Vartuli & Anor v Chief Commissioner of State Revenue [2014] NSWSC 678

Date of judgement 30 May 2014 Proceeding No. 2010/68900
Judge(s) White J
Court or Tribunal Supreme Court of New South Wales
Legislation cited Income Tax Assessment Act 1936 (Cth)

Land Tax Management Act 1956

Local Government Act 1993
Catchwords TAXATION AND REVENUE - assessment for land tax - land used for primary production - whether the taxpayers' land is exempt from land tax pursuant to s 10AA(2) of the Land Tax Management Act 1956 - whether use of land for taxpayers' cattle had "significant and substantial commercial purpose or character"
Cases cited Hope v Bathurst City Council (1980) 144 CLR 1

Hope v The Bathurst City Council (No. 3) [1994] NSWCA 139

Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379

Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408

Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165

Thomason v Chief Executive, Department of Lands (1994-1995) 15 QLCR 286

Summary

The taxpayers sought a review of the Chief Commissioner’s land tax assessments for the 2007 to 2013 land tax years, of the Property used by the taxpayers and 2 companies controlled by them, to conduct a primary production business.  The Property was zoned non-rural.

Justice White held that the use of the Property had neither a significant and substantial commercial purpose, nor a significant and substantial commercial character, as required under s 10AA(2)(a) of the Act, having regard to the minimal profits derived from the use of the Property.  His Honour held that the use of the Property did not contribute in a real and not trifling way to the income of Mr & Mrs Vartuli, or the two companies.  His Honour found it was not necessary to consider whether the business was carried on for the purpose of profit, as required under s 10AA(2)(b).

Background

The taxpayers, Bruno Vartuli and his wife Nancy Vartuli, are the owners of 14 hectares of land at Camden Valley Way, Edmondson Park (“the Property”) which was purchased in 1985 partly with the intention of breeding and fattening cattle on it.  The Property is part of land used by Mr & Mrs Vartuli, and by two family companies, Sydrom Pty Ltd and Deemhire Pty Ltd, to produce cattle. 

The Vartuli family also owns 22.4 hectares of land at Appin.  Deemhire and Sydrom operate cattle grazing businesses on the Appin property, on the Property, and also on adjoining lands to the Property at Edmondson Park.  The total area of all the lands on which cattle are agisted is 51 hectares.  Both Deemhire and Sydrom pay agistment fees to Mr & Mrs Vartuli for their use of the Property.

The maximum head of stock carried by Deemhire and Sydrom combined (both of which owned the cattle) varied between the mid-20’s during the 2006-2007 financial years to 122 head of cattle in the 2012 financial year.

In 2006, the Property was rezoned from “rural” to “residential” and other non-rural classifications.

Between October 2009 and January 2013, the Chief Commissioner issued land tax assessment notices to Mr & Mrs Vartuli in respect of the 2007 to 2013 land tax years (“the Relevant Land Tax Years”).  Mr & Mrs Vartuli sought a review of those assessments in the Supreme Court.

The Statutory Framework

It was not in dispute that the dominant use of the land was for primary production.  The Court was asked to determine whether the use of 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)

so as to satisfy s.10AA(2) of the Land Tax Management Act 1956.

Decision

Profitability of primary production activities on the Property

White J considered it appropriate to have regard to the entirety of Sydrom’s and Deemhire’s primary production activities, whether conducted on the Property or not: [36].  The profitability of those activities should be considered from the perspective of Mr & Mrs Vartuli, Sydrom and Deemhire, by consolidating their results and excluding the internal agistment charges paid to Mr & Mrs Vartuli.

His Honour did not think that the income derived from the rental of the farmhouse, nor the expenses incurred in relation to it, should be taken into account in assessing the profitability of the primary production activities on the Property: [39] and [45]. This is because his Honour found there was no evidence to indicate that the tenant of the farmhouse was engaged as a farm manager (although there was some evidence that he helped out), and therefore the occupation of the cottage by the tenants and their payment of rent was not incidental to the operation of a primary production business: [43]-[44].  Further, Justice White did not consider that the notional wages to the tenant set off against the rent should be treated as a real expense when it is not shown what work was done for that return and when that expense was not incurred in other years when the tenant was not living on the Property: [45].

In relation to the Chief Commissioner’s submission that an assessment of profitability should include notional wages in respect of Mr Vartuli’s labour, the Court disagreed because no such expense was in fact incurred: [49].

His Honour set out in an annexure to the judgment, a table representing what he considered to be an appropriate calculation of profits and losses for the primary production activities of Mr & Mrs Vartuli, Deemhire and Sydrom.  The net results vary between a loss of $5,777 in the 2007 financial year to a profit of $2,859 in the 2012 financial year: [50].  The figures do not include council rates, water charges and insurance.  His Honour sets out the council rates actually paid at [51] of the judgment and indicates how the profit and loss figures would have been affected if they were taken into account.

The taxpayers had submitted that the primary production results had been adversely affected by a drought between 1998 and 2008.  However, his Honour was unable to conclude that the figures would have been materially different in the years prior to the drought because there was insufficient evidence of the primary production activities before the year ended 30 June 2006: [54]-[57].

White J considered that in the circumstances of this case, a comparison of the capital value of the Property (almost $12 million in 2007) relative to the primary production profits, was not helpful in assessing whether the use of the land has a significant and substantial commercial purpose or character.  His Honour stated as follows at [90]:

“If it were established that the use of the land had a significant and substantial commercial purpose or character at the time of rezoning, then in my view a continued use of the land in the same way and for the same purpose would have continued to be for a substantial and significant commercial purpose and have a significant and substantial character, even if the land could have been put to more profitable uses.”

However, his Honour accepted that it could be relevant in some cases such as in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408:[111] and [137].

Beef cattle experts

The Chief Commissioner’s beef cattle expert, Mr Bill Hoffman, asserted that the average kilograms of beef produced by the Vartuli group was 33kg per hectare per annum.  He considered this to be a low level of productivity compared to the results of 36 members of the “Beef Profit Network” which was a group of 80 farmers throughout the northern tablelands and northern coastal areas of New South Wales. 

Justice White accepted the taxpayers’ two main criticisms of Mr Hoffman’s report. 

First, it was said that Mr Hoffman did not have the data from which to calculate the quantity of beef produced because a substantial proportion of the cattle purchased by Sydrom and Deemhire was purchased on a dollars per head basis, rather than a cents per kilogram basis.  In respect of those sales, Mr Hoffman estimated the weight of the cattle using a particular methodology based on the Eastern Young Cattle Indicator (“EYCI”).  However, his Honour found the explanation of the methodology inadequate and could not accept Mr Hoffman’s estimate of the weight of the cattle sold (see [65]-[72]) (and therefore his estimate of the average quantity of beef produced by the Vartuli group).

Secondly, his Honour expressed the view that one would expect the amount of beef produced per hectare from a cattle-grazing business in the New England district to be several times higher than the Cumberland district.  Therefore the comparator of the Beef Profit Network used by Mr Hoffman was inappropriate: [63], [73]-[74].  His Honour went on to note that the same comparison was used by Mr Hoffman in the decision of Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23.  However, neither at first instance, nor in the Court of Appeal, was any question raised as to the appropriateness of the comparator.

The taxpayers relied on statistics prepared by a variety of agricultural organisations relating to the financial performance of “small” beef farms in southern Australia.  Comparing the average receipts from beef cattle sales of small farms to the receipts from beef cattle sales in the Vartuli businesses, the Court observed that in the first three years the Vartuli receipts from cattle sales are well below the average for small producers, and in the last four years to 2012-13, the receipts are comparable.  The earlier low figures are attributed to the drought: [86].  Later, his Honour commented that in this case, unlike Maraya, the evidence is that the Vartulis’ scale of use and level of profits are consistent with thousands of other cattle farms: [112] and [118].

Significant and substantial commercial purpose or character

The Court held that for a use of the land to have a commercial purpose or commercial character, the purpose or character of the use must be or must include the making, or the potentiality for the making, of profits: [109].  White J considered that this conclusion was implicit in the reasoning of the Court of Appeal in Maraya Holdings: [105]. 

His Honour went on to say at [129]:

“…for the use of the land to have a significant and substantial commercial purpose or character, the use must have a character such that it generates, or can reasonably be expected to generate, profit that contributes in a real and not trifling way to the user’s income, or a purpose of generating such profit.”

It was also accepted that either a commercial purpose or a commercial character will suffice provided that it is both significant and substantial: see [108] and [131].

Applying these principles to the facts of the case, his Honour concluded that the use of the Properties had neither a significant and substantial commercial purpose, nor a significant and substantial commercial character, having regard to the minimal profits derived from the use of the land.  His Honour held that the use of the Property does not contribute in a real and not trifling way to the income of Mr & Mrs Vartuli, Deemhire and Sydrom.  The Vartuli group derived income through other businesses and investments of the Deemhire trust and Sydrom.  Further, although the taxpayers have a purpose of making money from their cattle operations, that is not a significant and substantial purpose because the cattle operations do not make money: [136].

Purpose of profit on a continuous or repetitive basis

In light of his Honour’s conclusion with respect to s 10AA(2)(a), it was unnecessary for him to consider s 10AA(2)(b).  Notwithstanding, White J set out his factual conclusions in relation to s 10AA(2)(b) in case he was wrong on the first limb.  He accepted that it was one of the taxpayers’ purposes that they should derive profit by using the Property for the breeding, fattening and sale of cattle.  However, he did not think that was their only purpose or dominant purpose.  His Honour found that Mr Vartuli continues to engage in cattle farming because he enjoys it and because it is something he has done since he started helping his father in his father’s cattle raising activities.  He declined to express an opinion as to whether s 10AA(2)(b) requires the purpose of profit on a continuous or repetitive basis to be the sole or dominant purpose of the use of the land, or whether it would be satisfied if it were one of the purposes: [139]-[142].

Orders

On 10 June 2014, his Honour made orders dismissing the taxpayers’ Amended Summons, confirming the Chief Commissioner’s notices of assessment for the Relevant Land Tax Years, and providing for the taxpayers to pay the Chief Commissioner’s costs of the proceedings.

Link to decision

Vartuli & Anor v Chief Commissioner of State Revenue [2014] NSWSC 678

Last updated: 18 May 2016