On 31 March 2016, White J delivered his judgement in the case of Metricon Qld Pty Ltd v Commissioner of State Revenue (No.2)  NSWSC 332 where he considered the dominant use of land and the subsequent access to the primary production exemption for land tax. The decision may permit some property developers in the future to escape land tax assessment for certain rural properties when in the preliminary stages of development.
WHAT IS POSSIBLE? (THE METRICON DECISION)
The facts involved a land developer (Metricon) acquiring and holding large parcels of land for urban development. Although the land was ultimately purchased for a proposed development, it had been predominately used for cattle-grazing under an agistment agreement for some time (Primary Production). Additionally, there were residential tenants living on the land.
Pursuant to s10AA of the Land Tax Management Act 1956 (NSW), the land tax exemption will apply if:
- ‡ the use of the land has a significant or substantial commercial purpose or character;
- ‡ the land was used to earn a profit on a continuing or repetitive basis; and
- ‡ the dominant use of the land was primary production.
The Commissioner accepted that the first two elements had been satisfied by Metricon. The issue for the Court was to determine whether Metricon’s dominant use of the land was for primary production. The Commissioner alleged that primary production was not the dominant use of the land as it was used for a variety of other purposes. The Court addressed each of these issues (as outlined below) and ultimately concluded that Metricon’s primary production was the dominant use of the land.
- RESIDENTIAL TENANCY AGREEMENT
It was held that the primary production use was more dominant. This determination was based on an evaluation of associated profit and expense figures, proportion of the land used as well as the amount of time dedicated to each use of the land.
- AGISTMENT OF CATTLE
This was deemed to be an actual use of the land, however the benefit Metricon derived from this was insignificant. It was considered to be an aspect of the use of the land in furtherance of the primary production.
- THE LAND FORMED PART OF A LAND BANK, HELD BY METRICON FOR THE PURPOSE OF FUTURE DEVELOPMENT
White J concluded that land awaiting development for some future purpose, was not being actually used. There was no evidence of actual use of the land as a land bank.
Additionally, it was held that claiming deductions for borrowing expenses was not sufficient to constitute a ‘use,’ where they arise out of the ordinary financing of the land’s purchase. The deductions were available to Metricon whether the land was used or merely held.
- THE LAND WAS PART OF CURRENT COMMERCIAL LAND DEVELOPMENT WITH RELATED ONGOING EXPENSES
In 2008, Metricon spent $2.2 million on consultants planning its proposed development.
It was held that preliminary activities that are required to obtain approval for the use of land in a particular way (such as seeking legal advice or engaging consultants to prepare reports) do not constitute a current use of the land.
The use of the land for obtaining requisite approvals does not have a character or intensity that would mean that the primary production use was not dominant.
Given the significant revenue implications, it is likely that the NSW Office of State Revenue will seek leave to appeal the decision. Until such time however, the position for developers should carefully be considered.
WHAT IS NOT POSSIBLE?
Prior to the Metricon Decision, there were a number of cases which attempted to rely on the primary production land tax exemption, however were unsuccessful for their own individual reasons. The underlying reasons for their failures can be distinguished from the Metricon Decision and carefully considered by prospective property developers.
- CARURANA & ANOR V COMMISSIONER OF STATE REVENUE  NSW ADT 183.
This case involved a taxpayer who owned two lots of land. One of the lots was ‘intended’ to be used for primary production but was currently being held as ‘rural bush.’ The other lot of land was used for meat processing operations.
The first lot was not held to be used for primary production as ‘intended’ does not constitute a use in itself. The second lot was also not held to be used for primary production as it did not involve the keeping of live animals. Animals were not maintained on the property, the cattle were slaughtered elsewhere and the meat was then taken to the taxpayer for processing. This was instead deemed as ‘secondary production.’
The Metricon decision differs from this case because the property has cattle on it and was therefore conducting ‘physical activity on the land itself.’ Mere intent does not amount a use for primary production.
- LEASE A LEAF PROPERTY PTY LIMITED V CHIEF COMMISSIONER OF STATE REVENUE (RD)  NSW ADTAP 41.
A company related to the taxpayer owned a property which conducted an indoor plant hiring business. The company itself did not propagate any plants on the land, instead they were purchased from a nursery. The taxpayer attempted to claim the primary production exemption on the grounds they operated a ‘commercial plant nursery.’
It was held that applying the primary production exemption via a commercial plant nursery required propagation of the plants. This ran in line with the definition of ‘nursery’ which includes activities confined to ‘the early’ cultivation of plants or trees.’
As such, the land must actually produce something and not merely hold produce temporarily. The Metricon decision satisfied this requirement because the cattle were bred on the land itself.
- LEDA MANORSTEAD PTY LTD V CHIEF COMMISSION OF STATE REVENUE  NSWCA 366.
The taxpayer was a property developer who purchased over 550 hectares of the land with the intention of developing a residential subdivision. They had 270 grazing cattle on the land and had also spent $12.4 million on earthworks for the purpose of the development.
On appeal, the taxpayer argued the ‘dominant’ use of the land was for primary production and that the earthworks were ‘preliminary activities’ to prepare the land for a contemplated use. It was submitted that a ‘use’ required the productive return of the land.
It was held that there was no warrant within the words of the section or the meaning of the word ‘use’ or the phrase ‘used for’ to require beneficial return of the land. Court of Appeal agreed with primary judge’s evaluation in comparing the cattle grazing and commercial development and subsequent decision that the former was not the ‘dominant use’ of the land.
This differs from the Metricon decision because the ‘preliminary activities’ conducted by Metricon had no physical impact on the land itself (consultancy) and cost Metricon far less to perform ($2.4mil). As such, Metricon’s use of the land for obtaining requisite approvals did not have a character or intensity that would mean that the primary production use was not dominant. Furthermore, Metricon’s consultancy merely signified an ‘intended’ use for property development and therefore did not constitute a current use of the land.
Pursuant to Section 53 of the Land Tax Act 2010 (Qld) (‘Land used for Primary Production’), an exemption exists for land or a part of land thats sole use (as opposed to ‘dominant use’ like for NSW) is for the business of agriculture, pasturage or dairy farming. Although the section itself does not provide a criterion to be met regarding primary production, the applicable Public Ruling (LTA053.1.1) provides guidelines to assist.
Generally, the words agriculture, pasturage and dairy farming refer to production resulting directly from either:
- the cultivation of the land; or
- the maintenance of animals for the purpose of selling them or their bodily produce, including their natural increase; or
- the growing of plants in sand, gravel, or liquid, without soil and with added nutrients, i.e. hydroponics.
To determine the existence of a business, regard must be given to:
- whether the activity has a significant commercial purpose or character;
- whether there is more than just an intention to engage in a business (the extent of preparatory activities undertaken is relevant—relevant activities may include clearing of land, fence and dam constructions etc.);
- whether there is an intention to make a profit as well as the profitability of the activity;
- whether there is repetition and regularity of the activity;
- whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
- whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;
- the size, scale and permanency of the activity; and
- whether the activity is better described as a hobby, a form of recreation or a sporting activity.
The existence of one of aforementioned factors may not conclusively establish the existence of a business; however, a combination of these factors may indicate that the primary production operation in question is a business. The relevance and weight to be given to each factor will depend on the circumstances of each particular case.
This test is far stricter than in its interstate comparison in NSW, however is nonetheless available. If a property developer acquires land for a proposed development, however conducts primary production business on that land, they may be able to rely on the principles outlined in the Metricon decision in order to claim a land tax exemption during the preliminary stages of the project. It is not enough to merely put a few cows, sheep or horses on the property and expect to secure valuable land tax exemptions.