This case involves an interesting and previously untested aspect of the exemption from land tax for land used for primary production where the issue is whether the dominant use of the land in question is for the propagation for sale of mushrooms (s.10AA(3)(f) Land Tax Management Act 1956 "LTMA"). The tax payer owns the subject land at Londonderry NSW and leases it to a related user, Beckhart Pty Ltd ("Beckhart") - a commercial mushroom grower- who uses it and two other separate parcels of land which the applicant seeks to link to primary production activities. The three parcels of land are quite a distance apart from each other.
Section 10AA LTMA provides in relevant part:
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.
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(3) For the purposes of this section, "land used for primary production" means land the dominant use of which is for:
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(f) the propagation for sale of mushrooms, orchids or flowers.
Both sides agree the subject land is rural land as defined.
The matter comes to the Tribunal following a disallowance of the taxpayer's objections to assessments for the 2011-2015 land tax years pursuant to s.96 of the Taxation Administration Act 1996 (TAA). On review the Tribunal has the powers in s.101 TAA.
The evidence (including some expert evidence) is in the form of statements and affidavits, some with annexures and exhibits, and the s. 58 documents, but no witnesses gave oral evidence.
On the first parcel of land at Vineyard there is a mushroom growing facility operated by Beckhart which produces mushrooms under the "Elf Mushrooms" trading name. There is land surrounding it grazed by cattle belonging to Beckhart.
The second parcel of land is at Ebenezer (about 18km from the Vineyard land) and is used by Beckhart to maintain cattle during calving, but mostly to consume mushroom by-product (stems cut off from mushroom caps and other damaged mushrooms) produced during the propagation of mushrooms at Vineyard. The mushroom waste product produced on the Vineyard land is delivered by trucks to the Ebenezer land three times per week and it is there consumed by the cattle. The necessity for moving the mushroom waste product is for hygienic reasons.
The third parcel of land (and the subject of this dispute) is located at Londonderry (about 15km from Vineyard and 24km from Ebenezer). The Londonderry land was used by Beckhart to rotate cattle from the Ebenezer and Vineyard parcels of land as part of good husbandry practices (for example to separate bulls from heifers and to wean calves).
The Londonderry land was also the subject of a development application (DA) lodged with the Penrith City Council for the development and construction of the new mushroom growing facility for Beckhart/Elf Mushrooms (which was the applicant for the DA). Council consent, subject to conditions, was obtained after a lengthy process.
The issue, in a nutshell, is whether the Londonderry land was being dominantly used in the 2011-2015 land tax years for the propagation of mushrooms for sale. The argument is put by the taxpayer in two ways: first, because the land is used as part of the process of mushroom propagation and disposal of resultant waste product.
Alternatively it is argued that the Londonderry land was being dominantly used for the propagation for sale of mushrooms since it had been committed to the development process for a new mushroom growing facility by an established mushroom grower.
The Londonderry land was purchased by the applicant in September 2004. The Londonderry land is 56 acres (22.26 hectares) in area, and is zoned Rural Small Holding under the Penrith Local Environment Plan. The land has fenced paddocks; at the rear of the land is a flora and fauna reservation of approximately 2-3 hectares, and there is a residential dwelling in a fenced area of about 600sqm off The Northern Road, Londonderry. The dwelling and fenced off area is leased to tenants. The residential dwelling is regarded as useful to provide security for the rest of the land.
The taxpayer leased the Londonderry land (except the residence) to Beckhart by a lease dated 7 November 2009 for a period of 5 years with provision for holding over, to be used for cattle grazing or other primary production use. Beckhart has used the land to maintain part of its cattle herd, other than on the flora and fauna reserve and on the residential use land.
Beckhart's mushroom growing business at Vineyard ("Elf Mushrooms") is the oldest mushroom growing facility in Australia and grows approximately 15% of the total mushroom production in NSW for sale to retailers. The Elf Mushroom business has a significant annual turnover and 130 employees.
Beckhart keeps its herd on the three different parcels of land. The applicant submitted that the sole purpose of maintaining the herd of cattle is to consume the large quantity of mushroom stems and other mushroom by-product which are produced at the Vineyard facility.
Approximately 54 tonnes of mushrooms are grown each week at the Vineyard facility, and approximately 15 tonnes of that is mushroom by-product. For disease control purposes it is necessary to remove the mushroom by-product. Expert evidence provided by Ms Judy Allan, in a report dated 29 September 2016 which was accepted by the Chief Commissioner without cross-examination, is that it is necessary to remove stems and other by-product at least 3km from the growing site, as waste product can become a breeding ground for flies which can infect the cultivated mushrooms.
As stated earlier the mushroom by-product is taken by truck from Vineyard to Ebenezer for consumption by the cattle on the Ebenezer land. The alternative method of disposal would presumably be to deliver it a local municipal tip or to some other party who could dispose of it, provided that the relevant site was at least 3km from Vineyard.
[3]
FIRST ARGUMENT
The taxpayer's submission is that the cattle are maintained on the three sites solely for the purpose of the disposal of mushroom by-product. However, mushroom by-product is not fed to the cattle grazing on the subject land at Londonderry.
The cattle are bred for natural increase and calved at Ebenezer. They are weaned either at Vineyard or at Londonderry and are rotated between the three parcels of land.
The Londonderry land is used for weaning cattle and also to separate heifers from bulls and to prevent overgrazing on the other lands. Cattle (predominately steers) are sold from time to time through auction at the sale yards at Camden, established by documents from the cattle selling agents which are in evidence and not challenged.
The evidence is that the Londonderry land was purchased due to its suitability for future development of a new mushroom growing facility. The new facility will require an investment of approximately $20 million.
The first approach to Penrith City Council for a major project declaration was made in November 2007 by Perram Partners, a firm of planning and environmental consultants. In September 2008 Penrith City Council permitted a major project application to be made and this was lodged in November 2008 by way of a concept plan and concurrent project application. In 2010 the project approvals were exhibited for consultation with stakeholders and government. In 2010 a bore was drilled on the land. Final approval of the project was obtained in January 2012. Various studies have been conducted by Beckhart during the 2011 calendar year. During 2012 and 2013 various design alterations were investigated and made. During 2013 and 2014 the construction and environmental management plan was developed, submitted and approved. During 2015 and 2016 various other studies and reports have been commissioned. In the land tax years 2011 to 2015 no significant physical works for the approved project were carried out on the subject land. In the period 2007 to the present Beckhart has incurred project expenditure of $630,578.00. It has also incurred holding costs in relation of the land which are not insignificant.
It is quite clear that the dominant use of the Vineyard land is for the propagation for sale of mushrooms and this is accepted by the Chief Commissioner.
In my view the exemption in s10AA(3)(f) LTMA does not apply in a restrictive fashion only to that part of the land physically used for and upon which are erected mushroom propagation facilities. Land used for associated activities such as staff parking and other amenities, administration, storage, loading docks, access roads and so on would be included (Chamwell Pty Ltd v Strathfield Council [207] NSWLEC 114). It also includes surrounding land upon which the cattle are grazed since that land is part of the Vineyard parcel which is being used for mushroom propagation business in the relevant sense.
In Parramatta City Council v Brickworks Ltd (1972) 128 CLR 1;[1972] HCA 21 it was held that land adjacent to that used for brickworks and a quarry was also used for those purposes so that it could extend its quarrying operations without consent, where it had been acquired for those purposes and devoted to them; even though it was not physically used as such at the relevant time as it was not physically possible to dig up the land all at once (per Gibbs J. at 22-23).
The word "propagation" is defined as "the action of causing a plant, animal, etc.to produce offspring or multiply by natural processes" (Oxford English Dictionary (online); meaning 1.a.). It appears to me that mushroom propagation is a process which involves not only the preparation of mushroom growing medium, the raising of mushrooms, but also the disposal of waste products. The mushroom eating cattle are akin to waste disposal "machines" and the land upon which they are situated while operating as such could be said to be used for mushroom propagation in the sense of being part of the process by which propagation occurs.
Thus it is tolerably clear that the Ebenezer land, which is principally used for the disposal of mushroom by-product by feeding it to cattle is also being used as part of the process for the propagation for sale of mushrooms.
The Chief Commissioner apparently accepts that the Ebenezer land is also exempt from land tax as land used for primary production, presumably because of its relationship to the propagation of mushrooms on the Vineyard land, but no estoppel operates against the Chief Commissioner so that the status of each parcel of land depends on its own facts.
It cannot be correct to say that because waste disposal land is deliberately and necessarily separate from the growing facility that the waste disposal land is not being used in the mushroom propagation process.
The more difficult question is- does the process of mushroom propagation go one step further to encompass the Londonderry land as being so connected to the process as to be dominantly used for the propagation of mushrooms for sale?
The other uses of the Londonderry land for a flora and fauna reserve and for residential purposes are comparatively minor to the use of the Londonderry land by the cattle which are rotated from the other two parcels of land.
As I said above the cattle can be seen as akin to "machines" used in the process of propagation of mushrooms in that they dispose in an economical way of the mushroom by-product.
It could be argued that the Londonderry land onto which these bovine "disposal machines" are rotated are like a shed or garage in which non-living machines would be stored when they are not immediately required for primary production activities.
However this pushes the analogy too far in my view. While I appreciate the demands of good animal husbandry requires the mushroom disposal cattle to be rotated to the Londonderry land, the connection between use of the Londonderry land and the process of mushroom propagation is too remote in my opinion, where the cattle are not even fed mushroom by-product on the Londonderry land.
However I do accept that the applicant has met its onus of proof that cattle use the Londonderry land for grazing purposes. Indeed this seems to be the main use of the Londonderry land, but the applicant puts its case on the basis that the sole or main purpose of maintaining the cattle is for mushroom waste disposal purposes. Although some cattle are sold from time to time the raising of cattle (or their offspring or bodily produce) for the purpose of sale is an incidental purpose of Beckhart.
[4]
SECOND ARGUMENT
The tax payer also submits that the activity involved in gaining the approvals necessary for the new mushroom growing facility on the Londonderry land constitutes a use of the land for the purpose of the propagation for sale of mushrooms, albeit in the future.
A distinction needs to be drawn between activities which are preparatory to a future use of land and activities which are part of an intended use of that land i.e. beyond the preparatory phase.
At paragraph 5.23 of the applicant's submissions reference is made to the case of Southern Estates Pty Ltd v F C of T [1967]117 CLR 481 at 488 where Barwick CJ states:
"Just as the taxpayer already engaged in primary production on part of his land is also so engaged when he sets about the improvement or the tilling of other parts of his land, so, in my opinion, a tax- payer, who is already engaged in primary production elsewhere and who acquires virgin land to bring it into primary production elsewhere as part of his existing business, is at least from the moment of his first expenditure in its improvement engaged in primary production upon the acquired land. That is to say, that although the activity bringing land to a state where primary production may begin is not itself primary production, it will be regarded as such for the purposes of s75 [ITAA 1936] when it is carried out by a tax payer already a primary producer."
Justice Windeyer said at page 494:
"Whether a person is engaged in primary production on land does not, I think, depend on whether any produce has actually been gathered from that land, or on how soon produce can be gathered from it. It depends, I think, on whether the activities in which the taxpayer is there engaged are for the purpose of obtaining produce from it. It is the character of the taxpayer's undertaking on the land which in my view brings s75 [ITAA 1936] into operation, not the stage which his undertaking has reached... A man could surely be engaged in primary production if he had sewn or planted his land, whether with wheat, grapes, bananas, fruit trees or pine trees - however distant the time of the harvest might be. And the day before sewing or planting he would be no less engaged in primary production than the day after. And if the land had not previously been ploughed or planted he would in my view still be engaged in primary production there if he were ploughing it to plant a crop for the first time".
Although the decision of the High Court in Southern Estates provides some general guidance, it was concerned with a different issue under different legislation. We are not engaged in a determination of whether a primary production business was being carried on, but rather with the dominant use of the land for a particular primary production purpose in the land tax years in question.
The taxpayer has submitted that Beckhart's activities in relation to the obtaining of development consents and associated studies and investigations amount to a use of the Londonderry land for the propagation of mushrooms for sale since this is the destination to which these activities are directed. This is put on the basis that Beckhart is in the business of mushroom propagation on the Vineyard land, and was seeking the development consents for a new, modern mushroom propagation facility to be built on the Londonderry land to continue its business.
The use of the land must be a present use. In this respect the appellant relies on the decisions in Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 and Educang Limited v Brisbane City Council [2002] QSC 374. On appeal in Leda Manorstead v Chief Commissioner of State Revenue [2011] NSWCA 366 His Honour, Allsop P, said that a use of land need not be a productive use to constitute a present use. But it did need to be an actual physical use, "not some notional or potential future or contemplated use" (at par [23]).
It was held in Leda Manorstead that the dominant use of the relevant land in the particular year was for commercial land development as the taxpayer had commenced major earthworks on the land preparatory to residential subdivision, pursuant to plans which it had been progressing with the relevant authorities over a number of prior years.
In Educang it was held that the relevant land was used for a school even though the school building was still under construction at the relevant date.
I regard those decisions as being of limited assistance here, on the basis that in both of those instances earthworks had commenced on the land (and in Educang construction of the school building had also begun). The two cases did not decide the question of the use of the land prior to the years in question, when the earth works/construction were in the planning stages.
The commencement of earth works in Leda Manorstead was held by His Honour Gzell J at first instance to manifest a definitive commitment to the residential sub-division which the tax payer had been planning and preparing for for a number of years (at par [61]).On appeal Allsop P. found it unnecessary to decide the validity of the 'definitive commitment' yardstick (at par.[35]).
The point at which it can be said that land is being used for development moves along a spectrum. It seems to be somewhat arbitrary to use the breaking of ground as the main indication of the commencement of the use of land for development but it is at least a bright line that is used in other contexts to mark commencement. The test could be rather more "fuzzy" than this, and depend on the facts and circumstances of each case. Fortunately that is not the issue requiring determination here.
I am conscious of the conclusion of His Honour Barrett AJA in CCSR v Metricon Qld Pty Ltd [2017]NSW CA 11 at [61] where he said:
"In summary, I am of the opinion that the concept of "use" relevant to s10AA as a whole (and s10AA(3) in particular) - a concept in which the preposition "for" plays a central role - is one of physical deployment of Isaacs J's "concrete physical mass" [footnote omitted] in pursuance of a particular purpose of obtaining present benefit or advantage from it, with deployment understood as including not only activity but also inactivity deliberately adopted as a means of obtaining such actual and present advantage from the land; and with purpose understood as objectively ascertained purpose. There is no requirement that immediate productive return be achieved, as long as some benefit or advantage accrues. In a s10AA(3) case, each "use" considered in the search for "dominant use" must be of a character I have described. Otherwise the necessary process of comparison cannot sensibly be undertaken...".
Barrett AJA went on to respectfully depart from the approach taken below where His Honour at first instance was prepared to accept that possible uses to be considered in the search for the dominant use of land were not necessarily confined to physical uses of the land.
There may be examples of the physical deployment of land through activity on it to obtain an actual, present advantage from the land without breaking ground. Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 9 could be one such case. There His Honour White J was determining the dominant use of land, and held in relation to the two of the land tax years in dispute that certain earthworks on what was called "Farmland" which were connected to residential or commercial development on adjacent land was a use of land. He also held the activities of consultants and surveyors on the land were a use of the land (I note in passing that those consulting and surveying activities included the digging of pits and strip trenches, plus flora and fauna assessment, and contamination and salinity testing and water sampling etc. (see paras [115]-[138]).
In this case, although there has been a lot of money and time invested in obtaining consents by Beckhart and in the results of studies and investigations, some of which required site visits and certain works to be performed on the land, (replacing old fences, removing fallen trees, draining a dam) no earthworks as such were conducted in the land tax years in dispute. Although the Londonderry land can be said to have been used by consultants and contractors in the sense discussed in Leppington Pastoral I am unable to conclude that the dominant use has been for the propagation of mushrooms for sale. The words of the exemption for mushroom farms are restrictive and it could be argued that physical acts involved in the process of the actual propagation of mushrooms are required for the exemption to apply.
To the objective observer, most of the land at Londonderry (excluding the small parts used residentially and as a reserve) was used for the grazing of cattle in the 2011-2015 years. The taxpayer's problem is that those cattle were not maintained for the purpose of selling them, or their natural increase or bodily produce. They were maintained for the purpose of disposing of mushroom waste elsewhere after they had rested on the Londonderry land.
I am further strengthened in my view by the decision of Judicial Member Block in Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183. One of the parcels of land in that case was also, coincidentally, in Londonderry. The taxpayer had made a number of unsuccessful attempts to obtain development consent for various rural related activities. Nothing happened to the land and it remained vacant and unimproved. There were no physical activities on the land of any substance apart from some site visits in connection with possible future uses (see para [31]). Expenditure and effort in seeking the necessary consents by Caruana was held not to be a use of the land in question.
It was further held in Caruana (at paragraphs [13] and [31]) that the fact that the subject property was used in conjunction with other property which is used for primary production did not give the same character to the subject land.
The Caruana approach is a further reason for denying the exemption based on the appellant's argument that the Londonderry land was used as part of the mushroom propagation process as a resting place or parking area for the bovine mushroom waste disposal "machines".
At paragraph [17] of Caruana Judicial Member Block said:
"I agree in summary that the relevant "land" the subject of the PPL [primary production land] exemption is land which is used for a prescribed primary production activity, not simply land that is owned by a primary producer and/or which plays some ancillary role in a primary producer's wider business".
I would not see that dictum as applicable to the use of the Ebenezer land which I regard as an essential part of the mushroom propagation process: i.e. the disposal of mushroom waste in a particular way for hygiene reasons.
In deference to an argument advanced by the Chief Commissioner, I am not convinced that the position with mushroom propagation is analogous to the situation with commercial fishing contained in s10AA(3)(c) LTMA. Commercial fishing by definition occurs on water and it was presumably considered to be of abundant caution to extend the exemption to land-based activities related to commercial fishing, such as preparation work or storage and preparation of fish or fishing gear. Furthermore I do not accept the submission of the Chief Commissioner in paragraph 27 of the respondent's submissions that "clearly while ancillary activities may be integral to the prescribed activity, they do not comprise "production" and so do not satisfy the exemption (i.e. unless specific provision is made for them)". In my view the ancillary activities provided they are part of an integrated process are part of that production process. I prefer to see the correct approach to be that production includes disposal of the unwanted results of production, unless specific provision is made which limits production to actual growing.
I therefore confirm the Chief Commissioner's assessments.
[5]
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
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Decision last updated: 01 June 2017