Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25

Summary

Ashleigh Developments Pty Ltd (“the Taxpayer”) appealed against a decision of the Administrative Decisions Tribunal (“ADT”) that the use of its property in Milton (“the Land”) did not satisfy the dominant use test for the 2007 to 2010 land tax years. The Chief Commissioner of State Revenue (“Chief Commissioner”) cross-appealed against the decision that the primary production activity conducted by the lessee of the Land (“the Farmer”) satisfied the business tests for those tax years.

The ADT Appeal Panel, comprised of President O’Connor J, Judicial Member Verick and Non-Judicial Member Butlin, dismissed the appeal by the Taxpayer. The Appeal Panel also decided that it was not necessary to make a decision on the Chief Commissioner’s cross-appeal, but disagreed with the Tribunal’s conclusions in respect of some aspects of the business tests and indicated that the Tribunal’s conclusions regarding the application of the business tests are not authoritative for future, similar cases.

Background

In 2006, the taxpayer purchased the relevant land (“Land”) from the Farmer, who continued to use the Land under lease for cattle grazing.

The Land was zoned residential and the Council granted approval to subdivide the Land into 157 residential lots. The taxpayer spent approximately $1.5 million on various fees related to ancillary processes associated with the future development and/or holding of the Land. However, the Taxpayer did not procure any physical works or improvements to the Land, the Land was not connected to services and no kerbs or gutters or road were laid. The only physical use of the Land was the Farmer’s cattle grazing, which the Farmer used in conjunction with 280 hectares of other land in the Shoalhaven area. The taxpayer contended the only “use” of the Land was the physical use of the Land by the Farmer, being commercial beef cattle grazing.

The Chief Commissioner contended the dominant “use” of the Land was the taxpayer’s use of the Land in the joint venture’s property development business as trading stock. The taxpayer was a partner of a joint venture in 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’ other activities.

The Statutory Framework

The taxpayer sought an exemption for land tax on the basis the Land was used for primary production under s. 10AA of the Land Tax Management Act (“Act”). There were 4 issues:

1. whether the “land” for the purposes of s. 10AA was the land the subject of the assessment, or whether it included other land used by the Farmer;
2. whether the dominant use of the land was for primary production (s. 10AA(3)), in circumstances where the only physical use of the Land was cattle grazing and the land was also held for the purposes of trading stock;
3. whether the primary production use of the Land 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 2006 to 2009 land tax years;
4. whether the primary production use of the Land 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 and on a sufficient scale of intensity.

Decision

Primary Decision of the Tribunal

1. Judicial Member Frost held in relation to the above issues:
   1. That the “land” for the purposes of s. 10AA was the land the subject of the assessment; however, the commerciality and profit tests in s. 10AA(2) should be decided on the common ground that it was all of the land used by the Farmer;
   2. The “use” of the land is not limited to physical activity that occurs on the land and can include an indirect and intangible use of land. In this case, the use of holding the Land as trading stock was the dominant use of the Land as the level of investment concerned dwarfed the other uses of the land;
   3. The Farmer conducted cattle grazing for the purpose of profit, even though he made significant tax losses from his primary production activities over the relevant tax years, as the Farmer engaged in these activities as a business and not as a hobby or recreational pursuit; and
   4. The farming activities had a ‘significant and substantial’ commercial character as 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.

   While the use of the Land satisfied the commerciality and profit tests, as the dominant use test was not satisfied, the taxpayer was not eligible for the exemption.

   The taxpayer appealed against the decision and the Chief Commissioner cross-appealed in relation to Judicial Member Frost’s reasoning at (3) and (4) above.

Decision of the Appeal Panel

2. The Appeal Panel dismissed the Appeal and held that:
   1. There was no error in confining attention to the state of activity on the Land;
   2. The Tribunal was not obliged by the words of the statute to confine its attention to the acts, facts, matters or circumstances that related only to the physical, tangible use of the land. It could have regard to the commercial purpose of the owners which use the land on an interim basis for cattle grazing. It could then move to making a finding as to which of the identified uses was dominant (para 35);
   3. & 4. The Appeal Panel did not consider it to be essential to the effective disposal of the appeal to address the issues raised by the cross-appeal. However, the Appeal Panel made the following observations:
      • The requirement that the primary production use that ‘have a significant and substantial commercial purpose or character’ eliminates hobby or token operations. The taxpayer needs to show that the operation is run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability; cognisant of the elements of unpredictability of any business operation, especially primary production (para 45(ii));
      • The requirement that the primary production activity be engaged in for the purpose of profit ‘on a continuous or repetitive basis (whether or not a profit is made)’ connotes a business enterprise of a well-structured, long term character, with administrative features (organisation, management, book keeping) which support the conclusion that it is set up with the aim of generating a profit year to year over a succession of years (para 45(iii));
      • It may be that a concession involving a less rigid approach to profitability is acceptable in a family farming operation where a subsistence level of income may be seen as sufficient in the circumstances, especially where the Farmer is of later age (para 47);
      • However, it is not enough that it simply be shown that the Farmer is not a hobbyist (para 48);
      • The Tribunal’s conclusions on this aspect of the case are not authoritative for future, similar cases (para 52).

Link to decision

Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue (RD) [2012] NSWADTAP 25