On 13.4.22, the NSW Supreme Court held that Godolphin was entitled to exemption from land tax, on 2 of its properties in the Hunter Valley as ‘land used for primary production’ under s10AA(3)(b) of the Land Tax Management Act 1956 (NSW). The Court held that the dominant use of the properties was for the maintenance of animals for the purpose of selling their bodily produce or natural increase, notwithstanding the considerable expense and emphasis on training horses for success on the racetrack. There was an integrated business model of ‘race to breed and breed to race’ where the economics dictated that the breeding was paramount.
The Chief Commissioner had assessed Godolphin for land tax for the 2014-2019 tax years in respect of 2 properties (Kelvinside and Woodlands) in the Hunter Valley, contending that although the dominant use of the properties was for the maintenance of animals, that use was not for the requisite statutory purpose of selling those animals, their natural increase or bodily produce.
The NSW Supreme Court agreed with Godolphin that it conducted an integrated stud operation (involving both breeding and raising thoroughbred horses) such that the dominant use of both properties was for the maintenance of animals for the purpose of selling their bodily produce or natural increase.
In the Court’s view, the objectives of winning races and pursuit of stallion excellence were part of the overall objectives of increasing the value of Godolphin’s stud operations (being nomination fees in particular and sale of the majority of Godolphin’s progeny) and that the sales were sufficiently proximate – if that was a required element – to the maintenance of the animals on the properties.
Extracts from judgement
Taxpayer contentions
2 Godolphin contends that the Land was exempt from land tax on the basis of the exemption for rural land used for primary production conferred by s 10AA(3)(b) of the Land Tax Management Act 1956 (NSW) (Land Tax Management Act) because the dominant use of the Land, in each of the relevant land tax years, was for “the maintenance of animals … for the purpose of selling them or their natural increase or bodily produce”. In summary, Godolphin (which operates a thoroughbred stud) maintains that the dominant use of the Land is the maintenance of stallions for the purpose of selling their bodily produce (specifically, their semen) or their natural increase; the maintenance of mares, foals and other horses for the purpose of selling those mares, foals, and other horses or their natural increase; and/or the maintenance of cattle for the purpose of selling cattle and their natural increase.
Commissioner’s contentions
5 However, the Chief Commissioner argues that, while the dominant use of the Land was for the maintenance of animals, that use was not for the requisite statutory purpose of selling those animals, their natural increase or bodily produce. Rather, it is contended that the purpose was for breeding and training thoroughbred racehorses and spelling thoroughbred racehorses in between race events; and that any sale of the thoroughbred horses was ancillary or incidental to that purpose. Alternatively, to the extent that a purpose of sale did exist, the Chief Commissioner says that it was not the dominant purpose or sufficiently proximate to the current use of the Land for the maintenance of animals and therefore did not satisfy the statutory test set out in s 10AA(3)(b) of the Land Tax Management Act.
6 Further or in the alternative, the Chief Commissioner says that, to the extent that the Land was being used for the maintenance of animals for the purpose of selling their natural increase or bodily produce, that use was not dominant in comparison to other uses of the Land (including the breeding and training of thoroughbred horses for the purpose of racing and the spelling of racehorses in between races).
Determination of issues
255 Mr Cox explains the “breed to race, race to breed” model as being that the breeding and supply of stock for the racing stable on the one hand is followed by the racing stable improving the stock and creating the supply of bloodstock assets. This is reinforced by the fact that stallion covering fees are clearly the key revenue driver for the business.
256 The question thus is whether there are two separate activities (such that it is necessary to determine which is the dominant use on each parcel of land) or an integrated or composite activity (involving both breeding and raising) such that the dominant use of all parcels (whether for breeding, training or spelling) is for the purpose of the ultimate sale of the stallion’s semen and the broodmares’ progeny.
257 The Chief Commissioner emphasises that the horses are being bred and educated in order to race (and says that the fact that there is an incidental sale at some stage does not affect this).
258 I accept that much of the use of the Land is devoted to breeding, training and preparation of the horses for racing (and that an obvious objective is to maximise prize winnings or success on the track). However, viewed overall, I have concluded that this is an integrated operation in which the preparation of horses for racing is with the overall or dominant purpose or objective of increasing or maximising the revenue from the nomination fees (i.e., the sale of bodily produce) and from the sale of the progeny produced by the broodmares.
259 I do not accept that the integrated operation is for the dominant purpose of generating prizemoney (i.e., of racing). That does not make sense from an economic point of view. Thus (and assuming for the sake of argument for this purpose that one is looking for dominant purpose rather than dominant use – as the legislation provides) I have concluded that the document purpose of the stud operations is just that – to run a thoroughbred stud (with revenue generated from the stallions’ covering services and, to a lesser degree, from the sale of progeny and any racing success).
260 To the extent that the Chief Commissioner says that the vast sums spent on training for the racehorse are for the production of stallions who might be capable of being sires (noting that Mr Cox accepts that the chances of producing such a sire are statistically low), and points to the fact that a number of stallions who assist with nominations are purchased (not bred by Godolphin); it seems to me that the expenditure can only logically be explained by an objective intention to increase the value of the thoroughbred stud and the purchase of stallions to achieve that simply reinforces this conclusion.
272 I consider that factors such as the uneconomic nature of the operations were they to be confined to racing alone; and the evidence that racing prowess (of the horse and of its progeny in due course) is an important factor in the pricing able to be commanded for the sale of stallions’ semen, lead to the conclusion that this is indeed an integrated stud operation and that the dominant use of each of the parcels of land for each of the land tax years was for the maintenance of animals for the purpose of selling their bodily produce or natural increase.
(Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue , Ward CJ, [2022] NSWSC 430 – 13 April 2022)
[Tax Month – April 2022 – Previous Month, 18.4.22] [LTN 72, 19/4/22]