The High Court has dismissed an appeal by Godolphin Australia Pty Ltd (Godolphin) and confirmed that it cannot claim the primary production land tax exemption, as it was unable to show that the “dominant use” of its properties was for primary production where it also had substantial horseracing activities. The decision illustrates the issues that can arise when primary production land is used as part of business models that include other interrelated activities.

What’s happened?

On 5 June 2024, in the case Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (2024) HCA 20 the High Court unanimously dismissed an appeal by Godolphin from a judgment of the Court of Appeal of the Supreme Court of New South Wales (Court of Appeal).

The appeal concerned the correct construction of section 10AA of the Land Tax Management Act 1956 (NSW) (the Land Tax Act).

Legislation

Subsection 10AA(1) of the Land Tax Act exempts from land tax rural land "if it is land used for primary production".

One of the key requirements is the ‘dominant use’ test in subsection 10AA(3), which requires that the dominant use of the land is for specified primary production activities. These include the cultivation of produce or the maintenance of animals for resale (amongst other).

Background Facts

Godolphin used two properties in New South Wales to undertake an "integrated" thoroughbred breeding and racing operation.

For the 2014-2019 years, the Chief Commissioner of State Revenue (the Commissioner) assessed the taxpayer as liable for land tax in respect of these properties. The taxpayer challenged all of the land tax assessments.

The taxpayer claimed that certain parcels of each property were exempt from land tax pursuant to the exemption in s 10AA(3)(b). While the Commissioner accepted that the parcels of land were being used to maintain horses, he did not accept that the dominant purpose of that use was for the sale of the horses, their progeny or their bodily produce.

On 23 April 2022, in Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (2022) NSWSC 430, the Supreme Court of New South Wales, the primary judge held that, given the integrated nature of the taxpayer's business it could not be said that there were two distinct purposes for the activities carried on at the properties. It was unnecessary to decide whether use for any one such purpose was the dominant use. Both parcels of land were used for primary production and exempt from land tax.

On 20 March 2023, the Commissioner succeeded on appeal in Chief Commissioner of State Revenue v Godolphin Australia Pty Ltd (2023) NSWCA 44, with a majority of the Court of Appeal deciding that the correct test required the word "dominant" to qualify the "use-for-a-purpose" in s 10AA(3)(b).

Issue before the High Court

The issue before the High Court was whether the requirement of "dominant use" of land applied to both "the maintenance of animals" and also to the purpose of sale in section 10AA(3)(b). Neither party disputed the critical finding below that a "significant use" of the two properties was animal maintenance for the purpose of selling animal produce and progeny. The taxpayer argued that the work done by the word "dominant" should be confined to the required use of the land and no more.

High Court decision

The High Court identified two distinct business operations – breeding and racing for prizemoney and determined that Godolphin could not show that the “dominant use” of the taxpayer’s properties in the Hunter Valley was for its horseracing activities. Therefore, the land did not qualify for the primary production exemption from land tax.

The lead judgement was given by Gordon, Edelman and Steward JJ and provided at paragraphs 34 and 35:

34 Whether land is being used for the dominant purpose of maintaining animals for their sale or the sale of their natural increase or bodily produce is a question of characterisation of the use or uses to which the land is put. The proper approach is to consider the amount of land used for any purpose, the nature and extent and intensity of the various uses which are taking place, and the time and labour and resources spent in using the land. In some cases, the financial gain from a given activity may be an indicator of predominance. And in all cases one should not ignore the conclusion reached by an objective observer who is viewing the land as a whole.

35 Where land has more than one use, for a given use to be dominant it must exhibit such predominance as to impart to the whole of the land the necessary exempting character.

…

The majority further held at paragraph [28] that, when the text of subsection 10AA(3) is read in its immediate statutory context and in light of broader statutory and extrinsic context, the word "dominant" qualifies one composite phrase, namely "use of which is for ... the maintenance of animals ... for the purpose of selling them".

Further, at paragraph [31] held that the taxpayer had shown “a significant use” was keeping and selling animals.

“A significant use of the land was for breeding horses ... [Godolphin] fell short of demonstrating that the ‘dominant use’ of the land was for the purpose of selling them or their natural increase or bodily produce.”

The broader statutory context supported the Commissioner's construction. Section 10A(1) operates where land is used for multiple purposes each of which is exempt; without having to show which use is "dominant" the whole of the land is exempt from taxation. The premise of this provision assumes, relevantly in the case of section 10AA, that a "dominant" purpose would otherwise need to be demonstrated.

In dismissing the appeal, the High Court held that though a significant use of the properties was for breeding horses, the taxpayer fell short of demonstrating that the "dominant use" of the land was for the purpose of selling them or their natural increase or bodily produce. In short, the amount of the land allocated for racing activities compromised the taxpayer’s “dominant use” argument

Key Observations

The High Court made an important distinction between “significant use” and “dominant use”. It is only the use of the land (in this case the maintenance of animals) which must be the dominant use.

This decision has widespread implications beyond the horse industry however and is relevant for all taxpayers engaging in any type of primary production activity that involves mixed-use operations, with the dominant use of the land being the determining factor.

Action Required

The test for exemption for primary production land is an all-or-nothing-test and this case shows that the purpose for which land is used can be just as important as the economic use of the land.

Where land is used for multiple purposes, the dominant use of the land must be for the exempt purpose. As such there is an increased burden on landowners to delve into a multifactorial analysis of their business when ancillary or secondary purposes may exist.

Factors include funds spent or assets deployed for each activity and the cost, nature, and intensity of competing uses, as well as the size of physical areas on which activities are conducted and the time and labour spent on those activities. Economic value derived from the activities conducted on the land is relevant but not decisive as shown in this case.

Please contact us with assistance with advice on the primary production land exemption, objections to land tax assessments or any other State Tax issues.

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au

Meera Pillai
Associate
T +61 3 9611 0179
E mpillai@sladen.com.au