The NSW Supreme Court’s (NSWSC) decision in Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue [2022] NSWSC 430 (Godolphin Case) is instructive as it provides guidance into the ambit and scope of the land tax primary production exemption particularly in relation to the breeding of horses.
While the decision examines the application of the primary production exemption in the Land Tax Management Act 1956 (NSW) (Act), these requirements are similar to the requirements for the equivalent primary production land tax exemptions contained in sections 65 to 68 of the Victorian Land Tax Act 2005 (Vic).
Key facts in the Godolphin Case
Godolphin Australia Pty Ltd (Taxpayer) operates a thoroughbred horse stud in rural NSW on four properties.
The Taxpayer operates a thoroughbred horse stud that involves breeding, racing and selling thoroughbred horses, or their semen or progeny.
The Taxpayer also engages in associated agricultural activities such as raising cattle and growing Lucerne.
The NSW Chief Commissioner issued the Taxpayer with land tax assessments for the 2014 to 2019 land tax years on the basis that 2 of the properties in question, while used for the maintenance of animals, did not satisfy the further statutory requirement that the animals were maintained for the purpose of sale, or their natural increase or bodily produce.
The Commissioner contended that the Taxpayer’s dominant purpose was for breeding and training thoroughbred racehorses in between race events and that any sale of the horses were ancillary or incidental to that purpose.
The Commissioner also further contended the following:
if a purpose of sale did exist, then that purpose was not the dominant purpose or sufficiently proximate to the current use of the properties for the maintenance of animals; and
the extent the properties were being used for the maintenance of animals for the purpose of selling their natural increase or bodily produce was not dominant in comparison to other uses of the properties such as breeding and training of thoroughbred horses for the purpose of racing.
Key issue in the Godolphin Case
The key issue was whether the dominant use of the properties in question were for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce for the purposes of the exemption in section 10AA(1) of the Act.
NSWSC’s findings in the Godolphin Case
The NSWSC noted the principle difference between the parties’ opposing contentions was the perspective from which the racing operations are viewed in the context of the Taxpayer’s equine operations.
On the one hand, the Chief Commissioner viewed the breeding, training, education and spelling to be for the dominant purpose of racing (“breed to race”).
The Taxpayer on the other hand contended that the horse breeding activities which it carried out were part of an integrated racing operation which was part of the thoroughbred stud operation. More particularly, the Taxpayer contended that racing success increased the value derived from stallion “nominations” (ie the sale of bodily produce) and the value of the progeny that is sold.
The NSWSC disagreed with the Chief Commissioner that the sale of horses were incidental to the dominant purpose of breeding for the purpose of generating prizemoney from racing as it did not make sense from an economic point of view.
In considering the specific equine activities carried out by the Taxpayer, including timing of sales, type of horses sold, at what age yearlings were sold, and how proximate the sales were, the NSWSC found that the objectives of winning races and stallion excellence were part of the Taxpayer’s overall stud operations.
In considering the uneconomic nature should the operations be confined only to racing and the evidence that racing prowess is an important factor in the pricing commanded for the sale of the stallions’ semen, the NSWSC ultimately found that the Taxpayer’s equine activities were indeed an integrated stud farm operation. This led to the Court concluding that the dominant use of each of the parcels of land for the relevant tax years was the maintenance of animals for the purpose of selling their bodily produce or natural increase.
Key takeaways
The Godolphin Case is authority for the proposition that the maintenance of horses can satisfy the “maintenance” requirement for the primary production land tax exemption in the Act.
However, the case also highlights the difficulties in establishing that the maintenance of horses constitutes the maintenance of animals for the purpose of selling them or their bodily produce, particularly when an element of horses being maintained for racing purposes coexists.
The decision is also instructive as it serves a cautionary reminder that even with the existence of sales, there is a likelihood that the revenue authorities may not consider the statutory requirements in the primary production land tax exemptions as being satisfied.
Unsure if your farming activities satisfy the primary production land tax exemptions?
The primary production land tax exemptions are notorious, not only for the legal complexities involved, but also the highly fact-driven requirements of satisfying the revenue authorities that the exemption requirements are satisfied.
If you are unsure whether a primary production land tax exemption applies to your circumstance, our state taxes team can assist with understanding whether the relevant land tax primary production exemptions apply, including what your options are if land tax has been imposed, including objecting to an assessment or providing representation at the various courts or tribunals.
Please feel free to contact our specialist team at:
Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au
