The High Court has unanimously dismissed an appeal by Godolphin Australia Pty Ltd (Godolphin) – upholding the NSW Court of Appeal decision that it cannot claim the primary production land tax exemption, as it was unable to show that the “dominant use” of its properties was for primary production where it also had substantial horseracing activities.

This decision will have implications for other primary producers which run integrated businesses that include substantial non-primary production activities.

The case was Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (2024) HCA 20 (reported at 2024 WTB 23 [426]), and was an appeal by Godolphin from a judgment of the NSW Court of Appeal. The appeal concerned the correct construction of s 10AA of the Land Tax Management Act 1956 (NSW) (the Land Tax Management Act).

Relevant legislation and background

Subsection 10AA(1) of the Land Tax Management Act exempts rural land from land tax "if it is land used for primary production".

The term “land used for primary production” is defined in subs 10AA(3)(b) to be “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 … ”. This creates the “dominant use test”.

Godolphin held 2 properties in NSW and used them in an integrated operation. This included 2 activities:

the breeding of thoroughbred horses, the sale of horses and the covering of mares; and
racing horses for prizemoney.

Revenue NSW assessed Godolphin for land tax for the 2014 to 2019 land tax years. Godolphin challenged the land tax assessments on the basis that the properties should be exempt as land used for primary production.

The Chief Commissioner accepted that the land was used to maintain horses, however did not accept that the dominant use of the land was for the sale of horses, their progeny or bodily produce.

The matter had already been before the Supreme Court (in Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue [2022] NSWSC 430) – where Godolphin won and in the Court of Appeal (in Chief Commissioner of State Revenue v Godolphin Australia Pty Ltd [2023] NSWCA 44) – where Revenue NSW won on the basis that the primary production use of the land was not the dominant purpose.

The High Court

The High Court had to decide whether the "dominant use" requirement under s 10AA applied both to "the maintenance of animals" and also to the purpose of sale in s 10AA(3)(b).

The case proceeded on the basis that a significant use of the property was the maintenance of animals for the purpose of selling them or their bodily produce.

Godolphin argued that the word "dominant" should only qualify the phrase “use of which is for … the maintenance of animals”. However, the High Court held that the dominant purpose test applied to the full phrase “use of which is for … the maintenance of animals … for the purposes of selling them …” (at paragraph [28]), when the text of subs 10AA(3) is “read in its immediate statutory context and in light of broader statutory and extrinsic context”.

The High Court, in applying the dominant purpose test, identified that there were 2 distinct business operations of Godolphin on the land - breeding and racing for prizemoney.

While the horse breeding activities were not questioned as being a primary production activity, the High Court ultimately held that the taxpayer could not show that the dominant use of the taxpayer’s properties in the Hunter Valley was for its horse breeding activities in light of the significance of its other purpose of horse racing. This was expressed as requiring “so predominant a use as to impart an exempting character of this type to the land as a whole” (at paragraph 37).

Therefore, the land did not qualify for the primary production exemption from land tax.

The lead judgment was given by Gordon, Edelman and Steward JJ and provided at paragraph 31:

“A significant use of the land was for breeding horses ... [Godolphin] fell short of demonstrating that the ‘dominant use’ of the land was for the purpose of selling them or their natural increase or bodily produce.”

Further, at paragraphs 34 and 35:

“34 Whether land is being used for the dominant purpose of maintaining animals for their sale or the sale of their natural increase or bodily produce is a question of characterisation of the use or uses to which the land is put. The proper approach is to consider the amount of land used for any purpose, the nature and extent and intensity of the various uses which are taking place, and the time and labour and resources spent in using the land. In some cases, the financial gain from a given activity may be an indicator of predominance. And in all cases one should not ignore the conclusion reached by an objective observer who is viewing the land as a whole.

35 Where land has more than one use, for a given use to be dominant it must exhibit such predominance as to impart to the whole of the land the necessary exempting character.

…”

The High Court also considered that it was necessary to focus not on the taxpayer’s conception of its business model – but rather on the objective features of the physical activities being conducted on the properties (at paragraph 82).

The High Court looked at the area used for each activity, revenue from sale of horses compared to prize money from racing and considered that the subjective intentions of the taxpayer were not to the point. Racing was never incidental or wholly ancillary to the exempt primary production purpose.

Application

This case will have broad implications to all rural taxpayers where primary production activities are rolled up into a wider operation that includes non-primary production activities.

Relevant taxpayers will be satisfied that the concept that horse breeding can be an exempt primary production activity was not challenged in the High Court.

This is an issue that, for example, vineyards with wineries or cellar doors or function venues have had to historically navigate.

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au

Meera Pillai
Associate
T +61 3 9611 0179
E mpillai@sladen.com.au