The primary production land tax exemption is an important concession for farmers and the owners of farm land. In particular, for farm land that is urban zoned within “Greater Melbourne”. The Victorian Supreme Court decision of Annat v Commissioner of State Revenue [2020] VSC 108 (Annat) demonstrates the difficulty that can be faced in satisfying all of the requirements the primary production land tax exemption.
This is particularly relevant for farm land owners as a result of the Victorian State Revenue Office’s increased scrutiny of primary production lands in recent years. As a result, farm land owners must, more than ever understand the difficult legislative requirements surrounding primary production land tax exemptions, and the resulting structuring and record keeping requirements, to ensure that they are not unintentionally exposing themselves to large land tax liabilities.
Primary production land exemption for urban zoned land in Greater Melbourne
In Annat, the primary production land tax exemption sought an exemption under section 67 of the Land Tax Act 2005 exemption, which contains the strictest test in relation to land in an urban zone in Greater Melbourne (of the 3 available primary production land tax exemptions).
Amongst the various requirements, section 67 of the Act specifies that primary production land owned by a trustee of a discretionary trust will only be exempt from land tax:
If the land is used solely or primarily for the business of primary production; and
At least one of the specified beneficiaries is normally engaged in a substantially full-time capacity in the business.
Facts in Annat
In Annat, the taxpayer (the Annat Family Trust) operated a farming business of cattle farming and had done so for a number of years. The land was owned by the taxpayer, a corporate trustee of a discretionary trust. In contention was whether the taxpayer was liable to pay land tax assessed in respect of the 2015-2017 land tax years.
The points of contention focused on whether the land was used primarily for the business of primary production and if a specified beneficiary of the Annat Family Trust worked substantially on a full time basis in the farming business of the trust.
Land used primarily for the business of primary production
In Annat it was accepted that 3 paddocks out of 24 were used for primary production as they were used for hay cultivation and cattle grazing. A close and critical analysis of all paddocks was conducted by the Court, with observations that 6 paddocks held chicken and sheep and were close to a residence used privately and that there were no records of cattle grazing on 21 paddocks. Instead, the remaining 21 paddocks were used for horse agistment (which is not an accepted primary production activity).
The Court noted that ‘although [it is accepted] that around 50% of the Land [area] was used for primary production, such use was not such as to impart the whole of the Land with the requisite character’ of being primarily used for the business of primary production
Specified beneficiary working in a substantially full-time capacity in the farming business
Another issue in contention was whether Stipo, the specified beneficiary of the trust, worked in substantially a full-time capacity in the farming business of the trust.
It was observed that Stipo was the sole director and shareholder of a construction company and held the commercial builder’s licence which was required in order for that business to operate. The taxpayer submitted that Stipo had stepped away from the construction business some years prior and spent most of his time on the farm, thus was only involved in the construction business to the extent necessary for it to operate under his licence.
Importantly, the Court noted that the onus to prove that the specified beneficiary works in the business is on the taxpayer and found that this onus was not satisfied as there was no sufficient evidence adduced. There were no business plans, employment contracts, records of hours worked, records of sales and purchases, sale or lease contracts, or records of grazing cycles. Additionally, the website for the commercial construction business falsely stated that Stipo would oversee all constructions and it was found that Stipo drew most of his income from the commercial construction business, These factors contributed to a finding that Stipo did not work full-time in the farming business.
Main takeaways
To mitigate any unintended tax outcomes, land owners involved in farming and their advisors should take the following precautions to mitigate any adverse tax consequences that may arise in the future:
Be fully aware of the nature of the changing requirements over time;
Ensure that they keep good records of their business plans, contracts of sale and purchase, employment contracts, and other records of the operations of the farming business; and
Ensure, where applicable, there is a requisite full time farmer and that records (of both work and income) support that that person is a full time farmer.
If you require advice on structuring and operating a farming enterprise, commercial or taxation advice, please contact:
Denise Tan
Senior Associate
T +61 3 9611 0160 | M +61 438 714 965
E dtan@sladen.com.au
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Laura Spencer
Senior Associate
T +61 3 9611 0110
E lspencer@sladen.com.au
