Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Walmsley v Chief Commissioner of State Revenue [2015] NSWCATAD 208 Hearing dates: 7 July 2015 Decision date: 15 October 2015 Jurisdiction: Administrative and Equal Opportunity Division Before: R Perrignon Senior Member Decision: The decision of the Chief Commissioner of State Revenue dated 5 December 2014, to assess the subject land to land tax in respect of the 2013 and 2014 tax years, is confirmed. Catchwords: Land tax – residential land, approved for residential subdivision – used for grazing cattle – whether primary production exemption applies Legislation Cited: Land Tax Management Act 1956 Taxation Administration Act 1996 Cases Cited: Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183 Hope v Bathurst City Council No 2 [1979] NSWLR 471 Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 Maraya Holdings Pty Limited v Chief Commissioner of State Revenue [2013] NSWSC 23 Maraya Holdings Pty Limited v Chief Commissioner of State Revenue [2013] NSWCA 408 Thomas v Commissioner of Taxation (Cth) (1972) 46 ALJR 397 Category: Principal judgment Parties: Peter Walmsley, Roy Walmsley, Dianne Millar, Vicki Bailey and Helen Mabutt (Applicant's) Chief Commissioner of State Revenue (Respondent) Representation: Solicitors: P Walmsley (Applicant's) Crown Solicitors (Repondent) File Number(s): 1510073 Judgment 1. The applicants own 9.2 hectares of land at Bilambil Heights in New South Wales. At all relevant times it was zoned residential. They seek review of a decision by the Chief Commissioner of State Revenue to assess the land to land tax in respect of the 2013 and 2014 tax years. That decision was made on 5 December 2014. 2. The taxpayers say that the land was exempt from land tax because, though not rural land, it attracted the primary production exemption in section 10AA(2) of the Land Tax Management Act 1956. They say it did so because, as the subsection requires, the land was predominantly used for the maintenance and sale of cattle, and the cattle operation had a significant and substantial commercial purpose or character, and was engaged in for the purpose of profit on a continuous or repetitive basis. 3. The respondent says the Tribunal would not be satisfied either that the land was used for that purpose, or that, if it was so used, the cattle operation had a significant and substantial commercial purpose or character, or was engaged in for the purpose of profit on a continuous or repetitive basis. 4. As the taxpayers have objected unsuccessfully to the Chief Commissioner's decision of 5 December 2015, the Tribunal enjoys jurisdiction to review the decision: section 101, Taxation Administration Act 1996. The applicants bear the onus of proving their case on review: section 100(3). Legislation 1. Section 10AA(2) of the Act provided as follows: (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: … (b) the maintenance of animals …, for the purpose of selling them or their natural increase or bodily produce… Issues for determination 1. The issues for determination by the Tribunal may be summarised as follows: (1) Whether the land was used for the dominant purpose of the maintenance and sale of cattle. (2) If so: (a) whether that use had a significant and substantial commercial purpose or character, and (b) was engaged in for the purposes of profit on a continuous or repetitive basis. Background facts 1. The following facts were not in dispute. The land has been owned by the family of the applicants since the mid 1940's. In the tax years in question, it was fenced with a shed and dam on it, but no residence. It was registered with the Livestock Health and Pest Authority. In the financial year ending 30 June 2013, the applicants sold eight cattle for $3,056, recording a loss of $1,791. In the financial year ending 30 June 2014, they sold at least three cattle (which included 3 steers, unlike the previous year) for $7,840, recording a profit of $4,424. The sale of these cattle was confirmed by Waybills which were included in the section 58 documents. 2. The financial figures for the cattle operation may be gleaned from the tax returns as follows. FINANCIAL YEAR ENDING $ SALES $ EXPENDITURE $ PROFIT/(LOSS) 2012 0 4,111 (4,111) 2013 3,056 4,847 (1,791) 2014 7,840 3,416 4,424 1. It is significant that Mr Walmsley's 2014 tax return disclosed a taxable income of $81,728, the bulk of which was derived from his employment as a real estate property manager. 2. From the section 58 documents, the Tribunal is able to infer the following additional facts, none of which were in contest between the parties. In June 2006, at the request of the taxpayers, a consulting firm prepared a Preliminary Assessment for Major Project Application no 05_0198, being a proposed 85 lot residential subdivision of the land and the neighbours' adjoining parcel of 16.32 hectares. 3. On 27 February 2008, the consultant applied on behalf of the owners to the Director-General of the NSW Department of Planning for a proposed 84 lot subdivision of these lands, with road construction and other subdivision works, estimating a capital cost of $9 million. From the plans produced by the consultant, about half of the proposed lots appear to fall within the land owned by the taxpayers. 4. On 11 March 2008, the Department of Planning indicated to the consultant in writing its requirements for an Environmental Assessment. 5. On 24 January 2012, the Tweed Shire Council endorsed the submission to the Department for a proposed residential subdivision. 6. In June 2012, the Department of Planning and Infrastructure issued its Environmental Assessment Report of the proposal. 7. On 2 August 2012, the Minister for Planning and Infrastructure approved an 85 lot residential subdivision of the lands the subject of the proposal, and the Planning Assessment Commission did likewise. Mr Walmsley 1. The Tribunal had the benefit of hearing from Mr Walmsley, who was one of the taxpayers. He sought and was granted leave to represent all the taxpayers at hearing. He explained that their land had been used to graze cattle for the last ten years – that is, from about 2005. Once a month or so, the cattle had to be counted and sprayed. From 2012 to 2014, he estimated that they would have run between 20 and 30 head of cattle on the land at any one time. The spraying records and other returns, which were produced after the hearing in accordance with the Tribunal's orders, were roughly consistent with this assessment, and in addition disclosed the presence of a few horses. 2. When the rains came, he said, it was easier to feed and fatten the cattle than in years when it was dry. For instance, he said, by June 2015 the rains had come, and he was able to sell 17 cattle for $11,000. This was corroborated by some very impressive photographs showing the condition of the land and its cattle in 2015. Conditions from 2012 to 2014, he said, had been so dry that they had had to feed the cattle on the road verges. Eventually many were not in good enough condition to sell, and he had had to shoot some for lack of food. That is consistent with the revenue figures from the tax returns tabulated above. 3. In written submissions made after the hearing, Mr Walmsley added that the available records by and large supported his estimate of the number of cattle on the land, that some of his neighbours who derived their sole income from cattle production ran about the same number of cattle as he or less, that very few cattle farmers have made a profit in the last few years because of drought, that all council rates have been paid from time to time and not deferred in the sense of remaining outstanding, that his father farmed this land all his life, with his mother's income as a school teacher helping "to balance the ledger when times were tough in primary production", and that the viability of family businesses like this are not generally judged having regard to the true cost of wages and the like. These are considered below. 4. Mr Walmsley told the Tribunal that the subdivision application had taken ten years. He was originally told it would cost about $25,000, but to date it had cost something in the order of $400,000 to $500,000. There was no evidence as to precisely when those costs were incurred, though some must have been incurred in 2006 and 2008 when the proposal was first prepared and submitted to the Department, respectively. There was no evidence as to what, if anything, was spent on the proposal in the 2013 and 2014 land tax years. Mr Walmsley said candidly that the taxpayers had no intention to develop the land, as they could not afford the outlay. Their hope, he said, was to sell with land with the development approval. He hoped that it would justify the outlay by increasing the unimproved value of the land by $800,000. 5. In addressing the question of dominant use, Mr Walmsley indicated that 8 of the 9.2 hectares had been used for grazing, whereas the development proposal utilised only 6 of the 9.2 hectares. 6. The facts as outlined by Mr Walmsley were unchallenged. They were internally consistent, and not inherently improbable. The respondent's submissions that the profit and loss figures for the cattle operation do not appear to take account of wages or council rates are considered below. Nonetheless, so far as it goes, I accept what Mr Walmsley has said as being accurate. Use of the land 1. Having regard to what Mr Walmsley has said, I am satisfied that during the 2013 and 2014 tax years, the land was used for the purpose of maintaining cattle and selling them or their offspring. It was clearly a small operation, but there is nothing to suggest that these animals were kept as pets, for lifestyle purposes, or for any purpose other than for sale. Whether dominant use 1. The next issue is whether grazing constituted the dominant use of the land. There can be no doubt that it constituted a 'use' for the purposes of section 10AA. The Chief Commissioner did not suggest that the proposed subdivision constituted a competing use, presumably because the mere obtaining of development consent, without any physical change to the land, does not constitute a 'use' in this sense: Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183. On the other hand, the execution of works preparatory to a residential subdivision can constitute a relevant use: Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867. That was not the case here. 2. It follows that the only relevant use during the tax years was cattle grazing. As it was the only use, I am satisfied it was the dominant use. Profit 1. Section 10AA(2) also requires that the use be 'engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made)'. As indicated above, a loss was made in the 2013 financial year, and a profit in the 2014 financial year. Both were in modest amounts, less than $5,000. The mere fact that a loss was made in the first of these financial years does not necessarily negate an intention to make a profit on a continuous or repetitive basis. The suffering of a modest loss in the 2011 financial year similarly does not do so. As Mr Walmsley has pointed out in his written submissions, farmers in Australia sometimes do suffer losses in consecutive years due to drought, but that does not negate an intention to profit from farming on a continuous and repetitive basis. 2. In this case, there was no explicit evidence of the owners' intention as to profit. For that reason, a conclusion as to intent must be drawn objectively from the evidence as a whole. The evidence established that cattle grazing had been carried on for many years. Mr Walmsley's father had farmed the land, and kept cattle there. His mother's income as a school teacher helped pay the bills when times were tough. For the few years in which figures were available to the Tribunal, the financial results were mixed. 3. In his written submissions, Mr Walmsley suggested in excess of fifteen hours per week were spent on average in looking after the cattle business. However, no such evidence was given at the hearing, there was no opportunity for the respondent to test it, and Mr Walmsley made no request for a further hearing in order to give that evidence, though such a request had been invited by the Tribunal in its orders. In those circumstances, it would be inappropriate to treat that submission (or any of the applicants' written submissions) as if they were evidence, and I cannot be satisfied of the precise amount of time spent on the cattle operation in the relevant period. Nevertheless, it is reasonable to accept that a good deal of effort was brought to bear in maintaining this herd when required, in the ways indicated above. 4. There was no evidence that the cattle were kept as pets, for lifestyle, or for any purpose other than maintaining them for sale. The most likely inference is that the owners did intend to run this as a business, albeit of a small character, and that profits be made continuously, whenever conditions permitted. I am satisfied that the loss experienced in the 2013 financial year, and the modest size of profit in the 2014 financial year, were both the result of drought, a vicissitude which notoriously affects farmers throughout New South Wales. The presence of drought conditions, with the consequence that losses are suffered or profits depressed, does not negate an intention to make profits from grazing. Though the evidence is slender, it is likely that the cattle operation was carried on with a view to a profit on a continuous and repetitive basis, notwithstanding the small losses made from time to time, and the small size of the operation. 5. As indicated, section 10AA(2) also requires that the primary production use have "a significant and substantial commercial purpose or character". The words "significant and substantial" are not defined in the Act. They were considered by the Court of Appeal in Hope v Bathurst City Council No 2 [1979] NSWLR 471. The phrase can be traced to the decision of Walsh J in Thomas v Commissioner of Taxation (Cth) (1972) 46 ALJR 397 (at 400-401). In that case, the learned trial judge distinguished between a business on the one hand, and activity by way of recreation or hobby on the other. He found that a barrister who grew avocado pear, macadamia nut and pine trees did so as a business. 6. In Hope, Rath J had found at first instance that Mr Hope was not conducting a business. To qualify as a business, he observed, 'there must be some activity of which it can be said that it has a significant commercial purpose of character'. He considered that the word 'significant' implied important, real, genuine and weighty. His decision was upheld by the Court of Appeal. Samuels JA, expressing the view of the majority, observed [at 477]: 'In my view, the appellant's argument is essentially this. Once a finding is made that the activities in suit are carried on for the purpose of profit, or for commercial purposes, it necessarily follows that they constitute a business. I am afraid that I cannot accept this argument. Activities may bear the ordinary indicia of commerce, but yet, in all the circumstances, may not constitute a business.' 1. In Maraya Holdings Pty Limited v Chief Commissioner of State Revenue [2013] NSWSC 23, Gzell J made the following observations: "83. In ordinary parlance, "significant" connotes importance, something of consequence, a key element, a vital or critical one. 84. These meanings tend to place "significant" at the upper end of the spectrum of meanings the word has developed. 85. In the context of s 10AA(2)(a) of the Management Act this is appropriate as the purpose of its commerciality test is to exclude a less important use of land from qualifying for exemption. 86. As the Administrative Decisions Appeals Panel said of the commerciality test in Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25 at [45]: "This criterion eliminates hobby or token operations even though they may have passed the de minimis threshold to which we have referred [above]. The taxpayer then needs to show that the operation is run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability; cognisant of the elements of unpredictability of any business operation, especially primary production. This is a higher standard than the one that applies to rural land." 87. It has been said that the word "substantial" lacks universal meaning and takes its meaning from the noun that it describes. As Burchett J said in News Ltd v Australian Rugby Football League Limited [1996] FCA 1256; (1996) 58 FCR 447 at 521: "The adjective 'substantial' will have a different effect according to the noun which it describes. Often it refers to size, as in the expression 'a substantial amount of money', or (to take an example from the Trade Practices Act) in the adverbial use to be found in the expression 'substantially lessening competition' repeatedly used in s 45. One can measure an amount of money or a degree of lessening of some activity. But purpose is not measured in any comparable sense. Applied to purpose, the adjective refers to its quality or significance, and may be regarded as a word of characterisation." 88. But in ordinary parlance the word "substantial" connotes size or bulk. It means an ample or considerable amount, quantity or size. 89. The commerciality test in s 10AA(2)(a) of the Management Act required Maraya's use of the lands for primary production, either individually or in conjunction with the other lands, to have had a significant and substantial commercial purpose or character. That test required the commercial purpose or character of the use of the lands to have had a relatively high degree of importance. The combination of "significant" and "substantial" demands that conclusion. 90. Not every business will satisfy the commerciality test. The test distinguishes activities amounting to a business that is carried on in a small way or as a sideline from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one. It will usually also exhibit some of such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence." 1. In Maraya Holdings, Gzell J found that the grazing of 50 cattle on 20 hectares of land lacked the requisite seriousness or intensity to qualify as "a significant and substantial commercial purpose or character". The decision in Maraya Holdings was confirmed on appeal: Maraya Holdings Pty Limited v Chief Commissioner of State Revenue [2013] NSWCA 408. 2. In this case, the grazing of 20 to 30 cattle on 9 hectares represents, on average, a similar intensity, which does not assist the applicant. However, stocking rates are not alone determinative and, as Mr Walmsley pointed out in his written submissions, the facts in Maraya were on the whole different from the facts here. Nevertheless, the principles expressed by Gzell J are of general application. As he observed, it is important to distinguish businesses "carried on in a small way or as a sideline from those of a more serious and weighty kind". 3. In his written submissions, Mr Walmsley said that he stocked more head of cattle per hectare than any of his neighbours, who relied on cattle for their sole income. For the reasons given above, it is not appropriate to treat this submission as evidence. Nevertheless, even one were to accept it as true, the mere fact that stocking rates of Mr Walmsley's neighbours are equal to or less than his cannot assist the taxpayers by way of comparison unless it is established that the neighbours' businesses are themselves of a significant and substantial commercial character or purpose. There is insufficient evidence for the Tribunal to draw any conclusion on that issue. 4. The degree to which records are kept, and their nature and reliability, will be important. There were some records kept, such as waybills, spraying records, and land and stock returns. However, the only evidence as to the calculation of profit and loss is in the tax returns, which provide no detail as to how those calculations were made - for instance whether they included wages, or even council rates. The rates notice dated 27 June 2013 in respect of the 2014 financial year indicates that that $1,212.40 fell due for payment on 31 August 2013. There is no evidence to establish that this amount was taken into account in determining the deductible expenditure declared in the 2014 tax return, or that wages were taken into account. 5. Mr Walmsley pointed out, in effect, that this was a family business, and the viability of family businesses is not generally assessed by deducting wages from revenue. There is no evidence before the Tribunal to establish whether that submission is correct. Even if it is, it proves neither that wages were taken into account in assessing profits, nor that the business had a significant and substantial commercial character or purpose, as required by section 10AA(2). As indicated, the onus of proof of that lies with the applicants. The absence of any evidence of detail as to how profit and loss was calculated, and evidence tending to show that profits were invested in the business, militates against a finding that the cattle business was of a significant and substantial commercial purpose or character. 6. As at 1 July 2013, the records of NSW Land and Property Information indicate that the unimproved value of the land was $1.1 million. For that level of investment, and taking into account the considerable effort required to maintain the herd, it is not reasonably possible to classify a net return of $2,633 (being the difference between profits and losses in the 2013 and 2014 financial years) as a weighty, serious or intense commercial operation. That is so, even though the value of the land in Maraya was far greater, as Mr Walmsley has pointed out. 7. In all the circumstances, the Tribunal has formed the impression that the cattle operation fits more into the category of a token or 'sideline' business, which is secondary to Mr Walmsley's main occupation as a real estate property agent. 8. The applicants bear the onus of proving that the cattle operation satisfied the dual statutory requirements of "significant and substantial commercial purpose or character" as required by section 10AA(2)(a). On the evidence, I am not satisfied that it did. 9. For that reason, the decision of the Chief Commissioner to assess the land to land tax in respect of the 2013 and 2014 will be confirmed. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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 October 2015