Inquiry into the NSW land valuation system

Our team here at Gadens has experienced a big increase in the number of land valuation appeals over the past 12 months, challenging the Valuer-General’s determination of land value, which is used for land tax and rating purposes, and is often used to calculate rentals under leases. From what we have seen thus far in 2013, the trend looks set to continue.

Many factors are taken into account by valuers in arriving at an ‘unimproved’ land value, and it is an art rather than a science, which can lead to significantly different subjective opinions by different valuers on the worth of the same piece of land. Ultimately the value of any parcel of land is a matter that can be determined by the Land and Environment Court, in an appeal, if the initial objection is not accepted by the Valuer-General.

Frequently, we see the assessed land value increase significantly from one year to the next, with little apparent basis for the large increases, particularly in a sluggish or stagnant property market. For large sites, the Valuer-General will often value land based on its hypothetical ‘highest and best use’ – for example stating that an applicant could build an enormous retail and commercial centre with towers of residential apartments directly above, irrespective of the real-world lack of feasibility for such a proposal in a particular site and/or market. The system is also particularly poorly equipped to deal with areas that are rezoned - valuation of land in growth areas, new employment areas, or other ‘upzoned’ areas are often unrealistic, where infrastructure and services are not yet available. Even where an appeal is lodged, the landowner must pay the full land tax and later seek a refund of some or all of it if they are ultimately successful in the appeal.

Not surprisingly, the system is now under review, with the Joint Standing Committee on the Office of the Valuer-General now holding a public inquiry into the Land Valuation System. Its Chairperson, the Hornsby MP, Matt Kean, recently said the system needed to be fair, transparent and to provide certainty to property owners:

''The valuation system determines the amount of tax paid by every land owner in NSW,'' he said. ''Recently we have seen shocking examples of the system failing right across the state. I am determined to apply the blowtorch to the entire process in order to safeguard the public's confidence.''

Strong words indeed!

The upcoming inquiry into the land valuation system will be considering these issues and then making recommendations, with its terms of reference being to investigate “the extent to which the current land valuation system delivers transparent, efficient, equitable and consistent outcomes for stakeholders”. Importantly, the inquiry expressly will not explore land tax revenues, and is therefore intended to be “revenue neutral”.

Submissions have been received and a series of public hearings are underway. We will update readers once the Inquiry is completed.

In the meanwhile, if you would like to discuss any particular land valuation issues with us, please do not hesitate to contact us.

Primary Production Land Tax Exemptions – Court sets the bar high for profit test

Obtaining a ‘primary production’ exemption from land tax liabilities on non-rural land in NSW just got harder.

Many property owners of greenfield sites have traditionally been exempt from the requirement to pay land tax, on the basis that they conduct some primary production activities on the land, and could therefore claim the exemption that is available under s.10AA of the Land Tax Management Act. This can assist developers, for example, to buy and affordably hold land for future development while also contributing to primary production within NSW.

In a recent judgment, the NSW Supreme Court applies a very strict interpretation of the requirement that primary production operations claiming the exemption, be engaged in for the purpose of profit.

The decision has implications for primary producers who operate on land that is not zoned rural, and landowners who agist or lease the land to small primary producers. It particularly relates to small primary production operations which generate low incomes and no profit.

The issue in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23 was whether the use of non-rural land had a significant and substantial commercial purpose or character (the commerciality test) and was engaged in for the purpose of profit on a continuous or repetitive basis, whether or not a profit was actually made (the profit test).

Maraya herded about 40 cattle in the land tax years in question. The purpose of Maraya’s operation was to graze and fatten cattle for sale.

The commerciality test

In the Court’s opinion, the commerciality test required the commercial purpose or character of the use of the lands 'to have had a relatively high degree of importance'.

The Court accepted evidence from a beef industry expert who determined the operating costs of the business and overhead costs, and dividing that by kilograms of beef produced. The result was that in each tax year the cost of production exceeded the income from livestock trading.

Expert evidence showed that:

  • Maraya’s operation produced on average 42.6 kilograms of beef per hectare, which was considered to be a very low output of beef compared to other operations;
  • Productivity would always be low when the cattle grazed on the type of (poor) pastures on the subject lands; and
  • The operation was not and would not be commercially viable.

The Court, accepting the expert evidence, also considered a number of factors to conclude that Maraya did not satisfy the commerciality test. Those factors included:

  • the intensity of the operation;
  • the size and quality of the herd - the low number of cattle grazing;
  • the size and carrying capacity of the land; and
  • the resources put into the development and maintenance of the cattle operation – notably that the manager spent very few hours per week on the cattle operation – time consistent with a part-time operation.

Profit test

In each of the relevant tax years the Maraya operation did not make a positive financial return when assessed in terms of operating profit. The Court accepted evidence from a financial expert that Maraya’s cattle produced a large negative financial return in each year.

In addressing the profit test, the Court held that, even though there is not a requirement in the Act that a profit be made, a continual failure to make any profit could lead a court to question and in some instances reject evidence that the primary production use of the land was engaged in for the purpose of profit.

In his judgment Gzell J said:

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.

This is very concerning because it suggests that it may not be enough for the primary production activities to be profitable if the profits are uncommercial having regard to the value of the land.

These comments assume that just because the land is worth, say $26.5m, the taxpayer should be able to earn more than modest returns from the land. The problem is that while the land has a value based on its future development value – that may not reflect its current income earning capacity e.g. there may be obstacles to developing the land at present and the best use for the land may currently be deriving a modest profit from cattle grazing.


As a result of failing the commerciality and profit tests, Maraya could not claim the primary production land tax exemptions and was required to pay the land tax assessments for the years in question.

Claiming a primary production exemption from land tax in brief

In order to claim an exemption from land tax on the basis that the land is used for primary production, the landholder must prove:

  1. The land is rural land used for primary production; or
  2. The land is not rural land but is used for primary production and that use of the land:
  • has a significant and substantial commercial purpose or character (and a marginal business operated on a part time basis is not likely to meet that test); and
  • is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made). Although it is not a requirement that a profit must always be made, an enterprise that never makes a profit is not likely to meet this test.

The Court and Office of State Revenue are now likely to require proof of profit to demonstrate a continual or repetitve engagement of primary production land for the purpose of profit.