Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2011] NSWADT 250

Summary

Ashleigh Developments Pty Ltd (“Ashleigh Developments”) sought a review of the decision of the Chief Commissioner of State Revenue (“Chief Commissioner”) to assessments for land tax for the 2007 to 2010 land tax years in respect of a property situated in Milton, NSW (“the Land”).

At issue in these proceedings was whether the primary production exemption under s10AA of the Land Tax Management Act 1956 ("the Act") should have applied in respect of the Land. Judicial Member Frost affirmed the decision of the Chief Commissioner that the primary production exemption was not available during the relevant tax years.

Background

In 2006, Ashleigh Developments purchased the Land from a farmer who continued to use the Land under lease for beef cattle grazing. The Land was zoned residential and the local Council granted approval to subdivide the Land into 157 residential lots. Ashleigh Developments spent approximately $1.5 million on various fees (such as legal fees, Council fees, and surveys/engineering fees) related to ancillary processes associated with the development and/or holding of the Land. However, Ashleigh Developments did not procure any substantial physical works or improvements to the Land, the Land was not connected to services (sewerage, water, gas or electricity) and no kerbs or gutters or roads were laid. The only substantial physical use of the Land was the farmer's beef cattle grazing, which the farmer used in conjunction with 280 hectares of other land in the Shoalhaven area. Ashleigh Developments contended the only "use" of the Land was the physical use of the Land, ie, beef cattle grazing. The Chief Commissioner contended that there were three "uses" of the Land:

1. the farmer’s use of the Land for beef cattle grazing;
2. the related leasing use of the Land; and
3. Ashleigh Developments' use of the Land in the joint venture's property development business as trading stock.

Ashleigh Developments held the Land on bare trust for two joint venturers carrying on a property development business. A significant write-down in the value of the Land meant the holding of the Land as trading stock resulted in the joint venturers paying almost no tax on the joint venturers obtaining a tax advantage in the form of sheltering other income.

Ashleigh Developments sought an exemption from land tax on the basis the Land was used for primary production under s 10AA of the Act. There were 3 issues:

1. Whether the dominant use of the Land was for primary production (s.10AA(3)), in circumstances where the only substantial physical use of the Land was beef cattle grazing but the Land also had a significant use as trading stock;
2. Whether the use of the Land by the farmer was engaged in for the purpose of profit on a continuous or repetitive basis (s.10AA(2)(b), in circumstances where the farmer suffered significant losses for the preceding 12 years;
3. Whether the use of the Land by the farmer had a significant and substantial commercial purpose or character (s.10AA(2)(a)), in circumstances where there was a question as to whether the farmer’s business was viable.

Decision

As a preliminary matter, Judicial Member Frost determined that:

• the commerciality and profit tests in s 10AA(2) should be determined by reference to the entirety of the farmer’s farming land, that is, including the additional 280 hectares used in conjunction with “the Land”; and
• the dominant use test in s 10AA(3) should be determined by reference to the Land only, that is, excluding the additional 280 hectares used in conjunction with “the Land”.

What was the Dominant Use?

1. Judicial Member Frost found:
   • it was necessary to identify the "acts, facts, matters and circumstances" by reference to which it can be said that the primary production use is the dominant use of land;
   • the "use" of land is not limited to physical activity that occurs on the land and can include an indirect use of land;
   • there were 3 relevant uses of the Land during the relevant tax years:
     • cattlegrazing;
     • the leasehold use; and
     • the use of the Land as trading stock;
   • the use of the Land as trading stock was the dominant use, having regard to the factors identified by Gzell J in Leda Manorstead v Chief Commissioner [2010] NSWSC 867 namely, time, labour, the extent of physical use, economic scale, and the end to which an activity is directed. Although the farmer’s activities outweighed competing uses by reference to time and labour, the use of the Land as trading stock dwarfed the farming activities by the level of investment undertaken by Ashleigh Developments and stamped the use of the Land with that character; and
   • as the dominant use of the Land was not for cattle grazing, the Land was not “land used for primary production” as defined in s 10AA(3).
   Nevertheless, Judicial Member Frost considered the commerciality and profit tests.

Commerciality and profits tests

2. The Chief Commissioner argued that this limb was not satisfied because the farmer’s activities were 'inherently' unprofitable.Judicial Member Frost found:
   • as to s 10AA(2)(b) (whether the primary production was engaged in for the purpose of profit on a continuous or repetitive basis):
     • the farmer’s significant tax losses from his primary production activities over the relevant tax years did not mean the farmer was not engaged in primary production for the purpose of profit;
     • the sub-section does not look to whether profit was actually made, rather it looks at the purpose behind the relevant activities;
     • having regard to his farming practices and extensive experience in farming, the farmer engaged in his primary production activities as a business and not as a hobby or recreational pursuit;
     • the farmer conducted beef cattle grazing for the purpose of profit, even though he did not make a profit (at least for income tax purposes).
   • as to s 10AA(2)(a) "significant and substantial commercial purpose or character"
     • the test comes down to the question of whether it is appropriate to describe the activities as having an important and real or genuine commercial purpose or character.
     • the farming activities had a 'significant and substantial' commercial character having regard to various factors:
       • the farmer maintained his stock levels at or around the notional carrying capacity of the Land;
       • the numbers of cattle sold and the level of income generated from the sales;
       • the extent to which the Land and surrounding lands were used for farming purposes and the level of investment in the beef cattle operation;
       • while the farmer’s cattle operations were not the largest in the country, they were nevertheless of 'moderate size' and sufficiently large to be characterised as a 'significant and substantial' operation.

Judicial Member Frost concluded that while the use of the Land satisfied the commerciality and profit tests, the dominant use test was not satisfied.

The Chief Commissioner's land tax assessments were confirmed.

Link to decision

Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2011] NSWADT 250