Lavender Rain Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2022] VCAT 1264

The land tax assessments made by the Commissioner of State Revenue for the 2017, 2018 and 2019 land tax years (nos. 24640816, 24640808 and 25320053) are confirmed.

1. This proceeding concerns land tax assessments issued by the Commissioner of State Revenue (Commissioner) to Lavender Rain Pty Ltd (Lavender Rain) for the 2017, 2018 and 2019 land tax years in relation to a property owned by Lavender Rain located at 150 English Street, Donnybrook[1] (Relevant Property).
2. Lavender Rain is jointly owned by Mrs Deirdre Worn and her son Mr Stuart Worn (Mr Worn Jnr), while Mr Worn Jnr is the sole director and secretary of the company.
3. Lavender Rain has, for many years, conducted a business on the Relevant Property of breeding cattle for sale. This business was predominantly conducted by Mr Peter Worn (Mr Worn Snr), the husband of Mrs Worn and father of Mr Worn Jnr.[2] Mrs Worn principally assisted with the administration side of the farm, and Mr Worn Jnr - who is a land surveyor - assisted his parents on the weekends.
4. Lavender Rain contends that, for each of the relevant land tax years, it satisfies the requirements for the exemption of the Relevant Property under section 67 of the Land Tax Act 2005 (Vic) (LT Act), being the applicable exemption for land in an urban zone (as the Relevant Property is) used solely or primarily for the business of primary production.
5. The Commissioner (now) accepts that, for each of the relevant land tax years:
   • the Relevant Property was used solely or primarily for a business of primary production; and
   • Mr Worn Snr and Mrs Worn (who owned more than 60% of the shares in the company during the relevant land tax years) were normally engaged in a substantially full-time capacity in that business.
6. However, the Commissioner contends that the exemption does not apply because the principal business and main undertaking of Lavender Rain was not the business of primary production. This is due to the company also receiving income relating to consultancy services and the operation of a ski competition, as well as the entry by Lavender Rain (and the owners of neighbouring properties) into a development agreement with a developer for the development of the Relevant Property and surrounding properties.
7. For the reasons which follow, I am not satisfied that the principal business or main undertaking of Lavender Rain was breeding cattle for sale. As such, the exemption is unavailable and the land tax assessments will be confirmed.

1. For the applicable land tax years, section 67 of the Act relevantly provided:

(1) Land is exempt land if the Commissioner determines that -

(a) the land comprises one parcel that is -

(i) wholly or partly in greater Melbourne; and

(ii) wholly or partly in an urban zone; and

(iii) used solely or primarily for the business of primary production; and

(b) the owner of the land is a person specified in subsection (2).

(2) The owner of the land must be -

...

(b) a proprietary company (not acting in the capacity of trustee of a trust) -

(i) In which all the shares are beneficially owned by natural persons; and

(ii) the principal business of which is primary production of the type carried on on the land.

(3) For the purposes of subsection 2(b)(ii), the principal business of a proprietary company is not primary production of the type carried on on the land unless -

(a) the main undertaking of the company is primary production of that type; and

(b) either -

(ii) if no dividends were declared during the relevant period, ordinary shares representing more than 60% of the paid up capital of the company (excluding shares entitled to a fixed rate of dividend) have been beneficially owned for the relevant period by persons normally engaged in a substantially full-time capacity in the business of primary production.

1. 'Primary production' is defined in s 64(1) of the Act to include 'the maintenance of animals or poultry for the purpose of selling them or their natural increase or bodily produce'. However, the LT Act does not include any definition of the phrases 'principal business' or 'main undertaking'.
2. In Lotus Oak Pty Ltd as trustee for the Bozzo Family Trust v Commissioner of State Revenue (Lotus Oak),[3] Garde J considered the meaning of 'principal business' (albeit in the context of the exemption relating to an entity that is the trustee of a discretionary trust), observing that the section:[4]

has the effect of excluding discretionary trusts where the principal business of the trust is not primary production of the same type as that carried on on the land. In practical effect, this excludes trusts which have two or more different businesses, unless it can be said that the type of primary production carried on on the land is the principal business of the trust. If a different business of the trust is the principal business, or if there is no principal business, the land is not exempt. The trustee bears the onus of showing that the principal business of the trust is primary production of the type carried on on the land.

This restriction was introduced in circumstances where Parliament intended to discourage land speculation and land banking of urban zoned land in greater Melbourne. Minor primary production activity conducted on the land should not give rise to an exemption from land tax_._ The legislative purpose was pejoratively described by the Commissioner as evincing an intent to exclude 'Collins Street farmers' whose professional or business activities conducted through a discretionary trust would be wider than the type of primary production actually carried on on the land.

1. As observed by Member Gibson in Di Dio Nominees Pty Ltd v Commissioner of State Revenue (Di Dio):[5]

It is apparent from the Act that a private company must show not only that its principal business is primary production but that its main undertaking is primary production. Just what kind of difference might be entailed by that change of wording may not be always easy, but this case does I think show that the notion of "undertaking" may be wider than the notion of "business".

1. In the following passage, Member Gibson went on to identify the relevant factors to be examined when seeking to determine the main undertaking of a company:[6]

I find it quite impossible to say that for the relevant time the main undertaking of the applicant company was cattle grazing when:

(1) The substantial part of the gross income of the company derived from the conduct of the business was derived by the baking business for the first year of the two years with which we are concerned.

(2) Most of the labour employed by the company was employed in respect of the baking business for that year.

(3) In the scheme of the affairs of the company, such income earned from cattle grazing, if any, was negligible and is nothing beside the capital gain that the company stood to make, and beside the amounts it was investing for that purpose. And, most importantly,

(4) The capital of the company consisted almost entirely of the land which was in substance by then being held as an investment property to be developed and sold, which investment the company was in the process of realising.

It would in my view be absurd to say that the company was holding more than $6 million worth of property in the year 2000 or 2001 as the major asset of a cattle grazing business which was earning nothing or next to nothing.

1. Similar considerations apply to identification of a company's principal business. In Colosseum Pty Ltd v Commissioner of State Revenue (Colosseum),[7] Senior Member Davis found primary production was not the principal business of a company that also operated a landfill business and a (passive) business of renting. In this regard, the Tribunal particularly focused on the comparative profit and loss from each business activity, accepting the Commissioner's submission that:[8]

comparing the applicant's profits/losses from its livestock activities with its profits/losses from its rental and landfill activities, one cannot say that, in 2009-11, the applicant's sole business was primary production. For the same reason, it is difficult to say that, in 2012-13, the applicant's principal business was primary production.

Background regarding Lavender Rain and its activities

1. It appears that Lavender Rain was incorporated as a shelf company in 1988, and was transferred to the ownership and control of the Worn family in January 1989.[9]
2. The company became the registered proprietor of the Relevant Property in May 1991.[10]
3. At the time of the acquisition of the Relevant Property (and through the relevant land tax years), the shares in Lavender Rain were held equally by Mr Worn Snr, Mrs Worn and Mr Worn Jnr.[11]
4. From October 1989 until mid-1995, Mr Worn Snr, Mrs Worn and Mr Worn Jnr were each directors of Lavender Rain.[12] Mr Worn Jnr became the sole director (and secretary) of the company from mid-1995. Nevertheless, decisions concerning the company continued to be made by the Worn family collectively.[13]

1. When the Relevant Property was purchased in 1991, it was intended as a place to build a family home,[14] as well as for breeding Murray Grey cattle.[15] Mr Worn Jnr recounts that they bought in Donnybrook because they 'had deep family roots in the area and knew the farming conditions'.[16]
2. In good years, the family would stock the property to its capacity of around 60 cattle, comprising of one bull, 20 breeding cows and 40 calves (with the calves being from two seasons).[17] However, during the relevant land tax years, the number of cattle on the property diminished (to around 45 cattle) as a result of the drought conditions which then prevailed.[18]
3. Nevertheless, despite the adverse conditions, the family still managed to sell 31 cattle in early 2016 and 14 steers in 2018.[19]
4. Mr Worn Snr did most of the 'physical work' on the farm, including looking after the animals, fixing fences, repairing damage to water troughs and cutting fire breaks.[20] He had retired many years earlier and worked full-time in this regard.[21]
5. Mrs Worn was responsible for feeding the bull, helping with some of the farming activities (eg. rounding up cattle) and looking after the administration of the farm.[22]
6. On weekends, Mr Worn Jnr attended and helped with physical tasks that needed a 'second pair of hands'.[23]
7. Based on Lavender Rain's accounts, the following income was generated from the primary production activities over the relevant period (January 2016 to December 2018):
   • 2015/2016:[24] $14,342
   • 2016/2017:[25] $2,182
   • 2017/2018:[26] $9,666
   • 2018/2019:[27] $500
8. Lavender Rain's expenses are not segregated based on activity, however it is apparent that over half the expenditure of the company was for salaries paid to each of Mr Worn Snr, Mrs Worn and Mr Worn Jnr. The salaries paid to Mr Worn Snr and Mrs Worn (collectively) in each financial year were:
   • 2015/2016:[28] $63,000
   • 2016/2017:[29] $64,000
   • 2017/2018:[30] $64,000
   • 2018/2019:[31] Nil
9. Lavender Rain also paid a salary to Mr Worn Jnr. In the relevant years, the salary was:
   • 2015/2016:[32] $41,918
   • 2016/2017:[33] $60,130
   • 2017/2018:[34] $27,250
   • 2018/2019:[35] Nil
10. It should be noted that, while Mr Worn Jnr gave evidence that his salary related to his contribution to the primary production activities, this assertion seems to me to be somewhat self-serving and does not sit comfortably with the evidence that:
    • he only assisted with the farm on weekends, and before and after work when his parents went away on their annual holiday (between Anzac Day and the Queens' Birthday holiday), such that his relative salary can be seen to be wholly disproportionate to his contribution to the primary production activity;
    • insufficient income was generated from the primary production activities to fund the salary paid to Mr Worn Snr and Mrs Worn, let alone Mr Worn Jnr; and
    • by contrast, most of the income of Lavender Rain was generated from the consultancy work that Mr Worn Jnr alone performed.
11. In these circumstances, I consider that Mr Worn Jnr's salary is more properly attributable to the consultancy services.
12. Looking at the assets of the company, the dominant asset is the Relevant Property (including buildings). The carrying value of the property of $1,571,011 is based on a revaluation in 2010, and represented approximately 85% of Lavender Rain's total assets at 30 June 2019.[36] However, it is apparent from the land tax assessments for the relevant land tax years that the value of the property has increased substantially since 2010, rising to $4,250,000 for the 2017 land tax year and then $14,711,000 for the 2019 land tax year.[37] While it is clear that the Relevant Property represented substantially all of the value of Lavender Rain for each of the land tax years, it is relevant to observe that, from June 2014, the land had been charged in favour of a developer (see [43], last bullet point). Further, the developer became responsible for the land tax and rates relating to the Relevant Property, and Lavender Rain was only permitted to remain on the land (and, impliedly, to continue its cattle farming) by contractual licence (see [43], second and fourth bullet points). It follows that the land (or at least the majority of the value of that land) was no longer attributable to the primary production business, but rather the property development.

1. Until October 2018, when he commenced work as an employee of another company, Mr Worn Jnr provided independent property consultancy services to Bosco Jonson (now known as Veris), a land surveying company.[38]
2. While the consultancy agreement is not in evidence, Mr Worn Jnr accepted in cross-examination that Lavender Rain invoiced Bosco Jonson for the services that he performed. Lavender Rain's accounts record the income generated from the consultancy services (described as management and consulting income in its accounts) during the relevant years as follows:
   • 2015/2016:[39] $219,529
   • 2016/2017:[40] $99,692
   • 2017/2018:[41] $193,892
   • 2018/2019:[42] $Nil
3. In his examination in chief, Mr Worn Jnr accepted that the arrangement of his affairs in this manner was designed 'to minimise personal tax'. Further, in cross-examination, Mr Worn Jnr also:
   • conceded that losses from the primary production activities (and, to a lesser extent, the ski competition) offset and reduced the taxable income of Lavender Rain (in the current or future years); and
   • agreed that the company's tax returns for each of the 2016 to 2019 tax years indicated "N" (or no) in response to a question as to whether the company's income 'include[s] an individual's personal services income'.[43]
4. While no income is recorded in the accounts for the 2018/2019 financial year, it is relevant to note that Lavender Rain had initially recognised consulting income of $153,524 in its business activity statement for the first and second quarters of that financial year.[44] However, the business activity statements for those quarters were amended in January 2021 to reduce the company's income for each quarter to nil. Apparently, this reflected a decision by Mr Worn Jnr to stop 'putting [his] personal business through Lavender Rain's books' after learning of its impact on the company's land tax.[45] In cross-examination, Mr Worn Jnr said this change took place because his new accountant had a 'different take' on the arrangements and that Mr Worn Jnr subsequently registered for GST in his own name and, as a result, 'paid more income tax'.
5. As noted at [26], Lavender Rain paid a salary to Mr Worn Jnr, which I consider related to the consultancy services he provided to Bosco Jonson (see [28]).
6. Mr Worn Jnr says the only asset of Lavender Rain which was related to the consultancy services was a company car, although Mr Worn Jnr suggests that he 'used this car more often to travel to the [Relevant] Property than to drive to work because [he is] a keen cyclist and prefer[s] to ride'.[46]

1. Mr Worn Jnr also operated the Mount Buller Team Challenge (previously known as the Victorian Interclub Ski Championships) through Lavender Rain.[47] He says that it 'was never intended to be a money-making venture although [he] tried (unsuccessfully in 2017 and 2018) to avoid making losses'.[48] He likened it to a 'voluntary community service activity'.[49]
2. In cross-examination, Ms Pierce took Mr Worn Jnr to the website pages for the 'Mont Blanc Blonde Team Challenge' for the relevant years.[50] Mr Worn Jnr explained that Mont Blanc Blonde is a beer and that Mont Blanc sponsors the event, and provides beer for the winners. Mr Worn Jnr accepted that the website refers to Lavender Rain 'trading as SnowExpo' as the 'organiser' of the event, explaining that the wording on the website (specifically the exclusion of liability for injury) had been provided by his 'friends at Mt Buller Ski Lifts'.
3. Irrespective of how the ski competition is characterised, it generated income and expenditure for Lavender Rain. During the relevant years, the income and (direct) expenses associated with the ski competition were as follows:

1. There was no income or expenditure in 2018/2019 because Mr Worn Jnr started using another company (associated with his new employer) for the purpose of operating the team challenge in that year.[55]

1. In 2008, the then Victorian planning minister announced that:[56]
   • the urban growth boundary would be moved, bringing the Relevant Property within the urban growth zone; and
   • English Street, Donnybrook would be the subject of a precinct structure plan.
2. Being aware that it was 'inevitable that the land covered by [a precinct structure plan] will be developed', Mr Worn Jnr engaged in discussions with the owners of neighbouring properties who 'agreed to let [him] negotiate on their behalf' in relation to 'selling all of [their] properties to a developer'.[57]
3. On 27 June 2014, Lavender Rain (and the owners of the neighbouring properties) entered into a development agreement (DA) with the Moremac Property Group (MPG) for the development of their collective properties.[58]
4. Relevant features of the DA include:
   • The properties are to be developed in stages.[59] Mr Worn Jnr gave evidence that, given its location, the Relevant Property was always going to be one of the last stages.[60]
   • Until the works commencement date for the stage on which the farmhouse on the Relevant Property is due to commence, Lavender Rain is entitled to occupy that farmhouse.[61] Strangely, there is no express reference to the company being permitted to use the remainder of the land or allowing its use for cattle farming. However, Mr Morgan (counsel for Lavender Rain) contended this should be implied.
   • There is no sale of the land from the landowners to the developer, rather lots are to be sold by the landowners to the ultimate purchasers after the lots have been developed: further, the developer is entitled to a development fee for its efforts.[62]
   • The gross sale proceeds from lot sales are applied, in priority, to (1) any GST on the sales, (2) payment of a 'Landowner Amount' to the landowners and (3) a development fee to the developer.[63] However, there is a variation if more than 50% of the lots in a stage are pre-sold, in which case the developer is entitled to its Development Costs in priority to the entitlement of the landowners to the Landowner Amount.[64] It is relevant to note that the definition of Development Costs includes 'all Rates and Taxes and other holding costs incurred in respect of the Development Land' (in turn defined to include the Relevant Property).[65]
   • The Landowner Amount is defined as 25% of gross sale proceeds, although it is subject to adjustment (down or up) if the developer's margin is below 12.5% or above 22.5%.[66]
   • As between the landowners, the owner of the land of the particular lot which is sold is entitled to 70% of the Landowner Amount, with the balance shared among all of landowners on a pro-rata basis having regard to the developable area of each landowner compared to the total developable area.
   • As part of the arrangements, Lavender Rain was required to provide a deed of charge to the MPG to secure the performance of Lavender Rain's obligations under the DA.[67] Relevantly, the deed of charge was executed on the same day as the DA.[68]
5. No lots were developed on the Relevant Property or sold in 2016, 2017 or 2018 (being the calendar years to which the land tax relates). While Mr Worn Jnr suggested in his witness statement that Lavender Rain did not receive any Landholder Amount in any of these years,[69] it emerged in evidence that an amount recorded in Lavender Rain's accounts for the 2019 financial year as a 'loan from Development Partners' (of $1,131,272) represented amounts received by Lavender Rain under the DA (ie. the amounts referred to in the second last dot point of the preceding paragraph). Mr Worn Jnr said he understood the accountants considered it a 'loan' because it would need to be 'paid back when [their] land is developed' (ie. the other landowners would be entitled to a small percentage of the proceeds from development of Lavender Rain's land under the same provisions).
6. For completeness, there has been some modest development activity on the Relevant Property. In this regard, the Tribunal Book includes a witness statement of a project director employed by the MPG, who explains that a small amount of work was done on the northern boundary of the Relevant Property to deal with stormwater outfall from the neighbouring properties that were in the stages of being developed at the time.[70]

1. While the applicant accepts Di Dio suggests that the 'main undertaking' of a company is different and wider to its 'principal business', Mr Morgan suggested that the difference is 'subtle and fine'.
2. Lavender Rain submits that, in assessing its principal business or main undertaking, regard must be paid to the fact that the cattle breeding business was 'family owned' (ie. during the relevant years, by Mr Worn Snr, Mrs Worn and Mr Worn Jnr) and 'family run'. In the latter regard, although Mr Worn Jnr was the sole director, the evidence is that decisions were made jointly (see [17]).
3. Attention then turned to addressing each of the four identified 'income streams' of Lavender Rain.
   • - Consulting income from Bosco Jonson
4. Mr Morgan observed that Mr Worn Jnr 'used Lavender Rain to receive [consulting] income and pay [consulting] expenses' until October 2018, when he commenced as an employee for a different land surveying company.
5. Noting that this was a 'matter of convenience',[71] and that Mr Worn Jnr controlled the 'flow of money in and out of Lavender Rain's account', Lavender Rain submits that the 'better characterisation' of the receipt of the consulting income (in 2016 and 2017) was like a bank holding an account for a saver; that is, it is 'not part of a bank's business to do work' leading to a deposit and, likewise, consulting was 'no part of the business or undertaking of Lavender Rain'.
6. Alternatively, Lavender Rain contends that the level of income and expense was not such as to 'displace' the primary production activities as the principal business and main undertaking of the company.
7. Lastly, Mr Morgan submitted that, as at 31 December 2018 (ie. for the 2019 land tax year), it was 'no part of the business of Lavender Rain to receive consulting income' (ie. given the consulting work for Bosco Jonson had ceased in October 2018).
   • - Ski competition
8. Lavender Rain contends that the ski competition was 'not a business', but rather a 'voluntary community service activity'.[72] In this regard, in closing submissions, Mr Morgan observed that the activity was loss making, ran for a short duration (approximately four weeks around August each year), had no employees and the bank account of Lavender Rain was simply used to 'house' the participant fees and from which to pay the running expenses as 'a matter of convenience' and with 'no advantage' to the company.
9. Mr Morgan submitted that the 'better characterisation' of the ski competition is that it did not form a business or undertaking of Lavender Rain or that, even if it did, it was not the principal business or main undertaking of the company.
   • - Development activities
10. Mr Morgan submitted that, while Lavender Rain does not dispute that it will engage in development activities in the future, no such development had happened during the relevant period.
11. Mr Morgan pointed to the evidence of Mr Worn Jnr that, during the relevant period, Lavender Rain did not enter into any sale contracts for land or sign any other documents, and that Mr Worn Jnr devoted less than an hour each month to the development.[73] He submitted the only real activity performed under the DA in that period was the granting of a charge over the Relevant Property, which should not be regarded as a business or undertaking of the company.
12. Lavender Rain contended that, if the works undertaken by the MPG on the land (ie. the stormwater channel) were part of Lavender Rain's business, they were 'very minor'. It submitted that, it would only be after the 'works commencement date' (ie. the commencement of the stage encompassing the Relevant Property) that Lavender Rain's principal business and main undertaking would change to become property development.
13. In terms of the Landowner Amounts received by Lavender Rain and treated as a loan in its accounts, Mr Morgan submitted they are 'like a deposit' in that, because each gets a small part of the proceeds of sale of the land of other landowners, the amount may have to be returned.
    • - Primary production
14. Mr Morgan suggested that 'significant weight' should be given to Lavender Rain's primary production activities, which were as 'intensive' as they could be given the weather conditions at the time (ie. drought). In this regard, he observed that Mr Worn Snr and Mrs Worn engaged in those activities 'full time', with assistance from Mr Worn Jnr and, while it did not make much money, it 'does not mean it was not a significant business of Lavender Rain'.
    • - Principal business and main undertaking
15. Turning to the overall analysis of Lavender Rain's principal business and main undertaking, Lavender Rain submitted:

While the bulk of its income in the relevant years was generated from Mr Worn Jnr's personal consulting activities (and, to a lesser extent, the ski competition), that needs to be understood in context. In this regard, Mr Morgan observed that farms are 'cyclical' (with 'income in the good years helping to get through the bad years') and, in the present case, there were two years where no cattle were sold and so the primary production activities generated 'zero income'.

Nevertheless, despite the drought, Mr Morgan suggested that Lavender Rain still farmed the Relevant Property 'in essentially the same way' (albeit that, in some ways, the activity was 'more intense than in the good years' as hay had to be sourced for the cows to eat due to the lack of grass).

Mr Morgan suggested that the Commissioner's contentions inappropriately focused on the income generated by each activity, observing that:

• If the weather conditions were different, and it was a 'bumper year', the Commissioner's case would be 'very different', but nothing would have changed other than the weather, 'which is not part of the business or undertaking'.
• If Mr Worn Jnr's daughter had set up a lemonade stand and sold some lemonade in those years, the selling of lemonade would (on the Commissioner's case) be the company's principal business if income were the determinative factor.

Mr Morgan reiterated that Lavender Rain is a family company and that two of its shareholders lived on the property and were full time farmers, while the third shareholder (ie. Mr Worn Jnr) also worked on the farm, albeit not full time.

By comparison, while Mr Worn Snr and Mrs Worn were aware that their son was 'us[ing] Lavender Rain accounts for his other work', it 'had little to do with [them]'.[74]

The main asset of Lavender Rain is the Relevant Property, which it has owned since 1991 and used (and intended to be used) as a farm. Mr Morgan submitted that, apart from the bank accounts, all other assets are on or used for the farm.

1. Mr Morgan contended that a 'useful way to discern Lavender Rain's main undertaking' was to consider what the company would 'look like if it did not do' some of the activities. That is, if Lavender Rain ceased to carry on the primary production, then it would be an 'entirely different entity'. By contrast, while its financial position would change if it ceased to receive any consulting income, the 'fundamental nature' of the company would not change in this situation. Similarly, if there was no development activity, this would result in 'little change'.
2. Lavender Rain contends that 'Di Dio is a very different case from the present one because it involved a company that was, in effect, the alter ego of its owner'; whereas Lavender Rain is 'a family company which had three equal shareholders who made decisions jointly'.[75] Lavender Rains submits the 'more relevant consideration' in the present case is the fact that, of the business activities, 'one [ie. primary production] was undertaken by all of them', while the others (ie. consulting services and ski competition) were undertaken only by Mr Worn Jnr (with the company only used 'for convenience').[76]
3. While the applicant accepts that, like the situation in Di Dio, the capital of Lavender Rain largely comprises a property that will be sold once developed, it is submitted that:[77]

the [Relevant] Property was not acquired for development purposes and [unlike Di Dio] was not an unprofitable retirement project for a man who had made a fortune elsewhere. It was a company owned by life-long farmers, two of whom had done nothing else for many years.

1. Further, while the cattle breeding activities of Lavender Rain were loss making, Mr Morgan observed that, unlike the situation in Di Dio, there is an explanation of why losses were made, namely because of drought.
2. The applicant submits that it 'would be artificial to say that just because [Mr Worn Jnr] happened to run an unrelated business though [Lavender Rain's] books that it thereby ceased to be what it had always been: a farming business'.[78]
3. Ultimately, it is contended that - in each of the relevant land tax years - the principal business and main undertaking of Lavender Rain was the primary production activities.[79]
4. In reply submissions, Mr Morgan submitted that the commitment of the appellant in Lotus Oaks to land development was 'well beyond this case'. Further, in any event, the Commissioner's submissions regarding the development activities, if accepted, would (it is contended) 'have the effect of transforming a future business and undertaking into a present one'.[80] Contrary to the Commissioner's submissions, it is contended there is 'no concept of futurity' in sections 67(2) and (3) of the LT Act, with the legislation using clear language when what is to be considered is a future state of affairs.[81]

1. In closing submissions, Ms Pierce (counsel for the Commissioner) rejected the 'counterfactuals' which Mr Morgan had advanced as a way to think about the nature of Lavender Rain's activities (eg. what the position would be if there was a bumper year or the company did not engage in consulting work). In this regard, Ms Pierce observed that counterfactuals are 'not part the statutory test' and 'apt to lead the Tribunal into error'.
2. Attention then turned to addressing each of the four activities the Commissioner suggested were carried on by Lavender Rain.
   • - Development activities
3. Ms Pierce submitted that, on the evidence, it is 'open to the Tribunal to find that Lavender Rain was carrying on a business of land development on the terms of the development agreement during the relevant period'. In this regard, she pointed to the following matters:
   • Lavender Rain's commitment to development, even before a precinct structure plan had been finalised, noting that Mr Worn Snr had made submissions regarding that plan.[82]
   • The acceptance, by Mr Worn Jnr, that a residential development was 'inevitable' once the land had been rezoned and a precinct structure plan put in place.[83]
   • Mr Worn Jnr negotiating the terms of the DA on behalf of Lavender Rain and the owners of the neighbouring properties.
   • Rather than being an 'abstract piece of lawyering' or some 'future thing', the DA has bound Lavender Rain (and the other landowners) since 2014 or, at least, from around February 2016, when the precinct structure plan was approved and the DA became unconditional.

In this regard, as part of the terms of the DA, the company granted security over its main asset (ie. the Relevant Property) and Lavender Rain has been 'abiding by its terms' (including receiving a share of income from the development of the neighbouring properties).

Relying on Garde J's observation, in Lotus Oaks, that it is the 'element of commitment' that distinguishes preliminary activities from those that constitute the carrying on of a business,[84] Ms Pierce submitted there 'is no question of futurity when a party assumes contractual obligations' and any suggestion that there was no development business because there was no physical transformation or development of the Relevant Property during the relevant land tax years is 'either incorrect or too binary'.

1. Noting that:
   • there was a consulting agreement between Lavender Rain and Bosco Jonson, under which Lavender Rain invoiced Bosco Johnson for consulting services;
   • Lavender Rain returned that revenue in its tax returns for the 2016/2017 and 2017/2018 financial years (which Mr Worn Jnr admitted he checked and made sure were correct), as well as (initially) recording associated sales in its first two business activity statements for the 2018/2019 financial year;
   • the revenue was banked into a discrete bank account and used to pay day to day expenses of the company; and
   • in its tax returns, Lavender Rain indicated that it had not derived income relating to any other person's personal services,[85]

Ms Pierce submitted that Lavender Rain was carrying on a business of providing consulting services during the relevant years.

1. While Ms Pierce denied that the Commissioner is suggesting that 'whichever aspect earns the most money must be the principal business' of Lavender Rain, that the company earned 'relatively large amounts' of income from Bosco Jonson and that income was 'not treated by anyone else as their income' is, the Commissioner submits, relevant to the assessment of Lavender Rain's principal business.
2. Noting the tax advantage received by Mr Worn Jnr from having the consulting income received by the company (see [32]), Ms Pierce indicated that the Commissioner also relies on the High Court's observation in Richardson v Federal Commissioner of Taxation[86] that 'no person may, after obtaining an advantage by assertion of rights in relation to another and, while retaining it, set up and rely on other rights against the same person inconsistent with those already asserted'.[87]
   • - Ski competition
3. Noting that Lavender Rain:
   • held the business name for the ski competition;
   • was identified on the relevant website as the organiser of the competition;[88]
   • seeks to exclude liability for injury to participants, and otherwise takes out insurance for the event; and
   • pays on-costs and staff costs and venue hire,

Ms Pierce contend that it is 'not sound' to characterise Lavender Rain's role in relation to the ski competition as merely housing income and expenses.

1. Similarly, the Commissioner maintains that the number of participants involved in a business is 'not a sound basis' for identifying a company's principal business or main undertaking, particularly where this relates to the activities of the company's shareholders.
2. While the Commissioner accepts there is 'some evidence' as to the impact of the drought on the 'relatively modest income' derived by Lavender Rain for the 2017 to 2019 financial years, Ms Pierce observed that there is 'no evidence of [the company's] income in earlier years to establish that the income derived in the 2017 to 2019 financial years was 'abnormally modest'.
   • - Principal business and main undertaking
3. The Commissioner invites the Tribunal to conclude that Lavender Rain has not discharged its onus of proof[89] of establishing that its principal business was primary production.
4. In the alternative, the Commissioner contends that it is 'not apparent what is [Lavender Rain's] principal business, if not land development'.
5. In relation to Lavender Rain's main undertaking, Ms Pierce referred to the decision of the Supreme Court of New South Wales in Top of the Cross Pty Ltd and Another v Federal Commissioner of Taxation[90] for the proposition that the meaning of the word 'undertaking' is protean (ie. depends on the context), but embraces the assets used in its conduct.
6. On this basis, Ms Pierce contends that the main undertaking of Lavender Rain is its 'land holding attenuated by its obligations under the development agreement' and the scope of that development is 'as contemplated by the precinct structure plan'.
7. While not perfect, Ms Pierce submitted that there is an analogy between the facts of this proceeding and those considered in Di Dio, noting Member Gibson's observations about the unreality of the proposition that a company's main undertaking was other than development when it held land ready for development with modest primary production activity.[91] In this regard, Ms Pierce added that the Tribunal 'should not assume away the context of development for realisation, gradually, of the land'.
8. As with the principal business test, the Commissioner's ultimate position is that Lavender Rain has not discharged its onus of establishing that its main undertaking is the primary production activity.

1. Broadly speaking, land tax for a given land tax year is payable based on the ownership and use of that land as at 31 December of the preceding calendar year (ie. 31 December 2016 for the 2017 land tax year), although regard is also had to its use for a period not overlong before and after that date. In the present case, the critical issue is Lavender Rain's principal business and main undertaking at each point in time. The starting point for the identification of a company's principal business or main undertaking necessarily involves identification of the business or businesses that the company carries on.

Was Lavender Rain carrying on a business of primary production?

1. The Commissioner concedes that, for the relevant land tax years, Lavender Rain carried on primary production activities in terms of the breeding of cattle for sale, and that Mr Worn Snr and Mrs Worn were normally engaged in a substantially full-time capacity in that business.
2. The concession is amply supported by the (uncontradicted) evidence of Mrs Worn as to the work that she and Mr Worn Snr performed, as well as objective evidence of cattle sales during that period.
3. Having regard to the evidence, I am satisfied on the balance of probabilities and find that:

(a) Lavender Rain was carrying on a business of primary production during the relevant land tax years;

(b) Mr Worn Snr and Mrs Worn were engaged in a substantially full-time capacity in that business; and

(c) the Relevant Property was being used primarily for that business (apart from the small sections of the land used by the MPG for the drainage works).

1. I also accept that the primary production activity was a substantial activity of Lavender Rain in the sense that it occupied the full attention of two of the company's shareholders (ie. Mr Worn Snr and Mrs Worn), was a family owned and run business and was conducted as intensively as possible given the climactic conditions at the time. That said, I note that it was not a profitable activity in the relevant years given that the salary drawn by those two shareholders well exceeded the revenue generated. Further, noting that, prior to the relevant years, Lavender Rain did not have any retained earnings (but rather had accumulated losses),[92] it can be inferred that the ability of the company to continue to conduct the primary production activities in this manner was somewhat dependent on the income generated from the consulting services.

Was Lavender Rain carrying on a consulting services business?

1. While I accept that the income from the performance of the consulting services were generated by the efforts of Mr Worn Jnr alone, I do not accept the suggestion that this did not represent a business of Lavender Rain or that the receipt of that income by Lavender Rain can be viewed as equivalent to a consultant depositing their income with a bank.
2. The agreement that was in place between Lavender Rain and Bosco Jonson was not in evidence. Nevertheless, having regard to the evidence that Lavender Rain:
   • recorded the consulting services income in its accounts;[93]
   • declared to the Commissioner of Taxation that such income was not personal services income of Mr Worn Jnr (or any other person);[94] and
   • paid Mr Worn Jnr a salary for his services to the company, which I consider to be primarily attributable to the consulting services (see [28]),

it can reasonably be inferred that Lavender Rain contracted with and derived the consulting services income from Bosco Jonson in its own right. (Contrary to the bank account analogy sought to be drawn by Lavender Rain (see [50]), it can be observed that a bank would not contract with the company engaging a consultant who happened to be a depositor.)

1. There has been no suggestion that the arrangement between Lavender Rain and Bosco Jonson was a sham.
2. In my view, it necessarily follows that Lavender Rain was carrying on a business of providing consulting services as at 31 December 2016 (for the 2017 land tax year) and 31 December 2017 (for the 2018 land tax year).
3. However, I accept that, as a result of Mr Worn Jnr taking up employment with a different land surveying group, together with the restructuring of the Bosco Jonson invoicing arrangements (see [33]), Lavender Rain had well and truly ceased to carry on any consulting services business by 31 December 2018 (being the relevant date for the 2019 land tax year).

Was Lavender Rain carrying on a ski competition business?

1. I reject the submission that the ski competition was a 'community service' rather than a business. In this regard, it is notable that Lavender Rain claimed the expenditure associated with the ski competition as a deductible expense which offset the income generated by the ski competition (see [38]), and the losses from the activity partly sheltered the consulting services income from tax.
2. That the ski competition was carried on by Lavender Rain in its own right is consistent with its ownership of the relevant intellectual property and website, the reference to Lavender Rain as the 'operator' of the competition and to Lavender Rain being the beneficiary of the waiver by competitors of their right to sue for injury.
3. While I accept that the ski competition occurred during a confined period of each year (ie. coinciding with the ski season), this does not mean that the business ceased at the end of the competition each year, and then recommenced in the following year. Rather, the nature of the business was active during the competition period, and largely dormant during the off season (although I expect it is likely that some activity would still occur, such as to secure ongoing sponsorship of the competition, arrange insurance, etc).
4. As such, I find that Lavender Rain was carrying on the ski competition business as at 31 December 2016 (for the 2017 land tax year) and 31 December 2017 (for the 2018 land tax year).
5. However, I accept the evidence of Mr Worn Jnr that, at around the same time that he restructured the invoicing for the consulting services and took up employment with the new land surveying group, he had determined to move the ski competition to another entity (owned by that group). Accordingly, I do not consider that Lavender Rain was carrying on the ski competition at 31 December 2018 (being the relevant time for the 2019 land tax year).

Was Lavender Rain carrying on a land development business?

1. While I accept that, apart from the de minimis drainage works, no physical land development occurred on the Relevant Property during the 2016, 2017 or 2018 calendar years, and there were no sales made by Lavender Rain, I do not regard these matters as determinative of the question as to whether Lavender Rain was carrying on a business of land development in those years.
2. In Lotus Oak, Garde J determined that a residential subdivision of land owned by the trustee taxpayer was a business of the trust, despite the development being carried on through a developer under a development agreement.[95] This was so because it was a 'comprehensive and large scale enterprise for profit in a competitive market that went well beyond the mere realisation of a capital asset in an enterprising way'.[96]
3. His Honour went on to consider when the trustee commenced that business, observing that '[i]t is the element of commitment which distinguishes' between 'activities constituting the carrying on of a business, and activity which is preliminary to the commencement of a business'.[97] Garde J went on to find that the business commenced in August 2014, being the date agreed between the trustee and the developer under the relevant development agreement as the commencement date for the project (even though the agreement was signed later).[98]
4. It is relevant to note that the date which the parties agreed, and Garde J found, as the commencement date of the property development business preceded the 'soft launch' of the development (in October 2014), the obtaining of planning permits (April 2015) and the commencement of physical development (June 2015).[99] While it appears there were some pre-sales, with some 54 lots sold to the public and for display homes by 31 December 2014,[100] these presumably occurred after the soft launch.
5. In the present case, Lavender Rain entered the DA in 2014 and was fully committed by the time that the DA became unconditional in early 2016. Consistent with the decision in Lotus Oaks, the subdivision and sale of the land as part of that DA is more than the 'mere realisation' of an asset, but rather amounts to a business of land development. Indeed, so much appears to be accepted by Lavender Rain (see [57]).
6. Further, consistent with Lotus Oaks, I consider that that business commenced from the time that Lavender Rain committed to the development by entering into the DA and charging the Relevant Property in favour of the MPG. As in that case, this is so notwithstanding that any development activity would, necessarily, take place sometime after the DA was entered into and became unconditional (and even if the Relevant Property was to be developed as the first rather than last stage).
7. As such, I find that Lavender Rain commenced to carry on a land development business by early 2016 (at the latest) and was therefore carrying on a land development business as at 31 December 2016, 31 December 2017 and 31 December 2018.
8. Of course, I accept Mr Worn Jnr's (uncontradicted) evidence that during those years, he was not devoting much time to the development. However, that is consistent with the terms of the DA which placed the MPG in charge of managing and undertaking the development.
9. In terms of the assets employed, for the reasons discussed at [29], the Relevant Property (or, at least, most of its value at the relevant times) should be considered to be an asset employed in the property development business (rather than the primary production business).

1. As observed by Garde J in Lotus Oak, the practical effect of the land tax regime is that a company or trust with two or more businesses will not be entitled to the exemption from land tax for urban land 'unless it can be said that the type of primary production carried on on the land is the principal business' of the company or trust.
2. The decisions in Di Dio and Colosseum establish that, when assessing a company's principal business (and main undertaking), it is relevant to consider the gross income received from each business, as well as the labour and capital employed in those businesses.

1. Based on gross income, the most significant business of Lavender Rain as at 31 December 2016 and 31 December 2017 was the consulting services business. As already observed, this activity allowed the primary production activity to continue through the drought period.
2. For the 2018/2019 financial year, the Landowner Amounts of $1,131,272 received by Lavender Rain dwarfed the nominal income received from primary production ($500). Although it seems those amounts were treated as a loan rather than income for accounting purposes (see [44]), I consider that the amounts remain relevant when determining the most significant business of Lavender Rain from this perspective, given they satisfied a contractual entitlement it held.
3. While it may be accepted that Lavender Rain's neighbours also had an entitlement to a share of future sales of the Relevant Property, I do not accept (particularly in the absence of any expert accounting evidence) that the Landholder Amounts should be viewed as 'like a deposit'. In this regard, it is relevant to observe that there is no necessary correlation between:
   • the amounts that Lavender Rain has received (or will receive) by way of Landowner Amount from sales of lots in the neighbouring properties; and
   • the amount that will be paid to the owners of those properties from the sales of lots from the Relevant Property,

given that the sale prices, and hence the dollar amounts received or paid, may differ considerably.

1. As such, I consider that, when assessed from the perspective of the gross income, the land development business was also the most significant business of Lavender Rain as at 31 December 2018.

1. Based on labour employed, I accept the most significant business of Lavender Rain as at 31 December 2016, 31 December 2017 and 31 December 2018 was the primary production business given that two shareholders/employees were devoted to that business in a full-time capacity and Mr Worn Jnr also assisted in a part time capacity.

1. Based on capital employed, I consider that the most significant business of Lavender Rain as at 31 December 2016, 31 December 2017 and 31 December 2018 was the property development business because the land had been committed to that business in 2014 (or, by the latest, early 2016) and its increasing value reflected its worth as a development property, rather than its use for primary production (see [29] and [106]).

1. As the most significant business of Lavender Rain varies depending on the basis on which its different businesses are examined (ie. based on income, labour or capital), it cannot be said that the primary production business was the principal business of Lavender Rain for any of the relevant land tax years. Accordingly, I find that the primary production business was not the principal business of Lavender Rain as at 31 December 2016, 31 December 2017 and 31 December 2018.
2. For completeness, I do not consider it helpful to engage in the kind of analysis suggested by Mr Morgan (see [60(a)] and [61]), which is necessarily a hypothetical exercise. Of course, the role of the Tribunal is to make the correct or preferable decision, on the evidence before it, as to what in fact took place in the relevant calendar years.

1. Given the finding at [115], it is not strictly necessary to consider Lavender Rain's main undertaking. However, accepting the observation in Di Dio that the notion of an undertaking is broader than the notion of a business, even if property development was not yet a business of Lavender Rain, I consider it would be an undertaking of Lavender Rain given its substantial commitment to that development through entry into the DA and the charging of its main asset and the receipt of Landowner Amounts in 2018/2019. As such, in my view, the ultimate analysis would not change.
2. That is to say, the exemption is not available because I (also) cannot be satisfied that Lavender Rain's main undertaking was primary production in any of the relevant calendar years given the comparative income generated from, and capital employed, in its other undertakings.

[1] Formerly it was 90 English Street, Donnybrook, but the street address was renumbered.

[2] Until his passing (after the relevant tax years).

[3] [2021] VSC 388.

[4] Ibid [112]-[113] (footnotes omitted; emphasis added).

[5] [2004] VCAT 1824 [31] (emphasis from original).

[7] [2016] VCAT 130.

[9] Company extract: Tribunal Book (TB) at tab (T) 9.

[13] Witness statement of Deirdre Worn dated 26 October 2021 (Mrs Worn's Witness Statement): TB, T61 [25].

[15] Witness statement of Stuart Worn dated 26 October 2021 (Mr Worn Jnr's Witness Statement): TB, T66 [13].

[17] Mrs Worn's Witness Statement [12].

[19] Tax invoices: TB T43, pages918-919.

[20] Mrs Worn's Witness Statement [14]-[16].

[23] Mr Worn Jnr's Witness Statement [47].

[24] Profit and loss statement: TB, T41 page 903.

[26] Income statement: TB, T13 page 446.

[28] 2016 Income tax returns: TB, T41 pages 831 and 868.

[29] 2017 Income tax returns: TB, T41 pages 821 and 857.

[30] 2018 Income tax returns: TB, T3 pages 94 and 122.

[31] Income statement: TB, T13 pages 447.

[32] 2016 Income tax returns: TB, T41 page 783.

[33] 2017 Income tax returns: TB, T41 page 771.

[34] 2018 Income tax returns: TB, T3 pages 94 and 122.

[35] Income statement: TB, T13 page 447.

[36] Balance sheet and notes: TB T13, pages 448 and 449.

[38] Second Witness Statement of Stuart Edward Worn dated 24 December 2021 (Mr Worn's Supplementary Witness Statement): TB, T71 [10(a)].

[39] Profit and loss statement: TB, T41 page 903.

[44] Summary of business activity statement: TB, T58 page 1042.

[45] Mr Worn's Supplementary Witness Statement [5].

[46] Mr Worn Jnr's Witness Statement [39].

[50] These were tendered as Exhibit R1.