Vartuli v Chief Commissioner of State Revenue - [2014] NSWSC 678

Supreme Court

New South Wales

Medium Neutral Citation: Vartuli & Anor v Chief Commissioner of State Revenue [2014] NSWSC 678
Hearing dates: 25-28 November 2013
Decision date: 30 May 2014
Jurisdiction: Equity Division - Revenue List
Before: White J
Decision:
Refer to para [143] of judgment.

Catchwords: TAXATION AND REVENUE - assessment for land tax - land used for primary production - whether the plaintiffs' land is exempt from land tax pursuant to s 10AA(2) of the Land Tax Management Act 1956 - whether use of land for plaintiffs' cattle had "significant and substantial commercial purpose or character"
Legislation Cited: Land Tax Management Act 1956
Local Government Act 1993
Income Tax Assessment Act 1936 (Cth)
Cases Cited: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379
Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408
Hope v Bathurst City Council (1980) 144 CLR 1
Hope v The Bathurst City Council (No. 3) [1994] NSWCA 139
Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286
Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165
Category: Principal judgment
Parties: Bruno Vartuli - (1st Plaintiff)
Nancy Vartuli - (2nd Plaintiff)
Chief Commissioner of State Revenue (Defendant)
Representation: Counsel:
C J Bevan (Plaintiffs)
I Mescher (Defendant)
Solicitors:
Galluzzo Andriano (Plaintiffs)
Crown Solicitor (Defendant)

File Number(s): 2010/68900

Judgment

HIS HONOUR: The issue in these proceedings is whether land owned by the plaintiffs at Camden Valley Way, Edmondson Park, is exempt from land tax pursuant to s 10AA(2) of the Land Tax Management Act 1956 ("the Act"). The plaintiffs purchased the land in November 1985. Since then they, or companies controlled by them, have conducted a small cattle-farming business on the land.

In 2006 part of the land was rezoned from "rural" to "residential" and the balance was rezoned for other non-residential use such as electricity transmission easements, new roads and bushfire asset-protection zones. The land ceased to be "rural land" for the purposes of s 10AA(4) of the Act. Section 10AA(2) and (3) provides:

"10AA Exemption for 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."

It is not in dispute that the land is used for primary production. That is to say, it is not in dispute that the dominant use of the land is for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce (s 10AA(3)(b)).

Land tax is "charged on land as owned at midnight on the thirty-first day of December immediately preceding the year for which the land tax is levied" (s 8). Land tax is levied on the taxable value of all land situated in New South Wales owned by taxpayers other than land which is exempt from taxation under the Act (s 7).

On 6 August 2009 the defendant issued a land tax assessment notice in respect of the land tax years 2007, 2008 and 2009. According to the assessment the land value of the subject land increased from $5,250,000 in 2006 to $11,950,000 in 2007. In 2000, before the rezoning, its unimproved capital value was $880,000.

The defendant denies that the plaintiffs are entitled to the primary production exemption pursuant to s 10AA(2) of the Act.

The defendant denies that the use of the subject land is engaged in for the purpose of profit on a continuous or repetitive basis (s 10AA(2)(b)).

Section 10AA(2)(a) contains an additional requirement that the use have a significant and substantial commercial purpose or character. The defendant also denies that this requirement is satisfied. The defendant submitted that for the taxpayer to satisfy this requirement the taxpayer needed to show that the business of primary production satisfied a commerciality test of being significant and substantial and this required consideration of the size, depth, bulk, weight, seriousness, quality, intensity and prominence of the business which in turn required consideration of the intensity of the primary production activities, the size and quality of the herd, the size and carrying capacity of the land, and the resources put into the development and maintenance of the cattle operation.

The defendant relied on the decision of Gzell J in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 at [89]-[91]. After the hearing the Court of Appeal delivered judgment on the appeal from the decision of Gzell J in Maraya (Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408). The appeal was dismissed. Both parties provided written submissions as to the consequences of the Court of Appeal's decision for the issues in this case. Both parties claimed support for their position from the Court of Appeal's judgment.

Section 10AA(2)(b) states the test for when the use of the land for primary production would amount to the carrying on of a business of primary production as explained by Mason J in Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9 (Hope v The Bathurst City Council (No. 3) [1994] NSWCA 139 per Priestley JA; BC9402975 at 16).

The plaintiffs submitted that the defendant had misconstrued s 10AA(2)(a). In the plaintiffs' submission, s 10AA(2) did not require that the business carried on on the land be a substantial and significant business. Rather, the additional requirement imposed by s 10AA(2)(a), (i.e. additional to the requirement that a business of primary production be carried on) was either that the use of the land have a significant and substantial commercial purpose, or that the use of the land have a significant and substantial commercial character. According to the plaintiffs, a purpose is a commercial purpose if the pursuit is engaged in for the purpose of returning a profit. Under s 10AA(2)(a) that purpose is to be assessed objectively rather than subjectively (in contrast to s 10AA(2)(b)). The plaintiffs submitted that the adjectives "significant and substantial" are concerned with the relative importance of the commercial purpose or character as compared with another purpose or character having some other quality. This might be a purpose of using the land as a hobby farm, or holding the land for redevelopment whilst carrying on farming operations, or it might be for a fiscal purpose, that is to obtain an exemption from land tax or a reduction in rates. A use of the land for primary production that was also for any of those purposes would not entitle the landowner to the exemption in s 10AA(2) unless the purpose of using the land to make a profit from primary production was significant and substantial in comparison to the other purpose. Where the only purpose of using the land was to make a profit from primary production, that purpose must be both significant and substantial.

Moreover, so the plaintiffs submitted, when the farming business conducted on the land is considered not in the abstract, but in comparison with other cattle-farming businesses in Southern Australia, many of which carry similar heads of cattle, and most of which made losses over most of the relevant period, even if it were right to focus on the scale of the farming business conducted on the land, the use of the land had a significant and substantial purpose or character.

The land in question is part of land used by the plaintiffs and by two family companies of which the plaintiffs, or the first plaintiff, Mr Vartuli, are directors and shareholders, to produce cattle. In the land tax years in question the business of primary production made losses in some years and otherwise made only small profits. The defendant says that if the land is being used for a business of primary production, nonetheless it does not generate a reasonable rate of return on the capital employed, and this means, or is a factor leading to the conclusion, that the use does not have a significant and substantial commercial purpose or character.

Purchase of the land

The land in question (that is, at Edmondson Park) comprises 14 hectares (35 acres). It was purchased by Mr and Mrs Vartuli in June 1985. Their intention in buying Edmondson Park was to build a family home on it and to breed and fatten cattle on it for sale at a profit. A house was constructed on the property but was only occupied for part of the period in question and then not by the Vartulis.

Deemhire and Sydrom

The Vartuli family also owns 22.4 hectares (56 acres) of land at Appin. A company called Deemhire Pty Ltd ("Deemhire") operates a cattle grazing business on the Appin property as well as on Edmondson Park and adjoining lands. Deemhire is the trustee of a Vartuli family trust of which Mr and Mrs Vartuli, their children, his brothers and sisters and their spouses and their children are beneficiaries. Mr Vartuli and his brother are the directors of Deemhire. The financial statements for Deemhire as trustee of the Vartuli family trust for the years ended 30 June 2005 to 30 June 2011 show that it had substantial operating profits, but only marginal profits or losses from livestock trading. The bulk of its income was from receipt of rents and interest. Its net profits that were distributed between the beneficiaries of the Vartuli family trust were as follows:

30 June 2004 $371,815.35

30 June 2005 $557,863.67

30 June 2006 $648,827.37

30 June 2007 $308,854.61

30 June 2008 $346,433.35

30 June 2009 $382,960.00

30 June 2010 $243,063.13

30 June 2011 $693,028.86

30 June 2012 $700,182.00

(The 2012 figure is taxable income of the trust estate taken from Deemhire's tax return.)

Deemhire's profits and losses from livestock trading do not make a material contribution to those results as shown in the table below:

Deemhire
Year ended 30 June
Income
Gross Profit (Loss) on Livestock Trading
2006
$1,857,666
$1,454
2007
$2,332,693
($772)
2008
$2,394,124
$2,266
2009
$2,424,049
$2,071
2010
$2,458,944
$384
2011
$2,624,566
$3,610

Mr and Mrs Vartuli are the directors and shareholders of Sydrom Pty Ltd ("Sydrom"). From the 2004-2005 financial year Sydrom also engaged in livestock trading. Again, its profit and losses from this activity were only a small part of its business. Not all its financial statements were in evidence. But for the year ended 30 June 2010 its income was stated to be $219,614 which included gross profit from livestock trading of $5,288. Its principal source of income was interest received from a partnership between it and Deemhire and its principal expense was interest on a loan. In that financial year, according to its financial statements, it made a loss before tax. In the year ended 30 June 2011, according to its financial statements, it made a profit before tax. Its income in that financial year was stated to be $375,010. The gross profit on livestock trading that contributed to that income was $5,828. The principal income was again interest received from the Deemhire and Sydrom partnership and its principal expense was interest. In the year ended 30 June 2012 its revenue was $406,651. The gross profit on livestock trading that contributed to that income was $11,742.

The parties did not adduce any evidence as to the nature of the other businesses conducted by Deemhire and Sydrom.

Use of the land

The cattle that graze on the Appin property and the Edmondson Park property are owned by Deemhire and Sydrom. The cattle are also agisted on land adjoining the Edmondson Park property. There are four adjoining owners who allow the cattle on the Edmondson Park property to be agisted on their land. Agistment fees are paid to one of the adjoining owners, a Mr Nassar. The total area of adjoining land on which the cattle are agisted comprises 14 hectares (35 acres), that is, about the same size of land as the Edmondson Park property.

The Vartulis commenced grazing cattle on the Edmondson Park property shortly after they completed its purchase in October 1985. In November 1985 the Vartulis purchased 19 heifers and grazed them on Edmondson Park. In August 1986 they purchased a tractor to sow fodder on the farm at a cost of $15,400. In June 1986 they constructed a dam on Edmondson Park and cleared land for sowing to pasture at a cost of $6,500. In March 1987 they constructed a cattle yard on the farm and divided the land into seven paddocks with stock-proof fencing at a cost of $4,000. By early 1987 the Vartulis were grazing 37 head of cattle (Black Angus and Murray Greys) on Edmondson Park. Cattle fattened on Edmondson Park were sold by the Vartulis at the Camden cattle sales when ready for sale between 1985 and 1995.

From 1985 until 1998 Mr Vartuli's father, who was then retired from fulltime paid employment, managed the cattle farming operation on Edmondson Park for the Vartulis without payment. From 1989 cattle owned by Deemhire were grazed on Edmondson Park under an agistment agreement for a fee of $2,600 per annum. That fee increased to $3,120 per annum in 1994.

From 1989 the Vartulis began reducing the number of cattle they grazed on Edmondson Park to enable Deemhire to agist more of its cattle on the land as the agistment income had provided a reliable source of income for the Vartulis.

Up to 1998 Mr Vartuli conducted a jewellery business. He sold that business in 1998 and commenced devoting himself to the fulltime management of the grazing activities of himself and his wife (in partnership), Deemhire, and, from 2004, Sydrom.

Between 1998 and 2008 Mr Vartuli devoted himself for between 30 and 35 hours per week to the management of the grazing activities of himself, his wife, Deemhire and Sydrom on Edmondson Park, the adjoining lands to Edmondson Park on which cattle were agisted, and Appin. From 2008 and up to the hearing Mr Vartuli worked on the Edmondson Park property for about eight to 12 hours per week not including time attending sale yards. He attended the sales about 12 times a year for two to six hours.

The Vartulis' cattle fattening operations (meaning thereby the operations of Deemhire, Sydrom and Mr and Mrs Vartuli) involve the use of Edmondson Park (14 hectares), the lands adjoining it at Camden Valley Way (15.4 hectares), and the land at Appin (22.4 hectares), a total of 51.8 hectares or 128 acres.

Stock levels

Between 1990 and 1997, before a drought, and when there was good rain, Deemhire grazed between 47 and 79 head of cattle on Edmondson Park and Appin.

In 1999 the Vartulis ceased to graze any of their own cattle on Edmondson Park and allowed Deemhire to agist its cattle there exclusively for an agistment fee. On 1 July 2000 Deemhire agreed to pay an agistment fee of $6,000 per annum for Edmondson Park under a written agreement. That fee was later reduced to $5,200 per annum. From 2000 the Vartulis resumed grazing their own cattle on Edmondson Park after the drought broke. From 2004 Sydrom started grazing cattle on Edmondson Park. When Sydrom started grazing cattle, the Vartulis ceased grazing cattle of their own. Sydrom is a company of which the Vartulis are the sole shareholders. Sydrom also paid agistment fees to the Vartulis.

Mr Vartuli said that the property was affected by drought from about 1998 until 2008. The drought was most severe in 2006 and 2007 which were the first two years where the question arises as to whether the use of the land satisfied the requirements of s 10AA(2).

The stock levels of Deemhire and Sydrom that grazed on Edmondson Park, the lands adjoining Edmondson Park, and Appin for the financial years ended 30 June 2006 to 30 June 2011 were as follows:

2006
Total
Opening Stock
21
Purchases
15
Natural Increase
0
Sub-total
36
Sales
23
Deaths
2
Closing Stock
11

2007
Total
Opening Stock
11
Purchases
20
Natural Increase
0
Sub-total
31
Sales
3
Deaths
10
Closing Stock
18

2008
Total
Opening Stock
18
Purchases
27
Natural Increase
2
Sub-total
47
Sales
29
Deaths
2
Closing Stock
16

2009
Total
Opening Stock
16
Purchases
34
Natural Increase
0
Sub-total
50
Sales
36
Deaths
0
Closing Stock
14

2010
Total
Opening Stock
14
Purchases
116
Natural Increase
0
Sub-total
130
Sales
80
Deaths
4
Closing Stock
46

2011
Total
Opening Stock
46
Purchases
62
Natural Increase
2
Sub-total
110
Sales
72
Deaths
0
Closing Stock
38

In the year 1 July 2011 to 30 June 2012, 121 cattle were purchased and 111 were sold. There was a natural increase of 17 and one death with a closing balance of 63. In the financial year 1 July 2012 to 30 June 2013, 140 cattle were purchased and 97 were sold with a natural increase of 8. Mr Vartuli deposed that as at early September 2013 he was running 79 head of cattle at Edmondson Park. On 6 September 2013 he took 19 head to the local cattle sales. They were sold. On 24 September 2013 Mr Vartuli sold a further 40 head of cattle. He said he made the decision to sell the further 40 head because of the dry spell that he was then experiencing which led to feed levels starting to suffer. After the second sale he was left with 19 head of cattle.

For about three to four months from August to November 2006 there was no feed on the ground and the 21 head of cattle were being handfed by Mr Vartuli collecting excess fruit and vegetables from fruit shops for handfeeding.

The opening and closing stock figures present an incomplete picture of the stock being carried. But in the financial years to 30 June 2006 and 30 June 2007 the maximum head of stock being carried at any time was in the mid 20s. This increased to the mid 40s in the following two years, to 50 in the year ended 30 June 2010 and 52 in the year ended 30 June 2011. In the year ended 30 June 2012 between October 2011 and January 2012 there were between 77 and 122 head of cattle grazing on the various properties before sales reduced the end of financial year numbers to 63. (I have used livestock numbers in appendix 8 to Mr Finney's first report which show there is an error in the stock figures for 30 June 2011 reproduced elsewhere in the experts' reports.) In the following financial year there were again upwards of 100 head of cattle grazing on the various properties.

Profitability of activities on the land

Both parties retained accountants who expressed opinions as to the profitability of the primary production activities carried on on the land. They took different approaches. Mr Finney, who was retained by the plaintiffs, summarised what he called the "Enterprise Gross Margin" for the group consisting of Deemhire, Sydrom and Mr and Mrs Vartuli, and the net profits and losses derived from the primary production activities of the group. Mr McGuiness, who was retained by the defendant, assumed that the "indicators" that would "inform" a decision as to whether the use of the land was of a commercial purpose or character, and if so whether that commercial purpose or character was significant and substantial, would be a business plan that demonstrated an expectation of achieving profits or returns relative to the investment, an accounting of the arm's length nature of resources used in the activities on the land, a track record of profits or cash surpluses relative to the investment, and an expectation that the business was capable of achieving satisfactory profits or cash surpluses relative to its value. He considered not only what he called an "accounting perspective", but also what he called "an economic perspective". He expressed the view that the latter perspective was more apt to analyse the "commercial purpose or character" of the use of the land and that from an economic perspective, the inquiry should be whether or not any profits derived from use of the land provided a satisfactory return having regard to the amount of capital employed, including the value of the land itself.

For the land tax years in question Mr and Mrs Vartuli derived income from the Edmondson Park land from two sources. One source was from agistment fees charged to Deemhire and Sydrom. In his first report Mr Finney purported to summarise the profits derived only from the Edmondson Park land and not the whole of the land used by the Vartuli group and said that the net profits derived by Mr and Mrs Vartuli and Sydrom from the use of the Edmondson Park land were as follows:

Year
Net Profits
$
2007
2,275
2008
6,124
2009
6,586
2010
8,453
2011
4,949

These figures were obtained by taking Mr and Mrs Vartuli's agistment income ($5,200 in each of the years ended 30 June 2007 and 30 June 2008, and $10,400 in the following three years) and subtracting Sydrom's net loss, or, in the case of the 2008 financial year, adding Sydrom's net profit from cattle trading. In other words, it excluded the Deemhire results. This was an artificial construct. The agistment fees paid by Sydrom and Deemhire were not negotiated at arm's length.

It is not appropriate to isolate the land in question. The tests posed by s 10AA(2) are whether the use of the land was engaged in for the purpose of profit on a continuous or repetitive basis and had a significant and substantial commercial purpose or character. The focus in s 10AA(2) is on the profit-making purpose of the use of the land and therefore attention is directed to the purpose of the user or users and the profit or losses made from the use of the land, not the profits or losses made by the owner of the land. In deciding whether the use of the land was engaged in for the requisite profit-making purpose, and whether the use of the land had a significant and substantial commercial purpose or character, it is appropriate to consider the entirety of Sydrom's and Deemhire's primary production activities, whether conducted on the land or not. This is because the Edmondson Park land was only part of the land used as part of those companies' primary production activities. Those activities had the same purpose and character, irrespective of the particular parcels of land upon which the cattle grazed (Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379 at [73]; Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286 at 307). The profitability of those activities should be considered from the perspective of Mr and Mrs Vartuli, Sydrom and Deemhire, by consolidating their results, and excluding the internal agistment charges by which income from those activities was paid to Mr and Mrs Vartuli at those companies' expense.

Rent derived from farmhouse

The second category of income derived by Mr and Mrs Vartuli from the land was rent from the farmhouse. According to Mr Finney, the rent from the farmhouse amounted to $3,714 in the financial year ended 30 June 2007, $6,300 in the financial year ended 30 June 2010, and $5,500 in each of the financial years ended 30 June 2011 and 30 June 2012. These figures were taken from the Vartulis' taxation returns, but it is not possible to reconcile these figures with Mr Vartuli's evidence that the occupier of the farmhouse paid $200 per week in rent.

There was an issue between the accountants as to what expenses should be allowed against the rental from the farmhouse if the rental from the farmhouse were to be taken into account in assessing the profitability of the primary production activities. In their tax returns Mr and Mrs Vartuli claimed deductions for land tax and also interest on a loan. It does not appear that the loan was taken out for the purpose of acquiring or maintaining the farmhouse. Whether the property is liable for land tax is the issue to be decided. Were it necessary to decide, I would not take account of either expense.

However, I do not think that the income derived from rental of the farmhouse should be taken into account in assessing the profitability of the primary production activities conducted on the land. Mr Bevan for the plaintiffs submitted that the farmhouse was provided as a fringe benefit to a farm manager employed by the Vartulis. It was an agreed fact that from 2009 until June 2012 the Vartulis employed a farm manager who managed Edmondson Park with assistance from her husband and who paid $200 per week in rental on the farm manager's cottage on Edmondson Park to the Vartulis. It was an agreed fact that the balance of the rental based on its market value was set off against the farm manager's salary because only the net rental was brought to account in the Vartuli's accounts for the 2009-2012 financial years. Although this last fact was agreed between the parties, as appears below I have serious reservations about it.

In his affidavit Mr Vartuli said that:

"I engaged a caretaker to help me with the running of the farm from 2009 to mid 2012 and allowed her and her husband to stay in the cottage on the farm at a reduced rent of $200 per week. They were constantly engaged in such tasks as repairing fencing, shifting cattle from paddock to paddock, slashing paddocks when necessary to eliminate weeds, feeding, drenching, sorting cattle for delivery, help load and unload cattle and taking care of sick or injured cattle. The manager and her husband left the farm in June 2012 and I have not replaced them."

However, Mr Vartuli's oral evidence about the arrangement presented a different picture. In his oral evidence Mr Vartuli said that the tenants on the property were Juliana and Pino Pannuccio. He said that Mrs Pannuccio did not help with the cattle on the property, but that Mr Pannuccio did. He said that Mr Pannuccio went to work and looked at the cattle in the morning, or looked after the cattle in the morning, and then again in the afternoon and on the weekends. He worked part-time as a handyman elsewhere. Mrs Pannuccio only assisted with the maintenance of the cattle if the cattle got out. Mr Vartuli described Mr Pannuccio's work as "looking over" the cattle and helping him maintain the cattle. If he saw any problems he would telephone Mr Vartuli. Mr Vartuli explained that Mr Pannuccio came from the alps in northern Italy and asked Mr Vartuli if he could look over the cattle because that was what he liked doing. Mr Vartuli agreed and said that he would rent the house out to Mr Pannuccio at a reduced rate. He said that he thought that the house was worth $280-$300 per week and he discounted the rent by between $80-$100.

The farmhouse was let to a Sarah Burrows from December 2006 to April 2007 for $200 per week. After that, the Pannuccios were the only people who rented the farmhouse. The cottage was in a state of disrepair at the time of the hearing. It is a long way from a road and I accept Mr Bevan's submission that it is unlikely to be tenanted, except under the kind of arrangement made with the Pannuccios.

The agreed fact that the Vartulis employed a farm manager who managed Edmondson Park with assistance from her husband is incorrect. Mr Vartuli's evidence quoted at para [40] is also incorrect. It is clear from Mr Vartuli's oral evidence that Mrs Pannuccio was not engaged as a manager.

Mr Vartuli's evidence of the work done by Mr Pannuccio went no further than that he would "look over" and "help maintain" the cattle and telephone Mr Vartuli if there were any problems. Probably he did help out on the land because he liked working with cattle. It is clear that Mr Vartuli did not have personal knowledge of the hours Mr Pannuccio spent in doing so. I do not think that the Pannuccios' occupation of the cottage and their payment of rent was truly incidental to the operation of a business of primary production.

It was Mr Finney's view that only the costs associated with the primary production activities should be recognised for the purposes of s 10AA(2) and that to include costs of the cottage undermined the defendant's admission that the land had always been used for primary production purposes. Mr Finney was of the view that the fact that the cottage was occupied by someone who was doing work on the farm and whose notional wages were set off against part of the rent did not have the effect of incorporating the use of the cottage as part of the primary production business. I agree with that view. In my view neither the income from the cottage nor the expenses incurred in relation to the cottage should be taken into account in determining the profitability of the primary production activities. Nor do I consider that the notional expense reflected in the reduction of rent should be treated as a real expense in assessing the profitability of the primary production activities when it is not shown what work was done for that return and when it does not appear that any such expense was incurred in other years when Mr Pannuccio was not living on the property.

Although the agreed statement of facts refers to the market rental value of the cottage, there was no attempt to identify a true market value of the cottage. The rent charged was the same as had been paid in early 2007. No-one was employed to do whatever work Mr Pannuccio did do before or after his residence on the property. There was no evidence that he would have been prepared to pay a higher rent than he was charged simply to occupy the cottage if Mr Vartuli had asked for it.

Profitability of cattle grazing

Because the internal agistment charges paid by Sydrom and Deemhire to the Vartulis are to be excluded from the assessment of the profitability of their primary production activities, it is necessary to bring to account in making that assessment the expenses incurred by the Vartulis in making their land available. The profitability of the primary production activities for the financial years ended 30 June 2006 to 30 June 2012 derived from the financial statements of Deemhire and Sydrom on a combined basis, excluding the agistment fees paid to Mr and Mrs Vartuli and adding expenses incurred by Mr and Mrs Vartuli for repairs and maintenance, and the capital works deduction appear at annexure "A" to these reasons.

In the table which is annexure "A" to these reasons the "cost of sales" is the figure representing the value of opening stock at average cost plus purchases and the value of natural increase, less the value of any stock that died, and less the value of closing stock at average cost.

The figures in annexure "A" reflect actual income and expenditure. I do not consider that any notional expense should be included as a wage expense for Mr Vartuli. No such expense was incurred.

In summary the primary production activities of the Vartulis (including Deemhire and Sydrom) produced losses and profits as follows:

Year ended
$
30 June 2006
$2,863
30 June 2007
($5,777)
30 June 2008
($2,351)
30 June 2009
($323)
30 June 2010
$2,130
30 June 2011
$96
30 June 2012
$2,859
30 June 2013
($3,987)

These figures do not include council rates, water charges and insurance. As a result of the rezoning and consequential changes to land value council rates increased from $4,938 in 2005 to $25,833 in 2009. However, Mr and Mrs Vartuli applied for and were granted a council rates concession under s 585 of the Local Government Act 1993. Water charges and insurance relate to the house on the property and for the reasons above I do not think such expenses should be included in assessing the profitability of the cattle-farming operation. But council rates are payable in respect of the land and the concession was only given because the house was being occupied as a residence. The Vartulis were only entitled to the benefit of the postponement (and I assume an adjustment of rates under s 594) whilst the house was so occupied (Local Government Act, ss 597 and 598). The rates paid were:

Year ended
$
30 June 2006
$4,936
30 June 2007
$8,672
30 June 2008
$9,121
30 June 2009
$2,604
30 June 2010
$2,604
30 June 2011
$2,604
30 June 2012
$2,604

The expense for council rates negates the profit for the 2006 financial year and increases the financial losses for years ended 30 June 2007, 2008 and 2013.

It is arguable that because from 2009 the rates were levied only in respect of the occupation of the house, they should not be brought to account in assessing the profitability of the farming operation from 2009 to 30 June 2012. If they are, the rental income from the house and other expenses relating to the occupation of the house from 2009 to 2012 should also be brought to account.

There is insufficient material to make a precise finding as to how such adjustments would affect the statement of profits and losses. As noted earlier, in their taxation returns Mr and Mrs Vartuli claimed deductions for interest and land tax, which should not enter the calculation. Amounts claimed as deductions for council rates bear no relation to the evidence of the council rates paid. It suffices to say that at best the returns for the years between 30 June 2009 to 30 June 2012 would be improved by about $7,500 if rental income of $200 per week from occupation of the house and other expenses (including council rates) for those years were brought to account. The picture of only small profits of up to about $10,000 for those years remains. The bulk of such profits would not be derived from primary production.

The plaintiffs contend that the picture presented by the tables in annexure "A" is not a fair representation of the general profitability of the group's primary production activities because the results were affected by a severe drought that only broke in about 2008. According to Mr Vartuli the property was affected by drought from 1998.

The accountants did not have regard to the companies' financial statements prior to the year ended 30 June 2006. There was no evidence that earlier financial statements were not available. Mr Vartuli produced schedules which he described as schedules for the period from 1989 to 2011 of the numbers of cattle grazed on the farm. These were schedules prepared by his accountants. For the period from 1989 to 2004 they are statements of Deemhire's livestock accounts for the periods ending on 30 June each year showing opening stock, purchases, natural increase, sales, deaths by number of cattle and by value, and include a statement of Deemhire's gross profit for those periods.

Notwithstanding Mr Vartuli's description of the schedules as showing the numbers of cattle grazed on the farm, the figures are for Deemhire's business only. But it is not possible to say that figures for Mr and Mrs Vartuli's own business when they grazed cattle would have materially altered the picture.

The figures reflect a similar scale of operations prior to 1998 as obtained during the land tax years in question.

Beef cattle experts

Both parties called beef cattle experts. Mr Robert Marsh acts as an agricultural and management consultant to assist landholders who operate primary production businesses. He was retained for the plaintiffs and asked to provide a report on the commercial viability of the cattle farming operations. His report addressed issues relating to pastures, infrastructure, soil fertility, the potential for improved pastures, and the viability of the business as a cattle-trading enterprise. It was Mr Marsh's opinion that whilst Edmondson Park itself, consisting of 14.2 hectares, was too small for an adequate cattle-grazing business when other factors were taken into account, such a business could stand alone financially. The other factors were the availability of the adjoining properties on which cattle were agisted, the use of the Appin property, the quality of the pasture in the paddocks, the growth rate of that pasture and the availability of quality cattle feed throughout the year given reasonable seasonal rain, the availability of weaner or weaned cattle locally through the Camden saleyards, and the ready availability of markets for the sale of cattle through the Camden saleyards and the potential to increase substantially the number of cattle that could be grazed if pastures were top-dressed.

The defendant adduced evidence from a Mr Bill Hoffman who had various roles in the Department of Primary Industry between 1973 and 2010 in the beef cattle area. From 2010 he has provided specialist advice on beef breeding to producers. He acts as a consultant to individual beef producers and to Meat and Livestock Australia, the Beef Co-operative Research Centre and to other government agencies. He is a beef producer himself operating what he calls a moderate sized beef enterprise based on 800 head of steers being grown out of the "heavy 'feeder steer' market". It was Mr Hoffman's opinion that Sydrom and Deemhire's business was not carried out in a manner, scale and size characteristic of a profitable commercially viable beef grazing business which had a significant and substantial commercial purpose or character. In his view an important Key Performance Indicator for any beef business was the kilograms of beef produced in each year and that the kilograms of beef produced by Sydrom and Deemhire were low when measured either as total kilograms of beef produced or kilograms of beef produced per hectare grazed by the cattle. He said that high productivity was important if profitability was to be achieved. It was also his view that the business was not carried on in a manner, scale and size characteristic of a person who was carrying on a business for the purpose of making a profit or a reasonable rate of return on a continuous or repetitive basis. He noted that the business was burdened by low productivity and high costs resulting in year-on-year losses for the six years that he reviewed.

Mr Hoffman asserted that the average kilograms of beef produced by the Vartuli group on Edmondson Park, the lands adjoining Edmondson Park and Appin was 33 kilograms per hectare per annum. He considered this to be a low level of productivity and compared that level of productivity with the productivity of the "Beef Profit Network" that included 80 members spread throughout the northern tablelands and northern coastal areas of New South Wales. The average kilograms of beef produced by the businesses comprising the Beef Profit Network in 2010/11 (when it consisted of 36 beef producers in northern New South Wales) was 257 kilograms per hectare. Mr Hoffman said that when compared to other cattle businesses, Sydrom and Deemhire's business was less commercially viable. His comparison was with the Beef Profit Network.

The calculation of kilograms of beef produced by Deemhire and Sydrom was not made by calculating the increase in the weight of cattle purchased before being sold and adding the difference in weight of natural increase and any deaths. Rather, it was determined by attempting to calculate the weight in kilograms of beef sold and beef purchased, with the difference in any year being the amount produced. Obviously, unless there is a relatively constant ratio of sales and purchases, that calculation can only be made over an extended period. But Mr Hoffman made the calculation over seven financial years up to 30 June 2012.

Mr Hoffman's analysis was challenged on two bases. First, that he did not have the data from which to calculate the quantity of beef produced. This was because 56 per cent of the cattle purchased by Sydrom and Deemhire was purchased on a dollars per head basis, rather than on a cents per kilogram basis. 28.8 per cent of the cattle sold was sold on a dollars per head basis rather than a cents per kilogram basis. For this reason, for a substantial number of the cattle purchased and sold, the details of their weight were not known. Therefore, the calculation of the weight of beef produced was speculative.

The second basis of challenge was that the comparator used by Mr Hoffman was inappropriate. The beef profit network that Mr Hoffman used as a comparator represented only 1.7 per cent of the total cattle in New South Wales, and produced cattle in a "specifically high production cattle-producing area which is not compatible with the area where the Vartulis' land is located".

I accept these criticisms of Mr Hoffman's analysis.

Mr Hoffman provided a summary in which he purported to set out the weight in kilograms of the cattle bought and sold by Sydrom and Deemhire. Where the invoices for purchases or sales recorded the weight of the beasts, this weight was used. In other cases Mr Hoffman attempted to estimate the weight. He had not seen the cattle and did not rely on any estimate of weight provided by the Vartulis. Mr Hoffman did not give the methodology for making his calculation of the weight of beef produced. He listed to his reports what he stated to be "full details of sales and purchases". These were purportedly set out in appendices 8(b) and 8(c) of his first report and in appendix 2 to his third report.

The details provided do not enable an assessment to be made of the cattle's weight. For example, Sydrom sold 13 steers through Inglis Livestock on 6 May 2011 for prices per beast ranging between $460 and $666. The invoice contains no statement of the average weight, nor the total weight of the beasts, nor the price per kilogram. Mr Hoffman attributed an average weight of 413 kilograms per beast, but provided no explanation for that figure. Similarly, on 2 March 2012 Deemhire sold nine head of cattle at an average value of $600. The invoice records no price per kilogram, average weight, or total weight. In his third report Mr Hoffman attributed an average weight to each of those beasts of 284 kilograms. Similarly, in respect of a sale made on 13 April 2012 of seven steers for $4,200 which were sold on a per head basis, Mr Hoffman attributed an average weight to the beasts of 285 kilograms. The only explanation was that he used the "Eastern Young Capital Indicator ('EYCI') price published by MLA for that day used in conjunction with $/head price to calculate an estimated live weight.

The methodology used was unexplained. There was minimal explanation of the EYCI. It is an average price of certain cattle sold over the previous seven days that meets an EYCI specification. Mr Hoffman said that the EYCI applied basically to young cattle. An EYCI average price is calculated by using the average live weight price, a dressing percentage (i.e. the percentage of the beef produced from the animal slaughtered to the live weight of the animal) and the number of head for individual pens. Thus, if ten head of cattle in a pen are sold for an average price of $160 and the dressing percentage is 55 per cent, the calculated carcass weight price for the ten head of cattle is $2,909 (10 x $160/55 per cent = $2,909). Although Mr Hoffman did not describe his methodology, I understand from Mr Marsh's evidence that a price is published for areas of New South Wales that is the seven days' rolling average for the type of cattle covered by the EYCI sold in that seven-day period. I understand from the explanation given by counsel for the defendant that Mr Hoffman used the carcass weight price per kilogram and the average dressing percentages in the EYCI calculation to calculate from the price paid or received per head of cattle, the average weight of the beast bought or sold.

Because Mr Hoffman did not provide any calculations or the EYCI prices and dressing percentages he used, it was not possible to verify his calculations. In any event, there was no evidence that the weight of the cattle of the breeds raised by the plaintiffs in the Camden area could be considered approximately equal to the weight of whatever were the breeds of cattle in the areas the subject of the EYCI. The latter details were unexplained. Further, the EYCI is based on sales of young cattle. If other things were equal, it may be a proper basis for calculating the weight of young cattle purchased where the only evidence is of a live weight price of the cattle purchased, assuming that the cattle purchased are of a similar age to the cattle the subject of the EYCI. But in the absence of satisfactory evidence to explain the use of the EYCI, I do not consider it to be an adequate basis from which to calculate the sale price of cattle which may have been fattened and that may well be older than the young cattle the subject of the EYCI.

Mr Hoffman was retained as a single beef cattle expert in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue. In his reasons for judgment Gzell J said (at [37]):

"[37] 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."

In his report in Maraya Mr Hoffman said:

"A significant number of the stock purchases were made on the basis of $ per head and this means that the animal's live weight was not recorded at the time of purchase. This is the alternative method of marketing livestock as opposed to where the animals are weighed and the sale is transacted on the basis of a price in dollars per kilogram of live weight.

Cattle purchased on a $ per head basis as opposed to on a live weight basis creates some difficulty in calculating the number of kilograms purchased. To overcome this I have used sales and purchases where weights were recorded in a similar period, and estimates made based on my 37 years experience in the beef industry to calculate the likely kilograms of beef for these situations."

In this case, Mr Hoffman was cross-examined as to why he did not use the same method in the present case, that is, by looking at sales and purchases in a similar period where weights were recorded and then simply using his experience. He gave the following evidence:

"Q. But you don't suggest that you adopted that approach in the Vartuli matter, do you?

A. I considered it in the Vartuli matter.

Q. But you didn't adopt it?

A. I didn't adopt it. Can I just have one moment [to] explain this please? The critical word there is that I made an estimate based on my experience. I wracked my brain as to how to address that same difficulty or issue for the Vartuli business and I made a value judgment to try to be a little bit more objective because I'm aware, obviously, that I would be - my estimate would be questioned. So, I tried to be a little more objective, which led me to use the methodology that I finished up using in the Vartuli business for no other reason than to try to be a little bit more objective than just an estimate, which is open to questioning."

This honest answer is a salutary reminder of the risks that can attend the appointment of a single expert. But although the use of the EYCI was thought by Mr Hoffman to provide a more objective indicator of the weight of cattle sold as well as purchased, I am not satisfied that it provided a reliable indicator of the weight of cattle purchased or sold, and particularly not a reliable indicator of the weight of cattle sold in this case.

The second ground of challenge is also made good. Mr Hoffman made no attempt to compare the results for the Vartuli group with the results of other farming areas in the Cumberland district where Edmondson Park is located. The Beef Profit Network is primarily located in the New England district. The Livestock Health and Pest Authority annual report 2010-2011 recorded that the Cumberland district had a notional carrying capacity of 1.36 stock units per hectare, whereas New England had a notional carrying capacity of 3.17 stock units per hectare. Mr Hoffman said that if property A had a higher notional carrying capacity than property B, one would not necessarily expect that property A would produce a higher amount of beef per hectare than property B, but this was because the actual carrying capacity of the properties might be different from their notional carrying capacity. It is the quality of the land and the pastures growing on it that should influence the statement of a notional carrying capacity of a district. Other things being equal, one would expect the amount of beef produced per hectare from a cattle-grazing business in the New England district to be several times higher than the amount of beef per hectare produced in the Cumberland district.

I accept Mr Marsh's evidence that the Key Performance Indicator used by Mr Hoffman was not a general industry standard. I accept his evidence that the use of benchmarks used by cattle producers in a specifically high production cattle-producing area is not compatible with the area in which the Vartulis' land is located.

The other area within their expertise on which Messrs Marsh and Hoffman provided opinions concerned the quality of the pasture. Mr Marsh attended Edmondson Park on 21 August 2012. Mr Hoffman inspected the property on 31 October 2012. Mr Marsh again inspected the property on 19 December 2012. Mr Hoffman considered that the feed base on the Vartuli properties had low digestibility and this restricted the live weight gain that the animals grazing on the properties could achieve. This would restrict overall total annual productivity to what Mr Hoffman called moderate levels. At the time of Mr Marsh's inspection on 21 August 2012 and Mr Hoffman's inspection on 31 October 2012, the property was experiencing a dry spell. There had been no rain for 72 days before Mr Hoffman's inspection. Mr Hoffman observed that the pasture was composed mainly of species which are most active in regards to growth during the warmer wetter months of the year and he would expect growth rates to increase from the low level at the time of his viewing of about four to ten kilograms DM (Dry Matter)/day to a higher level of 25-29 kg DM/day during the summer months. There was considerable rain on the property after 31 October 2012 and before Mr Marsh's second inspection on 19 December 2012. He observed significant pasture growth and a large regeneration of summer pasture species. I accept Mr Marsh's opinion that given reasonable seasonal conditions the number of cattle which can be depastured on the properties of the Vartuli group exceed 100.

That is not to say that the lands were not being used to their optimal capacity when there were fewer than 30 cattle grazing. That was in time of drought.

Comparing size and profitability

The plaintiffs submitted that in deciding whether the size and profitability of the cattle operations indicated that the use of the land had a substantial and significant commercial purpose or character, regard should not be had to the figures of gross and net profit in the abstract, but rather regard should be had to comparable cattle farms in comparable areas. A publication of the Meat and Livestock Authority entitled "Financial Performance of Beef Farms, 2006-07 to 2008-09" stated that 10,166 or 33.3 per cent of beef cattle farms in southern Australia had fewer than 100 head and that 13,699 farms representing 44.9 per cent of cattle farms in southern Australia carried between 100 to 400 head. Between them those groups produced 37 per cent of the beef produced in southern Australia between 2001 and 2008.

The Meat and Livestock Authority published detailed estimates of production and financial performance of broadacre beef cattle farms that carried more than 100 head of cattle. In southern Australia farms carrying between 100 and 200 head of cattle were categorised as small, 200-400 as medium, 400-800 head of cattle as large, and more than 800 head of cattle as very large. Southern Australia covers New South Wales, Victoria, South Australia, Tasmania and south Western Australia. It may be noted that by this categorisation Mr Hoffman is a large or very large beef producer, not a moderate sized enterprise as he would categorise it. I think his background influences his perspective and opinion as to the viability of the cattle activities of the Vartuli group.

The estimated average financial performance for small beef producers in southern Australia between 2006-07 and 2008-09 was described by the Meat and Livestock Authority as follows:

Small
2006-07
2007-08
2008-09
Farm cash receipts
Beef cattle
$
58 111
60 300
(11)
69 400
Beef cattle transferred off-farm
$
90
210
(0)
na
Crops
$
42 807
61 900
(27)
95 900
Sheep and lambs
$
29 583
16 050
(19)
25 700
Wool
$
21 407
18 150
(17)
11 800
Total cash receipts
$
190 758
180 010
(11)
225 700
Farm cash costs
Beef cattle purchases
$
18 004
13 550
(16)
27 300
Chemicals
$
7 323
7 180
(13)
11 100
Contracts
$
7 171
6 330
(40)
na
Fertilisers
$
13 093
18 870
(17)
21 800
Fodder
$
12 952
5 750
(21)
6 000
Fuel, oil and grease
$
12 553
13 830
(10)
16 300
Handling and marketing
$
5 812
5 130
(8)
9 800
Hired labour
$
2 919
4 510
(28)
3 100
Interest
$
23 391
20 360
(16)
15 000
Repairs and maintenance
$
16 484
13 420
(9)
16 400
Total cash costs
$
177 578
156 470
(8)
187 900
Farm financial performance
Farm cash income
$
13 180
23 540
(48)
37 800
Farm business profit
$
-74 187
-57 060
(20)
-38 800
Note: The figures in parentheses are relative standard errors expressed as a percentage of the estimate.

A later document prepared by the Australian Government using statistics from the Australian Bureau of Agricultural Resource Economics and Sciences to show the financial performance of beef farms in southern areas of Australia between the years 2008-2009 and 2010-2011 contains the following information in relation to small beef producers:

Financial performance, southern beef industry
average per farm
small
2008-09
2009-10p
2010-11z
Farm cash receipts
Beef cattle
$
46 064
56 080
(9)
59 400
Beef cattle transferred off-farm
$
0
460
(166)
na
Crops
$
55 378
55 200
(39)
75 100
Sheep and lambs
$
25 852
29 540
(25)
32 700
Wool
$
15 234
20 090
(33)
18 600
Total cash receipts
$
170 551
181 210
(17)
201 800
Farm cash costs
Beef cattle purchases
$
10 340
16 150
(15)
15 600
Chemicals
$
6 677
9 850
(29)
13 000
Contracts
$
5 574
6 890
(23)
5 700
Fertilisers
$
13 314
12 990
(38)
16 700
Fodder
$
4 535
2 420
(32)
1 600
Fuel, oil and grease
$
13 584
10 780
(20)
13 200
Handling and marketing
$
4 903
5 290
(30)
na
Hired labour
$
3 416
3 390
(39)
3 900
Interest
$
17 260
14 520
(29)
13 000
Repairs and maintenance
$
12 604
13 880
(20)
19 700
Total cash costs
$
138 616
151 780
(16)
159 100
Farm financial performance
Farm cash income
$
30 337
28 590
(38)
42 700
Farm business profit
$
- 29 579
-36 960
(35)
-13 000
p Preliminary estimates. z Provisional estimates. na Not available.
Note: Figures in parentheses are relative standard errors expressed as a percentage of the estimate. A guide on how to use RSEs is in the survey methods and definitions section.

A publication of the Australian Bureau of Agricultural Resource Economics and Sciences includes the following information for the 2009-2010, 2010-2011 and 2011-2012 years:

Small
2009-10y
2010-11y
2011-12y
Farm cash receipts
Beef cattle
$
57 425
51 860
(6)
43 300
Beef cattle transferred out
$
548
0
0
Crops
$
54 491
79 940
(40)
60 400
Sheep and lambs
$
29 880
42 500
(35)
42 500
Wool
$
20 376
23 340
(34)
21 400
Total cash receipts
$
183 397
217 040
(23)
180 300
Farm cash costs
Beef cattle purchases
$
16 749
13 990
(19)
8 700
Beef cattle transferred in
$
1 348
640
(95)
400
Chemicals
$
9 774
8 910
(35)
11 500
Contracts
$
6 819
5 980
(53)
7 700
Fertilisers
$
13 048
15 230
(33)
12 300
Fodder
$
2 456
2 250
(22)
1 400
Fuel, oil and grease
$
11 060
12 450
(21)
11 800
Handling and marketing
$
5 369
5 260
(31)
na
Hired labour
$
3 365
2 860
(45)
3 500
Interest
$
15 371
14 400
(36)
13 900
Repairs and maintenance
$
14 183
16 330
(18)
16 700
Total cash costs
$
154 978
156 810
(25)
140 000
Farm financial performance
Farm cash income
$
28 420
60 230
(32)
40 200
Farm business profit
$
-40 115
18 630
(100)
-5 400
p Preliminary estimates. y Provisional estimates. na not available.
Note: Figures in parentheses are relative standard errors expressed as a percentage of the estimate.

The plaintiffs also tendered a document entitled "Australian Government Department of Agriculture Fisheries and Forestry Australian Beef Financial performance of beef cattle producing farms 2009-10 to 2011-12" which also included estimates of financial performance for the 2012-13 financial year. Figures for small beef cattle producing farms (100-200 head) for southern Australia were provided for the 2010-11, 2011-12 and 2012-13 years as follows:

Financial performance of beef cattle producing farms, southern Australia, by herd size
average per farm
small
2010-11
2011-12p
2012-13y
Farm cash receipts
Beef cattle sales
$
51 890
49 300
(8)
51 000
Sheep, lambs and wool sales
$
70 590
89 200
(14)
51 000
Total crop receipts
$
89 080
108 800
(19)
78 000
Total cash receipts
$
233 100
270 700
(10)
193 000
Farm cash costs
Beef cattle purchases
$
13 990
10 700
(24)
9 000
Wages for hired labour
$
2 920
5 400
(19)
4 000
Interest paid
$
17 200
21 300
(16)
11 000
Total cash costs
$
170 950
203 000
(8)
148 000
Farm capital and debt
Total capital at 30 June
$
2 410 580
3 218 000
(8)
3 180 000
Farm business debt at 30 June a
$
232 620
310 400
(16)
na
Equity ratio at 30 June a
%
90
90
(2)
na
Farm financial performance
Farm cash income
$
62 150
67 700
(23)
46 000
Farm business profit
$
20 320
200
(999)
-24 000
p Preliminary estimates. y Provisional estimates. na not available.
Note: The figures in parentheses are relative standard errors expressed as a percentage of the estimate. A guide on how to use RSEs is in the survey methods and definitions section.

These figures have to be taken with caution, particularly as they include figures for income derived from the sale of crops, wool, sheep and lambs and the farm costs would include costs for growing crops, sheep, lambs and wool, as well as cattle.

Mr Marsh stated that the Vartuli group was in the second smallest group of cattle producers in southern Australia (i.e. in the group of 100-200 producers). In fact, for the most part the Vartulis fell within the smallest group of farms with up to 100 head. Mr Marsh said that for a considerable portion of the time in question all other small cattle producers operated in a financial loss situation as did the Vartuli group. Mr Marsh cannot know that, and the data to which he referred which has been set out above does not state that all other small cattle producers incurred financial losses, only that on average farm losses (not necessarily losses from cattle operations) were incurred in each of the financial years ended 30 June 2007, 2008, 2009 and 2010, and on average losses were incurred or there was minimal profit for the year ended 30 June 2012.

The average small farm cash receipts from beef cattle reported in these publications can be compared with the receipts of Deemhire and Sydrom (the Vartuli receipts). (Where there is more than one figure provided in the publications I have included all of them.)

Average Receipts from
Beef Cattle Sales
Vartuli Receipts
2006-07
58,111
925
2007-08
60,300
15,613
2008-09
69,400
46,064
18,829
2009-10
57,425
56,080
35,863
2010-11
59,400
51,860
51,890
40,542
2011-12
43,300
49,300
62,415
2012-13
51,000
38,852

This shows that whilst in the first three years the Vartuli receipts from cattle sales are well below the average for small producers (fewer than 200 head), in the last four years, and particularly the last three years, the receipts are comparable. The first three years were years of drought. Stock numbers had to be reduced for lack of feed. The plaintiffs say that this does not detract from the substance and significance of the commercial purpose and character of the use of the land.

Return on capital

The primary production profits from the use of the land can be considered in relation to the capital value of the lands of almost $12 million in 2007. The defendant contends that this shows that the use of the land for primary production does not have a commercial purpose or character, let alone a substantial and significant commercial purpose or character.

In this case (in contrast to Maraya Holdings considered below) I do not think that comparison is useful. The question raised by s 10AA(2)(a) is whether the use of the land has a significant and substantial purpose or character. The land had been used for the same purpose and the use had the same character both before and after rezoning.

Mr Vartuli gave unchallenged evidence that there were difficulties in developing and subdividing the land for residential purposes for which it was zoned. He said that planning restrictions required that development be approved in precincts, which meant that other adjoining land owners also had to be involved as joint venturers or partners in any residential development of the land. This made the making of a viable subdivision of the farm for residential purposes impossible so far as he was aware, although the situation was expected to improve in the future as a result of activity on adjoining lands.

If it were established that the use of the land had a significant and substantial commercial purpose or character at the time of rezoning, then in my view a continued use of the land in the same way and for the same purpose would have continued to be for a substantial and significant commercial purpose and have a significant and substantial character, even if the land could have been put to more profitable uses.

The point can be illustrated by an example. Let it be assumed that in 1984 a firm of accountants opened an accountancy practice and acquired a property for $250,000 from which the practice was conducted. Let it be assumed that at that time the practice generated revenue of $100,000 and profits of $40,000. It would be clear that the use of the land had a significant and substantial commercial purpose and a significant and substantial commercial character. If, 30 years later, the land is still being used as premises for an accountancy practice whose revenue is perhaps $500,000 and profits $200,000, the same use would still have a substantial and significant commercial purpose and commercial character. The land would be being used to run a business for the purposes of profit in a substantial way. That would be so even if, perhaps as a result of rezoning, or developer activity, the building were now worth $20 million. A return of one per cent on the value of the land might not be regarded as "commercial" in some senses, but the use of the land would still have a substantial commercial purpose and commercial character. The plaintiffs say that that is this case. The land has been used for primary production since 1985. It was fortuitous that the land was rezoned in 2006.

The decision in Maraya Holdings

The farming operations in Maraya were conducted on various parcels of land that had a combined area of 20.949 hectares of which 20.1 hectares was available for grazing (CA, [6]). Grazing activities commenced in 2005 on a parcel of 2.522 hectares (CA, [6]). Notices of assessment were received with respect to the 2006-2001 land tax years. For approximately two years part of the subject lands were subject to road works which meant that those parts of the lands could not be used for pasturing cattle (CA, [14]). The road works were required for subdivision. A plaintiff, Mr Giusti, paid $500,000 towards the costs of the road building in order to preserve the value of the lands (CA, [13]). The lands had a taxable value for 2009 of $26,558,700 (CA, [6]). Mr Giusti and his son devoted about two and a half to three hours per week on cattle operations (CA, [10]).

The number of cattle the subject of Maraya's operations ranged between six and 41 in the tax years in question (CA, [7]). In the years after the 2010 tax year, there were up to 55 cattle on the lands (CA, [7]). In the financial years ended 30 June 2006 to 30 June 2012 there were losses and profits from livestock trading of $1,070 (profit), $4,712 (loss), $1,213 (profit), $271 (loss), $982 (profit), $5,008 (profit) and $7,985 (profit) (Gzell J, [27]).

The judgments in Maraya do not include figures for the value of sales. It is possible that receipts from livestock sales were the difference between the primary production expenses and the profit or loss summarised at para [27] of the judgment of Gzell J, but it is more likely that those differences would be the gross profits from cattle trading before other primary production expenses. Mr Hoffman's report in the Maraya proceedings that was tendered in this case indicated the following receipts:

Year ended 30 June
2006
$11,772
2007
$16,573
2008
$4,667
2009
$11,940
2010
$7,330
2011
$18,546

(Calculated from tables 6 and 7.)

Emmett JA recorded (at [12]):

"During the years in question, dry conditions affected the feed stocks available on the Subject Lands and feed stocks were very poor in those years. In 2007, Maraya was only able to retain most of the herd by buying feed at significant cost. In the 2008 and 2009 years, Maraya sold the majority of the herd, rather than buy feed."

It was found that during the relevant period on average the Maraya cattle operation produced 42.6 kilograms of beef per hectare. Mr Hoffman's opinion that this was a very low output was accepted. (CA, [20]). Gzell J compared that production with the production of the 36 beef businesses who are Mr Hoffman's clients which recorded an average of 228 kilograms of beef per hectare in 2011 (Gzell J, [37]), without any adverse comment as to the appropriateness of the comparison.

The average price received by the Maraya cattle operation was $1.62 per kilogram (CA, [21]). The average cost of production was $22.26-$56.44 per kilogram (CA, [22]). A major contributing cost was council rates (CA, [22]) which exceeded $30,000 per annum (CA, [60]).

Both Gzell J and the Court of Appeal held that s 10AA(2)(a) had not been satisfied. They did not have to consider s 10AA(2)(b).

Gzell J said (at [77]):

"[77] 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)."

He went on to say that in the context of s 10AA(2)(a) "significant" connoted something of importance or something of consequence, a key element, or something that was vital or critical (at [83]) and that "substantial" meant an ample or considerable amount, quantity or size (at [88]). His Honour said:

"[89] 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.

[90] 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.

[91] 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.

[92] 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.

[93] 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.

[94] 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.

[95] 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.'

[96] 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.

[97] 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.

[98] 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."

In the Court of Appeal it was argued that the primary judge had erred by incorrectly conflating purpose and character. The appellants contended that there are two alternative criteria in s 10AA(2)(a), namely, that the use of the land for primary production has a significant and substantial commercial purpose, and that the use of the land for primary production has a significant and substantial commercial character. The satisfaction of either criteria would suffice. It was argued that by concluding that the activities in question must be ample or considerable in amount, quantity or size, the primary judge failed to give separate regard to the commercial purpose of the land use and that a person might have a significant and substantial commercial purpose even if the use of the land in question was small in scale, so long as it was businesslike (CA, [42]-[45]).

Emmett JA, with whom Meagher and Leeming JJA agreed, did not query the correctness of the taxpayer's submission that s 10AA(2)(a) does specify two alternative criteria: one of commercial purpose, and the other of commercial character. The Court of Appeal held that Gzell J did not fall into the error of conflating the two criteria, but recognised that s 10AA(2) would be satisfied if the requisite purpose or character was evident from the particular use (at [46]). The Court of Appeal also said that there was no point in the primary judge's reasoning where a failure to distinguish between purpose and character had a bearing on his ultimate conclusion.

It is clear that the Court of Appeal upheld the primary judge's approach that to determine whether the use of the land had a significant and substantial commercial purpose, or a significant and substantial commercial character, it was necessary to consider the intensity of the operation, the size and quality of the herd, the carrying capacity of the land, the resources put into the development and maintenance of the operation and the profitability of the operation (at [55] and [60]). Emmett JA held that Maraya's cattle operations had no commercial purpose or character (at [60] and [66]), let alone a substantial and significant commercial purpose or commercial character. Emmett JA said (at [55], [56] and [60]):

"[55] ... His Honour observed that to determine whether Maraya's cattle operations had a significant and substantial commercial purpose or character, it was necessary to consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the Subject Lands, and the resources, whether of time, labour or expenditure, put into the development and maintenance of the operation. There is no reason to doubt that his Honour considered Mr Glover's evidence as to carrying capacity in making the assessment that he made.

[56] It is unrealistic to suggest that an assessment can be made as to whether use of land has a significant and substantial commercial purpose, or a significant and substantial commercial character, in the abstract. Whether a particular use has a commercial purpose or a commercial character can only be assessed by reference to the way in which land is generally used. It was not suggested that the Subject Lands could be used only for cattle operations. Indeed, they were zoned for industrial or residential use and could only lawfully be used for cattle grazing by reason of existing use rights. The Taxpayers' reliance on Mr Glover's evidence appears to be underpinned by an assumption that cattle grazing was the only use to which the Subject Lands could be put. A relevant consideration in determining whether use of land has a commercial purpose or a commercial character must be the way in which land is generally used. There was no error in this regard on the part of the primary judge.

...

[60] At no stage did Maraya's cattle operations generate profits according to any normal use of that term. The greatest 'profit' generated by the cattle operation was $1,213 in the 2008 year. That so-called profit excluded all holding costs in relation to the Subject Lands, including council rates exceeding $30,000 per annum. The Subject Lands have a value in excess of $26 million. They consist of more than 27 hectares. In no sense can it be said that the cattle operations had any commercial purpose or character. There was no error on the part of the primary judge in taking into account the lack of profitability of the use of the Subject Lands in determining whether that use had a commercial character or commercial purpose."

Thus, Emmett JA considered that an assessment of the commercial purpose or the commercial character of the use of the lands should be assessed having regard to the way in which land is generally used. Having regard to the value of the lands (in excess of $26 million), the holding costs of more than $30,000 per annum and the impossibility of the cattle operations ever generating a profit or surplus, as well as the zoning and development on other lands, to which might be added the development works carried out on the land through the construction of a road that was inimical to the use of the land for cattle operations, but important for future subdivision, the use of the land for cattle operations had no commercial purpose or commercial character.

One definition of "commerce" is the buying or selling of goods in the course of trade (Stroud's Judicial Dictionary of Words and Phrases, 8th ed). In Thomason v Chief Executive, Department of Lands the Queensland Land Appeal Court suggested that for a use of land to have a commercial purpose or character the use should generate reward, if not profit (see below at [130]). It is implicit in the Court of Appeal's reasoning in Maraya that a "commercial purpose" and a "commercial character" for the purposes of s 10AA(2)(a) means not only that the use of the land for primary production has the purpose of achieving returns from the sale of goods (that is, livestock), but that to have a "commercial" purpose or character the use must have at least a profit-making potential.

The Court of Appeal did not disagree with the primary judge's assessment that any commercial purpose or character lacked substance and significance having regard to the comparison with other cattle operations described in Mr Hoffman's evidence. It appears that neither at first instance nor in the Court of Appeal was any question raised as to the appropriateness of the comparator used by Mr Hoffman, that is, his comparison of Maraya's operations and the operations of the 36 beef businesses that were his clients. The appropriateness of that comparison was challenged in this case. In Maraya the Court of Appeal accepted that whether the primary production use of land had a substantial and significant commercial purpose or a substantial and significant commercial character could be considered by comparison with the use of other lands. But it was not necessary for the Court of Appeal to consider the appropriateness of the comparison with the Beef Producers Network who were Mr Hoffman's clients.

Leeming JA addressed the adoption in s 10AA(2)(a) of judicial language in earlier forms of cognate legislation in Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 and Hope v Bathurst City Council and the modification of that language by the inclusion of the words "and substantial" in the phrase "significant commercial purpose or character". Leeming JA pointed out that the addition of the word "substantial" was intended to impose a more stringent test than the test which had been applied in Thomas v Federal Commissioner of Taxation and in Hope v Bathurst City Council as to whether the taxpayer was carrying on a business of primary production. His Honour (with whom Meagher JA agreed) continued (at [83]-[86]):

"[83] What is the nature of the more stringent test? 'Substantial' is a word which is not only susceptible of ambiguity, but which is also calculated to conceal a lack of precision: Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union [1979] FCA 132; 42 FLR 331 at 348 (Deane J). But in its context, the ambiguity falls away. In Thomas and in Hope six Justices of the High Court had emphasised that scale was not relevant to whether a business of primary production was undertaken on land. Mason J referred to the absence of a requirement of 'magnitude or size'. Walsh and Mason JJ each referred to a business being carried on 'in a small way'. Gibbs and Stephen JJ referred to possibility that a commercial activity might be 'small in scale'. It is clear in this context that the additional qualification is to negate what each of those Justices had said of the former legislation. The primary judge was correct at [91] to find that to determine whether there was 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.

[84] In order to assess the additional qualification of substantiality, a comparison needs to be made. Whether something has a substantial commercial purpose or character is at least in part a relative judgment. Speaking of s 45D of the Trade Practices Act, Bowen CJ said in Tillmanns at 339 that 'No doubt in the context in which it appears the word imports a notion of relativity', and the same is true of 'substantial' when it appears in s 10AA(2). A commercial truffle grower may have very little land, and harvest only a few kilograms of product, and yet the use may be substantial, seen against his or her competitors. The word 'substantial' has in the present context no inherent or absolute meaning standing alone. There was no error by the primary judge contrasting the small scale and impossibility of profit of the cattle business on the land with other cattle raising businesses.

[85] In light of the foregoing, the taxpayers' principal submissions may be rejected concisely.

[86] First, it is plain that both limbs of the subsection must be satisfied in order for it to exempt any land from taxation. Secondly, there is no basis for contending that the different language of s 10AA(2)(a) imposes the same tests established by Thomas and Hope. A test in which substantiality played no part has been replaced by one requiring the commercial purpose or character to be substantial as well as significant. Thirdly, there is no sound basis for narrowing the effect of 'substantial' merely to 'purpose' and not to 'character'. Fourthly, there is no room for what was described in argument as 'the Tweddle principle', in support of a submission that it matters not that a profit could never realistically be made. It suffices to say that the reasoning in Tweddle v FCT (1942) 180 CLR 1 at 7 does not translate to the Land Tax Act which requires, in order to satisfy an exemption, land use to have a significant and substantial commercial purpose or character."

It follows from the Court of Appeal's decision in Maraya that s 10AA(2)(a) can be satisfied if the taxpayer can show either that the use of the land has a significant and substantial commercial purpose, or that use has a significant and substantial commercial character. This is in accordance with the decision of the Queensland Land Appeal Court in Thomason v Chief Executive, Department of Lands at 306 referred to below at para [130].

It also follows from the decision in Maraya that "significant" and "substantial" are not synonymous and the phrase "significant and substantial" is not an hendiadys. The adjective "substantial" imposes a more stringent test than would be imposed by the phrase "significant commercial purpose or character". For a use of the land to have a commercial purpose or commercial character, the purpose or character of the use must be or include the making, or the potentiality for the making, of profits. Nothing in the Court of Appeal's decision excludes the potentiality for making profits from satisfying the requirement of commercial purpose or commercial character.

The magnitude and size of the use for primary production and the intensity of the operation are relevant to an assessment of whether the commercial purpose or commercial character of the use is significant and substantial. This includes the size of the herd, the size and carrying capacity of the land, the resources put into the business of primary production, and the revenues and profits generated. In deciding whether the use has a significant and substantial commercial purpose or character it is appropriate to compare the use of the subject lands with other primary production activities of the same kind, in this case cattle-raising, and with how land is generally used.

The return from the primary production use relative to the value of the land can be relevant in determining whether there is a commercial purpose or character of the use, and, if so, whether that commercial purpose or character is significant and substantial.

The decision in Maraya provides guidance in assessing when a primary production use has a significant and substantial commercial purpose or character, but it does not by itself provide the answer to this case. Thus, in Maraya the maximum number of cattle sold in any one year was 32. In this case it was 111. In Maraya, the maximum number of head of cattle grazing on the lands at any one time was 55. In this case it was 122. In the abstract, and without evidence enabling a comparison with other cattle operations, I could not say whether this was or was not a significant and substantial use. The evidence was consistent with this being an optimal use of the land if land were used for cattle grazing, but that was also the evidence in Maraya. In this case, unlike Maraya, the evidence is that this scale of use is consistent with thousands of other cattle farms.

In Maraya the profit or loss derived from livestock trading without overhead expenses and holding costs ranged from a loss of $4,712 to $7,985, but when overheads were added including council rates of $30,000 per year, there was no prospect of a profit from the use of the land for cattle farming.

For the years in question the cattle operations of Mr and Mrs Vartuli, Deemhire and Sydrom also operated at a loss for some years, and otherwise only at a small profit without taking into account the incidence of council rates. If council rates and income from the rental of the farm property were taken into account, again there would be losses in the earlier years and only small profits in the years from 30 June 2010 to 30 June 2012. After 30 June 2012 the council rates would again mean that the cattle operations would be unprofitable.

Mr and Mrs Vartuli say that account must be taken of the extended drought that only broke in 2008. Although drought conditions were mentioned in Maraya, neither the primary judge nor the Court of Appeal said whether it was significant that the farming operations in that case had been adversely affected by drought in the early years.

That may well be due to the fact that in Maraya the farming operations did not start until 2005 when the property would have been affected by drought. Hence the taxpayers in Maraya could not argue that their purpose in embarking on the cattle-raising business was a commercial purpose, as would have been demonstrated but for temporary adverse conditions. In contrast, Mr and Mrs Vartuli have been conducting cattle growing operations on their properties since 1985.

Although there is some uncertainty about the revenues generated from the sale of cattle in Maraya, it seems that the quantum of receipts in the latter years was many times lower than in the present case.

In Maraya the only available evidence of cattle-farming that could be used as a comparison in determining whether the taxpayer's use of the land had a significant and substantial commercial purpose or character was that of the cattle-growers who were clients of Mr Hoffman. In this case the taxpayer has demonstrated that that is not an appropriate comparison. Although it is impossible to say how many of the small cattle operations whose financial results are summarised in the publications referred to at paras [77]-[82] would individually satisfy a test of use of the land being for a significant and substantial commercial purpose or character, it is clear from the statistics that there are thousands of beef cattle farms of a comparable size to the cattle operation of Deemhire and Sydrom and that, on average, small beef producers made losses in the financial years ended 30 June 2007, 2008, 2009, 2010 and 2012. 2011 seems to have been the only good year across the industry.

These facts are relevant in assessing whether one should infer an absence of commercial purpose, or of a significant and substantial commercial purpose, from the lack of profits.

Construction of section 10AA(2)(a)

To consider how s 10AA(2)(a) is to be applied in this case it is necessary to go behind Maraya and consider the cases that led to the adoption of the text now found in s 10AA(2)(a) and Parliament's purpose in legislating in those terms.

In Thomas v Federal Commissioner of Taxation the question was whether the taxpayer carried on "a business of primary production" for the purposes of s 157 of the Income Tax Assessment Act 1936 (Cth). The taxpayer had originally planted 1,800 pine trees, 30 avocado trees and more than 50 macadamia nut trees. The pine trees were not well cared for as they were allowed to be overgrown by wattle and other forms of regrowth. Walsh J held that the taxpayer was carrying on a business of primary production in growing macadamia nut trees and the avocado trees. It did not matter that he was doing it in a small way and that his primary occupation was as a barrister. The growing of the macadamia nut trees and avocado trees was not "merely for recreation or as a hobby" (at 171). Walsh J said of the macadamia nut trees and the avocado trees that:

"The appellant ... set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with a relatively small outlay of time and money, and that this return would continue for a very long time."

In contrast the growing of the pine trees lacked "a significant commercial purpose or character" (at 171). This was because although a large number of pine trees were planted they were of little value and would not have produced future profits. Walsh J's conception of a business of primary production and the concept of a "significant commercial purpose or character" turned on whether the business was sustainable in the sense of producing, or having the capacity to produce, future ongoing profits. It was relevant to examine the quantum of the profits that could be expected, the length of time over which profits could accrue and the efforts required of the taxpayer to obtain them.

In Hope v Bathurst City Council (1978) 38 LGRA 1 the taxpayer claimed that he carried on a business. He owned land with a number of paddocks on which he agisted others' cattle and horses. He did little other than provide the land and drinking water for the agisted animals and received annual agistment income of between $100 and slightly over $600 per year. Rath J and the majority of the Court of Appeal (Hope v Bathurst City Council [1979] 2 NSWLR 471) held that the activity did not have a "significant commercial purpose or character". Samuels JA said (at 477) that an activity could be commercial but was "too slight" to attract the character of a business.

The decision was reversed on appeal to the High Court (Hope v Bathurst City Council (1980) 144 CLR 1). Mason J (with whom the other members of the Court agreed) said (at 8-9) that carrying on a business denotes "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". Mason J said (at 10) that Walsh J's statements in Thomas v Federal Commissioner of Taxation, "did not go to the magnitude or size of the activities necessary to constitute a business". Gibbs and Stephen JJ said (at 4) that in Thomas v Federal Commissioner of Taxation it was immaterial whether the growing of the pine trees was also done in the course of carrying on a business.

As a result of the High Court's decision in Hope v Bathurst City Council, s 118 of the now repealed Local Government Act 1919 (NSW) was amended to include a definition of "farm land" as meaning:

"A parcel of rateable land which is valued as one assessment and the dominant use of which is for farming 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."

As the Court of Appeal held in Hope v Bathurst City Council (No. 3) [1994] NSWCA 139 and as Leeming JA said in Maraya, the amendment added an additional requirement beyond those considered by Mason J in Hope v Bathurst City Council, namely that the use have a substantial commercial purpose or character as well as a significant commercial purpose or character. In introducing the amendment the Minister stated in her second reading speech (at 3, 778 of the Parliamentary Debates, 29 November 1988) that:

"The Government wants to help councils to weed out those persons who have exploited the vagueness of the present rural rating provisions of the Act to obtain rates concessions when in fact they have not been genuine primary producers."

Following the amendment, it was held in Hope v Bathurst City Council (No. 3) (at 18) that Mr Hope's "agisting a handful of horses and generating a gross annual income in the order of $1,000 was altogether too minor and small to satisfy the requirement of para (a) of the definition".

On one view the amendment imposing an additional requirement that the commercial purpose or character be substantial as well as significant may have been intended only to address primary production activities of the scale in Hope v Bathurst City Council. A "significant commercial purpose or character" discussed in Thomas v Federal Commissioner of Taxation, as interpreted in Hope v Bathurst City Council, is satisfied if the venture is in the nature of a going concern engaged in for the purpose of profit on a continuous and repetitive basis. That threshold is low as illustrated by the facts in Hope v Bathurst City Council. The additional requirement that the commercial purpose or character also be substantial raises the threshold. The question is, how high is the threshold raised?

It is clear from the Minister's second reading speech that the exemption was intended to apply only to "genuine" primary production. That was the raised threshold. In my view, having regard to the Court of Appeal's reasoning in Maraya, for the use of the land to have a significant and substantial commercial purpose or character, the use must have a character such that it generates, or can reasonably be expected to generate, profit that contributes in a real and not trifling way to the user's income, or a purpose of generating such profit.

The use of the land for primary production by way of a recreation or a hobby might fail the requirement of commercial purpose or character. In Thomas v Federal Commissioner of Taxation, Walsh J contrasted the growing of trees merely for a recreation or as a hobby and activities having a significant commercial purpose or character (at 171). In Thomason v Chief Executive, Department of Lands the Queensland Land Appeal Court said (at 306):

"It is difficult, and unnecessary, to state a precise and compendious meaning of the expression 'significant and substantial commercial purpose' and 'significant and substantial commercial character'. Bearing in mind the various connotations of the words 'significant' and 'substantial' it is perhaps sufficient for present purposes to say that for s17(1) of the Act to apply to the subject land there must be evidence that:

(a) the business or industry is being carried on with a genuine and sizeable intention or desire that there will be reward, if not profit and is not being engaged in merely for recreational or some other purpose; or

(b) the qualities or distinguishing features of the business or industry demonstrate that it is being carried on in a way which (ordinarily, at least) will generate reward, if not profit."

This passage distinguishes between a commercial purpose on the one hand, and a mere recreational purpose on the other, and distinguishes between purpose and character. Either a commercial purpose or a commercial character will suffice provided that it is both significant and substantial.

It is clear from s 10AA(2)(b) that the subsection as a whole is capable of being satisfied even though a profit is not actually made at the time the subsection has to be applied, that is, at midnight on the 31st day of December immediately preceding the year on which the land tax is levied (s 8). Section 10AA(2)(b) necessarily assumes that use of the land might have a significant and substantial commercial purpose or character, notwithstanding that a profit is not actually made.

The defendant submitted that the cattle grazing at Edmondson Park should be characterised as a hobby or token business. Counsel submitted that Mr Vartuli had not carried out repairs and maintenance consistent with his being a genuine farmer. I accept Mr Vartuli's evidence that the fences and other improvements on the farm about which he was cross-examined were adequate for their purpose. I do not think the business is a token business. I accept Mr Vartuli's evidence that since he and his wife acquired Edmondson Park, his purpose has been to use the farm for the breeding, fattening and sale of cattle at a profit, where possible, each year. Mr Vartuli's father had run a cattle business in the 1960s and he had grown up helping his father breed and fatten cattle. Mr Vartuli tries to make money from his cattle operations. But he does not rely on the income earned from the cattle operations for his income other than in a trifling way. He has a purpose of making profit, notwithstanding that his primary motivation, in my view, is his enjoyment of the work entailed.

I would not accept the characterisation of Mr Vartuli's grazing activities (through his companies) as a mere hobby. Nor would I characterise the cattle grazing operations as merely "token" whether in the sense of being representative or symbolic or merely nominal. A recreational purpose is not necessarily fatal to the first limb of s 10AA(2)(a) provided that there is a commercial purpose that is substantial and significant. Such a commercial purpose could co-exist with a recreational purpose. The requirement in s 10AA(2)(a) is that the commercial purpose be significant and substantial, not that it be the sole purpose. And a recreational purpose can co-exist with the use of the land having a significant and substantial commercial character.

Nonetheless, in my view, the use of the land has neither a significant and substantial commercial purpose, nor a significant and substantial commercial character. Notwithstanding the allowance that must be made for the land's having been adversely affected by drought over the earlier relevant years, the subsequent results of the Vartulis' cattle operations show that only minimal profits could be derived from the use of the land, and only then for so long as the Vartulis were entitled to a postponement or reduction of council rates whilst the cottage on the property was occupied. There was no evidence showing greater profits in earlier years. The occupation of the cottage cannot materially affect the assessment of commercial purpose or character.

The use of the property does not contribute in a real and not trifling way to the income of Mr and Mrs Vartuli, Deemhire and Sydrom. That income is derived through other businesses or investments of the Deemhire trust and Sydrom. Although the plaintiffs have a purpose of making money from their cattle operations, that is not a significant and substantial purpose because the cattle operations do not make money. The cattle operations are small. Mr and Mrs Vartuli (through their companies) would be classified as small beef producers. The operations are of a sufficient size that the scale of operations in itself would not preclude the use of the land having a commercial purpose or a commercial character that was significant and substantial. But the lack of profitability does mean that the Vartulis' and their companies' commercial purpose in using the land, and the commercial character of the use of the land, cannot be categorised as significant and substantial.

I have reached this conclusion without considering the rate of return compared to the value of the land. It is clear from the decision in Maraya that this could be a relevant consideration. It certainly would have been relevant in Maraya where the cattle raising operations started at or not long before the rezoning. For the reasons at paras [87]-[91] above, the present case raises different facts which make a comparison between the rate of return as a percentage of the value of the land and a return which might generally be expected from the use of land to be not useful.

In this case I would not conclude that the use of the land lacked a significant and substantial commercial purpose or character because the level of profits did not provide a reasonable return when compared to the value of the land. Rather, I conclude that the use of the land lacked a significant and substantial commercial purpose or character because profits are not derived from the use of the land that make any real, as distinct from trifling, contribution to the income of the plaintiffs, Deemhire and Sydrom.

This conclusion makes it unnecessary to consider whether s 10AA(2)(b) is satisfied. In case I am wrong in my conclusion concerning s 10AA(2)(a) I will state the factual conclusions to which I would have come on the issues raised by s 10AA(2)(b).

I accept that it was one of Mr Vartuli's purposes that he and his wife should derive profit by using the land for the breeding, fattening and sale of cattle. I accept that his purpose should be attributed also to Mrs Vartuli. That was a purpose of using the land for profit on a continuous and repetitive basis.

I do not accept that that was the plaintiffs' only purpose, nor that it was their dominant purpose. I have already explained that in my view Mr Vartuli has continued the operations because he likes cattle farming. He seeks to profit from that activity, but he does not depend on it. Having regard to the absence of profits actually made, I do not think that his purpose of making a profit is his dominant purpose. He continues to engage in cattle farming because he enjoys it and because it is something he has done since he started helping his father in his father's cattle raising activities.

The submissions did not focus on the question whether s 10AA(2)(b) requires that the purpose of profit on a continuous or repetitive basis be the sole or dominant purpose of the use of the land, or whether the section would be satisfied if it were one of the purposes for which the land was used. That question is not resolved by Thomason v Chief Executive, Department of Lands at 306 (quoted above at [130]). It is unnecessary for me to express an opinion on that question.

Conclusion

For these reasons, the challenge to the assessments fails. I will stand the proceedings over for counsel for the defendant to bring in short minutes of order in accordance with these reasons. Prima facie, the orders should provide for the summonses and amended summonses in the various proceedings to be dismissed and the assessments to be confirmed. Prima facie, the plaintiffs should pay the defendant's costs on the ordinary basis. If there is any argument as to costs I will deal with that when making the final orders.

Annexure A

Years ended 30 June
2006
2007
2008
2009
2010
2011
2012
2013
Cattle sales
14,916
925
15,613
18,289
35,863
40,542
62,415
38,852
Cost of sales
-8,548
-3,637
-11,165
-12,871
-30,131
-31,104
-45,951
-34,653
Gross profit
6,368
-3,483
4,448
5,418
5,672
9,438
16,464
4,199
Expenses:
Cartage & freight
270
300
130
1,044
1,060
1,250
1,990
2,091
Commission
476
40
305
322
662
1,857
2,267
1,810
Ear tags
84
0
22
0
10
24
192
10
Feed
182
0
470
161
0
412
699
453
Mouthing
26
0
20
22
20
5
0
15
Other expenses
0
0
0
904
1,053
1,078
899
272
Veterinary fees
97
25
90
0
0
462
943
510
Yard dues
85
12
65
80
165
342
256
691
Total deductions
1,220
377
1,102
2,533
2,970
5,430
7,246
5,852
Enterprise Gross Margin
5,148
-3,860
3,346
2,885
2,702
4,008
9,218
-1,653
Council fees
85
66
90
0
0
0
0
Depreciation
389
432
491
465
441
419
538
721
Government charges
0
0
65
580
130
255
542
485
Materials & supplies
183
0
2,486
162
0
0
123
Motor vehicle expenses
1,628
1,160
2,505
1,965
0
0
0
Agistment fees - external
2,773
3,120
1,040
Repairs & maintenance
455
2,001
Total Other Expenses
2,285
1,658
5,637
3,172
571
3,902
6,324
2,246
Companies' Primary Production Results
2,863
-5,518
-2,291
-287
2,131
106
2,894
-3,899
Expenses relating to agistment income as disclosed in personal income tax returns:
Repairs and maintenance
-223
-24
-9
Capital works deduction
-36
-36
-36
-1
-1
-35
-88
Net Primary Production Result
2,863
-5,777
-2,351
-323
2,130
96
2,859
-3,987

Decision last updated: 30 May 2014

Medium Neutral Citation:	Vartuli & Anor v Chief Commissioner of State Revenue [2014] NSWSC 678
Hearing dates:	25-28 November 2013
Decision date:	30 May 2014
Jurisdiction:	Equity Division - Revenue List
Before:	White J
Decision:	Refer to para [143] of judgment.
Catchwords:	TAXATION AND REVENUE - assessment for land tax - land used for primary production - whether the plaintiffs' land is exempt from land tax pursuant to s 10AA(2) of the Land Tax Management Act 1956 - whether use of land for plaintiffs' cattle had "significant and substantial commercial purpose or character"
Legislation Cited:	Land Tax Management Act 1956 Local Government Act 1993 Income Tax Assessment Act 1936 (Cth)
Cases Cited:	Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379 Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 Hope v Bathurst City Council (1980) 144 CLR 1 Hope v The Bathurst City Council (No. 3) [1994] NSWCA 139 Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286 Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165
Category:	Principal judgment
Parties:	Bruno Vartuli - (1st Plaintiff) Nancy Vartuli - (2nd Plaintiff) Chief Commissioner of State Revenue (Defendant)
Representation:	Counsel: C J Bevan (Plaintiffs) I Mescher (Defendant) Solicitors: Galluzzo Andriano (Plaintiffs) Crown Solicitor (Defendant)
File Number(s):	2010/68900

Deemhire
Year ended 30 June	Income	Gross Profit (Loss) on Livestock Trading
2006	$1,857,666	$1,454
2007	$2,332,693	($772)
2008	$2,394,124	$2,266
2009	$2,424,049	$2,071
2010	$2,458,944	$384
2011	$2,624,566	$3,610

2006
Total
Opening Stock	21
Purchases	15
Natural Increase	0
Sub-total	36
Sales	23
Deaths	2
Closing Stock	11

Year	Net Profits $
2007	2,275
2008	6,124
2009	6,586
2010	8,453
2011	4,949

Year ended	$
30 June 2006	$2,863
30 June 2007	($5,777)
30 June 2008	($2,351)
30 June 2009	($323)
30 June 2010	$2,130
30 June 2011	$96
30 June 2012	$2,859
30 June 2013	($3,987)

Year ended	$
30 June 2006	$4,936
30 June 2007	$8,672
30 June 2008	$9,121
30 June 2009	$2,604
30 June 2010	$2,604
30 June 2011	$2,604
30 June 2012	$2,604

Small
2006-07	2007-08	2008-09
Farm cash receipts
Beef cattle	$	58 111	60 300	(11)	69 400
Beef cattle transferred off-farm	$	90	210	(0)	na
Crops	$	42 807	61 900	(27)	95 900
Sheep and lambs	$	29 583	16 050	(19)	25 700
Wool	$	21 407	18 150	(17)	11 800
Total cash receipts	$	190 758	180 010	(11)	225 700
Farm cash costs
Beef cattle purchases	$	18 004	13 550	(16)	27 300
Chemicals	$	7 323	7 180	(13)	11 100
Contracts	$	7 171	6 330	(40)	na
Fertilisers	$	13 093	18 870	(17)	21 800
Fodder	$	12 952	5 750	(21)	6 000
Fuel, oil and grease	$	12 553	13 830	(10)	16 300
Handling and marketing	$	5 812	5 130	(8)	9 800
Hired labour	$	2 919	4 510	(28)	3 100
Interest	$	23 391	20 360	(16)	15 000
Repairs and maintenance	$	16 484	13 420	(9)	16 400
Total cash costs	$	177 578	156 470	(8)	187 900
Farm financial performance
Farm cash income	$	13 180	23 540	(48)	37 800
Farm business profit	$	-74 187	-57 060	(20)	-38 800
Note: The figures in parentheses are relative standard errors expressed as a percentage of the estimate.

Financial performance, southern beef industry average per farm
small
2008-09	2009-10p	2010-11z
Farm cash receipts
Beef cattle	$	46 064	56 080	(9)	59 400
Beef cattle transferred off-farm	$	0	460	(166)	na
Crops	$	55 378	55 200	(39)	75 100
Sheep and lambs	$	25 852	29 540	(25)	32 700
Wool	$	15 234	20 090	(33)	18 600
Total cash receipts	$	170 551	181 210	(17)	201 800
Farm cash costs
Beef cattle purchases	$	10 340	16 150	(15)	15 600
Chemicals	$	6 677	9 850	(29)	13 000
Contracts	$	5 574	6 890	(23)	5 700
Fertilisers	$	13 314	12 990	(38)	16 700
Fodder	$	4 535	2 420	(32)	1 600
Fuel, oil and grease	$	13 584	10 780	(20)	13 200
Handling and marketing	$	4 903	5 290	(30)	na
Hired labour	$	3 416	3 390	(39)	3 900
Interest	$	17 260	14 520	(29)	13 000
Repairs and maintenance	$	12 604	13 880	(20)	19 700
Total cash costs	$	138 616	151 780	(16)	159 100
Farm financial performance
Farm cash income	$	30 337	28 590	(38)	42 700
Farm business profit	$	- 29 579	-36 960	(35)	-13 000
p Preliminary estimates. z Provisional estimates. na Not available.
Note: Figures in parentheses are relative standard errors expressed as a percentage of the estimate. A guide on how to use RSEs is in the survey methods and definitions section.

Small
2009-10y	2010-11y	2011-12y
Farm cash receipts
Beef cattle	$	57 425	51 860	(6)	43 300
Beef cattle transferred out	$	548	0	0
Crops	$	54 491	79 940	(40)	60 400
Sheep and lambs	$	29 880	42 500	(35)	42 500
Wool	$	20 376	23 340	(34)	21 400
Total cash receipts	$	183 397	217 040	(23)	180 300
Farm cash costs
Beef cattle purchases	$	16 749	13 990	(19)	8 700
Beef cattle transferred in	$	1 348	640	(95)	400
Chemicals	$	9 774	8 910	(35)	11 500
Contracts	$	6 819	5 980	(53)	7 700
Fertilisers	$	13 048	15 230	(33)	12 300
Fodder	$	2 456	2 250	(22)	1 400
Fuel, oil and grease	$	11 060	12 450	(21)	11 800
Handling and marketing	$	5 369	5 260	(31)	na
Hired labour	$	3 365	2 860	(45)	3 500
Interest	$	15 371	14 400	(36)	13 900
Repairs and maintenance	$	14 183	16 330	(18)	16 700
Total cash costs	$	154 978	156 810	(25)	140 000
Farm financial performance
Farm cash income	$	28 420	60 230	(32)	40 200
Farm business profit	$	-40 115	18 630	(100)	-5 400
p Preliminary estimates. y Provisional estimates. na not available.
Note: Figures in parentheses are relative standard errors expressed as a percentage of the estimate.

Financial performance of beef cattle producing farms, southern Australia, by herd size average per farm
small
2010-11	2011-12p	2012-13y
Farm cash receipts
Beef cattle sales	$	51 890	49 300	(8)	51 000
Sheep, lambs and wool sales	$	70 590	89 200	(14)	51 000
Total crop receipts	$	89 080	108 800	(19)	78 000
Total cash receipts	$	233 100	270 700	(10)	193 000
Farm cash costs
Beef cattle purchases	$	13 990	10 700	(24)	9 000
Wages for hired labour	$	2 920	5 400	(19)	4 000
Interest paid	$	17 200	21 300	(16)	11 000
Total cash costs	$	170 950	203 000	(8)	148 000
Farm capital and debt
Total capital at 30 June	$	2 410 580	3 218 000	(8)	3 180 000
Farm business debt at 30 June a	$	232 620	310 400	(16)	na
Equity ratio at 30 June a	%	90	90	(2)	na
Farm financial performance
Farm cash income	$	62 150	67 700	(23)	46 000
Farm business profit	$	20 320	200	(999)	-24 000
p Preliminary estimates. y Provisional estimates. na not available.
Note: The figures in parentheses are relative standard errors expressed as a percentage of the estimate. A guide on how to use RSEs is in the survey methods and definitions section.

Average Receipts from Beef Cattle Sales	Vartuli Receipts
2006-07	58,111	925
2007-08	60,300	15,613
2008-09	69,400 46,064	18,829
2009-10	57,425 56,080	35,863
2010-11	59,400 51,860 51,890	40,542
2011-12	43,300 49,300	62,415
2012-13	51,000	38,852

Year ended 30 June
2006	$11,772
2007	$16,573
2008	$4,667
2009	$11,940
2010	$7,330
2011	$18,546

Years ended 30 June	2006	2007	2008	2009	2010	2011	2012	2013
Cattle sales	14,916	925	15,613	18,289	35,863	40,542	62,415	38,852
Cost of sales	-8,548	-3,637	-11,165	-12,871	-30,131	-31,104	-45,951	-34,653
Gross profit	6,368	-3,483	4,448	5,418	5,672	9,438	16,464	4,199
Expenses:
Cartage & freight	270	300	130	1,044	1,060	1,250	1,990	2,091
Commission	476	40	305	322	662	1,857	2,267	1,810
Ear tags	84	0	22	0	10	24	192	10
Feed	182	0	470	161	0	412	699	453
Mouthing	26	0	20	22	20	5	0	15
Other expenses	0	0	0	904	1,053	1,078	899	272
Veterinary fees	97	25	90	0	0	462	943	510
Yard dues	85	12	65	80	165	342	256	691
Total deductions	1,220	377	1,102	2,533	2,970	5,430	7,246	5,852
Enterprise Gross Margin	5,148	-3,860	3,346	2,885	2,702	4,008	9,218	-1,653
Council fees	85	66	90	0	0	0	0
Depreciation	389	432	491	465	441	419	538	721
Government charges	0	0	65	580	130	255	542	485
Materials & supplies	183	0	2,486	162	0	0	123
Motor vehicle expenses	1,628	1,160	2,505	1,965	0	0	0
Agistment fees - external	2,773	3,120	1,040
Repairs & maintenance	455	2,001
Total Other Expenses	2,285	1,658	5,637	3,172	571	3,902	6,324	2,246
Companies' Primary Production Results	2,863	-5,518	-2,291	-287	2,131	106	2,894	-3,899
Expenses relating to agistment income as disclosed in personal income tax returns:
Repairs and maintenance	-223	-24	-9
Capital works deduction	-36	-36	-36	-1	-1	-35	-88
Net Primary Production Result	2,863	-5,777	-2,351	-323	2,130	96	2,859	-3,987