The following is a case summary of the recent Supreme Court decision in Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue  NSWSC 9 (30 January 2017). At the end of the article we identify five key insights arising from this case.
The legal significance of this case
This case builds upon the principles confirmed in the earlier authority of Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2)  NSWSC 332; our summary of the Metricon case is available to read here. Although the Metricon case is presently under appeal, it remains good law and must be applied unless and until overturned.
This case is important as it explores the comparison of a taxpayer’s asserted primary production use against other competing uses in circumstances where the subject land was used for primary production which had a significant and substantial commercial purpose/character and was engaged in for the purposes of profit on a continuous and repetitive basis. Despite this substantial use, the trial judge held that in two out of four land tax years, the primary production use was not the “dominant use” of the subject land.
This case provides guidance in determining the evidentiary burden imposed upon taxpayers in seeking to discharge the onus of proving a land tax assessment is excessive; as will be discussed below, that task now appears more difficult to achieve and consequently there is an elevated standard or quality to which evidence and submissions in land tax matters must meet if taxpayers are to successfully challenge a land tax assessment in Court.
The taxpayer (“LPC”) owned a substantial area of land (generally the former Oran Park raceway site) which was subsequently released over time in land subdivisions.
The subject land was used by LPC in its substantial and repetitive dairy operations. Heifers were raised upon the subject land (but rotated from time to time) and additional feed produced which was used to sustain LPC’s cattle held elsewhere.
Over time, GDC (a sister company) would take possession of parts of the subject land for land development activities.
The Chief Commissioner submitted that there were three competing uses of the land, which the trial judge summarised (at ) as:
“the earthworks use on the Farmland for the residential development on adjacent Development Land, the use of the land by consultants for existing and future residential development use, and an intangible use of the land by reason of the Development Rights Agreement.”
A fourth competing use was raised in argument by the Chief Commissioner, namely that there was a “land banking” use of the subject land and such use being a current rather than future use; this submission was rejected in the earlier Metricon case but was raised in order to preserve the Chief Commissioner’s rights on appeal should the Metricon case be overturned on appeal.
LPC itself did not carry out land development activities on the subject land; rather, such related activities were carried out by its sister company GDC and the land development consultants.
The third intangible use of the land arose from a development contract between LPC and GDC; the economic purpose of this document was to ensure that GDC held the economic risk and rewards of land development.
Key legal principles in this case
In determining what constitutes the “dominant use” of the subject land, his Honour held (at ):
“Section 10AA(3) requires weighing the nature and intensity of the competing uses, the physical areas over which they are conducted, the time and labour spent in conducting the different uses, the money spent or assets deployed in each use and the value derived or to be derived from it.”
His Honour affirmed his earlier view in the Metricon case that the “dominant use” test is not confined to examining physical use, but again preferred a “look-through” approach in examining rights and entitlements under an instrument to the underlying use derived from exploiting those rights and entitlements.
This formulation of the “dominant use” test in land tax requires a close examination of the day to day activities conducted upon the subject land. In essence, taxpayers must lead evidence of the component activities giving rise to the asserted primary production use at a granular level with a vigorous degree of precision.
Interestingly, his Honour went further in describing what is involved in establishing the taxpayer’s case. In the instant case, the Chief Commissioner caused the Court to issue subpoenas for the production of documents concerning the extent and cost of civil works conducted on the subject land (presumably this happened after the taxpayer failed to volunteer such information). His Honour was highly critical of LPC’s tactical decision not to lead any evidence on the competing uses, stating (at ):
“It should not have been necessary for the Chief Commissioner to have served those subpoenas and to have adduced details of the evidence on the question of the extent and cost of civil works conducted on or relating to the Farmland in question. In land tax cases such as this, all of the relevant evidence is known to the taxpayer, or is accessible to the taxpayer through its consultants or contractors. The onus is on the taxpayer to establish its case. The taxpayer is expected to put forward its position frankly, warts and all.”
From our perspective, this is concerning as it results in the taxpayer in the shoes of performing the Chief Commissioner’s case preparation for him. But at any rate, a failure to lead evidence to refute a claim that competing uses preclude primary production use from constituting the dominant use of the subject land is an invitation for the Court to draw a Jones v Dunkel inference that such evidence would not advance the taxpayer’s case.
Our impression is that the evidence prepared by the taxpayer was too general in nature and not relevant to the subject land; for example, evidence was led at LPC’s director level as to overall dairy operations much of which was conducted on other land, yet no affidavit was tendered for the key employee responsible for day to day operations who presumably would have had detailed knowledge concerning what actually occurred upon the subject land.
Further, there was evidence which established that the value of expenditure incurred in the competing uses in the 2010 and 2014 land tax years substantially exceeded the expenditure on cattle grazing and raising of pastures and crops.
As a result, the trial judge held there was a lack of precision in the evidence going towards the heads of cattle run upon the subject land nor how much additional feed was produced for the benefit of the rest of its cattle operation. It was impossible on LPC’s evidence to establish how many heads of cattle were stationed on the subject land at any particular time and the lack of persuasive evidence on the valuation of the economic benefits generated from feed produced on the subject land to LPC’s cattle operations.
There were also inadvertent operational errors in the taxpayer’s misapprehension of what constituted the subject land, which meant that land development activities occurred too early on the subject land contrary to what LPC (as the landowner) had intended. This was an unavoidable weakness in LPC’s case once this error was exposed and made a substantial impact on the trial judge’s assessment of the primary production and competing uses.
It is possible the case may have had a different outcome if the taxpayer adduced more persuasive evidence on its cattle operations on the subject land. It is also possible the land tax assessments which were upheld were unlikely to have been overturned as the sheer value and scale of the earthworks in question were so substantial that no other finding was open to the trial judge (which would have placed the instant case on all fours with the facts in the Leda Manorstead case).
We set out five valuable land tax insights for taxpayers and practitioners arising from the LPC case:
- The evidentiary burden of proving the requisite dominant use of primary production has arguably increased not only in regards to the quality and precision on primary production evidence but also the need to rebut and address competing use evidence.
- The evidence of primary production use must be precise and relevant to the subject land; it is not sufficient to generalise and approximate a taxpayer’s overall operations to discrete areas of land. Further, approximations or apportionment will not necessarily be accepted in the absence of persuasive evidence as to the reasonableness of adopting imprecise methodologies.
- Record keeping is a critical element of preparing the necessary evidence to challenge land tax assessments. Not only this – the quality of the records and relevance of such information to the subject land must also be borne in mind when preparing and retaining documentation.
- Prudent case management may involve voluntary discovery on competing land uses (the alternative scenario is to face subpoenas/summons to produce that information in a late stage of the litigation and the need to prepare last-minute evidence). This ties in with the trial judge’s remonstration that a taxpayer “is expected put forward its position frankly, warts and all”.
- Development consultants’ use of land may be de minimis on a standalone basis but may cause a primary production use to fall short of being the dominant use when assessed in conjunction with other competing uses (such as earthworks as occurred in the instant case).
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.
© 2017 Stratos Lawyers Pty Ltd.