Revenue Ruling No. LT 097v2

Land Used for Primary Production

Section 10AA – Land Tax Management Act 1956

Ruling history

Ruling no. Issued date Dates of effect Status
From To
LT 097 01 July 2015 01 July 2015 09 February 2017 Replaced by LT 097v2
LT 097v2 27 November 2017 10 February 2017 - Current

Preamble

  1. Section 10AA of the Land Tax Management Act 1956 (LTMA) exempts land that is used for the dominant purpose of primary production. If primary production land (PPL) is not rural land, its use must also satisfy additional tests which determine whether the primary production undertaking is carried out for genuine commercial and profit purposes (the “commercial tests”).

Land used for primary production land

  1. “Land used for primary production” means land whose dominant use is:

    1. cultivation, for the purpose of selling the produce of the cultivation, or

    2. the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or

    3. commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or

    4. the keeping of bees, for the purpose of selling their honey, or

    5. a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public, or

    6. the propagation for sale of mushrooms, orchids or flowers.

  2. The reference to “land” in section 10AA is a reference to a parcel of land which has been separately valued and recorded in the Register of Valuations kept by the Valuer General under s.14CC of the Valuation of Land Act 1916.

Commercial purpose and profit tests apply to non-rural land

  1. In the case of land that is not “rural land”, the primary production conducted on the land must have a significant and substantial commercial purpose or character, and must be engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made).

Purpose of Ruling

  1. The purpose of this ruling is to explain the Chief Commissioner’s interpretation of s.10AA.

Ruling

Classification of land as “rural land”

  1. An owner of “rural land” must demonstrate that the dominant use of the land is one of the types of primary production specified in s.10AA(3), or a combination of those primary production uses. The commercial tests specified in s.10AA(2) do not apply to “rural land”.

  2. Land is “rural land” if it is zoned “rural”, “rural-residential”, “non-urban” or “large lot residential” under a planning instrument. If land is not zoned under a planning instrument, it may be regarded as “rural land” if the Chief Commissioner is satisfied the land is rural land.

  3. The zoning of land may be found in a “planning instrument” as defined in section 3 of the LTMA. A planning instrument may be a state, regional or local environmental plan, (including a former planning instrument in force prior to 25 March 1988).

  4. Land that is not rural land but which may be used for primary production under existing use rights is not “rural land” for the purposes of the PPL exemption.

  5. Under a Local Environmental Plan made under the Standard Instrument (Local Environmental Plans) Order 2006, land with the following land use zones is “rural land”:

    • RU1 Primary Production;
    • RU2 Rural Landscape;
    • RU3 Forestry;
    • RU4 Primary Production Small Lots;
    • RU5 Village;
    • RU6 Transition.
  6. The land use zone R5 (“Large Lot Residential”) under a Standard Instrument replaces the rural-residential zoning and such land is also treated as “rural land” for the purposes of the PPL exemption. Land in any other “Residential Zone”, as well as land in a “Business Zone” or “Industrial Zone” is not “rural land” for the purposes of the PPL exemption.

  7. A parcel of land that is not “rural land” must satisfy the additional commercial tests specified in s.10AA(2). The commercial tests require that the primary production use (or uses):

    1. has a significant and substantial commercial purpose or character; and

    2. is engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit is actually made.

Determining “dominant use”

  1. The non-primary production uses of land that are taken into account for the purposes of determining whether the dominant use is primary production are limited to physical uses or activities that occur on the land itself (see Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11.

  2. The activity of primary production must be the dominant use of land for that parcel to qualify for the PPL exemption. If primary production is conducted on several parcels, the use of each parcel must be separately determined, and only those parcels that satisfy the test are entitled to exemption.

  3. The key facts and circumstances that should be taken into account in determining whether primary production is the dominant use include:

    1. the area of land over which each use extends;

    2. the actual intensity of the primary production activities compared to the potential intensity of that use or carrying capacity of the land;

    3. the relative economic and financial significance of competing uses, including the amount of capital expenditure, current expenditure, revenue and profit attributed to each use;

    4. the scale, extent and intensity of each use;

    5. the length of time that each use has been conducted on the land; and

    6. time and labour and resources spent in using the land for each purpose.

    (see Leda Manorstead v Chief Commissioner [2010] NSWSC 867, Hope v Bathurst City Council (No 2) (1983) 52 LGRA 79, and Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286).

  4. The decision as to whether primary production is the dominant use is a question of fact and degree, which should be determined as an objective matter of impression, viewing all of the relevant facts as a whole (see Leda Manorstead v Chief Commissioner [2010] NSWSC 867 at 69 & 70; see also Minister Administering the Crown Lands Act v NSW Aboriginal Land Council [2008] HCA 48 at 69).
Multiple uses
  1. Where land is partly used for primary production, but is also used for other purposes, the land cannot qualify for exemption if the PPL use is not the dominant use, or if neither the PPL use nor one of the other uses is dominant.

  2. A partial PPL exemption cannot be applied to a part of a parcel of land which is used for primary production (see paragraph 3 regarding the definition of a “parcel”). The whole parcel is either exempt or not exempt depending on whether or not primary production is the dominant use (Brown v Commissioner of Land Tax (1977) 7 ATR 642).

Non-use may dominate primary production use
  1. If primary production is the only activity conducted on a parcel of land, consideration must be given to whether the whole of the land is used for primary production activity. If not, the issue will be whether the primary production activity is sufficiently substantial or intensive to prevail over the proposition that the land is predominantly unused, which may lead to the conclusion that primary production is not the dominant use (Greenville Pty Ltd v Commissioner of Land Tax (1977) 7 ATR 278); Saville v Commissioner of Land Tax (1980) 12 ATR 7 at 10); Leda Manorstead v Chief Commissioner [2010] NSWSC 867).
Capital intensive uses
  1. Where land is used for primary production and is also used for other activities, the comparative level of capital investment, as well as the actual and expected level of income will largely determine whether the land is exempt. If the non-primary production uses require a higher level of capital investment and generate a higher level of income than the primary production uses, it is unlikely that the land will qualify for exemption. This will be particularly important where primary production land is also used for wind farming or mining operations. The area of land committed to each use may be decisive if the amount of capital investment and revenue generated does not clearly suggest which is the dominant use.

Preparatory work as a “use”
  1. Preparation of land for a particular purpose is capable of constituting a use of the land. For example, costs associated with construction work and land improvements in preparation for the sale of lots or completed dwellings may constitute a subdivision use (see Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 at 61).

  2. In the case of primary production activities, land may be classified as land used for primary production if significant preparatory work necessary to commence actual primary production has been undertaken but actual production has not commenced e.g. planting and tending of fruit or nut trees, or trees intended to produce timber may constitute primary production even though fruit, nuts or timber may not be produced for several years (see Safety Beach Estate Pty Ltd v Commissioner of Land Tax 79 ATC 4032 and Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165).

Activities that are secondary to primary production
  1. Land that is used for activities relating to preparation for distribution and sale will not qualify for the PPL exemption as this constitutes secondary processing of the primary production and does not fall within the definition of “land used for primary production” in s. 10AA. For example, land used for the dominant purpose of slaughtering animals and/or processing and distributing primary products, such as animal carcasses, will not qualify for exemption, even if the animals were maintained prior to slaughter on other land which was entitled to the exemption (see Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183).

  2. Where secondary processing of primary production occurs on the same land as the primary production activity, the primary production must dominate the secondary processing for the PPL exemption to apply (see relevant factors identified in paragraph 20), for example, slaughtering of animals on the same land on which the animals are maintained.

Time of use
  1. The use of each parcel of land is determined as at the taxing date, but uses of land for a reasonable period before and after the taxing date are relevant in determining the dominant use. The uses of the land during the 6 months immediately before and after the taxing date are generally most relevant (see Leda Manorstead v Chief Commissioner [2010] NSWSC 867). However, longer periods may be relevant in particular circumstances such as where there is an extended hiatus period (see paragraphs 27-29). A longer period will also be applicable when looking at the commerciality test (see paragraph 49(h)).

Intention to use land for primary production
  1. An intention to use land for primary production is not sufficient to qualify for the PPL exemption (see Greenville Pty Ltd v Commissioner of Land Tax (1977) 7 ATR 278). However, such an intention may be relevant in some cases if there are activities conducted on the land which result in future sales of produce. For example, in the case of fruit trees, planting and tending of trees with the intention of producing fruit for sale may qualify as primary production use even if the production and sale of the fruit does not occur until the trees reach maturity several years after planting.

Temporary cessation of primary production
  1. Where primary production use of land temporarily ceases, in a physical sense, for a period of time that includes the taxing date, the circumstances before and after the taxing date, and during the tax year are relevant to determining whether the land qualifies for the PPL exemption (see Longford Investments Pty Ltd v Commissioner of Land Tax 78 ATC 4264) (eg due to drought, or allowing the land to lie fallow, or changing the method of production, including changing to organic farming methods).

  2. If there is a change in the method of primary production, the exemption may continue to apply even though no primary products may be produced for sale for a period of time while the changeover occurs (Quito Pty Ltd v Commissioner of State Revenue [2014] WASAT 8). The period during which the exemption continues will depend on the circumstances but may include a change from conventional farming to organic farming, requiring removal of stock or cessation of cultivation for an extended period to satisfy certification requirements.

  3. The landowner must demonstrate that the primary production activity had previously been the dominant use of the land, and that the hiatus period during which there was no primary production was temporary or a typical part of the cycle of primary production, such that primary production remains the “purpose” attributable to, or the reason for occurrence of the hiatus period. Examples include a drought, biosecurity measures for the treatment of diseases, allowing the land to lie fallow, converting to organic farming methods which may result in the land being unproductive for a period of time, or during an orderly transition from one form of primary production to another.

Primary production use by a person other than the owner
  1. Land may qualify for the PPL exemption if the owner permits another person to conduct primary production activities under a lease or licence. However, both the owner's use of the land and the lessee’s or licensee’s use of the land are relevant in determining the dominant use of the land.

  2. Land that is only used intermittently for agistment is unlikely to qualify for the PPL exemption (Oliveri & Anor v Oliveri (1993) 38 NSWLR 665 at 674).

Multiple primary production activities
  1. Where land is used for more than one form of primary production, the dominant use test may be satisfied if all of the primary production uses together satisfy the dominant use test. It is not necessary for one of those uses to be the dominant use of the land.

Types of Primary Production

Cultivation of land [s.10AA(3)(a)]
  1. Cultivation of land for the purpose of selling the produce is not limited to annual crops, or crops with periodic production. The land may in the relevant sense be cultivated either by breaking it up, such as ploughing, or by activities that may not be associated with the breaking up of the soil. “Cultivation” occurs in respect of a particular tax year when the land is tended, or subject to a programme of tending, including improving the water supply, if the tending is conducted in accordance with the practices of husbandry applicable to the particular crop (see Safety Beach Estate Pty Ltd v Commissioner of Land Tax (N.S.W.) 79 ATC 4032).

  2. In the case of land used for timber production, “cultivation” may occur if work is carried out for the protection and improvement of the growing timber, including maintenance of firebreaks, removal of undergrowth or thinning of the trees to allow healthier growth of the remaining timber.

  3. Hydroponic methods of crop production may also qualify as “cultivation” where the tending of the relevant crop is conducted in accordance with the usual husbandry practices applicable to the production of crops by such means.

Maintenance of animals for the purpose of sale [s.10AA(3)(b)]
  1. Maintenance of animals comprises keeping and maintaining animals, whether wild or domesticated, and including birds. The maintenance of animals must generally occur on the land for which the PPL exemption is sought. The animals must be maintained for the purpose of selling them or their natural increase or bodily produce (see Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183, at 41 to 53). It does not matter whether the purpose is to sell live animals or to sell the animal or its products after slaughter and secondary preparation or processing (Illawarra Meat Co Pty. Ltd. v Commissioner of Land Tax (1979) 1 NSWLR 188).

  2. The maintenance of the animals requires that the animals are owned or controlled (including leased) by the person claiming to be a primary producer. A licence to take wild animals which are not owned by the licensee is not sufficient to satisfy the requirement that the animals are “maintained” (see Burnside and Marakai Ltd v Federal Commissioner of Taxation (1957) 11 ATD 181).

  3. Land used for the maintenance of horses will be eligible for the PPL exemption where the horses are maintained for the purpose of selling them or their offspring. However, the exemption does not apply if the dominant use of the land is the maintenance of horses:

    1. for horse-racing purposes; or
    2. for recreational riding and/or riding sports, including polo; or
    3. for a riding school.
Commercial fishing [s.10AA(3)(c)]
  1. The PPL exemption may apply to land if the dominant use of the land is commercial fishing or commercial farming of fish. For the purposes of the exemption, “fish” includes marine, estuarine or freshwater fish, oysters, molluscs, crustaceans or other aquatic animals. “Fishing” includes the catching of bait fish. Activities conducted on the land may include preparation or storage of nets, boats or other fishing equipment, preparation of bait, or preparation of the fish that have been caught (including the use of drying racks).

  2. In the case of commercial fishing and commercial farming of fish, the dominant use of the land must be for a commercial business. A person who uses land in connection with a commercial enterprise would therefore be expected to hold a commercial licence, permit or other authority appropriate to the enterprise under the Fisheries Management Act 1994.

Beekeeping [s.10AA(3)(d)]
  1. Land used for primary production includes land used to keep bees for the purpose of selling their honey (see Reysson Pty Ltd v Chief Commissioner of State Revenue (RD) [2009] NSWADTAP 17). Factors that are relevant in determining whether a beekeeping use of land satisfies the dominant purpose test include:

    1. the number of hives kept;

    2. the length of time before and after the taxing date during which bees are continuously maintained on the land;

    3. the area containing buildings and equipment used in the course of maintaining the bees or producing and selling honey;

    4. the area containing flora and watering points from which foraging bees collect nectar and water so that the bees in the hives can make honey;

    5. the availability of suitable flora on adjacent land from which foraging bees may collect nectar and water; and

    6. whether unused land surrounding the hives is necessary or reasonable curtilage providing a buffer between the hives and adjacent land, such as where adjacent land contains residences or businesses.

Commercial plant nurseries [s.10AA(3)(e)]
  1. Under s.10AA(3)(e) of the LTMA land may be eligible for the PPL exemption if it is used for a commercial plant nursery. In order to be eligible for exemption, the land must be used for the propagation of plants. If plants which are maintained and sold by the nursery are primarily propagated elsewhere, the land will not qualify for the exemption. In addition, the nursery must produce and maintain plants for sale. The propagation of plants primarily for use by the propagator, or to be hired, displayed or distributed other than by way of sale is not primary production. Retail nurseries that do not propagate most of the plants that they sell (from seed or cuttings) are not eligible for the exemption (see Lease A Leaf Property Pty Limited v Chief Commissioner of State Revenue (RD) [2011] NSWADTAP 41 at 32).
Propagation of mushrooms, orchids and flowers [s.10AA(3)(f)]
  1. Under 10AA(3)(f) of the LTMA land may be eligible for the PPL exemption if it is used for the propagation of mushrooms, orchids or flowers. This requires the growing of mushrooms, orchids or flowers via propagation methods such as spores, seeds or cuttings. They may be grown in the soil or in pots, but must be produced for the dominant purpose of selling the produce. The PPL exemption will not apply if the product of the propagation is consumed or displayed by the producer rather than being sold.

Commercial purposes and profits tests

  1. If land is used for primary production but is not “rural land” as defined in s.10AA(4), the use of the land must also meet the commercial tests set out in s.10AA(2), namely:

    1. the primary production use must have a significant and substantial commercial purpose or character (s.10AA(2)(a)); and

    2. the primary production use must be engaged in for the purpose of profit on a continuous or repetitive basis whether or not a profit is actually made (s.10AA(2)(b)).

  2. Whether or not the tests in s 10AA(2)(a) and (b) are satisfied may be evident from either the use of a parcel of land viewed in isolation from any other land, or viewed together with other parcels used in the same business (Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; Thomason v Chief Executive, Department of Lands (1995) 15 QLCR 286 at 303).

Significant and substantial commercial purpose or character
  1. A “significant and substantial commercial purpose or character” requires that the primary production operation be administered consistently with the business orthodoxies of income, expenditure, the aim of profitability and a return on investment, recognising the volatility that may accompany a primary production business: Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25 at 45, approved in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 at 86; for financial returns see: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 at 66 and (Thomas v Commissioner of Taxation (1972) 46 ALJR 397 at page 401).

  2. The qualifications “significant” and “substantial” apply to both the purpose and character components of the test: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 at 82.

  3. “Significant” means “important” or “of consequence”: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 at 83. On appeal, Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 held that:

    • “Substantial” concerns magnitude or size and is to be determined having regard to the characteristics of other businesses within the industry: at 84;

    • It means “bulky” or a “considerable amount” : at 48; and

    • will exclude a commercial activity that is small in scale: at 83.

  4. Relevant factors in determining whether land is used for a significant commercial purpose or character include:

    1. the physical size and scale of the primary production activity;

    2. the repetition and regularity of that activity;

    3. the actual primary production from the land compared to the expected production if fully utilised for that purpose;

    4. the intensity of the primary production activities;

    5. the history and future prospects in relation to income, costs and profit;

    6. the size of the profits having regard to the value of the land;

    7. the characteristics of other businesses within the industry;

    8. the expected commercial viability of the business in the foreseeable future, including whether the primary production activity had the potential to generate a profit and was a commercially viable use of the land.

    (see Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23, at 98 to 107 and Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 at 66).

The purpose of profit
  1. S. 10AA(2) requires that the use of the land for primary production must be engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit is actually made.

  2. The primary producer must have a genuine intention to make a profit (Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2011] NSWADT 250). An activity engaged in primarily as a hobby or for recreational purposes will not satisfy this test.

  3. Evidence of the primary producer’s intention may be imputed from records kept by the primary producer, such as forecasts of costs and revenues in a business plan or a cash flow forecast prepared in support of a loan application.

  4. A primary producer does not have to make a profit in the particular tax year for the exemption to apply. However, actual profits or losses achieved in years prior to the tax year in question, and expectations of profit or loss in future years are important indicators of the primary producer’s intentions. A history of regularly failing to make a profit may support a conclusion that primary production was not engaged in for the purpose of profit (see Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 at 107).

The meaning of “profit”
  1. The word “profit” is not defined in the LTMA, and should be given its ordinary meaning. Measures of profit that are commonly used by businesses, including primary production businesses, are relevant. Non-cash costs, such as depreciation should also be accounted for in determining profit. Common costs, where there are competing non-primary production uses, such as Council rates and utility charges are also relevant and should be accounted for in determining profit or, if appropriate, apportioned between the primary production and competing non-primary production use. Labour and other resources provided free of charge may also be taken into account as well as the value of fringe benefits (e.g. a farm hand who is remunerated by way of reduced rent or the provision of board). The marginal costs of each use may be relevant in determining the short term profitability of the primary production use. Profitability is also relevant to the commercial purposes tests in s.10AA(2)(a).

  2. An intention to make a bare profit is not sufficient to attract the exemption. The primary producer must have an intention to make a living or derive income or profit from the primary production use (see Explanatory Note to the Local Government (Rates and Charges) Amendment Bill 1988, which introduced similar provisions into the Local Government Act 1919). The primary producer’s intentions must include a reasonable profit after recovering annual expenses, including the costs of utilities, council rates, and interest on borrowings used to finance the primary production business, as well as capital replacement costs, such as the cost of replacing farm machinery, fences and other structures.

Profit on a “continuous or repetitive basis”
  1. The requirement of an intention to make a profit must be on a “continuous and repetitive basis”. A one-off profit for a particular period is not sufficient to qualify for the PPL exemption. The actual profit result in periods preceding the relevant taxing date and the expected profit result in subsequent years are relevant in determining the primary producer’s intention. The preceding and prospective profit results are particularly important where the primary production use does not generate a profit over the period which includes the relevant taxing date.

Rural land re-zoned for non-rural uses
  1. Where rural land that has previously been exempt primary production land is rezoned for non-rural use, the exemption may continue if the continuing primary production activities satisfy both the dominant use and commercial tests.

  2. However, the land may cease to be exempt if the preparatory work leading to subdivision has commenced and the scale, extent, intensity and cost of the preparatory work or activity indicate that the main, chief or paramount use is commercial land development. Preparatory work may consist of physical work conducted on the land such as earthworks (see Leda Manorstead v Chief Commissioner [2010] NSWSC 867 at 69 and 76, and Leda Manorstead v Chief Commissioner (2011) NSWCA 366 at 25).

Onus of proof

  1. The onus of proving that land qualifies for the primary production exemption rests with the owner of land, even if another person uses the land. If another person uses the land, the owner is responsible for obtaining detailed information about that other person’s use of the land; including details of non-primary production uses, if any (see Cornish Investments Pty Limited v Chief Commissioner of State Revenue [2012] NSWADT 204).

Flow Chart

  1. Attached is a flow chart which demonstrates the decisions which have to be made in considering whether or not the use of land satisfies the requirements necessary to qualify for the PPL exemption under s.10AA.

Stephen R Brady
Chief Commissioner of State Revenue
27 November 2017

Last updated: 5 December 2017