|Date of judgement||21 November 2019|
|Judge(s)||S E Frost, Senior Member|
|Court or Tribunal|
NSW Civil and Administrative Tribunal
Land tax; exemption for land used for primary production; significant and substantial commercial purpose or character
These proceedings concerned the Chief Commissioner’s decision to assess the applicant’s land at Gowrie, New South Wales (“the Land”) as liable for land tax for the 2015, 2016 and 2017 land tax years (“the relevant period”). Throughout the relevant period, the Land was zoned ‘R1 – General Residential’.
Mr Ernst, the owner of an adjoining parcel conducted a cattle farming and stud breeding operation on his land together with the Land owned by the applicant under an oral agistment agreement with the applicant that was later recorded in writing. The applicant claimed the primary production exemption from land tax for the Land on the basis of the use of the Land by the owner of the adjoining parcel.
During the relevant period, Mr Ernst ran between 85 and 115 head of cattle across his land and the applicant’s Land and spent approximately 30 hours per week undertaking primary production activities. He undertook stud breeding activities on the Land, utilising procedures involving hormone injection, artificial insemination and embryo transfers. The cattle were almost entirely purebred Murray Grey and were of a high quality, having won awards at various agricultural shows, including the Sydney Royal Easter Show.
According to Mr Ernst’s income tax records, his primary production activities on the land had incurred losses of $29,736 in 2015, $50,359 in 2016 and $52,694 in 2017.
The issue in dispute in this matter was whether the Land was eligible for the primary production exemption from land tax under s. 10AA of the Land Tax Management Act 1956 (“the LTM Act”).
The Chief Commissioner agreed that the land was “used for primary production” in the sense that the dominant use of the land was for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce: s. 10AA(3)(b).
However, the Land was not “rural land”, and for the primary production exemption to apply, the applicant had to prove that the use of the land satisfied the commerciality test contained in s. 10AA(2), that is:
“(2) Land that is not rural land is exempt from taxation if it is land used for primary production and that use of the land:
The applicant, relying on the expert evidence of Mr Peter Tremain, submitted that Mr Ernst’s primary production activities were of a significantly commercial nature so as to meet the test imposed by s. 10AA(2).
Mr Tremain gave evidence that Mr Ernst’s income for tax purposes should be adjusted to remove certain expenses and arrive at a figure described as “earnings before interest and tax”, which Mr Tremain described as the most appropriate measure of profit in this context (at -). These adjustments included removing expenses of a capital nature and interest paid on bank loans for the purchase of land, which resulted in Mr Ernst’s activities posting small profits each year.
Mr Tremain also identified the following factors which pointed to Mr Ernst’s primary production activities being of a significant and substantial purpose or character, and being engaged in for the purpose of profit on a continuous or repetitive basis (at -):
The Chief Commissioner, relying on the expert evidence of Mr Peter Schuster, submitted that Mr Ernst’s primary production activities did not have a significant and substantial commercial purpose or character. Mr Schuster disagreed with Mr Tremain’s analysis of the financial performance of the activities, preferring the income tax records which indicated that the activities did not produce a profit (at ).
Mr Schuster considered that the primary production activities were not commercially viable, and noted in particular a lack of a plan for achieving commercial viability and the limited evidence regarding the financial and other resources dedicated to the development and maintenance of the cattle enterprise and cattle trading activities (at ). Mr Schuster also gave evidence that the value of Mr Ernst’s labour, as an owner-operator, should be taken into account when calculating the profits of the primary production activities. This increased the losses incurred by the activities by approximately $40,000 each year (at  and ).
To determine whether Mr Ernst’s primary production activities had a significant and substantial commercial purpose or character, the Tribunal undertook an evaluative judgment of relevant factors identified in the evidence.
In support of the applicant’s claim that the use of the land had a significant and substantial commercial purpose and character, the Tribunal identified that the Land was used efficiently to produce a quality product (at -) and was undertaken by Mr Ernst in a serious manner (at ).
However, the Tribunal found that the use of the land during the relevant period did not generate a profit that contributed in a real and not trifling way to Mr Ernst’s income and that it could not reasonably have been expected to do so (at -). The Tribunal did not accept the adjustments proposed by Mr Tremain, instead relying on the income tax records of Mr Ernst. The Tribunal noted, in particular, that Mr Ernst was paying significant amounts of interest on bank loans for the purchase of land used for his primary production activities, which could be considered a legitimate outgoing of the primary production activities (at ).
While the financial performance of the primary production activities was not the only factor taken into account, the Tribunal held that it weighed very heavily against finding that the use of the Land had a significant commercial purpose or character (at ).
Having determined that the applicant had failed to demonstrate that Mr Ernst’s primary production activities had a significant and substantial commercial purpose or character, it was unnecessary for the Tribunal to determine whether the primary production activities were engaged in for the purpose of profit on a continuous or repetitive basis (s. 10AA(2)(b)).
The land tax assessments for the land tax years 2015 to 2017 inclusive are confirmed.