Administrative Decisions Tribunal New South Wales Medium Neutral Citation: Gareffa v Chief Commissioner of State Revenue [2012] NSWADT 41 Hearing dates: 6 February 2012 Decision date: 15 March 2012 Jurisdiction: Revenue Division Before: A Verick, Judicial Member Decision: The land tax assessment for the land tax years 2006, 2007, 2008, 2009 and 2010 is confirmed. Catchwords: Primary production exemption- rural land - dominant use test Legislation Cited: Land Tax Management Act 1956 Administrative Decisions Tribunal Act 1997 Taxation Administration Act 1996 Local Government Act 1993 Cases Cited: Romano v Chief Commissioner of State Revenue [2011] NSWADT 73 A R Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286 Cornish, Ball v Chief Commissioner of State Revenue [2010] NSWADT 114 Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 Tourapark Pty Ltd v FCT (1982) 149 CLR 176 Newcastle City Council v Royal Newcastle Hospital (1958) 100 CLR 1 Southern Estates Pty Limited v Federal Commissioner of Taxation (1967) 117 CLR 481 Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2010] NSWSC 867 Saville v Commissioner of Land Tax (1980) 12 ATR 7 Hope v Bathurst City Council (No 2) (1983) 52 LGRA 79 Hope v Bathurst City Council (1986) 7 NSWLR 669 Category: Principal judgment Parties: Guieseppe Garreffa (Applicant) Chief Commissioner of State Revenue (Respondent) Representation: Counsel H El-Hage (Respondent) F Galluzzo CPA (Applicant, agent) State Crown Solicitor (Respondent) File Number(s): 116019 REASONS FOR DECISION 1The applicant, Giuseppe Gareffa, is the owner of two adjoining properties, 158 and 160 Riverstone Road, Riverstone. On 19 February 2010, the respondent ("the Chief Commissioner") issued a land tax assessment under the Land Tax Management Act 1956 ("LT Management Act") for the land tax years 2006, 2007, 2008, 2009 and 2010 ("the land tax years") in respect of 158 Riverstone Road, Riverstone ("the property"). 2The applicant objected to the assessment on the grounds that the property was exempt under s 10AA of the LT Management Act which was, in the relevant years, in the following terms: 10AA Exemption for land used for primary production (1)Land that is rural land is exempt from taxation if it is land used for primary production. (2)Land that is not rural land is exempt from taxation if it is land used for primary production and that use of the land: (a) has a significant and substantial commercial purpose or character, and (b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). (3)For the purposes of this section, land used for primary production means land the dominant use of which is for: (a) cultivation, for the purpose of selling the produce of the cultivation, or (b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or (c) commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or (d) the keeping of bees, for the purpose of selling their honey, or, (e) a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public, or (f) the propagation for sale of mushrooms, orchids or flowers. (4)For the purposes of this section, land is rural land if: (a) the land is zoned "rural", "rural residential" or "non-urban" under a planning instrument, or (b) the land is not within a zone under a planning instrument but the Chief Commissioner is satisfied the land is rural land. 3The Chief Commissioner disallowed the objection. 4The applicant seeks a review of the assessment under s 96 of the Taxation Administration Act 1996. 5At the hearing the applicant relied entirely on a bundle of documents, described as "Evidence and Submissions", which contained various documents that the applicant's agent submitted was the evidence to support the applicant's case. 6The property is a five-acreage property with a heritage-protected house on the property. Since 25 October 2006, Anthony Esner has rented the house and approximately 3 acres of the surrounding land. The leased area is separated from the rest of the property, which is approximately two acres, by fencing. 7The applicant resides in a house situated on 160 Riverstone Road, Riverstone and claimed that, in the land tax year 2006, primary production activities were undertaken on the land not leased for "the growing of flowers, pumpkin and broad beans" and as "from 26 October 2006, three acres were leased to Anthony Enser for breeding of goats". In respect of the land tax years 2007, 2008, 2009 and 2010, the applicant claimed that the two acres not leased were used for "flower, pumpkin and broad beans cropping" and the three acres leased to the tenant were used by the tenant for "breeding and selling goats". 8The various documents in the bundle of evidence included rate notices in respect of the property issued by the Blacktown Council, treating the property as "ordinary farmland", and the applicant's individual income tax returns for the 2006 to 2010 income tax years. 9In each income tax return, the applicant described his main business as "flower growing (outdoors)" and gave 160 Riverstone Road, Riverstone as his business address. The applicant disclosed losses in respect of the business for income tax years 2006 ($7,202), 2007 ($2,953) and 2008 ($3,976). For the 2009 and 2010 tax years the applicant disclosed total profits, $15,423 and $19,013 respectively. 10The applicant also included in his tax returns the net rental income earned from the leasing of the property - 2006 ($3,890), 2007 ($7,219), 2008 ($10,578), 2009 ($12,092) and 2010 ($12,196). 11The respondent, in addition to various documents produced under s 58 of the Administrative Decisions Tribunal Act 1997, also tendered at the hearing an inspection report of the property and an affidavit by Anthony Esner, the neighbour and tenant of the applicant. 12The tenant was the only witness produced at the hearing. The tenant is fully employed as a forklift driver and in his affidavit stated as follows: 5.I moved into the rented property around 26 October 2006. Since that time, I have lived at the rented property as my home. 7.For the first two years, I did not have any animals, such as goats or sheep, on the rented property as Mr Gareffa did not wish me to have animals on the rented property. 8.But Mr Garreffa later said I could have animals on the rented Property. Since then, from time to time, I have bought goats and kept them on the rented property to fatten them up. There have not been more than about 8 or 10 goats on the rented property at any one time. I buy the goats as a group, because buying them individually is more expensive. I usually keep them for a few months and then sell them. On average, I buy and sell goats twice per year, although normally not in summer. 9.I cannot remember how many goats I have purchased and sold since I moved into the rented property. 10.The buying and selling of these goats is my hobby. I keep the goats as they are hardy animals and I don't really have to look after them. The goats feed on the grass in the paddock beside my house and graze and keep the place tidy, they also keep the grass down which is important as its snake ridden. 11.Within the last two years I have also bought some sheep and kept them on the rented property. Generally I might buy two or three sheep a year. 12.Currently, there are no goats on the rented property but there are two small sheep and a couple of laying chickens. 13.I work full time as a forklift driver. That job provides me with my main source of income. 14.When I buy goats, I pay around $75 per goat (give and take). When I sell the goats, I generally sell a goat for $15-20 more than I paid. Taking into account the money it costs to keep the goats, for example veterinary fees and veterinary supplies, and that some die from snake bites, I don't really make any money from the goats and probably spend more money on the goats than I make on them. 13The tenant was cross examined and was referred by the applicant's agent in particular to two "To whom it may concern" notes that he had provided to the applicant and which the applicant had submitted to the respondent at the objection stage of this matter. In the first note dated on 30 July 2010 the tenant certified that the acreage he rents "is used for breeding goats". In the second note dated 4 November 2010 the tenant indicated that he sells "approximately 30 - 60 goats by private sale a year". The tenant did not provide any clear explanation as to the different figures given in his affidavit and was also not able to categorically state the exact number of goats bought and sold in the relevant years. 14A senior operations officer attached to the respondent's office carried out an inspection on 27 July 2011 of the property and the adjoining property and in his written report made the following statements: Apart from the owner's residence, 160 Riverstone Rd contained some old structures including sheds and what may have been a greenhouse or igloo type enclosure at some stage in the past. There was no evidence of any current crop cultivation or flower growing activities visible on this property at the time of the inspection although the owner claimed that cultivation of crops/flower growing had taken place on this land in previous years. However, this parcel of the land is not in contention. I was also able to observe a residential property leased and land which was fenced off from the rest of the property at 158 Riverstone Rd. We did not attempt to enter the leased out land as the lessee was not in attendance at the time. The majority of this land was fenced off from the house and appeared to be overgrown and untended for some time, and no goats were visible from the fences. As we concluded our inspection and returned to the car I noticed from a distance what appeared to be 2 sheep and 1 duck inside the fenced area. Photos were taken of various parts of both properties. I could not see any evidence of flower cultivation on the parcel in dispute. Submissions 15The applicant's agent relied on the bundle of documents produced and made a number of submissions to support the claim that the property was used for primary production. 16Firstly, it was submitted that the property had been annually inspected by the Blacktown Council and certified as "farmland" for rating purposes in the relevant land tax years. Although it was acknowledged that that was under a different legislation, it was submitted that the tribunal ought to note the Council's finding of fact. 17Secondly, it was submitted that the decision of the tribunal in Romano v Chief Commissioner of State Revenue [2011] NSWADT 73 could be distinguished. Unlike Romano's case where the rental income was almost 30 times more than the primary production income, the rental income in this matter was a loss in each of the relevant tax years. 18In relation to the evidence given by the tenant, it was submitted that the tenant had confirmed that he sold 30 to 60 goats annually and clearly it was not a hobby as claimed by the tenant. 19Finally, it was submitted that reference to only 160 Riverstone Road address in the income tax returns was because it was the address where records were kept although the income disclosed in respect of the primary production activities included profits from the property as well. 20The primary submission on behalf of the respondent was that the applicant had "simply not discharged the onus" that the dominant use of the property in the relevant years was for primary production. 21In relation to the 2006 land tax year, it was submitted, that although the applicant had claimed that the primary production activities constituted of the propagation of flowers for sale and the cultivation of broad beans for sale, "the Applicant has simply failed to produce cogent evidence as to the scale and the nature of these activities on the Property". And that in "essence, he has merely asserted that he has conducted these activities on that part of the Property not leased". 22It was next submitted that "his tax returns are not evidence of the extent of flower or vegetable growing said to have been undertaken on the Property at the relevant time" and that on "the other hand, the Applicant's own tax returns show that he derived a significant level of income from renting part of the Property during the land tax year". 23A similar submission was made in relation to the claim that, in the years 2007-2010 land tax years on the part of the property not leased, the applicant had used the land for the propagation of flowers and cultivation of pumpkin and broad beans. 24In relation to the applicant's claim that, from 26 October 2006, three acres were leased to the tenant for breeding goats, it was submitted that the tenant's sworn evidence established that - A.In the first two years after he moved in, ie in 2007 and 2008, he did not have animals within the Leased Area; B.After that time, he purchased goats from time to time to fatten them up. He has not kept more than 8-10 goats within the Leased Area at any one time. On average, he has bought and sold goats twice per year; C.His selling and buying of goats is a hobby. The goats help keep the grass tidy; D.He doesn't "really make any money from the goats and probably spend[s] more money on the goats than" he makes on them; E.Within the last two years he bought "some sheep" and kept them on the rented property. Currently, there are no goats on the rented property but there are two small sheep and a couple of laying chickens. 25It was submitted that "the Applicant's own tax returns show he derived a significant level of income from the tenant during 2007-2010 land tax years" and that in comparison, "the Applicant has not produced any cogent evidence of income generated from other activities on the Property". 26It was further submitted that - 3.22.In these circumstances, the available evidence demonstrates that as at 31 December 2006 and 31 December 2007, the rental of the Leased Area to the Tenant constituted the dominant use of the Property. As at those dates, the main use of the Property was for generating rental income. The Tenant was not keeping animals within the Leased Area. 3.23.As for the 2009 and 2010 land tax years, even if the keeping of goats were taken to fall within s. 10AA(3)(b), they certainly did not constitute the dominant use of the Property. Mr Esner kept a small number of goats within the Leased Area as a hobby. His evidence suggests that the money he spent on the goats was greater than any (minimal) profit he might have made from selling them. The nature, extent and intensity of the goat keeping was far outweighed by the rental income of the Leased Area as the ruling or most influential use of the Property as at the relevant taxing dates. 3.24That this conclusion is correct is confirmed by comparing the position of the Applicant to the applicants in the recent case of Romano . 27Mr El-Hage, counsel who appeared for the respondent also submitted that the rating decision by the Blacktown Council to treat the property as farmland "is of no relevance" and that the tribunal "must be guided by the applicable legislation (ie, the LT Management Act), case law and principles". And that "in any event, there is no evidence of the basis on which the Council made its decision and the criteria applied by the Council". Consideration and Reasons 28It was common ground that the property in the relevant tax years was rural land. The applicant's claim was that he was entitled to the primary production exemption under s 10AA(1) of the LT Management Act, in particular s 10AA(3)(a) and (f) for the 2007 land tax year and s 10AA(3)(a), (b) and (f) for the 2008 -2010 land tax years. In short, the issue for determination was whether the dominant use of the property was for purposes set out in the above subparagraphs of s 10AA(3). 29In respect of the 2007 year, the claim was that it was used for the cultivation and sale of pumpkin and broad beans and the propagation and sale of flowers. For the land tax years 2008-2010, it was claimed that in addition to these activities, the land was also used for the breeding of goats. 30In determining land "use", the courts have suggested various principles. Relevant to this matter, the principles require an examination of the actual use of the relevant land ( A R Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286, at 293; Cornish, Ball v Chief Commissioner of State Revenue [2010] NSWADT 114 and Romano v Chief Commissioner of State Revenue [2011] NSWADT 73), recognise that the use can be by a tenant or a third party ( Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 and Tourapark Pty Ltd v FCT (1982) 149 CLR 176, at 181, that land is "used" even if part of it is not being used ( Newcastle City Council v Royal Newcastle Hospital (1958) 100 CLR 1, at 4) and that preparation of land to be used for primary production does not by itself constitute use of land for primary production ( Southern Estates Pty Limited v Federal Commissioner of Taxation (1967) 117 CLR 481 at 488). 31As regards the "dominant use" test for purposes of s 10AA(3) of the LT Management Act, Gzell J in the recent decision of Leda Manorstead v Chief Commissioner [2010] NSWSC 867 has usefully set out the various matters courts have indicated are relevant to the determination of dominant use - 69 Dominant in its ordinary meaning connotes ruling, prevailing or most influential. The statute's reference to a dominant use presupposes that the land may be used for more than one purpose and requires a determination of which use of the land is the main, chief or paramount use. 70 That is a question of fact and degree that may, in the end, be determined as an objective matter of impression having regards to the facts. 71 In Saville v Commissioner of Land Tax (1980) 12 ATR 7, Roden J was concerned with whether land was used primarily for the maintenance of animals thereon under a former provision in the Land Tax Management Act . The primary use test was not unlike the dominant use test in the present legislation. His Honour said at 10: "I am of the view that, for any use of the land to justify the statement that the land is used primarily for that purpose, it is necessary not only that the use prevail over any competing use but also that it be sufficiently substantial to prevail over the proposition that the land is primarily to be regraded as unused land." 72 In Hope v Bathurst City Council (No 2) (1983) 52 LGRA 79, Perrignon J was concerned with the definition of "rural land" as land that is wholly or mainly used for carrying on the businesses or industries of grazing amongst other uses in the Local Government Act 1919, s 118. At 84 his Honour said that what was called for where land was put to a number of uses, was the weighing of the evidence relating to various uses to which land was put, including, but not limited to, the nature and intensity of such uses, the physical areas over which they extended, and the time and labour spent in conducting them. 73 His Honour's decision was upheld on appeal ( Hope v Bathurst City Council (1986) 7 NSWLR 669). A majority of the Court of Appeal held that the characterisation of rural land as land that is wholly or mainly used for carrying on the businesses or industries of grazing, amongst other uses, did not relate solely to the quantum of area of land used for relevant purposes but related to the end to be achieved by the use and included other criteria such as the nature and intensity of the use. 74 In Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286 the Land Appeal Court of Queensland, presided by Ambrose J, had to consider whether, at the relevant date of valuation, the subject land was "exclusively used ... for purposes of farming". 75 In terms of the Land Tax Management Act , s 10AA, "farming" was defined for this purpose in the Valuation of Land Act 1944 (QLD), s 17(2) to mean the business or industry of grazing, and other specified pursuits, or any other business or industry involved in the cultivation of soils, the gathering in of crops, or the rearing of livestock, if the business or industry represented the dominant use of the land and had a significant and substantial commercial purpose or character and was engaged in for the purpose of profit on a continuous or repetitive basis. 76 The Court, helpfully, gave its approach to the determination of dominant use of land at 303: "In our view, the proper approach to be taken when ascertaining the dominant use of land is to consider such matters as the amount of land actually used for any purpose, the nature and extent and intensity of the various uses of the land, the extent to which land is used for activities which are incidental to a common business or industry of a type specified in section 17(2), the extent to which land is used for purposes which are unrelated to each other, and the time and labour and resources spent in using the land for each purpose. When undertaking this exercise, one cannot ignore the conclusion that an objective observer would reach from viewing the land as a whole." 32In this matter, the difficulty the applicant had at the hearing was essentially lack of hard evidence of what primary production activities were conducted on the part of the property that was not leased in the relevant land tax years. The applicant's individual income tax returns disclose losses in some years and income earned in some from a business described as "Flower growing (outdoors)" with the business address of 160, Riverstone Road, Riverstone. But no evidence was produced to show the "the nature, extent and intensity" of that activity on the part of the property not leased. No income was disclosed in his returns from the cultivation and sale of pumpkin and broad beans nor any evidence was produced to establish that the part of the property not leased was used for any primary production activity. 33Reliance was placed on the use of three acres for goat breeding by the tenant. Although the tenant's evidence was not altogether satisfactory, it was clear that he did not treat that activity seriously or carried it out on a serious commercial basis. The tenant's evidence was that he treated the activity as a hobby and there was no evidence produced by the applicant to challenge that assertion. 34There was some merit in the applicant's submission that the land was treated as "farmland" in the years in question by the Blacktown Council. It was noted by his Honour in Leda that the current s 10AA was amended in 2005 to be consistent with the definition of "farmland" found in s 515 of the Local Government Act 1993. The "used primarily for primary production" test was replaced by the "dominant use" test found in s 515 and relied upon by local councils to categorise land as farmland. As the two provisions are similar it is relevant to have regard to any determination made under s 515 of the Local Government . But in this matter, whilst the rate notices included in the bundle of documents treated the property as "farmland", no evidence was produced to indicate the basis of that categorisation. It would have been helpful if a qualified officer of the Blacktown Council had given evidence to indicate how that determination was made. In the absence of any such evidence, little weight can be given to the rate notices to determine whether the land was used for primary production. 35The only evidence before the tribunal to determine what the "ruling, prevailing, or most influential" use of the property in the relevant years was the fact that rentals were paid to the applicant by the tenant. Having discounted the role of the goat breeding as being a serious commercial activity, the only conclusion that can be properly drawn on an objective basis is that the property's principal use in the relevant years was as an investment property earning rental income from the letting. It is unfortunate the rental income was not significant to make large profits for the applicant, but he has failed to establish a competing primary production use. The onus was on the applicant to produce evidence to establish the nature, extent and density of any competing use. The applicant failed to produce any hard or independent evidence of any such competing use. 36Some reliance was placed by the applicant on the decision of this Tribunal in Romano v Chief Commissioner of State Revenue . In that case, the taxpayer was also the owner of two large adjoining properties with a house and a granny flat on one of the properties, which were rented to tenants. Two residences on the other property were also rented to tenants in the relevant years under review. The dwellings on each of the two properties are separated from rest of the land by fencing. This fenced area of approximately 91% of the two adjoining properties was used by the owner for the maintenance of cattle for the purpose of selling them or their natural increase or bodily produce. The Tribunal rejected the owner's claim for the primary production exemption for both properties on the grounds that the renting out of residential premises was such a significant activity that it was impossible to conclude, in relation to the land tax years in question, that the dominant use of either of the properties was for primary production. The rental income was approximately about $12,000 each year with the primary production income of about $1,000 in each year. The applicant's submission was that, in his case, the rental income did not have this kind of disparity. It was claimed that he derived substantial income from the primary production business. Unfortunately, as indicated above, no evidence was produced as to the income earned from this business in relation to the property not leased to the tenant. 37The assessment must in these circumstances be confirmed. ********** 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. Decision last updated: 15 March 2012