Food for thought: Victorian SRO Releases Draft Rulings regarding the primary production land tax exemption

The SRO has recently published two draft rulings on its interpretation of the primary production land tax exemption in Victoria (Draft Rulings). In addition to providing general interpretative guidance, the Draft Rulings provide indications as to how the Commissioner will approach the assessment of land used for primary production activities.

These indications include the extent of activity required to be eligible for the exemption, the period of time the Commissioner will focus on in making an assessment and the nature of the primary production itself. These Draft Rulings are therefore highly relevant to any landholder in Victoria who is claiming, or considering claiming, the land tax exemption.

So, what are the Draft Rulings?

Two primary production draft rulings have been published by the SRO for comment – one which (broadly) covers the primary production exemption for land wholly or partly in Melbourne’s urban zone (Section 67 Ruling) and another more general one which explores, amongst other things, what the SRO considers to be primary production (General Ruling).

Specifically, they are:

• the Section 67 Ruling, LTA-011, which sets out the requirements for the primary production land exemption under section 67 of the Land Tax Act 2005 (Vic) (Act); and
• the General Ruling, LTA-010, which provides the Commissioner’s interpretation of key elements and terminology relating to the primary land exemption in the context of sections 64, 65, and 66 of the Act.

Remind me, what is primary production?

There are five “heads” of the definition of primary production. The General Ruling expands on what types of activities fall under these heads.

For ease of reference, the five heads are:

1. cultivation for the purpose of selling the produce of cultivation (whether in a natural, processed or converted state); or
2. the maintenance of animals or poultry for the purpose of selling them or their natural increase or bodily produce; or
3. the keeping of bees for the purpose of selling their honey; or
4. commercial fishing, including the preparation for commercial fishing or the storage or preservation of fish or fishing gear;
5. the cultivation or propagation for sale of plants seedlings mushrooms or orchids.

What does the General Ruling Say?

For qualifying land outside Greater Melbourne the exemption applies automatically and a landowner

The General Ruling states “the legislation confers an exemption only where the relevant primary production activities in section 64(1) are undertaken for the purpose of selling or for a commercial purpose where the primary production activity is commercial fishing”.

Therefore, only the fishing “head” of primary production needs to be commercial in nature. The other four heads, whilst needing to be more than merely “hobby farming conducted as a pastime, pursuit or diversion”, do not need to be undertaken on a commercial scale.

What problems/questions does the General Ruling raise?

Whilst the relevant time for the assessment for the use of the land as at 31 December, the General Ruling states that “focus should be placed on activities occurring during a period not overlong and not over short before and after that date. As a rule of thumb, approximately six months before and after 31 December may be considered a reasonable period for the inquiry.” There does not appear to be any express legislative support for this approach.

On the approach taken under the General Ruling it would be unclear as to whether the primary production activities need to be ongoing in nature and, if primary production commences (say) two months prior to 31 December, whether the exemption still applies.

Further, the General Ruling states that “cultivation covers the whole process of production from the soil to all aspects of husbandry and it is not limited to annual crops or crops with periodical production.” It also states that soil may need not be broken in order to constitute “cultivation” and that activity can simply involve the maintenance of firebreaks and establishing windbreaks.

On its face, this interpretation is considerably broader than the Commissioner’s approach to the other four heads of primary production as preparatory work, such as establishing firebreaks, removal of undergrowth or thinning of the trees, may qualify the land for the exemption under the general exemption, rather than under the “preparatory exemption” in the Act. The General Ruling would be improved if the Commissioner clarified that crops/timber need to be in fact growing for the exemptions under sections 65, 66 and 67 to apply.

What does the Section 67 Ruling Say?

The Section 67 Ruling focuses on the requirement that activities on land wholly or partly inside greater Melbourne and wholly or partly in the urban zone need to be ‘solely’ or primarily for the business of primary production. For a full description of what constitutes ‘greater Melbourne’ and the ‘urban zone’, please refer to the SRO guidance: https://www.sro.vic.gov.au/greater-melbourne-map-and-urban-zones. The Section 67 Ruling states that in considering this requirement, the Commissioner will consider, amongst other things:

1. whether the landowner has a purpose, as well as a prospect, of profit from the activity;
2. repetition and regularity of the activity; and
3. the size, scale and permanency of the activity (including the volume of operations and the amount of capital deployed) although it is acknowledged that a person can carry on a business in a small way.

Generally, the business of primary production on the land must be the principal business of the owner (except for a natural person in certain circumstances and a trustee of a family superannuation fund). The person(s) linked to any of the owner types (e.g. a specified beneficiary under a discretionary trust, the members of an SMSF, etc.) “must be normally engaged in a substantially full-time capacity in the business of primary production”.

The Commissioner states that he will assess this by comparing the time spent by that person on the business of primary production carried out on the land against the person’s responsibilities and commitments to their other endeavours and leisure pursuits.

What problems/questions does the Section 67 Ruling raise?

It is unclear what the Commissioner means by assessing a person’s leisure pursuits, so more information on what this involves would be helpful.

Further, where losses have been incurred, the Section 67 Ruling states that the taxpayer must demonstrate the presence of the other indicators of a business in sufficient strength, as well as a prospect of profit-making. There is no clear support for this approach in the text of the Act. The draft Section 67 Ruling currently does not provide comfort that a bona fide farming/primary production enterprise that is struggling with sales due to market forces (such as a lack of demand for a particular product) will not lose its primary production exemptions purely because it is making losses due to market forces.

Finally, example 6 of the Section 67 Ruling illustrates the example of Tania, a specified beneficiary of the landowning discretionary trust. The example states that “while regularly participating in the wheat cultivation activities, Tania is a director of a major construction company and 17 other companies. She also works as an inspirational speaker/life coach.”

The example of a person who is a director of 18 companies, regularly working on wheat cultivation activities and also working as a speaker and a life coach is excessive and does not appear to be based on any real-world examples. The Section 67 Ruling would be improved if this example was made a little less eccentric – for instance, would Tania be deemed to be normally engaged in the business in a full-time capacity if she only held one directorship at another company? Or if she was a life coach and a director? These are questions that the SRO will perhaps answer in the final version of the Section 67 Ruling.

We note that that these rulings are in draft. The industry consultation process has ended and we can expect a final draft following the Victorian state election.

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