The primary production land tax exemption remains an important concession for farmers and the owners of farm land. The Civil and Administrative Tribunal of New South Wales has added to the list of recent land tax cases offering insight into the application of the primary production land tax exemption. Importantly the case also highlights that where the land is used by a third party for the purpose of primary production the onus remains with the landowner to prove such activities occur on the land.
The relevant case is Mir Bros Industries Pty Ltd v Chief Commissioner of State Revenue; Mir Bros (Hollywood Creations) Pty Ltd v Commissioner of State Revenue; Mir Bros Trading Co Pty Ltd v Commissioner of State Revenue [2022] NSWCATAD 35 (Muir Bros Case).
What are the requirements in NSW for the primary production land tax exemption?
Section 10AA of the Land Tax Management Act 1956 (NSW) (LTM) contains an exemption from land tax based on primary production. The key requirements are:
the ‘commerciality’ test (s 10AA(2)(a)) – which requires that the activities on the land have a significant and substantial commercial purpose or character;
the ‘profit’ test (s 10AA(2)(b)) – which requires that the activities are engaged in for the purpose of profit on a continuous or repetitive basis; and
the ‘dominant use’ test (s 10AA(3)) – which requires that the land is use for one of the specified primary production activities including the cultivation of produce or maintenance of animals for resale.
These requirements are very similar to the requirements required for the equivalent primary production land tax exemption contained in sections 67 to 67F of the Victorian Land Tax Act 2005.
What were the important facts in the Muir Bros Case?
This case relates to three contiguous parcels of land (Land) which were held by the three Mir Bros entities (the Applicants). The Applicants claimed that each parcel of the Land was exempt from land tax as it was used for primary production, specifically “grazing, breeding and fattening of cattle for sale”.
The primary production activities were not undertaken by the Applicant but rather the use of the land was licenced to third parties who undertook such activities. The primary production was undertaken firstly by the partnership known as Avahar Pastoral (Avahar) during the 2017, 2018 and 2019 land tax years and then by Loop Organics Pastoral Pty Ltd (Loop) during the 2020 land tax year.
What was the Tribunal’s findings?
The Tribunal ruled that during the time that Avahar operated on the land the dominant use was for primary production as demonstrated by the cattle on the land. However, the Tribunal found that the primary production activities did not pass the commerciality test.
Key to this finding was that there was little evidence demonstrating the specific numbers of cattle, the activities undertaken, labour utilised, equipment and machinery, business plans, cattle management practices etc. The license agreement between the Applicant and Avahar included a requirement for Avahar to provide evidence of primary production activities. The Director of the Applicant had requested the required evidence from Avahar, however, the Tribunal found that the evidence was not supplied to the extent required to demonstrate the commerciality of the activities.
The Tribunal noted at paragraph 72:
The difficulty for the Applicants is that, aside from the size of the herd, the size of the land and some financial reports, there is little information from which the Tribunal can gauge whether the use of the Land has a significant and substantial commercial purpose or character.
As the exemption failed on the commerciality test the profit test was not required to be considered.
During the time that Loop held a license for use of the land the dominant use was determined to be primary production. Loop was a start-up business and therefore had incurred many losses, however, it had a business plan and the representative of the Loop was able to provide detailed evidence as to activities and practices.
The Tribunal concluded based on the evidence the activities had a significant and substantial commercial purpose. On the final profit test, it was noted that, despite losses, looking at a whole, the activities of Loop were continuous, repetitive and for the purpose of profit.
What are the key takeaways from this case?
This case provides further guidance on what constitutes primary production which has been the subject of significant litigation recently. Whilst the provisions of the exemption vary from state to state there are some similarities that can be drawn upon to understand how the courts may interpret these rules.
Importantly this case highlights the affect a licensee can have on the eligibility of a landowner to access particular concessions. Whilst provisions were made in the licence agreement requiring primary production to be conducted and information of such activities to be provided to the owner, this obligation was not met in the case of Avahar and this proved fatal to the Applicant’s case for those years.
The case demonstrates that where you intend to hold land and do not conduct the primary production activities themselves, you still have a positive obligation to ensure such activities occur and to collate sufficient evidence to prove it. It is clear from this case that revenue authorities are unlikely to ‘take pity’ on landowners unable to source evidence as ultimately the burden remains on the taxpayer (landowner) to prove the exemption should apply.
How can we help?
Primary production exemptions for land tax are complex and recent litigation has added further complexity. Our team can help you understand your eligibility to the exemption and assist in applying for the exemption, objecting to a denial of the exemption or responding to SRO audits on point.
If you require advice on structuring and operating a farming enterprise, commercial or taxation advice, please contact:
Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au
