New South Wales Supreme Court CITATION : McNally & Anor v Commissioner of State Revenue [2003] NSWSC 1118 revised - 19/12/2003 HEARING DATE(S) : 5 December 2003 JUDGMENT DATE : 16 December 2003 JURISDICTION: Equity JUDGMENT OF : Gzell J DECISION : Submission as to assessment of exempted land rejected. Application for review dismissed. Assessment of other premises confirmed. CATCHWORDS : TAXES AND DUTIES - Land Tax - Whether husband and wife with a principal place of residence exemption can have a principal place of residence exemption with respect to other premises - Whether the other premises were the principal place of residence of the husband - Whether the Chief Commissioner is entitled on appeal to submit that the exempted premises should be assessed because of the use of a room as an office unknown to the Chief Commissioner before the institution of the application for review Land Tax Management Act 1956 Land Tax Management (Amendment) Act 1975 LEGISLATION CITED : State Revenue Legislation (Miscellaneous Amendments) Act 1996 Income Tax Assessment Act 1936 (Cth) Taxation Administration Act 1996 Land Tax Management (Amendment) Bill 1975 Flaracos v Chief Commissioner of State Revenue (NSW) 2003 ATC 4348 Longford Investments Pty Ltd v Commissioner of Land Tax (NSW) (1978) 8 ATR 656 Buckley v Commissioner of Land Tax [1975] 1 NSWLR 189 CASES CITED : Ryan v Commissioner of Land Tax [1982] 1 NSWLR 305 McMillan v Commissioner of Land Tax [1972] 1 NSWLR 545 St George Leagues Club Ltd v Commissioner of Land Tax [1983] 2 NSWLR 399 Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 Robert Francis McNally (1st Plaintiff) PARTIES : Elizabeth Ann McNally (2nd Plaintiff) Commissioner of State Revenue (Defendant) FILE NUMBER(S) : SC 4918/02 COUNSEL : Mr CJ Bevan (Plaintiffs) Dr HR Sorensen (Defendant) SOLICITORS : JP Leong & Co Solicitors (Plaintiffs) IV Knight (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J TUESDAY 16 DECEMBER 2003 4918/02 ROBERT FRANCIS McNALLY & ANOR v CHIEF COMMISSIONER OF STATE REVENUE (Revised 19 December 2003) JUDGMENT 1 The defendant raised a notice of assessment with respect to land owned by the plaintiffs. They have sought review by the court of the adverse determination by the defendant of their notice of objection. 2 The plaintiffs owned a unit at Walker Street, North Sydney, a residence at Robertson Street, Greenwich and a residence at Elizabeth Drive, Noraville. 3 The Land Tax Management Act 1956, s 7 provides that land tax is levied on the land value of all land in New South Wales that is owned by taxpayers other than land that is exempt from taxation under the Act. Section 8 provides that land tax is charged on land as owned at midnight on 31 December immediately preceding the year for which the tax is levied. The assessments were raised for the 1998 to 2002 tax years. 4 The Land Tax Management Act 1956, s 10(1) provides that, subject to exceptions irrelevant for present purposes, certain lands are exempt from taxation. As it stood in the tax years in question, so far as is material, s 10(1)(r) exempted the following land: "… land that has a land value in respect of the year of less than the premium tax threshold and that is used and occupied as the principal place of residence of the owner of the land (or, if there are joint owners, as the principal place of residence of one or more of them) and for no other purpose… being: … (ii) a parcel of residential land…" 5 The defendant acknowledged that the exemption applied to the Greenwich residence and raised no assessment with respect to its land value. The plaintiffs claim that the exemption also applies to the Noraville residence. 6 Prior to December 1993, the Greenwich residence was the sole place of residence of the plaintiffs. They had, in the late 1980s, purchased a townhouse at Nora Head on the Central Coast of New South Wales where they spent most weekends. In 1991, they saw a vacant block at Noraville which they purchased at auction. The residence was completed on the Noraville land in December 1993. Mr McNally said he would like to live on the land when he retired. Mrs McNally said she could not leave Sydney. Their son was involved in a serious motorcycle accident that left him with an intellectual and a physical disability. Mrs McNally wanted to be close to him and also to her friends to indulge her interests in bridge and theatre. 7 Mr McNally had retired from the accounting firm Hall Chadwick by December 1993 but he maintained a consultancy with the firm until December 1997 during which time he worked one day a week with the firm. During the January 1994 school holidays the plaintiffs spent their time in the Noraville residence. Mr McNally decided he wanted to stay there permanently but had given up any idea of convincing Mrs McNally to do so. 8 During 1994, Mr McNally changed his residential address on his driver's licence, his motor vehicle registration and the electoral roll. Electricity bills for both premises were addressed to Mr McNally at Greenwich. He said all bills for the three properties were addressed to him at the Greenwich residence because he paid them from there. All telephone bills were addressed to his company at the Greenwich residence and the entry in the telephone book listed his address at Greenwich. Mr McNally maintains separate wardrobes at the Greenwich residence and at the Noraville residence. Objects bought jointly by the plaintiffs were kept at the Greenwich residence. A few ceramics and souvenir plates acquired overseas, Mr McNally kept at the Noraville residence. 9 During 1996, the plaintiffs converted a billiard room under the Greenwich residence to an office. It had its own dedicated telephone and facsimile lines and its own toilet. It had no internal access to the house and had its own separate street access. 10 After his consultancy with Hall Chadwick came to an end, Mr McNally used the office to attend to the affairs of a few remaining clients and family investments. For the last few years, Mr McNally has worked in his office at the Greenwich residence all day on Thursdays. The plaintiffs drive to the Noraville residence on Sunday morning, unless Mr McNally has completed his round of golf early on Saturday in which event they occasionally drive to Noraville on Saturday afternoon or evening. 11 While they occasionally drive in separate motor vehicles, the norm is that the plaintiffs travel to Noraville together. They normally return to the Greenwich residence on Tuesday evening. Thus, on average, the plaintiffs together spend four days at the Greenwich residence and three days at the Noraville residence. 12 The plaintiffs spend their holidays at the Noraville residence and Mr McNally spends about a week there, in the absence of Mrs McNally, with golfing friends. Mr McNally estimates that in the period from January 1998 to December 2002 he has spent about two to three weeks more than one half of his available time not spent travelling, living at Noraville. The Noraville residence is not used or occupied for other than the above described residential purposes. 13 In February 1994, the plaintiffs lodged with the defendant notice of a change in land use indicating the Noraville residence as a principal place of residence. At the time that document was lodged, Mr McNally was aware of the exemption for principal place of residence in the Land Tax Management Act 1956. 14 The principal residence exemption under the Land Tax Management Act 1956, s 10(1)(r) must be read in conjunction with the definition of the term "principal place of residence" in s 3(1) as the one place of residence that is, among the one or more places of residence of the person within and outside Australia, the principal place of residence of the person. It must also be read in conjunction with s 3(3) which is in the following terms: "For the purposes of this Act, in respect of any year in respect of which taxation is leviable or payable, land or a flat is not used or occupied as the principal place of residence of a person unless: (a) that land or flat and no other land or flat has, since before the first day of July that last preceded the commencement of that year, been continuously used and occupied by that person for residential purposes and for no other purpose; or (b) in any other case, the Chief Commissioner is satisfied that the land or flat is used and occupied by that person as the person's principal place of residence." 15 In Flaracos v Chief Commissioner of State Revenue (NSW) 2003 ATC 4348 at 4352, I said that the Land Tax Management Act 1956, s 3(3)(a) meant that the use of the land for residential purposes must remain constant throughout each relevant 18 month period. That is not so. The period is in excess of six months. Before the introduction of s 3(3) by the Land Tax Management (Amendment) Act 1975, the question was what use and occupation was made of the land at midnight on 31 December immediately preceding the tax year in terms of s 8. It had been recognised that this required an investigation of the use and occupation of land both before and after that date (Longford Investments Pty Ltd v Commissioner of Land Tax (NSW) (1978) 8 ATR 656 at 660-661). The Chief Commissioner will be called upon to make an assessment at some time during a tax year. In requiring the relevant use and occupation to have existed since before 1 July of the preceding year, s 3(3)(a) was giving effect to that understanding. 16 The Land Tax Management Act 1965, s 10(1)(r)(ii) used to exempt a parcel of residential land used and occupied for residential purposes and for no other purpose. In Buckley v Commissioner of Land Tax [1975] 1 NSWLR 189 it was held that land used for residential purposes was exempt whether or not the land owner owned other land similarly used. 17 As Hunt J observed in Ryan v Commissioner of Land Tax [1982] 1 NSWLR 305 at 309, the Land Tax Management (Amendment) Act 1975 introduced s 3(3) and amended s 10(1)(r) to limit the exemption to use and occupation as the principal place of residence. 18 It was to overcome a taxpayer with a principal place of residence outside the jurisdiction claiming exemption for residential land in New South Wales, that led to the introduction of the definition of the term "principal place of residence" by the State Revenue Legislation (Miscellaneous Amendments) Act 1996. 19 The plaintiffs argued that the Noraville residence was exempt by the combined operation of the Land Tax Management Act 1956, s10 (1)(r)(ii) and s 3(3)(a). It was argued that it was used and occupied as the principal place of residence of Mr McNally as one of its joint owners and that it and no other land had been continuously used and occupied by Mr McNally for residential purposes and no other purposes since before the six month period preceding the first day of each tax year in question. 20 In the alternative, it was submitted that the Noraville residence was exempt in terms of the combined effect of the Land Tax Management Act 1956, s 10(1)(r)(ii) and s 3(3)(b). It was argued that the land was used and occupied as the principal place of residence of Mr McNally as one of its owners and that the defendant should be satisfied that it was used and occupied by Mr McNally as his principal place of residence. 21 There was a deal of discussion as to the effect of Mr McNally's office in the Greenwich residence. The word "solely" is used to confine exemption for particular uses of land under the Land Tax Management Act 1956. For example, s 10(1)(d) exempts land owned by or in trust for a charitable or educational institution if the institution is carried on solely for charitable or educational purposes and not for pecuniary profit. It has been said that such words confine the use of property to the purpose stipulated and prevent any use of it for any purpose, however minor in importance, which is collateral to or independent, as distinguished from incidental to the stipulated use (McMillan v Commissioner of Land Tax [1972] 1 NSWLR 545 at 558). 22 It was submitted on behalf of the defendant that the words of the Land Tax Management Act 1956, s 10(1)(r) connoted exclusivity with the consequence that the Greenwich residence was not exempt under that provision because of the collateral or independent use of the premises for an office. 23 It was pointed out on behalf of the defendant that the first indication of the existence of an office came when the plaintiffs filed and served their affidavits in this matter and the defendant could not now amend the assessment. 24 In St George Leagues Club Ltd v Commissioner of Land Tax [1983] 2 NSWLR 399 the Commissioner assessed two properties liable to land tax. The club objected to each assessment claiming they were wholly exempt as sites for a building owned and solely occupied by a society, club or association not carried on for pecuniary profit. The Commissioner allowed the objection with respect to one property but only partially allowed it with respect to the other. The club requested the Commissioner to treat the objection as an appeal and forward it to the Supreme Court under the former Land Tax Management Act 1956, s 35. Thereafter, the Commissioner sought to vary his assessments by wholly disallowing the exemptions with respect to both properties. Lee J held that he could not. Once an appeal had been instituted, the intention of the legislation was that the court should decide upon the correctness or otherwise of the Commissioner's decision, the subject of the appeal. 25 However, Lee J went on to hold that the Commissioner was entitled to argue that the original assessments were correct and neither property was subject to exemption. His Honour arrived at this conclusion because the former Land Tax Management Act 1956, s 37(4) gave the court power to increase an assessment which his Honour interpreted to require the court to give a decision on the evidence before it which carried out the provisions of the Act. 26 That power no longer appears expressly in the Taxation Administration Act 1996, s 101(1) which provides that the court, upon review, may confirm or revoke the assessment or other decision to which the application relates, make an assessment or other decision in place of the assessment or other decision to which the application relates, make an order for the payment to the Chief Commissioner of any amount of tax that is assessed as being payable but has not been paid, remit the matter to the Chief Commissioner for determination in accordance with its findings or decision, or make any further order as to costs or otherwise as it thinks fit. 27 Further, what is referred to the court for review under the Taxation Administration Act 1996, s 97(1) is the adverse decision of the Chief Commissioner on the notice of objection. The notice of objection is to an assessment in terms s 86(1) and an assessment is limited to the taxable value of land under the Land Tax Management Act 1956, s 14(1). 28 The only lands with respect to which the defendant assessed a taxable value was the land at Noraville and the unit at North Sydney. There was no assessment of a taxable value of the land at Greenwich. 29 In my view, it is not open to the Chief Commissioner to seek to support his assessment of the land value of the Noraville property by inviting the court to make an assessment of the land value of the Greenwich property. 30 The Taxation Administration Act 1996, s 101(1)(b) empowers the court to make an assessment or other decision in place of the assessment or other decision to which the application relates. Since the application relates to the assessment of the taxable value of the Noraville property, that provision does not enable the court, in my opinion, to make an assessment of the taxable value of the Greenwich property. 31 The structure of the Act is to require the Chief Commissioner to consider a notice of the objection under the Taxation Administration Act 1996, s 86 and either to allow the objection in whole or in part or to disallow it under s 91(1) and give his reasons for the determination on the objection in terms of s 93(2). 32 The analogous structure under the former provisions of the Income Tax Assessment Act 1936 (Cth) were the subject of discussion by the High Court in Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466. It was held that the taxpayer bore the onus of establishing that an assessment was excessive and there was nothing confining the Commissioner of Taxation to matters in the notice of objection and once the decision on the objection was before the court, it was seised of the decision in its entirety and Commissioner was entitled to justify his assessment by arguing that some deductions which had been allowed by the assessment were in law not allowable so that the whole or part of the tax payable was still payable and the assessment was, accordingly, not excessive. 33 The structure of the Land Tax Management Act 1956 and the Taxation Administration Act 1996 is different. Assessments are confined to taxable values of discrete parcels of land. 34 The defendant did not assess a land value of the Greenwich property on the basis that it was not subject to exemption because of the use made by Mr McNally of the office. The plaintiffs did not have the opportunity to object to any such assessment. Nor have they had the opportunity, if such an assessment was raised, to consider the potential operation of the Land Tax Management Act 1956, s 9C. 35 In my view it is not open to the Chief Commissioner to seek to support his assessment of the land value of the Noraville property in this way. It would be unfair for the defendant to be allowed to raise issues with respect to the land value of a different parcel of land to off-set any diminution in his assessed land value of the Noraville property. 36 It is difficult to see how issue estoppel could deprive the defendant of the right to make a reassessment under the Taxation Administration Act 1996, s 9 if there is no decision on the merits with respect to the office or with respect to the potential operation of the Land Tax Management Act 1956, s 9C on the taxable value of the Greenwich land. 37 In Flaracos at 4351-4352 I discussed the concepts of use and occupation as developed in the authorities. It was common ground in these proceedings that the Noraville residence was used and occupied by the plaintiffs as a place of residence and for no other purposes and that it was continuously so used and occupied during the period in excess of six months referred to in the Land Tax Management Act 1956, s 3(3). The defendant disputed that the Noraville residence was the principal place of residence of Mr McNally. 38 In light of Mr McNally's knowledge of the principal residence exemption, the fact that he changed his address to the Noraville residence is not as significant as otherwise might have been the case. Nor, in my view, is the circumstance that Mr McNally, on average, resided in the Noraville residence for two to three weeks longer than he resided in the Greenwich residence, determinative of the issue. That evidence must be considered in light of the further evidence that on average Mr and Mrs McNally resided together in the Greenwich residence for four days per week and resided together in the Noraville residence for three days per week. 39 I do not regard the address to which bills were sent as denying Mr McNally the argument that Noraville was his principal place of residence, although the lack of a listing of the Noraville address in the telephone book, tells somewhat against the proposition. 40 In the end, what tips the balance against the plaintiffs, in my view, is the fact that they cohabited together at both residences. 41 Had Mr McNally spent four days per week by himself in the Noraville residence and then joined Mrs McNally in the Greenwich residence for the reminder of the week, the result might well have been different. 42 Here we have a married couple spending a majority of their time per week in what had indisputably been the principal place of residence of both of them in the past and an extended weekend in premises enjoyed by them for their annual holidays. 43 The Land Tax Management Act 1956 requires a decision to be made as to which of the premises so used is to be regarded as the principal place of residence. In my view, the plaintiffs have not discharged their onus of establishing that Mr McNally had relinquished Greenwich as his principal place of residence and had adopted the Noraville residence in its stead. I am of the view, therefore, that the plaintiffs have failed to establish their principal proposition. 44 As to the alternative submission, that the defendant ought to have been satisfied in terms of the Land Tax Management Act 1956, s 3(3)(b) that the Noraville premises were used and occupied by Mr McNally as his principal place of residence, the defendant submitted that there was no alternative argument because the Noraville premises were not, in fact, the principal place of residence of Mr McNally and s 3(3)(b) had no scope for operation. 45 The defendant submitted that the correct approach to the principal residence exemption was to determine whether premises were the principal place of residence of the owner, or one or more of the joint owners, in terms of the Land Tax Management Act 1956, s 10(1)(r) and, if so, whether the land was residential land in terms of s 10(1D) and, if so, whether s 3(3) excluded exemption. If the first or second question was answered in the negative, it was submitted that there was no scope for the operation of s 3(3). 46 It was further submitted that the Land Tax Management Act 1956, s 3(3)(b) was limited to the circumstance that a principal place of residence had not been continuously used and occupied for the period mentioned in s 3(3)(a), support for which contention is contained in the Second Reading Speech for the Land Tax Management (Amendment) Bill 1975. 47 I need not determine all of these issues. In my view, the Land Tax Management Act 1956, s 3(3) is not called into play unless there be a finding that premises in question constituted the principal place of residence of an owner or one or more of the joint owners of land in terms of s 10(1)(r). That not being the case in the instant circumstances, I am of the view that the limitation in s 3(3) does not arise and there is no question of fulfilling alternative requirements. 48 I would dismiss the application for review and confirm the assessment of the defendant. I will hear the parties on costs. I direct the parties to bring in short minutes of orders reflecting these reasons. ********** Last Modified: 12/22/2003 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.