McIntosh Bros Pty Ltd (In Liq) v Chief Commissioner of State Revenue

NCAT Administrative and Equal Opportunity|2018-11-26

REASONS FOR DECISION

This matter concerns the tax exempt status of a property known as "Denbigh" near Cobbity, New South Wales. The Department of Environment and Heritage NSW says (Ian McIntosh 1st affidavit (IM1) Tab 9 p250, future references to the affidavit evidence will be by first and surname initials and number of affidavit) "Denbigh is of state significance as an intact example of a continuously functioning early farm complex… the Denbigh Estate is of exceptional cultural significance for its historical, aesthetic, social and technical values."
Denbigh was originally granted in 1812 and was acquired by the McIntosh family in 1868. Successive generations of the McIntosh family have lived and farmed on Denbigh. The land was transferred to the taxpayer company in 1931. The company has been in voluntary liquidation since 1987, being slowly wound up.
The two descendants of the original Mr McIntosh who now farm the property are Mr Richard McIntosh and Mr Ian McIntosh who are cousins. I will, without disrespect, sometimes refer to them as Richard and Ian, and to Richard's father as Ron. There are two homesteads on Denbigh. Ron lives in the Bangor homestead, on the east side. Ian lives in the Denbigh homestead on the west side.
This case is a review of the assessments to land tax of the applicant company for the 3 land tax years 2014-2016 (the 'relevant years'). The applicant company claims that it was exempt from land tax as the land was used for primary production.
The principal issues to be determined are: 1. what was the dominant use of the land in each of the land tax years under consideration? 2. if primary production was the dominant use did it have a significant and substantial commercial purpose or character? 3. whether the dominant use was engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit was actually made)? There are a number of subsidiary issues as well (including whether the taxpayer met its onus of proof) which are referred to in the discussion of the submissions of the parties.

LEGISLATION

The relevant provisions of the Land Tax Management Act 1956 (LTMA) are as follows: 10AA EXEMPTION FOR LAND USED FOR PRIMARY P RODUCTION (1) Land that is rural land is exempt from taxation if it is land used for primary production. (2) Land that is not rur al land is exempt from taxation if it is land used f or primary production and that use of the land: (a) has a significant and substantial commercial purpose or character, and (b) is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). (3) For the purposes of this section, "land used for primary production" means land the dominant use of which is for: (a) … (b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or…

THE FACTS IN BRIEF

The users and the area of the company's land changed during the relevant years and it is convenient to look at the position year by year. It is acceptable to look at least six months either side of the taxing date of 31 December in the year preceding the land tax year to determine the use of the property (see Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue (CCSR) [2010] NSWSC 867 at [4]).
As at 31 December 2013 the company's land was 451ha including the 'Heritage Curtilage'. The Heritage Curtilage land was used seamlessly with the company's other land. The land was zoned residential by the State government (not by the taxpayer as proponent) in 2007. The land was subdivided into large 'superlots' in 2009. Carved out from the residential zoning was an area of about 207 ha called the Heritage Curtilage surrounding the homesteads which were zoned environmental living.
In May 2014 the company sold the Heritage Curtilage land in two parcels (lots 2008 and 2009) to Ian, and to Richard's sister Angela Head, so it was no longer the company's land. However the Heritage Curtilage continued to be used seamlessly as it was prior to the sale.
Richard and Ian are two of the persons who use the company's land. The shares in the company are held 50-50 by family trusts for Richard and Ian's sides of the family. Richard's and Ian's fathers used the land for dairy farming until the late 1980s when they decided to go into beef farming.
Use of the land is informally divided by agreement under which Richard and Ron and Richard's nephew James (Jim) Head used the Bangor (east) side of the land for cattle, and Ian and agistees used the Denbigh (west) side of the property for cattle. There are no formal leases or licences. There were various non primary production users as well in the relevant years.
Ian conducted a cattle farming operation on the Denbigh side. At the same time Mr Brett Hayter a local dairy farmer agisted his heifer cattle on Ian's side prior to their introduction into the dairy herd or sale. There were two other minor agistees inlater years.
Richard conducted a cattle farming operation on the Bangor side with help from his father Ron and other family including his nephew James (Jim) Head. Richard lived on his property at Molong NSW where he conducted a large sheep farm.
In 2014 Richard's nephew Jim began a cattle breeding and store cattle operation on the Bangor side through Head Pastoral Company (Head Pastoral).
Over the relevant years, small parts of the land were used for non-primary production purposes including a sewer pumping station and associated facilities; a one year storage lease; rental of two cottages; fencing; road works; planting; and surveys.

The Evidence: Mr Richard McIntosh

Mr Richard McIntosh gave evidence as to the history of the family's connection with the land, and of the arrangements between him and his cousin Mr Ian McIntosh as to the utilisation of the land.
The taxpayer company acquired the land in 1931 from the family. It was placed into voluntary liquidation in 1987. The shares in the company are held 50/50 by family trusts for two sides of the family.
Richard's father Ron, and Ian's father Jim McIntosh, were brothers. Jim is now deceased. For many years Ron and Jim conducted dairy farming operations on the company's land in partnership. From the late 1980s Ron's and Jim's families separately started running beef cattle on the land.
The land was informally divided between the two families roughly equally. Ron and his son Richard conducted their beef operation on the east side of the land upon which is an historic homestead called Bangor and which will be referred to as the Bangor (east) side. Jim and his son Ian conducted their beef operation on the Denbigh (west) side. There is an historic homestead on that side called Denbigh.
There was no formal licence or lease between the company and the two families. They each just use their side of the land for their own operations.
Richard gave evidence that he and Ron conducted a cattle breeding operation on the land via a family company called Kisel Pty Ltd ('Kisel').
Kisel also conducted a sheep and beef operation at successive large properties at Molong NSW from about 2005. The beef operations at Molong were suspended during the relevant years. Richard lives on the Molong property and drove down regularly to Bangor.
We learn from Ian McIntosh's evidence that a 2003 heritage study identified the Heritage Curtilage surrounding the two homesteads. The company's land was rezoned by the State government in 2007 (the company was not a proponent). Carved out from the residential zoning was an area of 207 ha for the Heritage Curtilage. The tax payer company and Mirvac Ltd worked together until 2009 to obtain approval for subdivision of the rezoned residential land into residential 'superlots' (which could be sold to a developer who would need to obtain further subdivision approval for say housing), and the Heritage Curtilage.
In 2011 the company sold 40 hectares of its land to AV Jennings. This land was excised from the Bangor (east) side.
In 2013 the company had 451 hectares including the Heritage Curtilage (244 hectares) which was formally subdivided into two parts the Bangor (east) and Denbigh (west) side company land.
In 2014 the company sold the east side of Heritage Curtilage to Richard's sister Angela Head. The company sold the west side of the Heritage Curtilage to Ian. This left the company with 244 hectares in the 2015 and 2016 years.
Although from 2014 there was a different ownership of the two parts of the Heritage Curtilage Richard gave evidence that the Heritage Curtilage land was treated no differently from the company's land after the sale; as he said it was used "seamlessly".
In 2013 company land was used by Kisel for cattle breeding where the progeny was fattened and sold. The day-to-day management of Richard's breeding herd on the Bangor (east) side was by Ron who lived in the Bangor homestead.
After Ron was injured in 2012 it was decided to phase out the breeding operation by Kisel, and for Richard's Family Trust to commence an operation of trading store or feeder cattle (that is buying steers, fattening them and selling them). Richard determined to gradually transition his family's farming operations from Kisel to his family trust ('Richard's Family Trust'). This was done during the relevant years by selling down Kisel's livestock and buying new livestock in Richard's Family Trust. For convenience I will refer to the cattle of Richard's family vehicles as 'Richard's cattle'.
His evidence was that Kisel finished its breeding activity at Bangor in 2013 and its sheep operations at Molong in 2015 was to be replaced by Richard's Family Trust. This involved a gradual disposal of the breeding herd over 2014 so that it took a 2 to 3 year disposal period after the last breeding season of cows/cattle in September 2012. The steer trading operation was done in the second half of 2014 and he stated that this was to be its last operation before stepping back to make way for the new operation of Head Pastoral Company.
Kisel's breeding cows were last joined in September 2012. Calves were born in June 2013. They were then maintained on the land while they grew. The herd was gradually sold. At 30 June 2013 Kisel's closing breeding stock head count was 142 and at 30 June 2014 was 46. The last of the breeding herd was sold by Kisel in the year ended 30 June 2015 (RM1 at 64). Richard's Family Trust began its steer trading operation in about March 2014. In conjunction with Kisel's cattle Richard's Family Trust had 30 head at 30 June 2014 (total 76) and 30 head at 30 June 2015 and nil at 30 June 2016. Richard gave oral evidence that the profits from steer trading were roughly equal to those of the breeding activities of Kisel.
In 2014 an intergenerational transition began on Richard's side. Angela Head's son, Jim Head, commenced his own cattle trading entity through the Head Pastoral Company. He had 77 head at 30 June 2015 (total 107 with Richard's store cattle) and 259 at 30 June 2016 (JH 1 at 27 and 44) . Further details are below.
In 2015 the company sold a further 12.91 hectares of land to AV Jennings from the Bangor (east) side and the informal dividing line between Richard and Ian's portions of the company's land was adjusted.
From November 2015 to July 2016 fencing and tree planting took place along the new boundary with the AV Jennings.
Richard gave evidence that so far as both Kisel and Richard's Family Trust were concerned their main purpose of running cattle on the Bangor (east) side was to make a profit in addition to the profit that those entities made from the Molong property. He said he wished to keep the company's land productive and reduce the farming risk by having properties in different climatic areas. He also said that during the period 2014 to 2016 he was trying to maintain the Bangor (east) side at full capacity taking account of Head Pastoral's cattle.
As for the physical features of the Bangor (east) side, Richard stated that the company's land was divided into nine large fenced paddocks and two smaller holding paddocks. There were also sheds, cattle yards constructed by Jim Head in 2014 and a cattle crush which was installed in late 2013.
Equipment used on the Bangor (east) side were a tractor and various implements and attachments, a seeding machine, a utility and miscellaneous tools.
The work done on the Bangor (east) side by Richard and Ron involved Ron working an average of 1 hour per day but 4 to 5 hours on some days. Richard said that he spoke about the property with Ron about once per week. Richard said that during 2013 and 2014 he estimated that he would spend about 10 hours per month at the Bangor (east) side plus bookwork that he did at his home at Molong (RM1 at 34-39). Richard was also assisted by his sons and by his nephew Jim Head during weekends and college vacations. During 2015 he spent less time given that Kisel was winding down its breeding operation and the trading operation of Richard's Family Trust took less time. Jim Head's operations on Richard's side through Head Pastoral Company were growing through the year.
Jim Head's evidence was that he worked at Bangor full time during college vacations and every third weekend until the end of 2015 when he finished college (as average of 12 hours per week) (JH1 at 19). As Head Pastoral Company grew he would no doubt have spent more time with Head Pastoral cattle. He worked for Head Pastoral full time in 2016 (JH1 at 12-21).
Richard's evidence was that Jim Head personally owned some cattle (approximately 15 head) which ran with Richard's from 2012 with their own ear tags. He also said that there was no written agreement.
At the same time as the activities were occurring on the Bangor (east) side of the company's land Richard was living at his property in Molong and Kisel and Richard's Family Trust were conducting operations on the Molong land.
Richard gave evidence of the connections between operations on the company's land and on the Molong land. He advised that they shear 7,000-10,000 super fine merino sheep each year at Molong and consistently did this throughout the period 2014 to 2016. Some of the sheep flock was sold for breeding or for meat
Richard thinks of the operation on the Bangor land as making a trading profit because the costs are low, that it had been profitable in the past and they had just kept going. He did not agree that the profit was immaterial but conceded it was small. He said that he was trying to run the land to full capacity without resorting to hand feeding.
The Joint Accounting Experts Report (JAER) Tab 3 shows Kisel's (rounded) cattle figures in 2014 of sales of $68,000 and in 2015 of $62,000. Direct trading expenses of those years were $56,000 and $39,000. Richard's Family Trust had cattle sales in 2015 of $6,000 and in 2016 of $40,000.
Richard gave oral evidence that there were consolidated accounts for family businesses and that Kisel and Richard's Family Trust ran operations on the company's land and on the Molong land. He uses a separate PIC number for cattle movements off Bangor.
The applicant tendered insurance policies for Kisel and Richard's Family Trust which covered both the Bangor (east) land and the Molong land (Exh A2,3 and 4).
Richard testified that financial transactions for the family businesses including for Bangor and Molong were run through the one bank account. He agreed in oral evidence that Bangor operations only make about 5% contribution to gross profit.
He stated that there was no separate accounting for the Bangor operation (RM1 Tab 9) although for management purposes he said it would be regarded as being on a standalone basis.
Richard also gave some evidence concerning other activities on the land during the relevant years. A new road was constructed to allow access to the homesteads from Cobbitty Road as they lost access to The Northern Road by the sale to AV Jennings in 2011(RM 1 at 72).
He also described further tree planting in 2015 and 2016 on the Heritage Curtilage (which was at that stage owned by Angela Head). There was also general mention of other works.

Evidence of James (Jim) Head

Jim Head was the son of Angela Head (nee McIntosh), nephew of Richard and grandson of Ron. During the period 2013 to 2015 calendar years he worked full time on the land during his college holidays, and he flew back every third weekend from college to work on the property.
He had experience with cattle from his childhood and began his own farming operations through Head Pastoral on the land from mid-2014 anticipating the end of his tertiary studies.
Head Pastoral was formed in July 2014 and the entity was used to build up the breeding and trading operations. His evidence was that from October 2014 he began buying cattle in the Head Pastoral which were run on Richard's side of the company's land (JH1 at 19). He bought 29 head (14 cows with calves at foot and a bull) in October 2014 (JH1 at 27). In March 2015 he purchased 24 more cows.
Jim Head kept detailed records of births, sales, parents, weights of cattle and also records "trading steers". Since December 2015 when he bought 62 new steers he has been a full-time employee of Head Pastoral, and pays himself $500.00 per week but gets free accommodation (JH1 at 21). He gave evidence that he used contractors to assist with the work on the land when needed for example with fencing and pasture improvement. He does not pay rent for the land but he does not charge the company for improvements that he makes to the land.
He maintains the land he uses by fertilising it, weeding it and keeping the fences in good order plus other work (JH1 at 23 and Tab 13). He also gave evidence about weighing equipment being used between the Molong property and Bangor.
He recognised in oral evidence that there was no sales income from cattle in the year ended 30 June 2015. His closing stock value at the 30 June 2015 was approximately $95,000 and at 30 June 2016 $295,000. Sales in the year ended 2016 were approximately $70,000 (figures have been rounded to the nearest $1,000) (JH1 at Tab 13).
He also gave evidence about horses that were kept on Richard's side of the land. These were used for mustering, for keeping the cattle quiet, for recreation and some were trained and sold as polo and stock horses. Sales income from horses in 2016 was $1,650.
Previously his father had owned these horses but Head Pastoral had taken the horses onto its books although they had not been bought. There had been no sales in 2014 to 2016. His evidence was that the horse activity was not a hobby and that the horses were bred for sale. In oral evidence he said that his first trading steers were acquired in February 2016 and he bought breeding cattle in 2014 and 2015.

Evidence of Ian McIntosh

Mr Ian McIntosh gave evidence concerning the recent history of the company's land. The property "Denbigh" was placed on the State Heritage Register in 2006. It was rezoned in 2007.
There was an agreement between the company and Mirvac pursuant to which a DA for sub-division of the residential zoned land into 'superlots' was approved in December 2008.
In 2009 the agreement with Mirvac was terminated. The firm of Gray & Walsh have managed the sales, leasing and other commercial arrangements in relation to the company's land but both sides of the family have to agree to a proposed sale by the liquidator of the company of the company's land.
On 15 December 2010 the taxpayer company entered into a heritage agreement with the relevant Minister under s39 of the Heritage Act 1977 (IM1 Tab 9). The company agreed to undertake works on buildings and the Heritage Curtilage to the value of $350,000 approximately. In the period 2010 to 2013 heritage works were performed on the Heritage Curtilage and the homesteads and associated buildings. This required a small restriction in the number of cattle which ran on the Heritage Curtilage. The agreed works were completed in May 2013 and the agreement was discharged in August 2013.
In June 2011 43.55 hectares of the company's land from the Bangor side was sold to AV Jennings.
In 2014 the Heritage Curtilage was formally sub-divided and sold to each side of the family. 207 hectares in total were sold. 127 hectares of Heritage Curtilage was on the Denbigh (west) side and 80 hectares was on the Bangor (east) side.
Prior to the sale of the sub-divided Heritage Curtilage the company land by area was 57% on the Bangor (east) side and 43% on the Denbigh (west) side by area. After the sale of the Heritage Curtilage in 2014 company land was 70% Bangor (east) side and 30% Denbigh (west) side by area. The Heritage Curtilage land was not fenced off from the company land.
In September 2015 a further 12.91 hectares of company land was sold to AV Jennings (Lot 2010) which was excised from the Bangor (east) side.
In July 2016 2.13 hectares was sold to Roads & Maritime Services (RMS) for road widening which was also excised from the Bangor (east) side.
Ian McIntosh gave evidence about his activities on the Denbigh (west) side of the company land and the Heritage Curtilage land. He worked the land full-time (8 hours per day) plus bookwork on top and lives in the homestead with his wife. His wife and grown children help out with the work. Also on the Denbigh (east) side are two cottages which are rented by him to arm's length tenants for modest rents.
The work performed by Mr Ian McIntosh involved the breeding of cattle and the sale of certain of them including vealers and weaners. He kept agisted cattle under observation. The work involved ensuring the cattle had food, water and was in general good health. Stock was moved. Fences and stock watering systems were checked. Weeds were controlled.
In 2014 his bull died and was not replaced. His breeding activities declined and he took more cattle from third parties on agistment arrangements. At this point he was 62 years old. In the 2014 financial year his closing stock using the Denbigh (west) side was 30 head. There were 57 cows on agistment (87 total). For financial years 2015 and 2016 the numbers were 32 and 47 which he owned, and 61 (93 total) and 79 (126 total) agisted (IM1 at 86 and 91).
So far as the agisted cattle are concerned Ian McIntosh stated that he keeps an eye on them but if there is any complex need he would be in contact with the owner because the cattle are the owner's responsibility (IM1 at 67e-68).
As for agistment arrangements during the 2014 to 2016 years there was a continuation of an agistment arrangement that had been going for more than 10 years with Mr Brett Hayter in relation to his dairy heifers (IM1 at 88). In 2015 he entered into an agistment arrangement with Ms Curran regarding her stud cattle. In 2016 he entered into another agistment agreement with Mr Martin and Ms Gibson (IM1 at 86). In the period 2013 to 2017 receipts for agistment payments increased from $6,000.00 to $21,000.00 per annum.
Charges for agistment were Hayter $3.00 per week for heifers, Curran $4.50 to $6.50 per week per animal and Martin $5.00 to $6.50 per week (IM3 at 6).
Explaining the agistment arrangement with the Hayters he said that he kept the rates stable because the Hayters were long-term customers with a considerable number of animals (IM4 at 6-15). He said it was important to him that the Hayter cattle were manageable. The Hayter cattle were agisted for a period of slightly over 2 years but then taken back by the Hayters. Where Hayters sold cattle, agents would visit the property, cattle would be mustered, and they would be then collected by the Hayters. He noted that the Hayters conduct breeding activities as well as milking and he stated that the Hayter animals were "show quality" (IM4 at 14).
The Curran's cattle were high-grade prizewinning breeding cattle (IM4 at 17-18) The Martin and Gibson cattle were their older herd and there were about five heifers (IM4 at 19).
Ian McIntosh stated in oral evidence that Brett Hayter visited the Denbigh (west) side to check on the agisted cattle every 2 weeks or so, sometimes more frequently. He would inspect the cattle, perform some veterinary work and have discussions about which animals may be moved.
Brett Hayter's cattle were kept separate from Ian McIntosh cattle, they were not run together. The Curran and the Martin cattle also had their own paddocks. From time to time he had to refuse Hayter cattle if there was insufficient food (oral evidence and IM4 at 6).
Certain obligations so far as fencing was concerned were required under the heritage agreement with the Minister.
Additional new fencing work was conducted on Ian's side over the period 2013 to 2015. Ian McIntosh said that this allowed stocking rates to increase by up to 50% (IM1 at 74-75). He also stated that he engaged in major weed control operations on both company land and Heritage Curtilage (IM1 at 76-77).
He described farm infrastructure on the land including the Heritage Curtilage which contained most of this infrastructure but was used for operations on the company land. This included sheds, stables, silos, yards, a cattle crush and a ramp (IM1 at 79).
He says that over the relevant years the activities on the company land and the Heritage Curtilage did not change other than the increase in agistment cattle on the land.
The JAER shows Ian having a trading profit (after small direct expenses) of $18,182 in 2014, $14,372 in 2015 and $41,428 in 2016. The depreciation worksheet shows that the cost of plant and equipment on the Denbigh (west) side cost $156,000 (IM2 Ann 2).
Ian McIntosh provided further detail of the area of rental properties of the rental cottages being Cluny Hill and Plantation Cottage which used 1.25 hectares of land. Rental income from one cottage between 2013 and 2015 was $8,000, and $13,350 for the other one in 2015 only (IM1 at 55).
There was detail of various non primary production works on the company's land (IM4 at 2) including road works to access the homesteads paid for by AV Jennings because the 2011 sale had cut off access from the Northern Road; a new gate; creation of a horse paddock attached to one of the rental cottages (0.7ha) certain further heritage conservation and fencing works; work performed by AV Jennings of a due diligence and survey nature involving a few hours or few days of work; the construction of a boundary fence between land owned by AV Jennings; some sewerage work and a retention basin in October 2016 outside the relevant period which were AV Jennings work; Endeavour Energy ran transmission lines across the company's land and leased and accessed 540 sq m for 1 year for storage; RMS acquired part of the Bangor side for road widening and did associated due diligence.
Tree planting on the land was to screen it from the AV Jennings land and to provide shelter for cattle, and it took 3 weeks or so of work to plant (IM4 at 4-5).
He rejected the suggestion put to him that all the works regarding fencing, planting and renovation were to benefit the Heritage Curtilage. The livestock accounts showed natural increase in 2015 and 2016 (IM1 at 86). As Ian's herd was declining, agistment cattle numbers were increased. At 30 June 2015 there were only 32 breeding cows left owned by Ian McIntosh.
His only farm income was from sales of the breeding herd and agistment (IM1 98-100). The contribution from cattle to his income he accepted as small but not "trifling".
He gave evidence of a claim for rent in relation to the sewer pumping station, apparently Gray & Walsh were trying to get $1,000.00 per week by way of rent in arrears and in the future.

Evidence of Brett Hayter

Mr Brett Hayter and his brother conduct a dairy milking and breeding operation and the family has been doing so since 1859. They had a dairy herd in the relevant years of between 140 and 150 head which produced about 80 calves per year. The business produced 600,000 litres of milk per annum which was sold to Lion Food & Drink (BH1 at 2-3).
They also sell some of their heifers both domestically and internationally (BH 1 at 4).
They have four full-time employees, two casuals and three contractors.
Their land is 400 acres (161 hectares) and is not big enough to grow out the heifers to markeTable size (BH 2 at 2).
They have had an agistment arrangement with Ian McIntosh since 2002 whereby they move 50 to 60 heifers at one time on agistment to Ian's land.
In an affidavit (BH 2) Brett Hayter gave evidence of his regular visits to Denbigh (BH 2 at 5-8). He attended once every 2 weeks or so and sometimes more often, for example when heifers are about to calve and he needs to move them back to his own property. He spends a few to many hours each visit. While there he inspects cattle; does cattle work including drenching, dehorning and joining; he can use the cattle crush on Ian's property. He also has discussions with Ian.
Annexed to BH2 were confidential financial statements of the Hayter's business. The respondent tendered a confidential summary (ExhR2). Through the relevant years this shows good five-figure totals for annual cattle sales and solid six-figure annual totals for milk sales. The business however made losses which Mr Hayter explained as poor milk prices and weather conditions during the relevant years. Examining the accounts one can detect very large feed bills which are by far the biggest expenditure item (about 50% of operating expenses).

Accounting Experts

The applicant led evidence from Mr Temple-Cole as their accounting expert. The respondent had Mr Rossetto as their expert. The two accounting experts also provided a joint accounting expert report (JAER) covering the areas of agreement and disagreement between them.
Mr Temple-Cole consolidated the 'Farming Operations' of Richard and Ian McIntosh on the subject land in his first analysis of the accounting position. He concluded that the consolidated Farming Operations made a trading profit but a net loss in each relevant year (JTC2 at 35 as revised by Exh A8). He also expressed the view that the Farming Operations had a commercial purpose or character and that it was of a significant and substantial commercial character or purpose. He also found the financial information showed that the operations were conducted for the purpose of profit. He also concluded that the financial information established that the dominant use of the land was the Farming Operations.
Mr Temple-Cole also looked at the operations of Head Pastoral (JTC3 at 66 & 68).
In his third report Mr Temple-Cole (JTC3) looked at the entirety of the primary production activities (including Molong) of all of the McIntosh family primary producer users of the land
He refers to the activities off the land as being the 'Wider Farming Operations' to incorporate the sheep activities of Richard at the property at Molong.
Mr Temple-Cole concludes that the Wider Farming Operations made a profit overall and also that the commerciality tests and the purpose of profit test were satisfied.
In 2014 the Wider Farming Operations made a net profit of $13,000; in 2015 $256,000; and in 2016 $58,000 (rounded). Richard's combined sheep and cattle operations made net profits in 2014 of $490,000; in 2015 of $648,000; and in 2016 of $522,000 (rounded) (JTC3 at 68).
Mr Rossetto called by the Chief Commissioner provided detailed comments on Mr Temple-Cole's three reports. He noted some areas of potential calculation differences between the two experts.
The principal point of difference between the two accounting experts was that Mr Rossetto was of the view that the profit result needed to account for notional expenses of the cost of land (rates and taxes reflected in a notional agistment fee) and a notional cost of labour for the proprietor of the cattle operation. He took as authority for this the provisions of Land Tax Ruling LT097.
Mr Rossetto found that the Farming Operations were not profitable if account was taken of notional costs of labour and agistment, and on that basis found that the commerciality and profitable purpose test were not satisfied. He also took account of the value of the land in the relevant years.
It is to be noted that Mr Rossetto was told to exclude consideration of Richard McIntosh's Molong operation as Wider Farming Operations.
Mr Rossetto noted that farming activity was conducted on most of the company's land and then discussed the changes to the farming operations over the land tax years in question. Mr Rossetto's conclusion was that there was a loss on the operation because of the failure to take into account notional expenses.
In calculating the financial results Mr Rossetto allocated a notional cost to labour of approximately $71,000.00 to $102,000.00 per annum at the farm hand award rate without allowing for any on costs such as superannuation, workers compensation, payroll tax etc. Furthermore, in his view the user of land should pay enough to the owner by way of agistment fees to enable the owner to break-even on rates and taxes. He concluded that the McIntosh family would not make a living from their cattle operations on the land.
The experts in their JAER went into considerable detail as to their differing interpretations but their principal areas of disagreement can be boiled down to two. Whether account can be taken of the Richard's Wider Farm Operations so that the sheep activity at Molong can be regarded as sufficiently connected with the operations on the Bangor (east) side; and whether account should be taken of the notional cost of labour and land use (even though no amount was actually paid) in the calculation of profit.
The joint experts end result was set out in agreed financial schedules. The following figures are rounded. Kisel trading profit in 2014-2016 was $12,000; $23,000; and $0: net profit/loss ($13,000); $2,000; ($1,000). Richard's Family Trust 2014-2016 trading profit $479,000; $625,000; $522,000: net profit/loss $142,000; $350,000; $137,000. Head Pastoral 2015-2016 trading profit $0; $48,000; net profit/loss ($34,000); ($87,000). Ian McIntosh trading profit 2014-2016 $17,000; $14,000; $41,000: net profit/loss $3,000; ($13,000); $8,000.
Agricultural Experts
The applicant relied on the reports of Dr Neil Moss. The respondent relied on reports of Mr Peter Schuster.
Dr Moss gave detailed evidence about the state of the Land and the farming activities and equipment and facilities on the land at the time he visited the land in 2017.
He discussed (NM1 at 7) the Local Land Service notional carrying capacity for the land at 5.5 stock units per hectare and noted that the total number of cattle on the land in the following years was as follows: 2013 - 247; 2014 - 178; 2015 - 200; 2016 - 385 which was above the notional carrying capacity in each year other than 2014 (a drought year). There were also the following number of horses on the land in those years: 17; 16; 14 and 16. The stocking rate on the effective land exceeded the notional stocking rate in each of the relevant years except the drought year (2014). No distinction was drawn between the company's land and the Heritage Curtilage. He said that the reduction in stock numbers in 2014 was in his view reflective of the severe drought conditions during that year. In his view a profit could have been generated with the resources at hand, and the operations demonstrated an ongoing long-term commitment to land care and capital works. The pastures were in good condition and so too were the cattle when he inspected the land.
When Dr Moss inspected the land including the Heritage Curtilage it was divided into 20 paddocks. The fences were good. Many of them were new and he considered that this should help profitability. The cattle yards, the sheds, the stock watering and supplementary feeding and pasture improvement and weed control were all appropriate. There was also a relationship with a stock agent, and relevant machinery was there. He noted Ian McIntosh's big investment in fencing and weed control on the Denbigh (west) side.
Dr Moss also noted the amount of work that was done to run the cattle business which included stock management, repairs, pasture improvements, and bookkeeping. In his view there was considerable ongoing work required as there were 7 separate mobs of cattle on the property owned by Richard's two entities, Ian, Jim Head, Brett Hayter and the two other agistees. He noted that the land used by Head Pastoral was high quality and in good condition as were the cattle. In his view a lot of work had gone into making the property capable of producing a profit over the foreseeable future (NM1 at p17). He also saw the agistment activities as being sustainable and that the outlook for the future with good prices also looks favourable (NM1 at p18).
Mr Schuster discussed the characteristics of a commercial cattle operation that has a significant and substantial purpose or character. He also commented at some length on the reports of Dr Moss. Mr Schuster also took into account what would be a suitable notional wage for the operator of the business and a suitable notional commercial agistment fee and looked to see whether each cattle operation would make a positive financial return.
In his first report Mr Schuster looked only at the 3 McIntosh family operations on the land (i.e. Richard, Ian and Jim Head) and accepted Dr Moss' statement of the carrying capacity of the land. In his view a notional wage of $55,000.00 per annum was appropriate for a proprietor of a cattle operation and a suitable notional agistment fee would be $4.50 per head per week. In Mr Schuster's view no profit on a continuous repetitive basis could be made if allowance is made for notional wages and a notional agistment fee.
He noted that Ian McIntosh's operation had a low intensity and that Richard's only allocated minimal expenses to Bangor which were represented in better profits. In regard to Head Pastoral he saw it as being an operation of greater intensity with the ability to generate profit.
Mr Schuster said (PS1 at 204-207) that while the combined Farming Operations on the subject land by the McIntosh family (Richard, Ian and Jim) has the characteristics of a cattle operation with significant and substantial commercial purpose or character the continuous profit making potential was compromised. He said that if Richard's and Ian's cattle operations were looked at in isolation then they may not be commercial. He does opine that Head Pastoral's operations are more intensive and likely to generate profit continuously.
Once again the area of most significant difference between the two experts was whether allowance needs to be made in calculating profit for notional labour and land access costs.
In the end Mr Schuster concluded that the McIntosh family's combined cattle operations have a significant and substantial commercial purpose or character but they are not profitable on a continuous or repetitive basis if a notional charge is made for labour and land access.
Mr Schuster then examined the aggregated cattle operations of the McIntosh family and whether such an aggregated operation made a positive financial return. He also took out Ian's agistment income.
Mr Schuster's conclusion that there was a positive financial return in each year of the aggregated cattle operations (PS 2 at 28) but Ian made no profit if his agistment income was removed.
In Mr Schuster's third report he took into account the "Wider Farming Operations" to include Richard's operations on the Molong property. He took the view that there was not enough evidence for him to determine what the financial position of the agistees was. More evidence was before the Tribunal about Mr Hayter's position. In his view if the sheep operation at Molong was included there was a significant increase in the financial return of the aggregated operation of the McIntosh family.
If the sheep operations were taken into account there were large operating profits which could be expected to continue to generate positive financial return in the future continuously or repetitively even without taking account of the agistment activities on the land (PS3 at 51(d)).
The issue for Mr Schuster was whether or not the cattle and sheep operations of Richard McIntosh were integrated. Mr Schuster noted that although the accounting functions were integrated that the cattle and sheep operations were not integrated for practical, functional or operational purposes. The movement of weighing scales between the properties and use of a farm vehicle on both was not regarded as having any significance. Mr Schuster took the view that the cattle operation was not a sideline. He also accepts that notional costs are not generally considered in determining profit and loss for accounting or tax purposes (PS3 at 113).
Mr Schuster discussed the figures on average hours worked by one person for a certain number of cattle (PS1 at 140) and concluded that the McIntosh family provided a comparatively high labour input for the number of cattle on the land which compromised profitability if a notional labour cost is applied. He referred to Meat and Livestock Australia survey evidence for comparison. Dr Moss did not accept the value for present purposes of the survey evidence (NM2 at 59-60). He pointed out that the survey was of larger operations, and that 24% of the beef herds in southern Australia were less than 100 head.
Other Witnesses

Mr Owen Walsh

Mr Walsh of Gray & Walsh is a land and property development consultant to the taxpayer and to the McIntosh family. He gave evidence of the rezoning process and the activities of other users of small parts of the land during the relevant period. These included Sydney Water's use of 0.1 ha for a sewer pumping stationand an access road and the 1 year lease of 540 sq m to Endeavour Energy to store building materials during the period of construction of a high-voltage power line.
He discussed the sub-division of the land in 2008 into six super lots with further approvals required, the heritage study, the creation of the Heritage Curtilage, and the heritage agreement. He also gave evidence about sales to AV Jennings in 2010 and 2015, and to Roads & Maritime Services in 2016.
He also gave evidence of certain other short term, minor uses of the land which included roadwork repairs, geotechnical surveys for AV Jennings, and RMS due diligence on the land it purchased, fencing in 2016, and formation of an earthen stormwater control basin in October 2016.
Evidence of Stewart Read
Mr Read is a senior heritage operations officer employed by the NSW Government. He provided an interesting report about the heritage value of the Denbigh property. He discussed its placement on the state heritage register, and the heritage agreement entered into in 2010 which required the owner to conserve and restore heritage items, and not do or permit anything to be done to a heritage item that adversely affects its cultural heritage significance or characteristics. The various heritage works were performed by 2013 and the heritage agreement was completed and formally discharged in August 2013. Mr Read made reference to the Conservation Management Plan (CMP) for the Heritage Curtilage developed by the company's architects in 2003 and referred to various provisions in the CMP related to retention and conservation and management of the estate including the deliberately cultivated landscape elements

THE ONUS OF PROOF

The Respondent submitted that the Applicant had failed to meet its s100(3) TAA onus of proof on the dominant use issue because of deficiencies of evidence concerning the non-primary production use of the land in the relevant years.
The Applicant's case was, in the main, very fully established by extensive evidence. In submissions it pointed out that a number of complaints by the Chief Commissioner related to insubstantial issues or uses which occurred outside the relevant years.
Where there has been an insufficiency of evidence on a particular matter I have noted it in this decision but so far as the insufficiency relates to non-primary production uses, in my view this relates to relatively minor matters which do not affect the overall outcome. The Applicant has adequately established the extent and impact of these uses which allow me to proceed to the next substantive issue- the 'dominant use' test. Accordingly, I find that the Applicant has carried its burden of proof unless stated otherwise.

THE DOMINANT USE TEST

The case concerns the availability of the exemption from land tax to the applicant for the 2014 to 2016 land tax years. It is necessary to look at the use of the subject land position as at midnight on 31 December of the preceding year taking account of the use for a period of at least 6 months each side of that date It is appropriate here to look at the position between the 30 June 2013 and 30 June 2016 (see Leda Manorstead Pty Ltd v CCSR [2010] NSWSC 867 at [4] (Leda Manorstead).
The case is conducted on common ground that: 1. the company's land was not zoned as "rural land"; and 2. that the land was used for the maintenance of the animals for the purpose of selling them or their bodily produce (for example: their calves or their milk).
The tax exemption for land used for primary production requires that the "dominant use" of the land be for the maintenance of animals etc (s10AA(3) LTMA). The ordinary meaning of dominant use was discussed in Leda Manorstead at [69]. 'Dominant' connotes "ruling, prevailing, or most influential" (the words main, chief or paramount have also been used in this context). "Use" means actual physical deployment of the concrete mass of the land itself for the purpose of obtaining a present benefit or advantage from it (CCSR v Metricon Qld Pty Ltd [2017] NSWCA 11 at [61] ('Metricon'). Use is not concerned with the identity of the owner of the land but rather what is done with the land by the user (Metricon at [47]).
Both Metricon and Leda Manorstead approved the "proper approach" adopted in the Queensland case of Thomason v Chief Executive, Department of Lands (1995) 15 QCLR 286 at 303 ('Thomason') in ascertaining the dominant use of land.
In Thomason the land was 24.28 hectares and there was an agistment agreement with a Mr Sellin a dairy farmer to accommodate 30 to 40 dairy heifers. Most of the land was used for pasture growing and grazing which produced agistment income. Ultimately it was held acceptable to consider the use of the land under agistment as part of Mr Sellin's dairy enterprise and used in the course of his business (which was significant and substantial). The parcels of land used by the dairy farmer Mr Sellin could be aggregated as all part of his business.
The other uses that were balanced against the agistment use (as dominant use implies other uses may be made of the land not necessarily ancillary to the main use) were a small amount used for residential, and a very small amount was used for a commercial rain gauge. It is use of the land not the identity of the owner that is relevant.
In looking for the dominant use one does not just focus on the area used or the main source of revenue. All the uses are considered and weighed against each other to determine what the land is "mainly devoted to".
The factors to be considered by an objective observer viewing the land as a whole are the area of land used; the nature, extent and intensity of all the various uses; how much is used for incidental purposes (for example roads); the extent to which the land is used for purposes which are unrelated to the others (for example a homestead used by a primary producer on the land would be used for a related purpose); the time, labour and resources spent in using the land for the various purposes.
There may be multiple types of primary production use on the same land: for example the grazing of cattle (beef and dairy); the grazing of sheep for wool or meat; the growing of crops (hay, grains, grapes, cotton). If the various primary production uses can be seen as a whole to be the main or chief use of the subject land outweighing the non-primary production uses that will mean that the dominant use of the land is for primary production. As a practical exercise it may be seen as an aggregation or consolidation of the primary production use but there seems to be no reason in principle why all the primary production uses should not be weighed against all the non-primary production uses to determine which is dominant. Consolidation of activities and results was applied in Vartuli v CCSR [2014] NSWSC 678 at [36] (Vartuli afi).
If there are multiple uses of the land then there is need to look at each use in relation to each land tax year. In this case there were changes in primary production use over the relevant period (as Richard transitioned from breeding to trading store cattle; as Jim Head began operations of Head Pastoral; and new agistees were added on Ian's side). There were various non primary production uses of the land over the period.
Following Thomason, if one were to look at the whole of the land objectively (in say July 2013) as a matter of first impression the vast bulk of the surface area of the subject land (a little over 450 ha) consisted of paddocks grazed by cattle. A small proportion of the surface area was devoted to associated improvements (the farm houses, sheds, roads, dams etc). A very small part (about 1000sq m OW1 at 17) was the fenced and gated site for the sewer pumping station completed in 2011 and associated access road, and rental cottages(1.25 ha- IM3 at 3).
It is reasonable to assume that the objective observer would know something of the history of the land. The observer would note that the taxpayer's land had been used continuously for various kinds of primary production activities since the early 19th century. The respondent did not put the history of the use of land in issue.
That makes it relevant to ask whether anything material changed in the use of the land through the relevant years which made the use different from its historical primary production use.
Looking first at the non-primary production uses of the land through the relevant period we find that the pre-existing use of the sewer pumping station and associated activities continued, short term geotechnical and other surveys and due diligence activities occurred, fencing was installed, a short term lease for storage was granted, road repairs were made, trees were planted for largely aesthetic reasons and certain agricultural heritage works were undertaken on the Heritage Curtilage. Two cottages and a small amount of curtilage were rented out.
Taken together I regard these non-primary production physical uses in the context of this land as de minimis as they were leases or licences of small areas for sewer, cottages and storage or were of a transitory nature (a few days or weeks for surveys, road works, planting, fencing etc).
The evidence was that the 'seamless' use of the company's land and the Heritage Curtilage continued despite the change in ownership of the Heritage Curtilage.
The Chief Commissioner submitted that another use of the land was a "heritage use". I am unable to accept this submission. Considerable work to preserve heritage aspects of Heritage Curtilage was undertaken up to May 2013.Replacement and improvement of fencing continued. The evidence established that this did not materially interfere with the grazing activities. In fact it made them more efficient.
The Chief Commissioner suggested in submissions and in the course of cross examination that the grazing of cattle was not for the purpose of selling them or their natural increase or bodily product but rather to comply with the heritage agreement. In my view the documents relating to the heritage aspects of the land do not require or compel the Heritage Curtilage to continue to be used for farming or cattle grazing to enhance the heritage value and character of the curtilage. Such an obligation cannot be derived from the documentation.
The applicant convincingly argued that the CMP had no legal force and that the heritage agreement had been completed by May 2013 and contained no requirement to continue to graze cattle or to continue to do any primary production on the land. I am unable to distill any obligation on the Company to continue grazing activities on the land or on the Heritage Curtilage.
In any event I can see no logical reason why cattle could not be maintained for the relevant statutory purpose even if it might be a requirement of a heritage instrument.
The Chief Commissioner also suggested in submissions that the land was used for development purposes. I reject that submission. Although the land was zoned to facilitate development the company merely held the land. It did not engage in physical development other than to improve the land by fencing, screen planting and other minor works.
Looking now at the primary production uses, we find that throughout the relevant period Ian's side (including his part of the Heritage Curtilage) has been used by him for cattle breeding; and by Brett Hayter for agisting part of his dairy herd; and in 2015-16 by Ms Curran and Mr Martin for agisting part of their herds. The total number of cattle (owned and agisted) on Ian's side varied between 90 and 126 over the relevant period.
The respondent argued that the nature of the agistment arrangements were such that Mr Brett Hayter was no longer in control of the cattle that he had agisted on Mr Ian McIntosh's land. Relying on the decision in Shanahan v Chief Commissioner of land Tax (1996) 32 ATR 468 to the effect that a person who merely uses the land to agist another person's cattle is not using the land for primary production because that person is not using the land for the purpose of selling the animals, Ian's agistment business was argued not to be a primary production use.
There was debate between the parties about the issue of agistment. The word "agistment" is an expression which can cover a variety of legal relationships between a land owner or head tenant (agistor) and an animal owner (agistee). It may take the legal form of a bailment of the animals, or a licence to graze the land and enter to care for the animals, or a lease with exclusive possession (Big Top Hereford Pty Ltd v Thomas [2006] NSWSC 1159 per Brereton J at [36-37]. It depends on the substance of the arrangement (Streatfield v Winchcombe Carson Trustee Co (Canberra) Ltd [1981] NSWLR 519).
An agistment arrangement involving the agistor taking control of the animals and responsibility for their health and welfare, where the agistee has no right to enter the land would ordinarily have the result that it is the agistor as bailee who is using the land and not the agistee.
If the agistor does not take control of the animals so as to become responsible for them it is the agistee who is using the land
In the present case the evidence is that Ian McIntosh did not take control of Brett Hayter's animals. The cattle were moved on and off the property informally after discussion between the two. Agents for Mr Hayter would come to inspect the cattle prior to sale. Mr Hayter visited the land regularly to inspect the animals, to work with them and to provide veterinary care. Ian McIntosh's role was to keep the animals under observation and report any issues and presumably move them between paddocks. Mr Hayter's animals were kept separately from Mr Ian McIntosh's cattle. If a problem arose with the agisted animals Mr Hayter dealt with the problem.
In this case I find that the nature and substance of the agistment arrangement is such that Mr Brett Hayter is a licensee who retains control of his cattle and so can be seen as the person who uses the land by agistment (in a way not dissimilar from that which occurred in Thomason). Although the evidence concerning the arrangements other agistees is not as clear, it seems fairly safe to assume their arrangements were similar to that with Mr Hayter. In any event their use of the land is quite minor.
On Richard's side of the land we find through the relevant period that the land has been used by him (through his entities) and by Jim Head and Head Pastoral for the grazing of both breeding and store cattle, and of horses. The total number of cattle on Richard's side of the land over the relevant period has varied between a low of 76 and a high of 259 and the total number of horses between 14 and 17.
Looking then at the circumstances from 30 June 2013 through each of the 31sts of December relevant to the 2014 to 2016 land tax years to 30 June 2016 what an objective person would observe is the continuity of primary production use with some change as to actual users.
Although there have been fluctuations in the number of cattle on the company's land over the period and the company's land has declined in size I find that there has been no essential change in the primary production use of the land during the relevant period. Indeed there had been no essential change in the use of the land for decades before that.
I find that the land is mainly devoted to primary production uses which significantly outweigh the competing non-primary production uses and thus the primary production use of the land during the relevant years meets the dominant use test in s10AA(3) Land Tax Management Act. This is because of the area devoted to cattle, the number of cattle grazed, the number of cattle grazed relative to the area and the carrying capacity of the land, the amount of work done on the land by the McIntosh family, and the size and intensity of the continuing grazing activity on the broadacres of land by the McIntosh family and agistees who use the vast part of the surface area and produce most of the cash income generated by the land (although the cattle operations were not very profitable in the relevant years).

THE COMMERCIALITY TEST

As the land is not "rural land", in order to qualify for exemption from land tax the dominant use of the land must also meet two further tests. The first is the test of having a "significant and substantial commercial purpose or character" (the 'commerciality test' s10AA(2)(a) LTMA)
The genesis of the test to overcome the effect of the decisions of the High Court in Thomas v FCT 72 ATC 4094 and Hope v Bathurst City Council (No.2) [1980] HCA 16; (1980) 144 CLR 1; 80 ATC 4386 was discussed in some detail by Leeming JA in Maraya on appeal at [72-82] and White J in Vartuli afi at [107] (full citations in par 170). It is not enough for the user to be carrying on business in a commercial way. The requirement that the operation have a commercial purpose or character has a stringent further qualification (see Leeming JA in Maraya on appeal at 82) that it be not only "significant", but more importantly "substantial" to qualify for the exemption.
It was mentioned in Maraya on appeal at [65] that the "significant and substantial rule" was introduced to prevent exploitation by persons who are not genuine primary producers. I find no suggestion here that the persons are not genuine primary producers. It is almost part of the McIntosh DNA and the Hayter family have been in the dairy business since 1859.
The expression "significant and substantial commercial purpose or character" was discussed in three leading cases: chronologically Thomason v Chief Executive, Department of Lands (1995) 15 QLCR 286 ('Thomason'); Maraya Holdings Pty Ltd v CCSR [2013] NSWSC 23 ('Maraya at first instance or afi') (Maraya Holdings Pty Ltd v CCSR [2013] NSWCA 408 ('Maraya on appeal) ;Vartuli v CCSR [2014] NSWSC 678 ('Vartuli afi'); and (Vartuli v CCSR [2015] NSWCA 372 ('Vartuli on appeal').
In Thomason at 305 "commercial" was defined as interested in financial return or capable of profit. So one looks for a genuine and sizeable intent of reward if not profit. "Purpose" was defined as the object to be attained or the intended result and this contains a subjective component. "Character" is the aggregate of qualities and is an objective consideration. "Significant" means noteworthy, important, consequential, real or weighty. "Substantial" means really important and of a considerable amount.
"Significant" implies sufficiently large and important to be notable as distinct from modest or minor. A sideline or a hobby would not ordinarily be significant. As Gzell J put it in Maraya afi at [84] the meaning of 'significant' in the LTMA falls on the upper end of the spectrum of meanings. In order for an operation to be "substantial" it must be more than just notable, it must stand out from the crowd and be a good deal more than average. Significant and substantial are separate concepts but one builds upon another, see White J in Vartuli afi at [109]. 'Significant' establishes a bar to be surmounted and 'substantial' raises that bar because it is more stringent. "Purpose" and "character" are separate tests but not separate concepts.
The elements of the test can be distilled from the cases. In order for an operation to be "substantial" consideration must be given to evidence going to the following: 1. The relative importance of the operation. A fairly high degree of importance or prominence is required (eg does the operation have a long successful history or well above average performance). It must be serious or weighty by comparison with relevant comparatives. 2. A business may be carried on in a small way for a wholly commercial purpose - but that does not mean the purpose is significant and substantial. Just because the intensity of an operation is strong, for example the land is carrying above notional carrying capacity, that does not make the operation significant or substantial 3. The size and quality of the herd. 4. The depth of the operation (what facilities, plant and equipment are utilised and what are the future business plans). 5. The bulk of the operation. This involves considering the size of the herd relative to the size of the land and its carrying capacity. 6. The seriousness with which it is undertaken looking at the resources of time, labour and costs to develop and maintain the operation. 7. The quality of the operation. This involves its businesslike aspects (eg. care for pasture, water, fences, facilities, and the health of the cattle). 8. The intensity of the operation. In other words, is it a constant operation which entails considerable time for work/management and the commitment of financial resources and utilisation of the land to its full capacity having regard to natural conditions? 9. Comparisons with the scale (including the value of stock) and profitability of other equivalent operations. Although this is not an exclusive test but only a relevant consideration, it looms large in operations involving smaller herds and lower profitability and efficiencies of scale. 10. When comparing comparable operations one looks to how they use other land 'generally'. It has been said to be unrealistic to assess the subject land in the abstract by looking only at whether there is significant and substantial commercial purpose or character in relation to that land alone. One must look at how the use of the subject land compares with the "general use" of land (of the same kind). 11. When looking at comparable operations one looks to "relevant competitors" not necessarily those of the same size as those on the subject land but rather primary production activities of the same kind and of comparable size. 12. Contribution to the operator's income. The relative income contribution contextualises the significance and substance of the commercial purpose or character. In other words, does it have a high degree of importance. Where the operation is not the full-time occupation of the operator it is appropriate to look at the income relative to the operator's other income. Financial results are relevant and poor results require an explanation eg. drought. 13. One looks to see whether or not the use of the land does generate, or could reasonably be expected to generate, a profit that is a real and not a trifling contribution to the user's income. Or, often importantly, whether the use has the purpose of generating such a profit. 14. Whether there is a continuous lack of profit (which could lead the court to question or reject evidence that there is a profit generating purpose). 15. If the profit is small, or there are losses, this can be a telling picture of the lack of significance or substantiality.
Sub-section 2(a) and 2(b) of Section 10AA have a different focus. The profit is relevant for 2(a) because it helps determine if the income or profit is a matter of high importance and whether or not the operation is significant and substantial. In the case of 2(b) it looks to the continuity of a profit purpose despite the absence of profit and looks at the reasons for that absence. Under 2(b) no profits can be explicable but one should not transpose that test to sub-section 2(a).
In Vartuli afi it was not an error to exclude allowance for a notional wage but it is relevant to look at the amount of time and labour contributed to the operation. If there are no labour costs it could mean that it is a small operation.
In the case of a rezoning, if before the rezoning the use was significant and substantial, and it is continued to be used for the same purpose then it would continue to be significant and substantial even if it was possible to use the land more profitably.
The rate of return on the value can be relevant in some circumstances. In Maraya on appeal this was relevant because the cattle operations started around the time of the rezoning, whereas in Vartuli afi the cattle operation was long-running and analysing the rate of return on the value of the rezoned land was not useful.
In Thomason it was said there must be a genuine and sizeable intent or desire for reward if not profit. Would the business ordinarily generate reward if not profit?
The use of the phrase "commercial purpose" or "character" may cover newly established primary production enterprises which have the requisite serious purpose (eg. Head Pastoral) but have not yet developed a commercial character.
There were a number of primary production users whose operations led to the conclusion that the dominant use of the land was for primary production. It is appropriate to examine each such user to determine whether both singularly and viewed overall the combined or aggregated operations meet the statutory standard. In Thomason and Vartuli afi the aggregated operations on the land were considered.
The respondent submitted that if there is more than one user the aggregate of users cannot have 'a purpose' because of the subjective element of deciding purpose requires a single user. I reject that submission. It seems unduly restrictive. I am unable to see why multiple users cannot have the same or a materially similar purpose. In any event the character of the use by multiple users is not usually affected by subjective elements.
Turning first to a user about whom there is little space to argue that their operations have a significant and substantial commercial purpose or character we look at the position of Brett Hayter.
Mr Hayter's cattle were agisted on Ian McDonald's side of the land for reward for a number of years prior to and throughout the relevant period. Mr Hayter clearly conducts a longstanding commercial milk production activity (since 1859) and dairy cattle breeding operation on a fairly large parcel of land (160 ha).
His operations produce 600,000 litres of milk a year from 140-150 cows and sales of 60 dairy cattle over the relevant period. His gross income from sales of milk and cattle is substantial, as set out earlier (at par 95).
The experts all accepted in oral evidence his operation as a significant and substantial commercial operation, subject to issues of profitability.
The respondent tested Mr Hayter's evidence in order to support a submission that lack of profit during the relevant period by Mr Hayter cast doubt upon the commerciality of his operations.
The lack of profits was properly explained and I accept that Mr Hayter's operations have the relevant commercial purpose or character and reject the submission to the contrary.
The only issue really is whether Mr Hayter's use of the subject land is part of his milk and breeding operation. Clearly the cows agisted are part of Mr Hayter's herd, and are kept agisted due to space limitations at Mr Hayter's property until they are ready to be joined with the herd to be milked, or fattened and sold. The agistment arrangement has been in existence for many years prior to the relevant years. In Thomason it was held that the agisted dairy cattle used the taxpayer's land as part of the dairying business. The same approach should be applied here. For reasons discussed earlier the agisted animals were under the control and responsibility of Mr Hayter who is regarded as the user of the land.
As Mr Hayter's operations on his own property have a significant and substantial commercial purpose or character, his use of the company's land on which part of his herd is agisted is part of the same operation. This imbues the Ian's side of taxpayer's land with the same commercial purpose or character (see Thomason at p308 and Vartuli afi at 36).
The evidence of the position of the other two agistees who are using the land on Ian's side does not contain the same level of detail as for Mr Hayter. These two agistees had a much smaller number of cattle agisted on the subject land (about 5 in 2015 and 10 in 2016).
The agistment arrangements appear to be similar to those applying to Mr Hayter. There is nothing in the evidence to suggest they are different. In other words, the agistees were responsible for the health and welfare of their cattle while Mr Ian McIntosh kept a watchful eye on them. As a result the agistees are to be regarded as the users of the land. There was some evidence that Ms Curran had a highly regarded stud cattle operation. She won various prizes for her cattle according to the evidence.
There may be room for an inference that Ms Curran's cattle operation has the relevant commercial purpose or character but the evidence is insufficient to allow me to do this.
The evidence regarding Mr Martin's operation contains less detail. In the circumstances there is not enough to enable me to find that either Ms Curran nor Mr Martin's operations have a significant and substantial commercial purpose or character.
However they are minor users of the land (approximately 5 cattle each agisted on Ian's side in 2016) in the scheme of things and only give me a moment's pause to consider their relevance to the statutory test and its operation. I conclude that the use by these minor players does not materially detract from my conclusion.
As to Mr Ian McIntosh's own cattle operation the unchallenged evidence was that he worked 40-48 hours per week on the land. This no doubt involved working his own herd, maintaining the property and keeping a watchful eye on the agisted cattle on his side of the subject land. His activities were a continuation of his career as a farmer and grazier on the land.
During the relevant period he was aged between 62-64 years. He lived on the land in the farmhouse on his side.
He had between 30-47 cattle of his own over the relevant period and there were between 57 and 79 agisted cattle on his side of the land. The evidence was also that seasonal conditions were adverse during the relevant period and that the land was being run to capacity. However the evidence also showed that there was little or no net profit for Mr Ian McIntosh from his own cattle.
The Commissioner's submission was that calculation of a profit needed to take into account an amount to represent a notional labour cost of the business owner and a notional land use or agistment charge. This might be termed an 'economic' approach to profit. The applicant rejected this approach, submitting that there was nothing in the statute that required it and that nothing in the ordinary, accounting notion of profit that required it. This issue is discussed in more detail below, but I do not accept the submission for reasons I set out later.
Although the number of Mr Ian McIntosh's own cattle was small during the relevant period, some account needs to be taken of seasonal conditions; the agistment duties; the number of agisted cattle; and the capacity of the land to sustain the number of cattle. In my view if the land is being managed by one person truly working full-time, to the carrying capacity of the land, bearing in mind its size and seasonal conditions it can ordinarily be readily found that such an operation has a significant and substantial commercial purpose or character even if no overall profit is produced. Such activities may suit a person's lifestyle, it may even be enjoyable in a sense but it is much more than a hobby. It is their full time occupation and would be expected to produce a reward if not necessarily always a profit. Where the person is working full time in their business, we take the business as we find it, whether it is a perfect model or has flaws dictated by human and Mother Nature. In Ian's case it was a continuation of his life's work. The reward of a modest trading profit has resulted and he has benefited from having the farmhouse and other facilities available for personal and family use as well as for business.
If Ian had only his own 30-47 cattle using his side that use may not have had a significant and substantial commercial purpose or character. This is due to the size of the herd relative to the size of his part of the land, the smaller amount of work that would be required and the low profitability.
Considering Mr Ian McIntosh's and Mr Brett Hayter's operations combined I find that they had a significant and substantial commercial purpose or character. While there is insufficient evidence to reach a conclusion regarding the other smaller agistment users, their use has been minor and do not detract from my conclusion that so far as Mr Ian McIntosh's side of the land is concerned that its use meets the commerciality test in s10AA(2) LTMA in all the relevant years.
On Richard's side the operation of Head Pastoral, which used Richard's land and also expanded to nearby agistment land, from its commencement in 2014 building to 259 head of cattle in 2016 had a commercial purpose from the outset, which in my view developed to a commercial character. The principal, Jim Head, was engaged full-time in his cattle business from the time he finished college at the end of 2015 and gained the professional qualifications to make a career in primary production. He had formed Head Pastoral earlier in 2014 and was engaged in developing the cattle business through the purchase of cattle and working them weekends and holidays until he could devote his full-time attention to it.
At 31 December 2014 I find that Head Pastoral had only 30 cattle valued at $95,000 and had made no sales. As Jim Head was working the cattle only part time, the evidence is insufficient to enable me to determine that the use of the land by Head Pastoral met the significant and substantial commercial character test at that date. Subsequent events bear out that there was a serious business purpose and Jim Head had the experience, access to resources and educational background to drive that purpose forward.
I find that from the end of 2015 when Jim Head was working full-time in the business and managing a herd which numbered 259 at 30 June 2016, and which used the land to its full capacity given seasonal conditions and the other exigencies of primary production and life in general that his use met the commerciality test.
Prior to the formation of Head Pastoral, Jim Head was treated as owning as many as 15 head of cattle on his own account which ran together with and were managed in common with Mr Richard McIntosh's cattle. For present purposes it is sufficient to treat his 15 'personal' cattle as if they were Mr Richard McIntosh's cattle.
It is common ground that Richard McIntosh's Molong sheep operation is of a size and importance that it had a significant and substantial commercial purpose or character. The controversy between the parties is whether Richard's cattle operations on the subject land and the sheep operations at Molong can be regarded as part of the same business.
If the sheep and the cattle operations are part of the same business the cattle operation will be invested with the same commercial qualities as the operation at Molong.
The Chief Commissioner submitted that the sheep operations and the cattle operations should be regarded as separate businesses and that the cattle operation did not meet the commerciality test.
Obviously if the cattle had been located on the Molong property the answer to this submission would have been rather easy.
It is also worth noting that it is a common phenomenon for primary producers to have operations on separate properties which may be located at a distance from each other - sometimes in different states. They may also involve different types of stock or crops depending on local conditions.
Here Richard's cattle were not transported between the two properties. Richard himself moved between them. There was also only minor sharing of items of equipment (a cattle weighing scale and a farm vehicle) between Molong and Bangor.
However the evidence establishes a number of connecting factors between Richard's sheep and cattle operations. Richard is responsible for the overall management of both operations. His father Ron who resides at Bangor is responsible for day to day management of the cattle and the land on which they graze. The accounting, bookkeeping and reporting functions cover both activities (for example for tax purposes) and do not separately identify two business operations, although there is recognition of cattle and sheep trading activities in sub-accounts. General farm expenditure is not separated as between the operations.
There is a single bank account through which all trading receipts and expenditures pass. The farm insurance policies for the relevant years cover both properties.
The evidence was that the cattle operations, while contributing relatively little to the profits of Richard's Wider Farming Operations provide a useful source of working capital if needed. Because of the different climatic conditions at Molong and Bangor the cattle operation can also spread the financial risk of farming operations.
In Westpac Banking Corporation v CSD (Qld) [2003] QSC 483 White J. considered the question of whether a consumer banking division of Chase AMP Bank could be regarded as a separate business so that the acquisition of certain of its assets would be subject to stamp duty. It was held at [73-74] that the division was not a separate business because of its interdependence) meant it could not be described as separate from the Bank of which it was a division.
The argument of the Chief Commissioner relies on the physical separation of the sheep and cattle by 4 hours driving time. There is also an element in the argument that as cattle and sheep are different species with different needs and management requirements they should be treated as the subject of separate business operations.
If I were to accept the Chief Commissioner's submissions that the cattle operation on Richard's side should be viewed on a standalone basis it is doubtful that a separate cattle operation on Bangor would meet the commerciality test in 2015 and 2016 at least, even though it was operated in a business-like and professional manner. Combined Kisel and Richard's Family Trust cattle numbers declined from 142 to nil between 30 June 2013 and 30 June 2016. The amount of time devoted to working Richard's cattle by Richard, Ron and Jim Head did not amount to a full time commitment. Trading profits from cattle sales profits were modest in 2014-2016. Until Head Pastoral built up, the land appears to have been underutilised. As Head Pastoral operations developed the intensity of utilisation of the land grew, so that from the end of 2015 Richard and Head Pastoral were conductin a combined operation that would meet the commerciality test having regard to the number of cattle, the intensity of the operation, the additional care for the land provided by Jim Head when he began his full time commitment to his business.
However, I find that Richard's cattle operation can be regarded as part of his Wider Farming Operation at Molong through the relevant years because of the interconnecting integrative elements (management, financial, banking, insurance, accounting, and risk management) between the two operations. This is sufficient to enable Richard's sheep and cattle operations to be regarded as part of the one business whose use of both Bangor and Molong had a significant and substantial commercial purpose or character.
Taking account of the findings in respect of both Ian's side of the property and Richard's side of the property my conclusion is that the use of the land has the required commercial purpose or character to meet the test in s10AA(2) LTMA.
I am fortified in this view by the remarks of White J in Vartuli afi at [90] where his Honour said: If it were established that the use of the land had a significant and substantial commercial purpose or character at the time of rezoning, then in my view a continued use of the land in the same way and for the same purpose would have continued to be for a substantial and significant commercial purpose and have a significant and substantial character, even if the land could have been put to more profitable uses.
The land was rezoned in 2007. The Applicant was assessed for Land Tax in 2014. This implies that for 7 years the use of the land was regarded as having a significant and substantial commercial purpose or character. I am unable to see any material change in the operations on the land except some gradual winding down of activity by Richard and Ian as they grew closer to retirement, and the building up of agistment activities and Head Pastoral.

THE PURPOSE OF PROFIT TEST

The second requirement in s10AA(2) LTMA for the land to be exempt from land tax where it is not "rural land", is that the primary production use must be engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made) - the "purpose of profit" test (s10AA(2)(b) LTMA).
The purpose of profit test is a separate, additional test. The pursuit of profit is a relevant consideration in considering the commercial purpose or character of a primary production use. In Vartuli on appeal Gleeson JA at [130] noted the different focus of the requirements of paras10AA(2)(a) and (b) LTMA, and cautioned against transposing them. Under para 2 (a) the profit issue goes to the significance and substantiality of the commercial purpose or character of the primary production use. Under para 2(b) the purpose of profit test looks to the continuity of the profit purpose. The purpose can continue despite the lack of profit. Much will depend on the explanation for the lack of profit.
In Maraya afi Gzell J said (at [101]) that the purpose of profit test introduces a subjective element. But the mere assertion by the operator of that purpose will not be enough to satisfy the test.
If it be found that the primary production use of non-rural land has a commercial purpose or character, and a fortiori if it is found to be significant and substantial, it seems likely that the primary production operation use would be found to be engaged in for the purpose of profit. Otherwise it would be hard to say the use was commercial.
As the focus of the "purpose of profit" test is on the engagement in the primary production use on a continuous or repetitive basis, it may be that a one off speculative primary production use of land would not necessarily permit that land to be exempt from land tax. The test looks to a dedicated use of the land.
In the present case each of the users identified was using the land, while their cattle were on it, on a continuous basis.
Richard's and Brett Hayter's use of the land have been found to satisfy the commerciality test.
These conclusions about commerciality and continuous use of the land are sufficient to answer the purpose of profit test for Richard McIntosh and Brett Hayter.
As for Ian, his activities involved continuing his life's work as a cattle producer, working with his own cattle and keeping his eyes on the agisted cattle of Brett Hayter and the two minor agistees. He worked full time in his business during the relevant years. One would not expect him to do this unless he had a genuine purpose of seeking reward, if not profit (Thomason at p306). The profits actually produced by Ian's own cattle were small but the experts agreed that there was some potential for profits to be produced by Ian on a continuing basis if various changes were made. Ian candidly accepted that his cattle operations on the company land were 'terminal' in the sense they would cease when the land was sold. However, I do not consider that this detracts from the purpose of profit while those operations continued in the relevant years. The operations of the two minor agistees on Ian's side can be ignored as negligible and do not affect this conclusion.
As for Head Pastoral at 31 December 2014 the business had commenced operations on Richard's side with the purchase of 29 cows and calves and 1 bull in October 2014. The herd was built up over 2015. Jim Head returned to work on the property full time during college vacations and every third weekend through 2015. He worked full time from the end of 2015. By 30 June 2016 Head Pastoral had 259 cattle. In my view, the operations of Head Pastoral had the purpose of profit from the time its operations commenced.
Although this disposes of the point, there was a spirited debate between the parties' representatives and their experts as to the meaning of "profit" in the context of s10AA(2) which has implications for both limbs in the sub-section.
The Chief Commissioner submitted that a primary production operation could not be regarded as "profitable" economically unless there was a provision in the calculation of profit for a notional cost of labour of the proprietor if that person works the land, and a notional cost for the use of the land.
The word "profit" is not defined in the LTMA. In Vartuli on appeal (at [181-184]) it was held not to be an error by the primary judge to refuse to impute a notional labour cost. Time and labour are taken into account but are not allocated a monetary value as such.
The accounting experts agreed that notional costs were not required by the accounting standards. Mr Rossetto's view expressed in the JAER was that allowance should be made to properly consider the comparative profitability of a business.
The applicant argued that there was no statutory requirement that profit should be read as meaning economic profit. The applicant said the profit result was only one factor for consideration and should be calculated according to ordinary accounting principles, without taking account of expenses which had not, in fact, been incurred.
I agree with the applicant's approach to the calculation of profit. It accords with accepted and clear cut principles. To adopt an economic approach requires, in my view, the authority of statute or binding precedent. It was interesting to note the expert evidence showed that many beef producers in southern Australia in the period 2000-2018 would not be profitable if such notional costs were factored in (NM2 at 9).
The use of notional costs adds an unnecessary area for argument between the parties. For example, what is the appropriate notional charge for labour and land use in every individual circumstance? What allowance if any is to be made for the value of fringe benefits for the proprietor such as the use of accommodation, business vehicles, farm land for family and personal purposes. What allowance, if any, is to be made for labour which is reflected in the capital value of the land (for example: new fencing and dam building).

Conclusion

Accordingly I conclude that the dominant use of the subject land was for the maintenance of animals for the purpose of selling them or their bodily products. That that use had a significant and substantial commercial purpose or character. It was engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit was actually made).

ORDER 1. The Commissioner's assessments are set aside. 2. I confirm the confidentiality orders made during the hearing. Pursuant to s64 of the Civil and Administrative Tribunal Act 2013 I order that access to Confidential Exhibit BH-1 to the affidavit of Brett Hayter dated 28 November 2018, and Exhibit R-2 in the proceedings and to any part of the transcript relating thereto be restricted to the parties and their legal advisers and relevant experts. I make a further order prohibiting publication of the above mentioned evidence.

I hereby certify that this is a true and accurate record of the reasons for decision of the New South Wales Civil and Administrative Tribunal. Registrar I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 June 2019

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