Assets under construction (e.g. building sites) have always been 'exempted' from rates assessment for the past decades. Following the Court of Appeal decision in Hong Kong Electric Co. Ltd v Commissioner of Rating and Valuation CACV 27/2010 handed down in September 2010, there was uncertainty in this area of law - the Court of Appeal decided that assets under construction should be subject to rates assessment. The Court of Final Appeal ("CFA") reversed the Court of Appeal's decision on 21 June 2011 (FACV 12/2010) and held that building sites or other assets in the course of construction were not rateable.
By way of background, whether a tenement is liable to rates assessment has depended largely on its occupation. A long history of English authorities established that a tenement will only be considered rateable if it is:
- in actual occupation or possession;
- exclusively for the particular purposes of the occupier;
- of value or benefit to the occupier; and
- not for too transient a period.
The CFA in the HEC Appeal, after considering relevant Hong Kong authorities, endorsed these four requirements and stated that these requirements should be used to determine whether a tenement has the "capability of occupation". Further, "capability of occupation" should be used as the legal test for determining whether land, a building or a structure under construction has reached a stage which constitutes a tenement susceptible to rates assessment. So long as the relevant assets under construction are not 'capable of occupation', they should not be subject to rates assessment.
The CFA also considered in detail relevant provisions in the Rating Ordinance and its subsidiary legislation. In particular, the CFA referred to certain provisions in the Rating (Effective Date of Interim Valuation) Regulation dealing with the effective date of an interim valuation of newly constructed buildings. Pursuant to such provisions, interim valuations of newly constructed buildings will only become effective after a specified period following the issue of relevant official documents certifying its occupation - such provisions plainly make rateability of a tenement dependent on the newly constructed building having attained a state in which it is capable of being occupied. Such provisions support the CFA's finding that assets under construction should not be treated as rateable. There are other provisions in the Rating Ordinance which lend support to the CFA's finding - but the important message is that the Rating Ordinance and its subsidiary legislation as a whole suggests that the land, building or structure in question must be capable of being occupied before it qualifies as a rateable tenement.
The HEC Appeal will be of interest to ratepayers who possess sites in the course of development or redevelopment, in particular, real estate developers, whereby the CFA confirmed that all assets under construction are not subject to rates assessment. Whilst the rateability of assets under construction is the principal point of interest for the developers, the CFA also confirmed the principles of valuation applicable to utilities with highly integrated assets, for example, where there is physical integration of the rateable assets constituting the tenement and plant and machinery.