In a win for property developers, the recent NSW Court of Appeal decision Chief Commissioner of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 (handed down on 17 February 2017) found that land held for future development, but used for grazing, may be exempt from land tax under section 10AA of the Land Tax Management Act 1956 (NSW) (“the Act”). Further information on this decision is set out below.
Background
Property developers often acquire agricultural land on the fringe of existing urban areas to be held as a “land bank” for future development. Whilst the land is being held, primary production activities usually continue, including cattle grazing through lease or agistment arrangements.
In New South Wales, land that is used for primary production is generally exempt from land tax if it meets the requirements of section 10AA of the Act. Relevantly, this section requires that, in order to be exempt, the property must be land used for primary production (i.e. that primary production is the dominant use of the land), and that use of the land must have a significant and substantial commercial purpose or character and be engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made).
However, the Office of State Revenue (“OSR”) has increasingly refused claims for the primary production land tax exemption, even where the property is being used f
or primary production, where the land is also held for future development. This position is based on a view that the exemption does not apply to developers using “land banks”, as the dominant use of such land is for land development, not primary production. The decision in the case of Chief Comr of State Revenue v Metricon Qld Pty Ltd [2017] NSWCA 11 has overturned that position.
Facts of the Case
The property developer, Metricon QLD Pty Ltd (“Metricon”), owned a number of parcels of rural land at Terranora in the Tweed Valley as a “land bank”. It purchased the land for over $60 million, for the purpose of residential subdivision . The developer had conducted some preliminary activities to obtain development approval, and had been actively seeking various approvals, but no actual construction had been commenced. Rather, the land was being used for grazing by professional cattle producers, pursuant to an agistment agreement. The taxpayer was assessed for land tax, by the Commissioner, for the years from 2009 to 2013 in relation to each parcel of land.
NSW Supreme Court Decision
Metricon applied to have the land tax set aside in the NSW Supreme Court, the sole issue being whether the use of the land for cattle grazing was the dominant use (under s 10AA of the Act). Metricon argued that to determine whether primary production was the dominant use, any comparable or competing use of the land had to be a physical use. Whilst the Chief Commissioner took the position that a number of competing land uses should be weighed against the primary production use for the purposes of the dominant use test. These included intangible use as a “land bank” and use for land development.
At the first instance, Metricon was successful in having its land tax assessments set aside, except for one parcel in one land tax year. Ultimately, the Court found that the exemption applied and held that the dominant use test was to be applied, on the basis that, a competing use was not limited to physical use of the land but that competing use had to be a present use and that the mere holding of land does not amount to present use (see Metricon Qld Pty Ltd v Chief Comr of State Revenue (No 2) [2016] NSWSC 332 (handed down on 31 March 2016)).
Court of Appeal Decision
The Chief Commissioner appealed the decision of the Supreme Court to the NSW Court of Appeal.
Ultimately, the Court of Appeal dismissed the Chief Commissioner’s appeal, holding that the concept of “use” in s10AA of the Act is one of physical deployment of the land to obtain a present benefit or advantage from it, and that land banking and preliminary land development activities cannot be regarded as being a use of the land in the required sense.
Essentially, the Court ruled that merely holding land as part of a developer’s trading stock is not a “use” of land, because it has not yet been used. It also held that the mere holding of land by a property developer for future residential development was not a “current use” of land that had to be taken into account for this purpose, despite the taxpayer claiming tax deductions for borrowing costs and loss of value. Rather, the Court found that the rental use in respect of the agistment of cattle was a “current use” of the land.
However, the Court determined that to the extent that land is physically used for the carrying out preliminary activities necessary to obtain approval for the use of land for a particular purpose (such as property development), then the land was “currently” being used for a purpose other than primary production. However, even in that case, the Court acknowledged that such physical use of the land did not prevent primary production from still being the “dominant use” of the land. Further, the Court held that such preliminary activities did not mean that use of the land for residential development had commenced.
Take Away
This decision provides a basis for acquisition or continued holding of farm land with the intention of future development, without having the holding costs associated with land tax.
It is now recommended that property developers holding primary production land review their current land tax bills, particularly if the exemption has previously been refused by the OSR on the basis that primary production was not the dominant use of the land.