Favello Pty Limited, Dr Preslav Trenchev, and Preslav Trenchev v Chief Commissioner of State Revenue [2014] NSWCATAD 47

Date of judgement 16 April 2014 Proceeding No. 201102274
Judge(s) A Verick, Senior Member
Court or Tribunal NSW Civil and Administrative Tribunal
Legislation cited Administrative Decisions Review Act 1997

Administrative Decisions Tribunal Act 1997

Civil and Administrative Tribunal Act 2013

Land Tax Management Act 1956

Local Government Act 1919

Taxation Administration Act 1996

Valuation of Land Act 1944 (Qld)
Catchwords TAXES AND DUTIES - Land Tax - Land Tax Management Act 1956, s 10AA - Primary Production Exemption - Twenty Seven disparate properties - Whether land used for the cultivation of nut trees - Whether the use is the dominant use
Cases cited Abbott v Commissioner of Land Tax (1978) 38 LGRA 417, (1978) 9 ATR 728

Ashleigh Developments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADTAP 25

B & L Linings v Chief Commissioner of State Revenue [2008] NSWCA 187, 74 NSWLR 481

Brown v Commissioner of Land Tax (NSW) (1977) 7 ATR 642

Cornish Investments Pty Ltd v Chief Commissioner of State Revenue [2012] NSWADT 204

Cornish Investments Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 25

FCT v Dalco (1990) 168 CLR 614

Gareffa v Chief Commissioner of State Revenue [2012] NSWADT 41

Greenville Pty Ltd v Commissioner of Land Tax (1977) 7 ATR 278

Hope v Bathurst City Council (1986) 7 NSWLR 669

Hope v Bathurst City Council (No 2) (1983) 52 LGRA 79

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Krew v Federal Commissioner of Tax 71 ATC 4213

Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2010] NSWSC 867, [2010] 79 NSWLR 724

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

Longford Investments Pty Ltd v Commissioner of Land Tax (NSW) (1978) 8 ATR 656

Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23

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

Pascoe v Commissioner of Taxation (1956) 30 ALJ 402

Reolon v Chief Commissioner of State Revenue [2013] NSWADT 96

Romano v Chief Commissioner of State Revenue (2010) 84 ATR 28

Safety Beach Estate Pty Ltd v Commissioner of Land Tax (1978) 9 ATR 451

Saville v Commissioner of Land Tax (1980) 12 ATR 7

Sonter v Commissioner of Land Tax (NSW) (1976) 7 ATR 30

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

Warriewood Pty Ltd v FCT (1993) 26 ATR 270

Summary

The Taxpayers sought a review of the Chief Commissioner’s decisions to deny the land tax exemption applying to land used for primary production, in respect of 27 properties on which nut trees had been planted.  Some of the properties contained rented residential premises.  All except one property were zoned rural.

The Tribunal held that held that the Taxpayers failed to discharge the onus of proving their case that the dominant use of the Properties was for primary production during the relevant years, and the Taxpayers’ evidence of the activity of nut tree planting with respect to the property which was not zoned rural did not satisfy the commercial purpose and character test.

Background

The Taxpayers owned multiple parcels of land within the Sydney basin, including the 27 properties the subject of the review (“the Properties”). The Chief Commissioner assessed the Taxpayers to land tax in relation to the Properties (“the assessments”) and disallowed the Taxpayers’ objections.  The Taxpayers claimed the Properties were exempt under s.10AA of the Land Tax Management Act 1956 (“LTM Act”) on the basis that the dominant use of the land was for primary production. Twelve of the Properties had residential buildings on them.

With the exception of four properties, all of the Properties were owned by Dr Preslav Trenchev in the relevant years. Dr Trenchev was the sole shareholder and director of the companies that owned the remaining two properties.  The relevant tax years were 2006 to 2010, with the exception of 66 Chaseling Road, Webbs Creek where the exemption was only claimed for the 2008 to 2010 land tax years (“relevant years”).

The Taxpayers’ evidence was that itinerant workers were used to plant thousands of nut saplings (which were predominantly pecans but included walnuts and chestnuts) on the Properties during the 2006 to 2010 years.  Dr Trenchev relied upon a list he created of the numbers of saplings that were planted by the workers and the numbers of saplings that died over the 2006 to 2010 years. Dr Trenchev’s evidence was that most of saplings died over these years, particularly during the 2006 to 2008 years, where the failure rate was predominately over 90%. 

The Taxpayers’ evidence was that the poor survival rates during the 2006 to 2008 years were attributable to a prolonged drought.  As a result of the drought, Dr Trenchev designed an “eco-planter” to store and release water and used an eco-planter and weed mat for each planting.  Most of the trees at the vacant properties were planted over areas of land that were not cleared and were planted amongst existing native vegetation.

The Taxpayers claimed that the dominant use of each of the Properties was “cultivation, for the purpose of selling the produce of the cultivation” under s.10AA(3)(a) of the LTM Act and that the use of the Properties for nut growing fell within this exemption.

The 27 properties may be divided into three categories over the relevant years:

  1. 15 properties that were zoned rural and were vacant (“the vacant properties”);

  2. 11 properties that were zoned rural and had residences that were rented to tenants (“rental properties”); and

  3. A property at Glossodia (“the Glossodia property”), which was zoned non-rural for the purposes of s.10AA(4) of the LTM Act and was rented to a tenant.

Issues

    Whether the nut growing activity constituted “cultivation for the purpose of selling the produce of the cultivation”

      The Taxpayers submitted that the planting and tending of the saplings constituted “cultivation”.  The Taxpayers relied upon the evidence of Dr Trenchev with respect to the activities that occurred on the Properties during the relevant years. The Taxpayers’ submitted that in order to plant the crop it was necessary to cultivate or till the soil.  The crops were tended by applying fertiliser at the time of the initial planning and the weed mat provided an effective weed control measure.  Further, the use of the eco-planter facilitated cultivation by supplying water to the newly planted seedlings. Thereafter, however, the seedlings were largely left to fend for themselves in competition with the surrounding native vegetation.

      The Chief Commissioner relied upon the decision of Rath J in Safety Beach Estate Pty Ltd v Chief Commissioner of Land Tax (1979) 9 ATR 451 (“Safety Beach”) and submitted that “cultivation” is the harnessing of the productive power of the land by proper, appropriate, judicious, husbandry of the land.  The Taxpayer’s practices did not amount to cultivation as there was no judicious husbandry, that was appropriate and applicable to a crop of nuts. Rather, the Taxpayers planted nut trees in a laissez faire manner and then left them to their own devices.  The Chief Commissioner relied upon the evidence of its experts as to what was a proper judicious programme of husbandry applicable to the commercial growing of nuts.

      The Chief Commissioner submitted that the requirement of maintaining or tending for “selling the produce” in s.10AA(3)(a) of the LTM Act points to more than a hobby or folly and is akin to a commercial operation, though not carried on to the exactitude of the commerciality and profit tests in s.10AA(2)(a) and (b) of the LTM Act. Viewed calmly and dispassionately the activities of the Taxpayers did not have a realistic or reasonable objective prospect of producing a crop for sale.

      Whether the dominant use of the vacant properties was the nut growing activities

      The Taxpayers submitted that the dominant use of all of the Properties was cultivation.  In relation to the vacant properties, the Taxpayers submitted that there was no need to consider any other relevant uses to which any part of those properties had been put.

      The Taxpayers relied upon the decision of Rath J in Brown v Commissioner of Land Tax (NSW) (1977) 7 ATR 642 (“Brown”) to submit that, in deciding whether the dominant use of the vacant properties was for cultivation, the Tribunal should disregard that portion of land that was described by its experts as unusable for cultivation.  On the Taxpayers’ figures between 69.5 and 97.9% of the untenanted properties were unusable for nuts trees and were not planted with nuts trees. 

      The Chief Commissioner submitted that the Taxpayer’s nut growing use was not sufficiently substantial to prevail over the proposition that the vacant properties were unused land.  The physical area over which the planting extended was very small if not de minimis and the nature and intensity of the use for nut growing was laissez faire at best, given the limited care and maintenance accorded to the seedlings after planting.  The time and labour spent in conducting the nut growing activities was minimal and there was no regular programme of supervision, inspection and maintenance.  Rather, the vacant properties were run down, unmaintained and in a state of disrepair. In light of these factors, no right minded objective observer could reasonably conclude that the dominant use of the vacant properties was for growing nuts.

      Whether the dominant use of the rental properties was the nut growing activities or the residential use

      The Taxpayers submitted that the dominant use of the rental properties was not residential but was the cultivation of nut trees. The Taxpayers relied upon projections by Mr Curry (who holds diplomas in agriculture) of nut sales in the years 2025 to 2030, compared to the residential rental income, to support the proposition that the nut growing use prevailed as the dominant use over the residential use.

      The Chief Commissioner submitted that the overwhelming conclusion with respect to the rental properties was that the dominant use of the land was the residential use.  The rental properties produced $868,624 over the relevant land tax years and yet not one nut kernel was produced during this period with the result that none were sold. The Taxpayers’ evidence in relation to the projections of nut sales had several miscalculations, there was no attempt to account for the expenses with respect to the growing of nuts and the comparison of income was misleading because there was no comparison of the present value of projected nut sales in 25 years’ time with the present value of the rental income over that period.

      Whether the Glossodia property satisfied the commerciality and profit tests

      The Taxpayers submitted that the use of the Glossodia property had a significant and substantial commercial purpose or character and the use of the land was engaged in for the purpose of profit on a continuous or repetitive basis during the relevant years.

      The Chief Commissioner submitted that the taxpayers failed to show that the operation was run on a commercial basis with appropriate attention to the orthodoxies of income, expenditure and the aim of profitability.   The Chief Commissioner also submitted that the Taxpayers did not exhibit a business enterprise of a well-structured long term character, with administrative features (organisation, management, book keeping) to support a conclusion that it was set up with the aim of generating a profit over a succession of years.

      Onus of proof

      The Chief Commissioner also submitted that the evidence relied upon by the Taxpayers was unreliable and that the Taxpayers had not discharged their onus of proof on the evidence in relation to legal propositions it relied upon.

      Decision

      Whether the nut growing activity constituted “cultivation for the purpose of selling”

      In determining the question of “cultivation”, Senior Member Verick referred to Safety Beach and held that cultivation is the activity of caring and raising plants.  It followed that merely planting seedlings is not sufficient. It is necessary to provide aftercare by way of irrigation, fertilisation and regular inspections to ensure the plants are disease free.  Where there is no resident care it is also necessary to provide protection from any damage by wild animals and vandals.

      Senior Member Verick accepted the evidence of Mr Durack (who owns and manages Stahmann Farms, the largest producer of pecans in Australia) that nut farming was an extensive and active process which needs to be intensively managed.  Senior Member Verick held that there was no proper management of the cultivation of the plants by full-time employees during the relevant tax years and that Dr Trenchev was only able to manage the farms on a part-time basis.

      Senior Member Verick held that the words “selling the produce” in s.10AA(3)(a) of the LTM Act clearly requires the activity to be a commercial undertaking. The various criteria that are used to determine whether an operation is a commercial undertaking would equally apply to determine whether an activity satisfies the requirement set out in s.10AA(3)(a) of the LTM Act.

        Whether the dominant use of the vacant properties was the nut growing activities

          In determining the question of dominant use, Senior Member Verick applied the principles set out by Gzell J in Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2010] NSWSC 867, namely, that the dominant use is the prevailing, most influential, chief or paramount use of the land and that the use must be sufficiently substantial to prevail over the proposition that the land may be unused land. Where land is put to a number of uses, one must consider the nature and intensity of the uses, the physical areas over which they extended, and the time and labour spent in conducting them.

          Senior Member Verick distinguished Brown on the facts of the case and held that the use must be sufficiently substantial to prevail over the proposition that the land is primarily to be regarded as unused land.   Senior Member Verick observed that the non-use part of the land is a relevant factor when only part of the land is being used for a primary production activity.

          Senior Member Verick observed that no figures of any nut trees were before the Tribunal nor was there any evidence that there was any activity on 31 December 2005, or any evidence for the prior six months.    In respect of the land tax years 2007, 2008, 2009 and 2010, the percentage of land used for planting nut trees has to be contrasted with the percentage of land not used.  No evidence was before the Tribunal to show the percentage of land used in the relevant years.  The only evidence, which was not tested, was the evidence of Dr Trenchev as to the number of seedlings planted and the number that died.  The vacant properties did not generate any income.  Senior Member Verick stated that it was necessary in each case to weigh the evidence of the degree, extent and intensity of use.  Senior Member Verick held in relation to each property that the evidence established that the predominate use of the land was not for cultivating nut trees for the sale of their produce.

          Whether the dominant use of the rental properties was the nut growing activities or the residential use

          Senior Member Verick affirmed the assessments for land tax year 2006 on the basis of the lack of evidence referred to above.

          In respect of the land tax years 2007, 2008, 2009 and 2010, the rental income from the land in respect of the rental properties clearly outweighed the extent and intensity of the use of the land for nut growing.  The rent received in each year was substantial and the use did not change simply because some nut seedlings were planted. Until the seedlings had the potential of becoming the subject of any produce, the rental use would clearly predominate over the planting use.

            Whether the Glossodia property satisfied the commerciality and profit tests

              Senior Member Verick adopted the approach taken by Emmett JA in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 408 (who affirmed the decision of Gzell J in Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23) where his Honour stated that:

              • the phrase “significant and substantial commercial purpose or character” in s. 10AA(2)(a), requires size, depth, bulk, weight, seriousness, importance, quality, intensity and prominence; with “substantial” connoting an ample or considerable amount, quantity or size, and “significant” connoting importance, something of consequence or an element that is key, vital or critical, and

              • while the profit test in s. 10AA(2)(b) does not require a profit to be made, it does require that the primary production activity be engaged in for the purpose of profit and a continuous pattern of a lack of profit may lead the Court to reject evidence that the primary production use was engaged in for the purpose of profit.

              Senior Member Verick held that the evidence of the activity of nut tree planting with respect to the Glossodia property did not satisfy the commercial purpose and character test as it was not significant and substantial as required by s.10AA(2)(a) of the LTM Act.

              Onus of proof

              Senior Member Verick held that the Taxpayers failed to discharge their onus of proving their case that the dominant use of the Properties was for primary production during the relevant years and affirmed the assessments.

              Link to decision

              Favello Pty Limited, Dr Preslav Trenchev, and Preslav Trenchev v Chief Commissioner of State Revenue [2014] NSWCATAD 47

              Last updated: 18 May 2016