The recent Supreme Court of Victoria decision of Lotus Oaks Pty Ltd as trustee for the Bozzo Family Trust v Commissioner of State Revenue [2021] VSC 388 is instructive as it provides further clarification on the application of the primary production land tax exemption for land located in greater Melbourne in an urban zone.

This decision is significant in relation to its consideration of the primary production land tax exemption for urban zoned land in Greater Melbourne that is contained in section 67 of the Land Tax Act 2005 (Vic) (Act). The section 67 exemption (now contained in sections 67 to 67F) contains a number of prescriptive requirements that must be met. Due to the significance of the decision’s consideration of these requirements as they relate to a land owning discretionary trust, the Court’s decision will be examined in a three-part series comprising of the following focussed topics:

Part 1: Principal business is farming requirement
Part 2: Primary production of the type requirement
Part 3: Substantially full-time engagement requirement

Facts

In 1988 the Bozzo Family Trust (Bozzo FT), a discretionary trust, was established with Lotus Oaks Pty Ltd (Lotus Oaks) as its trustee.

During the 2015 – 2017 calendar years (Relevant Period), one of the beneficiaries (Mario) and his three children were directors of Lotus Oaks. Mario was also a director of numerous related companies (collectively Bozzo Group).

Before 2010, business matters were discussed and decided informally at family functions and events.

From about 2014, five separate business units responsible for preparing their own accounts and reporting their own profits and losses were introduced. These business units were:

Farming – Undertaken by the Bozzo FT;
Egg production – Involved oversight of a 25% interest in the Bridgewater Poultry Farm, held by the Bozzo FT;
Milling of grain – Undertaken by Riverbank Milling Pty Ltd;
Property development at Wyndham Vale property – Undertaken by the Jubilee Development Partnership; and
Property development at Yarrawonga – Undertaken by the Bozzo FT and a number of other special purpose entities.

The Bozzo FT had six farms, which included:

Keysborough farm – Originally an egg farm, land was subdivided and sold off before the Relevant Period.
Wyndham Vale property – Initially there was livestock, then a mill, followed by the cultivation of crops. A share farming arrangement was entered into with a neighbouring farmer, which eventually became a share farming contract from 1 July 2014. One of Mario’s daughters managed the mill. Mario visited weekly and signed off on most decisions.
Seaspray Farm – Cattle farm. Ms Boulton was the farm hand who primarily oversaw the farm although Mario visited regularly and consulted with Ms Boulton on decisions being made.
Bridgewater Poultry Farm – Egg farm in which the Bozzo FT bought a quarter interest via two unit trusts. This farm had contracts for the supply of free range eggs to Coles and Woolworths. Mario did not oversee or manage the farm at all, farm operated during the Relevant Period.
Leongatha Stockfeed Mill – The Bozzo FT purchased this new mill around the 2011 calendar year to expand its stockfeed business.
Tuppal Station – Property situated in southern New South Wales. Over the Relevant Period, crops grown in rotations and cattle and sheep were farmed. A farm manager, assistant manager, several casual employees were employed. Mario visited weekly over the relevant period and authorised most decisions.

Development of the Wyndham Vale property

The property development undertaken on the Wyndham Vale property from late October 2014 was known as the ‘Jubilee Project’.

Planning permits for the first area to be subdivided were issued in 2015. These lots were subdivided and the titles registered in May 2016.

A separate development company, Lotus Oaks Developments Pty Ltd (Developer) was registered for the Jubilee Project and a development agreement was subsequently entered into between the Developer and the Bozzo FT to undertaken property development on the Wyndham Vale property.

Bozzo FT’s income and expenses

The Court held that the only financial records maintained by the Bozzo FT were the minimum possible to prepare an income tax return in each financial year.

As a result, it was not possible to determine which of the Bozzo FT’s major businesses was the most profitable over the Relevant Period.

Due to expenses not being able to be allocated to farms or businesses, it could not be determined whether an individual farm or primary production business was profitable.

The Court found that it was impossible to draw meaningful comparison between the farms from the limited information available in the financial statements and tax returns.

Principal business is farming requirement

It was not in dispute that the Wyndham Vale property was used primarily for the business of primary production. It was in dispute, however, that the principal business of the Bozzo FT during the Relevant Period was primary production of the type carried on on the subject land. This being one of the preconditions required to be met before the section 67 land tax exemption can apply.

The Commissioner contended the principal business of the Bozzo FT was the realisation of residential lots in the Jubilee Project for sale to purchasers or alternatively, the businesses conducted by the Bozzo FT were so many and varied that none of them could be said to be its principal business.

The Court considered the following factors in determining whether the Bozzo FT’s principal business was farming:

The magnitude of the property development carried on as part of the Jubilee Project;
The profit-making intention underlying the development of the Jubilee Project;
That Bozzo FT treated the the Wyndham Vale land as trading stock for tax purposes;
Residential subdivision was not new to the Bozzo FT. The Bozzo FT had previous experience having subdivided and sold its Keysborough farm and it also had other development projects underway; and
The lack of connection between the faming activities undertaken on the various farmland parcels.

The Court undertook a detailed inspection of various factual aspects of these three factors and came to the conclusion that the principal business of the Bozzo FT was not a farming business on the Wyndham Vale land during the Relevant Period. The Court found that the Bozzo FT carried on separate farming businesses on each of its separate parcels of farm land. Further, the Court found that Bozzo FT carried on a property development business even though it engaged the Developer to conduct the development.

While the Court did find that the principal business of the Bozzo FT was not farming, the close detail that the Court scrutinised various aspects of the farming businesses carried on by the Bozzo FT, as well as the concurrent property development business, shows that the carrying on of a property development business by a landowning entity that seeks to claim a primary production land tax exemption is not a fatal cause in and of itself.

This decision highlights the level of detail, particularly that relating to financial information, required to satisfy a taxpayer’s onus of proof in establishing that the principal business of a landowning entity is the farming business. The necessity to furnish detailed evidence is further heightened when a landowning entity concurrently conducts several businesses, one of which includes farming.

To discuss or for further information please contact:

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

Continue reading - Part 2: Primary production of the type requirement