Vic Land Tax Exemption Setback for Company

Media Release - Thursday Jul 2

It’s certainly been an active period in the past few years during which there have been significant Land Tax Primary Production Exemption court decisions – especially in NSW and Victoria.

The shock ’no exemption” decision in the Darley case was the highlight of these recent cases.

Another decision that seriously impacts rural based breeding operations wishing to claim a primary production exemption for land they own and operate a primary production activity on is the Delma case.

Accordingly, sharing the facts and principles that emerge from these cases is a real priority of the writer.

In the Delma decision, the Victorian Court of Appeal has confirmed that a company was not entitled to a land tax exemption for primary production land held by it as none of its owners were engaged in a substantially full-time capacity in the primary production business.

This is a significant decision as it highlights that Victoria has a stricter regime for the land tax primary production exemption to apply for companies that own urban-zoned land located in greater Melbourne that not only requires the land to be used solely or predominantly for the business of primary production but also for the input of the company “owners” to be taken into account. For reference, there is no such requirement in NSW.

Facts

This was an appeal from a decision of the Supreme Court of Victoria, the case being Delma Investments Pty Ltd v Commissioner of State Revenue (Vic)

The taxpayer was a private company that owned urban-zoned land in greater Melbourne. The land had been used as a cattle farming business since 2006, but cattle farming activities had declined in intensity prior to 2021.

Delma was registered in 1959 and, at the relevant times, had four directors: Mr Douglas (“D [RB1] ”), his sisters Anne and Mary, and John “Jock” Langley, who is the son of Mr Douglas’ late sister. Mr Douglas, his two sisters and John Langley Senior (Mr Douglas’ brother-in-law and the father of John “Jock” Langley) each held 25% issued ordinary shares.

When Delma recommenced its cattle farming business in 2016, the directors had a profit intention. At the time, the Land was exempt from land tax. Mr Douglas gave evidence that although municipal council rates were high, he believed profits could be achieved with good weather and decent cattle prices.

Cattle farming on the Land since 2016

At the relevant times, D was contracted to carry out cattle farming activities on the Land. D gave evidence that he is a farmer with 45 years of experience, and that in respect of farming, it was in his “blood”. In his evidence, D detailed a number of his activities in carrying on cattle farming on Land. These activities included, but were not limited to, checking the health and wellbeing of livestock, checking the dams and bore to ensure there is enough water for the cattle, rotating cattle between six paddocks, and weaning the cattle when first purchased.

D gave evidence that he was “purely a farmer”. As the sole contractor engaged by Delma in its day-to-day operations, D gave evidence that he spent on average 24 hours per week, being approximately four hours per day, six days per week, physically working on the Land. In re-examination, D conceded that he did not keep a record of the times, but estimated that as a matter of routine, he roughly divided his time equally between two farms. His evidence was that he would roughly work four hours before lunch and four or five hours after lunch between the two farms, usually six days a week. This routine, he said, varied form week-to-week according to the seasons.

Development Agreement

In 2014 the taxpayer entered a development agreement with a consortium to develop the land as part of a larger residential development. By 2019 a planning permit had been granted but no other steps had been taken to develop the land. In 2022 the land was sold for $50 million.

The Development Agreement provided for the appointment of the Developer by Delma to undertake key steps including and ancillary to the development of the Land. These steps included obtaining Planning Approval, the development of the Land, including subdivision of lots and advertising, marketing and sales of subdivided lots. Pursuant to the Development Agreement, the Developer was responsible for all aspects of the development, including obtaining finance and paying for all development costs.

The actual development of the Land was conditional upon the Developer obtaining a planning permit. Delma, under the terms of the Development Agreement, was to have no active involvement in the development of the Land. Delma retained ownership of the Land, and the Development Agreement provides that the Developer was to be remunerated for its provision of development services.

Property assessed for land tax

The taxpayer was assessed for land tax in respect of the land for the 2020 and 2021 land tax years but objected to the assessments on the basis that the land was exempt as in their view, it was primarily used for primary production purposes. On that basis, the land should be considered exempted land in an urban zone in greater Melbourne that was used solely or primarily for the business of primary production.

The relevant Victorian Land Tax Act imposed certain requirements for exemption where the owner was a non-trustee (i.e. trading) private company. The primary production business must be carried on by the company on the land, and that business must be the company’s principal business. In addition, one or more of the owners of the company must be engaged in a substantially full-time capacity in the business.

The taxpayer’s objections to the assessments were disallowed by the State Revenue Office and the taxpayer appealed to the Supreme Court. The court ruled that the taxpayer’s land was used solely or primarily for the business of primary production and the principal business of the taxpayer was the primary production business carried on the land. However, it found that D was not engaged in a substantially full-time capacity in the business carried on the land (the “engagement” issue) and confirmed the original assessments.

The taxpayer appealed against the Supreme Court decision in relation to the “engagement” issue, submitting that the words “normally engaged in a substantially full-time capacity” in the Act were expressly qualified by the phrase “in the business of primary production” referred to in the same section of the Act. It contended that the physical and administrative work undertaken by D was all the work “necessary” to conduct the farming business and the primary judge should have found that D was normally engaged in a substantially full-time capacity in the relevant business of primary production.

2.0 Decision

There was no dispute between the parties that Delma was carrying on a business of primary production as defined in the Land Tax Act. The issue was whether Delma’s cattle farming activities on the Land bore sufficient substance and intensity to enable a conclusion that the Land was “used primarily” for the business of primary production, allowing the access to the exemption.

The Court of Appeal dismissed the appeal and held that Land Tax Act did not contain any words that suggested that the relevant person’s “capacity” was to be understood as requiring an assessment of the “needs” or “requirements” of the business rather than the personal commitment of the person. The person must be engaged in a substantially full-time capacity in the relevant business.

The court found that the phrase “in the business of primary production” did not introduce any reference to the “needs” of the business, or anything like it. It simply identified where the person must be engaged, namely, “in the business”.

Further, the court held that parliament clearly intended that a relevant person should demonstrate a sufficiently high level of engagement, and hence connection, to the specific primary production business on the relevant land, regardless of how the person spent the balance of their time.

The term “substantially full-time capacity” was considered in other Land Tax cases. It noted that the phrase connotes “regular participation in the business for a considerable part of the time of the owner”.

If you wish for me to clarify or expand upon anything mentioned in this article, please do not hesitate to contact me.

PAUL CARRAZZO CA, CPA

Partner - Baumgartners