Transfer of Primary Production Property between family members

Preamble/Background

1. This revenue ruling is about sec. 274 of the Duties Act 1997 (NSW) (“Act”) one of the general exemptions from duty in Part 2 of Chapter 11 of the Act.
2. Sec. 274 was recently amended by the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) (“2022 Amending Act”). These amendments commenced on the date of assent of the 2022 Amending Act, being 19 May 2022.
3. The amended version of sec. 274, which expands the operation of the exemption by enabling the transfer or lease of the primary production land to companies and trusts controlled by relevant family members and not just to those family members personally, applies to transfers (and agreements for sale and leases) first executed on or after that date (19 May 2022).¹
4. This revenue ruling provides an overview of the operation of the amended version of sec. 274. (For transfers and agreements for sale and leases first executed prior to 19 May 2022, see DUT050.)
5. Sec. 274 is headed ‘Transfer of certain business property between family members’. In broad terms, the purpose of the exemption is to enable land used for primary production (business property) to be transferred or leased between relevant family members free of duty. As mentioned below, the exemption can also apply where the primary production land upon which the family’s farming operations are being conducted is held by associated companies and trusts of which the relevant family members are shareholders or beneficiaries. And as a result of the amendments made by the 2022 Amending Act, the land may now also be transferred or leased to (and not just from) such companies or trusts (subject to certain requirements).

Transfer of primary production property between family members

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Terms of the exemption

6. Sec. 274(1) provides that duty under the Act is not chargeable in relation to a transfer or lease of land used for primary production, together with other property that is an integral part of the business of primary production if the Chief Commissioner is satisfied of all the matters specified in subsections (2)-(4).²

Transactions to which the exemption applies

7. Sec. 274(6) provides that a ‘transfer’ of land includes the following:

• an agreement for the sale or transfer of the land,
• a lease of the land,
• a transfer or assignment of a lease or permit in relation to the land.

8. Each of a transfer, and an agreement for the sale or transfer, of land in NSW is a dutiable transaction for the purposes of Chapter 2 of the Act.³ However, if the agreement for sale and/or transfer is in relation to land used for primary production it may be eligible for an exemption under sec. 274 of the Act.
9. A transfer (which includes an assignment⁵) of an existing lease of land in NSW is also a dutiable transaction under Chapter 2 of the Act⁶. However, if the lease is in respect of land used for primary production, the transfer of the lease may also be eligible for an exemption under sec. 274 of the Act.
10. A grant of a new lease of land in NSW in respect of which a premium is paid or agreed to be paid or in respect of which other consideration other than rent is provided or agreed to be provided is chargeable with duty under secs. 8(1)(b)(viii) and 8(1)(b)(ix) of the Act. If such leases are granted in respect of land used for primary production, it may be eligible for an exemption under sec. 274 of the Act.⁷
11. Sec. 274(1) also refers to a transfer of other non-land property which is an integral part of the business of primary production. Common examples of such assets include water licences/entitlements and plant and equipment. However, such property has never been, or has ceased to be, dutiable property for the purposes of Chapter 2 of the Act. Accordingly, the exemption in sec. 274 no longer has any practical application in respect of such non-land primary production assets. In the remainder of this ruling it is therefore assumed that the dutiable transaction in respect of which the general exemption in sec. 274 is being sought is a transfer, and/or an agreement for the sale or transfer, of land in NSW.
12. A transfer and/or agreement for sale will usually be in respect of the whole interest in the subject land, but the exemption can also apply to a transfer and/or an agreement for the sale of a fractional interest or share in the land.

Meaning of ‘land used for primary production’

13. Under sec. 274(1), the land (in NSW) the subject of the transfer (or agreement for sale) must be ‘land used for primary production’.
14. In the Act as a whole (including sec. 274), the expression ‘land used for primary production’ means land that is exempt from land tax under sec.10AA of the Land Tax Management Act 1956 (NSW) (“LTMA”)⁸. In short, if the subject land is exempt from land tax under sec.10AA of the LTMA 1956 then it will be ‘land used for primary production’ for the purposes of sec. 274 of the Act - and otherwise if it is not.
15. Under sec.10AA of the LTMA 1956 (in summary):

• land that is ‘rural land’ is exempt from taxation if it is land used for primary production.
• land that is not ‘rural land’ is exempt from taxation if it is land used for primary production, and that use of the land has a significant and substantial commercial purpose or character and is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made).
• ‘land used for primary production’ means land, the dominant use of which is for:
  1. cultivation, for the purpose of selling the produce of the cultivation;
  2. the maintenance of animals (including birds) for the purpose of selling them or their natural increase or bodily produce;
  3. commercial fishing or the commercial farming of fish, molluscs, crustaceans or other aquatic animals;
  4. the keeping of bees, for the purpose of selling their honey;
  5. a commercial plant nursery (but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public);
  6. and the propagation for sale of mushrooms, orchids or flowers.

16. In determining whether a particular parcel of land is exempt from land tax under sec.10AA of the LTMA 1956 and is therefore ‘land used for primary production’ within the meaning of sec. 274 of the Act, the Chief Commissioner will have regard to the principles set out in Revenue Ruling LT097v3 and relevant case law.
17. In most cases it will be readily apparent (e.g., from our land tax records) that the relevant property is land used for primary production (such as a beef or dairy cattle farm, or a wheat or cotton farm). However, in cases of doubt, such as where there are multiple uses of the land not all of which are primary production uses (such as a quarry⁹ or a ‘wind farm’ or ‘solar farm’), the taxpayer claiming the exemption under sec. 274 may be required to provide further information in order to substantiate the claim for the exemption.

Additional requirements: secs. 274(2), 274(3) and 274(4)

18. If the subject land is exempt from land tax under sec.10AA of the LTMA 1956 and is therefore ‘land used for primary production’ for the purposes of sec. 274 of the Act, then the transfer of the land will be exempt from duty under sec. 274(1) of the Act provided the Chief Commissioner is also satisfied as to the matters referred to in secs. 274(2)-(4) of the Act. Broadly speaking, sec. 274(2) is concerned with the identity of the parties to the transfer of the land itself whereas secs. 274(3) and 274(4) are concerned with the identity of the persons conducting the primary production business on the land both before and after the transfer.

The transferor, or the person directing the transferor, must be a member of the family of the transferee or the person directing the transferee

19. Under sec. 274(2) the Chief Commissioner must be satisfied that the transferor of the land, or the person directing the transferor¹⁰, is a member of the family of either (a) the transferee or (b) the person directing the transferee.

Meaning of 'member' of the family of the transferee (or the person directing the transferee)

20. By sec.274(6) of the Act, a ‘member’ of a transferee’s family means each of the following persons:

    1. the transferee’s spouse¹¹,
    2. a parent of the transferee or the transferee’s spouse,
    3. a grandparent of the transferee or the transferee’s spouse,
    4. a brother, sister, nephew, niece, uncle¹² or aunt of the transferee or the transferee’s spouse,
    5. a child or grandchild of the transferee or the transferee’s spouse,
    6. the spouse of anyone mentioned in para (b), (c), (d) or (e).As this is an exclusive definition of ‘member’, the exemption does not apply to transfers of primary production land between any other family members e.g., cousins (or companies/trusts directed by them).

Meaning of ‘person directing’ a transferor/transferee

21. In many cases, the transfer of the land will be between the relevant family members themselves e.g., a transfer between parents and children, or between siblings (e.g., brothers). However, sec. 274(2) will also be satisfied if the ‘person directing’ the transferor and/or the ‘person directing’ the transferee are members of the same family as defined in sec. 274(6) (see para [20] above).

22. The phrase ‘person directing’ (a transferor or transferee) is defined in sec. 274(4A) of the Act. It covers those situations where the transferor or (following the 2022 amendments) the transferee of the land is (in summary): a deceased estate; a bare trust; a self-managed superannuation fund; a discretionary trust; a private unit trust scheme and a proprietary limited company.

Deceased estates

23. Sec 274(4A)(a)(i) refers to the situation where the transferor (or the transferee) is acting in the capacity of executor (or administrator) of a deceased estate. Here, the ‘person directing’ the transferor (or transferee) is the deceased person him/herself.

    In the typical case of the executor or administrator of the deceased estate being the transferor of the land (the land being an asset of the deceased person’s estate), there is no requirement that the transferor be a member of the family of the transferee (or of the person directing the transferee) -although this will often be the case.

    Nor is it necessary that the transfer be in accordance with the trusts of the deceased person’s will or those arising on intestacy (as is the case with the concession for deceased estates in sec.63(1) of the Act). For example, the transferee (who might be only one of several beneficiaries of the estate) may be purchasing the land from the estate so as to enable him/her to continue to carry on the family’s farming activities on the land.

Bare trusts

24. Sec. 274(4A)(ii) refers to the situation where the transferor or transferee is acting in the capacity of trustee of a bare trust.¹³ Here, the ‘person’ directing the transferor or the transferee (as the case may be) is a person who is a named beneficiary of the trust.

Self-managed superannuation funds

25. Sec. 274(4A)(a)(iii) refers to the situation where the transferor and/or transferee of the land is the trustee of a self-managed superannuation fund.¹⁴ Here, the ‘person directing’ the transferor or transferee is a person who is a (i.e., any) member of the fund.

    A ‘member’ of a self-managed superannuation fund does not include any other beneficiaries of this form of trust, such as the recipient of any death benefit payable upon the death of a member.¹⁵
    
    Nor does sec. 274 apply to a transfer of the primary production land from, or to, other superannuation funds which are not self-managed.

Discretionary trusts

26. Sec. 274(4A)(b) refers to the situation where the transferor and/or transferee of the land is the trustee(s) of a discretionary trust. Here, the ‘person(s) directing’ the transferor or transferee (being the trustee of the discretionary trust) is a person or persons (if any) who are entitled (as takers in default of appointment) to not less than a 25% interest in the capital of the trust.

    Further:

    • where the trustee of the discretionary trust is the transferor of the land, those persons must have held this beneficial entitlement for at least 3 years before the date of the transfer or from the date of establishment of the trust (where this was less than 3 years ago)
    • where the trustee of the discretionary trust is the transferee of the land, those persons must hold this entitlement for at least 3 years after the date of the transfer.¹⁶
27. With most (but not all) discretionary trusts, the beneficiaries of the trust fall into two (usually, partly overlapping) categories:

• the discretionary objects -the persons among whom the trustee may (at its discretion) appoint (distribute) the income and/or capital of the trust fund
• the takers in default of appointment -those beneficiaries who take the income and/or capital of the trust fund in default of any contrary appointment (distribution) by the trustee in favour of any one or more of the discretionary objects.

Sec. 274(4A)(b) is concerned with those family members (if any) who fall into the latter category (in relation to the distribution of the capital of the trust fund, usually on the vesting day of the trust).

28. The operation of sec. 274(4A)(b) can be illustrated by the following example:

Example 1

A mixed farming property named ‘Greenhills’ is registered in the name of a company called Greenhills Pastoral Pty Ltd in its capacity as trustee of a discretionary trust known as the Greenhills Family Trust which was founded 30 years ago by John Hicks and his wife Nicole for the benefit of their family. They have 2 sons, Keith; Barnaby. The trust is a typical discretionary trust under which the discretionary objects are John and Nicole, their children and grandchildren and their respective spouses, various other family members and charities - with their children being entitled to the income and capital of the trust fund (which includes ‘Greenhills’) in default of any contrary appointment by the trustee. John and Nicole wish to retire from the family’s farming business and Barnaby wishes to take over the operation of the business from them. To that end, Greenhills Pastoral Pty Ltd, in its capacity as trustee of the Greenhills Family Trust (the discretionary trust), transfers ‘Greenhills’ to Barnaby.

In this example, the ‘person directing’ the transfer of the primary production land by the trustee of the discretionary trust (which holds the land as part of the trust capital) is the transferee (Barnaby)’s brother Keith, who in his capacity as one of the two default beneficiaries of the trust (the other being the transferee himself) has a beneficial entitlement to not less than 25% (here, 50%) of the capital of the trust. And as the ‘person directing’ the transferor (the trustee of the discretionary trust) is a member of the family of the transferee (they being siblings), the transfer complies with sec. 274(2) (when read with sec. 274(4A)(b)) of the Act.

29. Following the 2022 Amending Act, the trustee of the discretionary trust (or another discretionary trust) may be the transferee of the land. For example, assume that in Example 1 the takers in default of the Greenhills Family Trust are the parents (John and Nicole) themselves rather than their children (Keith and Barnaby) and the trustee of the Greenhills Family Trust transfers the land not to Barnaby personally but to the trustee of a newly established discretionary trust (the Barnaby Greenhills Trust) of which Barnaby is the sole taker in default (in respect of both income and capital). In this alternative scenario, the persons directing the transferor (John and Nicole in their capacity as the takers in default of the Greenhills Family Trust) are members of the family (being the parents of) the person directing the transferee (Barnaby in his capacity as the sole taker in default of the Barnaby Greenhills Trust). The transfer would therefore comply with sec. 274(2) (when read with sec. 274(4A)(b)) of the Act, provided Barnaby retains his beneficial entitlement (in his capacity as the sole taker in default of the transferee trust) for at least 3 years after the transfer.

30. Not all discretionary trusts are the same; in particular, some of them do not have any takers in default. With these discretionary trusts, the trustee must (at its discretion) distribute all the income and capital of the trust fund among one or more of the discretionary objects of the trust, with none of these persons having any default entitlement to the trust property. With this type of discretionary trust, none of the discretionary objects of the discretionary trust are capable of being the ‘person(s) directing’ the trustee of the discretionary trust within the meaning of sec. 274(4A)(b) of the Act -with the result that a transfer of the primary production land from and/or to such a type of discretionary trust cannot qualify for any exemption under sec. 274 of the Act.

Private unit trust schemes

31. Sec. 274(4A)(c) is concerned with the situation where the transferor and/or transferee of the land is the trustee of a private unit trust scheme.¹⁷ Here, the ‘person(s) directing’ the transferor and/or transferee of the land (as the case may be) is a unit holder or unitholders in the unit trust scheme who:

• hold the units beneficially (i.e., for their own benefit and not as trustee), and
• are entitled (as such unit holders) to not less than 25% of the assets of the unit trust scheme on its winding-up.

Further:

• where the transferor is the trustee of the private unit trust scheme, those persons must have held this entitlement for at least 3 years before the date of the transfer or from the date of establishment of the trust (where this was less than 3 years ago) (sec. 274(4A)(c)(i))
• where the transferee is the trustee of the private trust scheme, those persons must hold this entitlement for at least 3 years after the date of the transfer (sec. 274(4A)(c)(ii)).¹⁸

32. The operation of sec. 274(4A)(c) can be illustrated by the following example (Example 2):

Example 2

A mixed farming property (sheep and pigs) named Hoggett Heaven is registered in the name of Babe Enterprises Pty Ltd in its capacity as trustee of a private unit trust scheme known as the Hoggett Family Unit Trust. The unit trust is a fixed unit trust under which each of the unitholders has a present entitlement (including on winding up of the trust) to all the income and capital of the trust in proportion to the number of units held by them. The unit trust has 100 issued units. These are held by Arthur and Esme Hoggett (husband and wife) (30 units each), their daughter Zoe and her husband Paul (20 units each). Each unitholder has held his/her units for more than 3 years. Babe Enterprises Pty Ltd, in its capacity as trustee of the private unit trust, transfers Hoggett Heaven to Zoe and Paul (who have taken over the operation of the family’s farming business following the retirement of Arthur and Esme).

In this example, the ‘person(s) directing’ the transfer of the primary production land by the trustee of the private unit trust scheme (Babe Enterprises Pty Ltd) are Arthur and Esme Hoggett (the parents and parents-in-law respectively of Zoe & Paul, the transferees of the land) who between them hold (beneficially) units in the transferring unit trust carrying an entitlement to at least 25% (here, 60%) of the assets of the trust (including the primary production land) on a winding-up of the trust (and they have held these units for more than the last 3 years). And as the ‘persons directing’ the transferor are members of the family of the transferees, the transfer complies with sec. 274(2) (when read with sec. 274(4A)(c)) of the Act.

33. Following the 2022 Amending Act, the trustee of the private unit trust scheme may be the transferee of the land. For example, assume that in Example 2 Hoggett Heaven is transferred not to Zoe & Paul personally but to the trustee of a fixed private unit trust scheme of which they are the only unitholders. In this alternative scenario, the persons directing the transferor (Arthur and Esme in their capacity as the holders of 60% of the units in the transferor unit trust) are members of the family of the persons directing the transferee (Zoe and Paul in their capacity as the holders of 100% of the units in the transferee unit trust). The transfer would therefore comply with sec. 274(2)(b) (when read with sec. 274(4A)(c)) of the Act -provided that Zoe and Paul retain their ownership of the units in the transferee unit trust for at least 3 years after the transfer of the land.

Proprietary limited companies

34. Sec. 274(4A)(d) is concerned with the situation where the transferor and/or transferee of the land is a proprietary limited company. Here, the ‘person(s) directing’ the transferor and/or the transferee (being the proprietary limited company concerned) is a shareholder or shareholders in the company who:

• are beneficially entitled to the shares in the company, and
• are entitled to vote at meetings of the company, and
• are entitled as shareholders to not less than 25% of the assets of the company winding-up.

Further:

• where the proprietary limited company is the transferor of the land, those shareholders must have held the entitlement referred to in sec. 274(4A)(d)(iii) for at least 3 years before the date of the transfer
• where the proprietary limited company is the transferee of the land, those shareholders must have the entitlement referred to in sec. 274(4A)(d)(iii) for at least 3 years after the date of the transfer.

35. The operation of sec. 274(4A)(d) may be illustrated by the following example (Example 3):

Example 3

A wheat farming property is owned by a proprietary limited company called Flanders Farm Pty Ltd. This company has issued four ordinary shares which are held beneficially by Ned Flanders (2 shares) and his two sons Todd and Rodd (1 share each). They have held these shares for more than 3 years. The company transfers the farming property to Todd.

In this example, the relevant members of the transferee (Todd)’s family are his father Ned and brother Rodd, and between them these persons hold (beneficially) ordinary shares in the transferring proprietary limited company which are voting shares and carry an entitlement to at least 25% (here, 75%) of the assets (including the farming property) of the company on its winding-up; accordingly, the transfer satisfies sec. 274(2)(a) (when read with sec. 274(4A)(d)) of the Act.

36. Following the 2022 Amending Act the transferee of the land may also be a proprietary limited company. For example, assume that in Example 3 the wheat farm is transferred not to Todd personally but to a company of which he is the sole shareholder (and director). in this alternative scenario, Todd would be the ‘person directing’ the transferee within the meaning of sec. 274(4A)(d) of the Act, provided he retains his shares in the transferee company for at least 3 years after the transfer. The transfer would then comply with sec. 274(2)(b) of the Act, because the persons directing the transferor of the land (Ned and Rodd) are members of the family of the person directing the transferee (Todd).

Primary production land held by subsidiary entities

37. The operation of both sec. 274(4A)(c) (land held by private unit trust schemes) and sec. 274(4A)(d) (land held by proprietary limited companies) is extended by sec. 274(4B) of the Act, which covers the situation where the primary production land is already held- and/or following the transfer will be held- by subsidiary entities. Sec. 274(4B) provides that for a transfer involving a proprietary limited company or unit trust scheme (a ‘subsidiary entity’) that is owned by another proprietary limited company or unit trust scheme (the ‘parent entity’), a person is taken to be a person directing the subsidiary entity if the Chief Commissioner is satisfied that, had the parent entity been the transferor or transferee (as the case requires), the person would be the person directing the parent entity under sec. 274(4A). Take the following example (Example 4):

Example 4

Thus, assume that in Example 3 (para [35] above):

• the primary production land is owned by Flanders Farm Pty Ltd
• all the shares in Flanders Farm Pty Ltd are owned by another proprietary limited company called Flanders Family Holdings Pty Ltd
• the 4 issued ordinary shares in Flanders Family Holdings Pty Ltd are held (beneficially) by Ned Flanders (2 shares) and his two sons Todd & Rodd (1 share each)
• the land is still to be transferred by Flanders Farm Pty Ltd to Todd.

Here, the proprietary limited company which will be the transferor of the primary production land (Flanders Farm Pty Ltd) is owned (here, 100% owned) by another proprietary limited company (Flanders Family Holdings Pty Ltd). Under sec. 274(4B) of the Act Flanders Farm Pty Ltd is thus the ‘subsidiary entity’ and Flanders Family Holdings Pty Ltd is the ‘parent entity’. Further, if the parent entity had been the transferor of the land instead of the subsidiary entity, the relevant family members (being Todd’s father Ned & brother Rodd) would have been the ‘persons directing’ the transfer by the parent entity within the meaning of sec. 274(4A)(d) of the Act. Sec. 274(2)(a) (when read with secs.274(4B) & 274(4A)(d)) is then satisfied.

38. Sec. 274(4B) is not limited in its operation to wholly-owned subsidiary entities (as in Example 4 above) or (in the case of proprietary limited companies) to subsidiaries in the Corporations Act 2001 (C’Wth) sense (which requires more than 50% ownership of the subsidiary entity). In practical terms, this means that the ‘subsidiary entity’ may have more than one ‘parent entity’ for the purposes of sec. 274(4B) of the Act. Take the following example (Example 5):

Example 5

A farming property is owned by Company C (a proprietary limited company). All the shares in Company C are owned by 2 other proprietary limited companies, Company A and Company B, each of which holds 50% of the shares in Company C. Each of Company A & Company B, in turn, is owned by a married couple (Mr & Mrs Clampett) and their daughter Elly May (with Mr Clampett holding 25%, Mrs Clampett 25% and Elly May 50%). Following the retirement of Mr and Mrs Clampett from the family’s farming business, Company C transfers the farming property to Elly May.

In this example, Company C is the ‘subsidiary entity’ and each of Company A and Company B (the companies which together own Company C) is the ‘parent entity’ for the purposes of sec. 274(4B) of the Act. Further, if each of these parent entities had been the transferor of the primary production land instead of the subsidiary entity then Mr & Mrs Clampett (as the parents of the transferee, together holding 50% of the shares in each parent entity) would have been the ‘persons directing’ each of these transferors within the meaning of sec. 274(4A)(d) of the Act. Sec. 274(2)(a) (when read with secs.274(4B) and 274(4A)(d)) of the Act would then be satisfied.

Combination of different parts of sec. 274(4A)

39. As a matter of administration of the exemption, the Chief Commissioner may also allow taxpayers to combine different parts of sec. 274(4A) (if necessary, also applying sec. 274(4B)) in appropriate cases. This can be illustrated by the following example (Example 6):

Example 6

A farming property is owned by Company A. All the shares in Company A are owned by Company B. All the shares in Company B are owned by Company C. (Each of Company A, Company B and Company C is a proprietary limited company.) Whilst Company B holds its shares in Company A in its own right, Company C holds its shares in Company B in its capacity as the corporate trustee of a discretionary trust.

In this example the Chief Commissioner will regard sec. 274(2) (when read with secs.274(4A)(b), 274(4A)(d) & 274(4B) of the Act) as being satisfied if on the facts of the particular case the transfer of the land would have fallen within sec. 274(4A)(b) had the land been held by the discretionary trust directly instead of indirectly through the three companies (each of which is ultimately owned by the discretionary trust).

Note: There may be other examples of such combinations of different parts of sec. 274(4A) (if necessary, also applying sec. 274(4B)). For example, the transferor or transferee of the primary production land might be the trustee of a private unit trust scheme all the units in which are held by the corporate trustee of a self-managed superannuation fund of which the relevant members of the farming family are the members.

No other cases in which a person is considered to be a person directing a transferor/transferee

40. Sec. 274(5) provides that, except as provided by secs.274(4A) and/or 274(4B), there are no other cases in which a person is considered to be a person directing a transferor or transferee.

41. This provision makes it clear that, unless the transfer falls within the relevant part(s) of sec. 274(4A) (or sec. 274(4B)), it cannot qualify for an exemption under sec. 274 of the Act. Examples include transfers of primary production land held by non-proprietary companies (such as a listed or unlisted public company), discretionary trusts which do not have any takers in default ¹⁹, public unit trusts or regulated superannuation funds which are not self-managed.

Persons carrying on the primary production business both before after the transfer of the land

42. As already noted (see para [18] above), whilst sec. 274(2) (when read with secs.274(4A) and 274(4B)) is concerned with the identity of the transferor -or the person(s) directing the transferor -and/or the transferee -or the person(s) directing the transferee- of the land itself, secs.274(3) & 274(4) (which can be considered together) are concerned with the identity of the person(s) carrying-on the primary production business upon the land both before and after the transfer.

43. Under sec. 274(3), the Chief Commissioner must be satisfied that the land was, immediately before the transfer, land used for primary production in connection with a business carried on, whether alone or with others, by either (a) the transferee, or a member of the family of the transferee²⁰ or (b) the person directing the transferee²¹, or a member of the family of the person directing the transferee.

44. Under sec. 274(4), the Chief Commissioner must be satisfied that the business (referred to in sec. 274(3)) will continue to be carried on, whether alone or with others, by either (a) the transferee, or (b) the person directing the transferee.

45. These linked requirements are additional to -and separate from the requirement (of sec. 274(2)) that the transferor (or the person directing the transferor) be a member of the family of the transferee (or the person directing the transferee) of the land itself.

46. In any given case, both sec. 274(3) & sec. 274(4) must be satisfied. Thus (and by way of example only), it is insufficient that the land might have been used for primary production in connection with a business carried on by the transferee or a member of the family of the transferee (and in either case whether alone or with others) before the transfer, if that business is not going to continue to be carried on by the transferee (whether alone or with someone else) after the transfer.

47. In many cases the primary production business will be carried on by the transferee (or the person directing the transferee²²) and/or other members of the transferee’s family themselves, both before and after the transfer of the land. Thus, in the straightforward case of the family farm passing between generations such as from father to son, the family’s primary production (farming) business will often have been carried on by the father and/or son prior to the transfer, and by the son alone after the transfer (as the father retires from the family’s farming business).

Primary production business carried on through a company or trust controlled by the relevant family members

48. However, it is not uncommon for the primary production business to be carried on by an associated private company or a trading trust (usually a discretionary trust but sometimes a private unit trust). It is to address this situation that sec. 274(5AA) provides that a reference in sec. 274 (specifically, in secs.274(3) and 274(4)) to a business carried on by a person includes a reference to a business carried on by a company, or under a trust, controlled by the person.
49. As explained by Brereton J (of the NSW Supreme Court) in Hancock v Rinehart [2015] NSWSC 646 at [152]-[153],[160]-[163],[165]-[166]:

• ‘control’ of an entity (including a company and a trust) is concerned with the ultimate power to decide how an entity acts, as distinct from proprietorship
• in the case of a company, control normally resides with those shareholders who, via the voting rights attached to their shares, have the ability to carry a resolution by majority at a general meeting of the company and thus to determine the composition of the company’s board of directors (who direct the company’s operations)
• typically, those who own a company will also control it
• in the case of a trust, it is generally the trustee (rather than the beneficiaries) who can decide how the trust will act; accordingly, the trust will usually be controlled by the trustee(s) or in the case of a corporate trustee by the persons who control that company
• however, if the trust -like many discretionary trusts- also has an appointor who (in that capacity) has the power to remove the trustee and appoint a replacement trustee, then the trust will usually be controlled by that appointor.

50. These general principles will be applied by the Chief Commissioner in determining who controls the company or trust who carries on, and/or following the transfer will carry on, the primary production business on the land for the purposes of secs.274(3) and 274(4) of the Act. However, ultimately this question will depend on the facts of the particular case.
51. In determining whether a company which carries on the relevant primary production business is controlled by a person (whether the transferor and/or the transferee and/or the person(s) directing the transferor and/or transferee (as the case may be)), the Chief Commissioner will usually have regard mainly to the identity of the directors of the company (who manage its business) as well as its shareholders (and the voting power attached to the relevant shareholdings).
52. In determining whether a trust which carries on the relevant primary production business is controlled by a person (whether the transferor and/or the transferee and/or the person(s) directing the transferor and/or the transferee (as the case may be)), the Chief Commissioner will usually have regard to whether the person is the (or a) trustee of the trust or controls a corporate trustee of the trust. If the trust also has an appointor (who has the power to change the trustee(s) of the trust) then the Chief Commissioner will also have regard to whether the transferee or a member of the family of the transferee (such as a parent of the transferee) occupies that role. Joint appointors -such as the transferee and his/her parent- are sufficient for this purpose.
53. The operation of sec. 274(5AA) may be illustrated by the following example (Example 7):

Example 7

A beef cattle property is owned by Mary Smith. She wishes to transfer the property to her son Robert Smith. The primary production business is carried on by a company called Smith Family Holdings Pty Ltd in its capacity as the trustee of a discretionary trust called the Smith Family Trust. Mary Smith is the sole director and shareholder of the trustee. She is also the sole appointor of the discretionary trust, in which capacity she has the power to remove and appoint trustees for the trust. Following the transfer of the land to Robert, it is proposed that the family’s primary production business will continue to be carried on by the trustee of the discretionary trust. Robert is one of the beneficiaries (and the only taker in default) of the discretionary trust.

In this example, the primary production land is owned by Mary Smith herself -rather than by the family discretionary trust which operates the family’s primary production business on the land, and in that capacity she will be the transferor of the land. Further, she is a member of the family -being a parent- of Robert, the transferee of the land. Accordingly, sec. 274(2) of the Act is satisfied. However, for the transfer to be exempt from duty both secs.274(3) and 274(4) must also be satisfied. In this regard, the primary production business is being carried on -and following the transfer of the land will continue to be carried on -by the discretionary trust. This trust is controlled by Mary Smith, both in her capacity as the sole director and shareholder of the corporate trustee of the trust and in her capacity as the sole appointor of the trust (in which capacity she can change the trustee of the trust). In this situation:

• sec. 274(3)(a) (when read with sec. 274(5AA)) would be satisfied, as the land would have been used for primary production in connection with a business carried on under a trust controlled by a member of the family of the transferee (Mary Smith, the mother of the transferee) prior to the transfer
• however, sec. 274(4) (when read with sec. 274(5AA)) would not be satisfied, because the trading trust (which will continue to be the sole operator of the family’s primary production business) is not controlled by the transferee of the land (Robert Smith). (The fact that he is the sole taker in default under the discretionary trust would be relevant to the operation of sec. 274(2) of the Act if the land was an asset of the discretionary trust (rather than Mary Smith personally); however, it is irrelevant to the operation of secs.274(3) & 274(4) of the Act.)

The position would be different if, prior to the transfer, Robert was to obtain control (or joint control) of the discretionary trust (e.g., by him becoming the sole appointor or co-appointor of the trust along with his mother).²³ In that event, the primary production business would continue to be carried on under a trust which is now under his control (or joint control). Secs.274(3) & 274(4) would also be satisfied if, prior to the transfer, Robert was to enter into a partnership agreement with the trustee of the discretionary trust for them to operate the primary production business together in partnership -for then the primary production business would be carried on (both before and after the transfer) by the transferee of the land (Robert) together with another person (the trustee of the discretionary trust).

Share farming

54. As to whether a share farming arrangement is capable of complying with secs.274(3) and/or sec. 274(4) of the Act, this depends on the terms of the particular arrangement. However, in the typical case of the share farmer conducting the primary production activities on the land in return for a share of the profits (and sometimes the losses) of the business the Chief Commissioner would regard this as a sufficient compliance with secs.274(3) and 274(4)) assuming that the profits are being shared with the relevant family member who is the transferee (or the person directing the transferee) of the land.
55. However, such an arrangement is to be distinguished from that of a tenant farming arrangement where the land is leased to a third party for the tenant to operate the farming business for their sole benefit; here, the relevant family member acts as a landlord rather than as an operator (or co-operator) of the primary production business (so that secs.274(3) & 274(4) of the Act are not satisfied).

Acquisition of the land by a trustee

56. Sec. 274(5A) provides that this section does not apply if the transferee acquires the land concerned as a trustee. This prohibition is carried over from the previous version of the exemption under which it was not possible to transfer the land used for primary production into a trust such as a discretionary trust or a private unit trust. Given that the main purpose of the 2022 Amending Act was to facilitate such transfers (where the transferee trust is directed by the relevant family member(s))²⁴, sec. 274(5A) is now to be read subject to the operation of those amendments.²⁵ In all other cases, the prohibition in sec. 274(5A) will continue to apply (for example, a transfer to a person who is a family member but who would be holding it on trust for an unrelated person).

Landholder duty equivalent of sec. 274 (sec.163A(1)(e))

57. As noted at paras [7]-[9] above, the exemption in sec. 274 applies primarily to a transfer, and/or an agreement for the sale or transfer, of the land in NSW which is being used for primary production. It also applies to an assignment of an existing lease of such land, as well as the grant of a new lease of such land (being a lease in respect of which a premium is paid or payable). These are all dutiable transactions under Chapter 2 of the Act, with the freehold or leasehold interest in the land itself being the subject-matter of the dutiable transaction.

58. However in the case of primary production land which is an asset of a proprietary limited company or a private unit trust scheme (being the situations referred to in secs.274(4A)(d) & 274(4A)(c) of the Act), the relevant family member(s), instead of acquiring the land direct from the proprietary limited company or trustee of the private unit trust, might (say) acquire all the issued shares in the company or units in the unit trust from the existing share/unitholders (thereby giving them complete control of the company/unit trust’s land). If the land has an unencumbered value of $2 million or more, such an indirect acquisition of the land will generate a liability to pay landholder duty under Chapter 4 of the Act.²⁶
59. Any such liability is subject to the availability of the exemption in sec.163A(1)(e) of the Act (one of the exemptions from landholder duty in Part 4 of Chapter 4 of the Act). This section provides that an acquisition by a person of an interest in a landholder (here, the proprietary limited company or private unit trust which holds the land) is an exempt acquisition if the landholding of the landholder comprises land used for primary production and the Chief Commissioner is satisfied that, had the landholder transferred the land to the person acquiring an interest as a result of the acquisition immediately before that acquisition, the transfer of the land would not be chargeable with duty under the Act because of the application of sec. 274.
60. The operation of this landholder duty exemption (which is the counterpart of the exemption in sec. 274) can be illustrated by the following example (Example 8):

Example 8

An apple orchard property at Bilpin is owned by a proprietary limited company called Granny Smith Enterprises Pty Ltd. The 4 issued ordinary shares in the company are held by Granny Smith (2 shares) and her two grandsons Bill and Ben (1 share each). They are also the only directors of the company. The company also operates the primary production business on the land. Granny Smith wishes to cease her involvement in the business and to give her grandsons complete control of it. To that end, she resigns as a director of the company and transfers all her shares in it to Bill and Ben (1 share each). The company (now solely owned and directed by Bill and Ben) remains the owner of the land and the operator of the business. The apple orchard property is valued at $3 million.

In this example, the acquisition by Bill and Ben of their grandmother’s shares in Granny Smith Enterprises Pty Ltd (the landholder) would be a relevant acquisition (and therefore liable to landholder duty) under Chapter 4 of the Act.

However, this acquisition would be an exempt acquisition under sec.163A(1)(e) of the Act because:

• the landholding of the landholder comprises land used for primary production (the apple orchard)
• had the landholder transferred this landholding to Bill and Ben immediately before they acquired their grandmother’s interest in the landholder, the transfer of the land to them would have been exempt from duty under sec. 274 of the Act. In this way, the landholder duty exemption in sec.163A(1)(e) of the Act ‘mirrors’ the general exemption in sec. 274 of the Act.²⁷

Revenue NSW Requirements for claiming the exemption

61. Any taxpayers claiming an exemption from duty under sec. 274 of the Act in respect of transfers of land (and agreements for sale of land) first executed on or after 19 May 2022 must complete Form ODA071 ²⁸

62. If the parties to the transfer are individuals, the transfer can be stamped electronically through our Electronic Duties Returns (EDR). In all other cases, the transfer and application for exemption should be sent to our office through our eDuties service for us to determine whether the exemption applies.
63. In cases of doubt, the taxpayer(s) (or their legal representatives) may seek a private ruling as to the availability of the exemption before proceeding with the transfer.²⁹

Footnotes

[1] Cf. Lewis & ors v Chief Commissioner of State Revenue [2007] NSWADT 89 at [28]-[35]

[2] Subsections (2)-(4) of sec. 274 are discussed in detail below

[3] See (secs.8(1)(a),8(1)(b)(i),8(2) & 11(1)(a))

[4] For the meaning vof ‘land used for primary production’, see paras [13]-[17] below.

[5] see sec.8(3) of the Act (definition of ‘transfer’)

[6] secs.8(1)(a),8(2),11(1)(a),11(1)(l)

[7] For that purpose, the lessor is to be regarded as the transferor, and the lessee as the transferee, of the land (see sec. 274(6) of the Act).

[8] see sec.6 and the Dictionary to the Duties Act 1997 (NSW) (Clause 1), Chief Commissioner of State Revenue v Adams Bidco Pty Ltd [2019] NSWCA 34 at [13] & [42]