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Profit/loss, excluding rental and landfill[2]

1. It should be noted, that where "?" appears in the table rather than a figure, it is because the applicant has not supplied sufficient material in order for Mr Kotros to be able to create a figure for the boxes in the tables where the question marks appear.

_Issue 1 - Land primarily for the business of primary production

1. The first issue is whether the land was used primarily for the "business" of primary production. The existence of a business, was referred to by the High Court in Spriggs v Commissioner of State Taxation [2009] HCA 22; [2009] 239 CLR 1 at [59] where the plurality of the Court stated as follows:

"The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions and whether the activities are systematic and organised often describe as whether the activities are carried out in a business-like manner."

1. From the table which I have set out, it is apparent that:

1. no income was generated from any fruits or nuts, whether prickly pears, olives, chestnuts, oranges, lemons, limes, mandarins, grapefruit or otherwise; 2. no income was generated from any wheat, barley or oats and there was income from hay in one year only;

1. Little income was derived by selling stock - particularly relative to income from leasing and landfill activities; and

1. a loss was made from sales of primary produce.
2. Mr Peter Serrano gave evidence that there was produce and livestock sold from the farm gate and on the website known as "Gumtree". However, no documents whatsoever were produced to show the sales from these places. It also appears that the sales from these places described by Mr Serrano, were not accounted for in the tax returns of the applicant for the relevant years. It is impossible, for me to ascertain what income was derived through sales from the farm gate and Gumtree. No estimate was given by Mr Serrano. The highest Mr Serrano put it was that the income from primary production had increased over the years, and he believed that now, that is in 2016, it was "turning the corner".
3. Ms Grant referred to a number of indicia in her submissions which she said should be considered to enable me to conclude that the applicant was "carrying on the business of primary production" at the relevant time. Those indicia were:

1. the breadth, scale and permanence of the activities; 2. repetition, organisation and continuity;

1. the carrying on in a systematic way in a business-like manner; and

1. the purpose and prospect of profit.
2. Ms Grant also referred to the diversity of the agriculture and the animals on the farm and the number of various trees that were planted. She then stated:

"The breadth and extent of these activities included employment of various farm machineries, such as tractors and harvesters and ploughs is far in excess of those that would be undertaken by a 'hobby farmer' and demonstrate that a business has and is being conducted on the land."

1. The difficulty with Ms Grant's submission is that there is a lack of evidence as to the produce and livestock that were being sold particularly through the farm gate and Gumtree. While I was shown advertisements from a Gumtree site, for pullets (egg-laying chickens) in my view that does not take the matter any further in determining the breadth and scale of the activity. Save and except for those figures extracted in the table by Mr Kotros, I have very little evidence of what else was happening on the farm.
2. The evidence from Mr Peter Serrano, his brother Anthony and others in my view are self-serving and do not really take the matter any further.
3. In relation to the question of "repetition, organisation and continuity" Ms Grant said that these factors point towards a business being conducted on the land. She referred to the fact that Mr Serrano and his family engaged in full-time work on the farm, and Mr Serrano gave evidence that he usually worked on the farm approximately 40 hours per week. Mr Serrano also gave evidence that he worked as a chef. While he made this statement in the witness statement that was filed, it did not appear to cover the whole situation. At paragraph 14 of Mr Serrano's witness statement he stated:

"In addition to running the farm I work at night on a casual basis as a chef. The amount of work I do depends on and generally is for a few nights a week. There was one period in 2014 when I filled in while a chef was overseas for some months but that was unusual. The income as a chef supplements the farm income but my main business is the farming."

1. It would appear that Mr Peter Serrano was involved in a business with a tip truck called 'Colorama Excavations Pty Ltd'. Mr Serrano stated that he was in this business in approximately 2007 and was out of it by 2008. He said the truck was mainly driven by his brother but he would drive it on Sundays. However, a Company Search has revealed, that the company, that was the proprietor of the tip truck business, Colorama Excavations Pty Ltd came into existence on 22 September 2008 and was still in existence in February of 2011. Mr Peter Serrano was the sole director of the company. It seems somewhat strange that Mr Peter Serrano would have brought a company into existence at the time that the sole asset of the company, being the tip truck, was sold. He was unable to explain this.
2. Mr Serrano also stated that he worked in a restaurant in Epping as a chef between 2009 and 2011. He said he worked two or three nights a week from 5.00 pm until 10.00 pm but sometimes more often.
3. Since 2011 Mr Serrano has been working as a chef at Club Italia in Werribee where he said he works three nights a week and sometimes more from 5.00 pm until 10.00 pm.
4. I was given no details of Mr Serrano's pay as a chef, nor earnings from the tip truck business, and he did not produce his personal copy tax returns.
5. I further note, that only 11% of the profit from the land, comes from primary production. The balance comes from landfill and a house which is rented out to a tenant.
6. It was submitted by Ms Grant, that the landfill was in aid of primary production. However, since 2007 the landfill has been exclusively on the southern block. That block has only been used for grazing of the sheep and goats, it did not appear to me from the evidence that it was in regular use.
7. Ms Grant referred me to s.68 of the Act which states:

(1) land is exempt from a tax year if the Commissioner is satisfied that-

(a) the land is being prepared for use primarily for primary production.

1. Bearing in mind the fact that the landfill has been happening on the southern block for such a long time, in my view it is unlikely that the purpose of the landfill is for primary production. In my view the purpose of the landfill is more likely for income. In coming to this conclusion I have taken into account the paucity of evidence from the applicant as to what he has received by way of income from primary production particularly in relation to the sales at the farm gate and through Gumtree.
2. Ms Grant submitted that the business was carried on in a systematic way in a business-like manner. She stated that even though the business records could have been better, that did not negate in itself a finding that the business was being carried on. She also referred to the fact that the business was not a large corporate entity such as in Warriewood Valley Pty v FCT [1993] FCA 396; [1993] 26 ATR 270 where the taxpayer was a large corporate entity. She said it was a small operation and that should explain the lack of business records. She also referred to a witness statement of Mr Holt who said that he had purchased chickens, goats and livestock from Peter Serrano on six to eight occasions. The difficulty with Mr Holt's statement is that he did not purchase his land until November 2013 and it seems clear from the witness statement that any activities he refers to were after that date. Therefore I do not believe that Mr Holt's statement cannot be given any weight.
3. It is difficult to see, how a business can be conducted in a systematic and businesslike manner, when records of sales are not kept. Not only were they not kept, but Mr Serrano did not give specific evidence of the amounts that were received from sales at the farm gate or on Gumtree. In my view, there was a total lack of system and businesslike manner in this particular instance. While there were some records, they were the bare records that were necessary for the production of the applicant's tax returns.
4. In relation to the indicia of purpose and prospect of profit; Ms Grant stated that, "the fact that no profit or only a small profit is made from the business is not sufficient basis to displace a finding that a business is in fact carried on." She referred to a statement by Williams J in Tweddle v FCT [1942] HCA 40; [1952] 180 CLR 1 at [7]. His Honour there stated:

It is not to suggest that the function of the Income Tax Acts or those who administer them is to dictate to a taxpayer what business they shall engage or how to run their business profitably or economically. The Act must operate upon the result of the taxpayer's activities as it finds them. If a taxpayer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interest, although it certainly would be better in the interest of the Commissioner if he did so.

1. However, the word 'business' as used in s.67(1)(a)(iii), denotes 'activities undertaken in a commercial enterprise the nature of a growing concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis' see Hope v Bathurst CC [1980] HCA 16; [1980] 144 CLR 1 at [8-9] per Mason J.
2. While the fact that the applicant has not made a profit from primary production may not be decisive to its case, in my view it is an important matter to be taken into account having regard to all the other evidence that has been put before me. I agree with what Mr Kotros has said in paragraph of his submissions:

Here, having regard to all the evidence before it, the Tribunal cannot be satisfied that the applicant's land was used for the business of primary production, particularly given:

(2) that a profit-making purpose is easily asserted but difficult to see amongst the history of loss-making. There is no objective evidence establishing a profit-making purpose or prospect;

(3) the lack of evidence of any businesslike system or organisation (a mere intention to carry on a business not being enough);

(4) the small size and scale of the relative activities, which in many respects do not complement each other;

(5) the general paucity of documentary and other evidence produced by the applicant produced to the Commissioner and the Tribunal.....

1. Further to that last point, the evidence produced to the Tribunal recently by the applicant is inadequate:

(i) The witness statement of Peter Serrano largely repeats the claims he made earlier to the respondent's delegate, but with little elaboration and detail.

(ii) The other witness statements are also, for the most part, lacking in detail and unhelpful.

(iii) There is an online advertisement for 'Roosters and Pullets $15', but it is in 2015.

(iv) There are photos of some ducks, chickens, plants etc. apparently on the property - but it is in 2015.

1. It would seem clear to me, that unless the applicant has a number of other resources, the expense of running the land would not have been able to be achieved but for the money received from landfill and rent.

1. Ms Grant, submitted that I should find that the land was used primarily for primary production. She referred to Marrone v Commissioner of State Revenue [2014] VCAT 1137 at [63] and stated the factors which are relevant in determining whether the land was used primarily for a particular purpose:

(a) the nature and extent that the land is used for particular purpose;

(b) the substance and intensity of the use of the land;

(c) the resources spent in using the land for particular purposes;

(d) relative incomes competing purposes although that is not primarily determinant;

(f) time and labour spent using the land for a particular purpose.

1. In relation to the nature and extent of the use of the land, Ms Grant referred to the cropping and the grazing of the animals. However, a very large portion of land was used for the purpose of landfill, which produced 70% of the income of the applicant. I have already dealt with the fact that I do not believe the landfill was related to primary production or sufficiently related to primary production.
2. Ms Grant also referred to the fact that the land was relatively intensely cropped which was undertaken on an annual basis. The difficulty with this submission is that it is unclear as to exactly what the produce of the crops were and the amount of income they produced. Some idea can be gained from the table produced by Mr Kotros however, it is quite clear that it must be a relatively small amount of income that came from these crops that were sown and harvested. Further I note, that it was only in the middle section of the land that there was any agriculture taking place.
3. Ms Grant also referred to the fact that Mr Peter Serrano worked at the property for 40 hours a week, seven days a week and there were extensive resources employed including use of tractors, ploughs and harvesters. While this may be so, it was only on a relatively small section of the land. The far more important activities that were going on the land, from an income point of view, were the landfill and the renting of the premises to an outside tenant. While the income derived is not determinative of itself, in this particular instance the proportions of income derived other than through primary production as compared with primary production are so large, as to give me the indication that the primary production of the land was not one of the primary purposes for which the land was being used.
4. Ms Grant also said that I should not take into account the rent from the house because that was a passive business and it was not within the term 'business' as referred to in the section. Both, Ms Grant and Mr Kotros referred to Mould v Commissioner of State Revenue [2014] VSC 268 (at first instance, Ginnane J) and Mould v Commissioner of State Revenue [2015] VSCA 285 where the Court of Appeal upheld the decision of Ginnane J.
5. The Court of Appeal in Mould's case at paragraphs [200 - 203] considered the relevant factors that should be taken into account. It was made clear in relation to those considerations that whether 'residential land' amounts to carry on a business is a matter of fact and degree and a number of factors that should be considered overall. It was also made clear, that rental properties did not cease to be a business because they are a passive investment.
6. Ms Grant referred to paragraph [82] of the judgement of Ginnane J, at first instance, in Mould's case:

The Appellant's submission that, in renting properties, the Trust was engaged in a passive activity and not a business activity does not, in itself, resolve the issue posed by s.67(2) of the Act. There is no one, clear cut fact, that determines the issue. The activities associated with the granting of income by renting properties must be considered. There is no fixed rule that buying and leasing properties cannot amount to a business. While the holding of a few properties may not amount to conducting a business, the renting of a significant portfolio of properties may be regarded as a business.

1. Ms Grant pointed out that in Mould's case, there were 23 rental properties involved while in this particular instance there was only one. She pointed to a decision of mine in Marrone v Commissioner of State Revenue [2014] VCAT 1137, where I found that even though there was a house producing rent, that house in itself in that particular instance did not alter the fact that the applicants were running a business primarily for primary production. This situation here is very different. In this particular instance, the house together with the landfill are producing 89% of the income, and it is also clear that Mr Peter Serrano, is earning income elsewhere. I have been given no detail of that income. In Marrone's case, the person concerned was operating the farm as his sole activity. He had no other income.
2. Taking all these matters as a whole, I have come to the conclusion, that the land was not used solely or primarily for the business of primary production as referred to in s.67(1)(a)(iii). I do not need to consider whether the renting of the house was a business in itself, what I have considered in coming to the conclusion I have above that it has not been established that any primary production use was of such a degree as to impart to the land considered as a whole the character of being used primarily for the business of cultivating and planting and maintaining animals for the purpose of sale.

1. Section 67(2) of the Act was amended by the State Taxation Further Amendment Act 2011, effective from 30 November 2011.
2. At all relevant times before the 2011 Amendment, s.67(2)(c)(i) provided:

67 Exemption of Primary Production Land in Urban Zone in Greater Melbourne

(i) the sole business is primary production of the type carried on on the land.

1. At the relevant times after the 2001 Amendment, s.67(2)(d)(i) provided:

67 Exemption of Primary Production Land in an Urban Zone in Melbourne

(i) the principal business must be primary production of the type carried on on the land.

1. In relation to the business of the applicant, as referred to in the two sections that I have outlined above, at paragraphs [46 - 48] of her submission Ms Grant stated as follows:

[46] The words 'sole' and 'principal' are not defined in the LTA. The word 'sole' is defined in the Macquarie Dictionary as 'being the only one or ones; only'. The word 'principal' is defined in the Macquarie Dictionary as 'first or highest in rank, importance, value etc.; chief; foremost.' These words must however be read within the context of the provision. They seek to describe a 'business' or 'businesses' carried on or undertaken by the Trust in question as distinct from other activities that may be undertaken by the Trust. In this case the provisions require the 'sole' or 'principal' business of the trust is primary production.

[47] It is the Applicant's submission that the only business carried on by the Trust as at each of the Relevant Dates was the business of primary production. The leasing out of a residence by the Trust was not the conduct of another business but rather the receipt of a passive investment income...

[48] Similarly, if the Tribunal comes to the view that the landfill activities are not related or directed to the primary production business (a conclusion which is not admitted), it is submitted that such activity did not amount to the operation of a 'business' in its own right and in any event was not the dominant or main undertaking of the Trust. The continuing primary production activities on the Land were at all times, the main or primary undertaking of the Trust.

1. For the reasons I have outlined above when dealing with Issue 1, it is clear, that the primary production is not the sole or principal business of the Trust. I have already made findings that the landfill was not associated with primary production, and the fact that that renting is a passive business does not mean it cannot be a business. (See Marrone's case both at the first instance and in the Court of Appeal). The landfill was producing a large amount of income and has done so for a number of years during the relevant period. I am told that it is continuing to produce such income.
2. I agree with what Mr Kotros has said at paragraph [51] of his submissions:

[51] Looking at the table above and comparing the applicant's profits/losses from its livestock activities with its profits/losses from its rental and landfill activities, one cannot say that, in 2009-11, the applicant's sole business was primary production. For the same reason, it is difficult to say that, in 2012-13, the applicant's principal business was primary production.

1. As I previously have stated I agree with what I have quoted from Mr Kotros and it necessarily follows, that the business of primary production is neither the sole nor the principal business of the trust.

1. At all relevant times before the 2011 Amendments, s.67(2)(c)(iii) provided:

67 Exemption of Primary Production land in Urban Zone in Greater Melbourne

(iii) At least one of the beneficiaries, or a relative of at least one of the beneficiaries, is normally engaged in a substantially fulltime capacity in the business of primary production of the type carried on on the land.

1. At all relevant times after the 2011 Amendments, s.67(2)(d)(iii) provided:

67 Exemption of Primary Production land in an Urban Zone in Greater Melbourne

(iii) ...(B) a relative of at least one of the specified beneficiaries is normally engaged in a substantially fulltime capacity in the business of primary production of the type carried on on the land.

1. It was conceded by Mr Kotros that Peter Serrano, was for the purposes of s.67(2)(c)(iii) as it was before the 2011 Amendments, 'one of the beneficiaries' of the Serrano Family Trust, and for the purposes of s.67(2)(d)(iii)(B) as it was after the 2011 Amendments, 'a relative of at least one of the specified beneficiaries' of the Serrano Family Trust.
2. I have already dealt with as far as they can be ascertained, the other activities of Mr Peter Serrano besides working on the land. Further I note, that it may be as Mr Kotros has said that Mr Serrano spends time working on the land (part of his 40 hours per week) that does not relate to primary production activities. The question that must be considered in relation to this issue is whether Peter Serrano was normally engaged in a substantially fulltime capacity in the business of primary production of the type carried on on the land pursuant to s.67(2)(c)(iii) (pre-Amendment) and s.67(2)(d)(iii)(B) of the current Act.
3. Ms Grant submitted that I should be satisfied that this provision has been made out by the applicant as Mr Serrano works on the land each day for six days a week carrying out primary production activities, totalling approximately 40 hours per week.
4. It should be noted, that the work that Mr Serrano must do in order to be fulltime on the land or substantially fulltime, is cultivating and maintaining for sale the produce and livestock.
5. I do not intend to repeat what I have previously said about Mr Serrano's activities outside the land, but it does appear, that they were far more substantial than Mr Serrano would have had the Tribunal believe in his written statement. It was only after questions from Mr Kotros in cross-examination and myself that it was revealed that Mr Serrano's non land activities were quite substantial.
6. I am uncomfortable, at the lack of objective evidence that could have been produced but has not been introduced by Mr Serrano to indicate what income he may have been receiving from activities outside the land. It would have been a relatively simple matter for Mr Serrano to tender his personal tax returns which would have shown such income. He did not produce group certificates or anything of the like.
7. I note that s.98 of the Taxation Administration Act requires the applicant to have the onus of proof. In my view the applicant failing to produce these documents in circumstances of the present, lead me to not be satisfied, that Mr Peter Serrano was normally engaged substantially in the fulltime activity of primary production on the land.

1. This issue only concerns the period prior to the 2011 Amendments. Prior to the Amendment s.67(2)(c)(ii) of the Act read as follows:

67 Exemption of Primary Production land in an Urban Zone in Greater Melbourne

(ii) Each beneficiary is a natural person who is entitled under the trust deed to an annual distribution of the trust income.

1. Clauses 3(i) and (ii) of the Trust Deed governing Serrano Family Trust provides:

The Trustee shall in each accounting period until vesting day pay apply or set aside the whole or such part (if any) as it shall think fit of the net income of the Trust Fund...to or for the benefit or for all or such one or more exclusive of the others or the other of the Beneficiaries...in such proportion and in such manner as the Trustee in its absolute discretion and without being bound to assign any reason therefore shall think fit...

The Trustee may in its absolute discretion...determine to accumulate all or any part of the net income.

1. The 'Beneficiaries' include the 'Primary Beneficiaries', Santo and Marianna Serrano, and the 'Secondary Beneficiaries', the children etc. of the 'Primary Beneficiaries' and certain others including related Trustees and Corporations, and Charities. (underlining supplied)
2. Ms Grant submitted, that to give the relevant provision its literal meaning, would mean that all beneficiaries pursuant to a discretionary trust would be excluded from the s.67 Exemption because it was usual practice for discretionary trust deeds to have corporations and charitable institutions as beneficiaries. Further she noted that by the Amendments that took place in 2011, beneficiaries were not excluded where there was a corporate or charitable institution included amongst their number.
3. She also noted that the explanatory memorandum in relation to the 2011 Amendments inter-alia stated as follows:

This Amendment clarifies that the primary production exemption is available in relation to land held by certain Trustees of discretionary trusts.

1. There is nothing in the relevant provision prior to the Amendment which would indicate that the words should be read as not applying to discretionary trusts where the same made provision for corporate trustees or charitable trusts. The words of the provision are clear and unambiguous. There is no exception to the words 'natural person' in the provision. To read that provision as to include a natural person except when referred to in a discretionary trust in my view would be quite wrong.
2. While the Parliament in 2011 may have realised that there was an anomaly in the Land Tax Act prior to that time, that does not necessarily mean that I should interpret the legislation by adding or deleting words in order to eradicate that anomaly. If Parliament had intended me to do so, in 2011 the legislation would have been made retrospective. It was not.
3. In my view, the words of the provision are clear and unambiguous and as a result, I do not accept the submissions made by Ms Grant in relation to this issue. Therefore on the issue of prior to 2011 clearly the eligible beneficiaries in the applicant's trust deed were in addition to those described in the statute.

1. It was incumbent (pursuant to s.98 of the Taxation Administration Act 1997) upon the applicant to make out the exemption granted by the provision. In each of the issues that have been argued before me the applicant has failed to do so. Given those circumstances, I will confirm the decision of the respondent.

[2] The figures in this row might be higher to the extent that any of the expenses relate solely to the income from landfill.