As you drive to work after what had been an unusually stress-free morning getting the kids out the door, your phone starts to ring.  You see it is your client Fabio but you can’t really answer with your rowdy kids in the car so ignore it.  But it rings again, then again.  You figure it must be urgent so pull over so you can take the call.

Fabio had been a client since you started your career 17 years ago.  He fancied himself as quite the wheeler and dealer but nothing he dabbled in ever really paid off.  A couple of years ago though, he had an unexpected windfall after his wealthy best mate, Bob, died leaving Fabio a very generous sum of money.

Whilst at the time of Bob’s death his family made it pretty clear that they didn’t like the idea of Fabio receiving anything, they begrudgingly accepted Bob’s wishes and Fabio ended up with enough money to pursue his life-long dream of breeding, selling and racing horses.

Despite the generous gift, Fabio was still on a pretty tight budget with little room for any unexpected or additional expenses.

With the knowledge that things were tight, and given Fabio’s past failed enterprises, you and Fabio’s accountant had both tried to discourage him from proceeding and to put his money into something a little more certain.  However, Fabio’s mission to follow his dream was so ingrained that he went ahead with it anyway.

Things had ended up going quite well for Fabio though since he purchased the property, particularly after he managed to find a wealthy investor with experience in breeding, racing and selling horses to partner up with.

As you hop out of the car for peace, you answer the call.  Fabio sounds pretty distressed as he tells you he received a letter from Revenue NSW yesterday with a land tax assessment for the property.

Wait a minute, you think, it’s primary production land, what on earth are they going on about?

You tell Fabio not to worry, that Revenue NSW has probably made an error and to email you the letter so you could take a look when you arrive at work.

It had always been your understanding that where you used rural land for the purpose of breeding and selling animals, that you would qualify for the Primary Production Land tax exemption (“PPL Exemption”).  In fact, land tax was not even something you had considered when acting for Fabio on the purchase so you felt confident that you could resolve any issues pretty simply.

But as you sit at your desk and start to read through the reason for the assessment, your heart sinks….

The Sting

Under the Land Tax Management Act 1956, land that is used for the dominant purpose of primary production is exempt from land tax.

The relevant section says (in part):

  1. Land that is rural land is exempt from taxation if it is land used for primary production.
  2. For the purposes of this section, land used for primary productionmeans land the dominant use of which is for—

(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….

The letter from Revenue NSW says that the dominant use of the land was not ‘the maintenance of animals for the purpose of selling them’ rather the dominant use was to breed horses for racing and therefore Fabio did not meet the requirements for the PPL exemption and would be required to pay land tax.

Whilst you had always been aware that Fabio was using the land to breed horses to sell, you didn’t know that he was also using it to breed horses to race.

So, you decide to give Fabio a call to clarify exactly how it all works.

“Well,” says Fabio, “it’s really all become about the racing now, but what difference does that make anyway?”

“I’m honestly not sure at the moment Fabio”, you respond, “let me look into it further and I’ll get back to you”.

“Righto, but please make sure you get it sorted soon, I don’t need this stress hanging over my head at the moment, things are ok for now but if I actually have to pay this, well I just don’t know what I’ll do…” he replies.

You apprehensively start doing some research and come across a current ruling number LT097v3 (“Ruling”) issued by Revenue NSW.

The Ruling clarifies the type of primary production that meets the requirement for the PPL exemption, in relation to the maintenance of animals for the purpose of sale, and says (in part):

  1. …..The animals must be maintained for the purpose of selling them or their natural increase or bodily produce[.
  2. Land used for a stud business, including a horse or cattle stud, is eligible for the PPL exemption if the stud animals are maintained for the dominant purpose of selling the animals or their bodily produce, including their offspring or semen.
  3. However, the exemption does not apply if the dominant use of the land is the maintenance of horses:

(a)        for horse-racing purposes;……

You keep researching and note that if Fabio does want to dispute the assessment, it will be up to him to prove the dominate use of the land was for the maintenance of animals for the purpose of selling them or their natural increase or bodily produce.  Which, given Fabio’s comment about the racing, does not sound promising.

You also come across the recent case of Chief Commissioner of State Revenue v Godolphin Australia Pty Ltd [2023] NSWCA 44 where the New South Wales Court of Appeal found in favour of the Commissioner and denied the PPL exemption to the taxpayer who ran a business on rural land involving the breeding, sale and racing of horses.

With Fabio’s words playing over in your mind you realise it isn’t going to be easy after all…..

Authors: Amanda Tully and Jim Main