On 10 February 2017, the Supreme Court of NSW (Court of Appeal) handed down its decision in Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 (“Metricon”). The decision followed the Supreme Court of NSW’s recent decision in Leppington, which was the subject of a previous post by the author.

At issue was whether the Chief Commissioner’s continued attack on ‘landbanking’, of itself, as a relevant current use in determining eligibility for the NSW primary production exemption from land tax was sustainable.

The central issue before the court was:[1]

“whether “intangible use” (such as “land banking use” or “land development use” in the sense already mentioned), as distinct from “physical use” (such as cattle grazing or some other physical activity pursued on the ground) is relevant for the purposes of s10AA and, if so, whether such an intangible use was, at relevant times, the “dominant use” of the land in question.”

Core meaning of ‘use’

After carefully canvassing the relevant authorities, both as to the construction of the word, “use” generally[2] and in the context of s10AA specifically,[3] Barrett AJA concluded as to the core meaning of use:[4]

“Decided cases are replete with statements that “use” is a word of variable meaning and that the construction of one statutory provision concerning “use” of land may well be an unreliable guide to the correct construction of another such provision. For that reason, approaches taken in cases about different statutory contexts in which the word “use” is employed with respect to land must be treated with caution. It must nevertheless be accepted that “use”, in relation to land, has a core meaning independent of statutory context. In the recent Berrima Gaol land claim case (New South Wales Aboriginal Land Council v Minister Administering the Crown Lands Act [2016] HCA 50, French CJ, Kiefel, Bell and Keane JJ said (at [34]):

“True it is that the words ‘used’ and ‘occupied’ might be said to take much of their meaning from context. But that is not to say that they are devoid of a commonly understood meaning in ordinary parlance. They require an examination of activities undertaken upon the land in question and, in the case of ‘occupied’, factors such as continuous physical possession must be taken into account.”

Examination of “activities undertaken upon the land in question” is thus central to identification of “use”, according to the commonly understood meaning of the expression; and, as Allsop P pointed out in the Leda Manorstead case, the inquiry is not limited to activities producing beneficial or commercial return. Furthermore, past activity may be indicative of present use even if the activity is for the time being not continuing. This is because the absence of activity on the land at a given time may be part of a scheme of calculated and continuing utilisation that stems from past activity and remains in course of implementation without discernible activity at the time in question.”

‘Use’ under section 10AA of the Land Tax Management Act 1956

Barrett AJA held that:

1. the primary production exemption focused on “use” at large rather than use by an “owner” (that is, it included the use of the land by those other than the owner);

2. “dominant use” must be “for” the purposes of primary production and the activities listed in subsection 10AA(3) of the LTMA require “deliberate physical acts in relation to the land”;

3. hypothetically, if there were a lessor leasing to a lessee that carried on primary production activities:
   1. if the focus is on physical activity, then the objective observer would conclude that the lessee’s agricultural use was the only use; and
   2. if the focus is on the exploitation of ownership rights, the lessor’s use by leasing would be the only use;

4. it is difficult to compare and contrast those two uses as they have “intrinsically different qualities” and where each is fully deploying their rights, neither use would be dominant;

5. it must follow that section 10AA of the LTMA is referring to the physical use of the land and therefore:[5]

“the hypothetical case under discussion would be resolved by holding that there is, for s 10AA purposes, only one use, being the agricultural use by way of physical deployment undertaken by the tenant; and that it is not necessary to address any question of comparison with any use by the lessor (or any question of relative quantification).  

6. inactivity cannot be a relevant current use[6] unless an intentional, actual and present advantage is derived by virtue of that inactivity.[7]

Conclusion

Barrett AJA concluded:[8]

“. . . the concept of “use” relevant to s 10AA as a whole (and s 10AA(3) in particular) – a concept in which the preposition “for” plays a central role – is one of physical deployment of Isaacs J’s “concrete physical mass”^[22] in pursuance of a particular purpose of obtaining present benefit or advantage from it, with deployment understood as including not only activity but also inactivity deliberately adopted as a means of obtaining such actual and present advantage from the land; and with purpose understood as objectively ascertained purpose. There is no requirement that immediate productive return be achieved, as long as some benefit or advantage accrues. In a s 10AA(3) case, each “use” considered in the search for “dominant use” must be of the character I have described.”

And further:[9]

“In saying this, I respectfully depart from the approach that commended itself to the primary judge and which his Honour confirmed in his later decisions on s 10AA in Bellbird Ridge Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1637 and Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 9. His Honour there confirmed the view that the possible uses to be considered for the purpose of determining what is the dominant use of land are not necessarily confined to physical uses of the land. That view should not be accepted.”

[Emphasis added]

Specifically as to landbanking, Barrett AJA held:[10]

“If “land banking” is understood as merely accumulating and holding a stock of land with a view to its future development, such “land banking” cannot be regarded as being, of itself, use of the land. Inactivity in the form of mere holding, although accompanied by a present intention to subdivide and sell at some future point, is not the source of present benefit or advantage and therefore does not constitute a use for the purposes of s10AA(3). What is required is some physical activity that causes the land to be raised out of a state of non-use into one of actual deployment in pursuance of the purpose of deriving advantage through subdivision and sale.”

Takeaway points

This is a big win for taxpayers. Not only did Metricon win, but the apparent expansion of relevant uses identified and accepted in Leppington (i.e. intangible use) was rejected in favour of a physical use test.

Assuming that sufficient primary production activities are being carried out on the relevant property in the first place, developers can expect to qualify for the land tax exemption until that critical point in time where, on all the relevant facts, a property development venture has crossed over from preparatory activities (even substantial preparatory activities such as planning and consultation) to the physical use of the land by means of subdivision and sale.

It is important to monitor the situation going forward to confirm whether:

1. the NSW OSR will appeal the decision; or
2. even if it does not appeal, legislative changes will follow to correct a perceived deficiency in the law.

If you or your clients need any assistance as to where the dividing line falls on the authority of Metricon, or for all your property development structuring needs, feel free to get in touch!

[1]  Barrett AJA at paragraph 17 (with whom Macfarlan and Ward JA agreed)

[2]   See Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493; Ryde Municipal Council v Macquarie University  (1978) 138 CLR 633; Minister Administering Crown Lands Act  v NSW Aboriginal Land Council (2008) 237 CLR 285; Blacktown City Council v Fitzpatrick Investments Pty Ltd [2001] NSWCA 259; Ferella v Chief Commissioner of State Revenue [2014] NSWCA 378; Thomason v Chief Executive, Department of the Lands [1995] QLAC 4; The Council of the Town of Gladstone v The Gladstone Harbour Board [1964] Qd R 505

[3]  See Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366

[4] At paragraph 45

[5]   At paragraph 56

[6]  Gladstone (above)

[7]  Royal Newcastle (above)

[8] At paragraph 61

[9]  At paragraph 62

[10] At paragraph 67

Introduction

On 30 January 2017, the NSW Supreme Court handed down its decision in Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue (“Leppington“).[1]

The issue at hand was whether a large parcel of land was eligible for the primary production exemption from NSW land tax.[2] The case is significant for three reasons:

1. the OSR repeated its position in Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2)[3] (“Metricon“) that “land banking”, of itself, constituted a relevant ‘use’ in determining eligibility for the primary production exemption, that is, land banking was a relevant current use rather than a excluded intended future use;
2.  the manner in which the OSR’s case was argued – the OSR submitted (amongst other things):
   1. Government policy guidance on the relevant legislation gave rise to an un-sustainably broad intention to narrow the scope of the exemption;
   2. based on an equally un-sustainable interpretation of relevant statutory interpretation principles, the court was required to give effect to this apparent legislative intent;
3. Metricon is currently on appeal, if the Commissioner succeeds therein (or the likely appeal in Leppington), this will have significant implications for both developers and the broader property market in relation to green field sites, that is:
   1. developers will have to factor in these additional cost inputs into any meaningful feasibility study of new acquisitions going forward;
   2. developers currently land banking may need to seek additional finance to meet the increased land tax liabilities going forward; and
   3. developers are unlikely to absorb these additional holding costs and simply pass them onto the market (in whole or in part), adding to the estimated $130,000 in State and Federal taxes already embedded in the price of a green fields ‘house and land’ package[4] (at a time when the freshly minted NSW Premier has described housing affordability as our “biggest issue”).

The facts

The decision involved rather complex facts whereby the landowner (“LPC“), which at all relevant times carried on one of the largest dairy farming businesses in Australia on the relevant land and elsewhere, granted a Call Option in favour of, then subsequently entered into a Development Rights Agreement (“DRA“) with, a related party (“GDC“).

Broadly, the effect of these agreements was that:

1. the development of the “Project Land” would be carried out in stages;
2. until the Project Land was disposed of by LPC, farming operations could continue at LPCs discretion;
3. GDC could enter into commercial arrangements with third parties to develop the Project Land and negotiate planning consents;
4. GDC could carry out these activities without first having to acquire the Project Land from LPC under the Call Option; and
5. GDC was required to fund the development of the Project Land and was entitled to any income derived from the development thereof, including sales contracts.

The Project Land was split into two categories:

1. the Development Land – being that part of the Project Land being developed from time to time; and
2. the Farmland – being that part of the Project Land not currently being developed and in relation to which, LPC, at its discretion, could continue its dairy farming operations under the relevant agreements.

Most, but not all, of the Project Land was not zoned rural land and as such, LPC had to satisfy the various requirements in subsection 10AA(2) of the Land Tax Management Act 1956 in order to qualify for the primary production exemption.

The legislation

 The primary production exemption is extracted below:[5]

“10AA Exemption for land used for primary production

1. Land that is rural land is exempt from taxation if it is land used for primary production;
2. Land that is not rural land is exempt from tax if it is land used for primary production and that use the land:
   1. has a significant and substantial commercial purpose or character; and
   2. is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made);
3. For the purposes of this section, land used for primary production means land the dominant use of which is for:
   1. cultivation, for the purpose of selling the produce of the cultivation; or
   2. the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce; or
   3. commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals; or
   4. the keeping of bees, for the purpose of selling their honey; or
   5. a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public; or
   6. the propagation for sale of mushrooms, orchids or flowers;
4. For the purposes of this section, land is rural land if:
   1. the land is zoned rural, rural residential, non-urban or large lot residential under a planning instrument; or
   2. the land has another zoning under a planning instrument, and the zone is a type of rural zone under the standard instrument prescribed under section 33A (1) of the Environmental Planning and Assessment Act 1979; or
   3. the land is not within a zone under a planning instrument but the Chief Commissioner is satisfied the land is rural land.”

The issues

There were various issues raised in argument, that is:

1. who was using the land – LPC or GDC?
2. what was use of the land?
3. what was the dominant use of the land in each relevant year?

The OSR’s argument

Preliminary findings

White J held that use was limited to a current use rather than a contemplated future use.

His Honour then concluded that it was necessary to consider the nature, extent and intensity of the various current uses of the land, the extent of the land used for different purposes and the time, labour and resources spent in using the land each purpose.[6]

As to the scale and intensity of the relevant primary production activities, His Honour concluded that certain evidence presented on behalf of LPC in this regard was honest but ultimately unreliable, which affected LPCs ability to discharge its onus of proof.

OSR’s identification of uses

The OSR argued that the competing current uses to the primary production use of the Farmland were as follows:

1. earthworks use on the Farmland for the development of adjacent Development Land;
2. consultant use for existing and future development;
3. intangible use of the land by reason of the DRA; and
4. LPC was using the Farmland as a land bank.

In addition, the OSR submitted that on account of the Minister’s Second Reading Speech (“Speech“) to the State Revenue Further Amendment Bill 2005 (“Bill“), Parliamentary intent was clear and effectively, the court was required to torture the wording of the legislation to deliver the intended outcome.

Minister’s Second Reading Speech

The Speech in relation to the Bill states:

“… It is important to put on the record that we make no apology for closing tax avoidance measures … Land tax for rural lands for genuine farm purposes is important. We are closing the loophole that has emerged. A developer buys a parcel of rural land from a genuine farmer and organises rezoning to allow subdivision for residential, commercial or industrial use. Under the current legislation all he or she has to do to retain the land tax exemption that applied previously to the land is to ensure that it is fenced, run some farm animals, periodically sell some of them and buys some replacements. The land is then subdivided in stages. Fences are moved back so that the remaining area of subdivided land can continue to be used for primary production. This process continues until all of the land is subdivided and sold.

The only parcels of land on which land tax is ever paid by the subdivider are the subdivided blocks created during the year that have not been sold on 31 December. The amendments will require that the dominant use of the land is primary production. This will allow the portion of the revenue generated from the land from sale of subdivided lots compared to the revenue generated from the sale of animals to be taken into account. The primary production use of the land will have to have significant and substantial commercial purposes, which must be engaged in for the purpose of a profit or on a continuous and repetitive basis. Running a few head of cattle or sheep to attract a land tax exemption rather than to make profits will no longer suffice.”

“Just make it happen”

The OSR submitted that on account of the above, the legislative ‘target’ was clear and the court was obliged to make it happen.[7]

However, the authority cited in support of that submission is more limited than the authority suggests. To follow the relevant line of interconnected authority:

1. where the legislation is clear, a court cannot legitimately construe the words in a tortured and unrealistic manner;[8] however
2. where the legislative intent is clear, a court may be justified in giving a provision a ‘strained interpretation’;[9] however
3. where a literal approach to statutory interpretation gives rise to ambiguity or inconsistency, a purposive approach is to be adopted and an interpretation consistent with legislative purpose is to be preferred to one that does not;[10]
4. this common law position is codified in various jurisdictions, including NSW[11] and the Commonwealth;[12] and
5. the Commonwealth provision was discussed by the Full Court of the Federal Court in R v L, where it was held:[13]

“The requirement . . . that one construction be preferred to another can have meaning not only where two constructions are otherwise open, and . . . is not a warrant for re-drafting legislation nearer to an  assumed desire of the legislature“[14]

[Emphasis added]

It is clear from the Speech that the legislation was targeted at a particular scheme whereby portions of land were fenced off and the vendors ran “some” farm animals to access the exemption.

The Minister was referring to cases where the exemption was claimed in circumstances where the relevant primary production activities were de minimis. The Minister was referring to circumstances in which the comparative scale or intensity of the relevant primary production use was low and it was in this context that he added that “[t]he amendments will require that the dominant use of the land is primary production.”

If land tax is assessed based on the use, or dominant use, of land from year to year, it stands to reason that land banking, which may not involve any use for many years (despite it being earmarked for future development) can only be weighed against any competing current use in that year.

How would taxpayer’s even determine the dominant use of a parcel of land where land banking was a current use with zero activity or expenses incurred on development activities? Would the future stages of actual development somehow relate-back to the earlier years as the relevant land was earmarked for development all along?

The scheme identified in the Speech was of narrow import involving de minimis primary production activities. It did not give rise to a broad-based intention to remove the exemption in relation to land banking regardless of the particular current uses from year to year. If it did, the legislature could (and should) have made this clear.

The OSR not only sought to argue that the policy identified in the Speech was of far broader scope than it actually was in narrowing the availability of the exemption, it then sought to apply an equally expansive view of relevant statutory interpretation principles to argue that the court was bound to deliver that apparently intended outcome.

The outcome

After comparing the current development uses versus the relevant primary production use of the Farmland in each year, White J concluded as follows:

1. in relation to 2011 – the OSR’s assessment was confirmed;
2. in relation to 2012 – the OSR’s assessment was revoked;
3. in relation to 2013 – the OSR’s assessment was revoked; and
4. in relation to 2014 – the OSR’s assessment was confirmed.

Comments and conclusion

The takeaway from Leppington is that the OSR is pushing to:

1. expand the apparent policy intent of the relevant legislation, thereby narrowing the availability of the primary production exemption; and
2. employ statutory interpretation principles to force the court to “make it so”.

Metricon is on appeal and the OSR raised the same argument in Leppington so as to preserve its rights on appeal in this regard.

Even if the OSR does not get up on appeal, in the absence of a determination by the High Court, it may still agitate to litigate on this point, which in itself presents a compliance risk for smaller taxpayers that simply do not have the resources to put up a fight.

Next steps

In light of the above, developers should:

1. review their circumstances;
2. identify the current uses of the relevant land;
3. if there is more than one current use, compare and contrast those uses in terms of scale and intensity;
4. be cognisant of the timing of certain activities and the impact it may have on eligibility for the primary production exemption (if any);
5. based on the timing of certain activities over the project period:
   1. work out any anticipated land tax liability into the feasibility study from the outset; or
   2. conservatively estimate its impact (on the high side) so as to more accurately estimate:
      1. holding costs;
      2. finance costs; and
      3. return on investment.

*   *   *   *   *

[1] [2017] NSWSC 9

[2] Section 10AA of the Land Tax Management Act 1956

[3] [2016] NSWSC 332 per White J

[4] See http://cms.3rdgen.info/3rdgen_sites/186/resourc/Senate%20Housing%20Affordability%20Submission.pdf

[5] Note 2 (above)

[6] Citing Thomason v Chief Executive, Department of Lands [1995]  QLAC 4

[7] Citing Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404

[8]  Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 at 113 per McHugh J

[9]  See Note 7 (above); Sutherland Publishing Co Ltd v Caxton Publishing Co Ltd [1938] 1 Ch 174

[10] Mills v Meeking (1990) 169 CLR 214 at 235 per Dawson J

[11] Section 33 of the Interpretation Act 1987 (NSW)

[12] Section 15AA of the Acts Interpretation Act 1901

[13] (1994) 49 FCR 534 at 538 per Burchett, Miles and Ryan JJ

[14] Citing Trevisan v FCT (1991) 29 FCR 157 at 162