The High Court of Australia (HCA) has unanimously dismissed an appeal by Godolphin Australia Pty Ltd (Godolphin) in relation to the primary production land tax exemption on the basis that Godolphin was unable to demonstrate that the “dominant use” of its properties was for primary production.
The decision in Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue [2024] HCA 20 handed down on 5 June 2024 concerns the proper construction of the meaning of “land used for primary production” and the “dominant purpose” of land under section 10AA of the Land Tax Management Act 1956 (NSW) (Land Tax Act).
The HCA agreed with the view adopted by the majority in the earlier NSW Court of Appeal (NSWCA) proceeding, that the requirement of “dominant use” of land referred to in section 10AA(3) applied to both the “maintenance of animals” and to the purpose of sale in section 10AA(3)(b). The HCA called this the “use-for-a-purpose” construction.
Key takeaways
- To enliven the section 10AA primary production exemption from land tax under section 10AA(3)(b) of the Land Tax Act, the dominant use of the land must be for the maintenance of animals and the dominant purpose of that use must be selling the animals or their natural increase or bodily produce.
- This is because section 10AA(3)(b) uses a composite phrase that combines an identified use of the land as well as a specified purpose for that use. The word “dominant” qualifies the use of the land, as well as the purpose for which the land is used.
- Where land has more than one use, for a given use to be dominant, it must exhibit such predominance as to impart to the whole of the land the necessary exempting character.
- Whether land is being used for the dominant purpose of maintaining animals for their sale or the sale of their natural increase or bodily produce is a question of characterisation of the use or uses to which the land is put. Factors to be considered include the amount of land used for any purpose, the nature and extent and intensity of the various uses which are taking place, the time and labour and resources spent in using the land, the financial gain from a given activity and the conclusion reached by an objective observer who is viewing the land as a whole.
Section 10AA of the Land Tax Act
Section 10AA of the Land Tax Act provides an exemption from land tax for rural land that is “used for primary production”: section 10AA(1).
The meaning of “land used for primary production” is provided in section 10AA(3), which provides:
“(3) For the purposes of this section, land used for primary production means land the dominant use of which is for-
a) cultivation, for the purpose of selling the produce of the cultivation, or
b) the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce, or
c) commercial fishing (including preparation for that fishing and the storage or preparation of fish or fishing gear) or the commercial farming of fish, molluscs, crustaceans or other aquatic animals, or
d) the keeping of bees, for the purpose of selling their honey, or
e) a commercial plant nursery, but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public, or
f) the propagation for sale of mushrooms, orchids or flowers.”
Under section 10AA(2), land that is not rural land is exempt from land tax if it is land "used for primary production” and satisfies the additional requirements that the use of the land: (a) "has a significant and substantial commercial purpose or character"; and (b) "is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made)".
Background
Godolphin was assessed for land tax, for the 2014 to 2019 land tax years, in respect of two properties used by them in a business which comprised the breeding of thoroughbred horses for sale as well as racing (including training the horses for racing).
The business was described as having two operations. The first was the breeding of horses, of which the Godolphin sold about 70% when they reach a certain age. The most promising racehorses were kept for the second operation, which was racing for prize money. The racing operation was run at a considerable loss, while the breeding operation was profitable and Godolphin’s breeding assets were valued significantly more highly than its racing assets.
The objective of the horse racing operation was to enhance the value of the horses Godolphin bred for sale, as well as the fees paid by customers to use the stallions for breeding, by achieving success on the racecourse.
The vast majority of the land in question was used for the horse racing operation, while only a small proportion of the land was used for the breeding operation.
Godolphin claimed that the properties should be exempt from land tax because the relevant land was rural land that was used for primary production. They argued that the properties constituted land used for primary production because the dominant use of the land was “the maintenance of animals…for the purpose of selling them or their natural increase or bodily produce and progeny”.
The Chief Commissioner of State Revenue (the Commissioner) argued that the parcels of land in question were not eligible for the exemption. The Commissioner accepted that the land was used for the maintenance of horses, however, he did not accept that the dominant purpose of that use was the sale of the horses, their progeny or their bodily produce.
Supreme Court of New South Wales - First instance decision
The primary judge in the Supreme Court of New South Wales (in Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (2022) 114 ATR 597) considered that the operations of Godolphin’s business were integrated, such that it could not be said that there were two distinct purposes for the activities carried out on the properties.
Ward CJ therefore considered it unnecessary to decide whether use for any one purpose was the dominant use of each property. Her Honour agreed with Godolphin’s view that the pursuit of success on the racecourse was part of the overall objective of increasing the value of Godolphin’s stud operations.
Thus, it was decided that both parcels of land were used for primary production and exempt from land tax.
NSWCA appeal proceeding
The majority of the NSWCA (Kirk JA and Simpson A-JA with Griffiths AJA dissenting) (in Chief Commissioner of State Revenue v Godolphin Australia Pty Ltd (2023) 115 ATR 490) disagreed with the primary judge and allowed the Commissioner’s appeal. Kirk JA considered that the words “dominant use” in section 10AA(3) had to be a use “for something”. Therefore the question to be asked was not whether the dominant use of the properties was the maintenance of horses, but instead whether the dominant use of the properties was the maintenance of horses for the purpose of selling them. This is the “use-for-a-purpose” construction that the HCA later favoured.
Kirk JA accepted that a “significant use” of the land was the maintenance of horses for the purpose of selling, but that the racing purpose was the dominant use. This finding was based on the greater resources and land dedicated to the horse racing activities. Simpson A-JA was unable to distinguish either purpose as dominant over the other, meaning the selling purpose could not be the dominant purpose and therefore section 10AA(3) was not satisfied.
Griffiths AJA, in the minority, was of the view that breeding for the purpose of selling was the dominant use of the properties. This was because the revenue and net revenue in each year from 2013 to 2019 from horse racing was less than the revenue and net revenue from stallion covering and the sale of horses. Additionally, the values attributed to stallions and broodmares was significantly higher than the values attributed to racehorses.
HCA appeal proceeding
Godolphin’s grounds of appeal
Godolphin did not dispute the NSWCA’s finding that a "significant use” of the two properties was animal maintenance for the purpose of selling animal produce.
Further, Godolphin did not seek a finding that selling horses was the dominant purpose of the use of the land, but that such a finding was unnecessary to satisfy the requirements of exemption under section 10AA. Thus, their main contention in the HCA proceeding was that the requirement of “dominant use” of land in section 10AA(3) only applied to the “maintenance of animals” and did not also apply to the purpose of selling them referred to in section 10AA(3)(b). They also contended that the purpose of selling animals or their natural increase or bodily produce need only be a purpose, in the sense of a real or material or non-trivial purpose, for the exemption to be engaged.
Godolphin supported its argument in three ways:
- Firstly, they pointed to the structure of the words of the provision. In particular, the location of the word “dominant” before the word “use” was said to describe how much of the land must be used for the maintenance of animals to qualify for the exemption. It was argued that the word “dominant” did not also apply to the purpose of selling the animals. The maintenance of animals, it was argued, was capable of being “for” selling the animals if selling the animals was a significant or real purpose of the maintenance.
- Secondly, the construction above was said to be supported by the statutory context. They pointed to section 10(1)(h) as an example of a nearby provision in which Parliament had expressly set out its intention that an exemption would rely on the predominance of a particular purpose. Section 10(1)(h) provides: “land owned by, or in trust for, any club or body of persons, and used primarily and principally for the purposes of any game or sport”. Godolphin argued that if Parliament had intended for section 10AA(3)(b) to require that the purpose of selling must also be a dominant purpose, it would have said so as it did in section 10(1)(h).
- Thirdly, they argued that the construction was supported by the purpose of the provision as revealed by extrinsic materials. When section 10AA(3)(b) was inserted into the Land Tax Act, the Minister for Finance explained in Parliament that the provision was intended to close a loophole, whereby developers claimed an exemption by ensuring their land was fenced and that “some farm animals” were run on it. The Minister said that “the primary production use of the land will have to have significant and substantial commercial purposes”. Godolphin argued that its construction of section 10AA(3)(b), which required that the purpose of selling be significant, was sufficient to satisfy Parliament’s intention to close the loophole. The construction preferred by Kirk JA and the Commissioner, they argued, went too far in denying the exemption for land which was significantly used for primary production.
“Dominant” qualifies a composite phrase
In a joint judgment, Gordon, Edelman and Steward JJ determined that the word “dominant” does not just qualify the phrase “the use of which is for…the maintenance of animals”. Instead, it qualifies the composite phrase “use of which is for…the maintenance of animals…for the purpose of selling them”.
The “use-for-a-purpose” construction adopted by Kirk JA and Simpson A-JA was therefore decided to be correct. The word “dominant” qualifies the use of the land, as well as the purpose for which the land is used. In that respect, the judgement observed that based on prior case law, the word "dominant" refers to its ordinary meaning, being that which is “ruling, prevailing, or most influential”.
Therefore, to enliven the section 10AA exemption from land tax using section 10AA(3)(b), the dominant use of the land must be for the maintenance of animals, and the dominant purpose of that use must be selling the animals or their natural increase or bodily produce.
Characterisation of the use of the land
In order to determine whether land was being used for the dominant purpose of maintaining animals for sale, the HCA characterised the use or uses to which the land was put. The correct approach adopted is an objective test which considers a number of factors including:
- The amount of land used for any purpose;
- The nature and extent and intensity of the various uses which are taking place;
- The time and labour and resources spent in using the land;
- The financial gain from a given activity; and
- The conclusion reached by an objective observer who is viewing the land as a whole.
Their Honours also stated that “where land has more than one use, for a given use to be dominant it must exhibit such predominance as to impart to the whole of the land the necessary exempting character”. Here, the amount of the land used for horse racing activities (constituting a significant proportion of the land), the greater resources directed to racing and the intensity of the activities in training horses to race, all supported a finding that selling the animals or their natural increase or bodily produce did not constitute the dominant use of the land.
It was concluded at paragraph 31 of the judgement that:
“That a "significant" use of the land was for breeding horses falls short of demonstrating that the "dominant" use of the land was the maintenance of horses for the purpose of selling them or their natural increase or bodily produce.”
Key principles from prior cases examined by Jagot J
Jagot J agreed with the joint judgment of Gordon, Edelman and Steward JJ, examining a number of prior cases for principles that Her Honour considered “should be accepted as the foundation for the contemporary incarnation of the exemptions”. These are as follows:
- Close attention to the precise terms of the exempting provision is required.
- The accepted context in which the Land Tax Act was enacted and amended is that use of land is for a purpose.
- In the ordinary case, the approach is to identify the physical acts conducted on the land by which the land is made to serve some purpose.
- The question of the use of land for a purpose is one of objective fact to be determined in all relevant circumstances, in particular the degree, extent and intensity of the physical activities on the land.
- As an objective fact, determined in all relevant circumstances, the same land may be used for more than one purpose.
- In determining whether the same land is being used for more than one purpose, it may be necessary to consider if the physical activities conducted on the land are wholly ancillary to or facilitative of a single purpose (in which case the land will be characterised as being used for one purpose) or serve an additional, independent or collateral purpose (in which case the land will be characterised as being used for more than one purpose).
- Where the same land is being used for more than one purpose, the question whether the use of the land is dominantly for the specified exempt purpose requires a comparison between such exempt uses and other (non-exempt) uses to ascertain whether the exempt use is the dominant use for purpose.
Conclusion
The HCA unanimously held that the construction of section 10AA(3)(b) as adopted by the majority in the NSWCA was correct, and therefore Godolphin failed to prove its case. The appeal was dismissed with costs.
Practical implications for taxpayers and next steps
Importantly, this HCA land tax decision affects all taxpayers who own land and engage in primary production with mixed uses or operations (including for example, using land for the purposes of land development etc), not just those in the horse breeding and racing industry. Taxpayers who were previously granted an exemption or who wish to access the land tax primary production exemption will need to be cautious when they use or start to use the land for more than one purpose, even if they regard the other purpose or purposes as ancillary or secondary purposes.
In order to qualify for the primary production exemption, landowners that use land for more than one purpose will need to ensure that the dominant use of their land is for an exempt dominant purpose, by having regard to the factors set out by the HCA and the case law principles on the construction of section 10AA(3).
The KWM Tax Team can assist you with seeking exemptions from land tax, including advising on whether the requirements for an exemption are satisfied, what steps to take to ensure the dominant use of land is for an exempt purpose, as well as preparing and lodging the necessary submissions to the State and Territory Revenue Offices to request on your behalf such land tax exemptions or objecting to an existing land tax assessment where an exemption is available.
