Chief Commissioner of State Revenue v McIntosh Bros Pty Ltd (in liq)

1. [1]

   MEAGHER JA: At the relevant times the respondent company was the owner of land at Cobbitty which was not zoned as “rural land”. The applicant Commissioner assessed that land to land tax for the calendar years ended 31 December 2014, 2015 and 2016. The Civil and Administrative Tribunal set those assessments aside on the basis that for each of those years the land was exempt from tax under Land Tax Management Act 1956 (NSW), s 10AA as land used for primary production: McIntosh Bros Pty Ltd (in liq) v Chief Commissioner of State Revenue [2019] NSWCATAD 124. The Commissioner’s ‘internal appeal’ from that decision was dismissed: Chief Commissioner of State Revenue v McIntosh Bros Pty Ltd (in liq) [2020] NSWCATAP 124. The Commissioner now seeks leave to appeal to this Court. That right to appeal with leave is limited to questions of law: Civil and Administrative Tribunal Act 2013 (NSW), ss 82(1)(a), 83(1).

2. [2]

   It is convenient at this point to set out the relevant provisions of s 10AA:

Factual background

1. [3]

   The Tribunal’s findings as to the uses of the land in the relevant tax years are summarised at Appeal Panel (AP) Reasons [7]-[21]. The following summary enables an understanding of the factual context in which questions of law are said to arise. This summary does not address the particular factual matters relevant to proposed grounds 3, 4, 5 and 7.

2. [4]

   The property known as ‘Denbigh’ was acquired by the McIntosh family in 1868. For many years that land was operated as a dairy farm. In 1931 the land was transferred to the respondent company. In 1987 when the company was placed in voluntary liquidation, the land was informally divided into two parts – the Denbigh (west) side controlled by Jim McIntosh and his family (including his son Ian) and the Bangor (east) side controlled by Ron McIntosh and his family (including his son Richard). There was no formal licence or lease between the company and the members of the families who controlled the occupation of the two parts of the land. The Tribunal found that the non-primary production uses of both parts of the land during the relevant land tax years were de minimis: Tribunal (T) Reasons [154].

3. [5]

   From the 1980s up to and including the relevant tax years, Ron McIntosh and his son Richard conducted a beef cattle operation on the Bangor side, as part of a wider farming business that also involved running sheep on properties at Molong, New South Wales. In addition during the land tax years Jim Head (Richard’s nephew) commenced a business of grazing cattle on the Bangor side under the name Head Pastoral Company.

4. [6]

   During the same period, the Denbigh side was used by Ian McIntosh to graze his own cattle and to agist cattle of third parties, most notably part of the herd of Brett Hayter, a nearby dairy farmer.

5. [7]

   The Tribunal found that although there were four or more independent uses of the land by different persons or entities, each use was a primary production use within s 10AA(3)(b). It also found that for the purpose of determining whether the whole of the land was “land used for primary production” those various primary production uses could be “aggregated or consolidated and weighed against the non-primary production uses”. Doing so the Tribunal concluded that the “dominant use of the land” was for primary production: T Reasons [148], [171]. The Tribunal then addressed the “commercial purpose” (or commerciality) and “purpose of profit” tests (s 10AA(2)(a) and (b)). It did so by reference to the several activities undertaken on the Denbigh and Bangor sides, concluding that both the commerciality and profit purpose tests were established taking account of the individual uses of the land (with the exception of two minor agistees on the Denbigh side): T Reasons [224], [234], [235], [236]. The Appeal Panel upheld the correctness of the Tribunal’s conclusions in each of these respects.

The proposed grounds of appeal

1. [8]

   The draft notice of appeal contains seven grounds. None in terms purports to frame the question of law which it is said to raise or involve. Proposed grounds 1 and 2 concern the application of s 10AA(2) and (3) and whether the “dominant use” of land may be an aggregation of primary production uses undertaken independently by persons who are independent from one another. Proposed ground 3 concerns the satisfaction of the commerciality and profit purpose tests in s 10AA(2)(a) and (b) in circumstances where the relevant use of the subject land was undertaken as part of a broader primary production enterprise, but not so as to involve livestock moving between the subject land and other land of the enterprise or fodder produced by that land being used elsewhere. Each of these grounds is capable of giving rise to a question of law concerning the construction of the identified provisions. Grounds 4, 5 and 6 relate to Mr Hayter’s agistment of cattle on the Denbigh side and whether that use was for the maintenance of animals for the purpose of selling them or their produce within s 10AA(3)(b). It is contended that the maintenance must be undertaken by the person using the land for the purpose of sale. Finally, ground 7 is directed to the satisfaction of the commerciality and profit purpose tests and whether the Tribunal was required to and did take into account that the various users of the subject land made little or no accounting profits, bore little or no costs for those uses and received no or meagre income for the labour involved.

Proposed grounds of appeal 1 and 2

1. [9]

   The Appeal Panel upheld the Tribunal’s finding that the relevant land was “land used for primary production” within s 10AA(3) because the dominant use of that land was the maintenance of animals for the purpose of selling them or their natural increase or bodily produce (s 10AA(3)(b)). That dominant use consisted of each of the separate uses answering that description on the Denbigh or Bangor sides of the land. That dominant use had to satisfy the two limbs of s 10AA(2). Its doing so in turn required consideration of the commerciality and profit purpose tests with respect to the individual uses considered separately and as a whole: AP Reasons [17]-[21].

2. [10]

   Although proposed grounds 1 and 2 are directed only to the construction and application of s 10AA(2) in relation to an aggregate of primary production uses undertaken independently of one another by independent users, in the course of the oral argument it became plain that the Commissioner also sought to challenge the construction of “dominant use” as capable of describing several independent primary production uses (ie uses within pars (a)-(f)) carried out on the land.

3. [11]

   Thus the Commissioner’s first contention is that where there are, as in this case, a number of primary production uses within s 10AA(3)(a)-(f), those uses cannot be aggregated for the purpose of the “dominant use” inquiry unless they are undertaken by the same user, or a “single cohesive group” of users, as is submitted to have been the position in Vartuli v Chief Commissioner of State Revenue [2014] NSWSC 678; (2014) 98 ATR 545 at [36]. That construction of s 10AA(3) is also said to follow from the nature of the commerciality and profit purpose tests in s 10AA(2) which, it is submitted, are directed to a single use – being the dominant primary production use – and a single user whose subjective purpose is relevant to the satisfaction of each of those tests.

4. [12]

   Turning first to the language of s 10AA, it exempts from taxation land that is not rural land if it is “land used for primary production” and that use satisfies the two limbs of s 10AA(2). Section 10AA(3) defines the phrase “land used for primary production” as meaning “land the dominant use of which is for …”, followed by pars (a) to (f), each describing a different activity and joined by the word “or”.

5. [13]

   Where a number of items in a statutory provision are connected by “or”, that word can properly admit of different meanings: R v Peart [2015] NSWCCA 321 at [52] (per Ward JA). One meaning is strictly disjunctive, where each provision is mutually exclusive. An alternative is that it has a conjunctive meaning, where “or” is effectively read as “and”. A third approach has been described as a “hybrid” of the two, where its meaning is equivalent to the phrase “or, or as well”. See Minister for Immigration and Ethnic Affairs v Baker (1997) 73 FCR 187 at 194-195 per Burchett, Branson and Tamberlin JJ; and Environment Protection Authority v Grafil Pty Ltd (2019) 101 NSWLR 245; [2019] NSWCCA 174 at [118] per Preston CJ of LEC, Davies and Adamson JJ agreeing.

6. [14]

   The evident purpose of s 10AA is to provide an exemption for land that is used for primary production. Each activity in s 10AA(3)(a) to (f) constitutes a use for “primary production”. As such when undertaken on the land each contributes to its character as “land used for primary production”. Accordingly there is no apparent reason why any of those activities carried out on the same land should not be treated as collectively contributing to its character as land, the dominant use of which is for primary production rather than for any other purpose.

7. [15]

   The Commissioner’s argument accepts that different primary production activities can collectively contribute to the characterisation of the “dominant use” of land as being for primary production, but only where those activities are undertaken by a single user or single cohesive group. Where the “dominant use” determined on that basis falls within one or more of pars (a)-(f) of s 10AA(3), the land will answer the description “land used for primary production”. However adopting this construction, activities that fall within pars (a)-(f) but are not undertaken by the dominant primary production user will not be taken into account in characterising the dominant use of land. The result is that in some cases land predominantly used for primary production (determined by the aggregation of activities within pars (a)-(f)) will not satisfy the definition in s 10AA(3) because the dominant single use is a non-primary production use.

8. [16]

   The extrinsic material relating to s 10AA(3) confirms that all activities falling into one or more of pars (a) to (f) are to be considered. As Payne J observed in Young v Chief Commissioner of State Revenue [2020] NSWSC 330 with reference to the Minister’s second reading speech, the section was introduced as part of a “suite of anti-avoidance measures” to ensure that “genuine” primary production activities gained the benefit of the exemption (at [102], [111]). Most significantly, the inquiry called for by s 10AA(3) is not concerned with identifying the most dominant single primary production user and use. This is confirmed by established authority, the correctness of which is not challenged.

9. [17]

   In Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11; (2017) 105 ATR 11 at [47] and [48] Barrett AJA observed (Macfarlan and Ward JJA agreeing) that:

10. [18]

    The comparison called for by s 10AA(3) is between use for primary production, and use for other activities. If the former activities are dominant in the requisite sense the land satisfies the definition. In Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366; (2011) 85 ATR 775 at [48] Campbell JA summarised the position:

11. [19]

    The use of the phrase “dominant use” as describing a singular use does not require a contrary conclusion. The uses being compared are use for primary production – any activity or purpose within one or more of pars (a) to (f) – and use for any other purpose.

12. [20]

    Furthermore, as Barrett AJA explained in Metricon at [61], in each case the inquiry is as to the activities undertaken on the land:

13. [21]

    There remains the Commissioner’s argument that an aggregation of uses undertaken independently of one another cannot satisfy the commerciality or profit purpose tests because each requires the identification of a subjective purpose of the relevant user of the land. This submission does not take account of the language of s 10AA(2)(a) and (b) which is directed, in the case of the former, to the “purpose or character” of the activity or activities constituting the use of the land; and in the case of the latter to whether the relevant activity “is engaged in for the purpose of profit on a continuous or repetitive basis”.

14. [22]

    Whether these requirements are satisfied is to be determined objectively, in the sense that regard is to be had to the fact and nature of the activities, how and why they are undertaken and their outcomes (see Maraya Holdings Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 23; (2013) 88 ATR 379 at [77]). To the extent that the purpose for which an activity is engaged in has a subjective element, that element may be taken into account but is not determinative (see Maraya Holdings v Chief Commissioner at [101], [103]; Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 89 at [12]; Vartuli v Chief Commissioner of State Revenue at [36]). In addition, neither of the limbs of s 10AA(2) requires that a single subjective purpose be identified. Where the “dominant use” consists of more than one independent use within pars (a) to (f), the “use of the land” which must satisfy the commerciality and profit purpose tests falls to be assessed as a whole, taking into account the independent uses constituting that use.

15. [23]

    Grounds 1 and 2 raise questions as to the proper construction of s 10AA(2) and (3) in circumstances where there are two or more independent primary production uses undertaken on the relevant land. Those questions are of general application justifying a grant of leave to appeal. However the appeal on those grounds should be dismissed.

Proposed ground of appeal 3

1. [24]

   This ground is addressed to the Tribunal’s finding that the cattle breeding operation conducted by Mr Richard McIntosh on the Bangor side had a significant and substantial commercial purpose or character taking into account its role as part of his wider sheep farming operation at Molong (T Reasons [219], [222], [223]). The Appeal Panel held that the Tribunal “understood the legal principles … and applied them to the facts that it found”, recording the respondent’s description of the Commissioner’s argument as being that the two farming operations could not “be considered sufficiently integrated when the animals are [not] moved between the two parcels of land” (AP Reasons [106]).

2. [25]

   The statements of principle to which the Appeal Panel was referring include two observations of White J (as his Honour then was) in respect of the inquiry called for by s 10AA(2). In Vartuli v Chief Commissioner of State Revenue, as part of their primary production business two companies, Syndrom and Deemhire, agisted cattle on the relevant land (Edmondson Park) as well as on the land of four adjoining owners. His Honour said at [36]:

3. [26]

   In Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 9; (2017) 104 ATR 820, Leppington Pastoral Co conducted a substantial dairy business on various parcels of land including the subject land, grazed heifer cows on the land and used it to produce fodder, some of which was in turn used to feed cows on other land. At [48] White J noted, citing Thomason v Chief Executive, Department of Land (1995) 15 QLCR 286, Maraya Holdings Pty Ltd v Chief Commissioner at [73] and Vartuli that:

4. [27]

   In each of these cases the same activities (cattle grazing or dairy farming) were conducted on the subject land and other land, as part of an overall business activity.

5. [28]

   That is not this case. Here the relevant findings of the Tribunal included (T Reasons [216]ff):

6. [29]

   The Commissioner’s argument accepts that an assessment as to whether the commercial purpose or character of the relevant use is “significant and substantial” may have regard to activities conducted on other lands where those activities are “integrated” in some way with the use of the subject land. It is accepted that would be the case if the subject land is used with other lands as part of an overall grazing or farming venture. In argument counsel suggested that the “physical” use of the lands had to be integrated, as would be the case if stock or crops were rotated between the lands or where fodder from one was used to feed stock on the other.

7. [30]

   The Commissioner ultimately accepted that the characterisation of the relevant use was to be undertaken having regard to any “wider use conducted on other lands” and that it was then a “question of fact and degree” as to whether in that context the subject use had a significant and substantial commercial purpose or character.

8. [31]

   The activities conducted on the lands may be the same (as was the case in Vartuli and Leppington) or they may involve the diversification of farming or grazing activities, thereby providing opportunities for the ongoing or continuous use of labour and equipment resources in the different activities. The different activity may also generate revenue from another source and at different times, thereby reducing an enterprise’s exposure to income from a single activity or generated at a particular time. Each of these considerations is capable of informing an assessment of the commercial purpose or character of the use of particular land as part of an overall business.

9. [32]

   The Tribunal and Appeal Panel addressed that question, the former concluding (at T Reasons [223], extracted above) that the Bangor side cattle operation was part of the wider farming operation because of the “interconnecting integrative elements (management, financial, banking, insurance, accounting and risk management) between the two operations”, having the consequence that in that overall business the cattle breeding activity at Bangor had a significant and substantial commercial purpose or character.

10. [33]

    Ultimately, the proposed ground of appeal does not identify a question of law which is distinct from the factual question posed by s 10AA(2)(a) as to the commercial purpose or character of the use being substantial as well as significant. The Tribunal decided that factual question adversely to the Commissioner. The Appeal Panel refused the Commissioner leave to challenge that finding of fact (AP Reasons [106]). Leave to appeal on this ground should be refused.

Proposed grounds 4 and 5

1. [34]

   These proposed grounds concern Ian McIntosh’s agistment arrangement with Mr Hayter. Before the Tribunal the Commissioner contended that for there to be a use within s 10AA(3)(b) the person who was maintaining the animals had to have the purpose of selling them or their produce. Adopting the Commissioner’s argument, it followed that if Mr Ian McIntosh was undertaking the maintenance of the cattle (taken for this purpose to be in his control) rather than Mr Hayter, who owned them and had the requisite selling purpose, there could be no activity satisfying par 3(b). That contention was made in reliance on an obiter statement of Newman J in Shanahan v Chief Commissioner of Land Tax (1996) 32 ATR 468, which for the purpose of characterising use under the equivalent of par (3)(b) does not focus on the physical activity being conducted on the land (cf Metricon at [46], [47], [61]). Applying that test, as explained by Barrett AJA, in this case it would not matter whether it was Mr McIntosh or Mr Hayter who was physically maintaining the cattle, because on any view of it the land was being used to maintain Mr Hayter’s dairy or other cattle for sale. That use satisfied s 10AA(3)(b).

2. [35]

   The Tribunal engaged with the factual question raised by the Commissioner’s argument, finding that Mr Hayter was a “licensee who retains control of his cattle and so can be seen as the person who uses the land by agistment” (T Reasons [167]). It did so having found at T Reasons [166]:

3. [36]

   Before the Appeal Panel, the Commissioner challenged the Tribunal’s finding at T Reasons [167] and submitted that the Tribunal erred in not finding that neither Mr Hayter nor Mr Ian McIntosh used the land for the par 3(b) primary production purpose. Neither was maintaining the livestock and doing so for the purpose of their sale or the sale of their produce. As part of that submission it was contended that the Tribunal had misunderstood the Commissioner’s submissions and as a consequence incorrectly imported a test of “control” in determining whether Mr Hayter was using the land for that purpose (AP Reasons [72], [73], [78]).

4. [37]

   The Appeal Panel did not accept that the Tribunal had misunderstood the Commissioner’s argument or misstated any relevant legal principle (AP Reasons [86]). In doing so it correctly observed at AP Reasons [82] that par 3(b) is satisfied if the land is being used to maintain livestock for the purpose of their sale, the identity of the “maintainer” not being relevant. In addition, the Appeal Panel noted (at [87]) that the Tribunal’s findings as to maintenance made it unnecessary to deal with the Commissioner’s “control” argument:

5. [38]

   In the face of that finding proposed ground 4 does not arise. The Appeal Panel did not have to consider whether par (3)(b) would not have been satisfied if the person maintaining the relevant animals was not the person who had the purpose of selling them or their produce.

6. [39]

   There remains proposed ground 5 which as formulated in oral argument contended that there was no evidence supporting the Tribunal’s findings that Mr Hayter was maintaining the animals and doing so as a licensee of the land.

7. [40]

   That submission is not supported by the lack of any such evidence. Mr Hayter gave evidence that he visited Denbigh at least once every two weeks and sometimes more frequently, that during these visits he inspected the cattle, and that on some occasions he would tend to the cattle. That evidence was capable of supporting the finding made by the Tribunal that Mr Hayter used the land to maintain his animals. It was also capable of supporting a finding that Mr Hayter held an informal licence permitting him to enter Denbigh to maintain his cattle as and when required.

8. [41]

   In the result, proposed ground 4 does not arise and ground 5 as reformulated in oral argument raises a question of law, but not one which has any real prospects of success in the face of that evidence.

Proposed ground 6

1. [42]

   This ground, put in the alternative to grounds 4 and 5, was that the Appeal Panel erred in refusing the Commissioner leave to appeal from the Tribunal’s finding that Mr Hayter was undertaking the maintenance of the cattle. It was not addressed in oral argument and accordingly is treated as not pressed.

Proposed ground 7

1. [43]

   By this proposed ground the Commissioner contends that the Appeal Panel erred in not holding that the Tribunal had failed to take into account three matters to which it was required to have regard in considering whether the commerciality and purpose of profit tests under s 10AA(2) were satisfied. Those matters were that the separate users of the subject land:

2. [44]

   The premise of this proposed ground is not made out. The Tribunal had regard to these matters, especially at T Reasons [204], [235], [239]-[243]. The Appeal Panel dealt with the argument that the Tribunal had failed to do so and rejected it at AP Reasons [110], [112], [118]-[122].

3. [45]

   After summarising the reasoning of the Tribunal and that submission, the Appeal Panel commenced by observing that in calculating profit there was “no requirement to include … land holding costs or a notional cost for labour that are not actually incurred” (AP Reasons, [112]). It then addressed the authorities supporting that conclusion before observing (at [119]) that:

4. [46]

   The Appeal Panel then addressed whether the Tribunal had erred in not taking those matters into account. Before the Appeal Panel it was said it should have done so by allocating “a notional charge for land use or labour costs/remuneration”. In concluding that there was no such failure the Appeal Panel reasoned (AP Reasons [121]):

5. [47]

   As to the profit generated from those activities, the Appeal Panel had earlier observed (at AP Reasons [120]) that it “seems clear that the derivation of profit from [the use of the land] was significant and substantial, even though it may have fluctuated from year to year, whether by seasonal conditions or the change in users”.

6. [48]

   As to the income or remuneration to the labour engaged in the relevant activities, as the Appeal Panel noted at AP Reasons [121] the individuals who were engaged in the various uses took their financial returns by way of profits rather than as employees.

7. [49]

   Leave to appeal on this proposed ground should be refused. It raises no question of law.

Conclusion

1. [50]

   In the result the Commissioner should be granted leave to appeal on grounds 1 and 2 and the appeal on those grounds dismissed. Leave to appeal on the remaining grounds should be refused. The Commissioner should be directed to file a notice of appeal limited to grounds 1 and 2.

2. [51]

   PAYNE JA: I agree with Meagher JA.

3. [52]

   WHITE JA: I agree with Meagher JA.