Vartuli v Chief Commissioner of State Revenue  NSWCA 372
|Date of judgement||30 November 2015||Proceeding No.||2014/189251|
|Judge(s)||Meagher, Ward and Gleeson JJA|
|Court or Tribunal||NSW Court of Appeal|
|Legislation cited||Civil Procedure Act 2005 s 56
Land Tax Management Act 1956 s 10AA
Local Government Act 1993 ss 585, 586, 587, 591, 594, 597
Taxation Administration Act 1996
|Catchwords||TAXES AND DUTIES - land tax - land used for primary production - whether use had a significant and substantial commercial purpose or character - s 10AA(2)(a) of the Land Tax Management Act 1956|
|Cases cited||Fox v Percy  HCA 22; 214 CLR 118
Hope v Bathurst City Council (1978) 38 LGRA 1
Hope v Bathurst City Council  2 NSWLR 471
Hope v Bathurst City Council  HCA 16; 144 CLR 1
Kuru v State of New South Wales  HCA 26; 236 CLR 1
Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue  NSWCA 408; 2013 ATC 20-429
Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue  NSWSC 23
Thomas v Federal Commissioner of Taxation (1972) 3 ATR 165
The Appellants, 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, the Property, as well as 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 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, and on 30 May 2014, White J confirmed the Chief Commissioner’s notices of assessment for the Relevant Land Tax Years. Mr & Mrs Vartuli then appealed to the Court of Appeal.
The Statutory Framework
At first instance, the Supreme Court was asked to determine whether the use of the Property:
a significant and substantial commercial purpose or character; and
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.
Justice White held that the Appellants failed to satisfy s.10AA(2)(a), and although he expressed certain factual conclusions with respect to s.10AA(2)(b), ultimately his Honour made no determination on that issue.
Issues and Decision on Appeal
Grounds 1 – 3 and 7: Assessment of significance and substantiality of the commercial purpose or character
The Appellants contended that his Honour misdirected himself (at ), and misconstrued the decision in Maraya Holdings v Chief Commissioner of State Revenue, in finding that it was necessary to consider whether the use of the land generates, or can reasonably be expected to generate, profit in an amount that contributes in a real, and not a trifling, way to the user’s income, or whether it has a purpose of generating such profit. The Appellants said that this invoked a novel test, and that the existence and extent of other sources of income of those engaged in the use of the land can have no relevance to the commerciality of the purpose or character of the use of the land. Further, they argued that the only relevant comparator is all the other similar size cattle farms.
The Court observed as follows:
“86. The Vartulis’ contention that the true and only test for significance or substantiality under s.10AA(2)(a) requires a comparison with competitor farms with similar attributes, should be rejected. That would be inconsistent with the evaluative judgment required by s.10AA(2)(a). The comparison contended for is a relevant consideration but not the exclusive test.
90. ...his Honour had regard to the evidence relevant to comparable cattle farms. At , he found that the Vartulis’ scale of use is consistent with thousands of other cattle farms of comparable size.
91. At  his Honour also observed that it was impossible to say how many of the small cattle operations ... would individually satisfy a test of use of the land being for a significant and substantial commercial purpose or character.
94. The fact that the contribution to the Vartulis’ income from the cattle operations was insignificant, underscored that the revenues and profits generated from the Vartulis’ cattle operations did not have a commercial purpose or character which was significant and substantial...”
Thus, the Court held there was no error at first instance, as the relative contribution to the users’ income contextualises the significance and substantiality of any commercial purpose or character: .
Ground 4: Significance of cattle operations being not merely a token business or mere hobby
It was asserted by the Appellants that when his Honour found that their cattle operations were not merely a token business and not a mere hobby, the inevitable consequence was that his Honour had to find that s.10AA(2)(a) was satisfied.
The Court noted that negating one purpose, namely that the use of the land was a hobby farm or mere token business, does not necessarily entail establishing a significant and substantial commercial purpose: at .
Grounds 5, 9 and 12: Significance of minimal profits after the end of the drought
The Appellants argued that the primary judge erred in finding that it was either decisive or relevant that the financial results of the Vartulis (through their companies) after the end of the drought showed that only minimal profits could be derived from the land.
The Court of Appeal held that such a finding was open to his Honour, having regard to the net primary production results of the Vartulis’ cattle operations. Further, the Court noted that his Honour expressly made allowance for the Property having been affected by drought in the earlier years: at .
The Court held that the amount of profits the use of the Property generates, or can reasonably be expected to generate, was a factor that his Honour was entitled to take into account: . Further, lack of profitability was not treated by his Honour as determinative of the commerciality test in s.10AA(2)(a), rather, it was only one of the factors correctly regarded as relevant: .
The Appellants also contended that the primary judge erred in failing to recognise that cattle operations which derived small profits after the drought ended, had the requisite significance and substance to their commercial nature by virtue of the “very nature” of those operations.
However, the Court’s view was that it “…does not follow from the fact that the Edmondson Park land was used for cattle operations up to the limit of its carrying capacity, and that this scale of operations was comparable with thousands of other small farms, that the requirement in s.10AA(2)(a) has been satisfied”: at .
Ground 8: Conflation of purpose and character
A similar reasoning to Ground 4 (see above) was adopted by the Appellants in arguing this ground. As the only purpose for the conduct of the Vartulis’ cattle operations found by his Honour was to derive profits whenever possible, it was contended that if there is no other available purpose, and that purpose is “self-evidently” a commercial purpose, then that purpose is “equally” a significant and substantial commercial purpose.
The Court rejected this reasoning: at .
Gleeson JA, writing the primary judgment, went on to state at :
“In any event, I do not agree that character and purpose are totally separate concepts… The fact that a business is carried on in a small way is relevant to determining whether its quality or significance may be regarded as having a substantial commercial purpose.”
Ground 10: Irrelevance of profits and of derivation of historical profits
On behalf of the Appellants, it was contended that if a profit need not be made to satisfy s.10AA(2)(b), and the requirements of subs.2(a) and (2)(b) are cumulative, then a profit need not be made to satisfy s.10AA(2)(a).
However, the Court pointed out that the two sub-sections have a different focus. The focus in subs.(2)(a) is on substantiality and significance of a commercial purpose or character of the use of the land, and looks to factors such as the income and profit generated by the primary production use, or that which could be so generated: . The focus in subs.(2)(b) is on the use of the land for the purpose of a profit on a continuous and repetitive basis and looks to the continuity of the profit purpose. The qualifying words in parentheses allow for the effect on profits of climatic conditions, for example, floods, drought, frost, hail damage, etc: .
It was held that merely because the requirement in s.10AA(2)(b) may be met in the absence of profits is irrelevant to whether a commercial purpose or character may be characterised as significant and substantial under subs.(2)(a): .
The Appellants also challenged his Honour’s findings that only minimal profits could be derived from the use of the land after the drought ended in 2008 and that there was no evidence showing greater profits in earlier years. This was said to be contrary to the evidence of the Appellants’ agricultural expert, Mr Marsh, whose evidence his Honour had accepted. However, the Court reviewed the evidence of Mr Marsh relied upon by the Vartulis and concluded that the finding in question was well open on the evidence at first instance: .
Notice of Contention
The Chief Commissioner filed a Notice of Contention to the effect that the Supreme Court’s decision should be affirmed on grounds other than those relied upon by the Court below. Although the Court considered it was not necessary to determine the issues raised in the Notice of Contention, Gleeson JA proceeded to address the issues briefly in the judgment.
Ground 1: Attributing value to Mr Vartuli’s labour
The Chief Commissioner contended that the primary judge should have attributed a value to Mr Vartuli’s labour, and taken that expense into account when assessing the profitability of the cattle operations. The decisions in Maraya Holdings both at first instance and on appeal were relied upon in support.
The Court agreed that Maraya Holdings is authority for the proposition that it is relevant to take into account the resources of time, labour or expenditure (among other things) put into the development and maintenance of the cattle operations: see -. However, the Court did not accept that the primary judge fell into error by not imputing a notional cost for Mr Vartuli’s labour. Their Honours did not consider that the decisions in Maraya Holdings compel the notional cost of labour to be included in the calculation of profits. Nonetheless, Gleeson JA stated at :
“…time and labour should be taken into account (even where no actual expense is incurred) in assessing whether the resources put into the cattle operation exhibit a commercial purpose or character of the use of the land that has a relatively high degree of importance.”
Ground 2: Whether necessary to take into account the value of the Property
It was contended that it was necessary for the primary judge to take into account the value of the Property in determining whether the requirements under s.10AA(2) were met. His Honour had found that a comparison of the profits from the use of the Property to its capital value (of almost $12 million in 2007) was not useful in the present case, in contrast to the position in Maraya Holdings. In Maraya Holdings, the cattle-raising operations started at or not long before the rezoning. However, his Honour had found that in the present case, the Property had been used for the same purpose and had the same character both before and after the rezoning in 2006. Further, his Honour had accepted that a consideration of the rate of return compared to the value of the land could be a relevant consideration in some cases.
The Court held that there was no error in the primary judge’s reasoning: .
Grounds 15 – 20 of the Notice of Appeal and Ground 3 of the Notice of Contention were directed to s.10AA(2)(b). The Court noted that it was unnecessary to the outcome of the appeal to consider those grounds, and that in any event, the meaning of “purpose” in that provision is not without difficulty. Accordingly, the Court declined to deal with that issue.
The appeal was dismissed and the Appellants ordered to pay the Chief Commissioner’s costs of the appeal.