J.A.M. Investments Australia Pty Ltd ATF The Geokjian Unit Trust v Chief Commissioner of State Revenue [2011] NSWADT 75

Summary

The taxpayer sought a review the Chief Commissioner’s decision to disallow the primary production exemption under section 10AA of the Land Tax Management Act 1956 for the 2011 to 2013 land tax years.  The taxpayer argued that the dominant use of the properties was the cultivation of hay or silage for sale, and cultivation of eucalyptus trees for sale as hardwood and firewood.

Senior Member Block affirmed the Chief Commissioner’s decision, finding that the Taxpayer had failed to discharge the onus of proving that actual cultivation occurred in accordance with normal husbandry practices or that if it had occurred that the cultivation was for the purpose of sale.

Background

The taxpayer, R & E Drafting Pty Limited, sought a review in the NSW Civil and Administrative Tribunal (“the Tribunal”) of the Chief Commissioner’s decision to disallow the primary production exemption under section 10AA of the Land Tax Management Act 1956 (“the Act”) for the 2011 to 2013 land tax years (“the relevant years”) for the properties situated at 2 Parsland Close Exeter, 42 Parsland Close Exeter, and 45 Parsland Close Exeter (“the properties”).

Issues

As the properties were zoned rural only the dominant use test (s.10AA(3) of the LTMA) needed to be satisfied for the taxpayer to obtain the primary production exemption.

Taxpayer’s argument

The taxpayer argued that it was entitled to the primary production exemption on the basis that the dominant use of the properties was the cultivation of hay or silage for sale, and in the case of one of the properties, cultivation of eucalyptus trees for sale as hardwood and firewood.

The taxpayer argued that the properties had a long history of use for primary production activities which supported exemption, and that the lease of a house on one of the properties from Aug 2010 was a “caretaker lease” to ensure the safe preservation of the farm, its fixtures (including the farmhouse), plant and equipment.

The Taxpayer argued that the decision on dominant use in Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366 at [48] (“Leda”) could be distinguished as it related to land not zoned rural.

Chief Commissioner’s argument

The Chief Commissioner noted that the dominant use test is a common requirement under both s.10AA(2) and s.10AA(3), and as Leda was determined on the basis of the dominant use test, it was not distinguishable from this case.

The Chief Commissioner argued that the taxpayer had not discharged its onus because it failed to prove that the dominant use of any of the properties was the cultivation of grass or eucalyptus trees for the purpose of sale.  The Chief Commissioner submitted that there was no such purpose.

The Chief Commissioner referred to cases in which the meaning of “cultivate” has received judicial attention including Lease A Leaf Property Pty Limited v Chief Commissioner of State Revenue [2011] NSWADTAP 41 and Favello Pty Ltd & Ors v Chief Commissioner of State Revenue [2014] NSWCATAD 47.  The Chief Commissioner submitted that cultivation requires more than allowing grass or trees to grow on land. There must be labour and attention devoted to ensuring this occurs. Furthermore, it is apparent that the term imports a purposive element in that the labour must be engaged in to achieve an end, i.e. production of a crop.

The Chief Commissioner argued that this purposive interpretation is consistent with the need for the cultivation to be for the purpose of sale. It is also apparent from cases such as Safety Beach Estate v Commissioner of Land Tax 79 ATC 4032; that cultivation should be in accordance with the practices of husbandry applicable to the particular crop.

Reasons for Decision

Credibility of Mr Ennis

The Tribunal considered that the taxpayer’s case rested solely upon Mr Ennis’ evidence as to the intentions of the Taxpayer (paragraph 52).  Having regard to a number of statements of Mr Ennis in submissions to the Chief Commissioner and in his evidence to the Tribunal (paragraph 53), from which Mr Ennis resiled during cross examination, the Tribunal agreed with the Chief Commissioner that Mr Ennis’ credibility was “open to doubt” (paragraph 54).

Cultivation

The Tribunal agreed with the Chief Commissioner’s submission that cultivation requires more than just allowing grass and trees to grow on the land and that “labour and attention must be devoted to ensuring that this occurs;  in addition the term "cultivation" involves a purposive element in that labour must be employed (paragraph 56).”

The Tribunal found that in the relevant period there was no evidence that the taxpayer planted seed or otherwise improved the grasses; sprayed for weeds (other than in December 2010 in response to a Weed Control Notice from the Wingecarribee Shire Council); or fertilized the properties.

The Tribunal found that there was no cultivation of grasses for hay or cultivation of trees within the meaning of s.10AA(3)(a) during the relevant tax years (paragraph 70).

Purpose of Sale of the product of primary production

The Tribunal noted that even if it were accepted that cultivation occurred on the properties, to obtain the benefit of s.10AA(3)(a) the cultivation had to be for the purpose of selling the produce of the cultivation (paragraph 72).

The Tribunal was satisfied that sale was not the purpose of the cultivation of either hay, silage or firewood. In relation to hay and silage, the Tribunal agreed (paragraph 74) that:

1. "such cultivation as took place was minimal, not in accordance with accepted husbandry and not such as would promote a useful hay or silage crop;
2. no grasses were in fact cut, raked or baled for hay or silage on any property;
3. no hay or silage was sold (or bartered) by the Taxpayer;
4. no attempts were made by the Taxpayer to sell (or barter) hay or silage until after the present dispute with the Chief Commissioner had arisen;…”

Mr Ennis offering hay in exchange for work undertaken by contractors was seen by the Tribunal as:

Residential rental use

In relation to dominant use, the Tribunal found that the residential/rental use was by far the dominant use of No 2 Parsland Close because: the rent produced a significant source of revenue ($15,955 in 2010-11 and $18970 in 2011-12) where the primary production use produced no revenue; the intensity of the rental use was greater (there were four people living in the residence) whereas the primary production use was largely passive; the residential house dominated in appearance and physical improvement despite occupying 15.76% of the total land area. In relation to the question whether the a primary production use dominates a residential use, the Tribunal indicated that:

Orders

As the Tribunal found that the taxpayer had failed to discharge its onus, the Chief Commissioner’s decision was affirmed.

Link to decision

R & E Drafting Pty Limited v Chief Commissioner of State Revenue [2014] NSWCATAD 75