Background
Godolphin carried out its equine operations on various parcels of land, including the two groups of parcels, both located in the Hunter Valley (“Kelvanside” and “Woodlands”). Not all of the parcels of land that comprised Kelvinside was contested, with the Chief Commissioner granting the PPE before the commencement of litigation for part of that property.
The Land was “rural land” for the purposes of s.10AA, so that Godolphin had to prove that the dominant use of the Land was for the maintenance of animals the purpose of selling them or their natural increase or bodily produce as set out in s.10AA(3)(b), to attract the PPE. The “Commerciality “tests in s.10AA(2).
Godolphin’s activities on Woodlands relevantly comprised maintaining broodmares and their offspring (most being sold after the start of their racing career) and maintaining a small number of horses for purposes ancillary to breeding and education.
Godolphin’s activities on Kelvinside included the covering of mares by its stallions, grazing of cattle, spelling horses owned by Godolphin between race campaigns, raising and education of yearlings; approximately 10% of the relevant PID on Kelvinside was used for the stallion covering activities.The remainder of the Land was used to breed, train and rest or spell racehorses.
Godolphin also conducted equine operations at Crown Lodge, opposite Warwick Farm Racecourse, where Godolphin trained its racehorses. Osborne Park, to the north-west of Sydney, also contain training facilities, spelling facilities and quarantine facilities for international horse movements. Godolphin did not claim the PPE for these properties.
The Chief Commissioner refused to grant the PPE, disallowed the objections to the assessments, and Godolphin commenced proceedings in the Supreme Court.
Statutory framework
The relevant exemption from land tax which Godolphin claimed should apply to the Land is provided for in s.10AA of the LTMA. Issues arose in these proceedings regarding the statutory construction of this provision, particularly s.10AA(3)(b), and the interaction between the concepts ‘use’ and ‘purpose.’
S.10AA(3) (b) provides that for the purpose of s.10AA, ‘land used for primary production’ means land the dominant use of which is for:
“(b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce.”
First instance proceedings in the Supreme Court
The Chief Commissioner argued that there were two uses of the Land: one being stud services and breeding (“Stud”), and the other being the use for the training and spelling of horses for racing, (“Racing”); and the maintenance of animals for Racing was the dominant use of the Land.
Godolphin argued that there was only one use, being an integrated business of the thoroughbred stud operation; in relation to the activities on the Land concerning racing, success in racing increased the value of the stallion covering activities and the value of the progeny that was sold.
The primary judge rejected the Chief Commissioner’s argument that the integrated operation was for the dominant purpose of generating prizemoney, that is, for Racing.
The primary judge found that the two properties were used as part of an integrated operation in which the preparation of horses for racing was with the overall or dominant purpose or objective of increasing or maximising the revenue from the stallion services (i.e. the sale of bodily produce) and from the sale of the progeny produced by the broodmares.
The primary judge held that the activities taking place on the Land fell within the statutory description of “land used for primary production” within the meaning of s.10AA(3)(b), because they involved a dominant use of the Land for “the maintenance of animals … for the purpose of selling them or their natural increase or bodily produce”.
The primary judge made orders revoking the assessments.
Appeal
Chief Commissioner’s submissions
The Chief Commissioner challenged a number of findings of facts, contending that they were not supported by the evidence. The Chief Commissioner argued that the primary judge at first instance erred in the application of the correct legal test, by failing to determine the issue of whether there were two or more uses of the Land, Racing and Stud.
The Chief Commissioner argued that the primary judge focused excessively on “an economic point of view”, had insufficient regard to the actual physical use to which the land in question was put, and erred in not making findings in relation to the matters identified by White J in Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue (2017) 104 ATR 820; [2017] NSWSC 9.The
Chief Commissioner submissions were that the factual matters about which parcels were used for each of Racing and Stud were directly relevant to the Court’s determination of whether there was a single use, or multiple uses of the Land; error was demonstrated in the primary judge’s reasoning and there was an appropriate basis for the issue of whether the requirements of s.10AA(3)(b) (ie what was the dominant use?) to be determined afresh.
Godolphin’s submissions
Godolphin’s submissions supported the correctness of the primary judge’s decision that there was one use of the Land, being an “integrated operation” having regard to the interconnectedness of the activities conducted by Godolphin on the Land.
Godolphin submitted that, upon application of this proper construction to the facts of this case, the Land was used for the purpose of racing and the purpose of breeding which were ‘complementary or mutually reinforcing’ purposes. In its distinctive business model “the purpose of sale and the purpose of racing are two aspects of a single composite purpose”. As such, Godolphin submitted that there was just one use of the properties, that being the maintenance of the racehorses in which the preparation of horses for racing was with the overall or dominant purpose or objective of increasing or maximising the revenue from the stallion services and from the sale of the progeny produced by the broodmares.
Regarding the primary judge’s consideration of the commercial realities of Godolphin’s operations, Godolphin submitted that there was nothing inappropriate with that consideration in determining that there was an integrated operation and hence, a single use of the both properties by Godolphin.
In Godolphin’s notice of contention, it submitted that on the proper construction of s.10AA(3), ‘use’ and ‘purpose’ were separate concepts and as such, the requirement of dominance only applied to the ‘use’ not the ‘purpose.’
Decision
The majority of the Court of Appeal determined that the appeal should be upheld (Griffiths AJA dissenting). Kirk JA, Simpson AJA and Griffiths AJA (in dissent) delivered separate judgments.
Kirk JA
In the leading judgment, Kirk JA identified that the key issue was whether the racing purpose of the activities on the Land was secondary to the sale purpose, such that the dominant use of the Land could be characterised as for the sale purpose. In determining this, his Honour considered the question as being one of statutory construction of s.10AA(3)(b) which required a determination as to whether this provision requires that the dominant use of land relate only to the activity of maintenance of animals or is it necessary that the use of land be characterised as for a dominant use for the identified purpose.
Further, considering the provisions in s10AA(3), his Honour considered whether the dominant use of the land in question was for one of the categories of a ‘use-for-purpose’ identified in the paragraphs in s.10AA(3): ( at [33]).
His Honour determined that it was correct to construe s.10AA(3) as the Chief Commissioner had submitted, namely that the to correct application of the test was to determine whether or not the dominant use of the Land was for the purpose of maintaining animals to sell them or their bodily produce. His Honour rejected Godolphin’s submission that ‘use’ and ‘purpose’ should be considered separately [22]. In reaching this conclusion, his Honour provided that as the word ‘dominant’ was before ‘use,’ but the phrase provides for a dominant use of something, for each of the six paragraphs in s.10AA(3) there must be a use and a purpose identified [31]; as such, the dominant use must be for one of the identified purposes [31].
Applying the test in s.10AA(3) to the facts of this case, his Honour recognised that the majority of actual activities on the Land were more directly related to the racing purpose as opposed to the sale purpose [104].
His Honour recognised there was some ‘force’ in factors identified by the primary judge in reaching her conclusion that the economic driver of the business was for the sale purpose, because establishing racing prowess in the progeny of Godolphin’s stallions enhanced their value for covering purposes and hence, indirectly served the sale process [92-93]. However, this did not ultimately persuade his Honour that the dominant use of the Land could be characterised as animal maintenance for the sale purpose [93].
His Honour further noted that the value of the breeding assets was significantly higher than the racing assets, however, reinforced that this was just one factor. As such, his Honour provided that the characterisation of the use of the land is the appropriate question to be asked not the value of the assets held on it [106].
Ultimately, his Honour provided that although the breeding and racing activities were linked, this did not mean that they should be labelled with one overall purpose [108]. His Honour recognised that the racing related operations occupied the greater part of activities undertaken at these properties, and hence, the racing purpose was not merely incidental to the sales purpose as the primary judge found [125]. Considering activities undertaken on the land, the areas directed to those activities, the intensity of those activities and the resources directed to the relevant purposes, his Honour found that the racing purpose constituted the dominant use of the land [125] as opposed to a secondary and incidental purpose to a dominant purpose of breeding [43, 125]: his Honour’s view was that, contrary to the conclusion reached by the primary judge, the characterisation of the maintenance of the racehorses on the Land was not supported by the facts and the appeal should be allowed.
Simpson AJA
Simpson AJA considered the question of statutory construction, whether the use of the Land was for one or more of the prescribed purposes specified in s.10AA(3)(b). Her Honour stated at [132]:
“With some misgivings, I bow to that authority and proceed on the basis that s.10AA(3)(b) is directed to a single concept, expressed by Kirk JA as “use-for-the-purpose”.”
Regarding Godolphin’s submissions that use and purpose are separate concepts, her Honour provided that to construe the provision in this way would involve discarding the definite article in paragraph (b), namely ‘the purpose,’ and substituting the indefinite article, namely ‘a purpose,’ unqualified and render any purpose no matter how insignificant in the overall use of land, sufficient to attract the exemption. Her Honour determined this construction would be entirely inconsistent with the legislative intention behind s.10AA which is to ensure this exemption is given where land is genuinely used for the purposes of primary production [159].
Her Honour agreed with the orders proposed by Justice of Appeal Kirk [157]. However, despite reaching the same conclusion [162], considering other legislative context and that the dominant purpose is often determined to be the ‘ruling, prevailing or most influential’ purpose (Federal Commissioner of Taxation v Spotless Services Ltd (1996)) [151], her Honour found that the land’s purpose for racing and the purpose for breeding, which Godolphin claimed were “complementary or mutually reinforcing,” were in fact evenly balanced and there was no ‘dominant purpose’ for use [155]. As such, her Honour determined that Godolphin had failed to discharge its onus of proving that the dominant use of the Land was for the purpose of the maintenance of animals for the purpose of sale [154, 161].
Griffiths AJA (dissenting)
Griffiths AJA determined that the appeal should be dismissed.
His Honour did not consider that the primary judge erred in setting aside the land tax assessments for the land tax years from 2014 to 2019 as the primary judge, when determining whether use of the land was for the purpose under s.10AA(3)(b), appropriately considered and gave appropriate weight to the fact that Godolphin’s use of the Land during the years 2014 to 2019 comprised of activities forming part of an integrated thoroughbred breeding and racing operation [164].
In view of that conclusion, he did not address the “use for a purpose” issue.
Orders
The Court of Appeal made the following orders:
- That the appeal be allowed.
- That the orders made by the Supreme Court on 13 April 2022 be set aside.
- In lieu of the Supreme Court orders, the Court ordered that the Further Amended Summons be dismissed and pursuant to s 101(1)(a) of the Taxation Administration Act 1996 (NSW), the two Land Tax Assessment Notice’s issued on 19 March 2020 and 20 July 2020 by the defendant to the plaintiff be confirmed.
- That Godolphin pay the Chief Commissioner’s costs at first instance and on appeal.
Decision
Link to the decision
