The recent case of Dwayne Taylor FT Pty Limited as trustee for Dwayne Taylor Family Trust and DA and P Taylor v Chief Commissioner of State Revenue [2024] NSWCATAD 80 is a win for taxpayers, but does illustrates the issues that can arise when primary production land is used as part of business models that include other interrelated activities.
Legislation
Section 10AA of the Land Tax Management Act 1956 (NSW) provides for the land tax exemption for primary production land.
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
In 2018, Mr and Mrs Taylor and a trustee of a family trust (the taxpayers) contracted to purchase a parcel of rural land in New South Wales and settled in 2019.
They bought the property because the rural zoning was most suitable for the maintenance of horses for the purpose of selling them. Under the contract, the taxpayers were entitled to use part of the land for some months before settlement.
The taxpayers also set up a company Sand Dancing Pty Ltd, which was licensed to use the land for the purpose of maintaining horses for sale. From 1 April 2018 to 31 March 2021, Sand Dancing Pty Ltd also rented the adjoining property on which it maintained horses for sale.
During this time the taxpayers trained their horses in the equestrian disciplines of dressage, eventing and show jumping. Sand Dancing Pty Limited’s main business activity, however, was ‘horse breeding’ according to 2020, 2021 and 2022 company tax returns.
The New South Wales Chief Commissioner of State Revenue (Chief Commissioner) issued land tax assessment notices for the 2020 and 2021 land tax years on the basis the exemption from land tax based on primary production was not available as the ‘dominant use’ test was not satisfied. The taxpayers appealed to the New South Wales Civil and Administrative Tribunal (Tribunal).
Issue and Opposing Arguments
The issue for the Tribunal to consider was whether the land was being used for distinct purposes and if so, whether the dominant purpose was use for primary production.
The taxpayers contended that Sand Dancing Pty Ltd at all material times conducted a business of selling horses and that this was the sole purpose of the company - the sale of horses, their offspring and bodily produce.
In response the Chief Commissioner submitted that there were competing uses of the land - the equestrian disciplines of dressage, eventing and show jumping. The horse sale use, if any, was ancillary to the equestrian disciplines which constituted a separate purpose from the sale purpose.
Further, that there was insufficient evidence as to which purpose was dominant – the sale of horses purpose or the equestrian disciplines purpose. The Chief Commissioner also claimed that there was significant construction on the land according to aerial photos that would render the land unable to facilitate the maintenance of horses for the purposes of selling them. Lastly, that the financial returns of Sand Dancing Pty Ltd disclosed significant revenue from sources other than the sale of horses.
Decision
The Tribunal referred to Chief Commissioner of State Revenue v Godolphin Australia Pty Ltd [2023] NSWCA 44 (Godolphin) (see our commentary here on the earlier New South Wales Supreme Court decision).
The taxpayer in Godolphin argued that the maintenance of the horses for sale, or sale of their offspring, were the significant commercial purpose of the land and the primary production exemption should apply. The Chief Commissioner instead argued that the business model should be considered as a whole which included racing activities which were the dominant purpose of the taxpayer and the exemption should not apply.
The New South Wales Supreme Court in Godolphin initially upheld the taxpayer’s objection. However, on appeal, the Court of Appeal overturned that judgement and held that although a significant use of the relevant properties was directed towards the sale purpose, it could not be characterised as the dominant use. The sale purpose and racing purpose were so intwined that they could not be separated. The Court of Appeal considered the entirety of the activities carried on by the taxpayer on the land. Importantly, economic factors i.e. how much revenue each activity generated were not determinative. The taxpayer has since successfully sought leave to appeal to the High Court and that decision is due later this year.
In this case, the Tribunal held that ninety per cent of the land apart from the house and its yard were used for the purpose of maintaining horses, including their feeding, exercise and training. The existence of unexplained revenue neither supported nor disproved the assertion that the dominant use of the land was the “horse sale use”. In a victory for the taxpayers, the Tribunal held that the land tax assessments should therefore be set aside.
Key Observations
As it stands today, 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. Taxpayers should note that where the dominant use of the land is for two distinct purposes, one of which qualifies for the primary production land exemption and one of which does not, they bear the burden of proof to show that the dominant purpose is the qualifying purpose.
Action Required
Another taxpayer win in Godolphin will provide more certainty in this issue and should have widespread and positive implications to many similar operations where showing, racing or eventing animals is an integral part of promoting animals for the purposes of sale.
In the meantime, please contact us with assistance with advice on the primary production land exemption, objections to land tax assessments where the exemption has been not allowed 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
