Edited version of private ruling

Authorisation Number: 1011757543748

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Ruling

Subject: Capital Gains Tax

Question 1

Is the activity of cattle agistment carried on by the taxpayer able to be classed as a small business?

Answer

No

Question 2

Is a property that the taxpayer has used for agistment eligible for the small business CGT concessions on sale?

Answer

No

Relevant facts and circumstances

The taxpayers purchased vacant land more than 200 acres in 199X, adjoining their beef cattle property. From the date of purchase the property has been used to agist dairy heifers owned by another farmer.

Terms of the agistment require the following duties to be undertaken by the taxpayers:

· all repairs and maintenance to fences

· fertilizer spreading

· irrigation of pasture

· pasture management

· assistance with drenching and management of livestock

· weed spraying and control

· pest control

The taxpayers undertook these duties in conjunction with the management of their own beef cattle property up until 200X when the beef cattle operation ceased.

The work in relation to the maintenance of the property is undertaken solely by the taxpayers. No contribution is made by the owner of the agisted cattle to the management of the property.

The taxpayers perform the same duties and management functions as would be required if they had been running their own livestock.

The sale of the agisted property will result in a gain and the taxpayers have assets valued at less than $6million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1(1)

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Division 152

Reasons for decision

Question 1

Summary

The activities carried on by the taxpayers do not constitute the carrying on of a business of agistment.

Detailed reasoning

Carrying on a business

Agistment income is assessable according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Taxation Ruling IT 225 states that agistment income may be part of primary production income if agistment is part of the normal activities of primary production or arises from the use of the assets of primary production. However, the leasing out of land for agistment does not constitute the carrying on of a business.

Agistment can largely be understood as the taking in and feeding of livestock for payment.

The term 'business' is defined in subsection 995-1(1) of the ITAA 1997 as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Paragraph 13 of Taxation Ruling TR 97/11 provides the following indicators that are relevant when considering whether a business is being carried on:

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

(b) whether there is more than just an intention to engage in business

(c) whether there is a purpose of profit as well as a prospect of profit,

(d) whether there is repetition and regularity to the activity,

(e) whether the activity is of the same kind and carried on in a similar manner to businesses in the industry,

(f) whether the activity is planned, organised and carried on in a business-like manner,

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

(h) whether the activity is better described as a hobby or recreation.

No one indicator is decisive and all indicators should be considered in combination and as a whole (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; 5 AITR 548) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Whether the activity has a significant commercial purpose or character:

For an activity to be a business, it is necessary that it is carried on for commercial reasons and in a commercially viable manner. Commercial purpose or character is an overall impression that is gain from the activities being undertaken as a whole. A strong indicator to there being a business is when the activity being undertaken is carried out in a similar manner to that of other businesses in the industry.

The activities carried out by the taxpayers are similar to those normally carried out by property owners who derive income from the agistment of livestock. This is not a characteristic of a business being carried on.

Whether there is more than just an intention to engage in business:

Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. … At the end of the day, the extent of activity determines whether the business is being carried on. This is a question of fact and degree.

An intention to carry on a business is an important but not determinative factor. As well as intention, there must also be activities which indicate that the person concerned is carrying on a business.

In this present case, the taxpayers have previously carried on a beef cattle business however this ceased in 200x and there is no indication that the current activities are of a temporary nature.

Whether there is a purpose of profit as well as a prospect of profit:

In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said:

In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit…

In this present case a profit (or loss) derived from agisting property is not determinative that a business is carried on.

Whether there is repetition and regularity to the activity:

In this present case, it is considered that there is repetition and regularity to the agistment activities as the taxpayers have been carrying on those activities since the purchase of vacant land in 199x.

Whether the activity is of the same kind and carried on in a similar manner to businesses in the industry:

In this present case, the taxpayers provide some assistance to the agistee in relation to drenching and livestock management and maintain the property in good condition for rent. The manner of the activities undertaken are not enough to be of the same kind or carried on in a similar manner to businesses of primary production but they are similar activities to those carried on in property agistment.

Whether the activity is planned, organised and carried on in a business-like manner:

The terms of the agistment would suggest a planned and well organised activity.

The size, scale and permanency of the activity:

The larger the scale of the activity, the more likely it will be that the taxpayer is carrying on a business. However, as per Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, the size or scale of the activity is not a determinative test and a person can carry on a business in a small way. The smaller the scale, the more important the other indicators become.

In this present case, the scale of the activities includes 2xx acres purchased for agistment in 199x. The taxpayers have agisted the property since that time so there is permanency in the operations.

Whether the activity is better described as a hobby or recreation:

Not Applicable

Agistment business

In AAT Case 10,331; 95 ATC 404; (1995) 31 ATR 1146 Senior Member Fayle said:

Agisting another's livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where a land owner is charged with the management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals. For example, if a land owner agreed with the owner of a herd of cattle to ensure their good health, proper veterinary care and husbandry of the progeny, marketing of their bodily produce and maintenance of the herd, then that land owner may be carrying on a business of primary production…

Providing assistance with drenching and management of livestock and maintaining the property does not support a contention that an agistment business is carried on.

Primary production business

Subsection 995-1(1) of the ITAA 1997 provides that a taxpayer carries on a primary production business if the taxpayer carries on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

In this case, the agistee is carrying on the primary production of cattle farming. It cannot be said that the taxpayer is carrying on a business of maintaining animals for the purpose of selling them or their bodily produce. The taxpayer maintains the property regarding fencing, fertiliser spreading, irrigation of pastures, weed and pest control and assisting the agistee with drenching and management of livestock.

The activities of the taxpayer in relation to the agistment property do not amount to the carrying on of a business.

Question 2

Summary

The sale of the property held for agistment activities does not qualify for the small business CGT concessions because it does not satisfy the conditions of being an active asset used for carrying on a business.

Detailed reasoning

The activities carried on by the taxpayer in relation to agistment do not constitute the carrying on of a business therefore the property under agistment is not an active asset for the purposes of section 152-40 of the ITAA 1997.

Accordingly, the small business CGT concessions under Division 152 of the ITAA 1997 cannot apply to a capital gain made on the sale of the property.

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