3 February 2013

Property Tax – Annual value

The Appellant is the trustee of a trust which owns a shopping centre (“the Property”). The Asset Items of the shopping centre consist of escalators, lifts, air-conditioning and fire safety systems installed within the Property. It is common ground that the Asset Items are fixtures.

A sum of $0.20 psf, representing the annual depreciation of the plant and machinery of the Property including, inter alia, the Asset Items, was included in each tenant’s monthly gross rent.

The Appellant sought to exclude the depreciation component in the computation of the annual value of the units in the Property for the purposes of assessment of property tax. However, the Chief Assessor ruled that the depreciation component should be included in the computation of the annual value of the units.

The Valuation Review Board agreed with Appellant but this decision was reversed by the High Court.

The Appellant appealed to the Court of Appeal. The question was whether the High Court Judge was correct to have refused to exclude the depreciation component in the rent paid by a tenant in determining the “annual value” for the purposes of property tax assessment.

The issues before the Court of Appeal were:
(a) what is the proper test for excluding an expense which has been included in the gross rent when determining the annual value of a property, and in particular the relevance of the fixture test and/or the enhancement test in that regard (“Issue 1”); and
(b) on the application of the test determined by Issue 1, whether the depreciation component should be excluded from the annual value of each unit in the Property (“Issue 2”).

“Annual value” is defined in s 2(1) of the Property Tax Act to be “the gross amount at which the same [property] can reasonably be expected to be let from year to year, the landlord paying the expenses of repair, insurance, maintenance or upkeep and all taxes (other than goods and services tax)”.

Two phrases in s 2(1) were analysed. The first being “reasonably be expected to be let from year to year”, and the second being “the landlord paying the expenses of repair, insurance, maintenance or upkeep and all taxes” (other than goods and services tax)”(“the qualifying words”).

On Issue 1,the Court of Appeal agreed with the High Court that the touchstone was whether each component in the gross rent, was related to rent or letting (“the rent or letting test”). This is based on the first phrase in s 2(1). In this regard, the fixture and/or the enhancement tests may be helpful because, as the rent or letting test is about whether the expense is related to the use or occupation of the heritable subject (ie the real property), it follows that expenses related to accepted fixtures, being components of the heritable subject, are related to rent or letting.

The starting point, however, is not to apply the rent and letting test straight away, but to first decide whether the particular expense falls within the qualifying words in the second phrase of s 2(1). If the expense belongs to one of these categories, it has to be automatically included in determining annual value. It is only if an expense does not fall within any of the categories in the qualifying words that the rent or letting test comes into play.

Although the qualifying words represents a closed list, the omission of an expense, such as depreciation, from that list only means that the expense is not to be automatically included in the computation of annual value. If the expense is found to be related to “rent or letting” when applying the rent or letting test, it will still be included in the annual value at the second stage of inquiry.

Depreciation represents the recognition that, even with maintenance, an item which has a certain useful life span will not stay in good repair for an infinite time. Depreciation is therefore not a species of maintenance, and does not fall under the qualifying words.

This then leads to whether the depreciation (which is distinct from maintenance) of the Asset Items, is related to “rent or letting”, ie whether the depreciation component in the tenant’s gross rent is related to the use or occupation of the heritable subject. Applying the fixture or enhancement test, not only are the Asset Items fixtures and a part of the heritable subject, they also clearly and directly enhance the enjoyment of each tenant’s occupation of his unit.

Based on the above, although depreciation did not fall under the qualifying words in s 2(1), it was found to be related to “rent or letting” under the rent or letting test. Accordingly, the Court held that the depreciation component should be included in the annual value of each unit.

As the $0.20 psf representing the depreciation component had already been directly attributed to the Asset items and accepted by the Assessor as a fair and reasonable rate, the depreciation component should, upon payment by the tenants, be immediately included in the assessment of annual value without the need to remit the matter back to the Chief Assessor.

The above judgement was delivered on 17 January 2013.