CITATION: Kassir v Chief Commissioner of State Revenue [2008] NSWADT 133 DIVISION: Revenue Division APPLICANT Jamal Kassir PARTIES: RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 076074 HEARING DATES: 3 September 2007, 14 September 2007, 10 March 2008, 18 April 2008 SUBMISSIONS CLOSED: 18 April 2008 DATE OF DECISION: 9 May 2008 BEFORE: Verick A - Judicial Member CATCHWORDS: Land tax exemption - principal place of residence MATTER FOR DECISION: Principal matter LEGISLATION CITED : Land Tax Management Act 1956 (NSW) Taxation Administration Act 1996 (NSW) CASES CITED: Beashel and anor v Chief Commissioner of State Revenue [2008] NSWADT 103 Flaracos v Chief Commissioner of State Revenue [2003] NSWSC 68 APPLICANT In person REPRESENTATION: RESPONDENT P Patterson, solicitor ORDERS: The decision under review is affirmed. REASONS FOR DECISION Introduction 1 This is an application for review of a decision of the Chief Commissioner of State Revenue ("the Chief Commissioner") to impose land tax under the Land Tax Management Act 1956 (NSW) ("the LTM Act") in respect of a property owned by the Applicant and situated at 34 Barnsbury Grove, Bexley North ("the Bexley property") for the land tax years 2004 and 2005. 2 The issue for determination is whether the Property was exempt for purposes of land tax under the principal place of residence exemption provisions found in the LTM Act. Factual Background 3 Pursuant to an audit carried out by the Chief Commissioner, the Applicant was issued on 1 November 2006 Land Tax Assessments for the land tax years 2002 to 2006. The 2006 land tax assessment was in respect of the Bexley property and the 2004 and 2005 assessments were in respect of the Bexley property and another property situated in Lakemba. The 2003 assessment was solely for the Lakemba property. The 2002 assessment was a nil assessment for the Lakemba property and two other properties. 4 The Applicant's accountants objected to the assessments on the grounds that the Applicant was not the owner of the Lakemba property and that the Bexley property was "the taxpayer's principal place of residence" and since 31 May 2003 the Applicant "had to rent this property due to sever (sic) financial hardship and health problems". 5 On 21 March 2007, the Chief Commissioner allowed the Applicant's objection in respect of the Lakemba property but disallowed his objection against the assessment of the Bexley property. The Chief Commissioner implemented his decision by issuing amended assessments for the 2004 and 2005 land tax years by excluding the Lakemba property from the assessments. The Chief Commissioner also reduced the assessment for the 2003 to nil by excluding the Lakemba property from the assessment. In addition, the Chief Commissioner issued a fresh assessment for the 2007 land tax year in respect of the Bexley property. 6 On 18 May 2007, the Applicant lodged an application for review by the Tribunal of the Chief Commissioner's decision in respect of 2002-2005 land tax assessments on the grounds that the Bexley property represented his principal place of residence. The Applicant did not object to the fresh assessment for the 2007 land tax year and is not the subject of the review. In addition, the Applicant did not seek a review of the 2006 land tax assessment in respect of the Bexley property. Both the 2002 and 2003 land tax assessments were for "nil" amounts and raise no issues for review. The objection decision under review was accordingly only in respect of the 2004 and 2005 land tax years. Relevant Legislative Provisions 7 Under the combined effect of sections 7, 8 and 9 of the LTM Act, land tax is payable by the owner of land upon the taxable value of all land situated in New South Wales owned by the owner as at midnight on 31 December immediately preceding the year for which the land tax is payable, other than land which is exempt from taxation under the LTM Act. 8 Section 10 of the LTM Act sets out various categories of land that enjoy exemption from land tax under the LTM Act. Section 10, so far as is relevant in relation to the "principal place of residence exemption", provides as follows: " 10 Land exempted from tax (1) Except where otherwise expressly provided in the Act the following lands shall, subject to sections 10B, 10D, 10E, 10G and 10P, be exempted from taxation under this Act: … (r) land that is exempt from taxation under the principal place of residence exemption, as provided for by Schedule 1A," 9 Schedule 1A to the LTM Act which sets out in detail the provisions relating to the principal place of residence exemption, was introduced to apply from 31 December 2003 and relevantly the provisions apply to the review of the Chief Commissioner's decision in respect of the 2004 and 2005 land tax years. Under clause 2 of Schedule 1A, land used and occupied by the owner as the principal place of residence of the owner, and for no other purpose, is exempt from taxation under the LTM Act. The relevant provision for this matter is sub-clause 2(2) which is as follows: " 2 Principal place of residence exemption … (2) Land is not used and occupied as the principal place of residence of a person unless: (a) the land, and no other land, has been continuously used and occupied by the person for residential purposes and for no other purposes since 1 July in the year preceding the tax year in which land tax is levied, or (b) in any other case, the Chief Commissioner is satisfied that the land is used and occupied by the person as the person's principal place of residence. …" 10 Residential land is defined in subclause 3(1). That sub clause provides, so far as is relevant: " 3 Residential land - meaning (1) In this Schedule, residential land means land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or buildings designed, constructed or adapted for residential purposes, other than a building or buildings: … (c) from any part of which income is derived." 11 A concession is allowed in relation to a former principal place of residence where the owner is absent and is able to fall within the ambit of the provisions of clause 8 of Schedule 1A. In the tax years under review clause 8 provided as follows: " 8 Concession for absences from former residence (1) If the Chief Commissioner is satisfied that: (a) A person is the owner of land ( the former residence ) that has been used and occupied by the person as his or her principal place of residence for a continuous period of at least 6 months, and (b) The person uses and occupies other land (whether or not in New South Wales), that is not owned by the person, as his or her principal place of residence the person is taken, for the purpose of the principal place of residence exemption, to continue to use and occupy the former residence as his or her principal place of residence. (2) The maximum period for which a person may be taken, under this clause, to continue to use and occupy a former residence as a principal place of residence is 6 years starting at the end of the last period (of at least 6 months) during which the former residence was used and occupied by the person as a principal place of residence (not including any period for which the person may be taken, under clause 7 of this clause, to have used and occupied the former residence as a principal place of residence). (3) If the principal place of residence exemption applies to the former residence of a person by operation of this clause, the exemption is revoked if the person is the owner of the former residence at the end of the 6-year period referred to in sub-clause (2) and fails: (a) to resume actual use and occupation of the residence as a principal place of residence by the end of that period, and (b) to continue that use and occupation for at least 6 months. (4) The effect of the revocation is that the principal place of residence exemption is taken not to have applied to the former residence in respect of any tax year to which, but for the revocation, it would have applied. Land tax liability is to be assessed or reassessed accordingly. (5) If the principal place of residence exemption is revoked, the reassessment of land tax liability more than 5 years after an initial assessment was made in respect of the land is authorised. (6) This clause applies in respect of the assessment of a person's ownership of land in a tax year only if the Chief Commissioner is satisfied that no income has been derived from the use or occupation of the former residence in the preceding tax year, except as permitted by sub-clause (7). (7) Income may be derived from the use or occupation of the former residence in a tax year if: (a) the income is derived from a lease, licence or other arrangement under which a person has a right to occupy the former residence and the total period for which any such right of occupation is conferred does not exceed 6 months in the tax year, or (b) the income is derived from any arrangement under which a person occupies the former residence, but the income is no more than is reasonably required to cover council, water and energy rates and charges and maintenance costs of the owner in respect of the residence. (8) This clause is subject to clause 12 (which limits members of a family to one principal place of residence exemption)." Evidence 12 Although the issue was a fairly narrow and straightforward issue, the Applicant made various applications to the Tribunal objecting to the production of evidence by the Chief Commissioner including seeking adjournments resulting in a fairly long and protracted litigation. Nothing much turns on the applications, other than the acceptance by the Applicant that the rental income for the relevant period from the Bexley property was banked into his bank account. On that admission, the Tribunal allowed his objection, on grounds of privacy, to the subpoena directed to his bank to produce his bank statements. 13 The Applicant produced a medical opinion from an orthopaedic surgeon regarding the Applicant's disability resulting from a work injury. In addition he produced overdue water bills for the period 10 July 2003 to 2 May 2006, which he claimed, were paid by him in relation to the Bexley property and a copy of the standard residential tenancy agreement for the Bexley property. 14 Pursuant to a summons issued by the Chief Commissioner A & B Property Consultants Pty Limited trading as Century 21 Real Estate, agents for the Applicant in relation to the rental of the Bexley property, produced the account information database, trust account ledger and trust account rent ledger for the Bexley property. The documents show that the agents had collected rent and paid the Applicant the rent less their commission. In addition, the Chief Commissioner tendered a statement by a director of A & B Property Consultants Pty Limited confirming that the Applicant engaged the company as his agents from 21 February 2003 by granting the company exclusive letting and management rights in respect of the Bexley property. Submissions 15 Essentially the Applicant's case was that the Bexley property should be treated as his principal place of residence in accordance with the concession allowed by clause 8 of Schedule 1A. In particular, reliance was placed on sub-clause 8(7)(b). The Applicant submitted that he had used almost $80,000 from the rental income to pay for repairs and other on going needs of the Bexley property. He also submitted that the mortgage payments made by him were "charges" and fell within that term as used in sub-clause 8(7)(b). 16 Alternatively, the Applicant placed some reliance on the decision of the Gzell J in Flaracos v Chief Commissioner of State Revenue [2003] NSWSC 68. In particular on paragraphs 27 and 31 of his Honour's judgment. His submission was that as he paid for the water bills for the property he should be taken to have used and occupied the Bexley property during the relevant period of the tenancy. 17 The Applicant had during the earlier hearings raised various other grounds but did not rely on them in his final submissions. They were, in any case, without any merit nor relevant to the issue in this matter. 18 The Chief Commissioner's case was simply that the Bexley property: "did not satisfy the requirements in cls. 2(2) and 3(1), Sch. 1A of the LTM Act for each of the relevant tax years. This is because as at 31 December of the year preceding each of the relevant tax years, the Applicant did not use and occupy the Property as his principal place of residence and for no other purpose. Accordingly, the Property was not exempt from land tax under s. 10(1)(r)." 19 In response to the Applicant's argument that Flaracos assisted him to establish that he was entitled to the principal place of residence exemption, the Chief Commissioner submitted as follows: "87. Flaracos is not relevant to the issues under consideration in the present matter. In Flaracos , the Tribunal was concerned with the effect of a license (sic), in circumstances where the taxpayer actually lived from time to time on the premises during the life of the license (sic). 88. In the present case, the tenant occupies the whole of the premises under a Residential Tenancy Agreement." Findings and Reasons 20 The principal issue in this matter is whether the Applicant is entitled to the concession under clause 8, in particular under sub-clause 8(7)(b), of Schedule 1A to the LTM Act. 21 The Tribunal has recently had the opportunity to examine in detail the scope of this concession in Beashel and anor v Chief Commissioner of State Revenue [2008] NSWADT 103 and as part of the reasons in this matter would adopt the following analysis of Clause 8: "26 "The scheme of Clause 8 is essentially to continue to grant the exemption for a principal place of residence to an owner who is absent from his or her former residence for an extended period. It only operates where the owner uses and occupies other land meaning his temporary residence, but which is not owned by the owner. The owner is taken, for the purpose of the principal place of residence exemption, to continue to use and occupy the former residence as his or her principal place of residence. 27 The concession under Clause 8 applies for a period of 6 years starting from the last period of at least six months during which the former residence was used and occupied by the person as a principal place of residence. The concession ceases to have effect if the person is the owner of the former residence at the end of the period of six years and fails to resume actual use and occupation of the residence by the end of that period, and to continue to use and occupy the former residence for at least 6 months. … 29 The concession granted under Clause 8 only applies in respect of a land tax year if the Commissioner is satisfied that no income has been derived from the use or occupation of the former residence in the preceding tax year, except as permitted by sub-clause (7). … 31 Sub-clause 8(7) allows the owner of a former residence to derive income from the use or occupation of the former residence in a tax year. 32 There are two limbs to sub-clause 8(7). Paragraph (a) allows the owner to derive income from "a lease, licence or other arrangement" under which a person has a right to occupy the former residence and the total period for which any right of occupation is conferred does not exceed 6 months in the relevant tax year. There is no limit as to the amount of the rental income that can be derived by the owner under these arrangements. Paragraph (b) allows an owner to derive income from an ongoing basis (including any period exceeding 6 months) arrangement under which a person occupies the former residence "but the income is no more than is reasonably required to cover council, water and energy rates and charges and maintenance costs of the owner in respect of the residence". … 44 I think paragraphs (a) and (b) are quite intentionally drafted in that manner to make the necessary distinction between an arrangement under which a person has a right to occupy the former residence and an arrangement where the owner of the former residence continues to have a right of control over the former residence. In the case of the latter, for the arrangement to fall within the ambit of paragraph (b) it has to place an obligation on the person who occupies the former residence to pay an amount near enough to "cover council, water and energy rates and charges and maintenance costs of the owner in respect of the residence". Such an arrangement, as submitted by Mr Rider, would have to be a non-arm's length arrangement to satisfy that requirement. 45 A lease with a fixed market rate rental would clearly not satisfy that requirement because it will give the tenant the right to occupy the former residence. Paragraph (b) is, in the scheme of Schedule 1A, designed to give absent owners the concession provided they do not derive commercial rents from the former residences. It allows an owner to be reimbursed for the kind of expenses set out in the paragraph and at the same time have the benefit of the principal place of residence exemption. Any interpretation, as suggested by the Applicant's solicitor, to extend the operation of paragraph (b) to leases made to earn commercial rentals would clearly make little sense and defeat the purpose of the concession. If that interpretation is correct, it was not necessary to draft sub-clause 8(7) in its present form. It would have been sufficient for the provision to state that "any lease, licence or other arrangement" exceeding six months provided all or the substantial amount of the income derived is used to "cover council, water and energy rates and charges and maintenance costs of the owner in respect of the residence". That kind of provision would have allowed owners to "create" or incur expenses to enable owners to continue to have the exemption. It would have made no sense and there would have been revenue leakage. The provision is designed to only apply to bona fide arrangements of the kind set out in paragraph (b), which would essentially include mostly non-arm's length arrangements. It is difficult to see arm's length arrangement with a stranger to occupy a former residence on those terms. The owner would be entitled to nominate all sort of expenses and the tenant would have no control over the amount that would be claimed as such expenses. 46 The Tribunal also agrees with Mr Rider's submission that only costs of maintaining the former residence in its current state and condition would qualify as "maintenance costs" under paragraph (b). In context of paragraph (b) "maintenance costs" cannot be given a wider application as suggested by the Applicant's solicitor because it would defeat the purpose of the concession. …" 22 In the present matter, the only evidence before the Tribunal was that the Bexley property was let to tenants under an arm's length rental lease during the relevant land tax years. The provisions of sub-clause 8(7)(b) clearly do not come into consideration in this matter. The Applicant also did not establish the requirement that he had occupied and used the Bexley property as his principal place of residence for a continuous period of at least 6 months prior to entering into the rental lease with the tenants. The Applicant also did not produce any evidence of the outgoings which he claimed fell within the provisions allowed by sub-clause 8(7)(b). 23 The onus was on the Applicant under section 100 (3) of the Taxation Administration Act 1996 (NSW) to establish that the property was used and occupied by him as his principal place of residence. The Applicant has regrettably produced no evidence to establish that the Bexley property was at any stage his principal place of residence. Whilst the Tribunal is sympathetic about his medical and financial hardship problems necessitating the letting of the Bexley property, there is no discretion under the LTM Act for the Tribunal to take those matters into consideration in determining whether a residential property is used and occupied as a principal place of residence by its owner for the exemption to apply. 24 In Flaracos, the court considered the position of an owner who took in tenants at the same time as maintaining residency. The owner was in the relevant land tax years unemployed and there were periods of absences from his dwelling whilst he was looking for work in other states. But when he returned from these trips he stayed at his dwelling, a portion of which was leased to tenants. The evidence also indicated that he had not established a residence anywhere else. His Honour, Gzell J found that the letting "involved joint physical presence in the dwelling and not handing over of exclusive possession to the tenant". In the relevant years, section 3(3)(a) of the LTM Act required "continuous use and occupation" to qualify for the principal place of residence. In concluding that the owner had not breached this provisions, his Honour expressed his opinion as follows: "[29] In my opinion continuous physical presence on the land is not required to constitute continuous occupation. If a person leaves his or her premises for a holiday, it would defeat the purpose of the Act to conclude that occupation had ceased to be continuous. So long as the person retains the right to possession and controls possession, that person remains in occupation, in my view. The observation of Sir Nigel Bowen in Christie that physical presence over the land is not necessary to establish occupation is equally apposite when there is some hiatus in physical presence over time." 25 The provisions of the LTM Act referred to in Flaracos have been replaced by sub-clause 2(2)(a) of Schedule 1A to the LTM Act which came into operation with effect from 31 December 2003. Sub-clause 2(2)(a) in the present case denies the Applicant the exemption because, in the relevant land tax years, the Applicant did not, as required by the provision, use or occupy the Bexley property as his principal place of residence. The tenants occupied and used the whole Bexley property under the residential tenancy agreement. The Applicant as a result neither had the right to possession of the Bexley property nor the control of the possession during the period it was let in the relevant years under review. Flaracos was decided on its very special facts and has no application in this matter. Orders The decision under review in respect of the land tax years 2004 and 2005 is accordingly affirmed. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.