Supreme Court New South Wales Medium Neutral Citation: Adams Bidco Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 735 Hearing dates: 21 May 2018 Date of orders: 21 May 2018 Decision date: 21 May 2018 Jurisdiction: Equity Before: Pembroke J Decision: See paragraph [26] Catchwords: TAXES AND DUTIES – landholder duty – whether land exempt from duty as land used for the purpose of primary production – land exempt per Section 163D of the Duties Act 1997 Legislation Cited: Duties Act 1997 Cases Cited: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 Carr v State of Western Australia (2007) 232 CLR 138 Hope v Bathurst City Council (No 2) (1986) 7 NSWLR 669 Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue (2010) 79 NSWLR 724 Category: Principal judgment Parties: Adams Bidco Pty Ltd – plaintiff Chief Commissioner of State Revenue – defendant Representation: Counsel: M Richmond SC with T Prince – for the plaintiff J Hmelnitsky SC with M Sealey – for the defendant Solicitors: PricewaterhouseCoopers – for the plaintiff Crown Solicitor for NSW – for the defendant File Number(s): 2017/213403 Judgment Introduction 1. The primary issue in this proceeding is whether the plaintiff was liable to pay landholder duty under the Duties Act 1997 upon its acquisition of all of the issued capital in Ingham Enterprises Pty Ltd (Ingham) on 27 June 2013. At all relevant times, Ingham acted as the holding company for Inghams Enterprises Pty Ltd (Inghams), which operated a poultry production business in Australia and New Zealand. The plaintiff contends that it was not liable to pay landhold duty because it was entitled to rely on the primary producer exemption in Section 163D of the Act. Statutory Scheme 1. On 9 March 2013, the plaintiff entered into a share sale and purchase agreement to purchase all of the issued shares in Ingham from Mr Bob Ingham. That sale was completed on 27 June 2013. The plaintiff's acquisition of shares was an acquisition of a 100% interest in a landholder within the meaning of Chapter 4 of the Act and was a relevant acquisition within the meaning of Section 149 of the Act. It follows that, subject to the application of the exemption in Section 163D, the plaintiff became liable to pay landholder duty under Section 148. 2. Section 163D provides in full as follows: (1) Duty is chargeable under this Chapter in respect of an acquisition of an interest in a primary producer only if, when the acquisition is made, the primary producer is land rich. (2) For the purposes of this section, a "primary producer" is a landholder whose land holdings in all places, whether within or outside Australia, wholly or predominantly comprise land used for primary production or land that would be considered to be land used for primary production if it were land in New South Wales. (3) A primary producer is "land rich" if: (a) it has land holdings in New South Wales with an unencumbered value of $2,000,000 or more, and (b) its land holdings in all places, whether within or outside Australia, comprise 80% or more of the unencumbered value of all its property. (4) If at any time within the period of 5 years after an acquisition of an interest in a primary producer is made, the landholder in whom the acquisition is made ceases for any length of time to be a primary producer: (a) the person who made the acquisition must immediately notify the Chief Commissioner: (i) that the landholder has ceased to be a primary producer, and (ii) of the date on which the landholder ceased to be a primary producer, and (b) duty is chargeable under this Chapter in respect of the acquisition on the date on which the landholder ceased to be a primary producer, and (c) the Chief Commissioner must make an assessment of the duty so chargeable. (5) Property is not to be counted in calculating the unencumbered value of the property of a primary producer for the purposes of this section if the primary producer is unable to satisfy the Chief Commissioner that the property was obtained otherwise than to reduce, for the purposes of this Chapter, the ratio of its land holdings in all places, whether within or outside Australia, to the unencumbered value of all its property. 1. It is pertinent to make the following observations about Section 163D: 1. Subsection (1) makes clear that duty is not chargeable in respect of an acquisition of an interest in a primary producer unless the primary producer is 'land rich'. Ingham was not land rich within the meaning of the Act. The only question therefore is the meaning and application of subsection (2), namely, whether Ingham was a primary producer; 2. Subsection (2) defines the expression 'primary producer'. For that purpose it focuses on whether the land is used for primary production. It does not, in terms, direct attention to a concept such as the area of the land or its value. It is concerned with 'use' – the way in which the land is worked, utilised or employed; 3. Subsection (3) defines the expression 'land rich'. In contrast to subsection (2) it specifically directs attention to the 'unencumbered value' of the primary producer's landholdings. No other criterion is necessary for determining whether the expression 'land rich' is or is not applicable to a primary producer; 4. Subsection (4) is concerned with the consequences of a landholder ceasing to be a primary producer within a period of five years after acquiring an interest in a primary producer. In that event, duty will be charged on the acquisition on the date on which the landholder ceased to be a primary producer; 5. Subsection (5) is an anti‑avoidance provision that operates specifically by reference to the 'unencumbered value' of the property of a primary producer. 1. I should point out that Section 147 defines a 'landholding' to be an 'interest in land other than the interest of a mortgagee, chargee or other secured creditor'. This does not create any difficulty with the construction or operation of Section 163D(2). While the first part of subsection (2) must be read subject to the definition of 'landholding', the operative part consists of the words: 'comprise land used for primary production'. The operative part of subsection (2) is, therefore, concerned with the physical, the practical, the objective. It operates by reference to 'land' (not an interest in land), that is used for primary production. 2. The statutory language of Section 163D(2) does not require a determination of whether an 'interest' in land is used for primary production. That would make no sense in the context. It requires an evaluative judgment to be made as to whether the physical land – which is legally represented by the particular interest in land held by the landholder – is used for primary production. 3. The determination of whether the use of the physical land is wholly or predominantly for primary production is an age old issue that arises from time to time in different statutory contexts. It has been described as 'a question of fact and degree that may, in the end, be determined as an objective matter of impression, having regard to the facts': Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue (2010) 79 NSWLR 724 at [70]. 4. Similarly, in Hope v Bathurst City Council (No 2) (1986) 7 NSWLR 669, the majority in the Court of Appeal held that the characterisation of rural land as land, that is wholly or mainly used for carrying on the business or industries of grazing, among 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. See Leda Manorstead at [73]. Ingham's Business 1. In order to address the particular question in issue, it is necessary to understand the operation and scope of the business of Inghams. That business was a fully vertically integrated poultry production business, including poultry production, (both chickens and turkeys), poultry processing, wet pet food ingredients and stock feed production. The business was conducted in both Australia and New Zealand. In addition, Inghams operated a piggery in Queensland and owned a number of beef cattle. Feed Mills 1. The operations of Inghams' business involved a number of components. One component consisted of the feed mills that Inghams owned and operated throughout Australia and New Zealand. Each feed mill consisted of a large shed housing the feed mill equipment and a number of grain silos. The predominant purpose of the feed mills was to produce feed to supply Ingham's breeder farms and broiler farms, as well as its contract broiler farms, its turkey farms and the piggery. A smaller production of the stock feed produced (approximately 30%) was sold commercially to external customers. Poultry Production 1. The first stage in the poultry production process involved the importation of eggs which were taken to a quarantine facility at Bungonia in New South Wales. The eggs were then hatched, reared and mated to produce great‑grandparent birds. Subsequently, these birds were reared and mated to lay eggs which were hatched to produce grandparent birds. Until around mid‑2012 the importation of eggs and the rearing of great‑grandparent birds was managed by Ingham directly. It subsequently entered into a contract with a third party to carry out those tasks. Breeder Farms 1. The grandparent birds were sent as day old chicks to breeder farms owned by Ingham where the birds were reared and mated to lay eggs. Those eggs were subsequently collected from the farms and taken to hatcheries owned by Ingham to produce parent chicks. After hatching, parent day old chicks were transferred from Ingham hatcheries to one of the company's parent breeder farms. 2. As at June 2013, Inghams owned and operated more than 30 breeder farms across Australia and New Zealand. Breeder farms generally consisted of a large open land area with one or more large sheds where the birds were housed and reared. To reduce the risk of disease outbreak, there was usually a large buffer area to ensure that the sheds where the birds are housed and reared were located a substantial distance from potential sources of disease contamination. Hatcheries 1. As at June 2013, Inghams owned and operated 12 hatcheries across Australia and New Zealand, two of which were dedicated to turkeys. Fertile eggs, after being laid by the parent birds, were transferred from the breeder farms to a hatchery where they were incubated for approximately 21 days before hatching. The hatcheries were equipped with egg holding rooms and automated setting systems to control the hatching environment. Broiler Farms 1. Once hatched, the day old chicks from the hatcheries were transported to broiler farms. Although Inghams owned a limited number of broiler farms, the majority were contract grower farms. The contract grower provided the land and facility and Inghams supplied and was responsible for the day old chicks, their feed, medication, husbandry technology and veterinary services. Like breeder farms, broiler farms generally consisted of a large open land area with one or more large sheds where the birds were housed and reared. Once the broiler birds reached their required weight, the live birds were collected from the broiler farms and transported to one of Ingham's primary processing plants. Use of Land for Primary Production 1. Ingham held, directly and indirectly, substantial landholdings in connection with the business of Ingham. There were 92 separate parcels of land in Australia and New Zealand, one of which is the subject of an uncompleted agreement. The total area is 3,974 hectares and the total value is $654,206,775. The plaintiff produced a table which indicated those parcels of land that are used for primary production. The defendant said that it did not necessarily accept the classification of each parcel in the table, but did not challenge any particular classification. It will not, however, affect the result. The overall position, according to the table, is as follows: 1. by area, approximately 90% of Ingham's land is used for primary production; and 2. by value, approximately 35% of Ingham's land is used for primary production. 1. The evidence suggests that the table's classification of land may possibly be conservative. For example, of the 92 parcels listed, approximately 32 were not classified as land used for primary production. However, the use of most of those parcels seems to have been inextricably connected to the core business of primary production. They include parcels of land on which about nine feed mills, as well as plant and storage facilities, were located. Other parcels not listed as being used for primary production consisted of land at Leppington in New South Wales used as a laboratory and trial farm where feed and nutrition tests were conducted to maximum bird performance; land at Bungonia in New South Wales which was used as a quarantine station; land at Cardiff in New South Wales used for storage; land at Netherby in Queensland used as a commercial piggery; land at Wingfield in South Australia which housed the Protein Recovery Unit, a facility where chicken offal was processed into meal to be added to feed stocks. 2. Were it not for the defendant's argument based on 'value', and no other consideration, it would seem obvious that, as a matter of practical utilisation of land, the landholdings of Ingham 'wholly or predominantly' comprised land used for primary production. The defendant's contention is that, on its proper construction, Section 163D(2) compels a different result. The underlying practical reason behind this submission is that, among the minority of parcels that were not classified in the table as being used for primary production, some have considerable value. Indeed, their value outweighs the value of the parcels that were classified as being used for primary production. 3. But such an outcome is not surprising, given the nature and extent of the business. For example, while the value of many of the parcels of farming land is modest, the head office at Liverpool is valued at $17.025 million; a feed mill at Berrima is valued at $11.289 million; another feed mill at Cardiff is valued at $9.009 million and a plant at Murarrie in Queensland is valued at $52.64 million. And there are many more examples. Text 1. Nonetheless, having regard to the language and the context of Section 163D(2), I cannot see a sound basis for accepting the defendant's contention. I have already explained the structure and effect of each of the five subsections in Section 163D. There is no textual basis for importing the defendant's 'value' approach into subsection (2). The words are simply not there. They must be imported. And the reference to 'unencumbered value' in subsections (3) and (5), for different purposes, does not justify any qualification of the language of subsection (2). The subject matter of subsection (2) is quite different to the subject matter of subsections (3) and (5). Context 1. The context also reinforces the approach which I have adopted. Where the Act requires an assessment of value, it is explicitly stated. The fact that no reference is made to value in Section 163D(2) reinforces the likelihood that the subsection does not require a comparison of land value for the particular object that it deals with. It would have been straightforward for Parliament to have inserted the words 'by value' before the phrase 'wholly or predominantly' in Section 163D(2). It effectively did so in subsections (3) and (5). It is significant that it has chosen not to do so in subsection (2). Capricious & Arbitrary 1. The defendant's value approach also has the potential to produce a capricious result. A tax payer may own primary production land whose value exceeds non‑primary production land at the time of a relevant acquisition. Solely because of a fluctuation in property prices, the value of the non‑primary production of land may increase over the next five years so that it becomes greater than the value of the primary production land. On the defendant's approach, the tax payer would cease to be a primary producer and would be required to pay duty. This could be the result, despite no change at all in the operation of the business or the underlying use of the tax payer's land. This would be an arbitrary outcome. It tends to make the correctness of the defendant's approach less likely. Commercial Rationale 1. The defendant's submissions also emphasised what was said to be the commercial rationale of the Act. But minds frequently differ as to commercial rationale as they do to commercial purpose. And ultimately, the text is paramount. This is the danger to which the High Court adverted in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at [51], when it adopted the following statement by Gleeson CJ in Carr v State of Western Australia (2007) 232 CLR 138 at [6]: [I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling. 1. To identify a general legislative purpose of the Duties Act as 'charging duty on a transaction based on value', creates a danger that the text of the relevant provision under examination does not receive the attention which it deserves. And it can tend to state the purpose or rationale at too high a level of generality to be useful. In this case, to say that much of the Duties Act involves charging duty on a transaction based on value actually says nothing about the scope of the exemption from duty in Section 163D(2). This is pre‑eminently a case where the statutory language requires close attention. Unintended Consequences 1. Finally, there is a distinct possibility that the value approach proposed by the defendant could result in unintended consequences. Some businesses do not revalue their land and buildings on a regular basis and, instead, record asset values at cost. The effective practical result of the defendant's submissions would be that if Section 163D(2) were to be construed in the manner for which it contends, landholders would be required to value their assets on a regular basis, including for five years after a relevant acquisition for the purpose of determining whether subsection (4) applies. I am not satisfied that that could have been intended. Conclusion 1. In conclusion, I am quite satisfied that at the relevant date, Ingham was a primary producer within the meaning of Section 163D(3) of the Duties Act 1997 and that the plaintiff is entitled to rely on the primary producer exemption. The language of Section 163D(2) does not compel a determination of Ingham's primary producer status solely by reference to the area of its landholdings, let alone solely by reference to the value of those landholdings. The question is to be addressed pragmatically having regard to the ordinary and natural meaning of the words 'land used for primary production' where they appear in the operative part of subsection (2). 2. I have made clear that the particular facts in this case support the conclusion that Ingham was a primary producer. That is not to say, however, that in a different case on some other combination of land values and areas, the same result would necessarily apply. Many extreme examples were given in submissions. A landholder with 300 hectares of rural goat country and a city office building on half a hectare worth ten times as much as the rural land, would probably not be a primary producer for the purpose of Section 163D(2). But that is not this case. 3. The result is that the plaintiff succeeds on the primary issue and the other issues do not arise. The parties should bring in agreed orders and declarations. The defendant should pay the plaintiff's costs. ********** Amendments 23 May 2018 - Minor typographical changes 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: 23 May 2018