Tax Files: Land Tax and the Primary Production Exemptions

Land Tax and the Primary Production Exemptions

BERNIE WALRUT, MURRAY CHAMBERS

The Land Tax Act 1936 (SA) (LTA) provides land tax relief for land used in the business of primary production.1 However, it distinguishes between land used for primary production outside what is described as the defined rural area (DRA)2 and land within the DRA. Where the land is outside the DRA and used in the business of primary production it is exempt if a number of basic conditions are satisfied. In the case of land in the DRA, there are additional requirements to be satisfied before the relief is available.

One very recent decision of the Court of Appeal of Commissioner of State Taxation v Takhars [2021] SASCCA 58 and an earlier Full Court decision of Commissioner of State Taxation v T & S Liapis Pty Ltd [2021] SASCFC 152 now provide some guidance on a number of the requirements for the primary production business use relief, and in particular in respect of land in the DRA.

Basic Requirement

The basic requirements for the relief are that the land is not less than 0.8 hectare in area and the Commissioner is satisfied that the land is used wholly or mainly for the business of primary production.3 The business of primary production is also defined to mean the business of agriculture, pasturage, horticulture, viticulture, apiculture, poultry farming, dairy farming, forestry or any other business consisting of the cultivation of soils, the gathering in of crops, the rearing of livestock or the propagation and harvesting of fish or other aquatic organisms and including the intensive agistment of declared livestock.4

DRA Land

If the land is within the DRA then one of the following six alternatives must be satisfied for the land to be exempt. The first is that a sole owner, who is a natural person must be engaged on a substantially full-time basis (either on their own behalf or as an employee)5 in a relevant business. The second is that the land is owned jointly or in common by two or more natural persons at least one of whom is engaged on a substantially full-time basis6 in a relevant business and any other owner who is not so engaged is a relative of an owner so engaged. The third is where the land is owned solely, jointly or in common by a retired person, the retired person was, prior to his or her retirement, engaged on a substantially full-time basis7 in a relevant business and the co-owner or co-owners of the land (if any) are relatives of the retired person.

The fourth is that the land is owned solely or by tenancy in common by the executor of the will, or the administrator of the estate, of a deceased person, the deceased person was, prior to their death, engaged on a substantially full-time basis8 in a relevant business and a close relative of the deceased person is currently engaged on a substantially fulltime basis9 in a relevant business. The fifth is that the land is owned by a company, or by two or more companies, or by a company or companies and one or more natural persons, and the main business of each owner is a relevant business.

The sixth alternative is where the company is the owner of the land and one of three further requirements is satisfied. A natural person owns a majority of the issued shares of the company and is engaged on a substantially full-time basis10 in a relevant business. The next is that two or more natural persons own in aggregate a majority of the issued shares of the company and each of them is engaged on a substantially full-time basis11 in a relevant business. The final requirement is two or more natural persons who are relatives own in aggregate a majority of the issued shares of the company and at least one of them is engaged on a substantially fulltime basis12 in a relevant business.

A relevant business is one in relation to land used for primary production if the business is a business of primary production of the type for which the land is used or a business of processing or marketing primary produce and the land or produce of the land is used to a significant extent for the purposes of that business.13

A person is a relative of another person if they are spouses or domestic partners, one is an ascendant or descendant of the other, or of the other’s spouse or domestic partner, one is a brother or sister of the other or a brother or sister of the other’s spouse or domestic partner or one is an ascendant or descendant of a brother or sister of the other or of the other’s spouse or domestic partner.14 A domestic partner of a person is a person who lives with the person in a close personal relationship.15

Liapis

In Commissioner of State Taxation v T&S Liapis Pty Ltd16 the taxpayer owned 1.5 hectares in the Hills face zone on which it conducted an olive grove. It was contented by the taxpayer that the majority shareholder worked full time on the land of the company and that the company was engaged in the business of primary production. The olive production was described as low and generally the business was run at a loss, though it was expected that once the olive trees fully matured and full production is achieved, a profit would also be achieved.

The Commissioner disputed that the majority shareholder was engaged full time in a relevant business and the company was conducting a business. The Commissioner submitted that the company was in effect engaged in a hobby. At first instance the trial judge found that the olive grove was conducted as a business,17 it was a matter of fact and degree.18 At first instance and on appeal the relevant factors as to whether the activity constituted a business were described as “a purpose of making a profit; repetition and continuity; the activity being conducted in an organised, businesslike or systematic manner; the size of the operation; and the activity being conducted in the same manner as recognised businesses”.19 In respect of the prospect of making a profit, it was said “that a prospect of making a profit is an indicia of a good or successful business, rather than an indica of a business simpliciter”.20

Both the trial judge and the full court considered whether the majority shareholder was engaged on a substantially full time basis in the business, they held he was. In this respect it was said that the term “’engaged’ should be given a broader construction than that which it might otherwise be given, namely that the capacity in which a person is engaged is of no consequence, so long as the person is engaged on a full time21 basis” and that is clarified by the words in parathesis “either on his or her own behalf or as an employee”.22

Takhar

In Commissioner of State Taxation v Takhar23 two brothers (Takhars) owned a number of parcels of land as tenants in common in the Gawler Belt region and one at Burton in the DRA. On two of those parcels of land they conducted extensive poultry meat production. On one of those two parcels they had also conducted an orchid nursery and on all but one of those parcels a share farmer cropped much of the land. They also conducted poultry and other primary production activities in Queensland. One of the brothers managed the South Australian operations and the other managed the operations in Queensland.24

One of those parcels, at Lewiston, was subdivided in 2007 into three lots. They were outside the DRA. Prior to the subdivision part of the land had been used for egg production from caged chickens with a manager’s residence and part of the land cropped by the share farmer. After the division, the manager’s residence on one of the lots was rented out, the other lot comprised mainly the former poultry sheds and the third lot continued to be share farmed.

The Burton land had been acquired in 1991 for egg production and was included in the share farming arrangement. There were access issues with the Burton land that eased in 2010. The land contained a low-lying area and between July 2009 and April 2010 approximately 50,000 cubic metres of soil was deposited in this area. The Environment Protection Authority determined this involved the conduct of an illegal dump and various orders were made in connection with the soil deposited on that land and its possible contamination. With a risk of contamination, the Takhars gave the share farmer directions to cease cropping the Burton land until the EPA issue was resolved. Even during this period the share farmer undertook activities in connection with the land. Once satisfied sometime in 2013 that the soil could be retained the share farmer was instructed to resume farming. The share farmer resumed share farming the land with varying success in the succeeding years. Also, in 2010 the local council compulsorily acquired a portion of the land, having given notice earlier of its proposal to do so, and there was a dispute as to the value of the land acquired.

In 2013 the Commissioner issued land tax assessments in respect of the Burton land and the Lewiston land. The Takhars lodged an objection with the Treasurer. It was disallowed and the Takhars appealed to the Supreme Court. Much evidence was adduced as to the use of the Lewiston and the Burton land. The Commissioner adduced evidence from valuers from the Valuer-General’s office, neighbours and others.

At first instance only the Lewiston lot used for share farming was found to be exempt under the primary production exemption.25 The Burton land was found to be used for the business of primary production and that the brother managing the South Australian activities was engaged on a substantially full time basis in a relevant business for the purpose of the DRA primary production exemption.26 The Burton land was therefore held to be exempt from land tax.27 The Commissioner appealed the decision in respect of the Burton land.

Both at first instance28 and on appeal,29 in considering the use of the Burton land some reliance was placed on a New South Wales decision of Saville v Commissioner of Land Tax (Saville).30 In that decision, Roden J considered the then New South Wales exemption in respect of land used for primary production. In doing so he observed that if at the relevant date there is no activity in respect of the use of the land, it is clearly appropriate to look both to the period prior to the date and to the period after it, to determine the use of the land during what is described as the hiatus period. Roden J then considered three different situations. One is where the land is fallowed before and after a period of cultivation. In that case he held there is no interruption as to use. The second is a chance occurrence which causes the land to be unused, that is there is no activity at the relevant date. An example provided is the destocking for the purpose of replacing of the stock. In such a situation the land is still being used, though there is no stock on the land, once again there is no interruption as to use. The third situation described is where a person gives up the use of the land for a reason with the intention of resuming it in the future. In that situation the conclusion is that the use has ceased to be used.

Roden J also stated in Saville that where there is a cessation and claimed hiatus period it is appropriate to have regard to the intention of the owner or person in occupation. More recently the New South Wales Court of Appeal considered the relevance of purpose and intention in Commissioner of State Revenue v Metricon Qld Pty Ltd,31 where the land was not being physically used. The Court stated that “[r]elevant purposes and intentions are principally those already executed, although the complexion of things already done may be coloured by whatever the relevant purpose or intention envisages for the future.”

Notwithstanding the assistance that those decisions may provide, the emphasis in the LTA is the use of the land in the business of primary production rather than simply the physical use of the land.32 The Commissioner’s contention in Commissioner of State Taxation v Takhar33 was that it was

not permissible to evaluate the whole enterprise without consideration of the use of the separate parcels. On this basis the relevant business in respect of the Burton land would be cropping rather than the broader primary production business.34 The Court rejected the approach and said there is no reason for “requiring an analysis that is limited to the activities on the particular parcel of land alone. The phrase, ‘the business of primary production’ is capable of referring to a business being carried out entirely on one discrete parcel of land but also, equally, to a broader business of primary production carried across several parcels of land. The Act does not deny either approach.”35

So once a business of primary production is identified then it is necessary to consider whether the land is used for that business.36 It becomes a matter of fact and degree.37 Further, any business of primary production may encounter obstacles to the exploitation of land under management. The individual parcels of land may contribute more or less effectively to the business.38 In the case of the Takhars it was their intention and expectation to crop the Burton land.39 They encountered obstacles, including complying with the EPA order, but steps were taken to crop the land. The Commissioner also contended the use was so token as to be de minimis. This was also rejected by the Court.40

The Commissioner’s other major contention was that the brother in South Australia was not engaged on a substantially full-time basis in a relevant business.41 There were in effect three elements to this contention. The first was whether the share farmer was conducting the business on the Burton land.42 The second questioned whether the Burton land was used to a significant extent for the purpose of the Takhars’ primary production business.43 The third questioned whether the relevant business44 was a cropping business or a primary production business, that is whether it was the same type of business as required by the definition of a relevant business.45 In respect of the first issue it was held that it was open to the trial judge to characterise the share farming arrangement as a joint venture46 and consequently two separate businesses.

In the case of the second, the Court observed that whilst the case before it highlighted the potential for a substantial overlap between the separate qualifying concepts within the exemption of land “used wholly or mainly for the business of primary production”47 and “used to a significant extent for the purposes of that business”,48 the “significant extent” qualification does have work to do in the legislation as structured. A relevant business, where it is the business of primary production, may be the same business that satisfies the requirement that the land is used wholly or mainly for the business of primary production.49

However, they may be different businesses where the relevant owner is engaged in the business of processing or marketing primary produce. In that situation, the business, for the purposes of the relevant business test, is not the same business of primary production that satisfies the definition in section 2(1). In such a situation the question is whether the land is used to a significant extent for the purposes of the processing or marketing business. So, the reference to “that” business in the second limb of the definition may be to a different business, as required by the context of what is a relevant business.50 The other difficulty for the Commissioner’s contention was that in the case of a single business with many parcels of land, the more parcels requiring assessment, the less significant each would be. This could then disqualify some of those parcels from the DRA exemption, contrary to the intent of the provision.51 The Commissioner’s submissions on this element were rejected.52

In respect of the third element the Court held that the word “type” did not require that the relevant business be identified by reference to what was occurring on the land in issue. There was no textual, contextual or purpose for not extending “type” to a mixed farming business to which the land in issue contributed. Further, if it was not extended then it would not achieve the purpose of the exemption.53 So the Takhar’s mixed farming business was the type of business of primary production for which the Burton land was used.54

Summary

In summary, for the purposes of the primary production exemption in the LTA, the emphasis is on the use of the land in the business of primary production rather than the physical use of the land. Accordingly, once a business of primary production is identified then it is necessary to consider whether the land is used in that business rather than focusing simply on the physical use of the land.

Whether the activity constitutes a business is a matter of fact and degree. Some of the relevant attributes of a business include: a purpose of making a profit; repetition and continuity; the activity being conducted in an organised, business like or systematic manner; the size of the operation; and is the activity being conducted in the same manner as recognised businesses. The prospect of making a profit is simply an indication of a good business rather than a requirement.

Where the land is in the DRA there are a number of additional requirements. One commonly required is that a relevant person is “engaged” full time in the relevant business. In that context the term “’engaged’ is to be given a broader construction than that which it might otherwise be given. So, the capacity in which a person is engaged is of no consequence, so long as the person is engaged on a full time basis”.

A share farming arrangement may constitute a joint venture and consequently the participants are undertaking separate businesses for the purposes of the DRA exemption. A relevant business in a matter may be the same business that satisfies the requirement that the land is used wholly or mainly for the business of primary production or may be a different business when the relevant person is engaged in the business of processing or marketing primary produce. In the case of a single business with many parcels of land, the test of significant use is not dependent on the extent of the contribution of a parcel but whether the parcel is used in the business or for some other purpose. The requirement that the business is a business of primary production of the type for which the land is used does not require that the relevant business be identified by reference to what is occurring on the land in issue. There is no basis for not extending the DRA relief to a mixed farming business to which the land in issue contributes.

Tax Files is contributed on behalf of the South Australian based members of the Taxation Committee of the Business Law Section of the Law Council of Australia. B