Cornish Group Pty Limited & Anor v Chief Commissioner of State Revenue [1996] NSWLEC 42 | Case summary

REASONS FOR DECISION Introduction 1 The applicants seek the review of the respondent's decision to assess land tax on land situated at Springs Road, Spring Farm ("the Land") for the 2006, 2007 and 2008 land tax years ("the Tax Years"). 2 The issue in dispute is whether the Land was exempt from land tax in the Tax Years under s 10AA of the Land Tax Management Act 1956 ("the Act"). Section 10AA of the Act exempts land used for primary production. 3 The applicants, Cornish Group Pty Ltd ("CGPL") and Cornish Group Spring Farm Pty Ltd ("CGSF"), are both members of the Cornish Group of companies. Cornish Group is a Sydney based property developer. This application was, however, by agreement with the applicants, prosecuted by M Collins & Sons (Contractors) Pty Ltd ("Collins"). Collins currently holds a lease over the Land and has also held a lease in the years under review. Factual Background 4 The Tribunal had before it the documents lodged pursuant to s 58 of the Administrative Decisions Tribunal Act 1997, which were accepted as Exhibit "R1". It received various written submissions by both the applicants and the respondent. The Tribunal also accepted the tender of exhibits as follows: Exhibit "A1": Statement of Mathew John Collins dated 4 November 2004 Exhibit "A2": Further statement of Mathew John Collins dated 24 March 2009 Exhibit "A3": Site plan of Cornish Group development Exhibit "A4": M Collins & Sons (Contractors) Pty Limited - Horticultural Products Summary as at December 2005 to 2007 Exhibit "A5": Pasture Preparation Costs - Woodgrand 2005 to 2007 Exhibit "A6": Ledger Account - Wood Grand Quarry Rehabilitation 2005 to 2007 Exhibit "A7": Cattle Inventory Account 2004 to 2008 Exhibit "R2": Respondent's Evidence Exhibit "R3": Documents from Camden Council - 110, Spring Farm Road, Spring Farm Aerial Photograph (2005 Aerial) and Cadastral Map as at 1 December 2008 Exhibit "R4": Woodgrand Greenwaste - Facility Environmental Management Report for the period ending 28/07/2006 Exhibit "R5": Woodgrand Greenwaste Facility - Annual Environmental Management Report for the period ending: 05/12/2007 and part-year ending: 31/07/2008 Exhibit "R6": Annual Return of Land and Stock as at 30 June 2005, 2006 and 2007 Exhibit "R7": Statement of Nadya Justine Haddad 5 The Spring Farm Land, also known as "Woodgrand", is approximately 70 hectares in area. CGPL purchased the Land in 2000 from Indaal Pty Limited. 6 Indaal Pty Limited had owned the Land for a number of years and had granted on 7 August 1997 under a deed a licence/lease to Collins for soil and sand extraction, and composting, on Woodgrand. 7 Collins was incorporated in 1968 "to take over contracting and carrying business previously operated by Collins family". In 1982, Collins leased a property situated at Macarthur Road, Spring Farm ("the Macarthur Road Property") to carry out turf farming and minor sand and soil extraction. In June 1982, Collins acquired a property adjoining the Macarthur Road Property ("the Elderslie Property") and which has since been used by Collins for turf farming. The Land adjoins another property at Macarthur Road, Spring Farm (known as "The Poplars"), which is currently owned by CGSF. 8 In December 2004, Collins acquired the legal title to the Macarthur Road Property. 9 On 7 September 2004, the land value of the Land for land tax purposes increased from $1,360,000 to $15,000,000. Prior to the 2006 Land Tax Year, the Land had been zoned "Rural/non-urban". From the 2006 Land Tax Year onwards, the Land has been zoned "Residential". 10 Collins undertook soil and sand extraction activities on the Land up to November 2005 "with the activity being undertaken on an increasingly reduced scale from June 2005". The "last royalty payment was for December 2005 and the level of royalty payments significantly reduced from June 2005 onwards". 11 At the end of the extraction activities on the Land, Collins undertook rehabilitation of the areas affected by the extraction activities. The bulk of the rehabilitation was completed by November 2005. 12 The Land, The Poplars, the Elderslie Property and the Macarthur Road Property (in addition to other land) form part of a major new master-planned residential development known collectively as "Spring Farm" that the Cornish Group is currently developing. There are no immediate plans for the Land, the Macarthur Road Property and the Elderslie Property. 13 Collins is managed largely by Mr Matthew John Collins. In addition to a statement provided to the respondent when objecting to the assessment for the 2006 Land Tax Year, Mr Collins provided the Tribunal with two further statements and gave evidence at the hearing. 14 In his first statement Mr Collins set out the areas of business that Collins is and has been involved as follows: "(a) extraction and sale of sand and soil; (b) production and sale of various grades of composting material; and (c) agricultural activities including: (i) cattle breeding operations ; and (ii) turf farming." 15 Mr Collins identified Spring Road Property ("Woodgrand"), a property situated at Cobbity ("the Cobbity Property"), the Marcarthur Road Property and Elderslie as the properties where the agricultural activities were conducted by Collins. Turf farming is carried out on the Cobbity Property, the Macarthur Road Property and Elderslie. Cattle breeding operations are carried out on the Springs Road Property and Cobbity Property. 16 He further stated that, currently, sand and soil extraction is carried out on the Macarthur Road Property, which is owned by Collins. "From August 1997 until late 2004 Collins carried on extraction of sand and soil from the Spring Road Property" and that "from late 1997 Collins also carried out compost blending on part of that property, covering approximately 2 to 3 hectares". "Collins is and has been responsible for rehabilitating that part of the Springs Road Property affected by its sand and soil extraction activities. It has been carrying out this rehabilitation on an ongoing basis since cessation of extraction activities on the various parts of that property". 17 In relation to the cattle breeding operations, Mr Collins, in his first statement, stated as follows: "9. The Company's cattle breeding operations are carried out on the Springs Road Property and the Cobbity Property. These activities are carried out pursuant to the Company's Cattle Business Plan dated 1 April 2004, a copy of which is attached and marked "A". Prior to that date the only agricultural activities carried on by the Company were the turf farming activities. The purpose of expanding agricultural activities from solely turf farming to include cattle breeding was to diversify Collins' agricultural activities and endeavour to obtain a more viable utilisation of the various owned and leased properties. 10. The Spring Road Property is currently, and in 2006 was, used by Collins primarily in connection with its cattle breeding operations. These operations are an integral part of Collins' overall business plan. 11. The relatively low financial returns obtained by Collins from its cattle breeding operations to date are a result of implementation of its Cattle Business Plan to build up stock numbers. It is Collins' intention to maximise the numbers of cattle which can be grazed on the Springs Road Property and the Cobbity Property (bearing in mind the use of part of the Cobbity Property for turf farming). Cattle have been, and will continue to be transferred from Cobbity Property to the Springs Road Property (and vice versa) as circumstances allow and require. 12. Collins presently owns approximately 125 head of cattle of which 100 are located on the Cobbity Property and 25 are on the Springs Road Property. In the financial year 30 June 2006 Collins sold 10 head of cattle for a gross sale price of approximately $8,500. In the financial year ended 30 June 2007 Collins sold approximately 40 head of cattle for gross sales price of approximately $24,000. This increase in cattle sales numbers is a result of increased breeding activities by the Company and is in line with the Company's intention to increase its cattle breeding and grazing activities and increase overall stock numbers." 18 In the Cattle Business Plan dated 1 April 2004, Collins had "projected trading profits" as follows: "Year One (Nil) Two Profit $16,968 Three Profit $21,321 Four Profit $21,253 Five Profit $23,805" 19 In his second statement, Mr Collins provided further background to the cattle breeding activities of Collins as follows: "8. The two properties utilised by Collins for grazing purposes are, as set out in my earlier statement, the Cobbity Property and Woodgrand. The Cobbity Property is approximately 240 hectares and has been owned by my parents since 1968. Part of the Cobbity property is currently used by Collins for turf farming and part of approximately 120 hectares is used by Collins for cattle grazing and cropping for cattle feed. The balance is leased by my parents to a third party for horse agistment. From 1968 until 2004 my parents carried out cattle breeding and grazing on part of the Cobbity property. Collins was carrying out turf farming on part of the Cobbity Property and my parents were using the balance for horse agistment. In 2004 my father was 82 years old and was neither able nor interested in carrying on the cattle breeding and grazing. Collins commenced cattle breeding and grazing and purchased 65 head of cattle which were on the Cobbity Property from my parents. Collins also purchased a bull on 20 May 2004 from RL & MG McIntosh in accordance with its Cattle Business Plan so as to commence breeding and increase overall stock numbers. Annexed and marked "MJC3" are copies of the invoices from my parents and RL and MG McIntosh. The herd of 65 on the Cobbity Property as at April 2004 was approximately equal to the carrying capacity of the 120 hectares available for cattle breeding on that property. The additional capacity of approximately 50 hectares on Woodgrand was necessary in terms of enabling Collins to increase the overall capacity of its breeding and grazing activities. 9. Collins maintains accounting records relating to its cattle grazing and breeding activities on its pronto accounting software system. Within the Collins accounts the cattle grazing and breeding records are maintained as a separate division. Within that division no distinction is made between the Cobbity Property and Woodgrand. Annexed hereto and marked "MJC4" is an extract of the Profit and Loss for the cattle grazing and breeding operations before financing and administration charges for the years ended 30 June 2006, 30 June 2007 and 30 June 2008. 10. Cattle are regularly transferred between the Cobbity Property and Woodgrand. The reason for this is to maximise the Collins' herd size capacity. Breeding activities mostly occur at Cobbity as does cropping of lucerne, oats and sorghum used to feed cattle at both the Cobbity Property and Woodgrand. Woodgrand is used primarily for fattening of steers and young cattle between about the ages of 6 months and 18 months. The Cobbity Property is more suitable than Woodgrand for cropping. Woodgrand has been used to date for grazing, including on areas sown by Collins with rye and other grasses, and a small amount of oats cropping adjacent to the dam which remains a potential use particularly given the dam on Woodgrand. The dam is also used as a source of water for the cattle and some irrigation. Annexed and marked "MJC5" is a schedule of the stock movements prepared from the records maintained by Collins for the period December 2005 to date. Stock are generally moved by AJ and JC Rae, an independent stock transportation contractor. … 14.3 The only activities which have been carried out on Woodgrand since December 2005 are cattle grazing and breeding, rehabilitation of parts of Woodgrand previously used for extraction of sand and soil and blending of various grades of composting material." 20 The financial returns from the Collins' cattle operations were usefully set out in Mr Rider's submissions for the respondent as follows: "31. Collins' income tax returns for this period relating to the Tax Years do not record that Collins derived any income or claimed any deductions in relation to primary production activities, including cattle grazing, during the Tax Years. 32. Collins' financial reports relevant to the Tax Years stated it had livestock as at: - 30 June 2006 valued at $43,640 (out of total assets of $16,084,398); and - 30 June 2007 valued at $46,492 (out of total assets of $16,617,737). 33. Collins' management reports relevant to the Tax Years provided as follows: 2005 - no mention of any cattle purchases or sales; 2006 - cattle sales of $8,476, but losses of $26,508 - however, there is no mention of Collins' cattle division in its consolidated profit and loss statement for the year June 2005 to 2006; 2007 - cattle sales of $23,758, but losses of $59,172 - however, there is no mention of Collins' cattle division in its consolidated profit and loss statement for the year June 2006 to 2007; and 2008 - cattle sales of $20,440, but losses of $96,703 (as set out in Collins' consolidated profit and loss statement for the year June 2007 to 2008)." 21 Collins' use of the Land during the Tax Years in relation to the soil and sand extraction, and composting operations was also usefully summarised by counsel for the respondent in his submissions as follows (without reference to the source of the information): "19. On 7 September 2004, Camden Council granted its consent to Collins' continued operation of a green waste composting and material blending facility on the Land. 20. On 14 December 2005, Collins and CGPL executed an Extraction License Agreement (Extraction Licence) which extended Collins' rights to extract sand and soil from the Land until 31 December 2006. Under cl.3 of the Extraction Licence, Collins was required to pay a royalty to CGPL of $3.50 per tonne of material which it extracted from the Land. Under cl.4, Collins was granted the right to extract sand and soil from the Land in the areas designated the "Soil Pit", "Areas 3 & 4" and "River Bank Area", and in the future, to extract material from the "Spring Road Site", as set out in Annexure 3 to the Extraction Agreement. In total, these areas comprised more than 50% off the area of the Land. Under cl.5, Collins was to complete material extraction and restoration work at the "Soil Pit", "Areas 3 & 4" and the "River Bank Area" on or before 31 August 2006. The Extraction Licence was conditional upon the operation and continuation of the "Rural Lease" (see immediately below). 21. On 14 December 2005, CGPL granted Collins a lease over the Land from 14 December 2005 until 1 December 2010 (Rural Lease). The Rural Lease was conditional upon the operation of the Extraction Licence. The Permitted Use of the Land under the Rural Lease was for blending and composting activities and grazing of cattle and other stock. The Rent payable under the Rural Lease was an amount equal to the Council Rates and Land Tax levied on the Land during the term of the lease. Based on the relevant amounts, the Rent in the Tax Years was approximately $302,243 (2006), $321,115 (2007) and $349,887 (2008). 22. On 17 March 2006, the New South Wales Department of Natural Resources (DNR) granted Collins' request for a renewal of its permit to undertake sand and soil extraction on the Land. The permit, which permitted Collins to extract a maximum of 241,933 cubic metres of sand and soil from the Land, expired on 2 March 2007. The permit required Collins to progressively rehabilitate the Land, including regrassing the affected land with millet, ryecorn, barley, oats and rye. 23. On 18 April 2006, The Environmental Protection Authority (EPA) granted Collins a licence to carry out composting and related reprocessing (5000 - 50000 tonnes received), crushing, grinding or separating works (100,000 - 500,000 processed and extractive industries (100,000 - 500,000 tonnes obtained) on the Land and the lots comprising Galvin's Farm. 24. In or around late 2006, Collins and the Applicants executed a Deed of Novation which extended the term of the Extraction Licence until 31 December 2008 (Deed). 25. On 5 December 2006, Camden Council granted Collins a two year extension for the operation of its green waste composting and material blending facility on the land. 26. During the Tax Years, Collins' annual sales of sand, soil and composted materials from the Land (for the financial years ended 30 June) were as follows: 2005 - 126,127 tonnes generating revenues of $2,362,607; 2006 - 214,656 tonnes generating revenues of $3,543, 211; 2007 - 269,442 tonnes generating revenues of $4,906,293; and 2008 - 335,753 tonnes generating revenues of $6,428,485." 22 I should mention that the parties, with their legal teams, and I had an opportunity to inspect the Land on 25 March 2009, which has greatly assisted the Tribunal and, I think, the respondent to have a better understanding of the uses of the Land. In particular, Mr Rider in his written submissions prepared without a proper inspection of the Land had some misunderstanding of the activities on the Land. At the time of the inspection, some cattle were seen in a fenced paddock, there were composting operations on an area of the Land and there was physical evidence of rehabilitation of the area previously used by Collins for sand and soil extraction. Relevant Legislative Provision 23 In the Tax Years subject of this application, the Act relevantly provided: "10AA Exemption for land used for primary production (1) Land that is rural land is exempt from taxation if it is land used for primary production. (2) Land that is not rural land is exempt from taxation if it is land used for primary production and that use of the land: (a) has a significant and substantial commercial purpose or character, and (b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). (3) For the purposes of this section, Land used for primary production means land the dominant use of which is for: (a) cultivation, for the purpose of selling the produce of the cultivation, or (b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or (c) commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or (d) the keeping of bees, for the purpose of selling their honey, or (e) a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public, or (f) the propagation for sale of mushrooms, orchids or flowers. (4) For the purposes of this section, land is rural land if: (a) the land is zoned "rural residential" or "non-urban" under a planning instrument, or (b) the land is not within a zone under a planning instrument but the Chief Commissioner is satisfied that the land is rural land." Discussion and Reasons 24 The essential issue in dispute was whether the Land was exempt from land tax in the Tax Years under s 10AA of the Act. The relevant provisions of 10AA that need to be considered in this matter are: "10AA Exemption for land used for primary production … (2) Land is not rural land is exempt from taxation if it is land used for primary production and that use of the land : (a) has a significant and substantial commercial purpose or character and (b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). (3) For the purposes of this section land used for primary production means land the dominant use of which is for: … (b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or …" (emphasis added) 25 Section 10AA has not been judicially considered nor has the respondent issued any guidelines as to how the provisions should operate. The key terms in the provisions as highlighted above are not defined and have their ordinary meaning. 26 I think the operation of the relevant provisions of s 10AA to the facts in this matter is best understood by considering in relation to the Land Tax Years under review three fairly independent questions, which are as follows: 1. Whether the dominant use of the Land was for the maintenance of cattle for the purpose of selling them or their natural increase or bodily produce? 2. Whether the use of the Land for the cattle operations had a significant and substantial commercial purpose or character? 3. Whether Collins was engaged in the cattle operations for the purpose of profit on a continuous or repetitive basis (whether or not a profit was actually made)? 27 I shall deal individually with these three questions taking into account the relevant submissions made by counsel for the applicants and for the respondent. Question 1 - Dominant Use 28 This question arises from the requirement in s 10AA(3) that land used for primary production means land the dominant use of which is for the maintenance of cattle, for the purpose of selling them or their natural increase or bodily produce. 29 In relation to the expression "dominant use", Mr O'Brien, counsel for the applicants examined how this expression had been construed by the courts when considering a similar test contained in sections 516 to 518 in the Local Government Act 1993 as follows: "5. In William Lionel Cleeve McKenzie v Raandwick City Council [1996] NSWLEC 42 (26 February 1996) the court stated that the expression "dominant use": … must refer to the main or principal purpose for which land is used. If there is one use of land, that use will of course be dominant use; if there are two or more uses, an inquiry needs to be made as to which of those uses is the main or principal use. 6. The issue in McKenzie's case was whether the principal use of premises was for residential or business purposes. The premises consisted of a house in which the applicant lived with his wife and family, and a surgery constructed at the front of the house that was opened for certain limited hours during the week. The court found that the dominant use of the premises was for residential accommodation: … that being the main or principal use of the premises in terms of space occupied, time spent in occupation and layout. 7. In Jakd Pty Limited v Randwick City Council [1996] NSWLEC 97 (28 March 1996) the court had to consider whether the dominant use of a building was for business or residential. Two businesses occupied the ground floor, employed 13 persons and had turnover of between $600,000 and $800,000. The upper floor was used as a residence. The business occupied 454 sq. metres and the residence about 91 sq. metres. The businesses were only open during the working week but the residence was occupied by two elderly persons who spent all their time at the residence. 8. The council argued that the dominant use was the industrial/commercial use by virtue of its nature, scale and intensity in comparison with the nature, scale and intensity of the separate residential use. 9. The court held in favour of the council finding that the residential use of the subject land was dominated by the industrial/commercial use of the land." 30 Counsel further placed some reliance on the decision in Greenville Pty Ltd v Commissioner of Land Tax (NSW) (1977) 7 ATR 278, in particular, the following observation made by Helsham J at p 280: "To claim an exemption under the Act the owner must be able to point to an activity being conducted on the land that will give the land the character of mainly being used for that activity, or that will enable a person to decide the matter to say that the land is, in substance and looked as a whole, being used for an activity that gives rise to the exemption." 31 Mr O'Brien then went on to submit that the test, supported by the above authorities, is the "actual physical use of the land" and that following facts supported his contention that the Land in the relevant Tax Years was used for the dominant purpose of primary production - "11. In the current context Woodgrand is being used for two purposes namely primary production and a compost business. The primary production is by way of cattle grazing and takes up 49 hectares (or 70% of the total area, including the lake). The compost business only occupies 3 hectares. The remaining land is either undergoing rehabilitation or is riparian land. 12. The evidence establishing that the dominant use of Woodgrand is for primary production includes the following: 1) the parents of Mr Collins had carried on, amongst other primary production activities, cattle grazing on their Cobbity property for many years until the father of Mr Collins decided to retire from that business (due to his age); 2) the company established a Cattle Plan which involved acquiring all of the cattle on the Cobbity property, and acquiring a bull, in order to build up its overall cattle breeding operations; 3) the carrying capacity of the various properties (and need to grow cattle feed) required the cattle to spread between two properties, Cobbity and Woodgrand; 4) the company employs a farmhand on a contract basis to manage the livestock; 5) work has been carried out on Woodgrand including fencing, land grading, sowing, cultivating and improving pastures which are all directed to accommodating the cattle breeding and grazing operations at Woodgrand. 32 On the basis of the decisions in Commissioner of Land Tax v Christine (1973) 2 NSWLR 526, Sonter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30 and Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 it was submitted by Mr Rider for the respondent that it was necessary to consider "both the physical and economic uses of the Land during the Tax Years". 33 Mr Rider further submitted "that both the Applicants and Collins used the Land in an economic sense" as follows: "79. … In terms of the Applicants, their economic use of the Land comprised: - passing their liability for Council Rates and Land Tax on the land to Collins under the Rural Lease, which relieved them of annual liabilities during the Tax years of $302,243 (2006), $321,115 (2007) and $349,887 (2008), respectively (Lease Use); and - holding the Land as an investment for the future "Spring Farm" residential development, with a land value alone in the Tax Years of $15,000,000 (2006 and 2007) to $17,556,667 (Investment Use). 80. In terms of Collins, its economic use of the Land derived from making annual sales of sand, soil and composted materials from the Land as follows: - 2005 - 126,127 tonnes generating revenues of $2,362,607; - 2006 - 214,656 tonnes generating revenues of $3,545,211; - 2007 - 269,442 tonnes generating revenues of $4,906,293; and - 2008 - 335,753 tonnes generating revenues of $6,428,485." 34 Mr Rider also submitted that to resolve, "what the dominant use of the Land was for the relevant period during the Tax Years" it was "necessary to consider and compare the nature, scale and intensity of the various uses of the Land in both physical and economic sense in order to determine its dominant use". In his written submissions, he set out the following comparison of the uses: "90. During the Tax Years, the Land was used for the Materials Use, the lease use, the Investment Use and … the Cattle Use. On the evidence, the nature, scale and intensity of the Investment Use substantially outweighed the other uses of the Land due to the substantial value of the Land and the extensive processes involved in rezoning the Land to "residential". 91. Of the remaining uses, the Materials Use substantially outweighed the other uses of the Land, particularly the claimed Cattle Use, because it involved: - extensive approvals, permits and licences, constant environmental monitoring and extensive rehabilitation of the Land, while the claimed Cattle Use did not involve any of these things, but merely some fencing; - constant truck movements (6) days per week over the Land carrying from 126,127 to 335,753 tonnes of materials annually, which would have affected the ability of the cattle to graze and any claimed Cattle Use; - annual revenues from $2,362,607 to $6,428.485, while the claimed Cattle Use only generated revenues from $8,476 to $23,758 (most of which appear to be attributable to the Cobbitty property); and - the employment of three (3) full time employees and a number of contractors, while the claimed Cattle Use employed only one (1) (Mr Nicholas Wilson)." 35 In response to the respondent's submissions, Mr O'Brien for the applicants submitted: "16. "Material Use" does not arise on the facts. The other two "uses" are misconceived in the context of the exemption provided by section 10AA. The provision is not concerned with "intangible" use but actual physical use of the land. "Lease Use" is not directed to physical use, and "Investment Use" is dealing with future use. 17. In brief, the only competing activity taking place at Woodgrand is composting. The composting activities being carried on by Collins at Woodgrand involve the sorting and fermentation of garden clippings and tree toppings, and blending and "fermentation" of those components into an end product. 18. This activity is primarily sedimentary with "fermentation" taking place by leaving the materials in piles for lengthy periods. The area occupied by the compost activities only covers 2-3 hectares of a 70 hectare site. Equipment is only used on a part time basis to stack the vegetation into piles ie., front-end loader and trommell screen. The limited machinery, and persons who operate the machinery, otherwise spend their time doing turf farming at Elderslie and soil and sand extraction at the Macarthur Road Property. 19. The nature, scale and intensity of use of the land is such that the dominant purpose is cattle breeding/grazing." 36 The authorities cited by Mr O'Brien to support his proposition that the inquiry to determine the "dominant use of the Land" must necessarily be confined to the "actual physical use of the land" were decisions of the Land and Environment Court of New South Wales. The provision in issue in both cases was s 516 of the Local Government Act 1993 which reads as follows: "516. (1) Land is to be categorised as "residential" if it is a parcel of rateable land valued as one assessment and: (a) its dominant use is for residential accommodation (otherwise than as a hotel, motel, guest-house, backpacker hostel or nursing home or any other form of residential accommodation (not being a boarding house or a lodging house) prescribed by the regulations); …" 37 In both cases, the only issue was whether the dominant use of the premises was for residential accommodation. In McKenzie, Pearlman J rejected the submission by counsel for the applicant that "for one use to be 'dominant use' of a parcel of land, it must dominate any other uses of that land: that is, it must be the case that all other uses of that land are subservient, subordinate or ancillary to that one use" and that it "would not suffice merely for that use to be the main use of the land". Instead, his Honour adopted what he described as the alternative meaning of "dominant" as "main" or "principal" which he said would avoid absurdity and injustice. His Honour went on to say: "Accordingly, the term "dominant use" in s 516 must refer to the main or principal purpose for which land is used. If there is one use of land that use will of course be dominant use; if there are two or more uses, an inquiry needs to be made as which of those uses is the main or principal use." 38 In McKenzie, Pearlman J after "taking into account all the facts" concluded that the dominant use of the premises was for residential accommodation. In Jakd Pty Limited, Bignold J used the same test suggested by Pearlman J and accepted the respondent's submission that the "dominant use" was industrial/commercial use by virtue of its nature, scale and intensity in comparison with the nature, scale and intensity of the separate residential use. In particular, reliance was placed by the respondent on the far greater floor space available to and used by the industrial/commercial uses and the substantial scale of the two businesses including the number of persons employed and their annual turnover. 39 In both McKenzie and Jakd Pty Ltd in reaching the use conclusion, the court conducted a fairly wide inquiry. 40 An approach similar to that adopted in McKenzie and Jakd Pty Limited was applied by Rath J when considering the meaning of the word "primarily" used in the expression "land used primarily for" in Sonter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30 at p 35: " … the land is plainly used in a number of ways and all the uses are substantial. The word "primarily", as applied in the case, means that those uses are to be weighed and evaluated. There is no particular touchstone that can be used; all circumstances bearing on the degree, extent and intensity of the use as land uses are to be considered. The question is one of fact and degree, and one to be approached on a broad, commonsense basis." 41 I think there is sufficient judicial authority to take a similar approach in this matter. The inquiry needs to be far ranging and should take into account not only the area of land used but all relevant facts including the intensity of the use and the financial profit generated by the use. Considering merely the area used by a particular activity in isolation of all other factors associated with the activity would result in "absurd or unjust" outcomes. For example, if on a very large property of some 300 hectares, there is a nuclear power plant situated on merely 100 hectares of the land and the rest is used for grazing 50 cows, on the "area used" test, the cattle use would be dominant. That would be an absurd outcome. 42 In this matter, it is therefore necessary, as submitted by Mr Rider, "to consider and compare the nature, scale and intensity of the various uses of the Land in both a physical and economic sense in order to determine its dominant use". 43 There was some disagreement as to the uses of the Land. Mr O'Brien submission was that the only competing activity taking place on the Land was the "composting activities being carried on by Collins on Woodgrand". Mr Rider's submission was that the Land in the Tax Years was used by the applicants for the "Lease Use", which effectively made Collins liable to Council Rates and Land Tax, and the "Investment Use", which was the future residential development of the Land. In the case of Collins, there was the Materials Use, which was the composting use and the Cattle Use. As mentioned earlier, Mr Rider's written submissions were prepared prior to the inspection of the Land and in his written submissions "Materials Use" also included soil and sand extraction activities. These activities, on the evidence of Mr Collins, had ceased in December 2005 but Collins had to renew the leases as they had a statutory requirement to rehabilitate the land previously used for soil and sand extraction. 44 I need to first consider whether the "use" has to be direct and physical. There is authority, which supports the view that "use" unlike "occupation" can be indirect. This question was considered by the High Court in Ryde Municipal Council v Macquarie University (1978) 139 CLR 633. In that case, the High Court had to consider whether part of land belonging to the University but leased from the University for commercial and shopping facilities was exempt from rating under the Local Government Act 1919 (NSW). The High Court held that the land devoted to commercial and shopping facilities was used by the University "solely for the purposes thereof" within the provisions of the exemption. The principal judgment was handed down by Gibbs ACJ, as then was, first made the observation that "used" is "a word of wide import, and its meaning in any particular case depends to a great extent on the context in which it is employed" and that "used" is not synonymous with "occupied". His Honour went on to make the further observation that: "A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease. That is almost beyond argument when the owner's purpose is to acquire income. … "Where use, and not occupation, is in question, I can see no reason to disregard the indirect use… In my opinion, therefore, land may be "used" by a university, in the ordinary and natural meaning of that word, if the university grants a lease of the for the purposes of the university." 45 On the basis of the these observations, I think the respondent was entitled to take the Lease Use into consideration in determining the dominant use of the Land. As to whether he was also entitled to take into account what was described by Mr Rider as the "Investment Use", it raises a different and independent issue. I do not think the observations made in Ryde Municipal Council v Macquarie University go far enough to extend to what was described by Mr O'Brien as the "intangible and future" use. I will accordingly disregard the Investment Use in this matter. There were thus, in the relevant Tax Years, three direct uses of the Land. Part of it was used for rehabilitation, some 2 to 3 hectares for composting and a paddock for the cattle grazing activities. 46 It is important to note that Mr Collins' evidence was, and the inspection suggested the same, that the cattle were not allowed to roam over the rest of the property but that, at any particular time, they were in a single fenced paddock and that the land had a few fenced paddocks. No evidence was given as to the size of each paddock but the estimate of the paddock that was used at the time of the inspection would have been no more than 5 hectares. The fourth use was the indirect use described by the respondent as the "Lease Use". 47 When an inquiry is undertaken of the uses, it becomes quite clear that the Cattle Use was not the main use in comparison to the Lease and Materials Uses of the Land in the Tax Years. I do not need to repeat the analysis made by Mr Rider for the respondent but merely say that I agree that, when the economic factors are taken into account, the Cattle Use was a fairly minor use. Collins could not have maintained the lease of the Land purely on the Cattle Use. The Cattle Plan was not prepared by an expert on cattle grazing and breeding. It did not take into account the real expenditures that had to be borne by Collins to keep the lease, which included the council rates and land tax payments and all other outgoings. Collins only held the Land during the Tax Years on the basis of their fairly profitable composting business. The rehabilitation was undertaken because Collins was obliged to do so under the original lease to extract sand and soil. 48 Mr O'Brien, in his submissions, had contended that the "primary production is by way of cattle grazing and takes up 49 hectares (or 70% of the total area, including the lake)" and that the "compost business only occupies 3 hectares". But, as set out in the Cattle Business Plan dated 1 April 2004, the land suitable for cattle grazing had to be "subdivided into a number of large paddocks" and, according to Mr Collins' own evidence, at any particular time, only one paddock was used. No evidence was produced to indicate the size of each paddock but the paddock used at the time of the inspection was no more than 4 or 5 hectares. In relation to the actual use of the Land not all the 70% of the Land was used for cattle grazing as submitted by Mr O'Brien. 49 In my opinion, Cattle Use was not the dominant use of the Land in the relevant Tax Years. This matter can be disposed on the basis of that conclusion. However, I will deal with the other two questions as well. Question 2: Significant and Substantial Commercial Purpose 50 The second question deals with the requirement under s 10AA(2)(a) that the use of the land has to have a significant and substantial commercial purpose or character. 51 Mr O'Brien in relation to the second requirement, "significant and substantial commercial purposes", submitted that it was "modelled" on the following comments made by Mason J, when considering the meaning of the expression "carrying on the business of grazing", in Hope v Bathurst City Council (1980) 144 CLR 1 at pages 8-9: "… denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is activities engaged in for the purpose of profit on a continuous and repetitive basis." 52 Mr O'Brien further submitted that - "17. The requirement that the use have a significant and substantial commercial purpose or character is probably intended to emphasis that the business has to have both size and substance. It is likely that this additional requirement has been included so as to exclude those small part-time activities that fall with the "grey area" between a hobby and carrying on a business. In other words there are some income tax cases that have held that an enterprise, although carried on both part-time and in a minor way, constituted a business (particularly where there was a profit motive, albeit small); see, for example, FCT v Thomas 72 ATC 4094. 18. The provision requires a "substantial commercial purpose" and "purpose of profit" but does not require that a profit be actually made. This seems to recognize that in primary production it may take some time before the undertaking commences to make any profit; see Shanahan & Anor v Chief Commissioner of Land Tax 96 ATC 4320 at 4323. It also recognizes that despite the best efforts of a person, that person's lack of skill or weather conditions might result in a person not making any profit from the business." 53 Based on the ordinary meanings of the words found in the expression and having regard to the observations made in Thomas v Commissioner of Taxation (1972) 46 ALJR 397, Hope v Bathurst City Council [1979] 2 NSWLR 471, Tillmanns Butcheries Pty Limited v Australian Meat Industry (1979) 42 FLR 331 and Shanahan & Anor v Chief Commissioner of Land Tax (NSW) 96 ATC 4320 Mr Rider submitted that - "… the use of the land for the relevant primary production activity will have 'significant and substantial commercial purpose or character' if the nature, scale and intensity of the activities on the land are of such importance and size that they actually, or are intended to, realise a profit. That is, only real, genuine, serious and weighty business operations as opposed to recreational, hobby or 'nominal, token, illusory, insubstantial or ephemeral activities will qualify for exemption. Also, agistment activities which are carried on in an attempt to attract the PPL exemption would not qualify for exemption." 54 In relation to the facts, it was submitted that : "…the evidence shows that the claimed Cattle Use of the Land did not comprise a real, genuine, serious or weighty business operation. Rather, it would appear that Collins claimed cattle were grazing on the Land in an attempt to attract PPL exemption, thereby saving Collins up to $281,000 annually in rent under the Rural Lease (such Rent comprising, in part, the land tax payable on the Land) while it carried on the profitable Materials Use of the Land." 55 These submissions were made in writing prior to the inspection of the property and have to be read subject to the acceptance by the respondent that there was real Cattle Use on the Land. 56 The difficulty that the Tribunal had with this issue was that the cattle operations were not entirely confined to the Land. The substantial activities relating to the cattle were on the evidence of Mr Collins on the Cobbity Property. In his statement dated 4 November 2008 he stated as follows: "10. Cattle are regularly transferred between Cobbity Property and Woodgrand. The reason for this is to maximise the Collins' herd size capacity. Breeding activities mostly occur at Cobbity as does cropping of lucerne, oats and sorghum used to feed cattle at both the Cobbity Property and Woodgrand, Woodgrand is used primarily for fattening of steers and young cattle between the ages of 6 months and 19 months. The Cobbity Property is more suitable than Woodgrand for cropping. Woodgrand has been used to date for grazing, including on areas sown by Collins with rye and other grasses, and a small amount of oats cropping adjacent to the dam which remains a potential use particularly given the dam at Woodgrand. The dam is also used as a source of water for the cattle and some irrigation." 57 The Cattle Plan was also in relation to the cattle activities on both the Cobbity Property and the Land. It was not clear what profits were expected from the cattle operations on the Land. Cattle operations on the Land only commenced when the sand and soil extraction work ceased on the Land in 2005. Without the profits from their turf, sand and soil extraction and composting businesses, the cattle operations could not have been continued. There were losses in the relevant Tax Years and the cattle operations, viewed independently from Collins' other business activities, were certainly on a small scale and against the leasing costs of the Land and the losses incurred in the operations they could hardly be described as "significant and substantial". Question 3: Purpose of Profit on a Continuous or Repetitive Basis 58 This question is in relation to the requirement that Collins were engaged in the cattle operations on the Land for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). 59 The applicants' case on this issue was that: "19. In the present context it has been established that the land has been used for substantial commercial purpose of making profit. It was projected in the business plan that a profit would be forthcoming. Although no profit is yet forthcoming on the project it is clear that significant sums of capital expenditure have been expended in developing Woodgrand for cattle grazing (ie., fences). Whether profits are made in the agricultural industry is always variable being highly dependent on weather and prevailing market conditions. There can be no suggestion on the facts that the activities being carried on at Woodgrand does not have a significant commercial purpose. This is particularly so in the current context where characterizing the activities being carried on regard has to be had to the scope of activities being carried on both at Woodgrand and the Cobbity property." 60 On behalf of the respondent, Mr Rider submitted that Collins were not in the relevant Tax Years engaged in cattle activities "for the purpose of profit on a continuous or repetitive basis" on the following grounds: "102. The Applicants have put forward a 'Cattle Business Plan' in support of their case that the claimed Cattle Use of the Land was engaged in for the purpose of profit. However, this plan related to both Cobbitty and the Land. Further, the majority of the cattle and infrastructure appear to have been on the Cobbitty property during the Tax Years as evidenced by Collins' Cattle Diaries, while the Land required extensive fencing (which could only have been temporary, considering the Materials use and the proposed future use as part of the Spring Farm residential development) and only carried small numbers of cattle. On that basis, the plan does not support the Applicants' case that the claimed Cattle Use on the Land (as opposed to Cobbitty) was engaged in for the purpose of profit or was the dominant use of the Land. 103. Further, as set out above, the nominal assets and income, the substantial rent liability for the Land and ever increasing losses of Collins' cattle operations indicate that the claimed Cattle Use of the Land was not engaged in for the purpose of profit. Rather, it would appear that Collins claimed cattle were grazing on the Land in an attempt to attract the exemption under the Act for land used for primary production." 61 The Cattle Business Plan dated 1 April 2004 recognised that the Land, at that time. did not have yards and fences and would require "capital expenditure to ensure the property would be suitable for cattle raising". It was also acknowledged that the Land "could be easily subdivided into a number of large paddocks that would suit grazing and cropping". The Plan projected trading profits from the second year to the fifth year. The projected profits did not take into account the large ongoing revenue expenditures including annual Council Rates and Land Tax liabilities, which have been highlighted by the respondent. Without taking these expenditures into account, Collins in any case made losses of $26,508 in 2006, $59,172 in 2007 and $96,703 in 2008. If these other expenditures had been properly taken into account, the losses would have been much higher in each year. 62 By 2008, it was quite obvious to Collins that the 2004 Cattle Business Plan was not working but Collins have not taken any action to ensure that their cattle operations would produce any profits in the future. The only conclusion that can be reasonably reached is that Collins was involved in the cattle operations on a small scale and without regard to earning any profit from the operations including in the Tax Years. But that is not to say that Collins was not operating an overall profitable business in the Tax Years under review. The sale of soil, sand, turf and compost generated large profits in each Tax Year. It is also interesting to note, highlighted by the respondent in his objection report (Exhibit "R1"), that on Collins' website there is no mention of any cattle breeding operations being undertaken by Collins. Conclusion 63 Under s 100(3) of the Taxation Administration Act 1996, the onus was on the applicants to prove their case. The applicants were not able to establish that the dominant use of the Land in the Tax Years involved Collins' cattle operations. In addition, Collins have not been able to establish that the use of the Land for their cattle operations had a significant and substantial purpose or character and that they were engaged in the cattle operations for the purpose of profit on a continuous basis. The applicants were, therefore, liable to land tax in the relevant Tax Years. Order The respondent's decision to disallow the applicants' objection to the notice of assessment for the 2006 land tax year dated 24 October 2006 and the respondent's decision to disallow the applicants' objection to the notice of assessment for 2007 and 2008 land tax years date 14 January 2008 are affirmed.

Cornish Group Pty Limited & Anor v Chief Commissioner of State Revenue

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