Farmers – Keep those records!

The case of Annat v Commissioner of State Revenue [2020] VSC 108 (Annat) serves as a timely reminder for those operating a farm about difficulties faced by farming land owners in continuing to qualify for a primary production land tax exemption and the importance of ensuring that their structuring and record keeping practices are up to scratch.

Primary production land exemption sought

In Annat, the primary production land tax exemption sought was the exemption under section 67 of the Duties Act 2000 (Vic). Section 67 is the strictest test in relation to land in an urban zone in greater Melbourne (of the 3 available primary production land tax exemptions).

Notably, section 67 specifies that primary production land owned by a trustee of a discretionary trust will only be exempt from land tax if the land is “used solely or primarily for the business of primary production” and at least one of the specified beneficiaries “is normally engaged in a substantially full-time capacity in the business” which requires “regular participation in the business for a considerable part of the time of the owner”.

Facts and outcome in Annat

In Annat, the taxpayer (the Annat Family Trust) operated a business of cattle farming and had done so for a number of years. The land was owned by the taxpayer, a discretionary trust. In contention was whether the taxpayer was liable to pay land tax assessed in respect of the 2015 to 2017 land tax years.  

The points of contention focused on whether the land was used primarily for the business of primary production and if a specified beneficiary of the Annat Family Trust worked substantially on a full time basis in the farming business of the trust.

Land used primarily for the business of primary production?

While it was accepted that 3 paddocks out of 24 were used for primary production as they were used for hay cultivation and cattle grazing, it was found that this was not sufficient to lend the primary production characterisation to the rest of the land, as there was no evidence that hay was sold in the farming business other than in connection with horse agistment services (which is not accepted as primary production activity).

The Court also analysed the use of each part of the land, finding that 6 paddocks that held chicken and sheep and were close to a residence on the land were used privately. Further, there were no records of cattle grazing on paddocks 1 to 21, and most of the evidence suggested that “the paddocks were intensely used for agistment, which included the addition of horse boxes, more concentrated fencing, and people coming and going to feed and manage agistment services.” 

Accordingly, the Court noted that “although [it is accepted] that around 50% of the Land was used for primary production, such use was not such as to impart the whole of the Land with the requisite character” of being primarily used for the business of primary production.

Specified beneficiary working in a substantially full-time capacity in the farming business?

Another issue in contention is whether Stipo worked in substantially a full-time capacity in the farming business of the trust.

Notably, Stipo, was the sole director and shareholder of a construction company and held the commercial builder’s licence which was required in order for that business to operate. The taxpayer argued that Stipo had stepped away from the construction business some years prior and spent most of his time on the farm, thus was only involved in the construction business to the extent necessary for it to operate under his licence.

Importantly, the Victorian Supreme Court noted that the onus to prove that the specified beneficiary works in the business is on the taxpayer and found that this onus was not satisfied as there was not sufficient evidence adduced. There were no business plans, employment contracts, records of hours worked, records of sales and purchases, sale or lease contracts, or records of grazing cycles. Additionally, the website for the commercial construction business falsely stated that Stipo would oversee all construction work and it was found that Stipo drew most of his income from the commercial construction business. These factors contributed to a finding that Stipo did not work full-time in the farming business.

Main takeaways

Annat is an important case that emphasizes how the threshold to qualify for a primary production land tax exemption becomes increasingly difficult as the character of any primary production land changes.

Land owners who do not keep track of this may be exposing themselves to large land tax liabilities. Land owners and their advisors should be fully aware of the nature of the changing requirements over time and must ensure that they keep good records of their business plans, contracts of sale and purchase, employment contracts, and other records of the operations of the farming business in order to mitigate any adverse tax consequences that may arise in the future.

If you require advice on structuring and operating a farming enterprise, require agreements in respect of your farming enterprise, or want general commercial or taxation advice, please contact:

Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

Alasdair Woodford
Senior Associate
T: 03 5225 5217
E: awoodford@ha.legal