Cooney v Chief Commissioner of State Revenue

The issue

1. The issue for determination by the Tribunal is whether the principal place of residence exemption is available for No. 27, or whether the exemption only applies to No. 25.

The facts

1. Subject to one minor point (as detailed in [10] below), the Chief Commissioner does not dispute (Respondent's Written Submissions (RWS) at [4]) the facts set out in [5]-[11] of the applicants' submissions (AWS) filed on 28 April 2017, and as drawn from the affidavits of each of the applicants (Exhibits 1 and 2) and that of their handyman/builder, Jeremy Tilse (Exhibit 3). I find the facts as follows.
2. The applicants have owned and lived together in the residence at No. 25 since December 2004. Continuously since that time No. 25 has been used and occupied as the applicants' principal place of residence.
3. On 28 August 2014 the applicants settled on the purchase of No. 27, which adjoins No. 25. There is a common boundary shared by the two lots. Since August 2014 the applicants' residence and surrounding environs have comprised both No. 25 and No. 27.
4. Shortly after purchasing No. 27, and by mid December 2014, the applicants removed fencing and a stone wall separating No. 25 and No. 27, such that there has been since then a means of egress between the two lots of about 6.5 metres.
5. Since its acquisition in August 2014, No. 27 has been used with No. 25 by the applicants and their family. The applicants submit in AWS at [9] that they use No. 25 and No. 27 as 'a single place of residence' for the family, but the Chief Commissioner does not accept that particular characterisation and nor is it appropriate for me, in setting out the background facts, to characterise things that way at this early stage. Despite this difference between the parties, they do at least agree, and I find, that the applicants and their family 'use' No. 27. The specific uses of No. 27 by the applicants include, but are not limited to, the following: 1. to maintain the privacy of the applicants and their family and their continuing enjoyment of their residence; 2. as a point of access to the two lots by the applicants, members of their family, delivery drivers and contractors; 3. to store stone blocks held for future use on the building located on No. 25; 4. to store rubbish; 5. to store plants and garden equipment, including, but not limited to, lawnmowers, leaf blowers, rakes and pitchforks; 6. to store tennis equipment; 7. as a place to construct furniture used in the applicants' residence; and 8. as a place for preliminary building works to take place for construction undertaken on the applicants' residence located on No. 25.
6. At all times since the applicants acquired No. 27, the building on that property (the Disused Building) has been in a dilapidated state. In particular, the state of the Disused Building is as follows: 1. it has internal cladding of asbestos sheeting that has been damaged with the result that there is asbestos dust within the Disused Building; 2. it has a leaking roof through which water can stream in; 3. the timber roof is rotten and needs to be replaced; 4. the leaking has caused rotting of the structural members of the building such that they will need to be replaced; 5. existing timber work has lead-based paint that needs to be removed; 6. the gutters and downpipes have rusted such that they cannot carry water to the stormwater connections; 7. the kitchen, bathroom, toilet and laundry are all in need of renovation so that they can be used; 8. all floor coverings are damaged to the point of being unsalvageable; 9. the electrical wiring is unsafe; and 10. the rear timber deck is rotten and structurally unsound, and the railing is unsafe.
7. The Disused Building has not been occupied since at least December 2004, and it cannot be occupied in its current state. The expected cost to renovate the Disused Building so that it can be occupied is over $900,000, including GST. The expected cost solely to remove the asbestos sheeting from the Disused Building is around $200,000.

The law

1. The question of liability in this case turns on the principal place of residence (PPR) exemption provisions in Schedule 1A to the Act.
2. The starting point is clause 2 in Part 2, which provides:

Principal place of residence exemption 1. Land used and occupied by the owner as the principal place of residence of the owner of the land, and for no other purpose, is exempt from taxation under this Act, in respect of the year commencing 1 January 2005 or any succeeding year, if the land is: 1. a parcel of residential land, or 2. a strata lot or, subject to this Schedule, land comprised of 2 or more strata lots. 1. Land is not used and occupied as the principal place of residence of a person unless: 1. the land, and no other land, has been continuously used and occupied by the person for residential purposes and for no other purposes since 1 July in the year preceding the tax year in which land tax is levied, or 2. in any other case, the Chief Commissioner is satisfied that the land is used and occupied by the person as the person's principal place of residence. 1. If the owner of land is entitled to the exemption conferred by this Schedule, no other person is liable to be assessed for taxation under this Act in respect of the land during the period of the owner's entitlement to the exemption. 2. The exemption conferred by this Schedule is referred to as the principal place of residence exemption. 3. The principal place of residence exemption is subject to the restrictions set out in Part 4.

1. The reference in clause 2(1)(a) to 'residential land' requires consideration of the definition of that expression in clause 3:

Residential land - meaning 1. In this Schedule, residential land means land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or buildings designed, constructed or adapted for residential purposes, other than a building or buildings: 1. comprised of strata lots or residential units, or 2. containing (out of the total of all rooms in the building or buildings) occupancies other than that of the owner, or 3. from any part of which income is derived. 1. Land does not cease to be used and occupied as provided by sub clause (1) by reason of there being on that land any building or improvement that is used or occupied for a purpose ancillary to the purposes for which the building is, or the buildings are, designed, constructed or adapted.

1. The restrictions to the PPR exemption, foreshadowed in clause 2(5), include clause 13 in Part 4:

Application of exemption to residence comprised of 2 or more lots (other than strata lots) 1. The principal place of residence exemption does not extend to a parcel of residential land that is comprised of 2 or more lots of land, and that is used and occupied by the owner of the lots (or by one of them) as a principal place of residence, unless: (a) the lots are adjoining, and (b) the lots are in the same ownership, and (c) the lots are the site of a single residence (excluding any additional residential occupancy that may be disregarded under clause 4). (1A) Lots are in the same ownership if: (a) the lots are owned by the same person or, if any of the lots are jointly owned, the lots are all jointly owned by the same persons, or (b) each lot is beneficially owned by the same person or, if any of the lots have more than one beneficial owner, each lot is beneficially owned by the same persons (subject to clause 11). 1. For the purposes of this clause: (a) separate lots are not to be regarded as adjoining merely because one lot has a single corner point on its boundary that is common to the boundary of another lot, and (a1) separate lots that are divided by a fence, wall or other structure are not to be regarded as adjoining unless access is readily available between the lots, by means of gates, doors, steps, stiles, elevators or openings or by similar means, and (b) separate buildings erected on separate lots are not to be regarded as a single residence if the buildings are separately occupied or capable of being used for separate occupation. 1. This clause does not apply to land comprised of 2 or more strata lots.

The parties' competing positions

1. The applicants' position, in summary, is that No. 25 and No. 27 together form a parcel of residential land, and that the PPR exemption applies to that parcel. The Chief Commissioner, on the other hand, says that No. 27 is not itself 'residential land', since at the relevant time it had (just as it continues to have) a house on it that was not lived in or capable of being lived in. So, even if the two lots together form a 'parcel', they cannot form a parcel of 'residential land' since one of the lots does not answer that description.

The 'parcel' question

1. Whether two 'lots' can constitute one 'parcel' depends on the 'four unities' test in Ryan v Commissioner of Land Tax (NSW) [1982] NSWLR 305; 82 ATC 4178. In Ryan, Hunt J stated that, 'continuous blocks of land can comprise a "parcel of residential land" within s 10(1)(r)(ii) only where they are undivided not only by physical separation but also in use, occupation and title': [1982] NSWLR at 310; 82 ATC at 4182.
2. Here, there is no doubt that No. 25 and No. 27 are undivided by physical separation, as a result of the removal of a length of fencing and a stone wall that previously separated the properties. There is also no doubt that there is unity of title and unity of occupation. The real question is whether there is unity of use, and this is where the dispute between the parties lies.
3. The Chief Commissioner says that while No. 25 is used for residential purposes, No. 27 is not. That is because on No. 27, there is no 'use and occupation of a building or buildings designed, constructed or adapted for residential purposes'. There is such a building, he says, but there is no 'use and occupation' of it for residential purposes. No. 27 therefore cannot be 'residential land'; the parcel - if it is a parcel - comprising No. 25 and No. 27 cannot be a 'parcel of residential land'; and so the exemption claim must fail.
4. There is a degree of circularity in that reasoning. To deny the existence of a 'parcel' of residential land because one of the components of the 'parcel' is not residential land - even if the parcel itself might be - is to deny that the separate existence of each component would be subsumed into the whole. The question is not whether each of the components is residential land, but whether the whole is.
5. That is why in Ryan's case, Hunt J spoke of lots being 'undivided' by reference to each of the four categories specified. His Honour did not use either 'identical' or 'equivalent' as the measure because the use of either of those words would suggest that the lots were to be assessed as stand-alone entities. The word used - deliberately, one must suppose - was 'undivided'. That requires a very careful enquiry and assessment. The lots must be 'undivided' by physical separation so that they form one physical whole. They must be 'undivided' in title so that they are owned as one. They must be 'undivided' in occupation so that they are occupied as one. And they must be 'undivided' in use so that they are used as one. The question is not whether there is 'identity' or 'equivalence' of use, occupation and title - is the use, occupation and title of each of them the same as the other? - But whether the lots are used, occupied and owned as one. That is why the test is known as the 'four unities' test rather than the 'four identities' or the 'four equivalences' test.
6. In summary, it is wrong to assess the components separately because that is not the test formulated in Ryan. The Chief Commissioner's contention that No. 25 and No. 27 together cannot comprise a 'parcel of residential land' because No. 27 by itself is not within the definition of 'residential land' must be rejected.
7. In concluding that way, I am fortified by the decision in Ryan itself. The taxpayer's exemption claim failed in that case not because one of the two adjoining lots was not itself within the 'residential land' definition but because unity in title was lacking: Mr and Mrs Ryan owned one of the adjoining lots while Mr Ryan alone owned the other. Indeed, the status of the 'garden lot' as non-residential in nature (with no structure on it except some stone steps) was acknowledged not to be an automatic disqualifier to exemption, as the following excerpt shows ([1982] NSWLR at 307; 82 ATC at 4180): The issue between the parties is this. If the two blocks used as the one residential area are identified as together comprising one "parcel of residential land", the Commissioner concedes that Mr Ryan is entitled to his exemption pursuant to s 10(1)(r)(ii). If, however, each block is identified individually as a "parcel of residential land", Mr Ryan concedes that, in relation to the land known as No 3 Baden Road, he does not on that block use and occupy a building designed and constructed for residential purposes, and thus is not entitled to an exemption in relation to that block: s 10(1D).
8. The question there, as here, was whether the two lots together comprised a 'parcel of residential land'. The status of each of the components of what may potentially be a parcel is relevant only if the lots together do not comprise a parcel in the first place.

Is there unity of use in relation to the two lots?

1. The applicants submit that No. 27 has at all times been used as one residential area with No. 25, and that they use No. 27 'as part of the surrounding environs of their home on 25 Shellcove Road'.
2. Having regard to the facts set out in [10] (a) to (h) of these reasons, I accept that submission. One of the significant purposes for which No. 27 was purchased was to maintain the applicants' privacy and enjoyment of the amenity of their home; in a sense No. 27 serves as a 'buffer' for the applicants' residence on No. 25. Windows in the building on No. 27 face directly onto the tennis court and adjacent living room on No. 25 (Exhibit 1 at [28]). No. 27 also 'completes' the applicants' land since, while No. 25 has an irregular shape, No. 25 and No. 27 together are very nearly rectangular in shape (Exhibit 1 at [19]; Annexure J).
3. While the actual physical use of No. 27 is minor, none of it is inconsistent with the residential use of No. 25. Storage of stone blocks for future use; storage of rubbish; and storage of plants, garden equipment and tennis equipment are activities commonly undertaken on residential lots. There is nothing unusual about any of those activities in the context of residential land.
4. As for the use of No. 27 as a privacy buffer, the applicants point to Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11, where Barrett AJA (with whom Macfarlan and Ward JJA agreed) stated at [61] that 'use' of land (at least in the context of the primary production exemption in s 10AA of the Act) requires: … physical deployment of Isaacs J's 'concrete physical mass' [see New South Wales v The Commonwealth [1923] HCA 34; (1923) 33 CLR 1 at 33] in pursuance of a particular purpose of obtaining present benefit or advantage from it, with deployment understood as including not only activity but also inactivity deliberately adopted as a means of obtaining such actual and present advantage from the land; and with purpose understood as objectively ascertained purpose. There is no requirement that immediate productive return be achieved, as long as some benefit or advantage accrues.
5. The applicants note that in Metricon, Barrett AJA referred to and followed the decision of the High Court in Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493 - where it was accepted that vacant land surrounding a hospital was used for the purposes of the hospital because it was used 'to ensure tranquil surroundings and abundant fresh air for tuberculosis patients'. Barrett AJA noted at [57] that 'the crucial factor in the Royal Newcastle Hospital case was that the owner "intentionally derived actual and present advantages by keeping the land in its virgin state".' The applicants draw a parallel with their own circumstance, in that they physically deployed No. 27 in pursuance of a particular purpose of obtaining present benefit or advantage from it.
6. In my view, the applicants' use of No. 25 flows over to No. 27 in such a way that No. 25 and No. 27 are used as one. It follows that the applicants have established that No. 25 and No. 27 together satisfy the 'four unities' test in Ryan. As a consequence the two lots together should be treated as a 'parcel' of land. Furthermore, that parcel satisfies the definition of 'residential land' - 'land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or buildings designed, constructed or adapted for residential purposes'. For reasons already explained, the fact that there is no separate 'use and occupation of a building' on that part of the parcel that is known as No. 27 is irrelevant.

The clause 13 restriction

1. At both relevant taxing dates (31 December 2014 and 31 December 2015), the parcel comprising No. 25 and No. 27 was within the PPR exemption provided by clause 2(1) in Schedule 1A. However, that exemption is subject to the restrictions set out in Part 4 of the Schedule: clause 2(5). One of the restrictions is in clause 13: see [16] of these reasons.
2. This comes down to a consideration of paragraph (c) of clause 13(1), which provides that the PPR exemption will be denied unless the two lots (No. 25 and No. 27) are 'the site of a single residence'. The answer to that question is informed by clause 13(2)(b), which states that 'separate buildings erected on separate lots are not to be regarded as a single residence if the buildings are separately occupied or capable of being used for separate occupation'.
3. Here we have separate buildings that are erected on separate lots, but the buildings are not separately occupied. The question then is whether they are 'capable of being used for separate occupation'.
4. That same question arose in Prendiville v Chief Commissioner of State Revenue [2010] NSWADT 270. The Tribunal member described the condition of the 'second' house in that case in the following way ([37]-[40]): [37] However, I am able, given the photographic evidence that there was (taken six and three months prior to December 2008, and some months after it) to say that certainly the external structure of the house remained intact. The pictures taken before and after the taxing date by the applicants' architect shows a building, perhaps showing its 50-odd years, but in solid shape and structurally intact. There was no evidence of external deterioration to a point where it would not be safe, or appropriate, to occupy it. [38] As for the internal condition, the evidence is that the main demolition or removals took place in the bathroom. The cistern of the toilet had been removed, as had the vanity unit and (it appears) at least part of the shower screen. Each of these would be able to be easily repaired in order to have the house in a fit state to occupy. The respondent submitted that the property would be "capable of separate occupation" even without the repair or reinstatement of the bathroom, given the existence of the external toilet; with this submission I agree. The standard of occupation is not specified in the Schedule, and while the applicant would not wish to live in the building with the associated rising damp and some roof leaks, that most certainly would not apply to the entirety of the relevant population of Sydney. [39] The applicants did not suggest that the absence of air conditioners would make the house unoccupiable. The holes left by the removal of the air conditioning units are, it appears, small. There was no evidence of the extent of the rising damp and in the light of there being no cross-examination of Mr Watkins, the son of the former owners, who gave evidence that the rising damp was not a problem in mid-2008, I find that the rising damp did not render the house unoccupiable as at 31 December 2008. [40] As for the utilities, the applicants merely had the accounts stopped. The phone was disconnected but the connections for future telephone connections remained. The same applied to the electricity and gas, and there remained a water and sewer service to the house (although no bills were being rendered for any of these utilities, or no significant bills).
5. The member ultimately concluded at [41]-[42]: [41] In my view the house was capable of separate occupation on 31 December 2008, in that it was in a fit state to be occupied as a residence, and needed only minor reinstatement and the reconnection of utilities to be in a fit state to be let (although fitness for letting is, of course, not the test). I use that analogy because it shows starkly the closeness of the house to being a commercial proposition should the applicants have chosen to rent it out for the duration rather than wait for the approval for demolition. [42] The question of what the applicants actually did with it is irrelevant to the question of whether the house was capable of being occupied. The fact that they chose not to occupy it, and chose not to have it occupied by others, is not determinative. The applicants would need to show that the house was in a state which rendered it not "capable" of separate occupation. They have, rather, shown that it was not in a state which lent itself to comfortable occupation on an immediate basis, which is a different thing.
6. There is a stark difference between the 'second' house in Prendiville and the house on No. 27. The evidence in this case, as set out in [11] of these reasons, is that the house on No. 27 is in such a state of dilapidation that for all practical purposes it is uninhabitable. Particularly noteworthy are the damaged internal asbestos cladding, the presence of asbestos dust, the lead-based paint, the leaking roof through which water can 'stream in' (not just drip), the unsafe electrical wiring and the fact that the kitchen, bathroom, toilet and laundry are all incapable of being used until they are renovated.
7. To bring the house on No. 27 into a state in which it would be 'capable of being used for separate occupation' would require the expenditure of over $900,000. On no measure is that similar in character to the minor and relatively insignificant work of the kind identified as necessary in Prendiville.
8. I find that, on each of the relevant taxing dates, the building on No. 27 was not 'capable of being used for separate occupation'. Clause 13 therefore did not deny the availability of the PPR exemption for the parcel of residential land comprising No. 25 and No. 27.
9. For completeness I note the Chief Commissioner's submission (RWS at [26]) that the facts in this case are substantially similar to those in McGrath v Chief Commissioner of State Revenue [2007] NSWADT 46. In that case the taxpayers purchased the land adjoining their principal place of residence but did not use the house on that adjoining block for residential purposes. The Tribunal found at [48] as follows: On the evidence before the Tribunal 14B [the adjoining lot] was not used as a place of residence. The dwelling on the land, which occupied a substantial area of the relevant land of the lot in question, was on the evidence not used for residential purposes. The relevant property was, at the relevant taxing date, land awaiting development. Eventually, of course the exemption would apply when the new home is constructed and used by the applicants as their principal place of residence. However, on the taxing date 14B was not being used for residential purposes.
10. The point to make about McGrath is that the factual finding in [48] (ultimately upheld by the Supreme Court in Chief Commissioner v McGrath [2008] NSWSC 387) was necessarily fatal to the taxpayers' case as it meant that one of the 'four unities' in Ryan was not satisfied. I have found the opposite here: that there was at the relevant dates 'unity of use' across No. 25 and No. 27. That finding distinguishes this case from McGrath.

Conclusion

1. The land tax assessments for the 2015 and 2016 land tax years are accordingly revoked.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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: 21 December 2017