High Court confirms strict test for rural landowners claiming ‘primary production’ tax exemptions in NSW

Rural landowners in NSW have been put on notice by a High Court decision confirming a strict reading of the “primary production” land use requirements for tax exemptions in NSW. Published on 5 June 2024, Godolphin Australia Pty Ltd ACN 093921021 v. Chief Commissioner of State Revenue [2024] HCA 20 affirmed the ruling of the NSW Court of Appeal to limit the application of rural tax exemptions under the Land Tax Management Act 1956 (NSW) (the Act).

The ’primary production’ tax exemption

Under s.10AA of the Act, rural land is exempt from taxation if used for “primary production”. Section10AA(3) of the Act defines land used for primary production as

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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.

The Godolphin Case

Godolphin Australia Pty Ltd is a global thoroughbred breeding and horseracing organisation with operations in NSW. The issue concerned two (2) NSW properties used for the breeding and sale of thoroughbreds as well as the training of thoroughbreds for horse racing. The two (2) properties were assessed by the Chief Commissioner of State Revenue (the Commissioner) as liable for land tax due to not satisfying the “primary production” test under s.10AA(3)(b) of the Act, which requires that the “dominant use” of the land is for “the maintenance of animals (including birds), whether wild or domesticated, for the purpose of selling them or their natural increase or bodily produce”.

Godolphin objected to the Commissioner’s assessment on the basis that the dominant use of their two (2) NSW properties was the maintenance and breeding of racehorses for the purpose of selling racehorses. By contrast, the Commissioner deemed that the alternate purpose of ‘achieving success in horse racing’ meant that the dominant purpose was not ‘maintenance of animals for their sale’.

The Supreme Court upheld Godolphin’s review of the Commissioner’s assessment at first instance, but this was later overturned on appeal by the NSW Court of Appeal. Last week, the High Court affirmed the NSW Court of Appeal’s rulings, clearly setting out the requirements of the primary production test.

The Test

The High Court’s decision turned on the construction of s.10AA(3). By unanimous decision, the High Court agreed with the NSW Court of Appeal’s finding that ‘maintenance of animals for the purpose of selling’ was a composite phrase in the Act, and that this must be the dominant use of rural land for said land to be eligible for tax exemptions.

As such, although Godolphin used the land for the maintenance of racehorses, the two separate purposes of selling and racing meant that ‘maintenance for the purpose of selling’ was not the dominant purpose within the meaning of the Act.  Where land is being used for multiple purposes “predominance must be of such a degree as to impart a character to the parcel as a whole”. Despite establishing that a significant use of the land was animal maintenance for the purpose of selling animals, Godolphin did not establish that this was the dominant use.

This composite reading of ‘use’ and ‘purpose’ was also said to apply to all the provided purposes under s.10AA(3)(a) to (f).

Key Takeaways

The decision highlights the strict application of tax exemptions under the Act and the need for rural landowners to carefully consider whether their property is eligible. As the decision in Godolphin demonstrates, sale must be the dominant purpose of the use of the land, and any additional purposes for use may render land ineligible for exemption.

Ultimately, rural landowners should document the use of land as diligently as possible, and where necessary, consider seeking legal advice in relation to their tax exemptions.

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