(Calculated from tables 6 and 7.)
95Emmett JA recorded (at [12]):
"During the years in question, dry conditions affected the feed stocks available on the Subject Lands and feed stocks were very poor in those years. In 2007, Maraya was only able to retain most of the herd by buying feed at significant cost. In the 2008 and 2009 years, Maraya sold the majority of the herd, rather than buy feed."
96 It was found that during the relevant period on average the Maraya cattle operation produced 42.6 kilograms of beef per hectare. Mr Hoffman's opinion that this was a very low output was accepted. (CA, [20]). Gzell J compared that production with the production of the 36 beef businesses who are Mr Hoffman's clients which recorded an average of 228 kilograms of beef per hectare in 2011 (Gzell J, [37]), without any adverse comment as to the appropriateness of the comparison.
97The average price received by the Maraya cattle operation was $1.62 per kilogram (CA, [21]). The average cost of production was $22.26-$56.44 per kilogram (CA, [22]). A major contributing cost was council rates (CA, [22]) which exceeded $30,000 per annum (CA, [60]).
98Both Gzell J and the Court of Appeal held that s 10AA(2)(a) had not been satisfied. They did not have to consider s 10AA(2)(b).
99Gzell J said (at [77]):
"[77] Section 10AA(2)(a) is concerned with objective qualities of the use of the land. The words 'significant' and 'substantial' in s 10AA(2)(a) are to be construed in their context and by interpreting the phrase 'significant and substantial commercial purpose or character' as a whole rather than by adding up linguistic elements of each of the words (Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389 at 396-397 quoting R v Brown [1996] 1 AC 543 at 561)."
100He went on to say that in the context of s 10AA(2)(a) "significant" connoted something of importance or something of consequence, a key element, or something that was vital or critical (at [83]) and that "substantial" meant an ample or considerable amount, quantity or size (at [88]). His Honour said:
"[89] The commerciality test in s 10AA(2)(a) of the Management 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.
[92] 40, or even 55, cattle grazing on the subject lands with or without the other lands do not constitute a serious or intense primary production use when the grazing areas of the lands are taken into account.
[93] Mr Hoffman's evidence should be accepted. Maraya produced on average 42.6 kilograms of beef per hectare, which Mr Hoffman considered to be a very low output of beef. His view was that productivity would always be low when the cattle graze on the type of pastures on the subject lands and the other lands.
[94] Mr Giusti made little attempt to improve the pastures. His one attempt at fertilising was not repeated when there was good following rain. There was one paddock he said had been pasture improved and one other was sown and harrowed after Mr Hoffman's visit.
[95] Mr Giusti spent approximately 1.5 to 2 hours per week and his son approximately 1 hour per week on the cattle operation. Those are times consistent with a part-time operation. As Mr Hoffman said at 21:
'The most likely corrective steps I would expect an entity, which is not returning a positive "profit", to take would be to increase productivity and reduce Cost of Production.
These steps are often difficult to implement with an entity which is based on a small area of land and is largely operating as what is commonly referred to as a "hobby" farm.
The term "hobby" is normally applied in cases where the beef business is not the full time occupation of the operator, is only contributing a minor portion of the income and is supported by "off farm" income. There are many "hobby farms" involved in the Australian beef industry with similarities to the Maraya beef business in that they do not return a "profit" and are supported by income from other sources.'
[96] Even with the omission of labour costs and holding costs, Maraya's cattle operation would produce very small amounts of profit with respect to land valued at $26.5m.
[97] Mr Bryant's evidence should be accepted. His view was that Maraya's cattle operation was not and would not be commercially viable. Mr Bryant considered that Maraya would have been financially better off if it had not engaged in cattle trading except for the possible land tax savings.
[98] The evidence leads to the conclusion that Maraya's use of the subject lands with or without the other lands did not satisfy the commerciality test in s 10AA(2)(a) of the Management Act. The cattle operations did not have such characteristics as importance, size, depth, bulk, weight, seriousness, quality, intensity and prominence that are indicative of a significant and substantial commercial purpose or character."
101In the Court of Appeal it was argued that the primary judge had erred by incorrectly conflating purpose and character. The appellants contended that there are two alternative criteria in s 10AA(2)(a), namely, that the use of the land for primary production has a significant and substantial commercial purpose, and that the use of the land for primary production has a significant and substantial commercial character. The satisfaction of either criteria would suffice. It was argued that by concluding that the activities in question must be ample or considerable in amount, quantity or size, the primary judge failed to give separate regard to the commercial purpose of the land use and that a person might have a significant and substantial commercial purpose even if the use of the land in question was small in scale, so long as it was businesslike (CA, [42]-[45]).
102Emmett JA, with whom Meagher and Leeming JJA agreed, did not query the correctness of the taxpayer's submission that s 10AA(2)(a) does specify two alternative criteria: one of commercial purpose, and the other of commercial character. The Court of Appeal held that Gzell J did not fall into the error of conflating the two criteria, but recognised that s 10AA(2) would be satisfied if the requisite purpose or character was evident from the particular use (at [46]). The Court of Appeal also said that there was no point in the primary judge's reasoning where a failure to distinguish between purpose and character had a bearing on his ultimate conclusion.
103It is clear that the Court of Appeal upheld the primary judge's approach that to determine whether the use of the land had a significant and substantial commercial purpose, or a significant and substantial commercial character, it was necessary to consider the intensity of the operation, the size and quality of the herd, the carrying capacity of the land, the resources put into the development and maintenance of the operation and the profitability of the operation (at [55] and [60]). Emmett JA held that Maraya's cattle operations had no commercial purpose or character (at [60] and [66]), let alone a substantial and significant commercial purpose or commercial character. Emmett JA said (at [55], [56] and [60]):
"[55] ... His Honour observed that to determine whether Maraya's cattle operations had a significant and substantial commercial purpose or character, it was necessary to consider the intensity of the operation, the size and quality of the herd, the size and carrying capacity of the Subject Lands, and the resources, whether of time, labour or expenditure, put into the development and maintenance of the operation. There is no reason to doubt that his Honour considered Mr Glover's evidence as to carrying capacity in making the assessment that he made.
[56] It is unrealistic to suggest that an assessment can be made as to whether use of land has a significant and substantial commercial purpose, or a significant and substantial commercial character, in the abstract. Whether a particular use has a commercial purpose or a commercial character can only be assessed by reference to the way in which land is generally used. It was not suggested that the Subject Lands could be used only for cattle operations. Indeed, they were zoned for industrial or residential use and could only lawfully be used for cattle grazing by reason of existing use rights. The Taxpayers' reliance on Mr Glover's evidence appears to be underpinned by an assumption that cattle grazing was the only use to which the Subject Lands could be put. A relevant consideration in determining whether use of land has a commercial purpose or a commercial character must be the way in which land is generally used. There was no error in this regard on the part of the primary judge.
...
[60] At no stage did Maraya's cattle operations generate profits according to any normal use of that term. The greatest 'profit' generated by the cattle operation was $1,213 in the 2008 year. That so-called profit excluded all holding costs in relation to the Subject Lands, including council rates exceeding $30,000 per annum. The Subject Lands have a value in excess of $26 million. They consist of more than 27 hectares. In no sense can it be said that the cattle operations had any commercial purpose or character. There was no error on the part of the primary judge in taking into account the lack of profitability of the use of the Subject Lands in determining whether that use had a commercial character or commercial purpose."
104Thus, Emmett JA considered that an assessment of the commercial purpose or the commercial character of the use of the lands should be assessed having regard to the way in which land is generally used. Having regard to the value of the lands (in excess of $26 million), the holding costs of more than $30,000 per annum and the impossibility of the cattle operations ever generating a profit or surplus, as well as the zoning and development on other lands, to which might be added the development works carried out on the land through the construction of a road that was inimical to the use of the land for cattle operations, but important for future subdivision, the use of the land for cattle operations had no commercial purpose or commercial character.
105One definition of "commerce" is the buying or selling of goods in the course of trade (Stroud's Judicial Dictionary of Words and Phrases, 8th ed). In Thomason v Chief Executive, Department of Lands the Queensland Land Appeal Court suggested that for a use of land to have a commercial purpose or character the use should generate reward, if not profit (see below at [130]). It is implicit in the Court of Appeal's reasoning in Maraya that a "commercial purpose" and a "commercial character" for the purposes of s 10AA(2)(a) means not only that the use of the land for primary production has the purpose of achieving returns from the sale of goods (that is, livestock), but that to have a "commercial" purpose or character the use must have at least a profit-making potential.
106The Court of Appeal did not disagree with the primary judge's assessment that any commercial purpose or character lacked substance and significance having regard to the comparison with other cattle operations described in Mr Hoffman's evidence. It appears that neither at first instance nor in the Court of Appeal was any question raised as to the appropriateness of the comparator used by Mr Hoffman, that is, his comparison of Maraya's operations and the operations of the 36 beef businesses that were his clients. The appropriateness of that comparison was challenged in this case. In Maraya the Court of Appeal accepted that whether the primary production use of land had a substantial and significant commercial purpose or a substantial and significant commercial character could be considered by comparison with the use of other lands. But it was not necessary for the Court of Appeal to consider the appropriateness of the comparison with the Beef Producers Network who were Mr Hoffman's clients.
107Leeming JA addressed the adoption in s 10AA(2)(a) of judicial language in earlier forms of cognate legislation in Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165 and Hope v Bathurst City Council and the modification of that language by the inclusion of the words "and substantial" in the phrase "significant commercial purpose or character". Leeming JA pointed out that the addition of the word "substantial" was intended to impose a more stringent test than the test which had been applied in Thomas v Federal Commissioner of Taxation and in Hope v Bathurst City Council as to whether the taxpayer was carrying on a business of primary production. His Honour (with whom Meagher JA agreed) continued (at [83]-[86]):
"[83] What is the nature of the more stringent test? 'Substantial' is a word which is not only susceptible of ambiguity, but which is also calculated to conceal a lack of precision: Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union [1979] FCA 132; 42 FLR 331 at 348 (Deane J). But in its context, the ambiguity falls away. In Thomas and in Hope six Justices of the High Court had emphasised that scale was not relevant to whether a business of primary production was undertaken on land. Mason J referred to the absence of a requirement of 'magnitude or size'. Walsh and Mason JJ each referred to a business being carried on 'in a small way'. Gibbs and Stephen JJ referred to possibility that a commercial activity might be 'small in scale'. It is clear in this context that the additional qualification is to negate what each of those Justices had said of the former legislation. The primary judge was correct at [91] to find that to determine whether there was 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.
[84] In order to assess the additional qualification of substantiality, a comparison needs to be made. Whether something has a substantial commercial purpose or character is at least in part a relative judgment. Speaking of s 45D of the Trade Practices Act, Bowen CJ said in Tillmanns at 339 that 'No doubt in the context in which it appears the word imports a notion of relativity', and the same is true of 'substantial' when it appears in s 10AA(2). A commercial truffle grower may have very little land, and harvest only a few kilograms of product, and yet the use may be substantial, seen against his or her competitors. The word 'substantial' has in the present context no inherent or absolute meaning standing alone. There was no error by the primary judge contrasting the small scale and impossibility of profit of the cattle business on the land with other cattle raising businesses.
[85] In light of the foregoing, the taxpayers' principal submissions may be rejected concisely.
[86] First, it is plain that both limbs of the subsection must be satisfied in order for it to exempt any land from taxation. Secondly, there is no basis for contending that the different language of s 10AA(2)(a) imposes the same tests established by Thomas and Hope. A test in which substantiality played no part has been replaced by one requiring the commercial purpose or character to be substantial as well as significant. Thirdly, there is no sound basis for narrowing the effect of 'substantial' merely to 'purpose' and not to 'character'. Fourthly, there is no room for what was described in argument as 'the Tweddle principle', in support of a submission that it matters not that a profit could never realistically be made. It suffices to say that the reasoning in Tweddle v FCT (1942) 180 CLR 1 at 7 does not translate to the Land Tax Act which requires, in order to satisfy an exemption, land use to have a significant and substantial commercial purpose or character."
108It follows from the Court of Appeal's decision in Maraya that s 10AA(2)(a) can be satisfied if the taxpayer can show either that the use of the land has a significant and substantial commercial purpose, or that use has a significant and substantial commercial character. This is in accordance with the decision of the Queensland Land Appeal Court in Thomason v Chief Executive, Department of Lands at 306 referred to below at para [130].
109It also follows from the decision in Maraya that "significant" and "substantial" are not synonymous and the phrase "significant and substantial" is not an hendiadys. The adjective "substantial" imposes a more stringent test than would be imposed by the phrase "significant commercial purpose or character". 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 excludes the potentiality for making profits from satisfying the requirement of commercial purpose or commercial character.
110The 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.
111The 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.
112The decision in Maraya provides guidance in assessing when a primary production use has a significant and substantial commercial purpose or character, but it does not by itself provide the answer to this case. Thus, in Maraya the maximum number of cattle sold in any one year was 32. In this case it was 111. In Maraya, the maximum number of head of cattle grazing on the lands at any one time was 55. In this case it was 122. In the abstract, and without evidence enabling a comparison with other cattle operations, I could not say whether this was or was not a significant and substantial use. The evidence was consistent with this being an optimal use of the land if land were used for cattle grazing, but that was also the evidence in Maraya. In this case, unlike Maraya, the evidence is that this scale of use is consistent with thousands of other cattle farms.
113In Maraya the profit or loss derived from livestock trading without overhead expenses and holding costs ranged from a loss of $4,712 to $7,985, but when overheads were added including council rates of $30,000 per year, there was no prospect of a profit from the use of the land for cattle farming.
114For the years in question the cattle operations of Mr and Mrs Vartuli, Deemhire and Sydrom also operated at a loss for some years, and otherwise only at a small profit without taking into account the incidence of council rates. If council rates and income from the rental of the farm property were taken into account, again there would be losses in the earlier years and only small profits in the years from 30 June 2010 to 30 June 2012. After 30 June 2012 the council rates would again mean that the cattle operations would be unprofitable.
115Mr and Mrs Vartuli say that account must be taken of the extended drought that only broke in 2008. Although drought conditions were mentioned in Maraya, neither the primary judge nor the Court of Appeal said whether it was significant that the farming operations in that case had been adversely affected by drought in the early years.
116That may well be due to the fact that in Maraya the farming operations did not start until 2005 when the property would have been affected by drought. Hence the taxpayers in Maraya could not argue that their purpose in embarking on the cattle-raising business was a commercial purpose, as would have been demonstrated but for temporary adverse conditions. In contrast, Mr and Mrs Vartuli have been conducting cattle growing operations on their properties since 1985.
117Although there is some uncertainty about the revenues generated from the sale of cattle in Maraya, it seems that the quantum of receipts in the latter years was many times lower than in the present case.
118In Maraya the only available evidence of cattle-farming that could be used as a comparison in determining whether the taxpayer's use of the land had a significant and substantial commercial purpose or character was that of the cattle-growers who were clients of Mr Hoffman. In this case the taxpayer has demonstrated that that is not an appropriate comparison. Although it is impossible to say how many of the small cattle operations whose financial results are summarised in the publications referred to at paras [77]-[82] would individually satisfy a test of use of the land being for a significant and substantial commercial purpose or character, it is clear from the statistics that there are thousands of beef cattle farms of a comparable size to the cattle operation of Deemhire and Sydrom and that, on average, small beef producers made losses in the financial years ended 30 June 2007, 2008, 2009, 2010 and 2012. 2011 seems to have been the only good year across the industry.
119These facts are relevant in assessing whether one should infer an absence of commercial purpose, or of a significant and substantial commercial purpose, from the lack of profits.