Triston Pty Ltd atf The Ghantous Family Trust v Chief Commissioner of State Revenue

Land that is not rural land

1. If land is not rural land, then not only must the land be 'land the dominant use of which is for' any of the activities in s 10AA(3), as explained above; there is a further test in s 10AA(2) that must also be satisfied. That test requires the use of the land (i) to have a significant and substantial commercial purpose or character; and (ii) to be engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made).

THE LAND

1. The three parcels of land (together the Property) comprise a total area of approximately 3.75 hectares (Lot 2 - 0.266 ha; Lot 3 - 2.008 ha; Lot 4 - 1.48 ha: Exhibit 5, pp. 53, 51 and 49 respectively).
2. Each parcel has dual zoning - 'rural landscape' (RU2) and 'low density residential' (R2) - under the Hawkesbury Local Environmental Plan 2012: Exhibit 1, Annexure C. Mr Ghantous, the sole director of the applicant, estimates the area of the Property within the RU2 zone as about 95% of the total (Exhibit 1 at [10]). That estimate is based on the results of a survey of the Property, undertaken by a registered surveyor, Matthew Freeburn (Annexure F to Exhibit 1). I accept that estimate as accurate.
3. The area of the Property zoned RU2 is flood liable: Exhibit 1 at [12]. The area zoned R2 is higher and is not so affected.
4. The two larger lots are irregularly shaped, narrower at the roadway end and increasing in width along their length. The third lot adjoins one of the larger lots and sits slightly off to one side. There are fences on the Property which broadly create six usable areas - five paddocks on the low-lying areas, and the nursery area on the higher ground.
5. There are neither stables nor any breeding equipment or structures on the Property. However, on one of the lots (Lot 4), in the area zoned R2, there is a building the size of a double garage (apparently used for the storage of plant and machinery and farm implements) with a feed shed close by.

THE USE OF THE LAND

1. The higher ground and the lower, flood-prone ground are used for different purposes.
2. The higher ground is dedicated to nursery activities. The nursery area spans all three lots. The nursery has been conducted since 1983 but the activities, it must be said, appear to be quite modest. They also cover at most only about 5% of the total area of the Property, as already mentioned.
3. In his first witness statement, Exhibit 1 at [20], Mr Ghantous described the use of the higher ground as: to conduct a propagating nursery to grow specific plants for sale. These include but are not limited to grafting Japanese Maples, figs, fejoa, native finger limes, limequat and pomegranates.
4. He acknowledged that the market at the moment is very small, comprising mostly apartments and the sale of smaller pot plants, rather than supplying for larger landscaping projects. Most of the plants on the Property (Mr Ghantous estimates they number between 700 and 800 at any given time) are very mature plants, and would command selling prices of between $200 and $2,000. They are not newly cultivated or newly propagated. There is an extensive underground automatic irrigation system that provides water to the plants: Exhibit 1 at [20].
5. Mr Ghantous keeps a record of the time he spends on the Property, conducting activities connected with the nursery, and he charges that time to the applicant at an hourly rate, plus GST. In addition to the time he spends on the Property, he also does some propagating at his residence, particularly during winter when it is more convenient and comfortable to do it there than at the Property. In his second witness statement, Exhibit 2, Mr Ghantous estimated that he spends on average 8 to 14 hours per week on nursery activities, and that seems broadly consistent with the timesheets and invoices included in Exhibit 8. In Exhibit 2, at [17], he also said that he, personally, performs 'all of the work undertaken for the nursery'. All the effort Mr Ghantous puts into the nursery activity is done outside business hours. He conceded that his work practices are consistent with a part-time nursery operation.
6. The financial statements of the applicant (Exhibit 4) show how modest the income from the nursery activities has been in recent years. Those statements declare nursery sales in the following amounts: $6,500 for the financial year 2012, $1,525 for 2013, $50 for 2014 and $1,100 for 2015. The corresponding amounts of expenditure recorded for 'contract labour - nursery' (which is presumably the payment for Mr Ghantous' time, as described in the previous paragraph) were nil for 2012, $27,355 for 2013, $13,501 for 2014 and $13,393 for 2015.
7. Mr Ghantous estimates the value of the nursery stock at mid-2016 as between $50,000 and $60,000.
8. I now turn to the lower ground, comprising the five paddocks.
9. For some period up to 2011, and at least during 2010 and 2011, the applicant had horses on the Property. Mr Ghantous lived on an adjoining lot but sold his house in 2011 and moved to a different location. After he moved away three of the horses were stolen. Mr Ghantous then realised the applicant could no longer keep horses on the Property if there was no-one on-site to feed them, ensure the irrigation was correct, mow the grass and so on.
10. By then, in any event, Mr Ghantous had decided to go into what he described as specialised thoroughbred breeding. He set out 'to try and find the secret of how to produce horses that could give a good return by sales of their progeny', as he put it in his oral examination in chief. He has undertaken a good deal of research over the years, 'investigating and selecting bloodlines for the purpose of improving the applicant's bloodstock breeding program' (Exhibit 2 at [18]). Mr Ghantous estimates he spends between 7 and 8 hours per week researching breeding and bloodstock journals and stallion books (Exhibit 2 at [19]).
11. Mr Ghantous started the breeding program with two mares. One of the mares died after having her first foal. The second mare died in mid-2016. Mr Ghantous described the breeding program as 'not enormously successful but quite successful'. Some of the progeny have been winning races, and those that have not been winning and have been sold have attracted 'reasonable prices'. Mr Ghantous referred in his second witness statement, Exhibit 2 at [18], to the sale of a filly for $20,000 and a colt for $12,500.
12. In his first witness statement he also said this, at [16]: Focusing on a breeding program to obtain the desired progeny is a long process with the objective to retain fillies and mares only if the program indicates some success. Colts are retained and raced if it is considered that their racing success will enhance the value of the progeny at sale.
13. Since the three horses were stolen in around 2011, no horses have been kept on the Property. Nevertheless, the livestock accounts for the applicant for the financial years that are available show that there were between 4 and 9 head of livestock owned by the applicant throughout the financial years ended 30 June 2012 to 30 June 2015. There have been some natural increase and some losses during those years. But since some time in around 2011 the horses have been kept elsewhere, not on the Property.

Is the Property 'land used for primary production'?

1. The taxing date for a land tax year is 31 December of the previous year. In other words, the taxing date for the 2011 land tax year is 31 December 2010; for the 2012 land tax year it is 31 December 2011, and so on.
2. The first question that needs to be answered, for each land tax year, is whether the dominant use of the land as at 31 December was for one of the purposes specified in s 10AA(3) of the LTM Act.
3. It is convenient to put to one side, for the moment, a consideration of the position at the first relevant taxing date, 31 December 2010, and consider instead the position for the remaining years in dispute.
4. The facts relating to the use of the Property for the 2012 to 2015 land tax years are the same from one year to the next. Therefore, even though the question of exemption needs to be answered separately for each year, the answer in each case will be the same.
5. The only physical activity undertaken on the Property at those various taxing dates was the nursery activity. That is clear from the evidence, which establishes that there have been no horses on the Property since three horses were stolen some time in 2011 and any remaining horses were removed to a different location. It is also clear that the part of the Property on which the nursery activity is undertaken comprises no more than 5% of the area of the entire Property. It follows that the remaining 95% of the Property sustained no physical activity at all. I should add that there is no prospect of regarding that remaining 95% as 'used' in some way during those years, such as by being actively kept in a particular state for the special needs of the applicant: see for example Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493 (High Court); (1959) 100 CLR 1 (Privy Council). There is no evidence to that effect here, and I find it not to have been the case.
6. The evidence about the actual activities conducted in relation to the nursery is somewhat sketchy. Relevantly, Mr Ghantous said in his second witness statement, Exhibit 2 at [3], that the applicant was carrying on 'a business of … propagating specialised and rare plants for commercial sale'. But in cross-examination he said the plants on the Property are not newly cultivated or newly propagated 'because it's an ongoing thing'. The evidence therefore falls short of establishing that there was any actual propagation conducted on the Property during any of the relevant years, and I find there was none.
7. For the purposes of paragraph (e) of s 10AA(3), a 'commercial plant nursery' is a place where horticultural stock is propagated as part of the early cultivation of plants: Lease A Leaf Property Pty Ltd v Chief Commissioner of State Revenue [2011] NSWADTAP 41; (2011) 85 ATR 273 at 281 [30]. On the facts I have found, the use of the land during the relevant years is not within the terms of paragraph (e). Nor can paragraph (f) apply, because of the lack of propagation.
8. Even if I had found that the use of the Property in relation to the land tax years 2012 to 2015 satisfied one or more of paragraphs (e) or (f) of s 10AA(3), I nevertheless would have concluded that the Property could not be characterised as 'land the dominant use of which is for …' any of the specified activities (my emphasis). This is because of the insignificant, practically de minimis, use of the land during those years, with the nursery area representing something less than 5% of the footprint of the entire Property. I would have concluded that the Property during those years did not have a dominant use at all.
9. The exemption claim for the 2012 to 2015 land tax years accordingly fails.
10. I now turn to the position for the 2011 land tax year.
11. At the taxing date for the 2011 land tax year there were horses being maintained on the Property. The number of horses on the Property has not been established with precision but, based on the applicant's livestock accounts (which I accept as accurate), the number must have been between 4 and 6. Based on Mr Ghantous' evidence I find that the horses were being maintained for the purpose of selling them or their natural increase. It is clear from Mr Ghantous' evidence that to the extent the applicant has entered its horses in races, it is not for the purpose of gathering race winnings as such, but rather to provide objective evidence of the quality of the breeding line. It is true, as Mr Ghantous conceded in his cross-examination, that the prizemoney recorded in the applicant's financial statements far exceeds the applicant's income from sales of horses. But that is not in itself surprising. Sales will always be infrequent, since it takes time to establish the quality that makes the sales worthwhile in the first place.
12. Mr Ghantous said that when the horses were on the Property they were moved around the paddocks. I accept that. I also infer that the general practice over many years has been to share the use of the paddocks roughly equally, so that none of them is significantly over- or under-used when compared with the others. That general practice may not have been achievable during the 2011 land tax years, in light of the theft of three of the horses and the applicant's subsequent decision to move any remaining horses away from the Property. But it would have been the expectation at the taxing date of 31 December 2010 that the historical practice would continue for the foreseeable future.
13. I comfortably conclude that the applicant was using the flood-prone area of the Property at 31 December 2010 for the maintenance of horses for the purpose of selling them or their natural increase. At that date it could reasonably have been expected that that use of that area of the Property would continue for the next six months, an appropriate period during which the evaluation of a claimed exempt use of this kind should be undertaken: Leda Manorstead v Chief Commissioner of State Revenue [2010] NSWSC 867 (Gzell J) at [4]. That it may not have been so used for the entirety of that period, owing to the particular circumstances that transpired, is in my view irrelevant.
14. That use, over 95% of the area of the Property, is sufficient to characterise the Property, and by extension each of the individual lots, as land the dominant use of which is for the exempt activity. It is not to the point that the identified use may not be at the level of intensity that the Property could tolerate, for two reasons: one, it cannot be regarded as an insignificant use of that part of the Property; and two, there is no relevant competing use that could undermine that characterisation.

Is the Property 'rural land'?

1. The next question is whether each lot is 'rural land'. The answer to that question determines whether s 10AA(2) of the LTM Act must also be satisfied.
2. The applicant says the lots should be regarded as rural land because they are, as a fact, zoned rural, even if they have some other zoning in addition to the rural zoning. There is no requirement that the lots have only one zoning; s 10AA(4) does not talk of land being 'entirely', or 'exclusively', or 'wholly' zoned rural or rural residential or non-urban or large lot residential. Attracting a rural zoning is enough, even if the land is subject to an additional zoning which is neither rural nor rural residential nor non-urban nor large lot residential, which are the zoning types specified in s 10AA(4) as 'rural'.
3. The Chief Commissioner takes a different position. He says that as the land is zoned low density residential as well as rural landscape it does not satisfy the test in s 10AA(4). The land lacks the necessary character because it is not, in its entirety, zoned rural.
4. On this difficult question I think the Chief Commissioner's submission must be accepted. To accept as 'rural land' a parcel of land only part of which carries a rural zoning would necessarily give rise to uncertainty about the point at which partial zoning satisfies the requirement. For the legislature, fully cognisant of the possibility of dual zoning, not to have included some qualifier - whether 'principally', or 'mainly', or something of the sort - suggests that only a single rural zoning covering the entire parcel will satisfy the test. On that basis it follows that none of the lots under consideration here, each of them carrying dual zoning, can be characterised as 'rural land'. That means s 10AA(2) must also be satisfied.

Section 10AA(2) - 'significant and substantial commercial purpose or character'; 'purpose of profit on a continuous or repetitive basis'

1. The evidence falls short of satisfying me that either of these requirements have been met.
2. In Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue (RD) [2012] NSWADTAP 25, the Appeal Panel of the Administrative Decisions Tribunal said at [45] that s 10AA(2) requires the following steps: (i) A threshold determination that the land is used for primary production. That means more, we consider, than some de minimis use of the land. It should be shown that the land as a whole is used for primary production in the requisite sense, even if that occurs in combination with some non-primary production uses. … (ii) If the threshold determination is favourable, there must be a level of use that 'has a significant and substantial commercial purpose or character' (factor (a)). This criterion eliminates hobby or token operations even though they may have passed the de minimis threshold to which we have referred in (i). The taxpayer then needs to show that the operation is run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability; cognisant of the elements of unpredictability of any business operation, especially primary production. This is a higher standard than the one that applies to rural land. This is where the dispute starts in the present case. (iii) The next criterion, factor (b), takes the issues raised by factor (a) to a further level of exactitude. The activity must be engaged in for the purpose of profit 'on a continuous or repetitive basis (whether or not a profit is actually made)'. The reference to 'continuous' or 'repetitive' we see as connoting a business enterprise of a well structured, long term character, with administrative features (organisation, management, book keeping) which support the conclusion that it is set up with the aim of generating a profit year to year over a succession of years.
3. In Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23, after referring with apparent approval to the substance of subparagraph (ii) above (dealing with s 10AA(2)(a)), Gzell J said at [66] that s 10AA(2) introduced a more stringent test for exemption than simply carrying on a business. His Honour also explained at [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.
4. The taxpayer's appeal to the Court of Appeal was unsuccessful: Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408.
5. In the current case, and applying the guidance provided by Gzell J in Maraya, I conclude that paragraph (a) of a 10AA(2) is not satisfied. The activity carried on by the applicant cannot be regarded, on any measure, as anything other than a 'sideline'; it is not an undertaking of a serious and weighty kind. I would have thought that, in both absolute and relative terms, the maintenance of somewhere between four and six horses on a property 3.75 hectares in area (or about 3.56 hectares of usable area) is not a use of land that has a significant and substantial commercial purpose or character. There is no evidence that dissuades me from that view.
6. As far as paragraph (b) is concerned, I note Mr Ghantous' evidence that the activities are undertaken with a view to profit. However, that evidence is self-serving and needs to be approached with caution.
7. It will of course be a rare person who claims to carry on an activity with a view to losing money. But merely saying the opposite does not make it so. Nor, at least as a matter of logic, does the fact of making losses necessarily undermine a claim that an activity is carried on for the purpose of profit on a continuous or repetitive basis. Nevertheless, a continuous pattern of a lack of profit may cause a decision-maker to question the reliability of the claim. In fact, it may be that a continuous pattern of a lack of profit indicates a level of indifference as to the financial performance of the activity and, instead, a realisation that the losses might at least to some extent be subsidised by the land tax exemption being sought.
8. I am not satisfied that the applicant's use of the land is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). Paragraph (b) of s 10AA(2) is therefore not satisfied.

CONCLUSION

1. The land tax assessments must be 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: 31 March 2017