Land tax - Exemption - Land used for rural business - Whether used by owner

Land Tax Assessment Act 2002 (WA), s 29(1), s 29(3), s 30

The applicants sought an exemption, in respect of two years, from land tax on the basis that they were using the land for a rural business. The respondent accepted that what was occuring on the land was a rural business, but argued that because the business was being carried on by two companies rather than by the owners, even though the owners were the only shareholders and directors of one of the companies, that company was acting in the capacity of trustee of a family trust of which the owners were, with their children, beneficiaries.

In one of the two years under review, the accounts of a partnership comprising the owners showed a small amount of income from the sale of strawberries. The owners relied upon that entry in support of their contention that they were using the land for a rural business. Otherwise they argued that they were using the land for that purpose by reason of them being actively involved in the business carried on by the two companies on their land.

The Tribunal concluded that the relevant sections of the Land Tax Assessment Act 2002 (WA) required that the owners be personally carrying on the rural business in order to gain an exemption, and that the owners did not satisfy that requirement. Accordingly the decision of the respondent to disallow the owners' objection to the land tax assessment was affirmed.

Cuming Smith & Co Pty Ltd v Melbourne Harbour Trust Commissioners [1905] HCA 27; (1905) 2 CLR 735

Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) FCR 450

Hibben & Others and Commissioner of State Revenue [2012] WASAT 234

Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1

Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

1 Two of the applicants, Ivan Ivankovic and Danica Ivankovic (Mr and Mrs Ivankovic) are, and were on 30 June 2009 and 30 June 2010, the registered proprietors of land located at 12 Reinhold Place, Carabooda, Western Australia (Land). The Land lies within the metropolitan region. Up until the middle of May 2011, the Land had enjoyed an exemption from land tax. In response to a review by the Office of State Revenue of exemptions or concessions allowed for land in non­rural zones, Mr and Mrs Ivankovic applied for an exemption. The application was unsuccessful, and Mr and Mrs Ivankovic were advised that the exemption previously extended under s 29(3) of the Land Tax Assessment Act 2002 (WA) (LTA Act) would no longer be applied to the Land for the 2009/2010 and 2010/2011 assessment years. Land tax assessments were issued accordingly. The applicants lodged an objection against the assessments which was ultimately disallowed on 18 April 2012. As a result, the applicants applied to this Tribunal for a review of the decision to disallow the objection. Whether or not Mr and Mrs Ivankovic are entitled to the objection turns upon questions as to who is using the Land for the purposes of s 29(3) of the LTA Act, and if the owners are using it in the relevant sense, whether they must be the only persons using it in order to enjoy the exemption under s 29(3) of the LTA Act.

2 Section 29(1) and s 29(3) of the LTA Act provide:

1. Land used solely or principally for rural business, exemption for

(1) Land (except land in a non­rural 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, horse­breeding business, horticultural business, viticultural business, apicultural business, pig­raising business or poultry farming business.

...

(3) Land in a non­rural 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.

...

3 Several facts relevant to the application of s 29 of the LTA Act are not in issue. The first is that the Land is 'land in a non­rural zone' for the purposes of s 29(3), and s 30 of the LTA Act which is set out below.

4 The second is that the Land is owned by Mr and Mrs Ivankovic in their personal capacities.

5 The third is that Mr and Mrs Ivankovic do not satisfy the one third income test stipulated in s 29(3) of the LTA Act. The failure to satisfy the one third income test does not end the matter, however, because s 30 of the LTA Act provides:

Other rural business land, concession for

If land of a kind referred to in section 29(3) or (4) is not exempt only because less than one third of the owner's total net income for a financial year was derived from carrying out a rural business or rural businesses of that kind in the State, or because the land is less than 100 hectares in area, then the land tax on the land is payable at 50% of the rate imposed for the assessment year by the Land Tax Act 2002.

6 Mr and Mrs Ivankovic contend that they are entitled to the exemption under s 30. For the exemption under s 30 to apply, the Land must be 'of a kind referred to in section s 29(3)'. That means that it must be 'land in a non­rural zone that is used by the owner of the land for a rural business or businesses'. It is the proper construction of those words that determines the outcome of these proceedings.

7 A further fact which the respondent accepted was that the activities being carried out on the Land at the relevant time were in the nature of a rural business or rural businesses. The respondent did not accept, however, that the owner was using the Land for those rural businesses, as distinct from third parties doing so. More particularly, the respondent contends that, as of 30 June 2009, the Land was used by Korba Pty Ltd (Korba) and P Kyme & Co Pty Ltd pursuant to a memorandum of understanding dated 1 July 2006 which governs the arrangements between those two entities in relation to the use of the Land and two other lots of land. The respondent contends that, as at 30 June 2010, the Land was used by Korba, P Kyme & Co Pty Ltd and a partnership known as I & D Ivankovic Partnership (Partnership). He contends, however, that use of the Land by the Partnership was not use for a rural business.

8 Korba was registered on 4 May 1982. On the relevant dates, the sole shareholders of Korba were Mr and Mrs Ivankovic. They were also the only directors. Korba is trustee for the Ivankovic Family Trust. In its 2009 and 2010 tax returns, Korba listed its main business activity as 'strawberry growing', and lists the 'business address of main business' as the Land.

9 For the year ended 30 June 2009, Korba's sole source of revenue was sales of strawberries ($4,788) and sales of tomatoes ($34,317). For that year, its expenses included various items related solely or principally to the rural business conducted by it such as fertiliser, chemicals and supplies, insurance, depreciation, motor vehicle expenses, protective clothing, repairs and maintenance, security/watchdog expenses, and tool replacement.

10 For the year ended 30 June 2010, Korba's sole source of revenue was sales of tomatoes ($40,854). Its expenses included items of the same nature of those set out above in relation to the 2009 year.

11 The Ivankovic Family Trust was established as a discretionary trust on 28 June 1982. The general beneficiaries of the Ivankovic Family Trust include Mr and Mrs Ivankovic and their children. Mr Apolon Ivankovic, who jointly commenced these proceedings as an applicant, is Mr and Mrs Ivankovic's son, and a beneficiary under the Ivankovic Family Trust.

12 P Kmye & Co Pty Ltd was registered on 8 May 1980, and as at 30 June 2009 and 30 June 2010, the sole directors of P Kyme & Co Pty Ltd were George Kyme, Paul Kyme and Tom Kyme who were also shareholders. The only other shareholder was Kathleen Kyme on the relevant dates.

13 The I & D Ivankovic Partnership (Partnership) is a partnership between Mr and Mrs Ivankovic. None of the Land was used by the Partnership to grow strawberries in the year ended 30 June 2009. In that year, the Partnership's sole source of revenue was stated as 'profit on rental operations', and its sole expenses were accountancy fees of $1,650 and borrowing costs of $1,000.

14 For the year ended 30 June 2010, the Partnership's sole sources of revenue were the sale of strawberries for $294 and 'profit on rental operations' of $154,123. The Partnership's sole expenses that year were accountancy fees of $1,810 and fertiliser for $486.

15 There was very little in the way of evidence as to the precise activities being carried on the Land. The respondent submitted, and I accept, that a taxpayer claiming the benefit of an exemption from the imposition of a tax has the burden of proving the facts necessary to fall within that exemption - see Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) FCR 450 at 457 per French J; Cuming Smith & Co Pty Ltd v Melbourne Harbour Trust Commissioners [1905] HCA 27; (1905) 2 CLR 735 at 742.

16 As already noted, the respondent accepts that activities carried out on the Land are such as to amount to a rural business. It can be gleaned from the papers that the particular activities comprising that business are the growing of strawberries and tomatoes. It is asserted in the objection which was lodged to the initial assessments that:

Ivan Ivankovic is qualified as an agricultural scientist and has been farming in rural businesses since the mid 70s. He is an active participant in the day to day rural business activities for the properties in question. This includes but is not limited to general supervision, fertiliser planning and irrigation control. Dancia Ivankovic has worked on family market gardens for the same period in the areas of workers' supervision and irrigation control. Both are active participants in the rural businesses being undertaken on 12 Reinhold Place.

17 Amongst the papers submitted in support of the application was a document entitled 'Memoranda of Understanding' which apparently records the 'cooperative production' arrangement between P Kyme & Co Pty Ltd and Korba. It provides for all costs to be paid by 'KB Tomatoes' which appears to be the business name used by P Kyme & Co Pty Ltd. There are references to 'Korba's share' and to a 'calculation as to a share of the proceeds of crops grown on the three locations the subject of the agreement'. It is not possible, in the absence of extrinsic materials, to make sense of that provision. No witness statements were provided by the applicants which might have assisted in an understanding of the agreement, or an understanding of precisely what activities Mr and Mrs Ivankovic actually undertook on the Land.

18 In its statement of issues, facts and contentions, the respondent asserted as a fact that, as at 30 June 2009, the Land was used by Korba and P Kyme & Co Pty Ltd. In their statement of issues, facts and contentions, the applicants disagreed, and asserted that the Land was used by the following legal persons for a rural business: Ivan and Dancia Ivankovic, Korba Pty Ltd and P Kmye & Co Pty Ltd.

19 During oral submissions, Mr Apolon Ivankovic, who appeared and spoke on behalf of the applicants, explained that that assertion was based on the proposition that Mr and Mrs Ivankovic used the Land in three ways. The first was by way of directing Korba's activities. The second was by way of undertaking strawberry farming activities personally. The third was by their active participation in the cooperative operation being carried out by P Kyme & Co Pty Ltd in that they undertook irrigation control, monitoring of Kyme staff, supplying the Land and power, and utilising their expertise in soil analysis and general agricultural science.

20 Mr Ivankovic tendered a bundle of documents which included a copy of a diploma he holds which, although no translation of it was provided, I accept is a qualification in agricultural science.

21 So far as the year 2009/2010 is concerned, the respondent asserts that the Land was used by Korba, P Kyme & Co Pty Ltd and the Partnership, although he contends that the use by the Partnership for the production of revenue of $294 from the sale of strawberries against fertiliser expenses of $486 is so minimal as to not be capable of amounting to the use of the Land by the Partnership for a rural business.

22 The applicants accept that the Land was used by those three entities, but in addition, assert that the Land was used by Mr and Mrs Ivankovic in the same manner as described for the 2008/2009 year.

Was the Land used by the owners for the purposes of s 29(3) of the LTA Act?

23 Notwithstanding the absence of clear evidence as to the particular activities undertaken personally by Mr and Mrs Ivankovic in relation to the activities on the Land at the relevant time, I am prepared to assume, for present purposes, that one or both of them monitored the activities of the staff of P Kyme & Co Pty Ltd on the Land, that they were engaged in 'irrigation control' (although precisely what that entailed was never explained), and that they provided where necessary some expertise in soil analysis or general agricultural science. In other words, I accept for the purposes of considering the application of s 29(3) and s 30 of the LTA Act, that Mr and Mrs Ivankovic were more than mere passive owners of Land provided to a third party to enable that third party to carry on a rural business. Because of the view that I have reached as to the proper construction of the relevant provisions of the LTA Act, acceptance of those factual matters does not alter the outcome of these proceedings. Were I to have taken a different view as to the requirement of an owner personally to carry on the rural business for the purposes of s 29(3), I would have invited an application by the applicants to adduce further evidence as to the precise activities undertaken by Mr and Mrs Ivankovic at the relevant time. I note in that context however, that the respondent put the applicants on notice prior to the hearing that, if no witness statements were filed, the respondent would proceed on the assumption that the applicants did not wish to adduce any further evidence.

24 The fact that Mr and Mrs Ivankovic participate in activities on the Land in the manner described does not lead to the conclusion that they are using the Land for a rural business. The parties were agreed that both P Kyme & Co Pty Ltd and Korba were using the Land at the relevant time for a rural business. The activities of Mr and Mrs Ivankovic as described above were essentially no more than assisting those companies to farm the Land.

25 Shortly before the hearing, I delivered reasons for decision in Hibben & Others and Commissioner of State Revenue [2012] WASAT 234 (Hibben). That case raised the question of whether a rural business carried on by a company controlled by owners of land could attract the exemption in s 29(3) of the LTA Act. I concluded that it was necessary, in order to attract the exemption under s 29(3), that the rural business must be carried on by the owner itself, and not by a different legal entity. I explained the reasons for that conclusion at [38] - [47], which read as follows:

1. 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. ...
2. 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.

1. 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.
2. 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'.
3. 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.
4. 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.
5. 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.

1. 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.
2. 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.

1. 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.

26 None of the submissions made by the applicants in this case cause me to alter the views that I expressed in Hibben, and I would adopt the reasons which are set out above for the purposes of this matter.

27 The thrust of the applicants' submissions in this matter is that, because they take an active part in activities on the Land, and because ultimately they receive income by way of distributions of the Ivankovic Family Trust, that is, through Korba, they should be considered to be using the Land for a rural business. That argument very much reflects the arguments of the applicants in Hibben which are dealt with at [45] - [47] set out above. The mere fact that the owners undertake activities related to the use of the land by a third party is not sufficient to satisfy s 29(3) of the LTA Act. As was observed in Hibben, it is not open to ignore the separate legal existence of the corporation carrying on the business. As was said in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 694 ­ 695:

Unfortunately, it very often happens in cases in this court that a person has arranged his affairs for commercial or fiscal reasons employing a particular structure, which with respect to creditors and the Government he expects to be recognized as no sham, but when it comes to a dispute ... it is not in his interests to maintain the structure and he pleads before this Court that one must not look at the structure at all but rather at the 'realistic' or 'practical' effect of what has happened. I do not find this sort of submission attractive. So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health.

28 It was submitted on behalf of the applicants that, at least in the 2009/2010 year, the Partnership was using the Land for a rural business as well as Korba and P Kyme & Co Pty Ltd. The evidence relied upon to support that proposition is the financial accounts of the Partnership which show sales of strawberries amounting to $294 and fertiliser expenses of $486. No evidence was provided by the applicants as to the circumstances surrounding those entries in the Partnership's accounts or any detail as to the activities which led to the receipt of that revenue and the expenditure on fertiliser.

29 The respondent contends that the applicants have not established that the Partnership conducted a rural business in the relevant year. I accept that submission.

30 All that the accounts reveal is that some revenue, and in a relatively insignificant amount, was received from the sale of strawberries. Whether that related to a single transaction or multiple transactions, is not apparent from the evidence.

31 The meaning of the word 'business' where it was used in s 118(1) of the Local Government Act 1919 (NSW) was discussed in the High Court in Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 at 8 - 9. Mason J, with whom the other members of the Court agreed, accepted that 'business' in the subsection carries its ordinary and popular meaning, and 'denotes ... activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis'.

32 There is simply no evidence put forward by the applicants which could support a conclusion that the Partnership was carrying on a business of strawberry growing in 2009/2010. If any inference is to be drawn from the entries in the Partnership accounts, the most likely inference is that whatever activities may have led to the production of $294 of income to the Partnership, those activities were incidental to the primary use of the Land by P Kyme & Co Pty Ltd and Korba. In my view, it is not open on the evidence to find that Mr and Mrs Ivankovic were carrying on a rural business through the Partnership in the relevant year.

33 The conclusion which I have reached makes it unnecessary to consider whether, in order for s 29(3) of the LTA Act to apply, the owners must be the only persons using the land for a rural business.

34 It follows that the applicants have not established that they are entitled to a concessional rate of land tax under s 30 of the LTA Act, and accordingly the respondent's decision made on 18 April 2012 to disallow the objection should be affirmed.

1. The decision of the respondent made on 18 April 2012 to disallow the applicants' objection to land tax for the years 2008/2009 and 2009/2010 is affirmed.

I certify that this and the preceding [34] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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