High Court ruling reshapes approach to land valuations

Land Valuation - The High Court sets down its interpretation of "improvements" when assessing site value

In Valuer-General Victoria v WSTI Properties 490 SKR Pty Ltd [2025] HCA 23, the High Court of Australia clarifies what constitutes an "improvement" when assessing site value under the Valuation of Land Act 1960 (VLA).

The case concerned the valuation of a heritage listed property at 490 St Kilda Road and whether the existing heritage building constituted an "improvement" to be ignored when assessing site value for land tax purposes.

The High Court overturned the Victorian Court of Appeal's interpretation of "improvements" under section 2(1) of the VLA, finding that an "improvement" must increase the market value of the land at the time of valuation, not construction. The High Court also found that "improvements" must not inhibit the hypothetical highest and best use of the land at the time of valuation.

The High Court's decision has relevance beyond Victoria (for example, the Valuation of Land Act 1916 (NSW) and Land Valuation Act 2010 (Qld), contain very similar concepts to "site value" and "improvements" for land tax and council rating purposes) and provides direction on how valuers are to assess "improvements", which will have implications for owners who may wish to challenge their land valuations.

Background

In 2019, WSTI Properties 490 SKR Pty Ltd (WSTI) purchased a heritage-listed mansion known as 'Landene' at 490 St Kilda Road, Melbourne (Land) for $8.25 million. The Land is located within a Commercial Zone, subject to a site-specific Heritage Overlay, and surrounded by land improved by newer commercial and residential towers.

In 2021 and 2022, the Valuer General Victoria (VGV) assessed the site value of the Land at $6.2 million. The VGV considered the existing heritage building was a constraint, and not an "improvement" which should be ignored in assessing site value, because it did not increase the market value of the Land at the time of valuation. The VGV's assessment involved comparing the value of the Land both with and without Landene, based on its hypothetical highest and best use at the time of valuation (which was considered to be a high-rise commercial building without Ladene).

The VCAT appeal

WSTI appealed VGV's assessments to the Victorian Civil and Administrative Tribunal (VCAT), claiming the site value should be assessed at $1.825 million for 2020 and $2 million for 2021. WSTI contended that the highest and best use of the Land at the time of valuation was constrained by the Heritage Overlay, and that Landene is an "improvement" contributing to its economic return and should therefore be ignored when assessing site value.

VCAT largely agreed with WSTI, reducing the site value to $2.925 million on the basis that the Land's highest and best use was its current state due to the Heritage Overlay and that within that context, Landene was an "improvement" to the Land, noting that it would cost money to replace that building.

The Court of Appeal

The VGV appealed. The Court of Appeal upheld VCAT's decision, finding that Landene was an "improvement" at the time of valuation. However, its interpretation of "improvements" differed, with the Court of Appeal splitting the test over two points in time and finding:

1. that Landene increased the value of the Land when it was constructed in 1987; and
2. the benefit of that work (Ladene) was unexhausted at the time of the valuations in 2021 and 2022.

In making this finding, the Court of Appeal recognised that land could be benefited by works without achieving its highest and best use but held there was no reason to doubt that Landene constituted the highest and best use when constructed.

VGV appealed to the High Court of Australia.

The High Court of Australia

The primary issue before the High Court was whether the definition of "improvements" in section 2(1) of the VLA required assessing whether the work Landene increased the value of Land at the time of valuation (VGV's position) or at the time the work was done (Court of Appeal's position).

A secondary issue was whether the Court of Appeal's construction of "improvements" over two separate points of time was material to its decision to dismiss the appeal.

The High Court concluded that the Court of Appeal's construction of the definition of "improvements" involved a material error and remitted the matter to the Court of Appeal for determination in accordance with the law.

The High Court held that the definition of "improvements", read in context and in accordance with its purpose, necessitates that the effect of the works must be assessed at the time of the valuation. It also held that works will only constitute "improvements" if the works increase the market value of the land at the valuation date and do not inhibit the hypothetical highest and best use of the land.

The High Court unanimously overturned the Court of Appeal's decision on the basis that the Court of Appeal's construction of "improvements" was "contrary to the text, context and purpose of the definition" and "impossible to apply in any practical way", noting the difficulties with assessing whether historical works improved the value of land at the time of construction.

The High Court found that the approaches adopted by VCAT and the Court of Appeal were each underpinned by a flawed assumption:

• VCAT's method assumed that the Land would have the same development potential with and without the Landene on it at the time of each valuation.
• The Court of Appeal's method assumed that if the Landene continued to provide a benefit to the Land it necessarily increased the value of the Land.

The High Court provided the following guidance for assessing site value under section 5A of the VLA:

• First step - Identify whether works on the land constitute "improvements", either as defined under the VLA or in line with the ordinary meaning given to that term of a thing done to land which increases the value of land. This involves a valuation exercise.
• Alternative market valuations - "Improvements" must increase the market value of the land, assessed by comparing the value of the land with and without the works at the time of valuation (not construction). In considering the market value, valuers must consider the land and its surrounds, the market, and all applicable planning and legal conditions as they exist at that time.
• Highest and best use - In considering market value, the valuer must consider the hypothetical highest and best use of the land, being the most valuable use that is physically possible, legally permissible and financially feasible to ensure the value of any existing works is not incorrectly assumed to be the highest and best use.
• Considering legal constraints - Valuers will need to consider the nature of any legal constraint and whether it is specific to the retention of the works being assessed to work out the highest and best use of the land without those improvements.

Practically, the High Court's ruling means that valuers must compare the land's market value with the works against the land's market value without the works. This assessment is to be conducted at the time of the valuation and to assume the land can be put to its highest and best use.

Key takeaways

• Valuers must assess whether works increase land value, by comparing the market value of the land and its highest and best use, both with and without the works at the time of valuation.
• Heritage overlays do not automatically restrict valuations to the current land use, noting the hypothetical highest and best use must be objectively assessed, and valuers must consider whether legal constraints are imposed by or broader than the existing works.
• Valuations are to reflect the potential of the land in line with market principles and not just its historical use, which could result in higher land tax for properties subject to site specific heritage controls.

If you would like advice on or assistance with reviewing, advising on, objecting to, or appealing land valuations, please contact our Environment & Planning partner, Tom White, or special counsel Alex Beale (New South Wales) and Joanna Kenny (Victoria).

This article was written by partner Tom White, special counsel Joanna Kenny and graduate lawyer Holly Aitken.