In the recent Victorian Civil and Administrative Tribunal (Tribunal) decision in Lavender Rain Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2022] VCAT 1264 (Lavender Rain) the primary production land tax exemption for urban zoned land was denied on the basis that the land owning company operated a number of businesses, including the entering into a property development agreement.  

Key facts in Lavender Rain

Lavender Rain Pty Ltd (Taxpayer) conducted a primary production business on 150 English Street, Donnybrook (Relevant Property) of breeding cattle for sale.

The Taxpayer also carried on two other businesses, one of which involved consulting services and the other being running a ski competition.

In addition, the Taxpayer, together with some owners of neighbouring properties, also entered into a development agreement with a developer for the development of the Relevant Property and surrounding properties. As part of that development arrangement, during the 2018/2019 financial year, the Taxpayer received $1,131,272 as a ‘loan from Development Partners’ for the development of the Relevant Property.

The Taxpayer contended that the Relevant Property qualified for the land tax exemption under section 67 of the Land Tax Act 2005 (Vic) (Act) on the basis that it was used exclusively or primarily for the business of primary production.

However, the Victorian Commissioner of State Revenue (Commissioner) argued that the Taxpayer did not qualify for the primary production land tax exemption because the principal business and main undertaking of the Taxpayer was not the business of primary production. Instead, the Commissioner submitted that the Taxpayer’s principal business was land development, followed by its consulting business and ski competition business.

Key issue in Lavender Rain

The key issue for the purposes of the land tax exemption in section 67 of the Act was whether the Taxpayer’s principal business or main undertaking was carrying on a primary production business during the 2017, 2018, and 2019 land tax years.

Tribunal’s findings in Lavender Rain

The Tribunal noted the observations of Garde J in Lotus Oak (which we discussed in a three-part series here) that a corporation with two or more business will not be entitled to the exemption from land tax for urban land ‘unless it can be said that the type of primary production carried on the land is the principal business’ of the corporation.

The Tribunal also noted that while ‘primary production’ is defined in s 64(1) of the Act to include ‘the maintenance of animals or poultry for the purpose of selling them or their natural increase or bodily produce’, the Act does not include any definition of the phrases ‘principal business’ or ‘main undertaking’.

The Tribunal examined the following factors, in order to determine the Taxpayer’s principal business and main undertaking:

Gross income

During the 2017 and 2018 land tax years, the Tribunal determined that the Taxpayer’s primary business was providing consulting services. This was due to the high gross income received by the Taxpayer through consulting services (more so than any other business).

As for the 2019 land tax year, the Tribunal held that the land development activities undertaken produced the most income for the Taxpayer and hence, made it the primary business for that period. In this regard, the Tribunal also noted that although the $1,131,272 received by the Taxpayer was recorded as a “loan” rather than revenue on the financials, the sums received were still pertinent for evaluating the Taxpayer’s most significant business.

Labour employed

Based on the labour employed, the Tribunal concluded that the most significant business of the Taxpayer during the 2017, 2018, and 2019 land tax years was its cattle breeding business. This was on the basis that two of three shareholders/employees were devoted to cattle breeding in both a full-time and part-time capacity.

Capital employed

Based on the capital employed, the Tribunal found that the most significant business of the Taxpayer during the 2017, 2018, and 2019 land tax years was its property development business. The Tribunal came to its finding on the basis that the Relevant Property had been committed to the property development business since 2014 (being the time the development agreement was entered into between the Taxpayer and the developer).  

The Tribunal also noted that the increasing value of the Relevant Property reflected its worth as a development property, rather than its use for primary production purposes.

Tribunal’s overall assessment

Since the Taxpayer’s most significant business varied depending on the basis on which its many businesses were examined (i.e., based on income, labour, or capital), the Tribunal found that the primary production business was not the Taxpayer's principal business for any of the relevant land tax years.

Key takeaways

Lavender Rain highlights the ongoing difficulty for taxpayers in establishing the land tax exemption for urban land where a taxpayer carries on two or more businesses.

It also indicates that the mere entering into a property development agreement, and receiving funds, under that agreement, could constitute a business, and be the primary business, of the landowner.

It is critical for taxpayers seeking to apply for a land tax exemption for urban land to prove that matters relating to gross income, labour and capital all support an objective finding that the principal business or main undertaking is the business of primary production. 

The decision is also instructive because it serves as a cautionary reminder that even if a corporation has conducted the same business on the land for years, there is no guarantee that a land tax exemption will be given for particular years, especially if the character and nature of the business activities undertaken or pursued have changed.

In particular, before entering into a development agreement, it is crucial to consider the land tax implications, particularly if the land development is to be undertaken over a period of several years.

Unsure if your principal business satisfies the primary production land tax exemptions?

The primary production land tax exemptions are notorious, not only for the legal complexities involved, but also the highly fact-driven requirements of satisfying the revenue authorities that the exemption requirements are satisfied.

If you are unsure whether a primary production land tax exemption applies to your circumstance, our state taxes team can assist with understanding whether the relevant land tax primary production exemptions apply, considering what your options are if land tax has been imposed, including objecting to an assessment, or providing representation at the various courts or tribunals.

Please feel free to contact our specialist team at:

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

Moke Man Thing
Law Clerk