The State Revenue Office wins fight to assess land tax on farmland in greater Melbourne

Are you claiming land tax exemptions for primary production? Read on.   

A recent decision of the Victorian Supreme Court is a warning to those who use trusts to own and manage "primary production" land or are land banking for future subdivision on the urban fringes of Melbourne. Taxpayers must ensure that the trust's 'principal business' is that of the primary production undertaken on the land and ensure that a beneficiary or a beneficiary's relative is engaged in full-time work on the land.

The Taxpayer's property and activities

In Lotus Oaks Pty Ltd as trustee for the Bozzo Family Trust v Commissioner of State Revenue [2021] VSC 388, Justice Garde of the Victorian Supreme Court dismissed an appeal from a Taxpayer concerning land used for primary production located wholly or partly in an urban zone of greater Melbourne. The Taxpayer (a corporate trustee who owned the land) attempted to gain an exemption from land tax, as is possible under section 67 of the Land Tax Act 2005 (Vic) (LTA), by claiming that the trust's "principal business" was the "primary production of the type carried on the subject land" and that one of its beneficiaries was "normally engaged in a substantially full-time capacity" in that principal business.

Relevantly, ‘primary production’ was defined in the LTA, to include activities comprising ‘the cultivation of crops for sale’, and ‘the maintenance of animal and livestock’. Justice Garde found that the activity of primary production located on the subject land was the cultivation of crops for sale, however the Taxpayer owned other farms on which the relevant primary production activity was the maintenance of animal and livestock. Justice Garde rejected the Taxpayer's submission that these diverse agricultural operations constituted "a single integrated business" and highlighted the substantial residential subdivision business the Taxpayer also conducted, which was not considered a primary production activity for the purposes of section 67.

Justice Garde concluded that while the Taxpayer conducted the business of cultivating crops for sale, it also "conducted major businesses of residential subdivision, animal husbandry through the breeding and fattening of cattle and sheep, and the sale of wool". Added to that, Justice Garde noted that "residential subdivision was a rapidly growing and profitable business" for the Taxpayer such that it was very likely that it was – by December 2014 – the Taxpayer's "most important and profitable business throughout the relevant period."

The Taxpayer failed also in its argument that one of its beneficiaries was engaged in the cultivation of crops for sale on the subject land in a "substantial full-time capacity." Justice Garde adopted the notion that this phrase meant "regular participation in the business for a considerable part of the time of the owner" (attributed to Damon v Commissioner of Land Tax (Vic) (1985) 17 ATR 278). The myriad of activities of the trust counted against the Taxpayer in this regard, with Justice Garde observing that the cultivation of crops for sale was only one of the Taxpayer’s significant businesses. Further, the myriad of roles and responsibilities of the beneficiary also counted against the Taxpayer, as evidence provided did "not offer any real insight into the extent to which" the beneficiary’s time was spent regularly participating in the business of cultivating crops for sale, compared to his time spent attending to his duties as a director of about 20 private companies, his role as a director of the Taxpayer, his involvement in property development on the subject land, and his oversight of the other primary production businesses carried on by the Taxpayer. As such, Justice Garde concluded that while it is clear that the beneficiary "regularly participated" in the business of the cultivation of crops for sale, it had not been established that this was, "for a considerable part" of his time having regard to his time commitments to the other businesses and his director’s duties.

A warning for those with farms on Melbourne's metropolitan fringes

Not all of the wording in the version of the Act considered in Lotus Oaks was retained in the now current LTA. While a trustee must still show that "it carries on the business of primary production on the relevant land and that that business is the trustee's principal business", the reference to "primary production of the type carried on on the land" was removed. Still, a trustee is required to evidence that "at least one of the specified beneficiaries who is a natural person, or a relative of a specified beneficiary, is normally engaged in a substantially full-time capacity in the business of primary production carried on on the land."

It would be false, however, to take solace in the removal of the reference to "type" in the new section 67. While this may open up the opportunity for a Taxpayer to argue that its primary production activities can consist of all or some of the activities in section 64(1)'s definition of "primary production" (rather than having to be one "type" of primary production as indeed hurt the Taxpayer's argument in Lotus Oaks), it is worth remembering Justice Garde's warning in Lotus Oaks that these provisions should not be viewed permissively. Justice Garde referenced the 'legislative history' of these provisions as showing that they "should be construed relatively strictly – it was not the intention of Parliament to exempt all persons carrying on farming activities from land tax. Rather, the exemption has been progressively narrowed. The practice of 'land banking' coupled with minor farming is a particular mischief which the Act seeks to counter."

Next steps

Those who use a trust to own land on Melbourne's suburban fringes and rely on section 67 of the LTA for an exemption from land tax need to review their arrangements to ensure that:

• the primary production conducted on the land the trust owns is the principal business of the trust; and
• at least one of the trust's beneficiaries (or a relative) is engaged in a substantially full-time capacity in that principal business.

Evidence of both of these activities needs to be assiduously documented. The Taxpayer failed to discharge the required onus of proof on both matters in Lotus Oaks, indicating that the evidence (or lack thereof) was crucial. Taxpayers must not open up the possibility that scant evidence will not permit them to discharge the required onus, should the Commissioner consider their property investment fails the requirements of sections 67, 67D or 67E (as applicable).