Heydon v Deputy Federal Commissioner of Land Tax (NSW) [1914] HCA 25; (1914) 17 CLR 727 (15 April 1914)

HIGH COURT OF AUSTRALIA

Heydon Appellant; and The Deputy Federal Commissioner of Land Tax, New South Wales Respondent.

H C of A

15 April 1914

Griffith C.J., Barton, Isaacs and Powers JJ.

Campbell K.C. (with him Norris), for the appellant.

Blacket K.C. and Crawford, for the respondent, were not called upon.

Griffith C.J.

The questions in this case arise under sec. 28 of the Land Tax Assessment Act 1910-1911, which makes provision for the assessment of land tax in the case of leases granted before the commencement of the Act. All the leases now in question were so granted. The appellant is the lessee of land for a long term, of which between 60 and 70 years have still to run, and he has granted a number of sub-leases of various portions of the land, all of which at the time the sub-leases were granted were in an unimproved condition. Sec. 28 lays down rules for the assessment of land tax upon leaseholds. The rules are arbitrary. I do not for a moment suggest that they are unjust. On the contrary, they seem to me to be eminently reasonable; but all we have to do is to see what they mean and to follow them.

The first rule is that where the owner of a freehold estate in land has before the commencement of the Act granted a lease of it, he is entitled during the currency of the lease to have what is called the "unimproved value" of the lease deducted from the unimproved value of the land. The principle is that the burden of the land tax, which is assessed upon the unimproved value of land, shall in such cases be divided between the owner and the lessee. Sub-sec. 2 prescribes how that division is to be made. The owner of a leasehold estate in land "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." This provision is not felicitous, and may, I think, be paraphrased thus: "shall be deemed to be the owner of an interest corresponding to the unexpired term of his lease in land of an unimproved value equal to that of the land in question." That is entirely irrespective of the amount of the rent which he pays, which may be a peppercorn or a rack rent. The value of his interest in the land, quâ land, is the same in either case. Then the sub-section goes on to say that if before the commencement of the Act the lessee has entered into an agreement to make, or has 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." Then, for the purpose of ascertaining the unimproved value of a lease, this rule is laid down by sub-sec. 3:—"The unimproved value of a lease or leasehold estate of land 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, according to calculations based on the prescribed tables for the calculation of values." The first step, therefore, in every case, is a matter of calculation, and is to apportion the total value between the value of the term and the value of the reversion. The respective values may fluctuate from a variety of circumstances, but the legislature has thought fit to say that they shall be ascertained by reference to prescribed tables. Regulations have been made prescribing that the calculation shall be made on what is called a 4½ per cent. basis. For the purpose, then, of ascertaining the value of the term the method is to ascertain first the whole unimproved value of the land. The annual value is assumed to be 4½ per cent. of that value, and the value of the term is ascertained by capitalizing that annual value for a period equal to the term of the lease. That gives the value of the term on which primâ facie land tax is to be paid by the lessee, the lessor being responsible for the tax on the remainder. That is on the supposition that the lessee pays no rent. Then comes the question of what is the value of the lease—if the lessee pays rent. In that case he is entitled to deduct from the value so ascertained the value of the rent reserved by the lease. The next calculation then is to ascertain the value of that rent. That is defined to be the rent for the term of the lease capitalized at 4½ per cent. Deducting that from the value of the unexpired term ascertained as if no rent were payable you get the amount in respect of which the lessee is to pay land tax if there is no sub-lease. If there is a sub-lease, exactly the same process is to be adopted. If the sub-lessee does not pay any rent the whole value of his unexpired term may be deducted by the head lessee from the value of his term, just as the value of his term in a similar case may be deducted by the owner. If he does, he may only deduct a part of it. The process is exactly the same in each case. The head lessee is entitled to two deductions, which should, strictly speaking, be made separately.

It is suggested that the regulation fixing the 4½ per cent. basis for the calculation of values is ultra vires. I confess that I am unable to follow the argument. Some rule must of necessity be laid down unless each case is to be decided upon evidence. Parliament has authorized the Executive to prescribe a rule. They have done so, and I can see no argument to support the contention that the regulation is ultra vires.

The first question asked is whether rule 51 of the Land Tax Regulations 1911 is ultra vires and void. That should be answered in the negative.

The second question is whether the respective assessments appealed from ought to be reduced and if so to what extent. Mr. Blacket says that the assessments have been made exactly on the principle I have stated, and so far as I can see from the documents referred to in the case it appears to be so, although a short cut seems to have been followed, which may have led to error.

The third question is in what manner the respective assessments should be made. I have indicated the proper method. If that method has been adopted, the assessment is correct; if not, it will be corrected by the learned Judge of first instance.

Barton J.

I concur.

Isaacs J.

I agree with what has been said, and desire to add only a few words. The process prescribed by sec. 28 seems to me quite simple if the steps are followed as there laid down. The first condition contemplated is where the owner has made a lease before the commencement of the Act. In such a case the legislature says that the freeholder is to be taxed not for the whole unimproved value of the land, but only for the benefit he retains out of it. The first thing to be done is to ascertain the unimproved value of the land in accordance with the definition in sec. 3 of the Act. Then the leaseholder is to bear his portion of the tax, and to that extent the freeholder is to be relieved. The unimproved value of the leasehold estate is for this purpose not merely what any person would give for the land for the unexpired term of the lease, because the landlord, though he has parted with the land for that term, retains benefit in the shape of rent. Therefore the amount to be deducted from what I will call the gross unimproved value is only the difference between the unimproved value of the land for that unexpired term and the value of the rent. So that, in ascertaining the value to be deducted from the gross unimproved value, you would have first to find what is the value of the unexpired term of the lease and what the value of the rent calculated according to the prescribed tables. Having done that, you would deduct one from the other, and the difference would be the deduction to be made from the gross unimproved value. The sum so deducted is that upon which the lessee pays land tax, and the balance that upon which the freeholder pays. Then, when there is a sub-lease you start with the sum which was in the first instance to be deducted from the gross unimproved value, and you make a corresponding deduction in the same way as before in order to adjust the matter between the lessee and the sub-lessee. It seems to me that when that course is followed the case becomes perfectly simple. Whether it has been followed in this case I am not aware. That is a matter for the Judge of first instance to ascertain on the facts.

I agree that the first question should be answered by saying that rule 51 is valid.

The second question cannot be answered because, although we know the ultimate amounts, we do not know the process or the figures by which they have been arrived at.

The third question has been answered by the observations that have already been made.

Powers J.

I agree with the answers suggested by the learned Chief Justice, and for the reasons stated by him.

Questions answered as stated.

Solicitor, for the appellant, W. H. Drew.

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