Craig v Chief Commissioner of State Revenue

The jurisdiction of the Tribunal

1. The applicants' right to seek external review of the respondent's assessment decisions arose following the respondent's determination to reject their objection to the Assessments: see TA Act, ss 86, 96(1)(a) and 101.
2. The role of the Tribunal is to determine the correct and preferable decision having regard to the material before it, including any relevant factual material and any applicable law: Administrative Decisions Review Act 1997, s 63(1).

Relevant legislation

1. Land tax is levied under s 7 of the LTM Act. That section provides: "7 Land tax on taxable value of land Land tax at such rates as may be fixed by any Act is to be levied and paid on the taxable value of all land situated in New South Wales which is owned by taxpayers (other than land which is exempt from taxation under this Act)." (italics added)
2. Section 8 provides that land tax is to be charged on land owned at midnight on 31 December immediately preceding the year for which it is levied. A "year" is defined in that section to mean the period of 12 months commencing on 1 January.
3. Section 9(4) of the LTM Act provides that the "land value of land", in relation to a "land tax year" is the value of the land entered in the Register of Land Values as at 1 July in the previous year. The word "Register" is defined in s 3(1) of the LTM Act to mean "the Register of Land Values kept under section 14CC of the Valuation of Land Act 1916."
4. In this case, the taxable value of the applicants' Land is $2.9million for each of the relevant land tax years
5. As set out above, the exemption from taxation for land used for primary production is contained in s 10AA of the LTM Act, as follows: 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) …, 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) …
6. I have dealt with the relevant legal principles applicable to s 10AA below.

Material relied on by the parties

1. The applicants relied on the following material at the hearing of their application: 1. three statements of the applicant, John Craig, dated 7 May 2018, 4 July 2018 and 20 August 2018; 2. three affidavits of Peter Edward Schuster, a senior consultant of Schuster Consulting Group Pty Ltd, affirmed on 23 May 2018, 26 June 2018 and 22 August 2018. Mr Schuster gave expert evidence on behalf of the applicants; 3. an affidavit of Greg Anderson, a licensed stock and station agent, affirmed on 20 August 2018; 4. a statement of David King, dated 22 May 2018. Mr King provides labour and farming advice on cattle operations and has provided labour and advice to Mr Craig on the cattle operation on the Land; 5. an affidavit of David Lethbridge, chartered accountant, affirmed on 24 May 2018;
2. The respondent relied on the following material at the hearing: 1. the tax returns of John Craig; 2. a bundle of s 58 documents; 3. an affidavit of Richard Victor Ivey, forensic accountant and agricultural consultant, affirmed on 6 August 2018; 4. an extract from NSW Property relating to the Land and values, as determined by the NSW Valuer General between 1999 and 2017; and 5. a Google map of the Land as at 17 May 2018.
3. At the hearing Mr Craig, Mr King, Mr Anderson, Mr Schuster, Mr Leathbridge and Mr Ivy gave oral evidence and were cross-examined. I have dealt with their evidence below.
4. Written submission were also filed and served by the applicants and the respondent.

The Land and its use

1. In his statement, the applicant, John Craig, explained that the Land was originally purchased and farmed, in partnership, by his father and his father's. The Land was known as 'Craigs' Hill Farm' or 'Mandelsons', which was the name of the farm when his father and uncle purchased the Land. He said his family homestead was on surrounding land and that he lived there for 15 years of his life.
2. His uncle and father died in the mid 1980s. His mother inherited his father's 50% share in the land and the children of his uncle inherited his 50% share. One year later, the applicants' mother purchased the 50% that was inherited by his uncle's children.
3. The applicant said that he has managed and controlled the farm since his father died. In this regard, he said he has 'run the business in the same manner throughout' and has 'adapted it where necessary as formal requirements have changed over the years including the requirement to record all cattle movements'.
4. In 2012, the mother of the applicants died. The applicants, Mr Craig and his sister, Jeannette Shuttle each inherited a 50% share in the Land.
5. Mr Craig explained that 3% of the Land is heavily timbered and 2% of the Land has been fenced off by the Council. Within that fenced area are water tanks and there is an access road to those tanks through part of the Land. The remainder of the Land is fenced into paddocks that are available for grazing cattle.
6. The Land is divided into several paddocks. There are three dams, sheds and cattle yards on the Land. Stored in the sheds and used in the farming operation are: 1. a Massey 35 Tractor; 2. a spray unit; 3. a fire trailer; 4. a N25 MIG Belarus Tractor with a front end loader which you can put hay forks or buckets; 5. a small chisel plough; 6. a post hole digger; 7. maddocks; 8. motor bike; 9. quad bike; 10. heavy duty rotary slasher; 11. farming and fencing tools; 12. 2 furrow malbourough plough; and 13. an air compressor.
7. For over 63 years, the Land has only been used for cattle grazing. Mr Craig said that the average carrying capacity of the Land is 35 head of cattle and he has always tried stock it, and use it, at its carrying capacity. He said he would not want to increase the number of cattle as there would be less pasture available to fatten the cows and it would also involve more labour in maintaining the extra cattle.
8. The applicants' father and uncle operated the cattle business under the name of 'Quarry Developments'. Mr Craig said that he and his sister have operated the business under the name of 'Quarry Developments Incorporation Graigs Hill' as a reminder of his father.
9. Mr Craig said that the general business plan for the grazing business on the Land is to minimise expenses while maximising profits by using the land available and its facilities. He said that in his opinion, the most effective way to achieve this was to have breeders and a bull, rather than a self-replacing herd. He said he also bought cattle throughout the year. He said that a bull is retained so long as it is performing and not injured and he is cost conscious when it comes to replacing a bull.
10. Mr Craig has operated the cattle business on the Land for many years. Ms Shuttle does not get involved in the day-to-day operation of the business. However, her husband assists with the paper work and accounts for the partnership between her and her brother, Mr Craig.
11. To assist with the business, in 2005, Mr Craig engaged David King, a 'very skilled farmer with many years of experience', of D K Woods Pty Ltd. Mr King is the director of D K Woods Pty Ltd, which is the trading name of his wool dealing business. Mr King explained that he has run and worked in the cattle operations and engaged in farm management for over 50 years. He assists in operation the Craigs Hill Farm with animal husbandry, maintenance and repair of fences, purchase and sale of cattle, transportation of livestock, pest and weed eradication, animal tagging, birthing and general oversight of the cattle. D K Woods Pty Ltd invoices the applicants for the services provided by Mr King.
12. Mr Craig and Mrs Shuttle are both retired and derive income from other sources.

Stock levels

1. The number of cattle on the Land, as at 30 June, during the relevant years ranged between 51 and 62 in number. Their type and age were as follows: Type of cattle June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 Cows 22 (5yrs) 27 (6yrs) 23 (7yrs) 24 (8yrs) 23 (9yrs) 16 aged 22 (4yrs) Bulls 1 (8yrs) 1 (9yrs) 1 (10yrs) 1 (2yrs) 1 (3yrs) 1 (4yrs) Calves 22 (6mths) 11 (6/8mths) 9 (6/8mths) 9 (6/8mths) 16 (4/6mths) 23 (6mths) Yearlings/ 6 (12/18mths) 8 (12/18mths) 7 (12/18 mths) Steers

1. The applicants' expert, Peter Edward Schuster, senior consultant of Schuster Consulting Group Pty Ltd, has expertise in livestock production and has been directly and extensively involved with Australian beef production and pasture utilisation in southern Australian landscapes. He has a Bachelor of Science in Wool and Pastoral Sciences, but has no formal qualifications in accounting.
2. In his report of 23 May 2018, Mr Schuster reported on the carrying capacity of the Land, the herd size and breed characteristic he would expect to see on the Land, the percentage of the beef industry that comprises cattle operations of a similar size to that of the applicants, the appropriate level of labour for a cattle operation of a similar size to that of the applicants and whether, in his opinion, the applicants' cattle operation was 'weighty, real and genuine'.
3. Based on the 'Notional Carrying Capacity' of the Local Land Services (LLS), Mr Schuster said that, in his opinion, the Land could 'notionally support 22 cows with followers and one bull'. This, he said was consistent with the number of cows managed during the relevant tax years, which averaged 26 cows and demonstrated that the Land had been used to capacity.
4. Mr Schuster said that a cattle operation the size and nature of the applicants did not typically require frequent and intensive activity. Minimising the cost of labour, he said was critical so as to achieve profitability.
5. Mr Schuster noted that, in the eyes of Mr Craig, the cattle operation is 'weighty', in that it carries significant meaning and importance from both a commercial and emotional perspective. Mr Schuster went on to say that, based on the documents he was provided and his visit to the Land, the applicants' cattle operation on the Land 'can be considered real and genuine and not just an aberration or construction designed in an ad hoc manner to achieve some other purpose'. In this regard, he pointed to the fact that the cattle operation had been ongoing for 63 years, there was efficient and effective use of labour, the stocking rate was reasonable for an operation seeking to minimise inputs and expenditure so as to maximise profit and well kept and extensive records had been maintained in relation to animal husbandry.
6. Mr Schuster summarised his findings as follows: 57) In summary, Craig's Hill cattle operation distinguishes itself from most other small cattle operations through its dedication to the profitable production of a high, low-cost beef cattle product in a fully costed manner. 58) Labour in particular is managed prudently to minimise costs while still attending to the animal husbandry and production requirements of the operation. 59) The operation conducted on the Land and the level of intensity with which it is undertaken is well suited to the productive capacity of the land. To this end, the herd size is noted to be relatively stable and consistent with the carrying capacity; that is to say, the Land is being fully and appropriately utilised. 60) Compliance with industry regulations and requirements appears to exceed that associated with many enterprises evidenced through thorough recordkeeping and the adoption of recent biosecurity requirements including signs fixed to the property gates. 61) The cattle operation represents a continuation of a long-standing business (exceeding 63 years) with demonstrable intent to continue the business into the future (the recent purchase of replacement cows) lending weight to the significance and substance of the operation.
7. In his supplementary report of 26 June 2018, Mr Schuster expanded on his qualifications and he addressed a number of additional questions asked of him.
8. During cross-examination at the hearing, Mr Schuster was asked questions about pasture improvement, investment in machinery, number of labour hours per year and what the industry considers to be a small operation.
9. In regard to pasture improvement, he said that he had seen some evidence of this when he inspected the Land, but without the soil being tested he could not say whether the Land would benefit from being fertilised. He said small cattle farmers would fertilise their land if it were cost effective. However, given the cost of fertiliser and the spreading charge, it is often not cost effective.
10. He acknowledged that the machinery was old but it appeared to be in good condition and workable. He said he did not consider the hours worked on the cattle operation by Mr King during the relevant years to be trivial, because the labour input has given rise to an efficient operation that has delivered an actual profit. He said, this is what sets the applicants' cattle operation apart from other small operations of a similar kind.
11. In his report of 31 July 2018, the respondent's expert, Richard Victor Ivey, a chartered accountant and the principal of Tremain Ivey Advisory, said that, in his opinion, the appropriate measures of 'significant and substantial commercial purpose of character' may include: • size of the cattle herd. • the number of cattle sale. • total income, • total profit, • labour requirements relative to a full-time workload, and • total profit compared to average annual incomes
12. Mr Ivey also inspected the Land on 26 July 2018. In his report, Mr Ivey said that the amount of resources put into the development and maintenance of the applicant's cattle operation appears to be similar on a per hectare basis to commercial cattle enterprises with the exception that the carrying capacity of the Land has not been optimised because of a lack of fertilising and pasture improvement. He said that the size of the herd and the total grazing capacity of the Land (size of the carrying capacity) were lower than what he would expect of a cattle operation which was seeking to achieve a reasonable rate of return. He said that he would expect a cattle operation to have a greater grazing capacity and a larger herd if it was seeking to achieve a reasonable rate of return. Alternatively, he said a cattle operation similar to that of the applicants could achieve a reasonable rate of return if it were operated on a property with a significant lower asset value.

Profitability of activities on the land

1. Mr Greg Anderson, the stock agent for Craig's Hill Farm operation for the last seven to eight years prepared a valuation of the stock at the farm as at 30 June for the years 2012 to 2017. In his affidavit, Mr Anderson explained that he took over the role of stock agent for the cattle operation from Jeff Connor of his firm and between them they had been the stock agent for the operation for over 20 years. Mr Anderson's valuation of retained stock, of the cattle operation, as at 30 June for the years 2012 to 2017 and income received from sale of cattle during each year is as follows: YEAR Value of Stock Retained Income from sales 30 June 2013 $37,660 $27,806.01 30 June 2014 $31,840 $13,169.71 30 June 2015 $39,970 $29,692.80 30 June 2016 $54,100 29,952.25 30 June 2017 $90,450 $40,672.28

1. David George Lethbridge, chartered accountant, included a profit and loss statement of the applicants' cattle operation for the relevant years in his report. Mr Lethbridge explained that this statement was based on the unaudited Financial Statements of the applicants' partnership, Mr Andersons' calculation of the fair value of the livestock as at 30 June of the relevant years and the direct farm expenses. In summary, Mr Lethbridge noted the income, expenses and total profit/loss for each year as follows: 2013 2014 2015 2016 2017 Income-cattle trading $31,916 $7,350 $23,443 $25,417 $32,083 Expenses $16,843 $14,838 $23,272 $16,349 $19,318 Net Profit/loss $15,073 ($7,488) $171 $9,068 $12,765

1. During cross-examination, Mr Lethbridge said he did not feel that he could comment on the level of profit. He did, however, acknowledge that there could be many farms with much less profit than that of the applicants' cattle operation. This he said was especially so during the drought conditions experienced during those years.
2. In his report, Mr Ivey noted that Mr Lethbridge's calculation of past profits were substantially higher than that set out in the tax returns of the partnership of the applicants in regard to their cattle business. While it was appropriate for Mr Lethbridge to have excluded legal costs and land tax from his calculations, Mr Ivey said it was not appropriate to exclude depreciation expenses. He also noted that Mr Lethbridge had recalculated the cost values of cattle trading as set out in the tax returns with market values as determined by Mr Anderson in his report. Mr Ivey went on to explain why he was of the opinion that the market values of Mr Anderson were not accurate. In the absence of detailed descriptions of each animal on hand at the end of each financial year, Mr Ivey assessed the cattle on hand as set out in the financial records by having regard to the changes in market prices as illustrated in the Eastern Young Cattle Indicator.
3. Based on his calculations of the value of cattle trading, Mr Ivey said that the partnership profit would be $14,139 over the 5 year period, which equated to an average of $2,828 per year. However, he did concede that during the financial years of 2015 to 2017 conditions were reasonably favourable and the applicants' cattle operation produced a profit of $8,555.
4. In response to the question as to what would be a reasonable rate of return of a cattle operation carried out on land with a taxable value of $2.9 million compared to other cattle operations, Mr Ivey said: The rate of return for agricultural businesses (profit divided by the value of assets employed) can be expressed into main ways - including capital appreciation or excluding capital appreciation. I had no information regarding changes in capital value of the applicants' property. Therefore, I have limited my analysis to the rate of return excluding capital appreciation.
5. Mr Ivey noted that a reasonable rate of return could be measured against other specialist beef cattle farms. In this regard he noted the average rate of return for specialist beef cattle farms in the NSW tablelands during the relevant years was 0.96% per annum. He went on to say that rates of return had generally been higher for larger cattle properties than smaller properties. In this regard the average rate of return for small specialist beef cattle farms within NSW of 100 to 200 cattle during the relevant years was 0.68% per annum. He explained that these properties had total farm asset values of a similar value to the tax value of the applicants' Land.
6. Based on his adjusted calculation of profit, the $2.9 million tax value of the land, the closing value of livestock and the value of other assets (i.e. $25,000), Mr Ivey calculated the annual rate of return of the applicants' cattle operation to be as follows: FY Rate of Return 2013 - 0.06% 2014 -0.33% 2015 0.21% 2016 0.53% 2017 0.12%

Is the 'dominant use' of the Land for primary production? - s 10AA(3)(b)

1. The word 'dominant' is not defined in the LTM Act. However, it is accepted that it should be given its ordinary meaning. In Leda Manorsted v Chief Commissioner of State Revenue [2010] NSWSC 867, at [69] to [70], Gzell J, made the following observation in regard to the word 'dominant' as it appears in the LTM Act: 69. Dominant in its ordinary meaning connotes ruling, prevailing, or most influential. The statute's reference to a dominant use presupposes that land may be used for more than one purpose and requires a determination of which use of the land is the main, chief or paramount use. 70. That is a question of fact and degree that may, in the end, be determined as an objective matter of impression having regard to the facts. 71. In Saville v Commissioner of Land Tax (1980) 12 ATR 7, Roden J was concerned with whether land was used primarily for the maintenance of animals thereon under a former provision in the Land Tax Management Act. The primary use test was not unlike the dominant use test in the present legislation. His Honour said at 10: "I am of the view that, for any use of the land to justify the statement that the land is used primarily for that purpose, it is necessary not only that that use prevail over any competing use but also that it be sufficiently substantial to prevail over the proposition that the land is primarily to be regarded as unused land."
2. In Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue (RD) [2012] NSWCATAP 25, at [45(i)], the Appeal Panel noted that the threshold determination that the land is 'used' for primary production, means more 'than some de minimis use of land' and that 'it should be shown that the land as a whole is used for primary production in the requisite sense, even if that occurs in combination with some non-primary production uses'.
3. In this case there is no dispute that the applicants' use of the Land was for their cattle business which had been operating for more than 63 years. While Mr Craig said he enjoyed going to the Land where his parents are buried, in my opinion this is not a use of the Land in any relevant sense. Hence, I am satisfied that the only use of the Land is for the purpose of the applicants' cattle business. On the basis of the evidence of Mr Craig and Mr King, this activity was undertaken over the majority of the Land and any expenditure on the Land during the relevant years was solely for the purpose of this activity.
4. While there is some evidence that with pasture improvement, the number of cattle grazing on the Land could have been increased during the relevant years, in my opinion, that evidence does not alter the dominant use of the Land during the relevant years. That is, I am satisfied that during the relevant years, 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.

Substantial commercial purpose or character for purpose of profit etc. - s 10AA(2)

1. As pointed out in the written submissions of the applicant and the respondent, the significant and substantial commercial purpose and character test in s 10AA(2) of the LTM Act has two limbs and both must be satisfied. The first limb being whether the use of the Land has a significant and substantial commercial purpose. The second limb is that the use of the Land is engaged in for the purpose of profit on a continuous or repetitive basis.
2. In Ashleigh Developments (supra), at [45(ii) and (iii)], the Appeal Panel made the following remarks in regard to the s 10AA(2) test once the threshold determination as to the dominant use of the land has been satisfied: (ii) If the threshold determination is favourable, there must be a level of use that 'has a significant and substantial commercial purpose or character' (factor (a)). This criterion eliminates hobby or token operations even though they may have passed the de minimis threshold to which we have referred in (i). The taxpayer then needs to show that the operation is run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability; cognisant of the elements of unpredictability of any business operation, especially primary production. This is a higher standard than the one that applies to rural land. . (iii) The next criterion, factor (b), takes the issues raised by factor (a) to a further level of exactitude. The activity must be engaged in for the purpose of profit 'on a continuous or repetitive basis (whether or not a profit is actually made)'. The reference to 'continuous' or 'repetitive' we see as connoting a business enterprise of a well structured, long term character, with administrative features (organisation, management, book keeping) which support the conclusion that it is set up with the aim of generating a profit year to year over a succession of years.
3. In Chief Commissioner of State Revenue v Brown Cavallo Pty Ltd [2017] NSWCATAP 189, at [30] to [37], the Appeal Panel summarised the legal principles applicable to the commercial purpose test in s 10AA(2) of the LTA Act as follows: 30 The commercial purpose test in s10AA(2) (LTMA) was discussed in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 at [77] - [91] and on appeal to the Court of Appeal [2013] NSWCA 408 at [48]-[60]. It was further elaborated in Vartuli v Chief Commissioner of State Revenue [2014] NSWSC 678 particularly at [108]-[119], and [129]; upheld on appeal in Vartuli v Chief Commissioner of State Revenue [2015] NSWCA 372. In these cases the Courts undertook significant analysis of the expression "significant and substantial" which imposed a more stringent test by inclusion of the words "and substantial": eg per Leeming JA in Maraya on appeal at [82]. 31 To summarise, in considering whether the use of the Land was within the commercial purpose test of s10AA(2) LTMA it is necessary to consider the evidence about the following factors: 32 The intensity of the operation being conducted, including the size and carrying capacity of the Land. 33 The herd number, and its quality. 34 The resources committed to the operation including the land, the man hours, plant and equipment etc. 35 The profitability or expectation of profit including the history of the operation, and reasons for any lack of profit. 36 The rate of return on capital value- which may or may not be useful. It was not regarded as useful in Vartuli [2014] NSWSC 678 at [88], [90] and [137]. Whether any profit contributed to the user's income in a "real and not trifling way" (Vartuli [2014] NSWSC 678 at [129]). It should be noted that the Court of Appeal in Vartuli at [92] - [94] made clear that this examination does not introduce "a 'novel' test focusing on the (enterprise's) other sources of income" but rather was a factor in the overall determination in whether the "commercial purpose or character… was significant and substantial"
4. While the applicable legal principles are not disputed it is necessary to briefly elaborate on these. In Maraya Holdings v Chief Commissioner of State Revenue [2013] NSWSC 23, at [77], Gzell J said that the words 'significant and substantial' are to be construed in their context as a whole phrase 'rather than by adding up linguistic elements to each word'. At, [90] and [91], his Honour said: 90 Not every business will satisfy the commerciality test. The test distinguishes activities amounting to a business that is carried on in a small way or as a sideline from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one. It will usually also exhibit some of such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence. 91 To determine whether Maraya's cattle operation had a significant and substantial commercial purpose or character, the court should consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources (whether of time, labour or expenditure) put into the development and maintenance of the cattle operation.
5. On appeal, the Court of Appeal upheld the findings of Gzell J and the abovementioned matters the court should consider in determining whether there was a significant and substantial commercial purpose or character: see Maraya Holdings v Chief Commissioner of State Revenue [2013] NSWCA 408, at [83] per Leeming JA.
6. In Vartuli v Commissioner of State Revenue [2014] NSWSC 678, at [129], White J held: 129 … [In] my view, having regard to the Court of Appeal's reasoning in Maraya, for the use of the land to have a significant and substantial commercial purpose or character, the use must have a character such that it generates, or can reasonably be expected to generate, profit that contributes in a real and not trifling way to the user's income, or a purpose of generating such profit.
7. At [138], his Honour held: 138 In this case I would not conclude that the use of the land lacked a significant and substantial commercial purpose or character because the level of profits did not provide a reasonable return when compared to the value of the land. Rather, I conclude that the use of the land lacked a significant and substantial commercial purpose or character because profits are not derived from the use of the land that make any real, as distinct from trifling, contribution to the income of the plaintiffs, …
8. On appeal, in Vartuli v Commissioner of State Revenue [2015] NSWCA 678, at [87], the Court of Appeal (per Gleeson JA, with Meagher JA and Ward JA agreeing) said: 87 Further, nothing in the reasons of either Gzell J or this Court in Maraya precludes consideration of the relative income contribution from the primary production use for the purpose of contextualising the significance and substantiality of any commercial purpose or character of the use of the land. The relative contribution to the income of the user is a relevant consideration when determining whether any commercial purpose or character of the use of the lands has a "relatively high degree of importance": Maraya (Gzell J) at [89].
9. At [152], the Court of Appeal said: 152 His Honour found that the lack of profitability meant that the Vartulis' commercial purpose in using the land and the commercial character of the use of the land could not be categorised as significant and substantial. That conclusion was, in my view, correct.
10. As I have noted below, the respondent relies on the decision in Vartuli in that the level of profits did not provide a reasonable return when compared with the value of the Land after it was re-zoned. The applicants contend that the decision in Vartuli is distinguishable from the circumstances in this case.

Applicants' submissions

1. In their written submissions, the applicants noted that for the purpose of making an ordinary rate (i.e. council rates), s 514 of the Local Government Act 1993 (NSW) (LG Act), requires each local council within the State of NSW to declare, for each parcel of rateable land in its area of responsibility, what category, as prescribed in that section, that parcel of land falls within. The prescribed categories include 'farmland' which is defined in s 515 of the LG Act in terms similar to that of s 10AA. In this case, the applicants noted that their Local Council had rated the Land on the basis of it being 'farmland', which they argued to be a factor the Tribunal should have regard to.
2. The applicants otherwise contend, on the basis of the evidence of Mr Schuster, that their cattle operation has a significant and substantial character or purpose because it: 1. was being conducted efficiently and utilising labour effectively; 2. distinguished itself from most other small operations through its dedication to the profitable production of a high-quality, low-cost beef cattle product in a fully costed manner new paragraph; 3. complied with industry regulations and requirements which exceeded that associated with many other enterprises; 4. is the continuation of a long standing business with a demonstrated intent to continue into the future; 5. is real and genuine and not just an aberration or construction designed in an ad hoc manner to achieve some other purpose; 6. is not trivial nor is it excessive; 7. has well-kept and extensive business records which speak to the genuine nature of the operation; 8. has a herd with a value of $90,450 which is not trifling in the context of beef production enterprises; 9. unlike most cattle operations, is capable of generating's efficient sufficient income two offset costs; and
3. The applicants contend that profits are not determinative of the statutory test in s 10AA(2)(a), they noted that in Vartuli in four out of the eight years the losses ranged from - $323 to - $5,777 and the profits in other years ranged from $96 to $2,863. In the present case, profits were $29,589 over the five-year period and the retained herd value was $90,450. This, it was contented, demonstrates a significant and substantial commercial cattle operation for its size and characteristics and one engaged in for continuous profit year after year.
4. The applicants also contended that this case is distinguishable from that in Maraya and Vartuli as the Court in those cases was not asked to consider the value of the herd, or the differing forms of accounting for determining 'profit'. In addition, there was no evidence before the Court in those cases that small and medium-sized beef operations relied on off-farm income to the effect that reliance on other income is normal in this particular industry.
5. The applicants contended that as the transactions entered into in regard to the operation of their business during its 63 years of operation were on a continuous and repetitive basis with a purpose of making profit and had a permanent character, this weighed in favour of a finding that the test in s 10AA(2)(b) was satisfied. That is, although the land size is small and the operation itself is small, it is run to maximum capacity and put to its best use as a cattle operation to maximise profits.

Respondent's submissions

1. The respondent, on the other hand, contends that, on the evidence, the activities of applicants on the Land were meagre or modest and were not significant and substantial. Instead, the evidence points to the Land being used for hobby or token cattle grazing activities.
2. In this regard, the respondent pointed to the small number of cattle, the meagre amount of activity that was undertaken in conducting the applicants' cattle grazing activities and the losses over five years. In summary, it was contended that the following were matters which pointed to the applicants' cattle operation not having a significant and substantial commercial purpose or character: 1. there was no pasture improvement save for average weed eradication costs of around $935 per year; 2. farm maintenance and checking costs were low (i.e. between $1685 and $2000 and $100 and $29 per annum); 3. the losses and profits were insignificant when compared to the value of the land which was more than its taxable value of 2.9 million dollars; 4. the average rate of return on the land over five years was a loss of 0.1836% of the value of the land which is well below that experienced for cattle farmers in New South Wales of a similar value where the average rate of return was 0.68 to 0.96%. In this regard when the value of Mr Craig services are included in the cost of the cattle operations conducted on the Land during the relevant years, those operations never produced a profit and always operated at a loss; and 5. the net profits or losses from the cattle operation on the Land did not make any real, as distinct from trifling, contribution to the income of the applicants.
3. The respondent contended that as the applicants derived no net income from the Land, it was difficult to accept that they held their Land for the purpose of profit on a continuous or repetitive basis. In summary the respondent contended that the lack of activity on the Land, lack of improvement on the pastures, lack of profit generated and relative value of the Land suggest that the activities on the Land should be considered token or insignificant and not substantial and significant.

A significant and substantial commercial purpose or character - s 10AA(2)

1. While the decisions of Ashley Development, Maraya and Vartuli provide guidance as to the relevant factors to be taken into account in determining whether a use of land for primary production has a significant and substantial purpose or character, ultimately it is a question of fact, whether a particular use of land has a significant and substantial commercial purpose or character.
2. I accept that the Land is categorised as 'farm land' for the purpose of assessing the Local Council rates on the property and that it is used as such. However, I do not consider that this is of any relevance to determining whether the applicants use of the Land has a significant and substantial commercial purpose or character under s 10AA(2)(a) of the LTM Act.
3. In this case, I am satisfied that the applicants have operated their cattle business on the Land in substantially the same manner it was operated during the time the business was owned by their mother. That is, I am satisfied that it is a genuine business that has been run efficiently and effectively for a number of years. However, on the evidence before me, I am not satisfied that the applicants' primary production use of the Land has a significant and substantial commercial purpose or character.
4. While the applicants cattle operation is genuine, as they readily acknowledge it is a small cattle operation where resources are limited to that which enable the operation to sustain itself from one year to another. That is, I accept it is more than a hobby farm as the respondent contends. However, as noted by Gzell J in Maraya, at [90], in my view, the operation when objectively assessed cannot be described as an operation that is of 'the more serious and weighty' kind. While there is no single factor which distinguishes the applicants' use of the Land from those that are more serious and weighty, in my view, when examined as a whole, it is the small size of the herd, the total carrying capacity of the Land, the limited resources/investment and low profit which distinguishes the applicants' operation from one that has a significant and substantial commercial purpose or character. At the same time it is these features which have enabled the applicants' mother and the applicants to continue to operate their small business for many years. However, with the change in the zoning of the Land, from rural to low density residential, their business needed to meet the 'commerciality' test in s 10AA(2) in order for the Land to be exempt from land tax.
5. As I have noted, in my view, the applicants have failed to meet the first limb of that test. Had the test applied while the Land was zoned rural, I would have made the same finding. That is, in this case, it has not been necessary for me to consider the change in value of the Land since it was re-zoned.

Engaged in for the purpose of profit on a continuous or repetitive basis - s 10AA(2)(b)

1. On the basis of my findings above, it is unnecessary for me to determine this issue. However, I agree that the applicants have operated their cattle business on the Land in a continuous and repetitive way. That is, their business has been well structured, long-term in character, with good record keeping and accounts and with the object of making a profit. However, as pointed out by the respondent any profit that was earned was minimal.

Conclusions

1. For the reasons set out above: 1. I am satisfied that the applicants have discharged their onus in establishing, on the balance of probabilities, that the dominant use of their Land is for the maintenance of cattle for the purpose of selling them or their natural increase or bodily produce; 2. However, I am not satisfied that the applicants have discharged their onus in establishing, on the balance of probabilities, that their use of their Land is exempt under s 10AA(2) of the LTM Act. That is, I am not satisfied that the applicant's have discharged their onus in satisfying the 'commerciality' test in that subsection.
2. Accordingly, I find, on the material before the Tribunal and the applicable law, that the decision of the respondent to issue the applicant with: 1. a re-assessment of land tax for the 2013 land tax year, together with an assessment for the 2014 to 2016 land tax years; and 2. an assessment of land tax for the 2017 land tax year is the correct and preferred decision and should be affirmed.

Orders

1. Hence, I order: 1. The decision of the respondent made on 28 October 2016, is affirmed. 2. The decision of the respondent, made on 17 January 2017, is affirmed.

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: 02 January 2019