Edited version of private ruling

Authorisation Number: 1011716150412

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Ruling

Subject: Carrying on a primary production business

Question

Are you carrying on a primary production business?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a rural zoned property for the purpose of conducting a primary production activity.

The area has the correct climate, rainfall and soil, with adjustments, that is required for the growing of your produce.

You have commissioned consultants to assess the viability of establishing this activity on your property. These consultants are satisfied that ideal conditions exist in the location of your property to establish a viable activity.

You have thoroughly researched the activity and have commissioned a feasibility study on the viability of the business venture from planting through to marketing.

You have resourced the activity and have sufficient capital reserves that enable the venture to be undertaken without the need for third party funding.

You reside at the property and as you are not engaged in any other occupation you will be working full time in the activity.

You have invested a sum of money in the project with the total cost of the property being a certain amount and plant and equipment valued at a lesser amount than the cost of the property.

You have provided a copy of your business plan together with projected income and expenditure from 2009 to 2018.

There is an intention to make a profit and you believe that a profit will be made which is confirmed by the independent report from the consulting firm.

You possess the organisational, management and business skills to conduct the operation in a business like manner.

The size of the operation is commensurate with other like activities and will produce commercial returns within eight years of planting.

The business will generate losses for several years before full production and you wish to claim expenses and outgoings until the business is cash flow positive.

You purchased a number of trees from an organisation in late 2010. The trees will be delivered and planted in mid 2011.

The consulting firm will be offering advice on a consultancy basis for growing and marketing.

Reasons for decision

Taxation Ruling TR 97/11 sets out the following factors or indicators that the courts and tribunals have taken into account in determining if a business exists for tax purposes:

(a)   whether the activity has a significant commercial purpose or character

(b)   whether the taxpayer has more than just an intention to engage in business

(c)   whether the taxpayer has a purpose of profit as well as a prospect of profit

from the activity

(d)   whether there is repetition and regularity of the activity

(e)   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

(f)   whether the activity is planned, organised and carried on in a businesslike

manner such that it is direct at making a profit

(g)   the size, scale and permanency of the activity and

(h)   whether the activity is better described as a hobby, a form of recreation or a

sporting activity.

While no one factor can be used to determine whether you are carrying on a business, taken together they should indicate whether your activity is a business.

We consider that, by applying the facts that you have provided to the indicators above, your activities constitute the carrying on of a business for tax purposes.

As it is considered you are carrying on a primary production business, the income derived from the sale of the produce is assessable and expenses incurred in growing the produce are deductible.

Commencement of business activities

In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are:

§ purpose, intention and decision;

§ acquisition of a business structure; and

§ commencement of business operations

In your case, your business activity is to receive income from the sale of produce.

Purpose, intention and decision:

The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. This process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner.

It is apparent from the information you have provided that you have decided the form of the business and that you have shown some commitment to the activity by purchasing 300 trees together with soil preparation, irrigation and fencing in readiness for the conduct of the primary production activity.

Acquisition of a business structure:

Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. What the particular capital assets are will depend on the particular business activity.

For a business activity to commence, an appropriate business structure should be in place. As to what this structure will consist of, and its size, this will be a question of fact and degree, and depend on the nature of the business activity. 

Your proposed business activity is the growing of produce for the purpose of earning income from the sales. You planned the requirements you needed for this activity. You had also commenced soil preparation and you had acquired the minimum amount of business assets needed to commence your business activity.

Commencement of business operations:

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

It is accepted that, from the time of purchase of the oak trees, you had gone beyond merely having an intention to engage in business and there had been some activity.

It is important in evaluating these activities to have a proper regard to the characterisation of your business. For example, as your business activity is a primary production activity, involving the growing of produce, then the purchase of the trees could be seen as the commencement of that business.

You have a business structure from which you can sell your product and activities which will make up the regular and systematic conduct of your business activity are being undertaken.

Conclusion:

Based on the information you have supplied, we have formed the opinion that you commenced carrying on a business from the time you committed to the purchase of the trees by paying the deposit in late 2010.

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