The recent decision of Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) provides an important clarification of the circumstances in which a land developer can obtain NSW land tax exemption on the ground of primary production usage.
Significantly, White J (NSW Supreme Court) concluded the dominant use of the developer’s land was primary production. The circumstances contrast with those of Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue (NSW CA and NSW SC), where the court held the primary production was not the dominant use of the developer’s land.
The fundamental issue is what constitutes “use” of land. Where the dominant use of land is primary production, access to the NSW exemption is possible. (For NSW land zoned rural, or one of several other listed similar categories, this is the sole test. Land in other zones has to meet this test and a further test in order for the exemption to apply.)
Here is the theory
Put simply, the Court decided that a “use” of land is not limited to the manner in which the land is actually/physically used:
- A “use” of land can be an actual/physical use (i.e. defined by activities conducted on the land) – e.g. the use might be defined by reference to the physical activities of a tenant.
- However, deriving an advantage from ownership of land (i.e. dealings with the land) can constitute use – e.g. the landowner’s action of leasing of the land to a tenant is another “use” of the land.
In elaboration of item (b), one particularly informative statement of White J is worth repeating:
” … ‘use’ includes employing land for a purpose, putting it into service or turning it to account. This need not be a physical use. … But ‘use’ does require doing something with the land, whether by using it physically or putting it to advantage, for example by letting it.” (underlining added)
The Commissioner argued that the concept (item (b)) of “use” as including an intangible use warranted the view that “land banking” or holding land as a stock in trade was a “use” of the land.
However, the Court held that “use” refers to a current use and does not refer to a future use. One has to compare all current uses (and only current uses) when determining whether primary production is the dominant use of the land.
Here are the circumstances to which the theory had to be applied:
Metricon had acquired the parcels of land to which the objections related for consideration which, in aggregate, was just under $60M. The land had been acquired for future residential development.
Some of the parcels contained residences and curtilages that were fenced off from the remainder of the relevant parcel. The fenced-off residential areas comprised minor proportions of the respective relevant parcels (e.g. 6.2%, 2.4% and 8.3% respectively).The residences were variously leased to families at more than nominal rents (i.e. ranging from approximately $220 pw to approximately $700 pw).
Metricon granted cattle agistment rights in respect of the land (“agistment land”) outside the fenced-off residential areas, to a gazing partnership (none of whose members were residential tenants). The consideration given by the partnership for the agistment rights was the obligation to maintain the fences and control noxious weeds on the agistment land.
The grazing partnership members owned other land (“the home farms”) on which they bred stock. Stock was relocated from the home farms to the Metricon’s land for fattening ahead of sale.
In the land tax years under objection (2009 to 2013 inclusive), objections were made in respect of each of the several parcels. During those years there was only one parcel which was the subject of any development application. In relation to this parcel:
- 23/11/09 – Department of Planning received an application for proposed subdivision (into 300 lots) under Part 3A (understood to have since been repealed) of the Environmental Planning and Assessment Act.
- Various reports and plans sought by Department provided (e.g. proposed subdivisional plans; Landscape Master Plan; Agricultural Buffers Assessment etc. – in total comprising 20 reports/plans).
- During the relevant land tax years – Metricon paid consultancy fees totalling $2.2m.28/06/13 – Metricon applied for a construction certificate for construction of a temporary sales office and related signage – construction post-dated the relevant land tax years.
- 30/05/14 (i.e. after the relevant land tax years) – project approval granted.
- 27/03/15 – a construction certificate for phase 1 bulk earthworks had still not issued.
Here is the outcome of applying the theory:
The Court decided that holding land for residential development was not a current use of land per se. Holding land as a land bank reflected an intention as to future use.
The Court distinguished the circumstances of the Leda Manorstead Case from Metricon’s circumstances. The former case recognised that a developer uses trading stock land when excavation and construction activities commence – it not being necessary to offer subdivisional lots for sale in order for that use to occur.
In Metricon’s circumstances, White J decided that the consultants’ activities resulted in land development being a present use of the land only to a minor degree. Primarily, the nature of their activities was referrable to future land development use.
The Court considered the relevance of the accounting and taxation treatment of the land as trading stock. It rejected a contention that this treatment amounted to an intangible present employment of the land to advantage. The taxation benefits arose from the mode in which the acquisition was financed and the change in market value during the holding period. The taxation treatment did “not convert the holding of land to a use”.
Here are some further Issues that the Court addressed:
Almost invariably, a land bank will have a mixture of physical use (which might comprise primary production activities, residential tenants’ use, areas devoid of physical use, etc.) and intangible use (which might include granting of residential/other leases, the creation of agistment rights etc.).
It follows that the process of weighing up these uses and determining the dominant use will entail:
- finding a common medium to compare the significance of the two fundamentally disparate sets of uses; and
- evaluating uses that involve differing combinations of intensity (say, the intense use of a small area as a residence) and extensiveness (say, sparse use of an expansive area, such as one might expect with grazing).
Here is “big” money question:
In the aftermath the Metricon Case, the “big” question is whether a suitably structured rural approach will continue to allow (and for how long) a developer to refrain from repeated withdrawals from a High Street Bank in order to maintain his/her Land Bank.
A ‘Pitt Street farmer’, with a quick glance towards ‘Macquarie Street’, might answer – “Make hay while the sun shines!”