Settler's Rise Pty Ltd ATF Maison Dieu Road Unit Trust v Chief Commissioner of State Revenue

The Tribunal's jurisdiction

1. The land tax assessments were made under s 14 of the LTM Act and s 8 of the Taxation Administration Act 1996 (the TA Act). The applicant objected against the assessments under s 86 of the TA Act, the Chief Commissioner considered the objections under s 91 of that Act and disallowed them. In reliance on s 96 of the TA Act, the applicant has applied to the Tribunal for review of the assessments. Section 9 of the ADR Act grounds the Tribunal's jurisdiction.
2. The Tribunal's task is to decide what the correct and preferable decision is having regard to the material before it: s 63(1) of the ADR Act.
3. The applicant has the onus of proving its case: s 100(3) of the TA Act.

The land tax legislation and the issues for determination

1. Under s 8 of the LTM Act, land tax is charged on land as owned at midnight on the thirty-first day of December immediately preceding the year for which the land tax is levied. Accordingly, the thirty-first of December is often referred to as the 'taxing date' for land tax purposes - 31 December 2014 is the taxing date for the 2015 land tax year, 31 December 2015 for the 2016 land tax year, and so on.
2. Section 10AA of the LTM Act contains provisions exempting land from land tax subject to specified conditions. Relevantly, s 10AA(2) provides as follows: (2) Land that is not rural land is exempt from taxation if it is land used for 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. The expression 'land used for primary production' is defined in s 10AA(3) to mean 'land the dominant use of which is for' one of the uses, activities or types of enterprise specified there. Paragraph (b) specifies as one of the qualifying activities 'the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce'. The Chief Commissioner accepts (CB Tab 14, 715), and based on the evidence of the user of the land (referred to in [23] below) I find, that the land in question is land used for primary production for the purposes of s 10AA(2) because the dominant use of the land is for the activity specified in paragraph (b) of s 10AA(3).
4. Lots 2 and 3 are not 'rural land' as they are zoned 'R1 - General Residential': CB Tab 11, 218.
5. That means the exemption claimed by the applicant is available only if, for the relevant land tax years (or for any one or more of them), both paragraphs (a) and (b) of s 10AA(2) are satisfied.
6. Although the imposition of, and exemption from, land tax fixes upon ownership and use of land at 31 December, the enquiry as to the use of land is not restricted to that one day of the year. As White J (as his Honour then was) said in Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) [2016] NSWSC 332 at [132]-[133]: [132] Liability for land tax arises as at midnight on 31 December immediately preceding a calendar land tax year. In Longford Investments Pty Ltd v Chief Commissioner of Land Tax [(1978) 8 ATR 656)], Sheppard J said (at 660-661) that although the liability for land tax arises as at midnight on 31 December, the question of whether land was used primarily for primary production was to be considered having regard to the facts spanning "some few months" before and after that date. In Leda Manorstead [v Chief Commissioner [2010] NSWSC 867], Gzell J applied this reasoning and said that in the circumstances of that case a reasonable period for inquiry was six months before and after the relevant date (at [4]). His Honour observed that that allowed for a consideration of the financial records pertaining to the uses to which the land was put. [133] This approach recognises that the question of the dominance of a particular use, or whether a primary production use has a significant and substantial commercial purpose or character, requires examination not of a single event but of a state of affairs that exists as a continuum. Experience before and after 31 December that is part of that continuum can throw light on the position as it existed at that date. But that does not alter the fact that liability to land tax is imposed and hence a claimed entitlement to exemption is to be determined as at midnight on 31 December. This is significant where there is a material change occurring after 31 December.

The land in question

1. In October 2012 the applicant became the owner of the land now identified as Lots 2 and 3. At the same time it also became the owner of what is now Lot 1 in the same Deposited Plan. Lot 1 covers 33.66 hectares; Lots 2 and 3 combined cover 76.17 hectares: CB Tab 16, 104-110. (These dimensions are slightly different from those specified elsewhere in the material before the Tribunal, but I prefer them over others because they were the ones provided by NSW Government Local Land Services.) The land is fenced on all sides and is internally subdivided into three paddocks: CB Tab 6, 123 [20].

Prior use of the land

1. For over 30 years up to October 2012, grazing activities had been carried out on the land, and on surrounding land, by a grazier named Warren Thomas Barry. Mr Barry's use of the lots ceased in late 2014, when Lot 1 was sold to Thomas Paul Ernst.

More recent use of the land for primary production purposes

1. Mr Ernst has conducted cattle breeding activities on Lots 1, 2 and 3 since he purchased Lot 1. His use of Lot 1 is as the owner of that land. His use of Lots 2 and 3 is by agreement with the owner of those lots, the applicant.
2. The agreement between Mr Ernst and the applicant for the use of Lots 2 and 3 was initially an oral agreement. There is now a written 'Agistment Deed' dated 8 August 2017 (CB Tab 5, 48-49) between the applicant and Mr Ernst, which is said by both Kerry Glenn Nichols on behalf of the applicant (CB Tab 6, 122 [13]) and Mr Ernst himself (CB Tab 5, 42 [10]) to 'confirm' the oral agreement. This is notwithstanding the fact that the Deed records that:

• the applicant subdivided the relevant land into 'Lots 1 & 2 DP 1195454' (not Lots 1, 2 and 3) in 2014;
• the applicant sold 'Lot 2 DP 1195454' (not Lot 1) to Mr Ernst in December 2014; and
• from December 2014 the parties agreed 'that Ernst could use the land owned by [the applicant] (Lot 1 DP 1195454) to agist cattle and add to his agricultural activities upon Lot 1 DP 1195454' - and thus recording, apparently incorrectly, that Lot 1 is both owned by Mr Ernst and not owned by him.

1. It is not disputed that the evident intent of the Deed is to formalise the pre-existing oral agreement for Mr Ernst to use the applicant's land (Lots 2 and 3) in conjunction with his own (Lot 1), and seemingly for the same purpose as the purpose for which he uses his own. I therefore merely record, but otherwise ignore, the apparent irregularities in the Deed.
2. Mr Ernst acknowledges that his farming activities are conducted on a 'part-time basis': CB Tab 5, 41 [6]. His main income-generating activity is as a process engineer, employed by Glencore at their mine in the Upper Hunter Valley: CB Tab 5, 41 [5].
3. Mr Ernst's farming operations are centred on the breeding and sale of cattle for domestic consumption, and stud breeding activities aimed at developing a high quality stud herd. The activities are now conducted not only on Lots 1, 2 and 3, as already mentioned, but also on an additional property Mr Ernst purchased in June 2018: CB Tab 9, 156 [10]-[11].
4. In his affidavit sworn on 27 March 2018 (CB Tab 5) Mr Ernst stated: [11] I would describe Lots 2 and 3 as they presently stand as grazing land. Those lots are fenced. They have stock yards and water troughs which are used for carrying out the farming purposes to which I refer. [12] I live approximately 4 kilometres from the abovementioned land and visit the land two to three times per week to check the condition of the land, check the cattle and otherwise attend to matters such as weed control and fence repairs. [13] Since approximately November 2017 and as a result of drought conditions the number of cattle that I have grazed on the land has reduced slightly. I generally run between 85 to 115 head of cattle on Lots 1, 2 and 3. [14] Because of the drought I have been forced to feed the cattle with supplementary feed whereas prior to the drought the cattle have been able to survive on the grass from the property. [15] During the period that I have been using the above land for grazing purposes I have not observed any other usage of the land by the owners or any other person save for the occasional use of a house on Lot 2. [16] My cattle breeding activities are carried out on a commercial basis. I have a PIC code [Property Identification Code] NK 210016 under which my cattle are sold. The code was issued by the Local Land Services Board and relates to my activities on Lots 1, 2 and 3. … [19] I could not adequately run the number of cattle referred to above solely on Lot 1 and without the benefit of using Lots 2 and 3 and the feed produced on those lots.
5. That evidence was not challenged by the Chief Commissioner and I accept it.
6. In an email dated 26 July 2017 to the Office of State Revenue (OSR) Mr Ernst stated he 'was not running any primary production activities in the 14/15 financial year': CB Tab 8, 148. He has since explained this statement was wrong, and that he meant to refer to the 2013/14 year instead. His explanation rings true, and I accept it. It is clear when one looks at the email in its entirety, and having regard to its timing, that this was not the only error he made - he also referred to having attached his financial statements 'for the 15/16 and 16/17 financial years' even though the statements for the later year would not have been available to him until after he sent the email, and were not sent to the OSR until 12 September 2017: CB Tab 8, 140-141 [7].
7. Mr Ernst's primary production activities, carried on since December 2014, include the breeding of stud cattle through processes such as the 'synchronisation' of the female breeding stock through hormone injection, and the artificial insemination of the cows with bull semen purchased from breeders in other States. Mr Ernst has also undertaken embryo transfers in the past, and currently has a 'substantial amount of eggs sitting in a can' waiting for more favourable conditions to enable them to be used.
8. The stud is registered under the name 'Dehavalyn'. Mr Ernst exhibits his cattle at the various agricultural shows including the Sydney Royal Easter Show, and has received awards from time to time. All but 4 head of the current herd (which includes about 40 cows) are purebred Murray Grey beasts. The herd seems to be of high quality.

Stock levels

1. Mr Ernst's Livestock and Produce Accounts (which form part of his tax returns) for the 2015, 2016 and 2017 financial years are at CB Tab 8, 149-151. They show the following: 2015 2016 2017 Number Value Number Value Number Value $ $ $ Opening stock 0 0 69 26,536 85 31,530 Purchases 66 31,945 10 14,350 15 37,700 Natural increase 18 33 21 Sales 14 9,258 22 20,194 28 27,915 Deaths 1 5 4 Closing 69 26,536 85 31,530 89 51,230 stock

1. The figures in the columns headed 'Number' are broadly consistent with Mr Ernst's claim that he generally runs between 85 and 115 head of cattle on Lots 1, 2 and 3. While he does not fix that claim to an identified date or period, he does say that '[s]ince approximately November 2017 and as a result of drought conditions the number of cattle that [he has] grazed on the land has reduced slightly': CB Tab 5, 42 [13]. (November 2017 is outside the period of review; the latest relevant taxing date for the purposes of s 8 of the LTM Act is 31 December 2016.)
2. In an email dated 21 July 2017 (CB Tab 14, 61-62), a representative of Hunter Local Land Services indicated to the OSR that the 'carrying capacity' of Lots 2 and 3 combined was 738.0873 units - which is equivalent to 738 sheep, or 73 cattle. The email explained: This carrying capacity is based on the number of animals that COULD be run on the entire holding in a 'reasonable season', regardless of whether there are ACTUALLY any stock run on the holding.
3. The email provides no information as to the carrying capacity of Lot 1.

Investment of time in the primary production activity

1. When he applied to the OSR in 2017 for the primary production exemption for Lot 1, Mr Ernst said he spent 30 hours per week undertaking his primary production activity: CB Tab 5, 51. In his oral evidence he explained the figure of 30 hours related to his activities on Lots 1, 2 and 3 together. He said he now spends '30 or more' hours - and there will be some with 40 - but those figures include his activities on the additional property he purchased in June 2018, and where he says he currently spends about two-thirds of his work time outside of his employment with Glencore. He said he does a lot of the work at weekends. I accept what Mr Ernst says, and find that up until about June 2018 he spent, on average, about 30 hours per week undertaking the primary production activity he conducted on Lots 1, 2 and 3.

Financial outcomes

1. Mr Ernst's tax returns disclose his main sources of assessable income as his employment with Glencore; bank interest; rental income from two investment properties; and the primary production activities conducted on Lots 1, 2 and 3.
2. According to his tax returns (CB Tab 15), the first three of those income sources generated the following amounts over the relevant years: 2015 2016 2017 $ $ $

Employment income 109,407 124,838 160,519 Bank interest 0 6,519 5,797 Gross rental income 28,485 29,566 22,053 Net rental income (loss) 317 4,691 (899)

1. Mr Ernst's tax returns also show the primary production (PP) activities have generated the following results - but it needs to be borne in mind that the results for 2015 reflect only about 6 months of activity, from the time Mr Ernst purchased Lot 1 in December 2014, until the end of June 2015: 2015 $ Sales 9,258 Plus Closing stock 26,536 Sub-total 35,794 Less Opening stock 0 31,945 Purchases 31,945 Gross PP income 3,849 Less Expenses 33,585 Total PP income (loss) (29,736)

$ 2016 Sales 20,194 Plus Closing stock 31,530 Sub-total 51,724 Less Opening stock 26,536 40,886 Purchases 14,350 Gross PP income 10,838 Less Expenses 61,197 Total PP income (loss) (50,359)

2017 $ Sales 27,915 Plus Closing stock 51,230 Sub-total 79,145 Less Opening stock 31,530 69,230 Purchases 37,700 Gross PP income 9,915 Less Expenses 62,609 Total PP income (loss) (52,694)

1. As those figures indicate, Mr Ernst has incurred significant losses from his primary production activities since he started undertaking them in December 2014. Some of the major contributors to those losses are items of expenditure in the following categories, and for the following amounts: 2015 2016 2017 $ $ $

Veterinary expenses 1,027 1,987 3,604 AI (Artificial insemination) expenses 2,123 4,489 2,080 Cartage and freight - buying 792 577 2,245 Working and cattle expenses 836 1,954 1,928 Low cost write off 10,476 11,626 Low cost write off - stock yards 10,507 Low cost write off - yard 2,581 Fuel and oil 868 Motor vehicle - Rav4 621 1,039 Motor vehicle - Triton 2,521 3,343 Repairs - fencing 3,433 1,788 532 Repairs - yard 2,425 63 Repairs - irrigation 1,254 Council rates 1,280 1,404 Interest 12,015 23,818 22,834

1. There are additional categories of expenditure recorded in Mr Ernst's tax returns but it is not necessary to list them all here.

Expert reports

1. Both parties engaged expert witnesses who expressed opinions relating to the primary production activities Mr Ernst has conducted. Peter Leslie Tremain was retained by the applicant and Peter Edward Schuster by the respondent.
2. Mr Schuster was the first expert to provide a report. His first report is dated 23 July 2018 and is at CB Tab 12. His second report, dated 26 July 2019, is at CB Tab 13.
3. Mr Schuster is a Senior Consultant with Schuster Consulting Group Pty Ltd and the sole director of Benalong Pastoral Company Pty Ltd. He holds the degree of Bachelor of Science (Honours) in Wool and Pastoral Sciences from the University of New South Wales and is a graduate of the Australian Institute of Company Directors. He has been involved with the Australian beef production industry since 1994.
4. Mr Schuster was asked to provide an opinion as to whether the primary production business operated by Mr Ernst on Lots 1, 2 and 3 in the relevant years was carried out in a manner, scale, and size which is characteristic of a profitable and commercially viable cattle grazing business having regard to, among other things he might consider relevant, the following: 1. The intensity of the operation; 2. The size and quality of the herd; 3. The size and carrying capacity of the land; 4. The financial and other resources put into the development and maintenance of the business; 5. The financial performance of the business; 6. The purchases, sales, and trade in cattle; 7. Market conditions; and 8. Feed and stock growing conditions.
5. At the end of his first report Mr Schuster summarised his opinions as follows (Tab 12, 254): 1. With the exception of the large labour input, Mr Ernst's beef cattle production enterprise appears to be more consistent with extensive rather than intensive agricultural production (as to this distinction, see [43] below). 2. The land area is relatively small when compared to profitable and commercially viable beef cattle enterprises. 3. The quality of the herd appears to be high. 4. Mr Schuster was unable to form a concluded opinion regarding the actual carrying capacity or stocking rate. 5. Minimal information had been provided regarding the financial and other resources dedicated to the development and maintenance of the cattle enterprise. 6. The labour resource dedicated to the enterprise is large and disproportionate when considered against an industry average established through comparative analysis. 7. The business appears to be unprofitable and not commercially viable. No plan for achieving viability has been presented. The addition of an owner/operator wage would extend this loss by approximately $40,000 in each of the relevant tax years. 8. There was little information provided to explain or provide context for the cattle trading activities. 9. The beef cattle market conditions during the relevant tax years were favourable. 10. Rainfall figures suggest that feed and stock growing conditions during the 2015 and 2016 tax years would probably have been favourable. The 2017 tax year would have presented more challenging growing conditions.
6. Mr Schuster's references to 'intensive' and 'extensive' agricultural production are explained in the extracts from Encyclopaedia Britannica included in Appendix 4 to his report (CB Tab 12, 275 and 278 respectively): Intensive agriculture, in agricultural economics, system of cultivation using large amounts of labour and capital relative to land area. Large amounts of labour and capital are necessary to the application of fertilizer, insecticides, fungicides, and herbicides to growing crops, and capital is particularly important to the acquisition and maintenance of high-efficiency machinery for planting, cultivating, and harvesting, as well as irrigation equipment where that is required. Extensive agriculture, in agricultural economics, system of crop cultivation using small amounts of labour and capital in relation to area of land being farmed. The crop yield in extensive agriculture depends primarily on the natural fertility of the soil, the terrain, the climate, and the availability of water.
7. Mr Schuster said in his report (CB Tab 12, 241 [40]): While these definitions deal with farming rather than grazing, the principle is transferable. … He did not elaborate on how or why that conclusion was reached, or whether he or someone else was the one who reached it.
8. There were other opinions or statements made elsewhere in the body of Mr Schuster's report (CB Tab 12, 232-255), including: 1. 'I am of the opinion that profitable and commercially viable cattle grazing businesses are those which are able to generate a profit once all reasonable costs are considered on a continuous and repetitive basis while complying with relevant regulatory requirements. While it is important that a profit be generated, this may not occur every year due to environmental and market influences.' (at [37]); 2. '… the herd appears to be of a modest size but not necessarily unprofitable nor commercially unviable as a consequence of size' (at [49]); 3. 'The sales records are what I would expect of a commercial breeder rather than a stud; there do not appear to be any account sales records for stud stock produced by the Applicant.' (at [50]); 4. 'I am of the opinion that … enterprises of a modest size are not necessarily unprofitable and non-commercial. Each should be assessed on its individual merit …' (at [54]); 5. 'The internal fencing and watering points observed on Lots 1,2 and 3 were minimal and in many cases in disrepair … [but] I do not necessarily consider this to be inconsistent with what I would expect of land being accessed by a commercial cattle operator under an agistment agreement.' (at [69]-[70]); 6. 'The cattle yards on Lot 1 adjacent to the waterline easement and near the boundary between Lots 1 and 2 […] were of solid construction, fit for purpose and representative of a level of resourcing (planning, labour and financial) commensurate with the size and nature of the cattle enterprise.' (at [71]).
9. The applicant retained Mr Tremain to review Mr Schuster's report, to provide comments on his findings, and to provide his own comments regarding the use of the land in the context of what Mr Tremain described as the 'commerciality and profitability tests in s 10AA(2) of the [LTM] Act'. It is clear from pages 17 and 18 his report (CB Tab 10, 179-180) that the 'commerciality test' he refers to is the test in s 10AA(2)(a), and the 'profitability test' is the test in s 10AA(2)(b) of the LTM Act.
10. Mr Tremain is a Senior Consultant with Tremain Ivey Advisory, which carries on the business of Agricultural and Management Consultants and Business Analysts. He holds the degree of Bachelor of Rural Science (Honours) from the University of New England and is a member of Ag Institute Australia and the Australian Association of Agricultural Consultants. He has been an agricultural consultant since 1986.
11. Mr Tremain had been provided with Mr Ernst's cashflow records and tax returns for the 2015 and 2017 financial years. He noted in his report that Mr Ernst had made substantial cattle purchases in all three years, which he considered typical of a newly formed and developing business. He also noted that expenditure on new tools and equipment, fencing repairs and cattle yard repairs were relatively high, but said that high expenditure on these items is not unusual for a new business, especially if fencing, equipment and cattle yards require improvement or construction.
12. Mr Tremain commented as follows (CB Tab 10, 168): In my opinion, the income statements [at Schedule 2 of his report] require substantial adjustments to reflect an accurate gross income of Mr Ernst's cattle enterprise. The stated gross incomes are set out in the tax returns under the heading 'livestock account'. However, the gross income of Mr Ernst's cattle enterprise is substantially undervalued because the high market inventory value of his herd arising from the purchase of high quality stud cattle is not fully accounted for. Mr Ernst's livestock accounts are prepared on a 'cost' basis and therefore do not reflect the market value of his herd. This method enables income (and the payment of tax) to be delayed, but does not reflect the actual gross income generated by the enterprise.
13. Through a methodology explained at CB Tab 10, 169 he recalculated the value of Mr Ernst's cattle stocks as follows, as at 30 June in each year: 2015 2016 2017 Original value as recorded in Mr Ernst's livestock accounts ($) 26,536 31,530 51,230 Mr Tremain's recalculated value of cattle stock ($) 39,770 71,374 103,566

1. But there were additional adjustments that according to Mr Tremain needed to be made to the income statements, including among others: 1. fencing repairs and expenditure on new tools and equipment, which appeared to Mr Tremain to be of a capital nature; 2. log book motor vehicle expenses, which according to Mr Tremain 'do not necessarily reflect the actual costs that are attributable to the cattle enterprise. They appear to relate mainly to fixed vehicle costs which would have been expended irrespective of the cattle enterprise'; 3. interest, 'because it is primarily a land ownership expense, and not an operating expense. If capital appreciation of the land is not included as a component of the assessed profit, then interest should also be excluded'.
2. For the purpose of comparison, the figures taken from Mr Ernst's tax returns, and as shown in [35] above, are repeated below, with Mr Tremain's revised figures next to them. Mr Tremain's figures are arrived at by adopting the revised cattle stock values ([50] above) and excluding expense items that Mr Tremain thought were not appropriate (those listed in [51] above, plus others). Mr Tremain labelled the resulting figure 'earnings before interest and tax' (EBIT), which he described as 'the most appropriate measure of profit in this context' (CB Tab 10, 181):
3. In his report, and by reference to Mr Schuster's comments regarding 'intensive' and 'extensive' agricultural production, Mr Tremain said (CB Tab 1, 172 [3.3]): In my opinion, the production intensity of Mr Ernst's farm business in isolation is not relevant to its commerciality or viability. The majority of Australian cattle enterprises would be classified as 'extensive' using Mr Schuster's criteria. Most of the largest and most profitable cattle businesses are 'extensive' enterprises. Stud operations are generally more intensive than other cattle enterprises due to higher cattle values, income and expenses. In my opinion, Mr Ernst's business is more 'intensive' than many other cattle enterprises.
4. In his report (CB Tab 10, 163-182) Mr Tremain agreed (at [3.4.2]) with Mr Schuster's comment (42 above) that the quality of the herd appears to be high. He also agreed with Mr Schuster's conclusion that Mr Ernst's herd 'appears to be of a modest size but not necessarily unprofitable nor commercially unviable as a consequence of size'. He added (at [3.4.1]) that he thought Mr Ernst's herd 'is of sufficient size to be profitable'.
5. Mr Tremain also agreed with a number of Mr Schuster's general comments, including: 1. that small beef farms 'are not necessarily unprofitable and non-commercial' (at [3.4.3]); 2. that supplementary feeding 'is characteristic of meaningful cattle production enterprises' (at [3.5.1]); 3. that fencing and watering points in disrepair 'is not necessarily inconsistent with a commercial cattle operation under an agistment agreement' (at [3.5.2]); and 4. that an apparent lack of fertiliser application 'does not necessarily indicate a lack of commerciality' (at [3.5.3]).
6. Mr Tremain did not agree with Mr Schuster's opinion that a value for owner-operator labour should be deducted when considering profitability and commerciality of an enterprise (at [3.6.1]).
7. In relation to the 'commerciality test' Mr Tremain expressed the opinion (at [4.1]) that 'Mr Ernst's cattle enterprise has many characteristics that are typical of an enterprise which has significant and substantial purpose'. These included:

• the size and quality of the herd;
• Mr Ernst's attendance at prominent sales across NSW in sourcing cattle for his stud, and his purchase of a cow and calf from Western Australia;
• Mr Ernst's purchase of high quality bull semen, his undertaking of artificial insemination activities and the carrying out of embryo transfers;
• exhibiting cattle at 'prestigious shows including the Royal Easter Show and the Murray Grey National Show and Sale';
• the existence of what Mr Tremain described as 'a clear plan to operate, diversify and expand his business' and to 'improve, promote and efficiently operate his stud herd';
• Mr Ernst's 'relatively high workload during the development phase of a stud cattle enterprise'; and
• the provision of supplementary feed to the herd.

1. In relation to the 'profitability test' Mr Tremain repeated his opinion (at [4.2]) that the financial results should be re-cast to exclude certain capital costs related to the establishment and development of a new enterprise and the accumulation of assets. Mr Ernst's reported cashflows and tax returns should not be used at face value to determine the likely future profit of the enterprise, or whether the land was used for the purpose of profit. His opinion was that there were a number of indicators that Mr Ernst's cattle enterprise was engaged in for the purpose of profit on a continuous or repetitive basis, including:

• a herd of sufficient size to be profitable, especially as a stud herd;
• Mr Ernst's purchase of another property and the expansion of his business;
• Mr Ernst's emphasis on developing a herd of high quality, his use of artificial breeding and the promotion of the herd through show exhibits; and
• Mr Ernst's clear plans for the operation, diversification and expansion of his business, and for the improvement, promotion and efficient operation of his stud herd.

1. In light of the filing of Mr Tremain's report and further evidence by the applicant, and the production of further documents by both Mr Ernst and Mr Tremain, Mr Schuster provided his second report (CB Tab 13), in which he was asked to respond to each of the conclusions reached by Mr Tremain. He agreed with some, disagreed with some, and found himself unable, as a consequence of insufficient information, to take a position one way or the other on some of Mr Tremain's conclusions.
2. Significantly, Mr Schuster agreed, at [26], that an alternative approach to reporting livestock accounts is on a market value rather than cost basis, but disagreed with the values Mr Tremain assigned to the 'stud' cattle, owing to a lack of evidence. He also thought there was insufficient evidence to adjust the income statements as Mr Tremain had done ([52] above, right hand columns). Furthermore, Mr Schuster and Mr Tremain remained divided on the question of deducting a value for owner-operator labour from the financial results.

The 'commerciality test' - s 10AA(2)(a)

1. Cases of this kind often focus more heavily on the test in s 10AA(2)(a) than on the 'profitability test' in paragraph (b). Perhaps that is because paragraph (b) is regarded as the statutory formulation of what amounts to carrying on a business of primary production, as explained by Mason J in Hope v Bathurst City Council (1980) 144 CLR 1 (Vartuli v Chief Commissioner of State Revenue [2014] NSWSC 678 at [10]; 98 ATR 545 at 549) and which can tend to present a somewhat more straightforward enquiry.
2. Several cases have discussed the meaning of s 10AA(2)(a) and explored the factors that can be relevant in determining whether the use of land has a significant and substantial commercial purpose or character.
3. In Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; 88 ATR 379, Gzell J noted at [83] that in ordinary parlance, 'significant' connotes importance, something of consequence, a key element, a vital or critical one. At [88] his Honour noted 'substantial' connoted size or bulk: 'It means an ample or considerable amount, quantity or size.' His Honour said at [89]-[91]: [89] The commerciality test in s 10AA(2)(a) of the [LTM] Act required Maraya's use of the lands for primary production, either individually or in conjunction with the other lands, to have had a significant and substantial commercial purpose or character. That test required the commercial purpose or character of the use of the lands to have had a relatively high degree of importance. The combination of "significant" and "substantial" demands that conclusion. [90] Not every business will satisfy the commerciality test. The test distinguishes activities amounting to a business that is carried on in a small way or as a sideline from those of a more serious and weighty kind. A business that satisfies the commerciality test will be an important one. It will usually also exhibit some of such characteristics as size, depth, bulk, weight, seriousness, quality, intensity and prominence. [91] To determine whether Maraya's cattle operation had a significant and substantial commercial purpose or character, the court should consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources (whether of time, labour or expenditure) put into the development and maintenance of the cattle operation.
4. On appeal (Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408; 97 ATR 818) the Court of Appeal endorsed that approach (Emmett JA at [55], Meagher and Leeming JJA agreeing).
5. In Vartuli, White J (as his Honour then was) said at [109]-[111]: [109] … For a use of the land to have a commercial purpose or commercial character, the purpose or character of the use must be or include the making, or the potentiality for the making, of profits. Nothing in the Court of Appeal's decision [in Maraya] excludes the potentiality for making profits from satisfying the requirement of commercial purpose or commercial character. [110] The magnitude and size of the use for primary production and the intensity of the operation are relevant to an assessment of whether the commercial purpose or commercial character of the use is significant and substantial. This includes the size of the herd, the size and carrying capacity of the land, the resources put into the business of primary production, and the revenues and profits generated. In deciding whether the use has a significant and substantial commercial purpose or character it is appropriate to compare the use of the subject lands with other primary production activities of the same kind, in this case cattle-raising, and with how land is generally used. [111] The return from the primary production use relative to the value of the land can be relevant in determining whether there is a commercial purpose or character of the use, and, if so, whether that commercial purpose or character is significant and substantial.
6. The current version of s 10AA(2) is relevantly identical to s 118 of the now repealed Local Government Act 1919. His Honour explained, at [126] and following, the apparent rationale behind the addition of the word 'substantial' to that legislative scheme: [126] As the Court of Appeal held in Hope v Bathurst City Council (No. 3) [1994] NSWCA 139 and as Leeming JA said in Maraya, the amendment added an additional requirement beyond those considered by Mason J in Hope v Bathurst City Council, namely that the use have a substantial commercial purpose or character as well as a significant commercial purpose or character. In introducing the amendment the Minister stated in her second reading speech (at 3, 778 of the Parliamentary Debates, 29 November 1988) that: "The Government wants to help councils to weed out those persons who have exploited the vagueness of the present rural rating provisions of the Act to obtain rates concessions when in fact they have not been genuine primary producers." [127] Following the amendment, it was held in Hope v Bathurst City Council (No. 3) (at 18) that Mr Hope's "agisting a handful of horses and generating a gross annual income in the order of $1,000 was altogether too minor and small to satisfy the requirement of para (a) of the definition". [128] On one view the amendment imposing an additional requirement that the commercial purpose or character be substantial as well as significant may have been intended only to address primary production activities of the scale in Hope v Bathurst City Council. A "significant commercial purpose or character" discussed in Thomas v Federal Commissioner of Taxation, as interpreted in Hope v Bathurst City Council, is satisfied if the venture is in the nature of a going concern engaged in for the purpose of profit on a continuous and repetitive basis. That threshold is low as illustrated by the facts in Hope v Bathurst City Council. The additional requirement that the commercial purpose or character also be substantial raises the threshold. The question is, how high is the threshold raised? [129] It is clear from the Minister's second reading speech that the exemption was intended to apply only to "genuine" primary production. That was the raised threshold. In my view, having regard to the Court of Appeal's reasoning in Maraya, for the use of the land to have a significant and substantial commercial purpose or character, the use must have a character such that it generates, or can reasonably be expected to generate, profit that contributes in a real and not trifling way to the user's income, or a purpose of generating such profit.
7. On appeal to the Court of Appeal (Vartuli v Chief Commissioner of State Revenue [2015] NSWCA 372), the taxpayers took issue with his Honour's articulation of the need for actual or expected profit to contribute 'in a real and not trifling way' to the user's income. This was said to invoke a novel test of whether the use of the land has the requisite commercial purpose or character. The Court of Appeal (Gleeson JA, Meagher and Ward JJA agreeing) rejected the argument, adding the following guidance: 1. The fact that the contribution to the Vartulis' income from the cattle operations was insignificant, underscored that the revenues and profits generated from the Vartulis' cattle operations did not have a commercial purpose or character which was significant and substantial (at [94]); 2. It is not appropriate to characterise as a 'benchmark' any of the factors relevant to the evaluative judgment which s 10AA(2)(a) requires. The relative contribution to the users' income contextualises the significance and substantiality of any commercial purpose or character, but is not a 'benchmark' when applying s 10AA(2)(a) (at [97]); 3. The commerciality test under s 10AA(2)(a) does not involve a binary choice between hobby farm or token business and a significant and substantial commercial purpose (at [106]).
8. It may also be observed that the question posed by s 10AA(2)(a) is not answered by simply looking to whether the user of the land is a 'genuine' primary producer (to pick up the language of White J in Vartuli at [129], quoted in [66] above), rather than a 'non-genuine' primary producer, whatever that may be. If that were the test then that would be the language used in the statute. Instead, all his Honour was highlighting is that a person who is recognisably a primary producer, and capable of being accurately labelled that way, is more likely to satisfy the test than one who is not.

Undertaking the evaluative judgment

1. I turn now to consider the factors relevant to assessing the applicant's case.
2. In doing so I acknowledge that no single factor is determinative. The enquiry is a weighing exercise, balancing the relative significance of factors that tend to point in one direction against the relative significance of those pointing the other way.
3. Nor is it a mathematical exercise determined by counting the number of factors on either side of an imaginary ledger but instead, an evaluative judgment comparing the extent to which each factor tends to support, or to run counter to, the applicant's case for exemption, and then an overall assessment once all the factors have been taken into account.
4. In the current case there are undoubtedly factors that point towards a conclusion that Mr Ernst's use of the land has a commercial purpose or character; the question is whether they point so heavily in that direction that, even taking into account any factors that may point the other way, any commercial purpose or character of the use of the land is 'significant and substantial'.
5. For example, and in spite of Mr Schuster's characterisation of Mr Ernst's activities as more consistent with extensive rather than intensive agricultural production ([42] above), it seems to me that Mr Ernst's activities are as intensive as could be expected in the circumstances. He appears to make efficient use of the land available to him, he has introduced a breeding and artificial insemination program, he has constructed, repaired or added to fences or stockyards, and undertaken supplementary feeding of the stock when required.
6. The quality of the herd is rated by both experts as high, and I accept their evaluation. The stocking levels appear appropriate given the size and quality of the land.
7. Furthermore, and despite his admitted 'part-time' involvement in the primary production activities, Mr Ernst appears to approach his activities in a serious way. During the years in question he spent many hours each week - a 'large and disproportionate' amount of time, in Mr Schuster's opinion - performing the many tasks requiring attention. But this was in the start-up phase of the business, and it is understandable that he would devote as much time as possible to establish a strong foundation for the future.
8. A countervailing factor - and this is where the applicant's case was always going to encounter its greatest challenge - is the financial performance of Mr Ernst's primary production activities.
9. The raw numbers taken from Mr Ernst's tax returns paint an unpromising picture, disclosing losses of over $130,000 in just two and a half years. As noted in [49] above, Mr Tremain thought those results required 'substantial adjustments to reflect an accurate gross income of Mr Ernst's cattle enterprise' and suggested a reconstruction which would revalue stock and strip out major items of expenditure. Mr Schuster agreed with the broad principle of revaluing the stock, but beyond that he did not accept Mr Tremain's reconstruction.
10. The numbers do look healthier if the expenses are recast in the way Mr Tremain suggested but I am not satisfied there is a sound basis to support that approach.
11. It may be that some of the expenses are capital in nature and should have been depreciated rather than immediately expensed.
12. It may also be that some of them are deductible for income tax purposes through a special small business 'instant asset write-off' concession which would need to be reversed or adjusted to reflect a more accurate non-tax financial statement.
13. It may be that the motor vehicle expense is not fully attributable to the primary production activity but relates in part to Mr Ernst's other income-generating activities, or is partly or wholly a private expense, or a combination of the two.
14. But on the evidence before me I could not comfortably come to any of those conclusions. It follows that I do not accept the figures resulting from Mr Tremain's reconstruction ([52] above, right hand columns) as an accurate representation of the financial performance of Mr Ernst's primary production activities.
15. Moreover, there is still the issue of the bank interest Mr Ernst is paying on the loan to purchase Lot 1. The amounts reported are $12,015 for 2015, $23,818 for 2016 and $22,834 for 2017 (CB Tab 15, 929, 904 and 879 respectively). I do not see any reason why this expenditure item should not be regarded as one of the legitimate outgoings incurred in carrying out the primary production activities. I do accept that if Mr Ernst had been able to establish and conduct his operations through equity rather than borrowings the financial outcomes would be different, but that is really nothing more than saying the facts as they are, are different from the facts that might have been. This is a case about the actual use of the land by Mr Ernst, not a hypothetical case about the way someone else might have used the land or the way Mr Ernst might have used the land in different circumstances.
16. As noted above, the experts did not agree on the question whether a notional amount for owner-operator labour should be taken into account in the financial results. However, that is not a question that needs to be taken any further since the results as they are tell a sufficient story.
17. I have come to the conclusion that Mr Ernst's use of the land during the relevant years had neither a significant and substantial commercial purpose nor a significant and substantial commercial character.
18. The use of the land during the relevant years did not generate a profit contributing in a real and not trifling way to Mr Ernst's income, and when assessed at any time during those years it could not reasonably have been expected to do so: Vartuli, White J, at [129].
19. That is not the only factor I have taken into account - see the discussion in [73]-[75] above - and nor is it a 'benchmark', but it is a factor that in the circumstances weighs very heavily away from, and tips the balance squarely against, a positive finding in relation to s 10AA(2)(a) of the LTM Act. After all, the financial results are one of the objective indicators providing feedback on the extent to which the various factors identified in Maraya Holdings - the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the land and the resources put into the development and maintenance of the cattle operation - have achieved their purpose. They can indicate, for example, a need to spend less money overall, or to target expenditure better; to buy better quality stock, or to sell in different markets; to reduce staffing levels or to aim for higher productivity. Importantly, as the Court of Appeal said in Vartuli v Chief Commissioner of State Revenue [2015] NSWCA 372, 'the relative income contribution from the primary production use … [can] contextualis[e] the significance and substantiality of any commercial purpose or character of the use of the land': at [87].
20. The applicant has failed to make its case that for any of the years in question paragraph (a) of s 10AA(2) of the LTM Act is satisfied. It is therefore unnecessary to decide whether paragraph (b) was satisfied.

Decision 1. Land tax assessments for the land tax years 2015 to 2017 inclusive confirmed

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 November 2019