In March last year, the NSW Supreme Court set aside the NSW Office of State Revenue’s assessment for land tax in 2009-13 on certain lands at Terranora in the Tweed Valley held by Metricon.

The developer bought the $60m aggregation to subdivide for residential use. It side-stepped a land tax liability of around $1.2m per year by leasing it for $17,000 a year to fatten cattle. Their total savings – at the expense of the state and other taxpayers – were around $6m.

White J found this to be entirely in accord with the spirit and intent of the NSW Land Tax Management Act 1956.

In 2007 the lands were rezoned 2(c) Urban Expansion, for residential development, and Metricon bought it in 2008 and 2009. The developer applied to subdivide one of the five areas of land and supplied to the Department of Planning plans and reports including:

“Proposed Subdivision Plans; Landscape Master Plan; Agricultural Buffers Assessment; Cultural Heritage Assessment; Acoustic Report; Soil Contamination Assessment; Conceptual Stormwater Assessment; Ecological Assessment; Vegetation Management and Rehabilitation Plan; Conceptual Groundwater Impacts Assessment; Acid Sulphate Soils Management Plan; Revised Preliminary Engineering Report; Broad Geotechnical Engineering Assessment; Visual Impact Assessment; Biting Insect Management Plan; Bushfire assessment; Transport Assessment; Site Management plan; Draft Community Management Statement; Architectural Plans of Proposed Community Facility.”

Metricon paid around $2.2m in consultancy fees for these and other services in the tax years in question. The change of use charges may surprise some, but Metricon would certainly have factored them into the price they were prepared to pay for the land.

Under s10AA of the Act, land is only to be taken to be used for primary production if it is the dominant use of the land. This was the sole issue to be determined in the case.

The Commissioner submitted that Metricon “incurred ongoing expenses in connection with the development of the land and these expenses exceeded the financial outlay and financial return from primary production.”

White J found “…the work was done and expenses were incurred in connection with an intended future use.”


“However a “use” for the purposes of s10AA must be a current use, not an intended future use. It does not follow that Metricon was using the land because it had acquired it for their purposes of residential development and the land formed part of its “land bank”, meaning, that it became part of its trading stock.

“But the fact that land is held does not mean it is being used.”

A Supreme Court judge finding a lessee agisting 103 steers is the dominant use of a piece of land while the holder spends $2.2m on development consultants is truly bizarre. Cattle grazing may be highly visible, yet the development work created 32 times the economic activity.

But the fault lies with s10AA, not White J, who can only interpret the intent of the law.

Clutching this judgement, any NSW land holder wishing to avoid paying land tax only has to lease it to cultivate crops, maintain animals, birds, fish or bees, or propagate mushrooms, orchids or commercial flowers. Such an arrangement could be for a peppercorn and meet the spirit of the law.

The Supreme Court judgement can be found here and I recommend taking the time to read it.

The NSW Land Management Act 1956

NSW’s land tax act is sorely in need of review – replacement actually. The list of amendments to this 61 year old law runs 11 closely written pages. The result is shambolic, a lawyer’s meal ticket and a tax-avoider’s dream.

NSW would do well to model a new act on Victoria’s Land Tax Act 2005 as amended.

In replacing the law, NSW could end some of the most outrageous wheezes that sorely limit the benefits land tax offers to land holders and oblige government to look elsewhere for revenues:

1. Average value of land. In calculating land values for tax purposes, NSW averages the values over the last three years. This pro-cyclic feature – no, not a good thing, it amplifies price rises and falls – adds volatility to the land cycle by smothering land tax’s important automatic stabiliser benefits.

When land prices are rising, NSW land tax trails and understates future liabilities. This understatement is directly capitalised into and artificially inflates contemporary market values.

When prices are falling, holders’ current land tax payments reflect past, more buoyant conditions and impose actual financial harm on land holders, just as the need for relief is at its greatest.

2. Tax Threshold Indexation. Every year NSW adjusts the land tax threshold based on the percentage change in land values in the year preceding. Put another way, land tax retreats as land prices rise: hitched up by its own trousers!

This intentional structural flaw exists to exempt low value land, the land allegedly held by the poor. In 2017, the threshold is $549,000. As the principal place of residence and agricultural land are exempt, land tax falls only on investment properties and holiday houses. An objective observer would be at a loss to understand why investors with over half a million dollars placed in land are extended such kindness.

Not taxing low-value land inflates the market value of inexpensive parcels, makes their rents and market prices extra sticky and ensures any land price correction is borne solely by the holder.

Worse, threshold indexation is a one-way ratchet and cannot fall when land prices retreat (Division 4A 62TBA(2)), depriving government of revenues and introducing further market distortions.

3. Premium Land Tax. NSW operates a two speed tax schedule. In 2017, tax of 1.6 per cent is payable on land valued over the $549,000 threshold. A ‘premium’ rate of 2 per cent (25 per cent higher) applies to land holdings valued above $3,357,000. Therefore, the tax schedule is almost flat.

Economic theory directs a flat land tax with a nil threshold produces the least behavior distortion and is an ideal worth enshrining in the law.

4. Land valuation frequency. NSW commissions biennial land valuations to calculate council rates and land tax. The two-yearly valuations blunt land tax’s automatic stabiliser function. The more tightly land tax obligations are connected to the contemporary market price of land, the more effective the signalling to holders of their obligation to put land to its highest and best use.

Victoria has just moved to annual land valuations, an easy and inexpensive reform made possible by innovations in computer assisted mass appraisal. Prosper commends this reform to NSW.

5. Agricultural englobo. The extreme caution of farmers about land tax is entirely understandable when, for example, the highest use for a parcel is dryland sheep or beef grazing. This land is near valueless and the fewer civic improvements the better. But nested in this high-minded principle to not burden agriculture are land holder agendas to switch to higher uses and capitalise without cost.

In contrast, Victoria’s Land Tax Act 2005 defines its primary production exemption within Melbourne’s Urban Growth Boundary and other urban zones much more tightly. Only a land holder directly and ‘normally engaged in a substantial full-time capacity in the business of primary production’ is eligible for land tax relief.

6. The ‘Tennis Court’ exemption. Prosper sees the Principal Place of Residence (PPR) exemption from land tax as a serious behavior-distorting tax concession. Separately titled land contiguous with a PPR and used solely for private benefit is also deemed exempt.

Multiple titled holdings can come about in a number of ways and from a range of landholder intentions. Some are old impractical subdivisions, overtaken by zoning changes or holder preference. Others are land holders buying more open space – for a vegetable patch, a tennis court or simply to distance themselves from neighbours. For others again, this is a form of land banking sheltered from tax by the PPR exemption.

While individual responses to removing the PPR exemption on contiguous land would vary, the overall consequence is to prompt economic activity as holding vacant land has a cost. Holders on old impractical subdivisions can amalgamate titles and restore the PPR status, a straightforward and inexpensive administrative exercise. Others have an obligation to pay for the privilege of landbanking.

This list of shortcomings is not complete, but should be enough to give reformers pause to ask the question: Is the NSW Land Management Act 1956 fit for purpose?