the rent as is attributable on that basis to the unimproved value on the date of the lease that is to be deducted from the value of the rent reserved. In the present case the first apportionment need not be made, because the land when originally leased was unimproved.

That is the general scheme. But it appeared to the legislature—and it will appear to every one who considers the matter impartially—that this arbitrary rule might operate unfairly by giving the landlord something more than he is really entitled to. So far as the lease deprives him of the benefit of the land it is fair that he should not be called upon to pay land tax upon that of which he has been deprived. But if under the lease itself he is to be compensated in the future for that temporary deprivation of benefit, it is reasonable that the lessee should pro tanto be relieved and the burden cast back upon the owner. That position would arise generally in cases where there were covenants in the lease by which the lessee is bound to give back to the landlord more than he got under the lease. That would really be in the nature of deferred payment for the use of the land during the term of the lease. Another instance would be where the lease imposed such conditions upon the lessee that he could not get the full value of the land leased. Those are two cases which might have occurred to the legislature in considering the matter, and it appears to me that they have dealt with them in the proviso to the section, which is: "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 foregift, or consideration in the nature of fine, premium, or foregift, 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."

The addition to the value of the "rent reserved" increases the amount of the deduction to be made in assessing the unimproved value of the land for the term of the lease, and is therefore in relief of the lessee.

It is, however, only in the case of onerous conditions that the legislature has thought fit to make provision in favour of the lessee. The only question that can properly be asked is whether certain matters can be taken into consideration by the Commissioner. The questions formally asked are whether the lessee is entitled to have certain additions made to what is called the value of the reserved rent. The complaint is that the Commissioner has not allowed a deduction—that is, an addition to the value of the rent which operates as a deduction—in respect of improvements which, under the lease, the lessee is bound to hand over to the landlord at the expiration of the term. No question is raised as to the propriety of making that deduction. But it is contended on behalf of the appellant that the Commissioner ought to have added to the deduction two other amounts, viz., rates and taxes payable by the lessee under municipal laws, and the amount to be expended by him for repairs. So far as rates and taxes are concerned it is clear that they do not fall within the proviso. It is contended that the term "rent reserved" should be read in such a wide sense as to include liability for rates and taxes. The words are, by themselves, too plain to admit of that meaning, and there is no context to throw doubt upon their meaning. As to repairs, it appears to me that, in considering what benefit the landlord will get at the end of the lease by having handed over to him valuable buildings, the Commissioner would properly take into consideration whether those buildings are to be handed over in a state of repair or not. If the Commissioner has proceeded on the assumption that the buildings are to be in a state of repair, the lessee has already got the benefit of the claim. If the Commissioner has based his allowance on the contrary assumption, other considerations may arise. On the case as stated, it is impossible to answer either question in favour of the appellant.

The first question is whether the appellant is entitled to have the amount expended for rates and taxes added to the reserved rent or allowed as a deduction for the purpose of assessing the taxable interest. The answer to that must be: No. The Parliament has not provided for such a case.

The other question is whether the appellant is entitled to have the amount expended for repairs added to the reserved rent or allowed as a deduction for the purpose of assessing the taxable interest. That question in the abstract must also be answered in the negative, and there is nothing to justify an amendment of the case so as to raise a question as to which we do not know the relevant facts—whether the Commissioner has or has not taken into consideration what it will cost the lessee to have the buildings in a proper state of repair when he hands them over to the lessor.

The unimproved value of land, as a freehold, is defined by the Act as the capital sum which the fee simple of the land might be expected to realize if offered for sale on the terms mentioned.

That definition disregards all contractual arrangements which, however they affect the individuals concerned, do not alter the land itself or lessen its taxable value to the Crown.

And therefore, when sub-sec. 3 (a) speaks of "the part of the unimproved value of the land corresponding to the unexpired term of the lease," it refers to that part which is attributable to the unexpired term, in other words the capital sum that would be ascertained if the definition referred to were applied substituting for "fee simple" an "estate for so many years." It is to be noted in this connection that sub-sec. 2 prescribes that the leaseholder is in respect of his estate to be deemed to be the "owner of land."

Actual contractual arrangements are, of necessity, equally disregarded. All responsibilities attached by law to the ownership or possession of land, as rates and taxes so far as they relate to the land, and all prudential considerations affecting the mind of a reasonable man free to make his own bargains in relation to the use for which the land is valued, of course enter into the calculation.

When that "part" of the unimproved value of the fee simple of the land is ascertained, it is set down, and for convenience we would term it the gross leasehold value.

The leaseholder, however, is to be taxed only on the net value of his estate. So the next step in the process is to get at the "value" of the rent, a distinct expression. The value of the rent is its value to the owner, and not to the tenant; so that must be taken off the gross unimproved value of the leasehold estate to arrive at the tenant's real interest.

The rent is also capitalized in the prescribed method, which at present is a 4½ per cent. basis, and its capital value is deducted accordingly. The amount so deducted necessarily remains as part of the landlord's liability.

But all these operations are conducted on an unimproved basis, which leads to a further consideration. If the land was in fact let as unimproved land, the rent reserved by the lease is the proper rent to apply in the process. Here the actual contract as to rent received is proper to consider, because it depends upon that as to how much of the value the landlord has "reserved" to himself. If, however, the land was originally let as improved land, then before you can tell how much of it represents reservation of the land value, and how much represents improvement value, you have to separate it. The formula for doing this is stated in par. (b). The portion found to be attributable to the unimproved land is in substance the rent reserved for it in the lease. Mr. Mitchell contended in the first place that, for the purpose of the calculation indicated, there should be added to the yearly rent all sums expended during the year for repairs and for rates and taxes. The only sum mentioned in the Act is "rent reserved by the lease," and it is impossible to extend the meaning of that expression in the manner suggested. "Rent reserved" is a perfectly well defined expression and includes everything, however called, which is really rent in the true sense.

Royalties are true rent (Daniel v. Gracie[1]) and can be distrained for, which is a characteristic of rent, subject to agreement (Giles v. Spencer[2]), and rent is payable to the lessor and not to a third party (Gilbertson v. Richards[3]). It is impossible, as Mr. Mitchell invited us to do, to extend without express direction or its equivalent the expression "rent reserved by the lease" beyond true rent having the characteristics mentioned, to such covenants as those for payment of rates and taxes, and repairs, which possess neither of them. These are elements which the parties take into consideration in fixing the rent, but when it is so fixed these elements are extraneous to the rent itself. See, for instance, Cox v. Harper[4].

Besides the straining of the words which would be necessary to include such elements, it is clear that repairs, which connote improvements, and rates and taxes, which depend to some extent upon them, cannot be the subject of simple addition to rent for unimproved land.

Then a further contention was raised, that in arriving at the immediate result of unimproved value of the leasehold, these elements should be borne in mind. Rates and taxes, so far as the possessor for such a term would be liable in respect of unimproved land, should be taken into account as already mentioned. Repairs are ex vi termini outside the ambit of the problem.

So far it comes to this: that the net value of the leasehold as already described is, in the ordinary course of things, the amount to be deducted from the total unimproved value of the land for the purpose of relieving the freeholder pro tanto of taxable liability, and of charging the lessee with it.

When we say "the ordinary course of things," we mean that the legislature, regarding the matter from a business aspect, recognizes that rent is ordinarily fixed upon what are sometimes conveniently called "usual conditions," or, at all events, upon terms and conditions which may fairly be regarded as compensation for the interest granted to the tenant.

In Hampshire v. Wickens[5] Jessel M.R., adopting Davidson's Precedents on this point, enumerates "usual covenants," which include payment of taxes except those expressly payable by the landlord and also repairs.

We do not say that only those technically "usual covenants" are to be included as equivalent for rent within the intention of the legislature, because the proviso, which makes allowance for special circumstances, states expressly to what obligations they are to apply, and we have no power to extend them.

If the tenant is under the "onerous conditions" (in other words the burdensome obligations) enumerated, the Commissioner'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 reserved. The Commissioner, then, is under an 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 enures to the landlord's benefit, that he is to consider, but only those obligations enumerated.

Solicitor, for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.

[1] 6 Q.B., 145.

[2] [1857] EngR 480; 3 C.B.N.S., 244.

[3] [1859] EngR 363; 4 H. & N., 277, at p. 295.

[4] (1910) 1 Ch., 480.

[5] 7 Ch. D., 555, at p. 561.

High Court of Australia

Apperly (Public Officer of the Australian Mutual Provident Society) v Federal Commissioner of Land Tax [1914] HCA 13; (1914) 17 CLR 535 (20 March 1914)

HIGH COURT OF AUSTRALIA