Landbanking and the primary production exemption: NSW OSR hosed down
On 10 February 2017, the Supreme Court of NSW (Court of Appeal) handed down its decision in Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 (“Metricon”). The decision followed the Supreme Court of NSW’s recent decision in Leppington, which was the subject of a previous post by the author.
At issue was whether the Chief Commissioner’s continued attack on ‘landbanking’, of itself, as a relevant current use in determining eligibility for the NSW primary production exemption from land tax was sustainable.
The central issue before the court was:[1]
“whether “intangible use” (such as “land banking use” or “land development use” in the sense already mentioned), as distinct from “physical use” (such as cattle grazing or some other physical activity pursued on the ground) is relevant for the purposes of s10AA and, if so, whether such an intangible use was, at relevant times, the “dominant use” of the land in question.”
Core meaning of ‘use’
After carefully canvassing the relevant authorities, both as to the construction of the word, “use” generally[2] and in the context of s10AA specifically,[3] Barrett AJA concluded as to the core meaning of use:[4]
“Decided cases are replete with statements that “use” is a word of variable meaning and that the construction of one statutory provision concerning “use” of land may well be an unreliable guide to the correct construction of another such provision. For that reason, approaches taken in cases about different statutory contexts in which the word “use” is employed with respect to land must be treated with caution. It must nevertheless be accepted that “use”, in relation to land, has a core meaning independent of statutory context. In the recent Berrima Gaol land claim case (New South Wales Aboriginal Land Council v Minister Administering the Crown Lands Act [2016] HCA 50, French CJ, Kiefel, Bell and Keane JJ said (at [34]):
“True it is that the words ‘used’ and ‘occupied’ might be said to take much of their meaning from context. But that is not to say that they are devoid of a commonly understood meaning in ordinary parlance. They require an examination of activities undertaken upon the land in question and, in the case of ‘occupied’, factors such as continuous physical possession must be taken into account.”
Examination of “activities undertaken upon the land in question” is thus central to identification of “use”, according to the commonly understood meaning of the expression; and, as Allsop P pointed out in the Leda Manorstead case, the inquiry is not limited to activities producing beneficial or commercial return. Furthermore, past activity may be indicative of present use even if the activity is for the time being not continuing. This is because the absence of activity on the land at a given time may be part of a scheme of calculated and continuing utilisation that stems from past activity and remains in course of implementation without discernible activity at the time in question.”
‘Use’ under section 10AA of the Land Tax Management Act 1956
Barrett AJA held that:
- the primary production exemption focused on “use” at large rather than use by an “owner” (that is, it included the use of the land by those other than the owner);
- “dominant use” must be “for” the purposes of primary production and the activities listed in subsection 10AA(3) of the LTMA require “deliberate physical acts in relation to the land”;
- hypothetically, if there were a lessor leasing to a lessee that carried on primary production activities:
- if the focus is on physical activity, then the objective observer would conclude that the lessee’s agricultural use was the only use; and
- if the focus is on the exploitation of ownership rights, the lessor’s use by leasing would be the only use;
- it is difficult to compare and contrast those two uses as they have “intrinsically different qualities” and where each is fully deploying their rights, neither use would be dominant;
- it must follow that section 10AA of the LTMA is referring to the physical use of the land and therefore:[5]
“the hypothetical case under discussion would be resolved by holding that there is, for s 10AA purposes, only one use, being the agricultural use by way of physical deployment undertaken by the tenant; and that it is not necessary to address any question of comparison with any use by the lessor (or any question of relative quantification).
- inactivity cannot be a relevant current use[6] unless an intentional, actual and present advantage is derived by virtue of that inactivity.[7]
Conclusion
Barrett AJA concluded:[8]
“. . . the concept of “use” relevant to s 10AA as a whole (and s 10AA(3) in particular) – a concept in which the preposition “for” plays a central role – is one of physical deployment of Isaacs J’s “concrete physical mass”[22] in pursuance of a particular purpose of obtaining present benefit or advantage from it, with deployment understood as including not only activity but also inactivity deliberately adopted as a means of obtaining such actual and present advantage from the land; and with purpose understood as objectively ascertained purpose. There is no requirement that immediate productive return be achieved, as long as some benefit or advantage accrues. In a s 10AA(3) case, each “use” considered in the search for “dominant use” must be of the character I have described.”
And further:[9]
“In saying this, I respectfully depart from the approach that commended itself to the primary judge and which his Honour confirmed in his later decisions on s 10AA in Bellbird Ridge Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1637 and Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 9. His Honour there confirmed the view that the possible uses to be considered for the purpose of determining what is the dominant use of land are not necessarily confined to physical uses of the land. That view should not be accepted.”
[Emphasis added]
Specifically as to landbanking, Barrett AJA held:[10]
“If “land banking” is understood as merely accumulating and holding a stock of land with a view to its future development, such “land banking” cannot be regarded as being, of itself, use of the land. Inactivity in the form of mere holding, although accompanied by a present intention to subdivide and sell at some future point, is not the source of present benefit or advantage and therefore does not constitute a use for the purposes of s10AA(3). What is required is some physical activity that causes the land to be raised out of a state of non-use into one of actual deployment in pursuance of the purpose of deriving advantage through subdivision and sale.”
Takeaway points
This is a big win for taxpayers. Not only did Metricon win, but the apparent expansion of relevant uses identified and accepted in Leppington (i.e. intangible use) was rejected in favour of a physical use test.
Assuming that sufficient primary production activities are being carried out on the relevant property in the first place, developers can expect to qualify for the land tax exemption until that critical point in time where, on all the relevant facts, a property development venture has crossed over from preparatory activities (even substantial preparatory activities such as planning and consultation) to the physical use of the land by means of subdivision and sale.
It is important to monitor the situation going forward to confirm whether:
- the NSW OSR will appeal the decision; or
- even if it does not appeal, legislative changes will follow to correct a perceived deficiency in the law.
If you or your clients need any assistance as to where the dividing line falls on the authority of Metricon, or for all your property development structuring needs, feel free to get in touch!
[1] Barrett AJA at paragraph 17 (with whom Macfarlan and Ward JA agreed)
[2] See Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493; Ryde Municipal Council v Macquarie University (1978) 138 CLR 633; Minister Administering Crown Lands Act v NSW Aboriginal Land Council (2008) 237 CLR 285; Blacktown City Council v Fitzpatrick Investments Pty Ltd [2001] NSWCA 259; Ferella v Chief Commissioner of State Revenue [2014] NSWCA 378; Thomason v Chief Executive, Department of the Lands [1995] QLAC 4; The Council of the Town of Gladstone v The Gladstone Harbour Board [1964] Qd R 505
[3] See Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2011] NSWCA 366
[4] At paragraph 45
[5] At paragraph 56
[6] Gladstone (above)
[7] Royal Newcastle (above)
[8] At paragraph 61
[9] At paragraph 62
[10] At paragraph 67