Ferella v Chief Commissioner of State Revenue
[2013] NSWADT 46
•27 February 2013
Administrative Decisions Tribunal
New South Wales
Medium Neutral Citation: Ferella v Chief Commissioner of State Revenue [2013] NSWADT 46 Hearing dates: 22 February 2013 Decision date: 27 February 2013 Jurisdiction: Revenue Division Before: J Block, Judicial member Decision: The objection decision under review is affirmed
Catchwords: Primary production exemption - consideration of different uses- onus of proof Legislation Cited: Land Tax Management Act 1956 Cases Cited: Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867
Commissioner of Land Tax v. Christie (1973) 2 NSWLR 526
Thomason v. Chief Executive, Department of Lands (1994-95) 15 QLCR 286
Saville v Commissioner of Land Tax (1980) 12 ATR at 10
Romano v Chief Commissioner of State Revenue [2011] NSWADT 7Category: Principal judgment Parties: Gustavo and Nida Ferella (Applicants)
Chief Commissioner of State Revenue (Respondent)Representation: Counsel
JT Svehla (Applicant)
E Bishop (Respondent)
Crown Solicitor's Office (Respondent)
File Number(s): 126062
REasons for decision
Part A Introduction and preliminary
The Applicant seeks the review of a decision (dated 21 March 2012) by the Respondent (who is usually referred to in these reasons as the "Chief Commissioner") disallowing an objection by the Applicant dated 6 December 2012 in which the Applicant claimed an entitlement, in respect of land situated at 6 Alan Street Box Hill, ("the land" or "the Property") to a primary production exemption for the land tax years 2007 to 2011 (both land tax years inclusive) and referred to in these reasons as "the relevant years". The term "relevant period" as used in these reasons refers to the period covered by the relevant years (1 January 2007 to 31 December 2011 and in addition, and having regard to the judgment in Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 at para 4, ("Leda") the period of 6 months preceding the first of those dates and the period of 6 months succeeding the second of those dates.
The Tribunal had before it the documents lodged in accordance with section 58 of the Administrative Decisions Tribunal Act 1997; in addition it admitted exhibits as follows:
Exhibit A1 is an affidavit by Angelo Ferella ("Angelo") dated 20 August 2012;
Exhibit A1 refers as an exhibit to a large folder of documents marked AF-1 and which is referred to separately in these reasons as "AF-1.
Exhibit A2 is a further affidavit by Angelo dated 23 October 2012; (Exhibit A2 also refers to AF-1);
Exhibit A3 is a diagram, or more accurately a sketch plan, prepared by Angelo in respect of the Property and which refers to the buildings and improvements on it. That diagram suggests that the area encompassed by the cottage as a proportion of the whole may perhaps be in excess of 5% and which is the percentage referred to in the Applicant's written submissions dated 13 December 2012 "(AS").
Exhibit R1 consists of two documents issued by the NSW Department of Primary Industry dealing with the 2007/2008 Equine Influenza epidemic; those documents indicate that the outbreak in question lasted for 6 months ending in February 2008.
Exhibit R2 consists of two colour photographs of the Property tendered by the Respondent, which show inter alia, on the right hand side, a cottage and on the left hand side stocks of material required for construction purposes.
Exhibit R3 is an affidavit by Mirjana Pecikova who is employed by the Crown Solicitor) dated 19 February 2013 and which was admitted on the basis that the Applicant did not require the deponent for cross-examination.
The Tribunal had before it, at the commencement of the hearing, written submissions by both parties; AS has been referred to previously in these reasons; the Respondent's written submissions dated 8 February 2013 are referred to in these reasons as "RS".
It is convenient in the first instance to draw on RS so as to include its content under the head of "Background Facts' and contained in clauses 3 to 15 of RS and which are included without footnotes (although the footnotes have been checked and found to be correct) as follows:
3.It is common ground that the land the subject of these proceedings is non-urban rural land.
4.The land is approximately 1.324 hectares. A residence and curtilage is on approximately 700 square metres of the land. The remainder of land is fenced off
2
5.The residence has been tenanted at least since 2004 for $185 per week. The remainder of the land has been used by the trustee of the Modena Family Trust (a trust for the benefit of the Ferella family). On 1 June 2007 the name of the Modena Family Trust was changed to Agusta Trust.'
6.The trustee until 6 May 2006 was Nida Ferella (the second applicant). The trustee from 6 May 2006 was Agusta Industries Pty Ltd. The trustee from 15 July 2011 was Agusta Pty Ltd.'
7.The applicants contend that during the relevant land tax years the primary production on the remainder land was conducted by Nida Ferella then Agusta Industries Pty Ltd and then Agusta Pty Ltd and that the primary production is thoroughbred horse breeding.'
8.On 1 October 2007 the applicants entered into a written lease of the land with the trustee of the Agusta Trust.' Consideration for the lease was $1.
9.Mr Angelo Ferella, the son of the applicants, is the person with sole responsibility for the primary production of thoroughbred horse breeding on the land.
3
11.The respondent issued land tax assessments for the years 2007 to 2011:3
12.On 4 October 2011 the respondent refused the applicants' application to treat the land as exempt from land tax."
13.On 6 December 2011 the applicants lodged an objection:
14.On 21 March 2012 the respondent disallowed the objection.
15.On 23 May 2012 the applicants lodged an application for review of the decision.
Having included content from RS, and in the interests of balance I include clauses 9 to 16 of AS (and notwithstanding the fact that it includes contentions as to law) (on the basis that G & N as set out therein refers to the parties constituting the Applicant) as follows:
9.It is also not in issue that there is a one bedroom fibro veneer cottage located on the Box Hill Land, fenced off and segregated from the rest of the Box Hill Land. The cottage and surrounding grounds occupy about 700 square metres ("Cottage Area") of the total area of the Box Hill Land, which is 1.34 hectares or approximately 13,700 square metres. The Cottage Area represents approximately 5.1% of the total area of the Box Hill Land.
10.The remainder of the Box Hill Land, fenced off from the Cottage Area, on which there are located three stables, a tack room and two sheds, and on which there are, depending upon the time, 1 to 3 thoroughbred horses, comprising approximately 94.9% of the Box Hill Land ("Thoroughbred Area").
11.At all times G&N have maintained control over the Cottage Area and have until recently rented out the Cottage Area.
12.The reference to the "dominant use" of the Box Hill Land:
"presupposes that land may be used for more than one purposes and requires the determination of which use of the land is the main, chief or paramount use",
Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2010] NSWSC 867 at [69]. This is a question of fact and depends upon a detailed consideration of all of the circumstances in each case, which should be determined:"as an objective matter of impression having regard to the facts" ,Leda Manorstead at [70].
13.This requires weighing of evidence relating to various uses to which the land is put, including, but not limited to, the nature and intensity of such uses, the physical areas over which they extended and the time and labour spent in conducting them: Hope v Bathurst City Council (No. 2) (1983) 52 LGRA 79 at 84; upheld on appeal in Hope v Bathurst City Council (1986) 7 NSWLR 669.
14. Almost all of the Box Hill Land is used for thoroughbred horses (94.9%). Further, the Thoroughbred Area is fenced off from the Cottage Area. The Thoroughbred Area is only used for maintaining and propagating thoroughbred horses purchased and owned by the Trustee.
15.It is accepted by G&N in the relevant years that:
(a)the thoroughbred horse activities undertaken by the Trustee in the relevant years did not derive a profit, but made a loss;
(b) in the relevant years, G&N made a profit of several thousand dollars each year from renting the Cottage Area.
16.In terms of time and human effort spent, it is spent on the Thoroughbred Area, not in relation to the Cottage Area, as that is tenanted. Stables and other structures in relation to the carrying on of the thoroughbred horse breeding activity have been carried out in the Thoroughbred Area and are part of the time and human effort spent in relation to this business activity.
Part B The evidence of Angelo; preliminary.
Oral evidence was given only by Angelo who is a son of the Applicant. The Tribunal was informed that Angelo was in complete charge of the Property and that his parents were elderly; the Tribunal was informed also that Angelo holds their power of attorney.
Angelo's evidence commenced with his confirmation of the content of Exhibits A1 and A2 and after which he was asked, and in chief, a number of questions by Mr.Svehla, who in the course of that examination took Angelo through the tax returns referred to later in these reasons. Angelo was then cross-examined by Ms Bishop on behalf of the Respondent. The submissions which were before the Tribunal at the commence of the hearing indicated that the Property was during the relevant years used for two purposes; in the first instance the cottage was throughout the relevant years rented to tenants (although there were brief vacancy periods); in the second instance the Property was used (so the Applicant contended) for the purpose of conducting thereon a thoroughbred horse breeding business. The cross-examination of Angelo revealed (when Exhibit R2 was put to him) that there was a third use in that the Property was also used for the maintenance of stocks of construction materials. Exhibit R3 sets out that the rental derived from the cottage on the Property (and according to information provided by Darren Starr Real Estate Pty Ltd) amounted to $74335.31 during a period which included but was in excess of the relevant period.
Angelo said that the cottage was rented out during nearly all of the relevant years at a rental of $185 per week which after deduction of collection and other costs was paid over to the Applicant. As appears from clause 8 of RS the Applicant leased the Property to the Agusta Trust for $1 in accordance with a lease dated 1 October 2007. Tab 3 of AF-1 sets out that the lease related in its terms to "the rural land known as 6 Alan Box Street Box Hill in the State of New South Wales." Ex facie that document the cottage rental accrued as from 1 October 2007 not to the Applicant but to the Agusta Trust. Mr. Svehla from the bar table said that the lease referred only to that part of the land which was rural and used for the horse breeding activity and thus excluding the cottage. The lease which formed part of AF-1 (an exhibit tendered by the Applicant) indicates in its terms that it related to the whole of the Property and there was no evidence before the Tribunal which would suggest otherwise.
There were during the hearing many references to the Agusta Trust and which is referred to in these reasons as "the Trust". The Trust was established as the Modena Family Trust and it changed its name to Agusta Trust on 1 June 2007. The Trust is a discretionary trust for the benefit of the Applicant and members of their family. In respect of the Trust the trustee was until 6 May 2006 Nida Perella who is one of the couple constituting the Applicant. On 6 May 2006 Agusta Industries Pty Ltd became the trustee of the Trust and on 15 July 2011 Agusta Pty Limited became the trustee of the Trust.
Part C; the evidence of Angelo as regards taxation.
Angelo was taken (as I have mentioned) and at some length through tax returns submitted during the relevant years by the Trust. It should be noted that land tax years are calendar years whereas tax years are not. In this part C the tax returns in question relate to tax years and thus to periods of 12 months ending on each relevant 30 June.
It is relevant by way of preface to note that Angelo said in evidence that he was during the relevant years and is, a builder and as such engaged in building projects of some size. He said that he worked an 18 hour day and that he attended at the Property for 2 hours each day and as from 5 p.m on each such day.
The 2006 tax return for the Trust (AF-1 tab 10 page1 and following and in which the Trust was referred to as the Modena Trust) indicated that its main business activity was construction, that in respect of its primary production business it had no income or expenses, and that in respect of its non-primary production business it derived income of $27594 and incurred expenses of $272146 thus resulting in an overall loss of $244552.
The 2007 tax return for the Trust (again described as Modena Trust) (AF-1 tab 10 page 7 and following pages) indicated that its main business activity was again described as construction; that in respect of its primary production business it derived no income but incurred expenses of $3923; that in respect of its non-primary production business it derived income of $455546 and incurred expenses of $592924, and that accordingly it sustained a loss of $3923 in respect of primary production and a loss of $137378 in respect of non-primary production.
The 2008 tax return of the Trust (now described as Agusta Trust and contained in AF-1 tab 10 pages 15 and following) again described its main business activity as construction, reflected primary production income of $360 and primary production expenses as $6698, and in respect of its non-primary production business reflected income of $127052 and expenses of $467309, and thus reflecting losses of $6388 (primary production) and $340257 (non primary production). (As will be seen the amount of $360 reflected as income related to the sale of the only two horses then on the Property (and being a mare and a colt) to a knackery)
The 2009 tax return for the Trust (again described as Agusta Trust) (AF-1 Tab 10 page 23 and following) again described its main business activity as construction; it reflected no primary production income but reflected primary production expenses of $2185; it reflected non-primary production income of $969027 and expenses of $1534004 and thus overall losses of $2185 (primary production) and $564977 (non primary production).
The 2010 tax return of the Trust (AF-1 Tab 10 page 31 and following) for the first time described its main business activity as primary production, showed no primary production income but reflected primary production losses of $3470 and thus a loss of this amount. Angelo said that the construction activity had been moved into another entity.
The 2011 tax return of the Trust (AF-1 tab 10 page 48 and following) again reflected its main business activity as primary production, and reflected no income and expenses of $9460; (that return reflected accumulated losses overall of $1263397).
Angelo said, and with some considerable force, during the course of his cross-examination that the Trust tax returns did not include or need profit and loss accounts and other information, on the basis that the Australian Tax Office if not satisfied with any returns could raise queries. He said also that no assessments had been received by the Trust. (The Tribunal considers that it is likely that the returns were deficient inter alia as regards opening and closing stock details.)
During the course of his cross examination, and as regards primary production expenses claimed by the Trust, Angelo was taken to invoices and other documents contained in AF-1. That evidence was lengthy and detailed and I do not think it necessary to canvas all of the relevant documents so examined. It would seem however that there were some significant expenses whose deductibility may have been open to doubt. I refer to a few examples only. Tab 9 of AF-1 page 20 is an invoice by Agusta Industries Pty Limited dated 25 August 2000 addressed to Riva NSW Pty limited("Riva") in an amount of $7700 and expressed to be referable to the construction of a new tank room and also work on stables. Page 21 is an invoice also addressed by Agusta Industries Pty Ltd to Riva dated 19 March 2010 for $2065 in respect of certain specified demolition and construction expenses. Page 30 is an invoice by Agusta Industries Pty Ltd to Riva dated 30 November 2007 in an amount of $6600 for demolition and removal of old stables and construction of new stables. As to why the invoices in question were rendered by Agusta Industries Pty Ltd to Riva (which, so the Tribunal was informed, is also the trustee of a Ferella family trust) is unclear; if Agusta was then the trustee of the Trust, and in accordance with the Trust tax returns, it incurred the expenses.
The tax returns to which I have referred were drawn up by Angelo and they were not audited. They do not appear to have been in conformity with the requirements of relevant tax legislation.
Part D. The evidence of Angelo; the horse breeding business
At the commencement of the relevant years there were two horses only on the land and being a mare and a colt. This was so despite the fact that the land could have sustained a considerably larger number of horses. The mare and colt were disposed of to a knackery in 2007 for $360. (It will be noted that the tax returns to which I have referred disclose one income item only and being that amount of $360)
Angelo said that following the disposal of the mare and colt in 2007 there were no horses at all on the Property until the end of 2008 when a yearling mare was purchased for an amount of $4000. There were no other purchases during the relevant years. (Angelo towards the end of his evidence corrected clause 32 of Exhibit A1, which refers to a horse purchase in December 2011, on the basis that the purchase was made in January 2012 outside the relevant years but within the relevant period. The yearling purchased in late 2008 was a mare and intended for breeding purposes but as a yearling could not be covered until she was three years old.
It will be seen then that throughout the relevant years there were either two horses (the mare and colt) or one horse (the yearling) or no horses at all on the Property. It may be noted that following the disposal of the original mare and colt in 2007 nothing at all in the context of horses was done until late 2008 and when one yearling only was acquired and which, on Angelo's evidence, could not be inseminated until the expiry of two years thereafter. Angelo said that the original mare and colt were sold because they were ill. He said also that it would not have been prudent to buy horses during the influenza epidemic. The evidence reveals though that the mare and colt were sold in point of time prior to the commencement of the epidemic and moreover that nothing at all was done after it ended In February 2008 until the purchase of the single yearling nearly a year later and being a yearling which could not breed for two years after its acquisition. Put succinctly activity of any relevant kind was altogether minimal and in particular there was virtually no breeding activity during the relevant years.
As I have noted Angelo said that he attended at the Property every day for two hours from 5 p.m. As to why his presence was necessary for this period for one horse or during periods when there were two, or when there were none at all is difficult to comprehend. It may be that he did attend the Property but for other reasons and being reasons connected with his construction activities (and which appear to have been significant). It is relevant to note that Angelo in his evidence said that there was a significant period towards the beginning of the relevant period when the horses (and being presumably the mare and the colt) lived off the land and by which he meant that their food consisted of the pasture on the land; during that period then it was not necessary to put out feed.
On the evidence before me it is not possible to conclude that the Property during the relevant years was used for the dominant purpose of thoroughbred horse breeding. On the contrary and as contended by Ms Bishop, a conclusion that horses constituted nothing more than a hobby is inescapable. It is relevant to note that no business or other plans or relevant material in respect of such a business was tendered at the hearing. (During closing submissions Ms Bishop drew attention to the fact that the section 58 documents contain a number of instances of information sought of the Applicant by the Respondent but not furnished.)
Part E. Statutory provisions and case law together with commentary.
I note by way of preface that in this particular context that I have drawn on RS to some extent for the purposes of this Part E.
Section 10AA of the Land Tax Management Act 1956 ("LTMA") provides as exemption from land tax as follows:
10AA Exemption for land used for primary production
(1) Land that is rural land is exempt from taxation if it is land used for primary production.
(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:
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).
(3) For the purposes of this section, 'land used for primary production' means land the dominant use of which is for:
cultivation for the purpose of selling the produce of the cultivation, or
the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or
commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or
4
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, or
the propagation for sale of mushrooms, orchids or flowers. (4) For the purposes of this section, land is 'rural land' if:
the land is zoned 'rural', 'rural residential' or 'non-urban' under a planning instrument, or
the land is not within a zone under a planning instrument but the Chief Commissioner is satisfied the land is rural land.
Pursuant to s100 (3) of the Taxation Administration Act (NSW) 1996, it is the Applicant who bears the onus.
In Commissioner of Land Tax v. Christie (1973) 2 NSWLR 526, Bowen JA (as he then was) said (at 533):
`Use' is a term with an extremely wide ambit and can be measured from a number of different perspectives. 'Purpose' carries the sense of an object in view. There are many examples where land is used in more than one capacity or by different entities simultaneously. 'Use' involves actual use, not contemplated use. (Thomason v. Chief Executive, Department of Lands (1994-95) 15 QLCR 286 at 293 per the Court (the Land Appeal Court constituted by Ambrose J, Mr Trickett and Mr Neate) citing London & South Western Ry Co v. Blackmore (1870) LR 4 HL 610 at 617 per Lord Hatherley LC ("Thomason")
Section 10AA does not specify "whose" use is the relevant use. Rather, the LTMA looks to all the competing uses of the land, whether by land owners, lessees and others.
Justice Gzell in Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 ("Leda") stated that the LTMA's reference to "dominant" use requires a determination of which use is the main, chief or paramount use (at 69).
Whether the dominant use of land is for primary production (s 1OAA(3)), depends upon whether that use prevails over any competing uses of the land, or whether the land is primarily `unused'.(Saville v Commissioner of Land Tax (1980) 12 ATR at 10)
In Thomason, the Court found at 303:
In our view, the proper approach to be taken when ascertaining the dominant use of land is to consider such matters as the amount of land actually used for any purpose, the nature and extent and intensity of the various uses of the land, the extent to which land is used for activities which are incidental to a common business or industry of a type specified in s.17(2), the extent to which land is used for purposes which are unrelated to each other, and the time and labour and resources spent in using the land for each purpose. When undertaking this exercise, one cannot ignore the conclusion that an objective observer would reach from viewing the land as a whole.
Dominant use is a concept of relativities and relationships. It requires a weighing of the evidence relating to the competing uses with respect to the nature and intensity of the uses, the surface area over which they extend, and the time, labour and cost of conducting them as well as the income generated.
In summary, whether a particular use is the dominant use of land is a question of fact and degree.
6
Whether land is used for primary production within the meaning of s lOAA must be decided objectively.
In Saville v Commissioner of Land Tax (NSW) (1980) 12 ATR 7, Roden J said at [10]:
I am of the view that, for any use of the land to justify the statement that the land is used primarily for that purpose, it is necessary not only that that use prevail over any competing use but also that it be sufficiently substantial to prevail over the proposition that the land is primarily to be regarded as unused
It is not appropriate as a matter of law to treat the rental property use as separate and apart. That use must then be weighed against the alleged thoroughbred horse breeding use to decide which use is 'dominant' or prevailing during the relevant years. The Tribunal accepts the contention of the Respondent that the Applicant has failed to establish a competing and dominant primary production use. (See also in this context Romano v Chief Commissioner of State Revenue [2011] NSWADT 7).
The only conclusion which can properly be drawn on an objective basis is that the land's dominant use in the relevant years was as an investment property earning income from the letting.
The only evidence as to the breeding of thoroughbred horses relates to the yearling acquired in 2008 and where attempts to inseminate her (made either at the end of the relevant years or after the relevant years) have failed.
The Trust tax returns are not evidence of the extent of horse breeding said to be undertaken on the land during the relevant years. Rather, they show that the Trust was engaged in the business of "construction" in the 2006 to 2009 financial years. The information provided in the tax returns in respect of primary production is quite clearly not indicative of a business activity. In addition, the Applicant has not put into evidence information which supports the tax returns such as notes or management accounts which might otherwise explain these anomalies.
Part F Conclusion
Regarded on an objective basis it is clearly not possible to conclude that the Property was during the relevant years utilised for the purpose of conducting a thoroughbred horse breeding activity. Having regard to all of the evidence before me a conclusion that the Applicant has not discharged the onus is mandatory and in the circumstances the objection decision under review must be affirmed
**********
Decision last updated: 27 February 2013
7
2
1