Bellbird Ridge Pty Ltd as trustee for Bellbird Ridge Unit Trust v Chief Commissioner of State Revenue

Supreme Court of NSW|2015-12-10|Before: White J

Solicitors: Hall & Wilcox (Plaintiff) Crown Solicitor (Defendant) File Number(s): 2014/363026

Judgment

HIS HONOUR: This is an application by a taxpayer ("Bellbird Ridge") for a review of decisions of the Chief Commissioner of State Revenue to issue assessments of land tax. The assessment notices were dated 9 April 2014 and 28 April 2015 and related to the land tax years 2011 to 2015. Bellbird Ridge seeks orders that the assessments be revoked.
The land in question comprises 80.381 hectares at Bellbird near Cessnock. Prior to 24 January 2011 the land was zoned Rural. From 24 January 2011 the land was rezoned as partly "R2 Low Density Residential", partly "RE1 Public Recreation" and partly "B1 Neighbourhood Centre".

The Alleged Use of the Bellbird land for Residential Development

In 2003 the Cessnock City Council identified certain land, including an area designated as North Bellbird as being suitable for further investigation for urban development. The Bellbird land in question in these proceedings fell within that area. In 2004 Johnson Property Group applied to the council for the inclusion of extra lands within North Bellbird and for the rezoning of North Bellbird to permit urban development. Further application for the expansion of the North Bellbird area was made by Johnson Property Group in 2005 and it commenced undertaking investigations in relation to matters the council had identified. It made a formal written submission to the council in July 2006 and provided various reports prepared by its consultants, including a community impact assessment report, a preliminary geotechnical and contamination assessment, a flooding and stormwater assessment, traffic reports, viticultural soils assessment, and numerous other reports. No doubt the preparation of many of these reports would have required consultants to access the land. Thus the preliminary geotechnical and contamination assessment prepared in July 2006 required the drilling of bore holes and excavating test pits as well as laboratory testing of surface and sub-surface conditions. Site inspections were required for the flood assessment and stormwater management report. The viticultural soils assessment required excavation of and collection of samples from 81 test holes. The bushfire planning assessment included field studies to identify classes of vegetation on the site. Various other assessments also required field trips to the site.
Such activities were carried out in 2006 before Bellbird Ridge acquired the land. Further activities were conducted on the land between May or June 2007 and 1 June 2010. These included the drilling of bore holes in May and June 2007, the excavation of test pits, further site inspections in relation to the assessment of flooding, stormwater and riparian corridor constraints, and assessment in 2007 of soil salinity. Geotechnical investigations were conducted in March 2009 and a further assessment of plant and animal species and communities on the Bellbird land was made in April 2009. Further site inspections and geotechnical investigations of subsurface conditions were undertaken in April 2009 and June 2010.
Bellbird Ridge acquired the land on 7 May 2007 for a purchase price of $12.5 million.
Johnson Property Group lodged a development application with the Cessnock City Council on 24 May 2010 for subdivision of the three lots in three stages into 60 residential lots, along with a drainage reserve lot and a residue lot. The residential development for which approval was sought would have occupied about six hectares of the 80-hectare site.
As previously noted, the land was rezoned in January 2011. On 14 July 2011 the council granted conditional development consent. Because of an administrative error in the granting of that consent it was surrendered by Johnson Property Group in December 2011 and a new application was lodged in the same terms. Further submissions were made to the council in December 2011. In January and February 2012 the council exhibited the new development application and sent notification letters to owners of adjacent lands and engaged in consultation with and sought required concurrence from relevant government agencies.
In 2012 and 2013 Johnson Property Group and the NSW Department of Planning and Infrastructure engaged in negotiations and then entered into a voluntary planning agreement that provided for contributions to be made by Johnson Property Group towards public infrastructure if the development application were approved. The agreement was entered into on 18 December 2013. Two days later, on 20 December 2013, the new development application was approved. An application for its modification was lodged by Johnson Property Group in early 2014. The modified consent was issued on 18 July 2014.
In May and June 2014 Johnson Property Group lodged applications for three construction certificates. Approval was granted on 13 October 2014.
In December 2014 Johnson Property Group lodged further planning proposals for the rezoning of parts of North Bellbird to facilitate an onsite water recycling and sewerage facility and to allow the consolidation of residential and open space areas and to modify the area of commercial zoned areas. Johnson Property Group provided the council with additional reports in 2007, 2008, 2009, 2010, 2014 and 2015.
No work was done on the Bellbird property by Bellbird Ridge or Johnson Property Group at any time prior to the hearing. The general manager of Johnson Property Group, Mr Felizzi, said that in 2014 the only development activities which occurred on the Bellbird property were the granting of the application to amend the development consent by revising the layout of the residential lots, the approval of a construction subdivision plan, and the lodgment of a planning proposal seeking the rezoning of a portion of the property to facilitate an onsite sewerage and water treatment facility. As at 27 August 2015 no further application had been made with respect to the Bellbird property and no construction works had been carried out on it.
Mr Felizzi joined Johnson Property Group in January 2013. He agreed that it was Johnson Group's purpose to redevelop the Bellbird land by a residential subdivision, but also said that the alternative was to obtain the approvals for the property with the view to a possible sale of the whole site in globo with the benefit of approvals. He said that it would probably be June to December 2017 before the Johnson Group could begin construction.
An accountant retained by the Chief Commissioner, Mr Mark Bryant, summarised the effect of financial records produced by Johnson Property Group and Bellbird Ridge. Between 2007 and 31 December 2014 Johnson Property Group incurred expenses in relation to the proposed development of the Bellbird land totalling in excess of $2 million. $272,000 of the expenditure was incurred in the calendar years 2007-2009. Only $8,000 was incurred in the calendar year 2010 and $4,000 in the calendar year 2011. No expenditure was recorded in the calendar years 2012 and 2013, but almost $1.8 million was incurred in calendar year 2014. Bellbird Ridge recorded expenditure for consultants in this period that appear to be separate expenses from those recorded by Johnson Property Group Pty Ltd. It recorded $7,000 under the heading "development costs" in the year ended 30 June 2011, $21,000 under the heading "consultants ($12,000)" and "statutory contributions ($9,000)" in the financial year ended 30 June 2012, $25,000 for "consultants" in the financial year ended 30 June 2013, $358,000 in the financial year ended 30 June 2014 and $529,000 in the financial year ended 30 June 2015. In relation to the last two years, there were expenses for consultants of $215,000 in the 2014 financial year and $389,000 in the 2015 financial year. There was a heading "estate major works" of $100,000 in the 30 June 2014 year and an expense for "valuation" of $43,000 in that year. These were identified as balance sheet movements that Mr Bryant deduced possibly related directly to development. There was no contradiction of that evidence.
The Chief Commissioner submitted that in the financial years from 30 June 2007 to 30 June 2015 Johnson Property Group and Bellbird Ridge incurred expenses in relation to the development (that is, the proposed development) of the land in the following amounts: Financial years (to 30 June): Total $000 2007 102 2008 104 2009 82 2010 11 2011 43 2012 80 2013 76 2014 780 2015 2,061 Total 3,319

Not all of the costs referred to by Mr Bryant were incurred in respect of the Bellbird property. The properties that were the subject of Johnson Property Group's development proposal included other land that is subject to option agreements, but Bellbird Ridge did not attempt an apportionment of such costs.
Bellbird Ridge has made no physical use of the property, except insofar as its consultants have had access to the property for the purpose of preparing reports that were submitted to the council in connection with the application for approvals in respect of the proposed development.
For the reasons I gave in Metricon Qld Pty Ltd v Chief Commissioner of State Revenue (No. 2) [2016] NSWSC 332; (2016) ATC 20-560 I do not consider that the possible uses of land to be considered for the purpose of determining what is the dominant use of land are necessarily confined to physical uses of the land. However, a comparison of uses of the land in order to determine whether a primary production use is dominant, must be a comparison between existing uses. An intended future use does not become an actual existing use merely because substantial moneys and resources are applied in its planning and preparation. In Metricon I said (at [70]) that "use" in s 10AA(3) requires the doing of something with the land, whether it be using it physically or by putting it to advantage, for example by letting it.
In the present case Bellbird Ridge did not use the land physically, other than by allowing Mr Bailey to agist his cattle on it, or, from time to time, by allowing surveyors, geotechnical engineers and other consultants to go onto the land to carry out tests and prepare reports for the purpose of obtaining requisite approvals and in planning and preparation for future residential or commercial development. Most of the access to the land by consultants took place in 2006 and 2007 and not again until 2014. In any event, a comparison of the physical use of the land by such consultants with the physical use made of it by Mr Bailey clearly points to Mr Bailey's primary production use as being the dominant use.
In Thomason v Chief Executive, Department of Lands (1995) 15 QLCR 286 the Land Appeal Court of Queensland stated the approach to be taken in ascertaining the dominant use of land as follows (at 303): "In our view, the proper approach to be taken when ascertaining the dominant use of land is to consider such matters as the amount of land actually used for any purpose, the nature and extent and intensity of the various uses of the land, the extent to which land is used for activities which are incidental to a common business or industry of a type specified in s17(2), the extent to which land is used for purposes which are unrelated to each other, and the time and labour and resources spent in using the land for each purpose. When undertaking this exercise, one cannot ignore the conclusion that an objective observer would reach from viewing the land as a whole."
All of the Bellbird land was used by Mr Bailey for raising cattle. I consider the detail of his cattle business below. The time, labour and resources spent by him in using the land far exceeded any physical use of the land by the consultants who sporadically visited the land for testing or inspection. The primary production use was both of greater extent and intensity than such physical uses of the land by the consultants.
I do not consider that the use of land for residential development had commenced. As at 31 December 2010 Bellbird Ridge had not obtained development consent for its application to subdivide the Bellbird land into 60 residential lots. That consent was not obtained until July 2011, but was relinquished in December 2011 by reason of evident flaws in the approval process. It received consent to the development application in December 2013. Its application for construction certificates was approved on 13 October 2014, but no construction work had commenced. In his submission the Chief Commissioner noted that: "In preparedness for commencement of the construction works, Bellbird engaged and instructed various additional consultants between December 2014 and July 2015 to undertake work and produce reports including in relation to, among other matters, water, sewerage, bushfire threats, stormwater management, ecological, acoustic and geotechnical issues."
Bellbird Ridge is not necessarily committed to the development. Mr Felizzi gave the following evidence: "Q. From the time you joined the company the Johnson Group's purpose was always to redevelop by subdivision the Bellbird land? A. Yeah, to develop. It depends on your definition of development, but yeah, to develop. Q. By a residential subdivision? A. Yeah, and also to improve the value by getting other approvals so we could possibly sell it in globo as well. Q. Sorry? A. Also to get other approvals on the property so that we could sell it in globo, as a whole site as well as opposed to individual subdivisions. If there was an offer that was generous enough to convince Keith to sell it in total then he could do that. Q. If he got a good offer he'd take it? A. Yeah."
In Leda Manorstead v Chief Commissioner of Sate Revenue (2010) 79 NSWLR 724; [2010] NSWSC 867, Gzell J concluded that the taxpayer had commenced its use of the land for residential development. He emphasised that the commencement of construction work on the land indicated a commitment to that use (at [47]-[61]): see also Meriton Apartments Pty Ltd v Parramatta City Council [2003] NSWLEC 309 at [22]. Bellbird Ridge is not necessarily committed to the development. As noted above (at [29]) it could sell the land as a whole site with the approvals in place if an attractive offer were made. But more significantly, it had not demonstrated its commitment to the purpose of using the land for residential or commercial development by commencement of works on the land.
The only land tax year for which it is necessary to decide whether the primary production use of the land was the dominant use is the 2011 land tax year, having regard to my conclusions below that the primary production use did not have a substantial purpose or character. However, consistently with my decision in Metricon (No. 2) I conclude that in none of the land tax years in question was the Bellbird property being currently used for residential development. That remained an intended future use.
It follows that the assessment for the 2011 land tax year should be revoked. However, for the taxpayer to succeed in respect of the subsequent years, it must show that the primary production use had a significant and substantial commercial purpose or character.

Mr Bailey's cattle operations

An agronomist, Mr Ross Watson, described the land as being fully cleared with gently undulating to flat topography. He described it as open grazing land which supported summer-active, semi-improved and native pastures. There are stockyards on the property in poor condition, but which are adequate for Mr Bailey's purposes. There is no house on the property. Mr Bailey lives at a property in Lomas Lane, Nulkaba which lies a few kilometres to the north of Cessnock, whereas the Bellbird land lies approximately 3.8 kilometres south-west of Cessnock.
Mr Bailey has a farm on the Nulkaba property which is used for raising cattle, poultry, sheep, goats and horses (although there was only one horse on the property in 2013 and 2014 and only one goat in 2014). The cattle are grazed on the Nulkaba property and also on the Bellbird property. Mr Bailey estimated that on average 80 per cent of the cattle would graze on the Bellbird property and 20 per cent on Nulkaba. No precise records are kept of stock movements between the Bellbird property and the Nulkaba property.
Mr Bailey started grazing cattle on the Bellbird property in 2007 after it was acquired by Bellbird Ridge. He deposed that he made an oral agreement with Mr Keith Johnson on behalf of Bellbird Ridge in around early 2007 in which it was orally agreed that no licence fee would be charged in the 2007 and 2008 financial years if he repaired the fences in the paddock. A licence agreement was drawn up between Bellbird Ridge and Mr Bailey dated 7 May 2007 that provided for him to have the right to agist an unspecified number of stock on the property for a period of three years with an option for a further one year at a rent to be negotiated for a fee of $40 per week plus GST. The agistment agreement provided for the moneys to be paid monthly in advance, but no payments have been made or insisted on. Both Mr Bailey and Bellbird Ridge say that the debt owing under the agistment agreement is accruing. It is recognised as an expense in Mr Bailey's income tax returns.
As well as being a farmer, Mr Bailey is a council worker. He has a full time job driving garbage trucks for the Cessnock City Council. He had that job from before 2006. For the financial years ended 30 June 2011 to 30 June 2014 (the last financial year for which tax returns were available) Mr Bailey earned a salary ranging between $62,204 and $65,688. In the same years, he incurred farming losses of $53,086 in the financial year ended 30 June 2011, $24,790 in the financial year ended 30 June 2012, $37,913 in the financial year ended 30 June 2013, and $26,338 in the financial year ended 30 June 2014. As a result he received tax refunds ranging between $11,837 and $15,149.
Before obtaining the right to agist stock on the Bellbird property Mr Bailey ran some cattle on Nulkaba. His financial statements record that as at 1 July 2006 he had 18 head of cattle. There were six cattle as a result of natural increase, 10 sales, one cattle killed for rations leaving a closing stock as at 30 June 2006 of 13. In the following financial year there was a natural increase of eight head, there were seven sales, one killed for rations and one loss giving closing stock as at 30 June 2007 of 12. In the following financial year ended 30 June 2008, after Mr Bailey acquired the right to agist cattle on the Bellbird property, he increased his cattle operations. He purchased 61 cattle in that financial year. After sales, rations and losses, he had closing stock as at 30 June 2008 numbering 50. The cattle numbers for the financial years ended 30 June 2008 to 30 June 2015 were as follows: Opening Stock Purchases Sales Natural Increase Closing Stock 2008 12 61 29 8 50 2009 50 43 43 20 70 2010 70 15 47 16 54 2011 54 19 51 17 39 2012 39 7 35 34 45 2013 52 66 72 16 67 2014 60 34 71 48 65 2015 65 15 51 21 47

The revenue derived from cattle sales and cattle rations for the financial years ended 30 June 2010 to 30 June 2015 were as follows: Cattle 2010 2011 2012 2013 2014 2015 $ $ $ $ $ $ Sales 20,488 21,882 19,318 22,559 26,032 28,132 Rations 179 133 83 162 436 326

Profitability of Mr Bailey's Cattle Business

The gross profit on cattle trading for those financial years as reflected in Mr Bailey's profit and loss account were as follows: Cattle 2010 2011 2012 2013 2014 2015 $ $ $ $ $ $ Gross Profit 12,410 15,453 17,101 12,317 16,230 20,084

These figures are taken from Mr Bailey's profit and loss statements. They were prepared for tax purposes. For tax purposes a taxpayer is allowed to value natural increase and closing stock at a nominal value of $20. The gross profit figures are calculated as the sales revenue less the cost of sales, with the cost of sales in turn being calculated as opening stock plus purchases and natural increase, less deaths and less closing stock. Mr Bryant concluded that the figures for cattle closing stocks were unlikely to reflect fair value because in each of the years except in 2008 the average value per head of closing stock was considerably lower than the value per head of sales made during the year. He recalculated the figures to value each head of closing stock in each year at fair value assumed to be the average sale value per head of that year, less 20 per cent; that reduction being intended to reflect the fact that cattle in closing stock, on average, would not have reached sale condition. Because opening and closing stocks have the same numbers and values this does not result in a substantial change: only $13,000 over ten years. For the years ended 30 June 2010 to 30 June 2015 Mr Bryant estimated that gross profit from cattle trading rounded to the nearest thousand dollars was: 2010 $12,000 2011 $15,000 2012 $17,000 2013 $12,000 2014 $16,000 2015 $20,000
Ms Jennifer Exner, also an accountant, called by Bellbird Ridge, also calculated gross profit from cattle trading for those years. Her calculation was: 2010 $12,410 2011 $15,453 2012 $17,101 2013 $12,317 2014 $16,230 2015 $20,084
These figures are for sales revenue less cost of sales. They do not take into account all direct costs. Nor do they take account of indirect costs. One of the complexities of calculating gross profit after direct costs is in apportioning costs between the different areas of primary production. Cattle trading was the largest component of Mr Bailey's farming business, but the other activities contributed to the overall expenses. Ms Exner calculated Mr Bailey's gross profit from his total cattle business after direct costs as follows: FY10 FY11 FY12 FY13 FY14 FY15 Total $ $ $ $ $ $ $ Sales Revenue 20,488 21,882 19,318 22,559 26,032 28,132 138,411 Cattle stock at year end 52 36 41 60 65 47

Gross profit pre direct costs 12,410 15,453 17,101 12,317 16,230 20,084 93,595 Restatement of cattle COGS 6,489 (1,265) 7,132 (8,240) 3,143 3,474 10,733 Restated amount 18,899 14,188 24,233 4,077 19,373 23,558 104,328

Direct costs Cartage 100 210 - - - - 310 Agistment expense 2,160 2,080 2,160 2,120 2,080 1,938 12,538

Blacksmith - - 1,047 736 245 136 2,164 Horse breaking 3,025 - - - - - 3,025 Cattle selling expenses 1,169 1,213 996 1,601 2,105 1,812 8,896 Fodder 4,674 5,001 2,228 1,980 2,714 2,211 18,808 Rates - re cattle 264 209 148 438 281 354 1,694 Repairs & maintenance 2,435 2,127 752 1,445 1,672 4,020 12,449 Motor Vehicle - repairs & maintenance 123 319 190 362 - - 994 Veterinary expenses 1,186 1,420 268 1,065 1,398 904 6,241 Fuel 1,035 1,124 1,417 1,359 1,288 1,214 7,436 Total direct costs 16,170 13,702 9,206 11,105 11,782 12,588 74,554 Gross profit/contribution margin 2,729 486 15,027 (7,028) 7,591 10,970 29,774

Ms Exner did not attempt to calculate the net profit derived from the cattle operation.
Ms Exner's calculations adopted Mr Bryant's approach of revaluing closing stock, rather than taking the closing stock figures as they appeared in Mr Bailey's tax returns. She adopted the same adjustment as Mr Bryant had made. Although Mr Bryant's and Ms Exner's calculations of profit or loss were not expressed in a way which allowed a ready comparison between them, there was no material difference between their approaches, save in relation to allocation of indirect costs. Ms Exner did not attempt such an allocation, although she said that she disagreed with the basis upon which Mr Bryant had made his allocation.
Mr Bailey deposed that his use of the Bellbird property for grazing and breeding cattle, if considered on its own, generated on average a small profit each year. He deposed that this was the reason that he continued to license the Bellbird property and said that the profit received from his cattle business on the Bellbird property assisted in covering the running costs of his other farming activities on the Nulkaba property. He said if he did not receive a financial benefit from his farming activities on the Bellbird property he would terminate the licence. Mr Bailey adopted a financial summary prepared by Mr Felizzi that purported to show the results of the cattle operations confined to the Bellbird property. Mr Felizzi's schedule suggested that in the five years ended 30 June 2010 to 30 June 2014 cattle use of the Bellbird property had an "operating gross margin" of $1,020, $3,434, $9,646, $3,134 and $5,839 respectively.
However, this evidence was confused. The figures for cattle trading were based upon Mr Bailey's financial statements that reported the results for the whole cattle trading in each financial year. It also included the whole of some expenses that related only to cattle, such as cattle selling expenses and veterinary expenses. It attempted an apportionment of other costs between Mr Bailey's different primary production activities. Although the trading summary was stated to relate only to the use of the Bellbird property, that was not so.
Mr Bailey ultimately accepted that on average 20 per cent of the cattle would be on Nulkaba and 80 per cent on Bellbird. Ms Exner prepared a schedule to show the gross profit or contribution margin from the Bellbird property applying 80 per cent of the direct costs relating to the cattle operation, save for the agistment expense for the Bellbird property which was accounted for in whole and save for an expense described as "rates - re cattle". Her table set out below shows a contribution to gross profit from the Bellbird property of just under $21,000 over a period of six years. FY10 FY11 FY12 FY13 FY14 FY15 Total $ $ $ $ $ $ $ Sales Revenue 80% 16,390 17,506 15,454 18,047 20,826 22,506 110,729 Cattle stock at year end 47 32 37 54 59 42

Gross profit pre direct costs 80% 9,928 12,362 13,681 9,854 12,984 16,067 74,876 Restatement of cattle COGS 80% 5,191 (1,012) 5,706 (6,592) 2,514 2,779 8,586 Restated amount 15,119 11,350 19,386 3,262 15,498 18,846 83,462

Direct costs Cartage 80% 80 168 - - - - 248 Agistment expense 100% 2,160 2,080 2,160 2,120 2,080 1,938 12,538

Blacksmith 80% - - 838 589 196 109 1,731 Horse breaking 80% 2,420 - - - - - 2,420 Cattle selling expenses 80% 935 970 797 1,281 1,684 1,450 7,117 Fodder 80% 3,739 4,001 1,783 1,584 2,171 1,769 15,046 Rates - re cattle 100% 264 209 148 438 281 354 1,694 Repairs & maintenance 80% 1,948 1,701 602 1,156 1,337 3,216 9,959 Motor Vehicle - repairs & maintenance 80% 98 255 152 289 - - 795 Veterinary expenses 80% 949 1,136 214 852 1,118 723 4,993 Fuel 80% 828 899 1,134 1,087 1,030 971 5,949 Total direct costs 13,421 11,420 7,827 9,396 9,898 10,529 62,490 Gross profit/contribution margin 1,698 (69) 11,560 (6,134) 5,601 8,317 20,972

Mr Schuster, an agronomist called by the Chief Commissioner, reached a similar figure if expenses he allowed for the value of Mr Bailey's labour and a commercial agistment expense as distinct from the agistment expense payable to Bellbird Ridge, were excluded.
These are not figures of net profit after an allocation of indirect expenses.
Ms Exner explained that her calculations of gross profit or contribution margin of the cattle operations of Mr Bailey in total, and the cattle operations conducted on the Bellbird property alone, were an attempt to measure the incremental value of those operations or, to put it another way, the extent to which Mr Bailey was better off because of the cattle operations either in total or on the Bellbird property. In assessing that incremental value of those operations she did not bring to account overhead expenses that would have been incurred irrespective of the cattle operations. She accepted that if the same incremental trading analysis were undertaken in respect of the other primary production activities applying the same approach, then those overheads would not be brought to account in such an alternative assessment of incremental value; in particular that would be so for interest expense. She said that looking at the contribution margin rather than the net profit overcomes the arbitrary assessment that would have to be made to allocate other overheads, including interest, to the various activities on the property, including private activities. In relation to that proposition Mr Bryant said: "I think in essence what is being said is that there is another activity that isn't primary production at all that represents Mr Bailey's living and lifestyle of the property and that that therefore means that those expenses don't have to be taken into account at all in relation to any primary production. I think that's the proposition that's being put, in effect. I can't see any other way that you could reach the conclusion that the rates and the interest, for example, are not to be allocated to primary production, unless you say they're allocated to something else which is not any sort of business. That obviously is a possible way of going about it. It has the difficulty that Mr Bailey tax returns indicate that all of his expenditure is primary production is he's claiming a tax deduction on that basis. So I take the view that all of those expenses in some way should be recognised as relating to primary production. How you allocate them between the various activities is certainly arguable, but given that the cattle is far and away the biggest operation it would seem to make sense that it's going to end up bearing far and away the majority of those overheads."
I accept Mr Bryant's opinion on this. Ms Exner accepted that if one were calculating net profit and if it were the fact that some borrowing was made to support the trading of cattle on and off the Bellbird property, there would have to be a recognition of the interest expense.
In contrast to the approach of Bellbird Ridge, Mr Bryant sought to calculate the net profits of the whole of Mr Bailey's cattle business. This requires there to be an allocation of overheads and indirect costs of Mr Bailey's primary production activities to his cattle business. These costs are recorded in Mr Bailey's financial statements as "Light & Power/Electricity"; "Insurance"; "Rates and Land Taxes"; "Repairs and Maintenance"; and "Interest".
Mr Bryant allocated expenses of Light & Power/Electricity; Insurance; Rates and Land Taxes, based on the proportion of the Nulkaba land that was used for the cattle operation as calculated by Mr Schuster. There was no dispute about that proportion. Mr Bryant allocated 50 per cent of the expenses for repairs and maintenance and interest to the cattle business.
The most significant of these expenses was interest on loans taken out by Mr Bailey. The interest expense that Mr Bryant allocated to Mr Bailey's cattle operations for the 2010-2015 financial years totalled $30,628. For the same periods he allocated an expense totalling $9,773 for rates and land taxes compared with Ms Exner's allowance under the heading "Rates - re cattle" of $1,694.
Mr Bailey did not have to pay taxes or council rates on the Bellbird property. He did however pay a small amount in rates to the Hunter Region local land service for the Bellbird property. The rates recognised by Ms Exner in exhibit A under the heading "Rates - re cattle" are not the same expense referred to in Mr Bryant's report under the heading "Rates and land taxes". Mr Bryant's expense relates not to the cattle operations on the Bellbird property, but on the Nulkaba property. In calculating the profitability of the cattle operations as a whole I adopt Mr Bryant's figures.
Mr Bailey's financial statements disclosed a non-current liability described as "loan farm" of $144,290 as at 30 June 2010 that had been reduced to $110,385 as at 30 June 2015. His financial statements disclosed a current liability under the heading "NPBS credit facility account" that varied from year to year between approximately $40,000 and $49,000. In his tax returns Mr Bailey claimed primary production losses that included an interest expense. Typically this was in the order of $11,000-$12,000 per year, although it decreased to about $8,000 and $6,500 in the financial years ended 30 June 2014 and 30 June 2015. Mr Bryant attributed 50 per cent of this interest expense to Mr Bailey's cattle operations in calculating the net profit of those operations.
A deduction for the interest expense would not be allowable if it were a personal or home expense. Mr Bailey did not say that the loans on which the interest was payable related to the purchase of his house on the Nulkaba property or to personal expenses. As Mr Bryant said, interest was by far the largest expense in each financial year and Mr Bailey's balance sheet showed that the interest was funding livestock, plant and equipment, and losses on his farming operations accumulated over previous years.
Bellbird Ridge submitted that Mr Bailey's principal expense that led to his incurring of losses was the interest expense on the loan. Bellbird Ridge submitted that the unchallenged evidence of Mr Bailey was that his interest expense had nothing to do with the cattle operations. In fact, Mr Bailey deposed in his first affidavit that: "The remaining expenses, being for the blacksmith, donations, fertiliser, horse breaking, insurance, material and supplies for bee keeping, memberships and subscriptions are not relevant to the cattle operations at the Bellbird Property and are wholly attributable to my other farming activities at the Nulkaba Property."
In the context in which this evidence was given and having regard to the comparative scale of the different primary production activities at Nulkaba, I did not understand Mr Bailey to be saying that interest was not attributable to his cattle operations at all, as distinct from saying that the interest incurred was attributable to his primary production activities at Nulkaba in their totality, and not to the cattle operations on the Bellbird property. This is explicable on the basis that the loans upon which interest was payable had been taken out well before 2007 when Mr Bailey acquired the right to agist cattle on the Bellbird property and expanded his herd. This might provide a legitimate reason for not treating the interest expense as being referable to the cattle operations on the Bellbird property if those cattle operations are treated as a separate enterprise, as Bellbird Ridge sought to do. But it does not justify saying that no part of the interest expense can be allocated to the cattle operations, at least insofar as they were conducted on Nulkaba. Given that the cattle operations were conducted as a single enterprise, some portion of the interest expense should be allocated to the cattle operation. Even before 2007 cattle was the major contributor to the gross profits of Mr Bailey's primary production business. In the year ended 30 June 2006 cattle trading (that is, sales, rations and closing stock, less opening stock and natural increase) contributed $3,890 to a "livestock trading profit" of $4,396. In the financial year ended 30 June 2007 it contributed $1,988 to a livestock trading profit of $3,928. After indirect expenses, including interest, Mr Bailey showed a primary production loss of $58,070 in 2006 and $46,501 in 2007.
As cattle trading operations were by far the largest of Mr Bailey's primary production activities, Mr Bryant's allocation of 50 per cent of the interest costs towards the cattle operations was conservative.
I accept Mr Bryant's opinion that it is appropriate to allocate the rates, light and power/electricity, and insurance expenses for the Nulkaba property as an indirect cost of the cattle operations based upon the proportionate area of the land on which the cattle operations are conducted, rather than by proportioning only 20 per cent of those costs on the basis that only 20 per cent of the total cattle operation are grazed on the Nulkaba property.
I accept Mr Bryant's opinion as to the profitability of Mr Bailey's cattle operations. He concluded that in the financial years ended 30 June 2010 to 30 June 2015 Mr Bailey's cattle operations incurred losses and profits rounded to the nearest thousand dollars as follows: 30 June 2010: (7,000) 2011: (8,000) 2012: 7,000 2013: (16,000) 2014: - 2015: 2,000

Mr Bryant noted that these results made no allowance for the value of Mr Bailey's labour and reflected the actual agistment expenses recorded, rather than an arm's length agistment expense.
Cattle grazing on the Bellbird property is not carried on as a separate operation from cattle grazing on the Nulkaba property. Cattle are moved from one to the other as circumstances dictate. Mr Bailey deposed that he swapped the cattle between the two properties to maximise the use of pasture. He said that between Christmas and autumn more cattle would be moved onto the Nulkaba property because of the different type of grass on that property. He said the grass dries off at Bellbird during the summer so there is lower feed.
Bellbird Ridge's concentration on the claimed incremental value for the cattle grazing activities on the Bellbird property was based on observations made by Gzell J in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379 at [73] that the tests in s 10AA(2) of the Land Tax Management Act are satisfied "if the requisite purpose or character is evident from either the use of the subject lands viewed in isolation from any other land or, the use of the subject lands viewed as part of the enterprise" applying Thomason v Chief Executive, Department of Lands. In Thomason the Land Appeal Court said (at 307) of the similar test contained in s 17(2) of the Valuation of Land Act 1944 (Qld) that: "It is implicit that the commercial purpose should be intended to be met, or the commercial character of the enterprise should be evident, from the use of the subject land, either on its own or in conjunction with other land."
In this case, as in Vartuli v Chief Commissioner of State Revenue [2014] NSWSC 678 and on appeal [2015] NSWCA 372, the character and purpose of the cattle grazing operation on the Bellbird land is the same as the conduct of the same business on the Nulkaba land. I do not think that the exercise of seeking to determine the incremental value of the use of the Bellbird land to Mr Bailey's primary production activity on the Nulkaba land assists the analysis. In any event, however the matter is approached, the incremental margin is small and disappears if there is a reasonable allocation of indirect costs to determine the net profit of the operation.

Other Aspects of Mr Bailey's Cattle Business

Mr Bailey on average spent about two or three hours every second day on the Bellbird property. The value of his labour was not an expense that he incurred and does not affect the assessment of the profitability of the grazing operation. But as the Court of Appeal observed in Vartuli (at [184]): "[W]here labour costs are omitted from the primary production results because no actual expense has been incurred, this may serve to highlight that cattle operations which produce very small amounts of profit, do not constitute a serious primary production use."
Mr Watson observed that the pastures of the Bellbird property were very stable in composition which was evident from the presence of both native and introduced grasses and the overall low weed content. He described the pastures as being in the medium quality unimproved pasture category with an average carrying capacity of five to seven dry sheep equivalents per hectare per annum. This gave it an annual estimated carrying capacity of between approximately 30-41 cow and calf units. Mr Schuster agreed with this assessment. Mr Bailey has not undertaken pasture improvement activities. Mr Schuster observed that once improved pastures have been established, they must be strategically grazed through the manipulation of stocking rates and are often supported by the application of fertiliser and weed control strategies to maximise productive potential and longevity. He observed it often takes many years to recoup the cost associated with pasture establishment. Mr Bailey said that he had not carried out pasture improvement because of the insecurity of his tenure. This is in contrast to the Nulkaba property which did have improved pasture and is a better farm.
The stockyards on the Bellbird property are in disrepair. Mr Bailey had used steel panels to repair the stockyards, but they were stolen. Accordingly, he brings in temporary steel panels when he needs to use the stockyards and removes them when finished. He said that if he owned the property he would weld the steel panels so they could not be stolen, but then they would be affixed permanently and as he had no security of tenure the next best thing was to take them backwards and forwards.

Significant and Substantial Commercial Purpose or Character

In Maraya, Gzell J said that in the context of s 10AA(2)(a) "significant" connoted something of importance or something of consequence, a key element, or something that was vital or critical (at [83]) and that "substantial" meant an ample or considerable amount, quantity or size (at [88]). This has been accepted in subsequent cases. Thus, in Vartuli (on appeal) Gleeson JA, with whom Meagher and Ward JJA agreed, observed (at [151]) that "substantial" had to be given its ordinary meaning of considerable or large, and "significant" had to be given its ordinary meaning of something of consequence.
It is necessary to consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources, whether of time, labour or expenditure put into the development and maintenance of the operation (Maraya per Gzell J at [91]). This approach was upheld in the Court of Appeal (Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408; (2013) 97 ATR 818 at [55] and [60]); see Vartuli at [103].
In Vartuli I also concluded that it was implicit in the Court of Appeal's reasoning in Maraya that a "commercial purpose" and a "commercial character" for the purpose of s 10AA(2)(a) means not only that the use of the land for primary production has the purpose of obtaining revenue, but the use must have at least a profit-making potential (at [105] and [109]). I said (at [129]) that for the use of the land to have a significant and substantial commercial purpose or character, the use must have a character such that it generates, or can reasonably be expected to generate, profit that contributes in a real and not trifling way to the user's income, or purpose of generating such profit. On appeal in Vartuli, Gleeson JA, with whom Meagher and Ward JJA agreed, said that (at [94]): "[94] The fact that the contribution to the Vartulis' income from the cattle operations was insignificant, underscored that the revenues and profits generated from the Vartulis' cattle operations did not have a commercial purpose or character which was significant and substantial."
Gleeson JA said (at [97]) that the relative contribution of income from the primary production use to the user's income contextualised the significance and substantiality of any commercial purpose or character, but was not a benchmark for the application of s 10AA(2)(a) (at [97]). It is not appropriate to characterise as a "benchmark" any of the factors relevant to the evaluative judgment as to whether the character or purpose of the primary production use is significant and substantial. No one consideration is controlling. However, the Court of Appeal did state in Vartuli (at [138]): "[138] … it could be expected to be extremely difficult for a taxpayer to satisfy s 10AA(2)(a) if no profits or very small profits are made spanning many land tax years …"
Not all of the factors identified by Gzell J referred to at para [72] above are discrete. Thus the intensity of the operation may be a function of the quality of the herd, the labour and skill devoted to the enterprise and the quality of the pasture.
The size of the land used in cattle operations in the present case is approximately 105 hectares of which 80.3 hectares constitute the Bellbird property. This is approximately double the size of the land used in the Vartuli cattle operations. This may reflect differences in the carrying capacity of the land. In the relevant years the maximum head of cattle in the Vartuli cattle operations ranged from the mid-20s in times of drought to between 77 and 122 (Vartuli at [32]). In the present case the opening and closing stock figures range from 39 to 70 and cattle sales between 2008 and 2015 varied between 29 and 72 head per annum. The revenue derived from cattle sales in financial years from 30 June 2010 to 30 June 2015 ranged from $19,318 to $28,132 and averaged $23,069. In contrast, in Vartuli revenue from cattle sales ranged from $925 in the 30 June 2007 financial year to $62,415 in the 30 June 2012 financial year and averaged $30,434 over a seven-year period. Judged in terms of cattle numbers and revenue, Mr Bailey's cattle operations were smaller than those in Vartuli.
Mr Bailey is making optimal use of the Bellbird property in its current state of improvement. But because of his insecurity of tenure he has not devoted resources to improving the pastures or stockyards on the Bellbird property. This reflects a less than optimal intensity of use.
Mr Bailey devotes only two to three hours per day every second day to the Bellbird property. As Mr Schuster observed, this allocation of hours did not appear to include time spent in the cattle operation on the Nulkaba land. Bellbird Ridge did not adduce evidence as to the amount of time Mr Bailey spent on the cattle operations on Nulkaba. I agree with the submission for the Chief Commissioner that one indicator that a cattle operation does not have a significant and substantial commercial purpose or character is that it is undertaken with only minimal time from the operator. In Vartuli, Gleeson JA said (at [184]) that: "… where labour costs are omitted from the primary production results because no actual expense has been incurred, this may serve to highlight the cattle operations which produce very small amounts of profit, do not constitute a serious primary production use".
Also relevant to the assessment of the intensity of the use is Mr Bailey's animal husbandry. There is no criticism of Mr Bailey's attention to the health of the cattle. They are provided with the necessary vaccinations and have appropriate veterinary care. But Mr Schuster observed that Mr Bailey's breeding program was not optimal for maximising productivity and profit. Mr Bailey has a breeding program. He has a Limousin bull. The bull is run with the cows continually, rather than there being a set joining. Accordingly, the calves are of varying maturity. Mr Schuster observed that the lack of a set joining would create several significant issues for a cattle operation that had a significant and substantial purpose or character. Staggered maturity among calves would make the handling and consignment of livestock inefficient as the fixed cost associated with such activities could only be spread over a small number of livestock at any one time.
Mr Bailey said that he spent on average approximately $500 per year on freight costs for travel to the Maitland or Singleton saleyards, but to reduce expenses he often transported calves in his own vehicle. This is indicative of the lack of size of the operation.
A second issue identified by Mr Schuster is that without a set joining peak feed production would not necessarily coincide with the peak animal requirements and that cows may calve when reduced feed is available in late autumn or early winter. This would reduce the production of kilograms of beef per hectare. He said that a continuous joining program meant there would be difficulty in detecting non-performing cows and can involve the inefficient use of labour.
I accept this evidence. It is a factor pointing against the cattle grazing operation having a substantial commercial purpose or character.
In this case, as in Vartuli, Mr Bailey's cattle operations did not generate profit that contribute in a real and not trifling way to Mr Bailey's income. Mr Bailey runs his primary production business of which the cattle operations are the most substantial part, at a loss.
For the reasons above, I think that an appropriate allocation of interest expense has to be taken into account in assessing the profitability of Mr Bailey's cattle operation. That does not directly translate to a conclusion as to the scale of the commercial purpose or character of the cattle operation. Whether the cattle operation is funded by debt or by equity is not irrelevant to the significance and scale of its commercial purpose and character, but nor is it determinative.
Nonetheless, whether one considers the gross profit from the cattle operations on the Bellbird land (after direct costs), the gross profit on the cattle operations as a whole (after direct costs) or a net profit figure after an allocation of indirect costs, the return from the cattle operations is small or negative. The plaintiff submitted that Ms Exner's analysis revealed that Mr Bailey's cattle operations made a total gross profit of $29,774 over six years, being an average gross profit (before indirect overheads) of $4,962 per year. If the Bellbird property were considered alone, then it made a total gross profit over a six-year period of $20,972 at an average of $3,495 per year. Although this is consistent with the primary production use having a significant commercial purpose or character (Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 at 171; Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9), it is not consistent with the use having a substantial commercial purpose or character. No genuine primary producer could conduct a cattle operation on those returns (Vartuli at [129]). When indirect costs are considered, the cattle business either made losses, broke even, or made at most a profit of $7,000 in the financial years in question (see para [63] above). Mr Bailey conceded that his farming business had never made a profit. When asked why he kept going he said "I saw it as a good way of life … I enjoy doing it." Whilst carrying on a business for pleasure does not disqualify the business from having a significant and substantial commercial purpose or character, Mr Bailey's evidence is nonetheless relevant in assessing whether Mr Bailey's primary production use has a substantial commercial purpose or character.
The modest contributions to gross profit or net losses or modest net profits referred to above, are based upon Mr Bailey's incurring an agistment expense of only $44 per week. This was well below a commercial rate. Mr Schuster said that typically agistment rates are levied on a per head per week basis and are influenced by the type of animal, seasonal influences, the price of cattle and the availability of alternative feed. There is little published data on the cost of agistment, but from his own experience he found the rate in June 2014 to be approximately $4 per week for one dry (non-lactating) cow or steer, $6 per week for one cow with one calf at foot, and $2.50 for one steer or heifer (six to 12 months of age). His experience was based on rates applicable to the Central-West of New South Wales, but believed that similar rates would be applicable to the Hunter region because cattle can be easily and relatively efficiently trucked between regions. This tends to standardise agistment rates between regions.
I accept that evidence. A commercial agistment rate would have been in the order of $7,800 to $11,000 as distinct from the actual expense of $2,288. Whilst a commercial agistment rate is not to be applied in determining the profitability of Mr Bailey's cattle operation because the commercial rate was not incurred, the difference between the expense incurred and the expense that could be expected to be incurred in another commercial operation is relevant to assessing the substantiality of the commercial purpose or character of the use. There is an analogy with what Gleeson JA said in Vartuli (on appeal) (at [184]) that if labour costs are omitted from a calculation of profit because no actual expense is incurred, but the cattle operations produce only very small profits, that that may indicate that they do not constitute a serious primary production use.
I conclude that in none of the land tax years from 2012-2015 did Mr Bailey's primary production use of the land have a substantial commercial purpose or character.
There was evidence that approximately 25 per cent of the cattle farms in New South Wales operate with less than 49 head of cattle, and that over 80 per cent of cattle farms have an estimated revenue from their cattle operations of less than $50,000 per annum. There was evidence that in the Cessnock shire cattle farms had an average of 56 head of cattle. I accept Bellbird Ridge's submission that Mr Bailey's cattle business ran approximately the same number of head of cattle as did a significant proportion of other cattle farms in the Hunter region and was carried on in a similar manner to other similar beef businesses in that region. However, as in Vartuli, it is impossible to say how many of the other cattle operations that go to make up the average figure would individually satisfy a test of use of the land being for a significant and substantial commercial purpose or character (Vartuli (on appeal) at [91]). In Maraya the difference between the productivity of the taxpayer's operations and what was said to be comparable grazing activities was a factor in the determination that the taxpayer's grazing activities did not have a significant and substantial commercial purpose or character. In Vartuli there was evidence that the comparison adopted in Maraya was inappropriate. Nonetheless, appropriate comparisons can be useful. But in the Hunter Valley there is a proliferation of what might be called lifestyle farms of which Mr Bailey's is one. The comparison of Mr Bailey's farming operation with other cattle farms in the Hunter Valley does not point one way or the other to whether Mr Bailey's use of the Bellbird property had a significant and substantial commercial purpose or character.
For these reasons I conclude that Bellbird Ridge has not established that the use of the land had both a significant and substantial commercial purpose or character. It follows that the assessments for the 2012-2015 land tax years should be confirmed.

Section 10AA(2)(b)

It is unnecessary to decide the question under s 10AA(2)(b) as to whether the use of the land was engaged in for the purpose of profit on a continuous or repetitive basis. The Chief Commissioner submitted that for that requirement to be satisfied the taxpayer would need to establish that the purpose of profit was the sole purpose of the use of the land. Bellbird Ridge submitted that the purpose of profit on a continuous or repetitive basis does not need to be the sole nor the dominant purpose of the use of the land and it is sufficient if it is one of the main purposes for which the land is used in the sense that it is not inessential or merely incidental, citing Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 196 at 206-207; Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314; Federal Commissioner of Taxation v Gulland (1985) 160 CLR 55 at 67-68; and Bunting v Federal Commissioner of Taxation (1989) 90 ALR 427 at 435 and 443.
In Vartuli, Gleeson JA said that since the meaning of "purpose" in s 10AA(2)(b) is not without difficulty, the resolution of that issue should be left to an occasion where it arises for decision. It is not necessary to express an opinion on the question in the present case.

Conclusion

For these reasons I conclude that the defendant's notice of assessment dated 9 April 2014 insofar as it applied to the 2011 land tax year should be revoked. The assessment, insofar as it applied to the 2012, 2013 and 2014 land tax years, should be confirmed.
The assessment dated 28 April 2015 in respect of the 2015 land tax year should be confirmed.
I direct counsel for the defendant to bring in short minutes of order in accordance with these reasons. I will hear the parties on costs. 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: 19 April 2018

Valuation of Land Act 1944(Qld)

(Taxation Administration Act 1996(NSW)

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