Disturbing Section of Land Sales Act

Manawatu Times, Volume 68, Issue 223, 20 September 1943, Page 6

Disturbing Section of Land Sales Act

Dangerous Fallacies in Method of Valuation No. 111. The most disturbing section of the Land Sales Act contains the provisions for determining the value of farm land. Close examination raises serious doubts as to whether the method of valuation is practicable; whether all the factors are taken into account; and finally, whether the formula is not essentially fallacious. In respect of farm land, three terms are used—basic value, productive value and fair value. The basic value is the productive value increased or reduced by the Land Sales Committee “to make it a fair value,’’ so that ostensibly the basic value is a fair value. The productive value is defined as the net annual income that can be derived from the land by “the average efficient farmer” —whatever that may mean capitalised at 4J per cent. The net income is to be ascertained by estimating the gross income at prices for farm products ruling on December 35, 1942, and deducting all expenses incurred in the production of the income, including specifically rates and land tax, reasonable provision for maintenance, “reasonable remuneration” for the work performed by the farmer or any other person employed and 5 per cent, interest on the value of stock and chattels. Value Falls as Costs Rise The valuation is to be discounted from the outset. The net income is the excess of gross income at prices ruling in December, 1942, over expenses at the date of the valuation. A few weeks ago the Government agreed to pay a * ‘ bonus” to dairy farmers to cover the increase in production costs. That bonus is not to be included in the computation of gross income, but all the ad ditional costs are to be reckoned. Again, the basis for computation of gross income is fixed, but any further advance in costs will be taken into account. Thus an increase in land tax would immediately reduce the valuation of every farm to which it applied. The capitalisation of net income is to be adjusted if the value of improvements exceeds or is less than “the value of the improvements normally required”—another phrase difficult to interpret. Vaine of Improvements Here is an obvious fallacy. All the Improvements on a farm are not employed in the production of the net productive income. The farmer’s house and its appurtenances are not assets exclusively employed” in the production of income. Consequently, if the value of the land can be ascertained by capitalising the net income, the real value of a farm cannot be less than the calculated value of the land plus the value of improvements not employed in the production of the income. What is “reasonable remuneration” for ‘‘the average efficient farmer?” When Mr. Nash fixed the guaranteed price for butterfat, he decided that £5 10s was a sufficient wage for a dairy farmer. That might now be increased to £0 by cost of living bonuses. The Land Sales Court may decide that £7 is a more reasonable wage for a farmer under present conditions. Consequently, if all other factors remain the same, the net incomes of the farm would be £7S a year less than it would have been under Mr. Nash’s guaranteed prices accountancy. The amount of that reduction capitalised at 4J per cent, is over £1730, which might be 30 to 40 per cent, of the former valuation of a 100-acre dairy farm. Government Valuation Ignored The legislation ignores all recognised standards of valuation. In respect of all land transactions the committees are to ascertain whether the price exceeds the consideration paid in any previous transaction,” but there is no suggestion that the price paid by the present owner will be regarded as a basis for assessing the price to be approved by the committee. There is not a single reference to Government valuation. Nor is there any suggestion that the price fixed by a committee will be immediately adopted by the Government for assessment of land tax and death duties or by local authorities for the levying of rates.

The fallacv of valuation by capitalisation of net income is that farm land cannot be valued by the methods appreciable to the assets of a manufacturing business. The assets of an established farm are more than the land and the buildings and other appliances used in working the farm. Under the freehold

tenure, the owner of land possesses intagible assets that have always been highly valued—the right of free and exclusive enjoyment, the right of free disposition and the right of indeterminate duration. The advantages of the freehold tenure are undoubtedly reflected in the production from the farm, but no system of capitalising net income will reveal the value of the freehold title. That factor is entirely ignored in the new legislation. Every farmer should calculate the value of his property according to this legislation and compare the result with the Government valuation. (To be continued.)