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[2012] WASAT 234
General information, not legal advice.
State Administrative Tribunal (WA)
2012-11-28
Justice J
Original judgment source is linked above.
ACT : TAXATION ADMINISTRATION ACT 2003 (WA)
CITATION : HIBBEN & ORS and COMMISSIONER OF STATE REVENUE [2012] WASAT 234
Taxation - Land tax - Exemption for land being used for rural business - Use of land by owner - Rural business carried on by corporation of which owners were directors and shareholders - Land registered in names of executors of estate - Whether beneficiaries under will were owners of land before administration complete
Land Tax Assessment Act 2002 (WA), s 29, s 29(1), s 29(3), cl 1, cl 4
The applicants sought exemption from land tax for land in the metropolitan region on the basis that it was used solely or principally for a rural business. To obtain the exemption, the applicants needed to show that the land was used by the owner of the land for a rural business.
The Commissioner for State Revenue accepted that the land was being used for a rural business by a company but not that it was being used for that purpose by the owners. At the relevant point in time, the land was registered in the names of three executors of the will of the former owner of the land. The applicants argued that, as the ultimate beneficiaries under the will, two of the children of the former owner were the owners for the purpose of the land tax exemption.
The Tribunal was called upon to decide who was the owner at the relevant time for the purpose of land tax and whether the owners were using the land for a rural business, albeit through a corporate entity. It concluded that the two children were not, in their personal capacity, the owners at the relevant time, but that even if they were, they were not using the land for a rural business because they were not, themselves, carrying on the rural business.
Church and Commissioner of State Revenue [2011] WASAT 26
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Glen v Federal Commissioner of Land Tax [1915] HCA 57; (1915) 20 CLR 490
Mills v Meeking [1990] HCA 6; (1990) 91 ALR 16
Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306
1 Section 29(3) of the Land Tax Assessment Act 2002 (WA) (LTA Act) exempts from land tax land, in a nonrural zone, that is used by the owner of the land for a rural business, provided more than one third of the owner's total net income for the previous financial year was derived from the owner's carrying out of the business of that kind within Western Australia.
2 The question for determination in this case is whether certain land located within the metropolitan region, and thus in a nonrural zone as defined by the LTA Act, should attract that exemption in relation to the 2010/11 financial year. In order to determine that question, it is necessary to determine the following issues:
3 The land the subject of these proceedings comprises land in four certificates of title in Keysbrook, within the Shire of SerpentineJarrahdale (the properties). Up until 16 March 2009, the properties were owned by Klaas Mostert, who passed away on that date. Klaas Mostert had been the sole owner of the properties since his wife, Vera Mostert, passed away in 2002. Prior to that time, Klaas and Vera Mostert had owned the properties for many years. Over the whole of that period, they had farmed the land.
4 Mostert's Dairy Pty Ltd (Mostert's Dairy) was incorporated in 1971. Its objects included carrying on business as dairymen and as manufacturers, producers and dealers in dairy, farm and garden produce of all kinds.
5 It is common ground that the dairy farm business on the properties, and more latterly a business of cattle grazing, has been carried on by Mostert's Dairy, and that the activity on the land was a 'rural business' as contemplated in the LTA Act.
6 Klaas and Vera Mostert had four children, Robert Cornelius Mostert (Robert), Irene Grinfelds (Irene), Elizabeth Sapienza (Elizabeth) and Nickolas Mostert (Nickolas). Robert and Irene have been for many years, and remain, actively involved in the rural activities carried out on the land.
7 The shares in Mostert's Dairy were divided into ordinary shares and A, B, C, D, E and F class shares. Prior to his death, Klaas Mostert held all ordinary and A and B class shares that had been issued. In 1985, the C, D, E and F class shares were given to the four children respectively. Those shares did not participate in dividend distributions as of right but rather dividends were declared over those shares at the director's discretion. According to the evidence of Mr Barry Hibben, who as acted as accountant for for Klaas Mostert and Mostert's Dairy since 1984, the nature of the entitlements attaching to the classes of shares held by the children is somewhat uncertain.
8 As at 30 June 2010, the shareholding in Mostert's Dairy was that 1,099 ordinary shares, 1 A class share and 900 B class shares were in the name of Klaas Mostert, and Irene, Nickolas, Robert and Elizabeth each held 100 C, D, E and F class shares respectively.
9 In November 2010, Nickolas and Elizabeth transferred their shares to Robert and Irene in equal shares. On 16 March 2011, the 900 B class shares held by the estate of Klaas Mostert were converted into ordinary shares, and on 10 April 2011, the 1 A class share held by the estate of Klaas Mostert was converted to an ordinary share. On 2 May 2011, the 2,000 ordinary shares were transferred to Robert and Irene as tenants in common in equal shares in accordance with the will of Klaas Mostert. As a result, as at 30 June 2011, the shareholding in Mostert's Dairy was that Robert and Irene held 2000 ordinary shares as tenants in common, Robert held 100 E class shares, 50 D class shares and 50 F class shares and Irene held 100 C class shares, 50 D class shares and 50 F class shares.
10 On his death, Klaas Mostert left a will which created certain trusts known as the No 1 Fund and the No 2 Fund. The executors of the will were Barry Doulas Hibben, Irene and Robert.
11 By clause 6.3 of his will, Klaas Mostert devised the properties to be divided equally amongst the No 1 Fund and the No 2 Fund. By clause 6.1, he bequeathed his shares in Mostert's Dairy equally to Irene and Robert, provided they survived him for 30 days.
12 The will appointed Robert as trustee, appointor and primary beneficiary of the No 1 Fund. An extensive category of his relatives, various other entities associated with Robert or his relatives, and any charitable, educational or sporting institutions or funds were also listed as beneficiaries.
13 The No 2 Fund was in identical terms, save that Irene was the trustee, appointor, and primary beneficiary.
14 Under the terms of clause 7.2 of Klaas Mostert's will, the executors were given a discretion to distribute all or part of the share of the estate in relation to a trust to the primary beneficiary of that trust in his or her personal capacity absolutely.
15 On 11 May 2010, the three executors were registered as proprietors of the properties.
16 Thus, as at 30 June 2010, the title to the property was in the name of the three executors.
17 Subsequently, on 5 November 2010, the executors signed transfers of the properties to Irene and Robert as tenants in common in equal shares. The consideration expressed in the transfer was 'Terms of the Will of the Deceased'. On 16 August 2011, Irene and Robert were registered as proprietors of the properties as tenants in common in equal shares.
18 In his witness statement Robert said that, in his will, his father gifted the properties to him and Irene as tenants in common in equal shares and that the transfers were signed to 'give effect to this gift'. That does not accurately describe the effect of the will, and it is not clear from the evidence whether Robert or Irene consider that they hold the land as trustees for the No 1 Fund and the No 2 Fund respectively or in their personal capacities. Mr Hibben, the third executor, said that the transfers were to Robert and Irene in their capacities as trustees of the No 1 Fund and the No 2 Fund respectively.
19 In view of the conclusion that I have reached on the issues discussed below, it is not necessary to determine whether the properties were registered in the names of Robert and Irene in their personal capacities, or as trustees of the No 1 Fund and the No 2 Fund. The evidence did not, however, adequately support a conclusion one way or the other.
20 As mentioned above, on 30 June 2010, the land was registered in the names of the three executors of the estate of Klaas Mostert. They held the land as trustees to deal with it in accordance with the terms of will. The ultimate beneficial entitlement to the land under the will lay with Robert and Irene, either as trustees of the No 1 Fund and the No 2 Fund respectively, or potentially in their personal capacities, should the executors exercise their discretion to distribute to the primary beneficiaries in their personal capacities.
21 'Owner' is defined in cl 1 of the glossary to the LTA Act to mean, in relation to land, 'a person who is entitled to the land for any estate of freehold in possession'.
22 The applicants contend that Robert and Irene were the owners of the properties as at 30 June 2010. As already noted the title was registered in the names of the three executors in that capacity, and it was not until 5 November 2010 that the properties were transferred to Irene and Robert. The applicants contend that Irene and Robert were the owners because they 'were entitled to be registered as owners of the land'.
23 The rights of a named beneficiary under a specific bequest under a will was discussed in Official Receiver in Bankruptcy v Schultz [1990] HCA 45; (1990) 170 CLR 306 (Schultz) at 312 where the Court said:
Not only does the legal ownership in the property not vest in the named beneficiary at the time of death of the testator, nor does the equitable ownership. That emerges from the Privy Council's decision in Commissioner of Stamp Duties (Q.) v Livingston. The reason for this is that, prior to administration of the deceased estate, there is no specific property capable of constituting the subject property of any trust in favour of the beneficiary. It could not be said at that stage what part or parts of the testator's property would need to be realized for the purposes of administration. So it was held that the beneficiary does not have a proprietary interest in each of the assets which are the subject of the devise or bequest such that he or she can say 'this is mine' or 'this belongs to me'. Although Livingston was concerned with a residuary estate, the observations it contains apply with equal force in the case of a specific bequest or devise. The parties here are agreed on that point.
24 The expression 'entitled to the land for any estate of freehold in possession' was considered in Glen v Federal Commissioner of Land Tax [1915] HCA 57; (1915) 20 CLR 490 (Glen). Griffith CJ said that '[t]he essential element of an "estate in possession" is ... that the owner of it has a present right of beneficial enjoyment, whether accompanied by physical possession of the land or not'.
25 It is apparent that, whilst the estate of Klaas Mostert remained unadministered, it was possible under the will that either the properties would be conveyed to the trustees of the No 1 Fund and the No 2 Fund, or alternatively, might be conveyed to the primary beneficiaries of those trusts in their personal capacities.
26 It cannot be said that, as at 30 June 2010, Robert and Irene had any present right to beneficial enjoyment of the properties in their personal capacities, or that they were entitled to the land for any estate of freehold in possession.
27 The applicants argue that Church and Commissioner of State Revenue [2011] WASAT 26 (Church) involved similar factual circumstances which, they contend, led the Tribunal to conclude that the persons having the present right of beneficial enjoyment to the land were the beneficial owners and not the executors. That proposition is not supported by Church. The factual position in Church was explained by the Tribunal at [9] which read:
On 10 June 2009, the applicants as executed two documents in respect of the Land, the first being an Application By Personal Representative (Application), being an application by the applicants to be registered as the proprietors of the interest of Mrs Church in the Land as executors of Mrs Church, and the second being a transfer of the Land by the applicants as executors of Mrs Church in favour of themselves as tenants in common in equal shares (Transfer of Land). The Application and the Transfer of Land were both registered on 25 June 2009. Mr Church's one half share of the Land is held by him as trustee of the trust created pursuant to cl 5.2 of the Will (Trust).
28 The applicants in Church argued that, notwithstanding the execution and registration of the transfer of land, the owners for the purposes of the land of the LTA Act for the whole of the land at the relevant time were still Mrs Church's executors. The Tribunal did not accept that argument, finding instead that the executors having administered the estate by the execution and registration of the transfer to themselves as tenants in common and equal shares, the property then belonged to the beneficiary, not the executors.
29 The position in Church was fundamentally different from the fact situation in this case, but in any event, there is nothing in the Tribunal's reasons in Church which is inconsistent with the propositions referred to above in Schultz or in Glen.
30 The applicants argued that Glen was distinguishable from this case because, in Glen, the gift was subject to certain trusts for the accumulation of income, whereas, in this case, the gift was not subject to any limitation. I do not accept that submission. The principle explained in Schultz, is applicable regardless of the terms of the bequest. The same principle underlies Schultz and Glen. In any event, as at 30 June 2010, it was open to the executors to distribute the properties either to the No 1 Fund and the No 2 Fund, or to the primary beneficiaries of those trusts personally. Thus there remained an element of discretion as to the ultimate distribution of the properties.
31 As at 30 June 2010, the owners of the land for the purposes of s 29 of the LTA Act, were the three executors, in their capacity as executors of the will of Klaas Mostert.
Were the properties being used for a rural business at the relevant time?
32 As already noted, the Commissioner for State Revenue accepted that the business being carried on by Mostert's Dairy on the properties as at 30 June 2010 was a rural business, and accordingly the properties were being used for a rural business.
Were the properties being used by the owners of the land for a rural business?
33 Robert gave evidence at the hearing. He said that he left school in Year 10 and took up full time work for Mostert's Dairy on the properties. As his father became older, his involvement and responsibility in Mostert's Dairy became greater. Since his father's death, Robert has continued to work for Mostert's Dairy carrying out the farming business on the properties.
34 The accounts for Mostert's Dairy in the relevant year show that the company had a significant farm income from cattle trading together with income from investments. The farm income profit and loss statement contains a line item for wages and salaries of $25,264.79, which Robert explained included wages paid to him in that year as well as wages paid to his son and possibly others.
35 Irene gave evidence that she had lived on the farm all her life and had worked alongside her father. They stopped milking on the properties in 2009. Although she still helps Robert on the weekends with various farming activities, she obtained outside employment with Woolworths in the year 2009/2010 from which she earned an income of $29,564. In that financial year, she did not receive a wage from Mostert's Dairy.
36 The tax return for the estate of Klaas Mostert for the year ending 30 June 2010 does not disclose any primary production income, and there was no suggestion in the evidence that Mostert's Dairy provided any income to the estate which, as I have found, was, through the executors, the owner of the land as at 30 June 2010.
37 In essence, the applicants' case is that Robert and Irene together used the properties for a rural business. That contention is, of course, premised on the assumption that the Tribunal would find that Robert and Irene were, by reason of being the ultimate beneficiaries under the will of Klaas Mostert, the owners of the land at the relevant time. I have rejected that contention. However, even if I were to have upheld that contention, I have concluded that the properties would not be exempt from land tax under s 29(3) of LTA Act for the following reasons.
38 There is a distinction in the way that the LTA Act deals with use of land used for rural business outside the metropolitan region as against land used for rural business inside the metropolitan region. Section 29(1) deals with the former. It reads:
(1) Land (except land in a non-rural zone) is exempt for an assessment year if, at midnight on 30 June in the previous financial year, it is or was used solely or principally on a commercial basis to produce income to the user from the sale of produce or stock in the course of carrying out one or more of the following kinds of rural business -
(a) an agricultural business, silvicultural business or reafforestation business;
(b) a grazing business, horse-breeding business, horticultural business, viticultural business, apicultural business, pig-raising business or poultry farming business.
39 Section 29(3) of the LTA Act deals with land in the metropolitan region (which is treated as nonrural zone land even if, under a local planning scheme, the land is zoned rural - see LTA Act glossary cl 4). Section 29(3) reads:
(3) Land in a non-rural zone that is used by the owner of the land for a rural business or rural businesses is exempt from land tax for an assessment year if more than one third of the owner's total net income for the previous financial year was derived from the owner's carrying out a business or businesses of that kind in the State.
40 What can be observed is that s 29(1) of the LTA Act, dealing with rural zoned land outside the metropolitan region, refers to use of land 'to produce income to the user'. Thus, for example, it provides exemption to land which may be leased by the owner to a person (the user) for the purpose for enabling the user to conduct a relevant kind of rural business. The exemption provided by s 29(1) does not require that the owner of the land itself uses the land for the relevant purpose, nor that it derives any income from the rural business conducted on the land.
41 Section 29(3) of the LTA Act can be contrasted. It contemplates use 'by the owner of the land for a rural business'. It then contemplates that one third of the owner's total net income must be 'derived from the owner's carrying out a business of that kind'.
42 In my view, read as a whole, the requirement that the land be 'used by the owner ... for a rural business' requires that it be the owner of the land which is carrying out the business of that kind on the land in question.
43 In this case, it is common ground that the business is being carried out by Mostert's Dairy. The fact that owners of land may also be directors, shareholders, and employees, of a corporate owner of a business, does not, in my view, lead to the conclusion that the owners are therefore carrying on the business. The proposition advanced by counsel for the applicants that the company was 'an alter ego' of the applicants ignores the separate identity, at law, of a company. It also ignores the fact that, at the relevant time, Robert and Irene were not the only shareholders in Mostert's Dairy.
44 The applicants relied upon the second reading speech in the Legislative Council on 11 May 1976 for the Land Tax Assessment Bill which subsequently became the LTA Act. In the Western Australia, Parliamentary Debates, Legislative Council on 11 May 1976 at page 847, examples were given of what was described as abuse of the then existing law which exempted 'land used for genuine primary production'. The examples referred to owners who were effectively land banking in the metropolitan area but leasing it for agricultural purposes essentially to avoid land tax liability. The observation was made that it was intended 'that the exemption be restricted to genuine primary producer owners'. The applicants relied upon the proposition that it was thus open to 'genuine primary producer owners' such as Robert and Irene to enjoy the exemption, notwithstanding that they carried on business through a corporate entity. Although not put specifically in these terms, I apprehend that the applicants' argument is that the expression 'used by the owner' should be given a broad construction and consistent with the achievement of the outcome to which the legislation was directed. That approach to interpretation by reference to context was explained in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 where the majority said:
Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.
(Citations omitted)
45 Thus, the applicants argued that s 29(3) of the LTA Act is directed to ensuring that absentee landlords, not themselves actively involved in farming operations, should not enjoy the exemption. They contend, however, that where actual farming work is being undertaken by the owners of the land, the exemption should apply regardless of the entity through which they conduct their business.
46 The difficulty with that approach is the reference to 'the owner's total net income ... derived from the owner's carrying out a business' in s 29(3) of the LTA Act. Read as a whole, the subsection contemplates that the 'use' required for the section to apply is use by way of 'carrying out a business'. It cannot be said that Robert and Irene are carrying out a business, in their personal capacities, on the land. As Dawson J said in Mills v Meeking [1990] HCA 6; (1990) 91 ALR 16 at 30 - 31:
However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman. Section 35 requires a court to construe an Act, not to rewrite it, in the light of its purposes,
47 In my view, the approach to construction of s 29(3) contended for by the applicants is not consistent with the words of the section. Commissioner's Practice LT 9.0 which was applicable as at 30 June 2010, dealt with exemptions for non-rural business land. That reveals that the Commissioner's practice in relation to the owner being the user of land was to regard 'the user of the land as the person entitled to the income from farming the land'. That Practice remained unchanged in the current Commissioner's Practice LT 9.1 which replaced LT 9.0 as from 19 August 2011. In my view, that Practice is a correct application of the requirements of s 29(3) of the LTA Act.
48 Accordingly, even if it could be said that Robert and Irene were the owners of the land at the relevant time, they were not using the land in the relevant sense because they were not, in their personal capacities, carrying on the business. The mere fact that they did work, either as an employee in Robert's case, or apparently voluntarily in Irene's case, on behalf of Mostert's Dairy is insufficient to satisfy the requirements of s 29(3) of the LTA Act.
Whether the requirement of one third of the owner's total net income being derived from the business met?
49 Apparently as a result of a misunderstanding between the parties as to whether satisfaction of this aspect of the entitlement to exemption was in dispute, the evidence adduced by the applicants on this issue was quite minimal. In closing submissions, the parties agreed that, were the applicant to succeed on the question on ownership of the land and use of the land by the owner, the question of satisfaction of the one third income requirement could be referred back to the respondent for further consideration. In view of the conclusions reached on the earlier questions, the issue as to satisfaction of the one third income requirement falls away.
50 For the foregoing reasons, the respondent's decision on the objection should be affirmed, and the application for review should be dismissed.
I certify that this and the preceding [50] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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(1915) 20 CLR 490
(1990) 91 ALR 16
(1997) 187 CLR 384
(1990) 170 CLR 306