Skinner v Chief Commissioner of State Revenue
[2014] NSWCATAD 66
•16 May 2014
NSW Civil and Administrative Tribunal
New South Wales
Medium Neutral Citation: Skinner v Chief Commissioner of State Revenue [2014] NSWCATAD 66 Hearing dates: 8 May 2014 Decision date: 16 May 2014 Jurisdiction: Administrative and Equal Opportunity Division Before: Professor G.D. Walker, Senior Member Decision: Decision under review affirmed in part and set aside in part.
Catchwords: Land tax - exemption - primary production - dominant use - commerciality test Cases Cited: Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue (CCSR) [2012] NSWADTAP 25;
FCT v Smorgon (1977) 16 ALR 721; Hope v Bathurst City Council (No 2) (1983) 53 LGRA 79;
Leda Manorstead Pty Ltd v CCSR (2010) 79 NSWLR 724, (2011) 85 ATR 775; Maraya Holdings Pty Ltd v CCSR [2013] NSWSC 23;
Saville v Commissioner of Land Tax (1980) 12 ATR 7.Category: Principal judgment Parties: Ronald Austin Skinner and Carolyn Suzanne Skinner (Applicants)
Chief Commissioner of State Revenue (Respondent)Representation: Counsel
M Bennett (Respondent)
R Skinner and C Skinner (Applicants in person)
Crown Solicitor (Respondent)
File Number(s): 136057
reasons for decision
The applicants Mr Ronald Skinner and Mrs Carolyn Skinner on 18 October 2013 sought review in the Administrative Decisions Tribunal of the Chief Commissioner's decision denying the applicants' exemption from land tax for the relevant period, the 2008 to 2013 land tax years, for two properties that they own at Iolanthe Street, South Grafton, and 233 Lawrence Road, Great Marlow, New South Wales. The applicants had lodged an Application for Exemption - Primary Production Land dated 6 April 2009. In the initial assessments for the 2008 to 2012 the relevant properties were exempted from land tax pursuant to s 10AA of the LandTaxManagementAct (LTM Act).
Before the exemption was granted, the Chief Commissioner requested further information, which the applicants provided. On 23 July 2012, the Chief Commissioner issued a notice of investigation to the applicants regarding the primary production exemption. That request included a questionnaire which the applicants completed and, together with other information, provided to the Chief Commissioner on 5 October 2012. Between that date and 5 November 2012 the parties engaged in further correspondence.
On 7 December 2012, the Chief Commissioner informed the applicants that they did not qualify for the primary production exemption as the relevant properties did not satisfy either test under s 10AA(2) or (3) of the LTM Act. Consequently the Chief Commissioner issued to the applicants a land tax assessment for the 2008 to 2012 land tax years assessing the relevant properties to land tax. As the taxing date for the 2013 tax year assessment had not yet arrived, the 2013 year was not included in the assessment.
On 12 February 2013, the applicants objected to the assessments issued on 7 December 2012, and on 23 April 2013 objected to the 2013 land tax year assessment. The Chief Commissioner disallowed those objections.
The applicants' 2013 land tax assessment, issued on 14 February 2013, was for a total of $53,616.95, but only part of that related to the South Grafton and Great Marlow properties. The applicants claim that the two properties were used for primary production, namely the maintenance of horses for the purpose of selling them or their bodily produce, and therefore exempted from land tax for the relevant period by s 10AA of the LTM Act. The Chief Commissioner contends that the exemption does not apply to the relevant properties for the relevant period.
During the relevant period the applicants owned at various times six other properties in the North Coast area, including 200 North Street, Grafton. The South Grafton and Great Marlow properties comprise 20 acres and 25 acres respectively and are approximately 5 km apart. There is a residence on the South Grafton property, which according to the applicants has not been occupied since May 2011, and a residence at Great Marlow that is currently occupied by a caretaker, Mr Swan.
The South Grafton property is said to contain seven stables, a dairy, a feed room, a shed and four paddocks. The applicants also state that agricultural equipment including a tractor, slasher, mower, quad bike and haymaking equipment are kept on the relevant properties, and that the holdings have been improved by fencing, irrigation and lucerne pastures.
In addition to the dwelling, the Great Marlow property contains a structure that the respondent describes as a storage shed. Development consent was sought on 16 September 2011, and shortly thereafter granted, to construct a "farm shed extension".
The Chief Commissioner accepts that the relevant properties were used for maintaining horses during the relevant period, but disputes whether that was sufficient for the primary production exemption to apply.
The applicants state that they predominantly used the properties for breeding horses, as registered breeders under stud registered number 689763 from 1 July 2007 (although they acquired Great Marlow on 7 September 2007), but concede that the properties were also used for spelling racehorses.
As the Administrative Decisions Tribunal was superseded on 1 January 2014 by the Civil and Administrative Tribunal, it should be noted that these proceedings continue in the present tribunal and that the law to be applied is that which would have applied but for the enactment of the CivilandAdministrativeTribunalAct 2013 : schedule 1, part 2, division 3, item 7 of that Act.
Applicable legislation
Land tax is levied and paid on the taxable value of all land situated in New South Wales owned by the taxpayer, other than exempt land: LTM Act ss 7, 9(1). The applicants are the owners of the land for the purposes of the Act: s 3. Subject to applicable exemptions, they are liable to land tax on both of the subject properties as at the taxing dates during the relevant period, which is midnight on 31 December each year: s 8. A series of exemptions is set out in part 3 of the Act, the relevant one being s 10AA, which provides as follows:
10AA 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.
The taxpayer is thus entitled to exemption under s 10AA after satisfying a number of tests in respect of the use of the land. The first is whether the land (whether "rural" or not) satisfies the definition of "land used for primary production". This is the "dominant use" test. For present purposes land used for primary production is land the dominant use of which is the maintenance of animals for the purpose of selling them or their natural increase or bodily produce.
If land is not "rural land", and if the test in the previous paragraph is satisfied, the owner must also demonstrate that the use of land for primary production purposes (whether or not the owner's use) satisfies the tests of commerciality in s 10AA(2).
Also relevant is s 6 of the LandTaxAct 1956 , which is separate from the LTM Act:
Land tax liability in respect of flood liable land
6 Land tax liability in respect of flood liable land
(1) In this section:
"council", in relation to any land, means the council of the area, within the meaning of the LocalGovernmentAct1993 , in which the land is situated.
"flood liable land" means land which is unoccupied and which has been determined, by the council, to be (or which is, in the opinion of the Chief Commissioner) unsuitable for the erection of a building because it is liable to flooding.
(2) Notwithstanding any other provisions of this Act or the provisions of any other Act, where a person is the owner of 2 or more parcels of land, one or more of which is flood liable land, the amount of land tax payable by that person shall, in respect only of such land as is flood liable land, be:
(a) calculated separately in respect of each parcel of that land that is not exempt from taxation, and
(b) so calculated in the case of each such parcel as if it were the only land owned by that person.
Issues
The principal issue is whether the applicants were entitled to the primary production exemption in s 10AA in relation to the relevant properties during the relevant period. That entails a number of sub-issues:
(a) whether the respective properties are zoned as rural land for the purposes of s 10AA(4);
(b) whether the dominant use of the properties was the maintenance of animals under s 10AA(3)(b) of the act such that the property is land used for primary production;
(c) if the answer to (b) is yes, whether that use meets the commerciality and profit test in s 10AA(2); and
(d) whether either of the relevant properties is flood liable land within s 6 of the LandTaxAct.
Each of the properties must be assessed separately for the purposes of the Act. The taxable value of all land owned by a person is the total sum of the average value of each parcel of that land, less any deduction allowed by the Act for the use of certain land for primary production and similar purposes: ss 9(2) and (3). The method for assessing the average value of a parcel of land is set out in s 9AA. The exemption in s 10AA also refers to the zoning of land, which is relevant to a particular piece of land, and s 6 of the LandTaxAct defines "flood liable land" as land which is unoccupied and has been declared by the relevant council to be unsuitable for the construction of a building. Thus the Act's assessment and exemption provisions operate on individual parcels of land, and must be applied to the two properties separately. It is for the applicants to prove their case for exemption: s 100(3) of the TaxationAdministrationAct 1996.
The evidence
The applicants called as a witness Mr Maxwell C Elphick, a Glen Innes chartered accountant and tax agent. In his statutory declaration dated 9 April 2014 (part exhibit A1) he stated that he has known the applicants for 24 years, having met them through a mutual interest in thoroughbred horse breeding and racing. Since 2004 they have been his clients. From then until the present he has prepared their business financial statements, and tax returns has advised them on financial matters and the management of their various businesses.
The applicants have long been horse racing enthusiasts. They have raised many horses over the years and before they became Mr Elphick's clients they also bred some thoroughbred horses themselves. Shortly before June 2007 they sold their interest in a large commercial property in North Street, Grafton. In September 2007 they purchased the property at 233 Lawrence Road, telling him at the time that they intended to operate a thoroughbred horse breeding business on the property in conjunction with the Iolanthe Street, South Grafton property. In 2008 and onwards they erected stables and yards on the property to accommodate brood mares. Substantial funds were spent on the improvements.
The applicants retained part of their North Street property, which was their residence until 2010, and the small parcel of land attached to it is set up to spell racehorses and is used for that purpose. Land tax is paid on that land.
Between 2007 and the present the witness had visited the properties at North Street, Lawrence Road and Iolanthe Street on about 10 occasions. He declares that he has only ever seen brood mares on the Lawrence Road and Iolanthe Street properties. He had mainly seen racehorses at the North Street property, but occasionally brood mares as well. He saw the impeccably bred stallion "Encosticated" at North Street when he was first purchased. He was later moved to Lawrence Road for stud purposes.
The applicants' horse breeding business is registered for GST. It has been a business and has been treated that way for income tax purposes.
In cross-examination Mr Elphick repeated that the applicants had always intended to breed horses, Great Marlow being used exclusively for breeding. He had personally visited the properties regularly, about every 3 to 6 months. Mr Skinner had occasionally told him that he was spelling racehorses but he had never personally observed that. The applicants had never been engaged professionally in spelling horses. The applicants had been involved in various businesses, including managing nursing homes, a field mower business and various other activities. They had derived $100,000 by way of interest and $5 million in capital gain on the sale of a commercial rental property. There had also been $150,000 from racing prizes in the 2007 to 2012 period. Losses of $50,000 had been incurred from breeding, but the accounts showed them simply as part of horse expenses. Invoices for investments in the Great Marlow property, such as shed purchases in 2007, had been included as horse expenses.
The applicants had raised two horses at a time over many years. The witness could not say if that activity had been profitable, but it had generated $150,000 in gross revenue. No yearlings had ever been sold, but five or six mares had been disposed of at one time because of a series of misfortunes. The witness had predominantly seen mares at Lawrence Street (Great Marlow) and Iolanthe Street (South Grafton), and also occasionally at North Street. During the relevant period four mares and one stallion were also raced. Some horses had been kept at North Street after leaving the stables at the racecourse, but Mr Elphick had never personally seen any there.
No witness statements had been filed for the applicants, but Mr Skinner sought to rely on an unsworn letter dated 5 November 2013, which was a mixture of evidence and submissions. The applicants' evidence as a result was rather disorganized and fragmentary.
Mr Skinner stated that no primary production and income was reported for the 2008 tax year from horse sales, and in 2009 and 2010 a loss or small profit was incurred, because quarantining for equine influenza began in September 2007 and lasted until March 2008. All horse movements were suspended for that period, which meant that horse breeding activities and sales were greatly hampered for that year's breeding season. That had an impact on subsequent years with yearlings coming through to be sold.
During the assessment years the applicants also had 18 foals born, but only two lived beyond two years. They were either stillborn, or had to be destroyed because of sickness or accident. The dead foals were not accounted for in the financial trading statements because they were only accounting for the live ones that were to be sold.
In the years in question the applicants had two highly promising yearlings of excellent stock that had an estimated sale value of between $100,000 and $150,000 each. That was the best chance for success in the breeding business. Both had to be put down on the same day, however, when the filly, which was being treated by a veterinarian for a bowel disorder, kicked the colt and broke his leg, necessitating his immediate destruction. The filly then died from the stress and the bowel disorder.
The applicants purchased a very well-bred stallion, "Encosticated", in September 2009. Foals from this sire would have been very valuable if sold, and if they had begun winning, the applicants would have been even more successful and the brood mares would have increased greatly in value. Unfortunately he was a failure as a sire and produced no foals. A profitable breeding business could not be achieved because the applicants had been forced to put down 90 percent of their foals and yearlings. It is difficult to succeed in the horse breeding industry, but the applicants had been confident they could succeed with the facilities they had built and the well-bred mares and sire they had purchased.
The house on the South Grafton property was never the applicants' residence, either regularly or occasionally. It had never been rented and they had used it only to have lunch or rest when doing work on the horses. The house had been flooded three times in the past six years, and in the January 2013 flood a metre of water went through it. It is now uninhabitable.
The Great Marlow property had never been used as a rental proposition and had never been rented. Stables had been built on the property in 2007-2008. During the January 2013 floods much of the land had been under water, except for a small area in the entrance from the road, because the flood levee had unexpectedly broken (see photographs part exhibit A1, exhibit A2). The flooding had destroyed most of the machinery and equipment on the land.
At no time during the past six years did either parcel of land have any more than two racehorses spelling. There was always a preponderance of brood mares on the land, which were being used for breeding in the business. During the relevant period the applicants had raced horses and won some money from it, but were mainly involved in racing horses in syndicates with other owners. Those horses were not spelled on their land - if they had intended to use the land for spelling they would not have invested so heavily in stables and yards. The horses on the property were not significantly used for racing purposes as most of the mares were purchased after their racing careers were over.
It is true that the racing activities were financially more successful than the breeding, but the two land parcels were mainly used to graze the brood mares that were part of the horse breeding business.
The Great Marlow land is zoned rural. The greater part of the South Grafton property is also zoned rural, amounting to approximately 75 percent of the total area. Lot 7014 is zoned SP2 infrastructure and amounts to approximately 12 percent of the total area. The remaining two lots are inside the flood levee and are used for grazing. The applicants had erected frames on those blocks for proposed foaling boxes, but that project did not proceed because of flooding.
The applicants now have only two foals remaining and are trying to sell them. The land is now being used to agist cattle. The applicants had abandoned the horse-breeding business because of the losses sustained and Mr Skinner's ill-health, which had also impaired his record-keeping during the relevant period.
In oral evidence Mr Skinner said that he had received about 60 percent of the racing prize money because he had been in partnerships with friends. During the equine influenza epidemic when livestock movement was restricted, he had received permits to move only two mares, and that because they were about to foal and he only had to move them a short distance.
Otherwise he had been unable to send mares to studs where the stallions were located. Although Grafton was in a low risk area, stock could not be moved because it was difficult to confine the spread of infection. They had raced one stallion, Encosticated, but he had broken a bone in his leg and could no longer race. He proved unsuccessful for breeding purposes. The applicants had enjoyed a long association with Minumurra Stud and the owner of that property had made a supportive statutory declaration (part exhibit A1). Minumurra had wanted the applicants' business to succeed because that would have added another dimension to their stud's business.
In cross-examination Mr Skinner conceded that his records in relation to breeding were poor, but disagreed that the reason was that he was treating it more as a hobby. He had sold the brewery property (the site of the old Grafton Brewery that closed in the 1950s) because of sickness, but had wanted to establish a breeding business to make a living. Racing, on the other hand, was a hobby, because almost anyone can do it, either alone or in partnership. But to breed one needed a property and facilities, which he had. He had always intended to turn it into a business to produce thoroughbreds. He had raced Encosticated in order to add to the stallion's list of wins and thus make him more desirable for breeding, as a record is needed for that purpose. Mr Skinner said his deficiencies in paperwork stemmed from his bouts of sickness.
The applicant's exhibit A1 included a number of attachments, one being a letter dated 21 January 2014 from Bruce Swan Racing Stables, Grafton, signed by Mr Swan, who stated that over the past six years he had trained several racehorses for Mr Skinner at North Street, Grafton. He trained the horses at the Cuban Song Lodge at Grafton racetrack, and as the need arose they were spelled at their property in North Street and Turf Street, Grafton. The property was purpose-built for spelling, with rail fences and stable boxes. Mr Swan wrote that he is also in charge of the properties at Lawrence Road, Grafton and Iolanthe Street, South Grafton, which were predominantly used for the holding of brood mares and for breeding purposes. He also holds a few head of cattle, a draft horse and some of his own stock.
A letter from John Shelton Racing Stables, of Grafton, dated 25 January 2014, said that Mr Shelton had over the years trained horses for Mr Skinner at the Shelton racing establishment in Turf Street. If they were not at Turf Street, they were at Mr Skinner's property in North Street, Grafton.
In a letter dated 11 February 2013, Dr Oliver Liyou, of Equine Veterinary and Dental Services Pty Ltd, of South Grafton, stated that Mr Skinner had been a client of EVDS for over six years. During that period Dr Liyou had examined and treated multiple thoroughbred brood mares and foals. He had attended at Mr Skinner's thoroughbred breeding farm at 233 Lawrence Road, Grafton, many times in order to treat those horses.,
Mr Andrew (Mark) Ritchie, owner and operator of Minumurra Thoroughbred Stud at Glen Innes, made a statutory declaration dated 8 April 2014 in which he declared that over the past 15 years had "had the pleasure and privilege of assisting Mr Skinner in many of the thoroughbred breeding ventures he [had] undertaken in that time". During those years he had considered the applicant to be one of his more stalwart clients and greatly appreciated the many occasions in which he had undertaken the journey up the mountain to utilize the services of his stallions for his brood mares. Several of these visits to the stallions were done on the basis of "Share Foal Ventures", whereby he provided the stallion service (inclusive of fee) and Mr Skinner provided the mare (inclusive of care and maintenance of her and of the resulting foal to yearling age).
Before entering into the share foal ventures, he had inspected the applicant's facilities for the housing of his brood mares and the shared foals, first at Iolanthe Street, where he found the fencing adequate and the mares and foals contentedly grazing on improved pasture. When he later inspected the property at Lawrence Road, Grafton shortly after the applicants had acquired it, he initially found the fencing to be grossly substandard and insisted on a massive upgrade before any of the shared mares were to be placed there, let alone any foals.
Soon after that visit, with direction from Mr Ritchie and several knowledgeable horse breeders, "I was amazed to see Ron re-fence the entire property and turn it into an oasis for the SAFE handling and healthy broad acre grazing for his brood mares and their resulting foals". Mr Ritchie was not required for cross-examination.
The respondent adduced no oral evidence but relied on the s 58 documents (exhibit R1) and two affidavits by Holly Morgan relating to the production of documents (exhibits R2 and R3). Exhibit R3 included a bundle of documents marked HTM 1. Neither affidavit was challenged by the applicants.
Consideration
As was noted above, for present purposes the two parcels of subject land must be treated separately.
Property at 233 Lawrence Road, Great Marlow
The respondent concedes that the above property is zoned "rural land" within the meaning of s 10AA. Consequently, as was explained above, it will be exempt from land tax if its dominant use during the relevant period was (relevantly in this case) the maintenance of horses for the purpose of selling them or their natural increase or bodily produce. The spelling of racehorses does not qualify as primary production under s 10AA.
The respondent also concedes that between 7 and 11 brood mares were maintained by the applicants on the property between 2008 and 2011, but argues that it is unclear how many were kept on which property. It is not disputed that the return of lands and stock for the year to June 2009 shows eight horses on the property, but the respondent points out that the only documentary confirmation of the presence of horses was when the mares were sold in July 2011. The breeding activity, moreover, was unsuccessful.
The respondent also criticizes the lack of distribution of expense records between racing and breeding, together with the lack of movement records and of a business plan. The absence of primary production and income between 2008 and 2010, the Chief Commissioner declares, means that the property was generating income mainly from rental and racing activities.
The question of "dominant use" is "a question of fact and degree that may, in the end, be determined as an objective matter of impression having regard to the facts":LedaManorsteadvChiefCommissionerofStateRevenue (2010) 79 NSWLR 724 at [69] - [70]. The test is to be applied by looking at the six-month period either side of the relevant taxing date: at [4].
It is common ground that the applicants have been registered as horse breeders from January 2007. The horse breeding business is registered for GST and has been treated as a business for income tax purposes: exhibit A1, p 13. Mr Elphick testified that Mr Skinner had from the start expressed the intention to use Great Marlow for the purpose of horse breeding, and Mrs Skinner had confirmed that. While the test is an objective one, evidence of intention could be relevant in a negative sense, for if the applicants had expressed an intention to use the land for another purpose, that would weigh against a finding that the dominant use was horse breeding. Mr Elphick also stated, however, that he had only ever seen mares on the property. He explained that just before June 2007, the applicants had sold their interest in a large commercial property in North Street, Grafton. They retained part of the North Street property, which was their residence until 2010, and the small parcel of land attached to it was set up to spell racehorses, and was used for that purpose. The retained North Street property is listed in the 2013 assessment with a taxable value of $363,000.
The applicants purchased the property at 233 Lawrence Road in September 2007, Mr Elphick continued. In 2008 and onwards they put stables and yards on the property to accommodate brood mares, investing large sums in improvements (exhibit A1, p 18).
Dr Oliver Liyou stated that for over six years he had performed veterinary examinations and treatments on multiple thoroughbred brood mares and foals. He had attended at the applicants' thoroughbred breeding farm at 233 Lawrence Road many times to treat those horses. The unsworn statement of the trainer Mr Bruce Swan states that Mr Skinner's racehorses were trained at the Grafton racecourse stables and if the need arose were spelled at the applicants' property in North Street and Turf Street, Grafton. That property is purpose-built for spelling, with rail fences and stable boxes. Similarly, Mr John Shelton recalled training horses for Mr Skinner at his training establishment in Turf Street. If they were not at Turf Street, they were at Mr Skinner's property in North Street, Grafton.
Mr Skinner conceded that his records were not good, but attributed that to his bouts of sickness and his frequent stays in hospital. He did not explain the absence of a business plan for the horse breeding venture. It is possible that he considered that he knew enough about horse breeding to make a start without preparing a written plan, but he did not say that.
He did, however, make it clear that the Lawrence Street property had never been rented, and his evidence on that point was not challenged, nor was his evidence that he had spelled horses at Lawrence Road only on one or two occasions because that land was not suitable for the purpose. Spelling racehorses could be kept there only for short periods and under constant supervision.
The respondent criticized the applicants' failure to adduce evidence of the carrying capacity of the land or the manner in which other horse-breeding businesses are normally conducted. Those shortcomings presumably reflect the applicants' lack of legal representation. Such evidence would have been directed to some of the factors mentioned in HopevBathurstCityCouncil (No 2) (1983) 52 LGRA 79, 84, including the nature and intensity of the land use, the physical areas over which it extends and the time and labour spent in conducting it. It is, however, implicit in the evidence of Mr Ritchie, Dr Liyou and Mr Swan that the activities on Lawrence Street were being conducted in the normal way for a horse breeding business. Dr Liyou refers to the applicants' "thoroughbred breeding farm at 233 Lawrence Road" and Mr Ritchie describes his inspection of the property, his proposals for the upgrading of the facilities there, with suggestions from other experienced horse breeders, and his share foal ventures with the applicant on the basis that the Lawrence Road property would be used for that purpose. Mr Swan describes the Lawrence Road and Iolanthe Street land as being predominantly used for the holding of brood mares and for breeding purposes.
Once the uncontroverted evidence that Lawrence Road was never rented and was well adapted to horse breeding but unsuitable for any but occasional racehorse spelling is accepted, it becomes reasonable to conclude from the totality of the evidence that the dominant use of the land was horse breeding. Further, the extent of that use was plainly "sufficiently substantial to prevail over the proposition that the land [was] primarily to be regarded as unused land", as Roden J put it in SavillevCommissionerofLandTax (1980) 12 ATR 7, 10. I therefore find that the applicants have discharged the burden of proving that the Lawrence Road property during the relevant period was rural land used for primary production within the meaning of s 10AA(3)(b).
Property at Iolanthe Street, South Grafton
If the South Grafton land can also be categorized as rural land, land tax liability for it will turn on the same "dominant use" test as was applied to the Great Marlow land. The respondent disputes that it can be so described, as it is zoned partly rural and partly industrial. The applicants estimate, and the Chief Commissioner does not dispute, that about 12 percent of the land area is zoned industrial (SP2 Infrastructure) and 75 percent is zoned rural. The evidence is not clear on how the other 13 percent is zoned.
Mr Bennett pointed out that there is no authority on whether land that is substantially, but not entirely, zoned as rural can qualify as "rural land" for the purposes of the exemption in s 10AA(1). On the one hand, the subsection does not state that the land must be "exclusively" or "solely" zoned rural, but on the other hand, neither does it state that the land must be "substantially" or "preponderantly" so zoned. Bearing in mind Stephen J's injunction in FCTvSmorgon (1977) 16 ALR 721, 729, that the construction of a statute which "produces the less hardship is to be preferred to another having the opposite effect", it is not to be presumed that the Legislature would have intended that a landowner would be denied the benefit of s 10AA(1) if, say, 2 percent of the land area was not zoned rural. In this case, however, at least 12 percent and possibly 25 percent of the land has zonings other than rural. That fact takes the case well beyond any putative de minimis concession that one could ascribe to the Legislature.
If, as I have concluded, the Iolanthe Street property is not "rural land", it must also satisfy the commerciality and profit tests of s 10AA(2) to be excluded from land tax liability. The two limbs of that test are that the use of the land must have "a significant and substantial commercial purpose or character" and that the activity is "engaged in for the purpose of profit on a continuous or repetitive basis". As this tribunal's appeal panel stated in AshleighDevelopmentsPtyLtdvChiefCommissionerofStateRevenue [2012] NSWADTAP 25, [45]: "The taxpayer... 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 element of unpredictability of any business operation, especially primary production. This is a higher standard than the one that applies to rural land" (see also MarayaHoldingsvChiefCommissionerofStateRevenue [2013] NSWSC 23, [86]). For the reasons set out above in relation to Lawrence Road, which I think apply equally to Iolanthe Street, the latter property would probably also pass the "dominant use" test. But the more demanding s 10AA(2) test is a different matter.
Mr Bennett submitted that the applicants had been unable to adduce evidence showing that the horse breeding activity was run on a commercial basis or what the property's carrying capacity would be. The only revenues of which there was any record came from the sales of the mares when the operation was closed down. There was no business plan, significant losses had been sustained and there was no evidence suggesting how the activity was operated, or how such operations are usually conducted (see Maraya [56]). The applicants declared no primary production income for the years to 2011 and had not claimed the primary production concessions otherwise available.
The lack of profitability, leading to the ultimate abandonment of the horse breeding venture, is adequately explained by the successive misfortunes of the equine influenza epidemic, the failure of Encosticated, flooding and a succession of illnesses and accidents leading to the loss of all the foals produced during the relevant period. The other shortcomings in the applicants' case are less easily explained, however.
While the breeding program did generate approximately $150,000 of gross revenue, the fact that all costs and losses incurred in it were combined with racing expenses in the financial statements under the heading "horse expenses", together with the treatment of the program in the income tax returns, suggests that horse breeding had not yet been established on a normal commercial basis at the relevant period. That is all the more likely as Mr Skinner was an experienced and successful businessman who, as Mr Elphick stated, was involved in a number of other business ventures at the time as well and would have been well versed in the proper conduct of a business enterprise.
When asked in cross-examination by Mr Bennett whether his keen interest in thoroughbreds led him to run the breeding activity as a hobby rather than as a business, as was shown by his poor records, lack of insurance and failure to account for the dead foals, Mr Skinner replied that "I intended to turn it into a business to produce thoroughbreds". That reply adds weight to the inference that while the applicants intended to become commercial thoroughbred breeders, they were still in the preparatory stages and were not yet engaging in the activity "on a continuous or repetitive basis" as required by ss (2). The land was not yet being used for a "substantial commercial purpose".
The Court of Appeal in Leda declared that there is no requirement to approach s 10AA in some beneficial fashion, striving to expand the exemption or to narrow the taxing operation of the section in accordance with strict language. Speaking in Maraya of the commerciality test, Gzell J stated that "A business that satisfies the commerciality test will be an important one. It will usually also exhibit some such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence": [90]. The evidence in this case does not warrant a finding that the horse breeding business on the Iolanthe Street land was during the relevant period a substantial commercial venture being engaged in for the purpose of profit on a continuous or repetitive basis. The applicants have not discharged their burden of proof.
The applicants contend in the alternative that the Iolanthe Street property should be exempt from land tax because it is situated in flood areas and was flooded in the January 2013 floods. The effect of s 6(2) of the Land Tax Act is not to exclude flood-prone land from liability. It merely calculates the liability as if the property were the owner's only holding. Further, for the purposes of this section, it is not sufficient that a piece of land has actually been flooded. The test in s 6(1) requires that the land be unoccupied and that the council determines it to be unsuitable for the erection of a building because of flooding. The applicants maintain that the house on the property is uninhabitable because it was flooded to a depth of a metre during the January 2013 floods. In Australia many houses affected to that degree by floodwaters have been rehabilitated and made habitable in the past. Even apart from that, there is no evidence that the relevant council has determined that the land is unsuitable for the erection of a building because of flooding. Mr Skinner did not think that approval to build a house would be given, but that is not sufficient. A council determination is required. The applicants' argument based on s 6 therefore cannot succeed, with the result that the Iolanthe Street property does not qualify for exemption from land tax.
Accordingly, (1) in relation to the Lawrence Road property the decision under review is set aside, and (2) in relation to the Iolanthe Street property the decision under review is affirmed.
I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.
Registrar
Decision last updated: 16 May 2014
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