Fitzpatrick Investments Pty Ltd ATF The Number One Trust v Chief Commissioner of State Revenue [2021] NSWCATAD 315
Background
This matter concerned a review of the Chief Commissioner’s land tax assessment of land at Erskine Park for the 2014 to 2017 land tax years. Lenore Drive divided the land into a southern paddock and a northern paddock. Bordering the northern paddock is a residential development and bordering both the northern and the southern paddocks to the west are portions of the Industrial Estate. To the east and south is a Conservation Area.
The Applicant claimed the land was exempt primary production land under s.10AA of the Land Tax Management Act (“the Act”).
The land has been in the family of the sole director of the Applicant, since the 1940’s and cattle had been run on the land since the 1950’s. The grazing activities were carried out first by the director’s grandfather, and then by the Applicant, until 2008.
Between 2010 and early 2014 the Applicant entered into an agistment agreement in respect of part of the Erskine Park land.
From about 2010, the Applicant has been developing parts of Erskine Park, by constructing industrial warehouses on the land. Part of the land would be subdivided and excised from the undeveloped part, usually before the commencement of physical work. The development of the Industrial Estate had been undertaken by the FDC Group of companies (“FDC”).
The application for exemption for the 2014-2017 land tax years was based on the maintenance of cattle by Filetron Pty Ltd (“Filtron”). There was a lease between the Applicant and Filetron, to commence in December 2013. The lease initially applied to an area of approximately 98.39 hectares, of which the Erskine Park land was part. The initial rental fee was $15,600 plus GST per annum. The Applicant subsequently withdrew its application for the 2016 land tax year.
In the 2014 and 2015 land tax years the Erskine Park land was approximately 70.39 hectares, reduced to 66.64 hectares for the 2017 land tax year.
The Statutory Framework
As the land had an industrial zoning, the Applicant had to prove that the use of the land met the tests set out in s.10AA of the Act, and referred to by the Tribunal as:
- The dominant use test, set out in s10AA(3);
- The commerciality test, set out in s.10AA(2)(a); and
- The profit test, set out in s.10AA(2)(b).
Submissions
The Applicant’s evidence was that the son of the Applicant’s sole director runs a large cattle and sheep operation on a number of properties in the Southern Highlands (“the Southern Highlands Operation”), mainly owned by Filetron. Overall, the Southern Highlands Operation had approximately 2000 head of cattle and 2500 sheep. The cattle operation on the Erskine Park land was stated to be for the purpose of fattening up to 40 low weight heifers to achieve a better price at sale.
The cattle, when they were present on the Erskine Park land, were usually in the southern paddock.
During the relevant period, there were three movements of cattle onto the Erskine Park land:
- in December 2013, 30 female Angus cattle were transported from one of the Southern Highlands properties; The cattle were removed on 21 March 2014 and sold in April 2014.
- on 23 October 2014, 25 female Angus cattle were transported from one of the Southern Highlands properties. The cattle remained on the Erskine Park land for over two and a half years. In June 2017, 18 cattle from the leased land were sold.
- On 17 December 2017, 17 female Angus cattle were transported from one of the Southern Highlands properties.
The Applicant submitted that the Erskine Park land attracted the primary production exemption on the basis of its use for the fattening of the heifers for sale. The Applicant claimed the use of the land by Filetron was the dominant use of the land, conducted for a substantial commercial purpose and for the purpose of profit. The Applicant’s position was that leaving the Erskine Park land empty of cattle during certain periods still amounted to a relevant “use” for primary production purposes.
The Chief Commissioner submitted in relation to the dominant use test that the Tribunal should consider the competing uses associated with the Industrial Estate, consisting of:
- a dry detention basin on the southern paddock,
- a dam/stormwater detention pit on the northern paddock,
- a dry detention pit to the east of the Pelikan Artline industrial site in the northern paddock, and related water drainage, and
- a temporary access driveway at the edge of part of the western boundary of the land for extension of the Pelikan Artline industrial site.
Decision
1. Dominant use test:
SM Frost considered that the enquiry into the dominant use of the land requires an assessment of whether the land is used for the maintenance of animals for the purpose of sale, whether there are other uses of the land, and whether the maintenance of animals was the main, chief or paramount use of the land (at [58]). In respect of each use, SM Frost took into account the area and proportion of land used for each use, the nature, extent and intensity of each use, and the time, amount of labour, and other resources devoted to each use.
2014 tax year
SM Frost held that the dominant use of the Erskine Park land for the 2014 land tax year was for the maintenance of cattle. There were 30 cattle on the land between 12 December 2013 and 21 March 2014, which included the taxing date. He found that cattle maintenance activities were almost exclusively confined to the southern paddock (at [65]), but the southern paddock represented the majority of the land. A dry detention basin was constructed between April and October 2014, after the cattle had been removed. On balance, he decided the stormwater detention use consisting of a combined dam/detention pit, was minor in comparison to the cattle maintenance use (at [76]).
2015 tax year
25 heifers were delivered to the property In October 2014. These 25 heifers remained on the land for over two and a half years. SM Frost noted that the cattle were eventually sold, but not during what might be regarded as a ‘reasonable period’ spanning either side of the 2015 taxing date of 31 December 2014 (at [88]). He agreed that the cattle were maintained on the land for eventual sale, but the actual physical activities associated with the maintenance of the cattle were few. There was no pasture improvement, no supplementary feed brought onto the land, and Mr Cottle’s visits, about once a month, comprised nothing more than driving across the paddocks and observing the cattle. Beyond that, there was fencing repair, and rounding up the cattle when they escaped; (at [89] – [90]).
SM Frost concluded that in respect of the 2015 land tax year the cattle maintenance use was not the dominant use of the land (at [115]), commenting that:
- If dominant use were to be decided solely by reference to the area of land used, maintenance of the cattle may have been the dominant use (at [104]);
- there was minimal use of the northern paddock for the cattle maintenance activity (at [107]);
- the combined dam/stormwater detention pit was used for the very significant purpose of controlling stormwater run-off from the Industrial Estate, and was the main use of the northern paddock (at [107]);
- there was a significant use of part of the southern paddock for controlling storm water runoff in connection with the Pelikan Artline industrial site; the information provided to the Tribunal about the construction of the detention pit fell short in important respects, making it difficult to establish precisely how this activity should be weighed in the balance (at [108]).
- The nature of the cattle maintenance activity was low-intensity, and almost entirely conducted on only part (albeit the larger part) of the land (at [109]);
- the cattle maintenance use was so minor in both a relative sense and in an absolute sense, that it is difficult to characterise it as the dominant use (at [112]).
2016 tax year
The Applicant withdrew its application for the primary production exemption for the 2016 land tax year. The Tribunal indicated (at [47]) that the extensive nature of activity associated with the construction of a warehouse on part of the northern paddock between November 2015 and August 2016 probably influenced the Applicant’s withdrawal of its primary production exemption claim for 2016.
2017 tax year
SM Frost noted that the activities on the Erskine Park land were materially the same between the 2015 and 2017 land tax years. Consequently, the dominant use of the Erskine Park land was not for the maintenance of cattle. (The site of the newly constructed warehouse in the northern paddock was excised from the assessed Erskine Park land before 1 January 2017).
2. Commerciality test:
As SM Frost determined that the use of the Erskine Park land satisfied the “dominant use” test for the 2014 tax year only, the commerciality (and profit) test is only relevant for the 2014 tax year assessment.
The Applicant argued that the use of the Erskine Park land together with Southern Highlands properties to conduct a cattle and sheep operation met the ‘commerciality’ (and ‘profit’) test.
The Chief Commissioner argued that the Applicant had to establish that the primary production use of the Erskine Park land was “integrated” with the use of the Southern Highlands properties.
SM Frost decided that rather than integration, the relevant authorities require consideration of whether the primary production activities on the Erskine Park land were part of a “larger whole” (at [135] -[136]). He was not satisfied, based on the way the Erskine Park activities were entered into and the way they were conducted, that they formed part of a single business comprising the primary production operations in Erskine Park plus those in the Southern Highlands (at [161]). The factors that informed the Tribunal’s conclusion were:
- lack of an explanation for the selection of the Erskine Park property for the fattening of the heifers, such as evidence that alternatives were explored and evaluated ([155]);
- no explanation clarifying why it was a good business proposition to move the heifers 100 kms from the Southern Highlands to Erskine Park when other closer and equally appropriate locations may have been available ([156]); SM Frost consequently drew the inference that the Erskine Park land was chosen because of the land tax benefit to the Applicant ([144])
- the lack of security of the cattle due to repeated cutting of the fences, which was known to be an issue before the heifers arrived, and was not adequately addressed in a timely manner, which does not indicate a serious, business-like approach ([157]);
- the almost total lack of attention to the animals at Erskine Park which not only allowed the heifers to go missing without their absence being noticed immediately, which was an unusually relaxed approach to livestock that are meant to be the source of income and, ideally, profit ([158]);
- nothing that was done at Erskine Park was connected with anything done in the Southern Highlands, apart from the fact that the activities at both locations were primary production ([159];
- the common sets of financial statements were of little relevance, it being a choice entirely open to Filetron whether it records and reports the activities separately or as one ([139]).
In view of the lack of connection between the activities conducted in the Southern Highlands and Erskine Park, SM Frost concluded that the ‘commerciality’ test required consideration of whether Filetron’s use of the Erskine Park land alone had a significant and substantial commercial purpose or character ([162]).
Based on the factors listed by Gzell J in Maraya and endorsed by the Court of Appeal, SM Frost concluded that Filetron’s use of the Erskine Park land in relation to the 2014 land tax year had neither a significant and substantial commercial purpose nor a significant and substantial commercial character ([165). Those factors were:
- the intensity of the operation,
- the size and quality of the herd,
- the size and carrying capacity of the Subject Lands, and
- the resources, whether of time, labour or expenditure in the development and maintenance of the operation.
- both the "purpose" and "character" of the primary production must be “substantial”, meaning “serious” or “weighty” as opposed to a business carried on in a small way or as a sideline.
3. Profit test
SM Frost deemed it unnecessary to consider the profit test with respect to the 2014 land tax year, in light of his conclusion that the commerciality test was not satisfied.
Orders
The land tax assessments for the 2014, 2015 and 2017 land tax years were confirmed.
Link to decision
https://www.caselaw.nsw.gov.au/decision/17cc3e670f3b4d53edffd23b