Land tax - Primary production exemption for land in urban zone

LTA-011

Preamble

The Land Tax Act 2005 (the Act) imposes land tax on all taxable land in Victoria each year unless an exemption or concession applies. Depending on the location of the land, Division 2 of Part 4 the Act exempts land that is used primarily for primary production or used solely or primarily for the business of primary production. 

Land is eligible for the exemption under section 67 of the Act, if the Commissioner determines that the land is located wholly or partly in greater Melbourne that is wholly or partly in an urban zone, and the land is used solely or primarily for the business of primary production and the owner of the land has satisfied the relevant ownership tests.

Urban is defined in section 64(1) of the Act to mean a zone or part of a zone under a planning scheme in force under the Planning and Environment Act 1987, that has been declared to be an urban zone by the Governor in Council for the purposes of the primary production exemption in Division 2 of Part 4 of the Act.

With the declarations of new zones, urban zones change over time. To assist with the determination of whether land is wholly or partly in an urban zone, the SRO website provides an updated list of all current and historical declarations of urban zones. 

To claim the exemption under section 67 of the Act, section 69 of the Act requires that the owner make an application to the Commissioner and provide all the relevant information and evidentiary documents. As set out in Revenue Ruling LTA-010 - Exemption for primary production land, the onus is on the owner to prove that the exemption under section 67 applies.

The purpose of this ruling is to provide the Commissioner’s interpretation of the requirements for the exemption under section 67. Please read this ruling in conjunction with Revenue Ruling LTA-010 – Exemption for primary production land. This ruling is provided as a guide only and is not exhaustive. If your circumstances are not covered in this ruling, please consider applying for a private ruling in accordance with Revenue Ruling GEN.009v3 – General Information on Private Rulings.

Ruling

The essence of the exemption under Subdivision 4 of Division 2 of Part 4 of the Act is that there must be a direct connection between the landowner, the business of primary production and the subject land. For land to be eligible for the exemption, all the following conditions must be met:

1. the land must meet the location requirements and usage requirements by the owner, and
2. the landowner must meet the relevant ownership criteria. 

The location requirements of the land are that the land must be:

1. Wholly or partly in greater Melbourne - section 67(1)(a)(i), and
2. Wholly or partly in an urban zone – section 67(1)(a)(ii).

The usage requirement of the land under section 67(1)(a)(iii) is that the landowner must use the land solely or primarily for the business of primary production.

There are separate ownership criteria under the Act that must be met depending on whether the owner is:

1. a natural person (section 67A)
2. company that is not acting as a corporate trustee (section 67B)
3. trustee of a family superannuation trust (section 67C)
4. trustee of a discretionary trust (section 67D)
5. trustee of a trust (other than a discretionary trust or superannuation trust) or unit trust scheme (section 67E), or
6. Where land is owned by joint owners, section 67F requires that each joint owner must meet the relevant ownership criteria.

Used solely or primarily for the business of primary production

The meaning of ‘used primarily for’ has been discussed in detail in LTA-010.

The word ‘solely’ is not defined in the Act. Therefore, it is appropriate to apply its ordinary dictionary meaning being ‘the only one or ones or only’. On this basis, the words ‘used solely… for’ should be taken to mean ‘used only … for’.  

For the exemption under section 67(1) to apply, the land must be used solely (only) or primarily for a business of primary production by the owner. Primary production is defined in section 64(1) and is discussed in detail in LTA-010.

The word ‘business’ is not defined in the Act and is to be given its ordinary, general meaning. The question of whether an activity amounts to a business is a question of fact and degree. It depends on a number of indicators which must be considered in combination and as a whole, no single indicator is necessarily determinative. Relevant indicators include (but are not limited to):

1. whether the activity has a 'significant commercial character' (some of the other factors below also form part of this factor)
2. whether the landowner has more than just an intention to engage in business
3. whether the landowner has a purpose of profit as well as a prospect of profit from the activity
4. repetition and regularity of the activity
5. whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business
6. whether the activity is carried out on in a systematic way and business-like manner such that it is directed at making a profit (including the keeping of books and records)
7. the size, scale and permanency of the activity (including the volume of operations and the amount of capital employed), although it is acknowledged that a person can carry on a business in a small way, and
8. whether the activity is better described as a hobby or form of recreation or a sporting activity.

The question of whether there is a business being carried on is determined based on a general impression gained from having regard to the nature and extent of the activities under review, as well as the purpose of the entity engaging in them. A mere intention to carry on a business is insufficient, there must be actual activity/activities that amount to a business.

This means hobby farming conducted as a pastime, pursuit or diversion and not as a business is not eligible for the exemption.

Where losses have been incurred, the taxpayer is required to demonstrate the presence of the other indicators of a business in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. 

Land used solely or primarily for agistment is ineligible for the primary production exemption under section 67 of the Act. This is because the owner of the land must use the land in a business of primary production to qualify for the exemption. Accordingly, the landowner must be engaged in a business of maintaining animals to sell, not in leasing the land out for agistment or maintaining animals for a fee. 

The evidentiary documentation required to establish that a business of primary production is being carried on on the land include:

1. Evidence and details of certification of the relevant primary production activity (eg. National Livestock Identification Service (NLIS), Property Identification Code (PIC) etc)
2. Financial records including balance sheet, profit and loss statement, etc.
3. Details of system and organisation utilised in the day-to-day operation of the business
4. Details of the methods employed in the primary production activity
5. Evidence of sales of any primary production activity
6. Details of the person or persons carrying out the business
7. Evidence of stock movement, volume of harvested produce, method of stock storage, etc.
8. Evidence and details of transactions were entered into on a continuous and repetitive basis, and
9. A business plan that may contain details of the relevant primary production activities, research, information, planning and estimates in relation to current and expected use of lands and scale of business expenses, sales, revenue and profit.

Ownership tests

The ownership tests for all owner types are set out in the table below:

Section Ref:	Owner type	Entity requirements	Ownership Requirements
67A	Natural person	The natural person owner is not acting in the capacity as trustee of a trust to the subject land, and   The natural person or their relative (as defined in section 3(1) of the Act) carries on the business of primary production referred to in section 67(1)(a)(iii) - the Commissioner will accept that the natural person (or their relative) is carrying on the business of primary production in relation to the land if the person (or their relative) effectively manages and controls that business, regardless of the type of business structure used (e.g. sole trader, partnership, company or trust).	The natural person owner or their relative is normally engaged in a substantially full-time capacity in the business of primary production referred to in section 67(1)(a)(iii).
67B	Company	The company must act in its own right and it is not a corporate trustee, The company must carry on the business of primary production referred to in section 67(1)(a)(iii), and That business must be the company’s principal business.	All shares must be beneficially owned by natural persons, and  If dividends have been paid to all shareholders over the past three years or since incorporation (whichever is shorter), dividend payments must be in proportion to their holdings, and 50 per cent or more of the dividends must have been paid to persons who are normally engaged in a substantially full-time capacity in the principal business of the company, or whose relative or relatives were normally engaged in a substantially full-time capacity in that business or Where no dividends have been declared over the past three years or since incorporation (whichever is shorter), 50 per cent or more of the issued share capital must be beneficially owned by persons normally engaged in a substantially full-time capacity in the principal business of the company, or whose relative or relatives were normally engaged in a substantially full-time capacity in that business.
67C	Trustee of superannuation trust	Superannuation trust within the meaning of section 3(1) of the Act	All the members or beneficiaries (as the case requires) of the trust are relatives, and At least one member or beneficiary (as the case requires) of the trust is normally engaged in a substantially full-time capacity in the business of primary production referred to in section 67(1)(a)(iii).
67D	Trustee of discretionary trust	The trustee must carry on the business of primary production referred to in section 67(1)(a)(iii), and That business must be the principal business of the trust.	Each specified beneficiary* is a natural person or At least one of the specified beneficiaries is a natural person and each of the remaining specified beneficiaries is either: a charitable institution or a trustee of a charitable trust, a company, all of the shares in which are owned by one or more of the specified beneficiaries of the discretionary trust who are natural persons, or a trustee of a trust (except a charitable trust), all of the beneficiaries or specified beneficiaries of the discretionary trust who are natural persons, and At least one of the specified beneficiaries, or a relative of at least one of the specified beneficiaries, is normally engaged in a substantially full-time capacity in the principal business of the trust.
67E	Trustee of a trust (other than a discretionary trust) or a unit trust scheme	The trustee must carry on the business of primary production referred to in section 67(1)(a)(iii), and That business must be the principal business of the trust or unit trust scheme.	Each beneficiary of the trust or unitholder is a natural person who is entitled under the trust deed to an annual distribution of the trust income, and  At least one of the beneficiaries or unitholders, or a relative of at least one of the beneficiaries or unitholders, is normally engaged in a substantially full-time capacity in the principal business of the trust.
67F	Joint owners	Each joint owner must meet the entity requirements for relevant owner type in section 67A, 67B, 67C, 67D, or 67E.	Each joint owner must meet the ownership requirements for relevant owner type in section 67A, 67B, 67C, 67D, or 67E.

 

* A specified beneficiary is a person who has been specified in writing under the trust deed as a beneficiary whom, by the terms of the trust, the whole or any part of the trust income or property may be distributed or vested in, in the event of the exercise of a power or discretion in favour of that person, or in the event that a discretion conferred under the trust is not exercised.

For the purposes of this exemption, section 67(2) excludes the following entities from being the owner of land:

1. a beneficiary of a trust (including an implied or constructive trust) to which the land is subject; or 
2. a unitholder in a unit trust scheme to which the land is subject. 

Except for a trustee of a family superannuation fund, the owner of the land must carry on the business of primary production referred to in section 67(1)(a)(iii) on the land for which the exemption is claimed. 
 

Principal business

Upon establishing that a business of primary production is being carried on on the land by applying the indicators set out above, that business must be the principal business of the owner (except for a natural person in certain circumstances and a trustee of a family superannuation fund). If a different business of the entity is the principal business, or if there is no principal business, the land is not exempt. The word ‘principal’ is not defined in the Act. It has been accepted that the ordinary meaning of ‘principal’ when used as an adjective is the chief, first or highest in rank or most important. In circumstances where there are multiple businesses and no one business can be considered as 'principal' then the requirement of a 'principal' business being that of primary production being carried on on the land will not be met. 

Normally engaged in a substantially full-time capacity in the business of primary production

Finally, a common concept in all the ownership requirements is that a person(s) linked to any of the owner types (eg. a specified beneficiary under a discretionary trust) must be normally engaged in a substantially full-time capacity in the business of primary production referred to in section 67(1)(a)(iii). This means regular participation in the business for a considerable part of that person’s time in their particular context. 

Generally, the Commissioner will compare time spent by that person on the business of primary production carried on on the land against time spent by the person on other responsibilities and commitments to their other endeavours and other activities. 

The evidentiary documentation required to establish that the relevant ownership test is met includes:

1. If the owner is a company, full details of its shareholders and details of dividends paid in the last three years or since incorporation (whichever is shorter).
2. If the owner is a trustee of a superannuation trust, a complete copy of the trust deed and details of its members or beneficiaries and any other relevant documents to show that it is a superannuation trust as defined in section 3(1) and its members or beneficiaries are relatives. 
3. If the owner is a trustee of a discretionary trust, a complete copy of the trust deed, details of all the beneficiaries (including specified beneficiaries), and
   • if one of its specified beneficiaries is a charitable institution or a trustee of a charitable trust, the constitution or memorandum of association and details of the activities to prove that the specified beneficiary is a charitable institution or a trustee of a charitable trust
   • if one of its specified beneficiaries is a company, details showing that all of the shares in the company are owned by one or more of the specified beneficiaries who are natural persons, and
   • if one of its specified beneficiaries is a trustee of a trust (except a charitable trust), the trust deed of that trust showing that all of the beneficiaries or specified beneficiaries of that trust are specified beneficiaries of the discretionary trust and are natural persons.
4. If the owner is a trustee of a unit trust scheme or any other trust, a copy of the trust deed and details on all the beneficiaries or unitholders to prove that at least one of them is a natural person who is entitled to an annual distribution of the trust income under the trust deed. 
5. If the owner is a natural person, company, trustee of a discretionary trust, unit trust or any other trust, relevant documents and details to prove that they are carrying on a business of primary production as referred to in section 67(1)(a)(iii). If the natural person owner is carrying on the business through a business structure, relevant documents to prove that they or their relative has control of the business.
6. If the owner is a company or trustee of a discretionary trust, unit trust or any other trust, relevant documents (e.g. financial statements) to establish their principal business. If there are multiple businesses being carried on on the land, the financial records of each business on the land should be provided to establish the principal business of the owner. 
7. To prove that a relevant natural person is normally engaged in a substantially full-time capacity in the business of primary production, relevant documents including documents detailing the person’s other responsibilities and commitments and evidence of income derived from all sources.

COMMISSIONER OF STATE REVENUE

Rulings do not have the force of law. Each decision made by the State Revenue Office is made on the merits of each individual case having regard to any relevant ruling. All rulings must be read subject to Revenue Ruling GEN.001.