Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 Hearing dates: 1 November 2013 Decision date: 09 December 2013 Before: Meagher JA at [1]; Emmett JA at [2]; Leeming JA at [69] Decision: The appeal be dismissed with costs. Catchwords: TAXES AND DUTIES - land tax - land used for primary production - whether use had a significant and substantial commercial purpose or character under s 10AA(2)(a) of the Land Tax Management Act 1956 Legislation Cited: Interpretation Act 1987, s 34 Land Tax Management Act 1956, ss 10AA(1), 10AA(2)(a), 10AA(2)(b) Local Government Act 1919, s 118 Local Government Act 1993, s 515 Trade Practices Act, s 45D Cases Cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) [2009] HCA 41; 239 CLR 27 Australian Education Union v Department of Education and Children's Services [2012] HCA 3; 86 ALJR 217 CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; 187 CLR 384 Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; 186 CLR 389 Ferguson v Federal Commissioner of Taxation [1979] FCA 29; 37 FLR 310 Hope v Bathurst City Council [1980] HCA 16; 144 CLR 1 Hope v The Bathurst City Council [No 3] [1994] NSWCA 139 Martin v Federal Commissioner of Taxation [1953] HCA 100; 90 CLR 470 Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union [1979] FCA 132; 42 FLR 331 Category: Principal judgment Parties: Maraya Holdings Pty Limited (ACN 003 631 785) - first appellant Antonio Giusti - second appellant Elizabeth Giusti - third appellant Searco Holdings Pty Limited (ACN 001 872 466) - fourth appellant Flag Constructions Pty Limited (ACN 098 491 064) - fifth appellant Chief Commissioner of State Revenue - respondent Representation: Counsel: R Hamilton SC with B Jones - appellant N Williams SC with E Bishop - respondent Solicitors: N Panos & Associates - appellant Crown Solicitors Office - respondent File Number(s): 2013/42150 Publication restriction: Nil Decision under appeal Citation: [2013] NSWSC 23 Date of Decision: 2013-01-30 00:00:00 Before: Gzell J File Number(s): 2010/292820 Judgment 1MEAGHER JA: I agree that this appeal should be dismissed with costs for the reasons given by Emmett JA. I also agree with the additional observations and reasons of Leeming JA. 2EMMETT JA: This appeal is concerned with the operation of s 10AA(2) of the Land Tax Management Act 1956 (the Land Tax Act). That provision affords an exemption from land tax if land is used for primary production and that use satisfies certain other prerequisites. The appellants (together the Taxpayers) each own parcels of land at Prestons or Edmondson Park in New South Wales (the Subject Lands) on which the first appellant, Maraya Holdings Pty Limited (Maraya), conducted cattle operations in the 2005 tax year and following. 3Rural lands used for primary production are exempt from land tax under the Land Tax Act. While the Subject Lands are used for primary production, they are not rural lands for the purposes of the Land Tax Act. As a result, they are only exempt from land tax if, as well as being used for primary production, that use of the Subject Lands also meets two further prerequisites provided for by s 10AA(2) of the Land Tax Act. That primary production use of the Subject Lands must, under s 10AA(2)(a), have "a significant and substantial commercial purpose or character" and, under s 10AA(2)(b), be "engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made)". Whether those two prerequisites were met in relation to the Subject Lands is the principal issue in this appeal. 4The respondent, the Chief Commissioner of State Revenue (the Commissioner), assessed the Taxpayers for land tax in respect of the years 2005 to 2010. The Commissioner subsequently withdrew the assessments in respect of the 2005 tax year. The Taxpayers' objections to the other assessments were disallowed. The Taxpayers then sought review of those objection decisions by the Supreme Court under the Taxation Administration Act 1996 (the Administration Act). On 30 January 2013, a judge of the Court confirmed the assessments and ordered the Taxpayers to pay the Commissioner's costs. The Taxpayers now appeal to this Court. The Subject Lands 5The Subject Lands owned by Maraya consist of four parcels situated in Wonga Road, Enterprise Circuit and Progress Circuit in Prestons. The Subject Lands owned by the second and third appellants, Mr Antonio Giusti and Mrs Elizabeth Giusti, consist of four parcels of the Subject Lands also situated in Wonga Road, Enterprise Circuit, and Progress Circuit, Prestons. The fourth appellant, Searco Holdings Pty Limited (Searco), owns a parcel of the Subject Lands situated in Kurrajong Road, Prestons and Flag Constructions Pty Limited (Flag), the fifth appellant, owns a parcel of the Subject Lands situated in Croatia Avenue, Edmondson Park, which is near Prestons. Mr and Mrs Giusti control Maraya, Searco and Flag. 6The parcels owned by Maraya and Mr and Mrs Giusti together amount to 11.55 hectares. Except for an area of 0.0662 hectares used as a residence, the parcels consist of grassed paddocks, with fencing, gates, cattle yard, loading ramp, hay and machinery sheds, shelter and water troughs. Those parcels together had a taxable value for 2009 of $15,038,700. The parcel owned by Searco is 6.877 hectares and has been used for cattle operations since 2007. The grazing area is just over 6.5 hectares and the facilities on that parcel consist of barbed wire fencing and gates, cattle yard, hay shed, loading dock, shelter and dam. That parcel had a taxable value for 2009 of $9,300,000. The parcel owned by Flag is 2.522 hectares and has been used for cattle operations since 2005. The grazing area is just over 2.1 hectares and the facilities on the parcel consist of a cattle yard, hay shed, loading dock, shelter and dam. That parcel had a taxable value for 2009 of $2,220,000. The Cattle Operations 7Maraya's cattle operations were also conducted on other parcels of land not owned by any of the Taxpayers. Those other parcels are situated in Kurrajong Road and Kookaburra Road in Prestons and Croatia Avenue in Edmondson Park. During the years in question, the number of cattle that were the subject of Maraya's operations ranged between six and 41. In the years after the 2010 year, there were up to 55 cattle on the Subject Lands. The cattle were Murray Grey, Hereford or Angus breeds. From time to time, Murray Grey bulls were included in the herd. 8Maraya's operations consisted of grazing and fattening cattle for sale. The cattle were either purchased at saleyards or bred on the Subject Lands. Cattle were sold from time to time, having regard to economic and environmental factors, current market prices and availability of feed. All sales and purchases were made at saleyards through William Inglis & Son Limited at Camden. 9In the relevant years, Maraya owned tools for fence building and repairs consisting of a post hole digger, star picket rammer, star picket extractor, barbed wire strainers, hoes, shovels, mattocks, crowbars, double-shovel cordless drill and augers. Maraya also owned the following farm equipment and facilities required for its cattle operations: (a) a Fiat tractor; (b) a chisel plough; (c) a slasher; (d) an aerator; (e) a harrow; (f) a seeder; (g) a sprayer for weed control; (h) a one tonne Holden utility with cattle cage; (i) cattle yards with head bailers; (j) loading ramps and facilities; (k) ear tag identification applicator; and (l) a castrating ring applicator. 10Mr Giusti conducted the cattle operations and made regular visits to the Subject Lands to check the cattle, fences and gates, and to check paddocks for feed. He attended to repairs, delivered feed, moved cattle between paddocks and to and from market, medicated and vaccinated cattle, assisted cows when calving, applied ear tags to newborn calves, applied castrating rings to male calves and applied weaning rings to vealers. Mr Giusti spent an average of 1.5 to 2 hours per week and his son spent approximately one hour per week on the cattle operations. 11Mr Giusti moved cattle between paddocks from time to time to take the best advantage of available feed, depending upon the condition of the pasture and available grazing land. There were other reasons for moving cattle. For example, the breeding bull was moved to paddocks with cows that were at breeding age and young heifers were moved away. Young cows needing assistance with birthing and cattle needing veterinary assistance or medication were moved when required. Each of the paddocks used by Maraya was rested from time to time to allow regrowth of feed. In general, at any given time, one or two paddocks were being rested. 12During the years in question, dry conditions affected the feed stocks available on the Subject Lands and feed stocks were very poor in those years. In 2007, Maraya was only able to retain most of the herd by buying in feed at significant cost. In the 2008 and 2009 years, Maraya sold the majority of the herd, rather than buy feed. 13Mr Giusti paid $500,000 towards the cost of a road built along the northern boundary of part of the Subject Lands owned by Maraya. He said that he did not want to build the road but that he would have been placed in a compromised position if he chose not to co-operate because subdivision required a carriageway. He agreed to share the costs of the road along the northern boundary in order to preserve the Subject Lands' value. 14For a period of approximately two years, while those parts of the Subject Lands owned by Maraya and Mr and Mrs Giusti were subject to roadworks, they could not be used for pasturing cattle. The grass was harvested from those parcels and taken to other parts of the Subject Lands. A different parcel owned by Maraya was also subject to roadworks from September 2009 to February 2010. Those works denuded that parcel of grass and it could not be used for pasturing cattle. 15Maraya maintained trading records, including stock and buying and selling records. Those records indicate that during the years in question Maraya incurred primary production expenses ranging between $705 in 2010 and $5,317 in 2007. Its livestock trading activities had results ranging from a deficiency of $4,712 in the 2007 year to a surplus of $1,213 in the 2008 year. The nature of the deficiencies and surpluses is addressed below. The Opinion Evidence 16The parties jointly retained two experts, Mr William Hoffman in relation to the beef industry and Mr Mark Bryant in relation to financial matters. Each produced a report that was tendered by the Taxpayers and admitted without objection. Both were cross-examined on behalf of the Taxpayers. Mr Andrew Glover was retained by the Taxpayers to provide opinion evidence as to the carrying capacity of land. His report was admitted without objection and he was not cross-examined. Mr Hoffman 17The Department of Primary Industries employed Mr Hoffmann from July 1973 to March 2010 in various roles. His responsibilities included the provision of technical advice to beef producers on a range of production issues, participation in research and development, work with industry stakeholders to assist producers to implement improved production practices and ensuring that producers implemented farm quality assurance and animal welfare programs. In March 2010, Mr Hoffman established his own beef consulting business through which he provided consulting services to a range of beef industry stakeholders. He also operated in his own right a moderate-sized beef business running up to 800 head of cattle for the heavy feeder steer market. 18Mr Hoffman was asked to undertake a view of the Subject Lands and the other land upon which Maraya conducted its cattle operations. He inspected the Subject Lands and considered a significant amount of material relating to the cattle operations. He found that the Maraya cattle operations did not make a positive financial return in the relevant years when assessed in terms of operating profit. He also formed the opinion that it was unlikely to produce a positive financial return over the foreseeable future on a continuous or repetitive basis. In forming his opinions, Mr Hoffman considered the size, scope, manner of operation and permanence of Maraya's cattle operations, as well as his knowledge of relevant market conditions and anticipated production levels. 19Mr Hoffman said that if a beef cattle business "being conducted with the intent of making a positive financial return", income from cattle sales should be greater than the total operating costs, including an allowance for owner/operator labour. He said that the size of the operating profit required would vary between businesses because of variations in the level of expenditure within the business, which is not considered in the calculation of operating profit. The major expenses over and above the cost of production are financing costs, taxation, capital reinvestment and living expenses in excess of the allowance for owner/operator labour. Mr Hoffman assessed Maraya's cattle operations in relation to the three characteristics of productivity, price and overhead costs, which will be dealt with in turn below. 20Productivity has the most influence on the operating profit of a beef producer's business. Productivity is itself influenced by factors such as the fertility of the breeding herd, nutrition, herd management, feed supply, and growth rates and genetic potential of the animals. Mr Hoffman said that kilograms of beef produced per hectare is a valuable indicator and is widely used to assess the performance of beef businesses in southern Australia. It is calculated by dividing the number of kilograms of beef produced on a particular area of land grazed by the number of hectares in that area. The Maraya cattle operation during the relevant period on average produced 42.6 kilograms of beef per hectare. Mr Hoffman considered that that was a very low output. 21Price is something over which beef producers have little influence. A beef producer may sell live animals in an auction system, consign animals to an abattoir for slaughter or market directly to consumers. Selling live animals in the saleyard system often gives beef producers the least control over the price received. Mr Hoffman considered that the average price received by the Maraya operation during the years in question was likely to be reasonably reflective of the market trend. The average over those five years was $1.62 per kilogram. 22Production costs are a significant portion of the total cost of operating a beef business. They include overhead costs that are fixed costs since they are largely incurred regardless of which beef production system is used. Council rates are usually a significant component of those fixed costs, while depreciation, selling costs and pasture costs are also important components. The Maraya cattle operations recorded very high production costs in the years in question. The average was $41.42 per kilogram of beef produced, with a range from $22.26 to $56.44 per kilogram. The major contributing costs were council rates on the Subject Lands. Mr Hoffman also included an allowance for owner/operator labour in that calculation. Removal of that cost resulted in a small reduction in the average cost of production to $38.93 per kilogram of beef produced, with a range from $23.66 to $53.84. The average cost of production for the Maraya cattle operations of $38.93 per kilogram was significantly higher than the average of $1.62 per kilogram received. 23Mr Hoffman expressed the opinion that the main characteristic of the Maraya cattle operations inconsistent with the purpose of making a profit was that they were conducted on land with a high land value, causing council rates to be relatively high and where 96 per cent of that significant cost was included as part of the production costs. Mr Hoffman also considered that the low productivity and very high production costs, due to the council rates, were not consistent with a beef business being carried on for the purpose of making a profit. Mr Bryant 24Mr Bryant is a consultant with Ernst & Young. He has had extensive experience in audits and other forms of financial investigation throughout his career, which began in 1975. Since the 1980s, he has regularly prepared reports for litigation and has frequently given evidence as an expert in courts and other tribunals in Australia and New Zealand. 25Mr Bryant was instructed to report on the financial return of Maraya's cattle operations in each of the relevant years and to comment on the sustainability of that financial return and any future projected financial returns. Mr Bryant made it clear that he was not an expert in the cattle grazing industry or the beef market. 26Mr Bryant said that the relevant measure for financial return of Maraya's cattle trading operations was that most commonly used by accountants, namely, the profit and loss account of the business. That measure records, in respect of any period, the income earned and expenses incurred. The difference between them is a measure of the financial return for that period. 27Mr Bryant described two approaches for measuring the financial return from an operation such as Maraya's cattle operations. The first approach (the marginal benefit approach) measures the benefit of the cattle operations compared with allowing the Subject Lands to lie idle. That approach ignores land expenses such as rates on the basis that they were already incurred or would have been incurred anyway. The second approach (the shared cost allocation approach) measures the extent to which the cattle operations contributed to Maraya being better off compared with its doing nothing. That approach requires the allocation to the cattle operations of costs that are shared between Maraya's various other activities. 28Mr Bryant was of the view that the shared cost allocation approach was more appropriate as Maraya's cattle operations were not an incidental use of the Subject Lands but rather their dominant use. That made it appropriate to attribute the costs of owning the Subject Lands, in particular rates and taxes, to the cattle operations. However, Mr Bryant concluded that, in aggregate, Maraya did not receive a positive financial return from its cattle operations in the relevant years on either of the two possible approaches to calculating financial return. 29Mr Bryant considered that it was very unlikely, on the marginal benefit approach, that Maraya's cattle operations achieved a positive financial return in any relevant year. That is to say, even without allocating the costs of owning the Subject Lands to the cattle operations, a loss was made in every relevant year. He considered that, on the shared cost allocation approach, the cattle operations produced a large negative financial return in each of the relevant years. 30Mr Bryant was unable to make any comment on the sustainability of the financial return since the notion of the sustainability of a negative return is not meaningful. Mr Bryant's analyses indicate that Maraya would have been financially better off to have not engaged in its cattle operations at all. Mr Glover 31Mr Glover has an associate diploma in Applied Science (Agricultural Protection), which covered livestock production, husbandry, physiology and anatomy of all common farm animals. Mr Glover also has other certificates relating to livestock husbandry. For the last 25 years he has been an employee of the Livestock Health and Pest Authority and its predecessors in areas dominated by small area farming, including 18 years in the Sydney Basin. During that time, Mr Glover has become aware of the issues relating to the management of land, both public and private, in areas of increasing urbanisation. 32Mr Glover explained that notional carrying capacity is a method of expressing the possible productivity of land used for agricultural activities. The notional carrying capacity is calculated using a standard measurement called Dry Sheep Equivalents (DSE). One DSE is equivalent to the area of land required to sustain a Merino wether sheep weighing 40 kilograms. A 400 kilogram steer is equivalent to 10 DSE. Mr Glover calculated the notional carrying capacity of the various parcels of the Subject Lands in the relevant years. The capacity varied from parcel to parcel between 4 DSE per hectare and 7.5 DSE per hectare. That indicates that the Subject Lands were being used to their full capacity as cattle pastures. The Primary Judge's Decision 33The primary judge held that s 10AA(2)(a) is concerned with the objective qualities of the use of the Subject Lands and that the words "significant" and "substantial" are to be construed in their context, by interpreting the phrase "significant and substantial commercial purpose or character" as a whole, rather than by adding up linguistic elements of each of the words. His Honour identified a number of characteristics of a business that might indicate that s 10AA(2)(a) was satisfied, namely, size, depth, bulk, weight, seriousness, importance, quality, intensity and prominence. 34His Honour referred to the connotation, in ordinary parlance, of each of the words "significant" and "substantial". Both adjectives qualify the word "commercial" and the phrase "significant and substantial commercial" qualifies both purpose and character. His Honour observed that the "substantial" connotes an ample or considerable amount, quantity or size and that "significant" connotes importance, something of consequence or an element that is key, vital or critical. The primary judge then proceeded to apply those notions in assessing the purpose and character of the primary production use of the Subject Lands represented by Maraya's cattle operations. 35His Honour considered that the test in s 10AA(2)(a) required that Maraya's use of the Subject Lands for primary production must have had a significant and substantial commercial purpose or character, such that the commercial purpose or character of the use had a relatively high degree of importance. The test distinguishes activities amounting to a business that is carried on in a small way, as a sideline, from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one that usually exhibits some of the characteristics of size, depth, bulk, weight, seriousness, quality, intensity and prominence. 36The primary judge had regard to the intensity of Maraya's cattle operations, the size and quality of its herd, the size and carrying capacity of the Subject Lands and the resources, whether of time, labour or expenditure, put into the development and maintenance of the cattle operations. His Honour did not consider that 40, or even 55, cattle grazing on the Subject Lands, with or without using other lands, constituted a serious or intense primary production use when the grazing areas of the Subject Lands were taken into account. 37The primary judge had regard to Mr Hoffman's evidence and opinion that productivity would always be low when cattle graze on the type of pastures on the Subject Lands. His Honour observed that Mr Giusti made little attempt to improve the pastures. One paddock had been pasture-improved and one other was sown and harrowed after Mr Hoffman's visit. His Honour considered that the times spent on the cattle operations by Mr Giusti and his son were consistent with a part-time operation. His Honour considered that, even with the omission of labour costs and holding costs, Maraya's cattle operations would produce very small amounts of profit with respect to the Subject Lands, which had an overall value of in excess of $26 million. His Honour accepted Mr Bryant's opinion that Maraya's cattle operations were not and would not be commercially viable and that Maraya would have been financially better off if it did not engage in the cattle operations. 38The primary judge concluded that Maraya's primary production use of the Subject Lands did not satisfy the test in s 10AA(2)(a). His Honour considered that the cattle operations did not have the characteristics of importance, size, depth, bulk, weight, seriousness, quality, intensity and prominence that would be indicative of a substantial commercial purpose or character. Accordingly, his Honour held that the Taxpayers had failed to establish that Maraya's use of the Subject Lands satisfied the prerequisites of s 10AA(2)(a). It was therefore not necessary for his Honour to consider s 10AA(2)(b). 39The primary judge nevertheless made some observations concerning s 10AA(2)(b). His Honour considered that the provision introduces a subjective element into the land use, insofar as the primary production use must be engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit is actually made. His Honour did not consider that the Court was bound to accept Mr Giusti's assertion that Maraya engaged in its use of the Subject Lands for the purpose of profit. Neither on the marginal benefit approach nor on the shared cost allocation approach did Maraya have a positive financial return in the years in question. 40His Honour considered that, while s 10AA(2)(b) does not require a profit to be made, it does require that the primary production use be engaged in for the purpose of profit. While the absence of a profit does not negate an engagement in a primary production use of land for the purpose of profit, a continuous pattern of a lack of profit may lead the Court to question, and ultimately reject, evidence that the primary production use of land was engaged in for the purpose of profit. The Appeal 41The notice of appeal filed on 29 April 2013, apart from asserting that the primary judge erred in concluding that the Subject Lands were not exempt, relied on several grounds, some of which are connected. In their written submissions, the Taxpayers formulated separate issues. Conflation of purpose and character in s 10AA(2)(a) 42Ground 1(b) was that the primary judge erred in construing the phrase "a significant and substantial commercial purpose or character" in s 10AA(2)(a) by incorrectly conflating purpose and character. The Taxpayers contended that there are two alternative criteria in s 10AA(2)(a) as follows: the use of the land for primary production has a significant and substantial commercial purpose; or the use of the land for primary production has a significant and substantial commercial character. The Taxpayers contend that it is sufficient if either of those criteria was satisfied. 43This complaint arises from the primary judge's statement that the words "significant" and "substantial" are to be construed in their context and by interpreting the phrase "significant and substantial commercial purpose or character" as a whole, rather than by adding up linguistic elements of each of the words. It is surprising that the Taxpayers complain about that statement. In their written submissions to his Honour, the Taxpayers asserted that the phrase "significant and substantial" is to be construed in its context and by interpreting the phrase "significant and substantial commercial purpose or character" as a whole, rather than by adding up linguistic elements of all the words. In support of that proposition, they cited Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; 186 CLR 389 at 396-397. That is the authority cited by his Honour for the proposition stated by him. 44The Taxpayers contend that having regard to the primary judge's conclusion that the activities in question must be "ample or considerable in amount, quantity or size", his Honour failed to give separate regard to the commercial purpose of the land use. That was because one does not speak of the amount, size, or quantity of a purpose. Rather, they say, the adjectives significant and substantial, when applied to purpose, refer to the quality or importance of the purpose. They contend that the significance of the commercial purpose can only be relevantly determined by the nature and extent of the activities conducted by the user of the land, having regard to the land in question. If those activities are of such intensity that the use of the land for the particular activities is maximised and continuously conducted in a business-like manner, the commercial purpose will be significant or substantial. 45The Taxpayers rely on the fact that the Subject Lands were not in fact used for any other purpose. They say that that fact heightens the significance and substantiveness of the use of the Subject Lands. They contend that a person might have a significant and substantial commercial purpose, even if the operational use in question is small in scale, so long as it is business-like. They contend that the use of the Subject Lands by Maraya satisfied that description. 46The underlying premise of this ground is that the primary judge failed to recognise a distinction between purpose, on the one hand, and character, on the other. However, a fair reading of his Honour's reasons suggests the contrary. Thus, his Honour observed that the prerequisites of s 10AA(2) are satisfied if "the requisite purpose or character is evident from" the particular use. His Honour was clearly drawing a distinction between purpose, on the one hand, and character, on the other. Subsequently, his Honour stated that the test required "the commercial purpose or character of the use" of the taxable land to have a relatively high degree of importance. That statement clearly recognises the distinction. 47In any event, the Taxpayers were unable to identify a point in the primary judge's reasoning where a failure to distinguish between purpose and character had a bearing on the ultimate conclusion that his Honour reached. There was no error in the approach that his Honour adopted. Construction of the word "substantial" 48Ground 1(c) was that the primary judge erred in construing s 10AA(2)(a), by concluding that the word "substantial" requires the primary production use of the Subject Lands to be ample or considerable in amount, quantity or size. That complaint refers to the observation made by his Honour that the word "substantial" connotes size or bulk and means an ample or considerable amount, quantity or size. The Taxpayers contend that that language is applicable to character and not to purpose. Thus, they say, his Honour failed to have regard to the significant and substantial purpose of the use. That contention is answered above, in dealing with ground 1(b). Comparison with other parties' use of other lands 49Ground 1(a) is that the primary judge erred insofar as his Honour considered that the test in s 10AA(2)(a) permitted a comparison between the use of taxable lands with other parties' use of other lands. Ground 2(b) is that his Honour erred by comparing the Taxpayers' primary production use of the Subject Lands with other person' primary production use of other lands. Those two grounds are also connected with ground 2(f), by which the Taxpayers complain that his Honour erred by placing undue weight on the evidence of Messrs Hoffman and Bryant and failing to exclude irrelevant aspects of their evidence from consideration. 50The Taxpayers say that his Honour should have considered whether the use of the Subject Lands had a significant and substantial commercial purpose or character only by reference to the Subject Lands, without comparing that use of the Subject Lands with other parties' use of other lands. The Taxpayers' contentions in this regard are surprising. As I have indicated, the opinions of Messrs Hoffman and Bryant were jointly requested by the Taxpayers and the Commissioner. The Taxpayers tendered their reports without objection. It is curious that the Taxpayers now contend that the evidence that they tendered in the proceedings below was irrelevant. 51The Taxpayers now say that there is nothing in the textual context of s 10AA(2)(a) that would permit regard to be had to the use of different lands by different users when considering the commercial purpose, or commercial character, of the use of the Subject Lands. They complain that such a process would be based, to some extent, on assumptions about different uses of different land, which were not the subject of evidence. They say that the question of whether the use of the Subject Lands is of the requisite significance and substantiveness is one of fact having regard to the features of the Subject Lands, particularly the size, fertility, location, type of operation and the like. They say that comparing the use of the Subject Lands with that of other land, particularly land in other regions and of different sizes, is contrary to the textual context and could only lead to error. 52The Taxpayers say that if regard is had only to the primary production use of the Subject Lands, the intensity of that use, in the context of the particular area of the Subject Lands, was significant and substantial. The size of the herd was significantly greater than Subject Lands' notional carrying capacity. The Subject Lands could not realistically be used more intensively to graze cattle. The Taxpayers say that was little or nothing more that, exercising their business judgment, they could have done to make the cattle operations more profitable on the Subject Lands. 53The Taxpayers say that the primary judge erred by having excessive regard to Mr Hoffman's evidence given that his assessment took into account the productivity achieved by other users in different regions of New South Wales and also by failing to balance Mr Hoffman's evidence against Mr Glover's evidence. They say that his Honour erred in failing to have regard to Mr Glover's uncontested evidence, which they say was highly relevant, insofar as it demonstrated, in the context of cattle grazing, that the use of the Subject Lands was maximised. 54This contention is also surprising. At no point in the course of oral or written submissions to the primary judge was any reliance placed on Mr Glover's opinion as to notional carrying capacity. Yet ground 2(e) is that the primary judge erred by failing to have regard to Mr Glover's evidence regarding the carrying capacity of cattle on the Subject Lands. Ground 2(c) is that his Honour also erred in failing to address all relevant matters concerning the Taxpayers' use of the Subject Lands. Senior counsel for the Taxpayers conceded that that was not intended to raise any matter other than the asserted failure to have regard to Mr Glover's evidence. In circumstances where his Honour was not asked to have regard to Mr Glover's evidence, there cannot have been error on his Honour's part if he did not do so. 55In any event, it is by no means clear that the primary judge did not in fact have regard to Mr Glover's evidence. His Honour observed that to determine whether Maraya's cattle operations had a significant and substantial commercial purpose or character, it was necessary to consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the Subject Lands, and the resources, whether of time, labour or expenditure, put into the development and maintenance of the operation. There is no reason to doubt that his Honour considered Mr Glover's evidence as to carrying capacity in making the assessment that he made. 56It is unrealistic to suggest that an assessment can be made as to whether use of land has a significant and substantial commercial purpose, or a significant and substantial commercial character, in the abstract. Whether a particular use has a commercial purpose or a commercial character can only be assessed by reference to the way in which land is generally used. It was not suggested that the Subject Lands could be used only for cattle operations. Indeed, they were zoned for industrial or residential use and could only lawfully be used for cattle grazing by reason of existing use rights. The Taxpayers' reliance on Mr Glover's evidence appears to be underpinned by an assumption that cattle grazing was the only use to which the Subject Lands could be put. A relevant consideration in determining whether use of land has a commercial purpose or a commercial character must be the way in which land is generally used. There was no error in this regard on the part of the primary judge. Lack of profitability 57Ground 2(d) is that the primary judge erred by taking into account evidence that Maraya would have been financially better off by not engaging in the cattle operations. The Taxpayers point out that it is not the function of taxing authorities to dictate to taxpayers the business in which they should engage or how they should run their businesses. Taxing legislation must operate upon the result of a taxpayer's activities as the taxing authorities find them (Tweddle v Commissioner of Taxation (Cth) [1942] HCA 40; 180 CLR 1 at 7). They say that the fact that Maraya's cattle operations were not profitable is irrelevant. Maraya had only the resources described above and was subject to the vagaries of weather and markets. They say that the incurring of losses or derivation of small profits is not inimical to a conclusion that use of the Subject Lands had a commercial purpose or character (Ferguson v Federal Commissioner of Taxation [1979] FCA 29; 37 FLR 310). 58The Taxpayers contend that the absence of actual profit does not affect consideration of whether Maraya's activities were entered into for the purpose of profit. They say that the question is to be assessed by reference to the nature and extent of the activities and Maraya's purpose in engaging in them (Martin v Federal Commissioner of Taxation [1953] HCA 100; 90 CLR 470 at 474). They contend that the fact that Maraya's cattle operations were not productive of significant profits is no bar to the exemption afforded by s 10AA, so long as it can be said that there was a significant and substantial commercial purpose in its use of the Subject Lands. 59The Taxpayers complain about the weight attached to the evidence of Mr Hoffman and Mr Bryant concerning the lack of profitability and commercial viability of Maraya's cattle operations. More particularly, they complain about the weight that the primary judge placed on the fact that Maraya's profits were small compared with the value of the Subject Lands. They say that a comparison between the profit derived and the value of the Subject Lands is irrelevant and unsound. 60At no stage did Maraya's cattle operations generate profits according to any normal use of that term. The greatest "profit" generated by the cattle operation was $1,213 in the 2008 year. That so-called profit excluded all holding costs in relation to the Subject Lands, including council rates exceeding $30,000 per annum. The Subject Lands have a value in excess of $26 million. They consist of more than 27 hectares. In no sense can it be said that the cattle operations had any commercial purpose or character. There was no error on the part of the primary judge in taking into account the lack of profitability of the use of the Subject Lands in determining whether that use had a commercial character or commercial purpose. Misuse of extraneous material 61Ground 1(d) is that the primary judge erred by having regard to extrinsic material in circumstances not permitted by s 34 of the Interpretation Act 1987. In the course of oral argument, senior counsel for the Taxpayers accepted that his Honour did not err in having regard to the extrinsic material in question. Rather, the contention is that his Honour reached an erroneous conclusion in reliance on that material. 62The primary judge referred to use of the phrase "significant commercial purpose or character" by the High Court in Thomas v Federal Commissioner of Taxation [1972-73] ALR 368; 3 ATR 165 at 171 (Thomas). The question in that case was whether a barrister taxpayer's tree farming business involving the farming of macadamia nut, avocado pear and pine trees, which "was relatively of minor importance" compared to the taxpayer's professional activities, was sufficient to conclude that the taxpayer was a primary producer despite the business not having been conducted with maximum efficiency and it not having made a profit in the relevant tax year. The Court found that the appellant's activities in growing the trees were not carried on merely for recreation or as a hobby. The Court left out of account the pine trees, "the growing of which did not have ... a significant commercial purpose or character" (emphasis added). 63The primary judge then referred to Hope v Bathurst City Council [1980] HCA 16; 144 CLR 1 (Hope), where the Court construed the phrase "carrying on the business of grazing" under s 118 of the Local Government Act 1919. After accepting that the proper meaning of "business", as used in that phrase, was the ordinary meaning it had in the compound phrase "carrying on a business" rather than any meaning "business" might have as a single word, the Court held that the phrase "denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis". The language used in Thomas and Hope is clearly the basis for the language of s 10AA. 64The primary judge observed that s 10AA(2) introduced "a more stringent test" for the availability of the exemption. The Taxpayers complain that the criteria to be found in s 10AA are not more stringent than the earlier language, which simply provided an exemption for land "used for primary production". However, in circumstances where the language of s 10AA(2) appears to be derived from observations made by the High Court, it is significant that the Parliament chose to add the word "substantial" to the phrase used in Thomas. It was not erroneous to suggest that the substitution of s 10AA for the phrase "land used for primary production" involved a more stringent test. 65The Taxpayers also contended that the language of s 10AA was not intended to alter the effect of its predecessor. They say that the terms of s 10AA(2) are satisfied if it can be concluded that business as a primary producer is clearly being carried on on taxable land. Such a contention ignores the clear intention of the parliament in changing the language in question in order to avoid the vagueness of the original provision, which was being exploited by persons who were not genuine primary producers. Further, the primary judge was not asked to consider the contention now advanced by the Taxpayers. His Honour was not asked to make any findings as to whether Maraya was carrying on a business of primary production. The ground is not raised in the notice of appeal. The contention must be rejected as having no substance. Conclusion 66The Subject Lands extend to more than 27 hectares. The total value of the Subject Lands is in excess of $26 million. The Subject Lands are zoned industrial and their appearance is anything but rural. There has been substantial industrial development on adjacent lands. Maraya's cattle operations, taking into account land holding expenses, could never be expected to generate a profit or surplus. The cattle operations have not, on any commercial approach, generated a profit or surplus since they began. It is impossible to conclude that that use of the Subject Lands could in any way be said to have a commercial purpose or a commercial character, much less a significant and substantial commercial purpose or significant and substantial commercial character. The Taxpayers have not demonstrated any error on the part of the primary judge in concluding that the prerequisites of s 10AA(2)(a) have not been satisfied. 67The Taxpayers' written submissions suggest that if either s 10AA(2)(a) or s 10AA(2)(b) is satisfied the appeal ought to be allowed. That statement is clearly wrong and was not maintained at the hearing of the appeal. It is clear that to obtain the exemption the Taxpayers must establish that the use of the Subject Lands satisfied both criteria. In the circumstances, it is unnecessary to consider whether the use of any of the Subject Lands satisfied s 10AA(2)(b) of the Land Tax Act. 68The appeal should be dismissed. The Taxpayers should pay the Commissioner's costs of the appeal. 69LEEMING JA: I agree with the reasons and conclusions of Emmett JA, but wish to add the following in relation to the construction of s 10AA of the Land Tax Management Act 1956. 70It was common ground that the taxpayers' lands were "used for primary production" but were not, in the relevant years, "rural lands" within the meaning of s 10AA, such that the trial and appeal turned upon s 10AA(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)." 71Orthodox principles of statutory construction require regard to be had to the statutory text and context in the first instance, without any need first to identify ambiguity: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; Australian Education Union v Department of Education and Children's Services [2012] HCA 3; 86 ALJR 217 at [26]. That the Act imposes tax makes no difference: "that a statute is a taxing Act ... is part of the context and is therefore relevant to the task of construing the Act in accordance with those settled principles": Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) [2009] HCA 41; 239 CLR 27 at [57]. 72A striking feature of the text of s 10AA(2), when read contextually, is that it faithfully adopts, subject to an important qualification, well-known judicial language on earlier forms of cognate legislation in Thomas v Federal Commissioner of Taxation [1972-73] ALR 368; 3 ATR 165 and Hope v Bathurst City Council (1980) 144 CLR 1. 73When determining whether Mr Thomas was carrying on "a business of primary production", Walsh J had referred to the absence of "a significant commercial purpose or character" in relation to part of the enterprise (pine trees), in contradistinction to the taxpayer's efforts in planting avocado pear trees and macadamia nut trees: Thomas at 171. Walsh J emphasised that "a man may carry on a business although he does so in a small way". 74That reasoning was applied by Mason J in Hope, where the question was whether land was wholly or mainly used for carrying on the business of grazing, such that it was "rural land" and subject to a lower general rate. His Honour said (at 8-9) of the expression "carrying on the business of grazing" that: "It denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis." 75After identifying what Walsh J had said in Thomas as the source of the emphasis upon the need for activities to be "significant", Mason J added at 10 that (emphasis added): "Walsh J in the passage quoted did no more than say that he left the pine trees out of account because the growing of them did not have a commercial purpose or character which was significant for the purpose of characterizing the taxpayer's other activities as a business. His Honour's remarks did not go to the magnitude or size of the activities necessary to constitute a business, nor indeed to the genuineness or bona fide character of those activities. His Honour had expressly conceded that a man may carry on a business though in a small way." 76The other four members of the Court agreed with Mason J. Gibbs and Stephen JJ reiterated that "it is perfectly clear that [Walsh J] did not intend to suggest that a commercial activity cannot be described as a business if it is small in scale" (at 3, emphasis added). 77Thus it may be seen that paragraph (a) of s 10AA(2) employs the language of Walsh J when referring to "a significant commercial purpose or character", but further qualifies it by including the words "and substantial". Paragraph (b) employs the language of Mason J to describe carrying on a business. 78This is not a case where there has been the re-enactment of words construed by a court and a question arises whether the re-enactment amounts to an approval of the judicial interpretation (which is controversial: see for example Flaherty v Girgis (1987) 162 CLR 574 at 594). This is a case where statutory language has been replaced by its curial paraphrase, but modified by adding the words "and substantial". 79Gageler J said in Baini v The Queen [2012] HCA 59; 246 CLR 469 at [43] that the modern contextual approach to statutory interpretation: "requires that, changes of drafting style aside, statutory language re-enacted in an altered form after it has acquired a settled judicial meaning be taken to have a different meaning. Were it otherwise, legislative policy choices would be blurred and orderly legislative reform would be impeded." 80Although Gageler J dissented in the result, the statement of principle is correct. The present case is even stronger, for the re-enactment replaces the former statutory language of carrying on a business by its curial paraphrase, but modified so as to confirm that the text imposes the very qualification which six Justices had said was not present in the former text. 81A similar question arose in this Court in Hope v The Bathurst City Council [No 3] [1994] NSWCA 139. Priestley JA, with whom Kirby P and Meagher JA agreed, not only detailed (at 2) the ongoing dispute between Mr Ian Hope and Bathurst City Council (which had commenced no later than 1969) but also described the effect of the 1988 amendments to what was then s 118 of the Local Government Act 1919 (at 15-16): "The history I have earlier set out seems to me to show quite clearly what was intended by the removal of the definition of 'rural land' and its replacement by the definitions of 'farming' and 'farm land'. The High Court had made it plain in its 1980 decision, 144 CLR 1, that it did not necessarily follow from the decision that an activity did not have a significant commercial purpose or character that it was not a business within the scope of the common or general meaning of the word. That is, the High Court left open the possibility that an activity engaged in for the purpose of profit on a continuous or repetitive basis (to use Mason J's words) would be a business within the ordinary or popular meaning of the word even if the business were carried on in a small way and irrespective of whether it had a significant commercial purpose or character. The new definition of 'farm land' both adopted Mason J's definition of the ordinary meaning of business (in par (b)) and added (in par (a)) further requirements which such a business must have before it could be considered a farming business for the purpose of the new definitions. The additional requirements were that it have a significant commercial purpose or character (adopting the words of Walsh J in Thomas) and also a substantial commercial purpose or character." 82It follows that the introduction of the words "and substantial" mean that a more stringent test was imposed. It is also obvious as a matter of ordinary grammar, as well as being what Priestley JA said, that "substantial" qualifies both "purpose" and "character". 83What is the nature of the more stringent test? "Substantial" is a word which is not only susceptible of ambiguity, but which is also calculated to conceal a lack of precision: Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union [1979] FCA 132; 42 FLR 331 at 348 (Deane J). But in its context, the ambiguity falls away. In Thomas and in Hope six Justices of the High Court had emphasised that scale was not relevant to whether a business of primary production was undertaken on land. Mason J referred to the absence of a requirement of "magnitude or size". Walsh and Mason JJ each referred to a business being carried on "in a small way". Gibbs and Stephen JJ referred to possibility that a commercial activity might be "small in scale". It is clear in this context that the additional qualification is to negate what each of those Justices had said of the former legislation. The primary judge was correct at [91] to find that to determine whether there was a significant and substantial commercial purpose or character, the Court should consider: "the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources (whether of time, labour or expenditure) put into the development and maintenance of the cattle operation." 84In order to assess the additional qualification of substantiality, a comparison needs to be made. Whether something has a substantial commercial purpose or character is at least in part a relative judgment. Speaking of s 45D of the Trade Practices Act, Bowen CJ said in Tillmanns at 339 that "No doubt in the context in which it appears the word imports a notion of relativity", and the same is true of "substantial" when it appears in s 10AA(2). A commercial truffle grower may have very little land, and harvest only a few kilograms of product, and yet the use may be substantial, seen against his or her competitors. The word "substantial" has in the present context no inherent or absolute meaning standing alone. There was no error by the primary judge contrasting the small scale and impossibility of profit of the cattle business on the land with other cattle raising businesses. 85In light of the foregoing, the taxpayers' principal submissions may be rejected concisely. 86First, it is plain that both limbs of the subsection must be satisfied in order for it to exempt any land from taxation. Secondly, there is no basis for contending that the different language of s 10AA(2)(a) imposes the same tests established by Thomas and Hope. A test in which substantiality played no part has been replaced by one requiring the commercial purpose or character to be substantial as well as significant. Thirdly, there is no sound basis for narrowing the effect of "substantial" merely to "purpose" and not to "character". Fourthly, there is no room for what was described in argument as "the Tweddle principle", in support of a submission that it matters not that a profit could never realistically be made. It suffices to say that the reasoning in Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 at 7 does not translate to the Land Tax Act which requires, in order to satisfy an exemption, land use to have a significant and substantial commercial purpose or character. 87This Court heard no argument on the second limb of s 10AA(2), and it is neither necessary nor appropriate to say anything about it. ********** 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: 09 December 2013