Reported Decision : 71 ATR 545 New South Wales Supreme Court CITATION : Chief Commissioner v McGrath [2008] NSWSC 387 HEARING DATE(S) : 15 April 2008 JUDGMENT DATE : 30 April 2008 JUDGMENT OF : Gzell J DECISION : Appeal allowed. Decision of Appeal Panel set aside. Decision of Judicial Member affirmed. Objection decision of Chief Commissioner affirmed. No order as to costs. CATCHWORDS : TAXES AND DUTIES - Land Tax - Principal place of residence exemption - Adjoining lots with houses on both - One house uninhabitable - Judicial Member of Administrative Decisions Tribunal found defendants failed as a threshold issue to establish that that lot was used for residential purposes - Judicial Member also found that the exemption could not apply to two residences on residential land constituted by adjoining lots - Appeal Panel of the Administrative Decisions Tribunal held that the Judicial Member erred in law in arriving at the "two dwellings" finding and that it was bound up in or informed his "residential land" finding - Only basis for extension of review to the merits of the case - Appeal to Supreme Court on question of law - Submitting appearances by defendants - Whether the Appeal Panel erred in law in extending the review to the merits Land Tax Management Act 1956 LEGISLATION CITED : Administrative Decisions Tribunal Act 1997 Taxation Administration Act 1996 Ryan v Commissioner of Land Tax (1982) 1 NSWLR 305 CASES CITED : Chief Commissioner of State Revenue v Coleman [2007] NSWSC 625, (2007) 66 ATR 713 Lloyd v Veterinary Surgeons Investigating Committee [2005] NSWCA 456, (2005) 65 NSWLR 245 Chief Commissioner of State Revenue (Plaintiff) PARTIES : Mr Adrian Robert McGrath (1st Defendant - Submitting appearance) Mrs Lucille Gloria McGrath (2nd Defendant - Submitting appearance) FILE NUMBER(S) : SC 6059/07 COUNSEL : Mr I Mescher (Plaintiff) SOLICITORS : I V Knight, Crown Solicitor (Plaintiff) W. P. McElhone & Co Solicitors (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J WEDNESDAY 30 APRIL 2008 6059/07 CHIEF COMMISSIONER OF STATE REVENUE v ADRIAN ROBERT MCGRATH & ANOR JUDGMENT The issue 1 The defendants, Adrian Robert McGrath and his wife, Lucille Gloria McGrath, lived in a house in Hunters Hill. It was their principal place of residence. They purchased the adjoining land. The Chief Commissioner issued an assessment for the 2006 land tax year treating Mr and Mrs McGrath's house as exempt from tax under the Land Tax Management Act 1956, but treating the adjoining land as liable to land tax. 2 Mr and Mrs McGrath applied for review by the Administrative Decisions Tribunal of Chief Commissioner's adverse decision on their notice of objection. They failed at first instance. They appealed to the Administrative Decisions Tribunal constituted by an Appeal Panel where they were successful. The Chief Commissioner appeals to this Court from that decision. Mr and Mrs McGrath have entered a submitting appearance. 3 The Chief Commissioner is limited to an appeal on a question of law in terms of the Administrative Decisions Tribunal Act 1997, s 119(1). Under s 113(2) an appeal lay to the Appeal Panel from the decision at first instance on a question of law and, with the leave of the Appeal Panel, might extend to a review of the merits of the decision. The Chief Commissioner submits that in granting leave under that provision, the Appeal Panel erred in law. Factual matters 4 There was no dispute about the facts. They were extracted by the Judicial Member at first instance and repeated by the Appeal Panel. 5 Mr and Mrs McGrath intended to consolidate the original land and the adjoining land, to demolish houses upon each lot and to construct a new residence on the consolidated land. A development application was lodged with the local authority for approval of the consolidation and the construction of the new residence. The Council granted development approval as from 30 June 2006. That was after the relevant taxing date of 31 December 2005. 6 Tenders for the construction of the new residence closed in December 2006. It was expected that by February 2007 the two houses would be demolished and construction of the new dwelling commenced. 7 The house on the adjoining land was of two storeys and substantial. It was disused well before the relevant taxing date. It was used as a storage area for equipment and bicycles. It was usually kept locked. The house was not in habitable condition because kitchen appliances had been disconnected and kitchen cupboards removed. 8 There was no evidence that Mr and Mrs McGrath or their family ever lived in the house on the adjoining land or that they carried out daily living activities in the house such as sleeping, eating, relaxing or watching television. 9 The McGrath family used a jetty and slipway attached to the adjoining land. That slipway had the advantage over the slipway on the original land in that it could be used at all times whereas the slipway on the original land could only be used at high tide. The family also gained access to a private beach within the title to the adjoining land whereas the beach adjoining the original land was a public one. 10 Mr McGrath spent in excess of $6,000 on repairs to the jetty on the adjoining land. 11 The concrete apron at one end of the house on the adjoining land was used for basketball and off-street parking for visiting family, friends and tradesmen. Mrs McGrath used a rotary hoist on the adjoining land to hang out washing. Statutory provisions 12 The Land Tax Management Act, s 10(1)(r) provides that land that is exempt from taxation under the principal place of residence exemption as provided for by Sch 1A is, subject to exceptions irrelevant for present purposes, exempted from taxation under the Act. 13 The Land Tax Management Act, Sch 1A, cl 1(1) defines the principal place of residence exemption by reference to cl 2. So far as is relevant, cl 2(1) was in the following terms: "Land used and occupied by the owner as the principal place of residence of the owner of the land, and for no other purpose, is exempt from taxation under this Act, in respect of the year commencing 1 January 2005 or any succeeding year, if the land is: (a) a parcel of residential land." Clause 2(4) provided that the exemption conferred by cl 2 is referred to as the principal place of residence exemption . 14 The term "principal place of residence" is defined in the Land Tax Management Act, s 3(1) unless the context or subject-matter otherwise indicates or requires, as follows: " principal place of residence of a person means 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." 15 The term "residential land" is defined in the Land Tax Management Act, Sch 1A, cl 3 as follows: "(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: (a) comprised of lots within a strata plan or residential units, or (b) containing (out of the total of all rooms in the building or buildings) occupancies other than that of the owner, or (c) from any part of which income is derived. (2) Land does not cease to be used and occupied as provided by subclause (1) by reason of there being on that land any building or improvement that is used or occupied for a purpose ancillary to the purposes for which the building is, or buildings are, designed, constructed or adapted." 16 The Land Tax Management Act, Sch 1A, cl 4 contains a concession that the principal place of residence exemption will not be lost if there is a single excluded residential occupancy by another in the residence such as a "granny flat." 17 The Land Tax Management Act, sch 1A, cl 12(1) provides that for the purposes of the principal place of residence exemption, only one place of residence may be treated as the principal place of residence for all the members of the same family. Clause 12(2) provides that if members of a family own, whether jointly or separately, more than one residence used and occupied by any of them as a principal place of residence, the Chief Commissioner is to treat the one place of residence elected as the principal place residence of the family as the principal place of residence of all members of the family in respect of a tax year. First instance decision 18 The Judicial Member found, as a matter of fact, that the adjoining land was not being used for residential purposes in terms of the Land Tax Management Act, Sch 1A, cl 3(1). At [48] the Judicial Member said: "On the evidence before the Tribunal 14B was not used as a place of residence. The dwelling on the land, which occupied a substantial area of the relevant land of the lot in question, was on the evidence not used for residential purposes. The relevant property was, at the relevant taxing date, land awaiting development. Eventually, of course the exemption would apply when the new home is constructed and used by the applicants as their principal place of residence. However, on the taxing date 14B was not being used for residential purposes." The reference to 14B is a reference to the adjoining land. The Judicial Member referred to this finding as a failure to satisfy the threshold requirement. The Appeal Panel described it as the "residential land" finding. 19 The Judicial Member went on to conclude, as a matter of law, that the principal place of residence exemption cannot apply to two residences on residential land constituted by adjoining lots. The Judicial Member pointed out that the scheme of the law restricted the exemption to one residence other than the concessions found in the Land Tax Management Act, Sch 1A, cl 4. The judicial member pointed out that cl 3(2) ensured that the exemption would not be denied if there were buildings upon the land for a purpose ancillary to the buildings designed, constructed or adapted for residential purposes as, for example, a garage, a green house or a pool house. The Judicial Member pointed out that an independent single dwelling or residence could not be said to be used or occupied for a purpose ancillary to the purpose of another independent single dwelling or residence. The Judicial Member said that this interpretation was consistent with cl 12 which restricted the principal place of residence exemption to only one residence and that two independent residences on adjoining lots would not be taken to be one residence for the purpose of cl 12. They were clearly two residences. At [55] the Judicial Member stated his conclusion thus: "The cumulative effect of clauses 3, 4, and 12 is that the exemption for a principal place of residence will not apply to both dwellings if there are two independent dwellings on a parcel of residential land of adjoining blocks. The taxpayer would in those circumstances nominate the one that he or she regards as his or her principal place of residence. In this matter the applicants were on the taxing date entitled to the principal place of residence exemption for 16A." The reference to 16A is a reference to the original land. The Appeal Panel described this finding as the "two dwellings" finding. 20 At a time when the principal place of residence exemption applied to a parcel of residential land not exceeding 2,100 square metres in area that is used and occupied as his principal place of residence, and for no other purpose, by the owner of the land or, where there are joint owners, as his principal place of residence, and for no other purpose by any one or more of them, Hunt J in Ryan v Commissioner of Land Tax (1982) 1 NSWLR 305 considered whether two contiguous lots constituted a parcel of residential land for the purposes of the exemption. 21 Mr and Mrs Ryan jointly purchased a block of land and at the same time Mr Ryan purchased the contiguous block. One purchase price was paid to the same vendor. A large house was constructed on one lot that, together with a garage, pool house, swimming pool and associated facilities virtually filled the site. There was no physical separation between the two lots and the other one was used and occupied by Mr and Mrs Ryan as a garden entertainment and recreation area, gardens having been laid out and a barbeque built. The only building on the contiguous lot consisted of stone steps commencing in the other block and crossing the boundary to the contiguous block. 22 His Honour accepted that the two lots were used and occupied together at all times as one residential area. He concluded that contiguous lots could comprise a parcel of residential land if four unities were established. At 10, his Honour said: "It follows, in my view, that contiguous blocks of land can comprise a "parcel of residential land" within s 10(1)(r)(ii) only where they are undivided not only by physical separation but also in use, occupation and title." 23 Because there was no unity of title, Mr and Mrs Ryan failed to establish an entitlement to the exemption. 24 In this case at first instance, the Chief Commissioner conceded that the two lots were not divided by physical separation and had a unity of title and a unity of occupation. The Chief Commissioner contended, however, that on the facts, Mr and Mrs McGrath had failed to show that there was a unity of use between the two lots. 25 On this issue, as a matter of fact, the Judicial Member concluded that unity of use had not been established. At [57] he said: "Having concluded that the applicants have failed to satisfy the threshold requirement for the principal place of residence exemption, it would follow that, on the evidence before the Tribunal, the applicants have also failed to discharge the necessary onus to show that there was a unity of use between 16A and 14B as at the relevant taxing date to satisfy the Ryan "use " test." 26 Thus, the first instance decision had three elements: a "residential land" finding as a finding of fact, a "Ryan" finding as a finding of fact and a "two dwellings" finding as a finding of law. Appeal Panel decision 27 The Administrative Decisions Tribunal Act, s 113(1) provided that a party to proceedings in which an appealable decision of the Tribunal is made may appeal to the Tribunal constituted by an Appeal Panel. An "appealable decision" is defined in s 112(1)(b) to include a review of a reviewable decision. A "reviewable decision" is defined in s 8 to mean a decision of an administrator that the Tribunal has jurisdiction under an enactment to review. An "administrator" is defined in s 9(1) to mean the person or body that makes, or is taken to have made, the decision under the enactment concerned. The Taxation Administration Act 1996, s 96(1)(a) provides that a taxpayer may apply to the Administrative Decisions Tribunal for a review of a decision of the Chief Commissioner that has been the subject of an objection if the taxpayer is dissatisfied with the Chief Commissioner's determination of the objection. 28 It was, therefore, open to Mr and Mrs McGrath to appeal to the Tribunal constituted by an Appeal Panel. 29 The Appeal Panel found that the Judicial Member did not fall into error by deciding whether the lots were residential land. At [29] they said: "The appellants argue that by proceeding on the basis of determining whether the relevant land was "residential land", the Tribunal fell into error. It is difficult to see how this is so given that the term "residential land" is both a defined term in the Act and part of the term "parcel of residential land" which appears in the Act as the basis of the exemption. If land is not residential land, can it be part of a parcel of residential land? The analysis of whether the land is part of a parcel of "residential land" within the meaning of the Act must commence with an analysis of whether the elements of the parcel are indeed "residential land"." 30 Next, the Appeal Panel determined that the Judicial Member did not err in making his "Ryan" finding. At [31] they said: "It seems to the Appeal Panel that the Judicial Member did not misinterpret Ryan . In considering whether the land formed "residential land", he considered the "four unities" which are that the land is undivided "not only by physical separation but also use, occupation and title" (paragraph [23]). Such a consideration is necessary for a finding that the land falls within clause 2(1)(a) of Schedule 1A." 31 The Appeal Panel took the view that the Judicial Member's finding that the adjoining land was not residential land (the "residential land" finding) was "bound up" in his finding that the principal place of residence exemption was confined to a single independent residence (the "two dwellings" finding) such that the former was only correct if the latter involved no error of law. At [34] the Appeal Panel said: "Was this finding an error of law? It seems to us that the "residential land" finding, bound up as it is in the "two dwellings" finding, is correct only if the "two dwellings" finding discloses no error of law." 32 The Appeal Panel then determined that the Judicial Member erred in law in making the "two dwellings" finding. At [37] they said: "The Appeal Panel is of the view that the expression of the learned Tribunal Member in paragraph [53] is indeed an error of law. There is no reason why an "independent dwelling", previously used for residential purposes, should be in any different position from, say, a greenhouse or a pool house (see paragraph [52] of the decision). The words "the building" in clause 3(2) where they appear after the words "any building or improvement" refer back to the words "any building". It is the building on 14B which must be used for a purpose ancillary to the purpose for which that building is "designed, constructed or adapted". To say, as the learned Judicial Member did, that a residential house on adjoining land could not, of itself, be used for that ancillary purpose appears to be a misconstruction of Clause 3." 33 The Appeal Panel gave leave to extend the review to the merits because of its view that the Judicial Member's error of law in the "two dwellings" finding "informed" the factual decision in the "residential land" finding. They said at [39]: "The appellant argues that if, as we have found, there is an error of law in the construction of Clause 3 informing the factual decision as to whether the use of 14B falls within the exemption, it is an appropriate case to grant leave to the appellant to extend the appeal to the merits of the case and to examine whether the property at 14B should be granted the exemption. We have noted the respondent's submission set out in paragraph [26] above and, having considered them, agree with the appellant on this point. Accordingly, leave is granted to extend the decision to the merits and we will consider the evidence in the light of the proper interpretation of Clause 3." 34 Having considered the merits of the case, the Appeal Panel concluded that the adjoining land was put to a use for residential purposes and for no other purpose ancillary to the uses to which the original land was put. At [41(d)] they said: "Taking into account those principles, it appears to the Appeal Panel that the uses to which 14B were put were both for "residential purposes and for no other purposes" and "ancillary to the uses to which 16A was put". The recreational and household use of 14B was, indeed, acknowledged by Judicial Member as being, in some circumstances, probably sufficient for the exemption to apply were it not for the incorrect "two dwellings" finding. Unlike the property in Coleman's case, there was no other actual use (such as a property development) being undertaken on the site. The fact that the land was "awaiting development" was irrelevant if that use had not yet commenced, and there was actual use of the property for appropriate residential purposes." 35 In Chief Commissioner of State Revenue v Coleman [2007] NSWSC 625, (2007) 66 ATR 713, the taxpayers subdivided a block of land retaining their principal place of residence on one block and building an additional residence on the other. At the relevant time, the new residence had foundations, walls and concrete slabs at ground and first storey level, but was unoccupiable. The taxpayers continued to live in their existing home and continued to use the block for gardens and recreational purposes until the new house was complete. In allowing the Chief Commissioner's appeal, Handley AJ concluded that the Appeal Panel had erred in law by disregarding the findings below that, at the relevant time, there were dual uses of the land and the use as a construction site was considerable. 36 In this case, the Appeal Panel concluded that the adjoining land was not a place of residence for the purpose of the Land Tax Management Act, Sch 1A, cl 12 because that provision was directed towards two houses being separately occupied as places of residence. The Appeal Panel said at [42]: "It is the Appeal Panel's view that 14B is not a "place of residence" for the purposes of clause 12 of Schedule 1A, as that clause is directed towards two house being separately occupied as places of residence, and not towards a house being used, not as a house, but for purposes ancillary to another dwelling." 37 Finally, the Appeal Panel concluded at [43]: "Accordingly, the land at 14B is part of a "parcel of residential land" and used and occupied by the appellants for residential purposes." Chief Commissioner's argument 38 The Chief Commissioner argues that the Appeal Panel erred in law in finding, as it did at [34] that the "residential land" finding was "bound up" with the "two dwellings" finding and was correct only if the "two dwellings" finding disclosed no error of law. 39 In concluding that the two findings were bound up together, or that the "two dwellings" finding "informed" the factual decision in the "residential land" finding as the Appeal Panel said at [39], I am of the view that the Appeal Panel misinterpreted the judgment of the Judicial Member. 40 When the Judicial Member made his "residential land" finding at [48], he made no mention of the "two dwellings" issue. The Judicial Member discussed the physical aspects of the user of the adjoining land in arriving at his conclusion. He considered the evidence of use of the amenities of the adjoining land such as the jetty and slipway and private beach and Mrs McGrath's use of the rotary hoist. He said these activities might have been sufficient to constitute use and occupation for residential purposes had there been no dwelling on the adjoining land. 41 That was not a reference to the "two dwellings" issue that the Judicial Member discussed later in his reasons. It was a reference to the lack of use of the house on the adjoining land that took up a considerable portion of it. In arriving at his conclusion on the "residential land" issue, the Judicial Member accepted the submission of the Chief Commissioner that if there exists on land a building or improvement that is either not used or occupied for any purpose, or is used or occupied for a purpose not ancillary to residential purposes, the land is not residential land. 42 Having made his "residential land" finding at [48], the Judicial Member turned to the "two dwellings" issue. He analysed the scheme of the law and concluded at [55] that the cumulative effect of the provisions of the Land Tax Management Act, Sch 1A was that the principal place of residence exemption will not apply to independent dwellings on a parcel of residential land constituted by adjoining lots. 43 That this was an issue separate from the "residential land" finding is apparent from what the Judicial Member said at [56]: "Apart from the outcome in this matter as to the threshold issue, the applicants would also not be entitled to a principal place of residence exemption in relation to 14B on the basis of the cumulative effect of clauses 3, 4 and 12." 44 The Judicial Member clearly regarded his "residential land" finding as determinative of the matter. He regarded the "two dwellings" finding as an obiter dictum. 45 While it is not necessary to identify an error of law to give leave to extend an appeal to the merits (Lloyd v Veterinary Surgeons Investigating Committee [2005] NSWCA 456, (2005) 65 NSWLR 245 at 257 [63]-[64]) an Appeal Panel should weigh relevant factors in exercising the power to extend an appeal to a review of the merits of the case. It would, I would have thought, be only in the most exceptional circumstances that a first instance finding that an appellant failed to satisfy the onus of establishing that the land in question constituted residential land under the four unities tests in Ryan that leave to extend a review to the merits would be granted. 46 In this case, the Appeal Panel gave its reason for extending the appeal. It found that the Judicial Member erred in law in making the "two dwellings" finding. It was that error of law that the Appeal Panel found was "bound up" in or "informed" the "residential land" finding. That was the only basis for extending the appeal to the merits of the case. 47 I have found that they erred in arriving at that conclusion. Not only did the Judicial Member treat his "residential land" finding as separate from his "two dwellings" finding but also they are separate and distinct considerations. 48 If the principal place of residence exemption was not denied for two independent dwellings on a parcel of residential land constituted by adjoining lots, Mr and Mrs McGrath would still bear the onus of establishing that the land in question constituted a parcel of residential land in terms of the Land Tax Management Act, Sch 1A. 49 In my judgment, in arriving at their decision to extend the review to the merits of the case, the Appeal Panel erred in law because, for the reasons already expressed, the Judicial Member's "two dwellings" finding was not "bound up" in and nor did it "inform" his "residential land" finding. 50 It was only by extending the appeal to the merits that the Appeal Panel could overturn the decision of the Judicial Member. The Chief Commissioner has made out his appeal to this Court on a question of law. Conclusion 51 The appeal is allowed. The decision of the Appeal Panel is set aside. The decision of the Judicial Member is affirmed. The objection decision of the Chief Commissioner under review is affirmed. 52 Mr and Mrs McGrath entered a submitting appearance, save as to costs. No doubt the Chief Commissioner's purpose in appealing from the decision of the Appeal Panel was not only to affirm the decision of the Judicial Member in the case of Mr and Mrs McGrath, but also to set aside the precedent established by the decision of the Appeal Panel as it might apply to other taxpayers. 51 In the circumstances, I am of the view that it is appropriate that I make no order as to costs. *********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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