The issue in this case is whether the dominant use of the subject land is for the purpose of primary production (here cultivation, for the purpose of selling the produce of the cultivation), sec.10AA(3)(a) Land Tax Management Act 1956 (LTMA). The 'commerciality' test (sec.10AA(2) LTMA) is not in issue. The year in question is the 2016 land tax year.
It is an unusual situation because the area of land in question is relatively small. The land area is approximately 1117 sq m.
The primary production activity is the growing of various types of fresh sprouts (mung beans, alfalfa and snow peas). The land is used for activities ancillary to sprout growing as well as other things discussed in more detailed below.
The Chief Commissioner treated the land as exempt primary production land in the 4 years preceding the 2016 land tax year. He changed his approach in relation to the 2016 land tax year and controversy has been the result. The matter comes before the Tribunal following disallowance of the taxpayer's objection, pursuant to sec.96(1) of the Taxation Administration Act 1996 (NSW) (TAA).
The land in question covers part of two adjacent lots (basically the backyards of two long residential lots) which I will call Lot 1 and Lot 2. There are fences dividing the land off from the residential premises.
Lot 1 provides access from the public road to Lot 2. Lot 1 is about 500 sq m in area. On Lot 1 there is a packing/storage shed (covering about 250 sq m) rented to an arms length tenant who uses the residue of Lot 1 for parking and deliveries.
The taxpayer has a shipping container and a dumpster bin for rubbish on Lot 1. The taxpayer uses Lot 1 to access Lot 2 with his own vehicles and for delivery trucks.
Lot 2 is about 620 sq m in area. On Lot 2 there is a larger warehouse/shed used in the primary production business. It has a ground floor (about 312 sq m) and a mezzanine floor (about 268 sq m). The warehouse/shed is used to store seeds, to prepare seeds by washing them, to sprout the seeds in low light conditions on stacked vertical racks, for a packing area and a cool room to hold sprouts for sale, for office space, and an amenities area. There is a loading bay and toilet. It is also used in a seed roasting business of the taxpayer.
Up until April 2015 there were two poly tunnels 'green houses' on Lot 2 each covering about 114m2. I shall call them Green House A and Green House B. These were used to grow snow pea sprouts.
Green House A was badly damaged by a storm in early 2015. Instead of repairing the damage, a vertical racking system was installed in the undamaged Green House B. This enabled the same quantity of snow pea sprouts to be produced in half the previous space.
The area previously covered by Green House A was generally unused thereafter except for parking on the hard standing and storing pallets. This seems to have been the main factor in the Chief Commissioner's change of heart over the operation of the primary production exemption in 2016 land tax year.
On the residue of the land area of Lot 2 (approximately 305 sq m) there was a shed used as a forklift storage area, a dumpster rubbish bin, pallet storage and space for the owner's car and for a delivery van for the business; there was no public parking.
The area devoted to the seed roasting business inside the shed on lot 2 is quite small (there is some seed storage, a gas fired roasting drum covering about 1 sq m, and shared use of packing tables with sprout growing activities).
The majority of the floor area inside the warehouse/shed is used for sprout production and associated activities. The area for sprout production itself is done in stacked racks about 6 or 7 high and in drums. But there are spaces for the storage of seed; washing facilities for seed, sprouts and trays; packing and cool storage; an office, amenities room and kitchen; as well as a loading bay and toilet.
It appears from the applicant's evidence that the area of all the racks inside the shed, and in Green House B is well over half the land area of Lot 2.
The taxpayer and his wife work together full-time in the business, and the financial accounts were in evidence. It is a successful business. The sprout business is according to the applicant's evidence highly regulated for food hygiene and safety. There are only four licensed sprout producers in NSW. All stages of production must very carefully follow the regulations and the end product (edible sprouts) must be in approved packaging for when it leaves the grower for sale.
[2]
Submissions
The taxpayer submitted that having regard to the area devoted to sprout production and allied activities such as rubbish bins, storage and parking; the intensity of the sprout production; the financial results of the various uses; and the time and labour committed by Mr and Mrs Moore to sprout production; that the dominant use of the land was for primary production.
The Chief Commissioner, correctly, submitted that the various uses of the land have to be identified and balanced against each other. The Chief Commissioner identified the various uses of Lot 2 as:
sprout production;
use ancillary to sprout production (including administration, amenities, deliveries and loading, parking, rubbish storage- which the Chief Commissioner submitted meant those areas were not under cultivation);
seed roasting; and
use ancillary to seed roasting (for example storage).
And the various uses of Lot 1 as:
rental of warehouse/shed 1;
ancillary uses to rental of warehouse/shed on Lot 1 (for example parking and deliveries);
access over Lot 1 to Lot 2; and
minor storage for benefit of activities on Lot 2.
The Chief Commissioner also submitted that it was incorrect to take into account the aggregated area covered by the various levels of stacked growing racks. His argument was that taken to its logical conclusion the 'rack area' could exceed the 'land area'. I am unable to see what the objection to this logical conclusion is. The Chief Commissioner submitted that the logical approach was 'fundamentally flawed' unless the land area could be adjusted in some 'principled manner'. I am unable to follow this line of argument. If a taxpayer can intensively use land for primary production activities, then so be it, and that will be just one of the factors to be weighed up in a decision on dominant use.
The Chief Commissioner further submitted that the packaging of sprouts constituted secondary production and that the packaging area should not be regarded as used for primary production relying on the case of Caruana v Chief Commissioner of State Revenue [2011] NSWADT 183 esp at [44] and [45].
The taxpayer countered this submission by arguing that packaging was a condition of his licence to produce sprouts and to maintain the hygiene of the process, and that there was no transformation of the sprout product which took place.
[3]
Consideration
In my view it is not useful to approach the question of use of land by breaking down the various uses into smaller and smaller parts. A common sense approach takes account of the connected ancillary uses as forming part of the leading use. As I said in the case of D W Tolson Management Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 173 at [24] and [25] a mushroom propagation farm includes areas for staff parking, amenities, administration etc. A grain farm may have silos and truck access facilities. A dairy farm may have a milking shed and vats to store fresh milk.
The test of "dominant use" was discussed by Gzell J in Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2010] NSWSC 867 which involved determining whether primary production or earthworks use was dominant. His Honour said at [69] and [70]:
Dominant in its ordinary meaning connotes ruling, prevailing, or most influential. The statute's reference to a dominant use presupposes that land may be used for more than one purpose and requires a determination of which use of the land is the main, chief or paramount use.
That is a question of fact and degree that may, in the end, be determined as an objective matter of impression having regard to the facts.
His Honour went on at [76] to adopt an approach used by the Land Appeal Court of Queensland to the determination of dominant use which he then applied at [103] - [116]. This involved examining relative expenditure on uses; areas of land involved in the two activities; the scale, extent and intensity of the activities; the number of persons working on the two activities; relative assets and risks involved; and time spent on the activities. In the result it was held that earthmoving was the dominant use. His approach was upheld on appeal (Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366).
Here the ancillary uses of the subject land related to the actual cultivation of sprouts and are to be considered as part of the sprout production use. The dominant use test is not constrained to look only at the area devoted to sprout growing racks.
This sprout production area will include areas used for parking, rubbish, loading and unloading goods, storage, administration and amenities. Space used for packing and cool storage of sprouts ready for sale also falls under the heading of use ancillary to actual sprout growing.
Clearly Lot 1 was dominantly used by the arms length tenant and not for primary production. The rent received was about 19% of gross trading profit from sprouts and seeds. But I must consider the dominant use of the land as a whole.
It is acceptable to recognise that Lot 1 had some relationship to the sprout business. It provided access to Lot 2 for people and vehicles involved in sprout production. It also was the location of the storage container and dumpster used in the sprout business.
I do not give these uses of Lot 1 a great deal of weight but I do put into the balance that they provided benefit to Lot 2.
I do not regard packing and cool storage of sprouts for sale as involving secondary production in the sense discussed in Caruana.
In that case it was unsuccessfully claimed that a suburban chicken meat processing facility (where chicken carcasses were delivered to be cut into pieces and where sausages were produced) was a continuation of primary production. It was held that these activities involved secondary production. The distinction was discussed by Judicial Member Block as follows at [39]:
Accordingly the ordinary meaning of "primary production" is the act of bringing into existence live animals (and live plants) or products comprising or derived from live animals (or live plants); "primary production" is to be contrasted with "secondary production", which means "of or relating to the processing of primary products", with "processing" meaning, relevantly, "to convert (an agricultural commodity) into marketable form by some special process.
And later at [44] and [45]:
The Respondent poses (correctly in my view) by way of example the Primary production ends and secondary production (i.e. the processing of the primary product) begins when another process transforms a live plant or animal into a derivative product. For example, the processing of an orange to make orange juice, or the slaughtering of a chicken for its meat, is "secondary production" and the further processing of the product derived (e.g. the processing of orange juice into concentrate or the portioning or filleting of chicken meat) is another step in the productive process.
Thus, "primary production" involves the bringing into existence of a new product (i.e. the first step) comprising or derived from a plant or animal while it is alive and "secondary production" involves the processing of that primary product into further new products (i.e. the second step). Thus, secondary production is the antithesis of "maintenance", because it involves altering, not keeping in existence or continuance, the relevant thing.
Here there is no change made to the sprout product by packaging. It is simply packed in accordance with health regulations in the form in which it is produced after it has been washed. It is little different from the packaging of apples and other fruit in boxes, then cool storage prior to sale; or from mushroom production which involves sorting, packing, and storage of product; and does not tip over into secondary production or processing. The primary product is not being transformed.
Further it seems to me that the use of Lot 2 for the 2016 land tax year for seed roasting was fairly negligible. The taxpayer's evidence was that the roasted seed sales for the year ended 30 June 2016 (covering the 6 months before and after 31 December 2015 -a reference period approved by Gzell J in Leda Manorstead at [4]) declined by 70% compared to the previous period due to loss of a contract. Seed roasting sales were approximately 17% of gross trading profit from sprouts and seeds in the 2016 financial year. The taxpayer's other evidence was that the space devoted to seed roasting and associated use was comparatively small.
Although each land tax year requires consideration of the relevant facts relating to that year, and although the Chief Commissioner is not 'estopped' by his treatment of past years, it is somewhat odd that the Chief Commissioner's treated the land as meeting the dominant use test for the first 4 of the 5 years under review. The only change in the situation of use of the land was that Green House A was damaged and 114m2 of land under it was not used for the actual production of sprouts anymore. Instead Green House B was "double stacked" and Green House A area provided extra parking and storage for the business on the hard standing. Seed roasting use presumably declined as demand fell away.
It hardly seems material to take 114m2 of ground out of actual sprout cultivation and use it for purposes ancillary.
Another factor to take into account is the economic return from the subject land. Lot 1 produced gross annual rent of 19% of total income from the subject land. Lot 2 produced 81% of total income from the subject land, and of that sprouts accounted for 83% and seeds for 17%.This means over 67% of the income from the subject land is attributable to sprouts.
Bearing in mind the economics, the intensity of sprout cultivation, the full time work commitment of Mr and Mrs Moore to the business, and the negligible space dedicated to seed roasting on Lot 2 I would find without difficulty that the dominant use of Lot 2 is for primary production. However the whole of the subject land (Lot 1 and Lot 2) is the subject of the test. Lot 2 is the larger part and the more important economically. Lot 1 provides access to Lot 2 and some storage space for activities on Lot 2.
Considering the subject land as a whole, and weighing up the relative factors affecting the two lots, it is my view that the dominant use of the land is for primary production activities. Pursuant to sec. 101(1) TAA the assessment is revoked.
[4]
Order
1. Pursuant to sec 101(1) of the Taxation Administration Act 1996, the assessment is revoked.
[5]
I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.
Registrar
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Decision last updated: 19 April 2018