Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue
[2013] NSWSC 23
•30 January 2013
Supreme Court
New South Wales
Medium Neutral Citation: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 Hearing dates: 12-13 November 2012 Decision date: 30 January 2013 Jurisdiction: Equity Division - Revenue List Before: Gzell J Decision: Assessment of Chief Commissioner of State Revenue confirmed with costs.
Catchwords: TAXES AND DUTIES - Land Tax - land used for primary production - whether use had a significant and substantial commercial purpose or character within s 10AA(2)(a) of the Land Tax Management Act 1956 Legislation Cited: Income Tax Assessment Act 1936 (Cth)
Land Tax Management Act 1956
Local Government Act 1919
Local Government Act 1993
State Revenue Legislation Further Amendment Bill 2005
Taxation Administration Act 1996
Valuation of Land Act 1944 (Qld)Cases Cited: ACI Pet Operations Pty Ltd v Comptroller-General of Customs [1990] FCA 398; (1990) 26 FCR 531
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; (2009) 239 CLR 27
Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25
CIC Insurer Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384
Clarke v Commissioner of Land Tax (NSW) (1980) 11 ATR 794
Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389
Coombs v Bahama Palm Trading Pty Ltd [1991] Aust Contract Reports 90-002
EMAAAS P/L v Mobil Oil Australia Ltd [2000] QCA 513
Greenville Pty Ltd v Commissioner of Land Tax (NSW) (1977) 7 ATR 278
Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366
Minister for Immigration and Citizenship v SZJGV [2009] HCA 40; (2009) 238 CLR 642
News Ltd v Australian Rugby Football League Limited [1996] FCA 1256; (1996) 58 FCR 447
R v Brown [1996] 1 AC 543
Saville v Commissioner of Land Tax (NSW) (1980) 12 ATR 7
Thomason v Chief Executive, Department of Lands (1995) 15 QLCR 286
Tweddle v Federal Commissioner of Taxation [1942] HCA 40; (1942) 180 CLR 1Texts Cited: New South Wales, Parliamentary Debates (Hansard), Legislative Assembly, 10 November 1988, 3186
New South Wales, Parliamentary Debates (Hansard), Legislative Council, 29 November 2005, p 20060 (The Hon Michael Costa, Minister for Finance, Infrastructure)Category: Principal judgment Parties: Maraya Holdings Pty Ltd (First Plaintiff)
Antonio Giusti (Second Plaintiff)
Elizabeth Giusti (Third Plaintiff)
Searco Holdings Pty Ltd (Fourth Plaintiff)
Flag Constructions Pty Ltd (Fifth Plaintiff)
Chief Commissioner of State Revenue (Defendant)Representation: Counsel:
Dr H Sorensen/ S McMillan (Plaintiffs)
N Williams SC/ E Bishop (Defendant)
Solicitors:
N Panos Associates (Plaintiffs)
Crown Solicitors Office (Defendant)
File Number(s): SC 2010/292820
Judgment
The Land Tax Management Act 1956 (Management Act) contains an exemption from land tax for land used for primary production. The Chief Commissioner of State Revenue, the defendant, assessed the first plaintiff, Maraya Holdings Pty Ltd (Maraya), and the other plaintiff owners of the land with respect to three land tax years. Their notices of objection were disallowed and they seek a review of those decisions by this court under the Taxation Administration Act 1996 (Administration Act).
The relevant provision of the Management Act is s 10AA which is in the following terms:
"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:
(a) has a significant and substantial commercial purpose or character, and
(b) 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:
(a) cultivation, for the purpose of selling the produce of the cultivation, or
(b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or
(c) 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
(d) the keeping of bees, for the purpose of selling their honey, or
(e) 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
(f) the propagation for sale of mushrooms, orchids or flowers.
(4) For the purposes of this section, land is rural land if:
(a) the land is zoned 'rural', 'rural residential' or 'non-urban' under a planning instrument, or
(b) the land is not within a zone under a planning instrument but the Chief Commissioner is satisfied the land is rural land."
It is not in dispute that the lands in question are not rural land. It is not in question that the lands are used for primary production being lands the dominant use of which is for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce.
What is in issue is whether that use of the lands has a significant and substantial commercial purpose or character and was engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit was actually made.
An item of property has an identifying number and may include more than one block of land. The identifying number corresponds with the identification used by the Valuer-General for valuation purposes.
Maraya received notices of assessment for the 2005-2010 land tax years with respect to Wonga Road, Prestons - 2967420 (Wonga 1); Wonga Road, Prestons - 2967425 (Wonga 2); Enterprise Circuit, Prestons - 2976530 (Wonga 3); and Progress Circuit, Prestons - 2967411 (Wonga 4).
Antonio Giusti, the second plaintiff, and Elizabeth Giusti, the third plaintiff, received notices of assessment with respect to the 2005-2010 land tax years for Wonga Road, Prestons - 2967423 (Wonga 5); Enterprise Circuit, Prestons - 2967422 (Wonga 6); Enterprise Circuit, Prestons - 2976529 (Wonga 7); and Progress Circuit, Prestons - 2967412 (Wonga 8).
Searco Holdings Pty Ltd (Searco), the fourth plaintiff, received a notice of assessment with respect to the 2008-2010 land tax years for 291 Kurrajong Road, Prestons - 2501665 (Kurrajong).
Finally, Flag Constructions Pty Ltd (Flag), the fifth plaintiff, received a notice of assessment for the 2007-2010 land tax years with respect to 165 Croatia Avenue, Edmondson Park - 2486605 (Croatia).
The Chief Commissioner withdrew his decision to impose land tax with respect to the 2005 land tax year. It is not in issue that in the land tax years now in question the dominant use of the lands was for primary production.
Mr Giusti was the person who carried out the duties relating to the cattle activities for him and Mrs Giusti, Maraya, Searco and Flag. He had spent time with Walter Ingall who leased the Wonga lands from 1986 observing and helping Mr Ingall with his cattle activity.
When Mr Ingall died, Higisu Pty Ltd as trustee of the Giusti Family Trust commenced to carry on a cattle activity under an informal lease arrangement with the then owner until the two lots in question were purchased in 1995 by Mr and Mrs Giusti and by Maraya, respectively.
Wonga 1 to Wonga 8 totalled 11.55 hectares. Except for an area of 0.0662 hectares enclosed by a paling fence and used for a residence on Wonga 5, Wonga 1 to Wonga 8 comprised grassed paddocks which had fencing and associated gates, cattle yard, loading ramp, hay and machinery sheds, shelter and water troughs.
As manager and principal person conducting activities for Maraya, Mr Giusti carried on cattle operations on Wonga 1 to Wonga 4 as well as on Wonga 5 to Wonga 8, Kurrajong and Croatia under formal or informal lease arrangements.
Croatia comprised 2.522 hectares and was used for cattle operations from 2005. The grazing area is just over 2.1 hectares and the facilities are a cattle yard, hay shed, loading dock, shelter, and dam.
Kurrajong is 6.877 hectares and has been used for cattle operations since 2007. The grazing area is just over 6.5 hectares and the facilities are barbed wire fencing and associated gates, cattle yard, hay shed, loading dock, shelter and dam.
Either formally or informally the cattle operations were also conducted on land owned by third parties at 42B Kurrajong Road, Prestons (42B Kurrajong) from 30 June 2006, Kookaburra Road (Kookaburra) since 2004 and the Banno property (Banno) between Kookaburra and 42B Kurrajong also from June 2006. In addition, use was made of 155 Croatia Avenue (155 Croatia), the land abutting Croatia, from 2006.
In the land tax years in question the herd was up to about 40 cattle. It was up to more than 50 cattle in 2011-2012. Maraya preferred Murray Grey, Hereford and Angus. It had a Murray Grey bull. It had owned three bulls, the first was purchased, the other two were bred from the original blood line.
Maraya's operation was to graze and fatten cattle for sale. The herd comprised cattle that were either purchased at market or bred on the lands. Stock was turned over taking into consideration economic and environmental factors, current market prices and availability of feed. All sales and purchases were made on-market through William Inglis & Son Ltd at Camden.
Each of the paddocks, including the third party properties used by Maraya, were rested from time to time to allow regrowth of feed. In general, at any given time, one or two paddocks were being rested.
Mr Giusti moved cattle between the paddocks depending on the condition of the pasture and available grazing and to take best advantage of available feed.
Cattle were also moved for other reasons. The bull was moved to land with cows at breeding age and young heifers were moved away. Young cows that might need assistance with birthing, cattle that might need veterinary assistance or medication by injection were moved to the paddock with the head bailing facility.
The number of cattle depastured on various properties varied from between three to fifteen on Wonga 1 to Wonga 8, three to twelve on Kurrajong, three to twelve on 42B Kurrajong, Kookaburra and Banno, and three to ten on Croatia and 155 Croatia.
Mr Giusti made regular visits to the lands and the third party properties to check the cattle, fences and gates and to check paddocks for feeding stock. He attended to repairs, delivered any feed, moved cattle between paddocks or to and from market, medicated and vaccinated cattle when required, assisted cows when calving, applied ear tags to newborn calves, applied castrating rings to male calves, and applied weaning rings to vealers.
Maraya owned the following farm equipment and facilities required for the cattle operation: Fiat tractor, chisel plough, slasher, aerator, harrow, seeder, sprayer for weed control, one ton Holden utility with cattle cage, cattle yards with head bailers, loading ramps/ facilities on all of the subject properties, Allflex ear tag identification applicator, and castrating rings applicator. Maraya also owned the following tools for fence building and repairs: post hole digger, star picket rammer, star picket extractor, barbed wire strainers, hoes, shovels, mattocks, crowbars, double-shovel cordless drill and augers.
Maraya maintained trading records including stock and buy/sell records.
During the land tax years in question, dry conditions affected the feed stocks available on the lands. Feed stocks were very poor in those years. In 2007, Maraya retained most of the herd by buying in feed at significant cost. In 2008/2009 land tax years Maraya sold the majority of the herd rather than purchase feed. For the financial years ended 30 June 2006 to 30 June 2012 the primary production expenses, opening stock, closing stock, sales, and profit/(loss) on livestock trading were, respectively:
2006
$1,386
18
12
16
$1,070
2007
$5,317
12
22
3
($4,712)
2008
$717
22
30
6
$1,213
2009
$2,694
30
6
27
($271)
2010
$705
6
27
16
$982
2011
$1,583
27
30
34
$5,008
2012
$1,966
30
32
29
$7,985
Cattle stock records show high and low cattle numbers for the following periods:
19/07/05 - 06/06/06
27
19
03/11/06 - 08/05/07
19
12
07/09/07 - ../04/08
30
28
19/08/08 - 16/06/09
29
6
02/10/09 - 22/05/10
41
20
02/07/10 - 29/06/11
55
27
01/07/11 - 26/06/12
53
31
Wonga 3 and Wonga 7 were subject to significant road works for the extension of Lyn Parade. For a period of approximately two years they could not be used for depasturing cattle. The grasses were harvested from them and taken to other areas.
The western corner of Wonga 1 was also subject to stage two of road works from September 2009 to February 2010. Those works denuded the land of grass and it could not be used for depasturing.
Mr Giusti agreed to pay $500,000 towards the cost of a road built along the northern boundary of Wonga 1 with the owner of the land to the north. Mr Giusti said he did not want to build the road but he was placed in a compromised position if he chose not to cooperate because the development application for subdivision required a carriageway and that would have required Maraya to extend the carriageway into the neighbour's land. He agreed to share the costs of an east-west road along the northern boundary of Wonga 1 to preserve its value.
The parties jointly retained William David Hoffman as a beef industry expert. He said that Meat & Livestock Australia (MLA) had developed a standardised calculator for southern Australian beef producers to use to calculate the cost of production for the beef they produced in their business. MLA, he said, developed the calculator as a means of standardising a set of common performance indicators so beef producers could compare their enterprises with others across the southern beef industry. Mr Hoffman used this calculator as part of his evaluation of Maraya's beef operations.
Mr Hoffman converted dollars per head of purchases and sales to kilograms per head. Total beef production was the kilograms resulting from inventory change, kilograms sold and kilograms purchased. He then determined operating costs including amounts for the time the owner/operator spent working in the business and overhead costs. The final cost of production calculation was made by dividing total operating costs by kilograms of beef produced.
Mr Hoffman applied the cost of production in each of the land tax years 2006-2011. In each year the cost of production exceeded income from livestock trading. Mr Hoffman expressed the opinion:
"My opinion is that the Maraya cattle business did not make a positive financial return in the relevant tax years when assessed in terms of operating profit. It is also my opinion that it is unlikely to produce a positive financial return over the foreseeable future on a continuous or repetitive basis."
Mr Hoffman calculated a negative operating margin over the period of $39.80 per kilogram of beef produced with a range of $24.46-$54.71. Mr Hoffman said: "Simply that means on average it cost $35.54 more to produce a kilogram of beef than was received when it was sold."
Mr Hoffman expressed the opinion that maximising kilograms of beef produced in a sustainable production system should be the focus of all beef producers.
Mr Hoffman said that kilograms of beef produced per hectare was a valuable indicator of productivity and was widely used in beef businesses in southern Australia. It is calculated by dividing the kilograms of beef produced by the area in hectares of land grazed. In the period analysed by Mr Hoffman, Maraya beef operation produced on average 42.6 kilograms of beef per hectare. Mr Hoffman expressed the opinion that this was a very low output of beef. 36 beef businesses, clients of his, and involved in the network of producing figures for cost of production recorded an average of 228 kilograms per hectare of beef produced in the 2011 land tax year. Mr Hoffman expressed the view that kilograms of beef produced per hectare would always be low when animals graze the type of pasture he assessed on the properties.
Mr Giusti said he had fertilised in the past but without following rain "you may as well be throwing money away".
Mr Giusti said that he had slashed one of the paddocks Mr Hoffman visited. After the cows had been grazed, he pastured it and intended to harrow it but there was substantial rain at the time and the ground was too wet. He said he had done it since.
Mr Giusti said that two of the paddocks on Wonga Road had been pasture improved.
Maraya did not accept the opinion of Mr Hoffman. The cost of production indicator contained much estimation explained only on Mr Hoffman's experience.
Maraya produced an amended cost of production exercise that excluded things that were not expensed and came to a more attractive result.
Maraya submitted that the cost of production exercise was merely a performance indicator and was not the answer to the question posed by s 10AA(2) of the Management Act.
It was pointed out that the group who provided figures for the MLA standardised calculator of cost of production are in the better percentile of beef producers.
What were produced were notional amounts in order to produce a commonality of factors across the industry.
The parties also jointly retained Mark Bryant as a financial expert. Mr Bryant identified two approaches to measuring the financial return from Maraya's cattle trading. He said:
"The first approach measures the benefit of cattle trading compared to allowing the land to lie idle. This approach ignores land expenses like rates on the basis that they were already incurred (or would have been incurred anyway). I will call this the 'Marginal Benefit Approach'.
The second approach measures the extent to which cattle trading contributed to Maraya being better off, as compared with Maraya doing nothing. This approach requires the allocation to cattle trading of costs that are shared between Maraya's various activities. I will call this the 'Shared Cost Allocation Approach'."
Maraya's other activities were investments producing interest and rent.
Mr Bryant concluded as follows:
"On neither of the two bases on which Maraya's financial return from cattle trading might be calculated did Maraya have a positive financial return in the six years to 30 June 2010 in aggregate; and
On the basis of calculation that is, in my opinion, the more appropriate in the circumstances of this matter, Maraya's cattle produced a large negative financial return in each of the Relevant Tax Years."
Again Maraya did not accept these opinions. It suggested that Mr Bryant's conclusion of holding costs was a preference for a particular view rather than a principle. It was submitted that, since s 10AA(2) of the Management Act focussed on use rather than user, to look at profit on that basis meant that it was not unreasonable to exclude holding costs. The basis for this assertion was not explained.
In calculating Maraya's profit or loss from its cattle operations, Maraya submitted that labour costs should not be included as Mr Giusti and his son were not paid wages for their work.
The Chief Commissioner submitted that it was unrealistic that a purpose of profit could be determined without having regard to holding costs and costs of labour.
Mr Bryant concluded that the analyses of the financial returns from cattle trading derived from Maraya's financial statements did not reflect the true economic costs of that trading to the extent that Maraya had received services for which it had not paid.
Under s 14(1) of the Management Act the Chief Commissioner is required to make an assessment from the returns and other information of the taxable value of the lands and the land tax payable.
Those taxable values are relatively high. The 2009 values for Wonga 1 to Wonga 4 totalled $8,466,700. The totals for Wonga 5 to Wonga 8 in 2009 totalled $6,572,000. For Kurrajong the value was $9,300,000 and the value of Croatia was $2,220,000 giving a total of $26,558,700.
The text is the starting point of statutory construction. As the High Court said in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; (2009) 239 CLR 27 at 46-47 [47]:
"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy."
(references omitted)
Maraya submitted that resort to extrinsic materials is only permissible if the statutory test is ambiguous or obscure. That is not so. As was said in CIC Insurer Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 at 408:
"Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy."
(references omitted)
In Minister for Immigration and Citizenship v SZJGV [2009] HCA 40; (2009) 238 CLR 642 at 664 [47] Crennan and Kiefel JJ said that in that case context, general purpose and policy of a statutory provision may be the surest guide to construction and those considerations provided a better guide to the intended operation of the statutory provision than did resort merely to the language and structure of the sub-section.
In my view those considerations apply equally to this case. Resort to such material will identify the mischief that parliament intended to address.
Section 10AA of the Management Act was introduced by the State Revenue Legislation Further Amendment Bill 2005. The second reading speech contained the following (New South Wales, Parliamentary Debates (Hansard), Legislative Council, 29 November 2005, p 20060 (The Hon Michael Costa, Minister for Finance, Infrastructure)):
"Land currently qualifies for a land tax exemption if it is within a rural or non-urban zone and is used primarily for primary production; or if it is within an urban zone and is used in the course of carrying on a business of primary production.
The Local Government Act definition of 'farmland' contains a more precise business test. The bill amends the land tax provisions to be consistent with that definition."
The reference was to the Local Government Act 1993, s 515 which provided:
"515 Categorisation as farmland
(1) Land is to be categorised as farmland if it is a parcel of rateable land valued as one assessment and its dominant use is for farming (that is, the business or industry of grazing, animal feedlots, dairying, pig-farming, poultry farming, viticulture, orcharding, bee-keeping, horticulture, vegetable growing, the growing of crops of any kind, forestry or aquaculture within the meaning of the Fisheries Management Act 1994, or any combination of those businesses or industries) which:
(a) has a significant and substantial commercial purpose or character, and
(b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made).
(2) Land is not to be categorised as farmland if it is rural residential land.
(3) The regulations may prescribe circumstances in which land is or is not to be characterised as farmland."
Section 515 of the Local Government Act 1993 replaced a similarly worded s 118 of the Local Government Act 1919. In the second reading speech to the 1988 bill introducing amendments to s 118 it was stated that the purpose of the amendments was to: "weed out persons who have exploited the vagueness of the current rule rating provisions of the Act to obtain rate concessions when in fact they have not been genuine primary producers." (New South Wales, Parliamentary Debates (Hansard), Legislative Assembly, 10 November 1988, 3186).
It was Walsh J who coined the phrase "significant commercial purpose or character" when speaking of a business in Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 at 171.
And it was Mason J in Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9 who said of s 118 of the Local Government Act 1919, which then defined rural land to include a parcel of land which exceeded 8,000 square metres in area and was wholly or mainly used for the time being by the occupier for carrying on the business or industry of grazing:
"I accept, then, that 'business' in the sub-section has the ordinary or popular meaning which it would be given in the expression 'carrying on the business of grazing'. It denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis."
In Hope it was held that an occupier of land who used over 80 percent of it for the agistment of other persons' cattle or horses was carrying on a business. It was to overcome this decision that the 1988 amendments to s 118 of the Local Government Act 1919 were made.
To return to s 10AA of the Management Act, in Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366 the Court of Appeal held that there was no requirement to approach s 10AA in some beneficial fashion striving to expand the reach of the exemption or to narrow the taxing operation of the section according to strict language.
Section 10AA(2) of the Management Act introduced a more stringent test for the availability of the exemption.
Section 10(1)(p) of the Management Act used to provide that land used for primary production, not being land owned by a company, was exempt from land tax.
To qualify for the exemption under s 10AA of the Management Act, the relevant primary production use must be an actual use at 31 December immediately preceding the tax year (Leda at [24], [40], Greenville Pty Ltd v Commissioner of Land Tax (NSW) (1977) 7 ATR 278 at 280, Saville v Commissioner of Land Tax (NSW) (1980) 12 ATR 7 at 10, 11).
It is common ground that with respect to the commencement of each land tax year the then present dominant use of the land was for primary production as defined in s 10AA(3) of the Management Act.
The exemption in s 10(1)(p) of the Management Act was concerned with use and not the user. It was of no consequence that the use was made by a person who was not the taxpayer (Clarke v Commissioner of Land Tax (NSW) (1980) 11 ATR 794 at 802).
In Thomason v Chief Executive, Department of Lands (1995) 15 QLCR 286 at 306 the same proposition was advanced by the Queensland Land Appeal Court, presided over by Ambrose J, with respect to the definition of farming in s 17(1) of the Valuation of Land Act 1944 (Qld) which was in similar terms to s 515 of the Local Government Act 1993.
There is no reason to doubt that the same considerations apply to s 10AA of the Management Act.
It follows that where, as here, a primary production enterprise is conducted on the subject lands and other lands, the tests in s 10AA(2) of the Management Act are satisfied if the requisite purpose or character is evident from either the use of the subject lands viewed in isolation from any other land or, the use of the subject lands viewed as part of the enterprise (Thomason at 307). I do not understand that the Chief Commissioner submits to the contrary.
Whether the lands are viewed singly or the lands and other lands are viewed as an enterprise it is irrelevant that they could have been used more profitably by Maraya or someone else.
Support for that proposition is found in decisions regarding the meaning of a business for the purposes of the Income Tax Assessment Act 1936 (Cth). It is not for the Commissioner of Taxation to dictate to a taxpayer how he is to run his business (Tweddle v Federal Commissioner of Taxation [1942] HCA 40; (1942) 180 CLR 1 at 7). A taxpayer may conduct a business of primary production though his husbandry is wanting (Thomas at 170, 171).
The tests in s 10AA(2) of the Management Act are to be considered solely by reference to the existing use on 31 December immediately prior to the land tax years in question.
Section 10AA(2)(a) is concerned with objective qualities of the use of the land. The words "significant" and "substantial" in s 10AA(2)(a) are to be construed in their context and by interpreting the phrase "significant and substantial commercial purpose or character" as a whole rather than by adding up linguistic elements of each of the words (Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389 at 396-397 quoting R v Brown [1996] 1 AC 543 at 561).
The word "significant" has acquired a number of shades of meaning.
In Coombs v Bahama Palm Trading Pty Ltd [1991] Aust Contract Reports 90-002 Young J cited a Californian decision with respect to the meaning of the word "significant". His Honour said at 89,123:
"As the Supreme Court of California said in No Oil Inc v City of Los Angeles (1974) 529 P (2d) 66, 76, the word 'significant' 'cannot be adequately defined by a random selection of synonyms from a thesaurus. Facing a spectrum of possible meanings, describing a range extending from projects of relatively minor import to those of truly momentous proportions', the Court must consider where along a spectrum the parties intended to focus. As Judge Friendly said in Hanly v Kleindienst (1972) 471 F (2d) 823, 837, when construing the phrase 'significantly affecting the quality of human environment', 'While...determination of the meaning of 'significant' is a question of law, one must add immediately that to make this determination on the basis of the dictionary would be impossible. Although all words may be 'chameleons, which reflect the colour of their environment', 'significant' has that quality more than most. It covers a spectrum ranging from 'not trivial' through 'appreciable' to 'importance' and even 'momentous'."
(references omitted)
See also Thomas JA in EMAAAS P/L v Mobil Oil Australia Ltd [2000] QCA 513 at [25].
In ACI Pet Operations Pty Ltd v Comptroller-General of Customs [1990] FCA 398; (1990) 26 FCR 531, Foster J, having said that the word "significant" had acquired a number of shades of meaning in common parlance and was not infrequently used as a substitute for "substantial", said this at 551-552:
"I derive assistance also from considering that the word is the opposite of 'insignificant' which word is defined in the Macquarie Dictionary as meaning 'unimportant, trifling or petty' and as 'too small to be important'. Looked at from this point of view 'significant' may be regarded as meaning 'not unimportant or trivial' or as 'sufficiently large to be important'."
By defining "significant" as the obverse of "trifling" the result will inevitably be an emphasis upon the lower end of the spectrum of meanings of "significant".
In ordinary parlance, "significant" connotes importance, something of consequence, a key element, a vital or critical one.
These meanings tend to place "significant" at the upper end of the spectrum of meanings the word has developed.
In the context of s 10AA(2)(a) of the Management Act this is appropriate as the purpose of its commerciality test is to exclude a less important use of land from qualifying for exemption.
As the Administrative Decisions Appeals Panel said of the commerciality test in Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25 at [45]:
"This criterion eliminates hobby or token operations even though they may have passed the de minimus threshold to which we have referred [above]. The taxpayer then needs to show that the operation is run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability; cognisant of the elements of unpredictability of any business operation, especially primary production. This is a higher standard than the one that applies to rural land."
It has been said that the word "substantial" lacks universal meaning and takes its meaning from the noun that it describes. As Burchett J said in News Ltd v Australian Rugby Football League Limited [1996] FCA 1256; (1996) 58 FCR 447 at 521:
"The adjective 'substantial' will have a different effect according to the noun which it describes. Often it refers to size, as in the expression 'a substantial amount of money', or (to take an example from the Trade Practices Act) in the adverbial use to be found in the expression 'substantially lessening competition' repeatedly used in s 45. One can measure an amount of money or a degree of lessening of some activity. But purpose is not measured in any comparable sense. Applied to purpose, the adjective refers to its quality or significance, and may be regarded as a word of characterisation."
But in ordinary parlance the word "substantial" connotes size or bulk. It means an ample or considerable amount, quantity or size.
The commerciality test in s 10AA(2)(a) of the Management Act required Maraya's use of the lands for primary production, either individually or in conjunction with the other lands, to have had a significant and substantial commercial purpose or character. That test required the commercial purpose or character of the use of the lands to have had a relatively high degree of importance. The combination of "significant" and "substantial" demands that conclusion.
Not every business will satisfy the commerciality test. The test distinguishes activities amounting to a business that is carried on in a small way or as a sideline from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one. It will usually also exhibit some of such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence.
To determine whether Maraya's cattle operation had a significant and substantial commercial purpose or character, the court should consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources (whether of time, labour or expenditure) put into the development and maintenance of the cattle operation.
40, or even 55, cattle grazing on the subject lands with or without the other lands do not constitute a serious or intense primary production use when the grazing areas of the lands are taken into account.
Mr Hoffman's evidence should be accepted. Maraya produced on average 42.6 kilograms of beef per hectare, which Mr Hoffman considered to be a very low output of beef. His view was that productivity would always be low when the cattle graze on the type of pastures on the subject lands and the other lands.
Mr Giusti made little attempt to improve the pastures. His one attempt at fertilising was not repeated when there was good following rain. There was one paddock he said had been pasture improved and one other was sown and harrowed after Mr Hoffman's visit.
Mr Giusti spent approximately 1.5 to 2 hours per week and his son approximately 1 hour per week on the cattle operation. Those are times consistent with a part-time operation. As Mr Hoffman said at 21:
"The most likely corrective steps I would expect an entity, which is not returning a positive 'profit', to take would be to increase productivity and reduce Cost of Production.
These steps are often difficult to implement with an entity which is based on a small area of land and is largely operating as what is commonly referred to as a 'hobby' farm.
The term 'hobby' is normally applied in cases where the beef business is not the full time occupation of the operator, is only contributing a minor portion of the income and is supported by 'off farm' income. There are many 'hobby farms' involved in the Australian beef industry with similarities to the Maraya beef business in that they do not return a 'profit' and are supported by income from other sources."
Even with the omission of labour costs and holding costs, Maraya's cattle operation would produce very small amounts of profit with respect to land valued at $26.5m.
Mr Bryant's evidence should be accepted. His view was that Maraya's cattle operation was not and would not be commercially viable. Mr Bryant considered that Maraya would have been financially better off if it had not engaged in cattle trading except for the possible land tax savings.
The evidence leads to the conclusion that Maraya's use of the subject lands with or without the other lands did not satisfy the commerciality test in s 10AA(2)(a) of the Management Act. The cattle operations did not have such characteristics as importance, size, depth, bulk, weight, seriousness, quality, intensity and prominence that are indicative of a significant and substantial commercial purpose or character.
I find that Maraya has failed to establish that the primary production use of the subject lands had a significant and substantial commercial purpose or character within the meaning of s 10AA(2)(a) of the Management Act.
The finding that Maraya's use of the lands for primary production did not have a significant and substantial commercial purpose or character is sufficient to dispose of the review.
But I add a few words with respect to s 10AA(2)(b) of the Management Act. It introduces a subjective element into the land use. The primary production use must be engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit is actually made.
The Chief Commissioner accepts that the records of Maraya establish that the cattle operation was conducted continuously on one or other of the lands.
The court is not bound, however, to accept Mr Giusti's assertion that Maraya engaged in its use of the land for primary production for the purpose of profit.
For income tax purposes, no profit was recorded in any of the years in question. Maraya's financial statements disclose "gross profit" from cattle trading. But that is calculated by deducting from sales revenue the direct costs of the items sold. It does not include other expenses that relate to that activity and, in particular, a proportion of holding costs and costs of labour.
On neither Mr Bryant's marginal benefit approach nor his shared cost allocation approach did Maraya have a positive financial return in the land tax years in question.
Section 10AA(2)(b) of the Management Act does not require a profit. It requires only that the primary production use be engaged in "for the purpose of profit" and accepts that that purpose may be satisfied whether or not a profit is actually made.
While the absence of a profit does not negate an engagement in a primary production use of land for the purpose of profit, a continuous pattern of a lack of profit may lead the court to question and, in appropriate cases, to reject evidence that the primary production use of the land was engaged in for the purpose of profit.
Court Orders:
(1) The assessments to which the applications for review relate are confirmed.
(2) The plaintiffs are to pay the defendant's costs.
(3) The exhibits and subpoenaed material are to be returned forthwith.
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Decision last updated: 30 January 2013
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