Land tax is an often-overlooked state tax that, unlike income tax or GST, doesn’t make headlines but significantly affects property owners once certain thresholds are met. This tax is applicable when the unimproved value of land surpasses a specific amount, which varies by state. Typically, principal places of residence are exempt, but investment properties, commercial holdings, and certain rural land can be taxed.
Individuals and small businesses should pay close attention to land tax since exemptions can mean the difference between a manageable annual payment and an unexpected financial burden. A recent case in New South Wales (the Zonadi case) highlighted when land utilised for growing crops qualifies for the primary production exemption. The lessons from this case are pertinent for farmers, wine producers, and anyone managing mixed-use rural land.
The basics of land tax
All states and territories in Australia, with the exception of the Northern Territory, impose land tax. Key characteristics include:
- Assessment Date: Typically set at midnight on 31 December of the previous year (for instance, the 2026 assessment is based on ownership and use as of 31 December 2025).
- Thresholds: Differ across regions; in 2025, for example, the NSW threshold stands at $1,075,000, while in Victoria, it is $300,000.
- Exemptions: Include principal places of residence, primary production land, land owned by charities, and specific concessional categories.
- Rates: Operate on a progressive scale, with larger landholdings facing higher rates.
Land tax is distinct from council rates, which fund local services; it is a state revenue measure, payable annually and calculated on the total taxable value of land holdings.
Primary production exemption
The majority of states exempt land employed for primary production from land tax. The objective is straightforward: farmers should not be penalised with land tax for using their land to generate food, fibre, or similar goods. However, definitions of what constitutes primary production can vary.
Generally qualifying uses include:
- Cultivation (growing crops or horticulture)
- Animal husbandry (grazing, dairying, poultry, etc.)
- Commercial fishing and aquaculture
- Beekeeping
While this might seem clear-cut, the nuances lie in the purpose and manner of land use.
Lessons from the Zonadi case
The Zonadi case centred around an 11-hectare vineyard in the Hunter Valley, featuring:
- 4.2 hectares of vines producing wine grapes
- A cellar door and wine storage facility
- A residence and tourist accommodation
- Various trees, paddocks, and access ways
Throughout five land tax years in question, the taxpayer sold some grapes directly but primarily used the harvest to create wine off-site, which was then sold at the cellar door. Income was generated from both grape sales and tourist accommodation.
The NSW Tribunal was tasked with determining whether the primary use of the land was cultivation aimed at selling the produce of that cultivation (as specified in section 10AA of the NSW Land Tax Management Act).
The Tribunal’s decision was not in favour of the taxpayer. It stated:
- The cultivation of grapes is indeed a form of primary production.
- However, using those grapes for wine production did not meet the qualifications, as the exemption applies only when the produce is sold in its natural state. Wine is deemed a processed product.
- While some grapes were sold directly, the majority of income came from wine sales.
- Thus, the dominant use of the land was for cultivation to produce and sell wine, which is not exempt.
The exemption was denied, resulting in a land tax obligation for the taxpayer.
Why this matters
This case serves as a critical reminder for small businesses, especially those that blend agricultural practices with value-added activities such as processing or tourism. The distinction between primary and secondary production can decide the availability of a land tax exemption.
If a significant portion of income stems from cellar door sales, farmstay operations, or product manufacturing, the exemption could be jeopardised, even if cultivation occurs on the property.
Different rules in Victoria
Victoria adopts a more inclusive definition, recognising primary production as cultivation intended for selling produce in a natural, processed, or converted form. Therefore, grapes sold for wine production would still be classified as primary production.
The only additional requirement lies in the “use test,” which varies based on location:
- Outside Greater Melbourne: land must primarily serve primary production.
- Within urban regions: land must either solely or primarily engage in primary production activities.
Had the Zonadi vineyard been in Victoria, the ruling could have turned out significantly differently, likely resulting in an exemption.
State-based comparisons
Here’s a brief overview of how land tax treatment varies among the states concerning cultivation and primary production:
| State | Primary Production Definition | Key Use Test | Treatment of Processed Produce |
|---|---|---|---|
| NSW | Cultivation aimed at selling produce in its natural state | Dominant use must be cultivation for selling natural produce | Wine made from grapes is not exempt |
| VIC | Cultivation for selling produce in a natural, processed, or converted state | Primarily or solely, depending on location | Wine, dried fruit, etc., are still exempt |
| QLD | Broad definition, including cultivation, maintenance of animals, etc. | Must be used exclusively or primarily for primary production | Processed products accepted |
| SA | Similar to NSW, concentrating on dominant use | Based on actual and predominant use | Narrower interpretation, similar risks as NSW |
| WA | Exemption applies to land used for primary production (cultivation, grazing, etc.) | Owner must engage in a business of primary production | Generally broader interpretation than NSW |
| TAS | Land used for primary production is exempt if actively in use for that purpose. | Based on use as of 1 July | Broad coverage |
| ACT | Land tax applies solely to residential land | Primary production is not typically an issue | N/A |
Tips and strategies for individuals and small businesses
- Understand the dominant use test
Authorities in NSW and SA assess all land uses. If financial returns from tourism or value-added services predominate, your exemption may be at risk. - Document use and income streams
Maintain records detailing land usage for cultivation, time and effort expended, and income allocation across activities. This information is vital if challenged. - Consider state differences
For those with land across different states, understand the variances in laws and regulations. Victoria and Queensland generally offer more leeway in recognizing processed or converted products. - Review structures
Utilising trusts or companies might alter liability, but exemptions hinge on the usage, not the ownership structure. Confirm your entity’s eligibility. - Timing matters
Use is evaluated as of a specific date (for example, 31 December in NSW). Authorities may review usage in the months before and after, making documentation of seasonal activities crucial. - Beware of mixed uses
Integrating a farm with accommodation or hospitality might shift the balance. Increased non-farming income may lead to higher land tax bills.
Conclusion
Australia’s land tax system can appear convoluted and inconsistent. For individuals and small businesses, particularly within farming and agribusiness, comprehending the nuances of primary production exemptions is essential. The Zonadi case highlights the delicate distinction between cultivation for sale in its natural form and cultivation feeding into a processing operation.
Key takeaways include:
- In NSW and SA, proceed with caution if most income originates from processed products like wine, cheese, or farmstay tourism.
- In Victoria and Queensland, the regulations are typically more accommodating, acknowledging processed or converted items.
- Thorough documentation of use, income, and labour is critical if your circumstances are challenged.
For small landholders, having a clear understanding of actual land usage and income sources can prevent costly conflicts. If in doubt, seek advice promptly, as once the Commissioner issues a land tax assessment, it is your responsibility to prove your eligibility for an exemption. For more information, check our special offer.
