Edited version of private ruling

Authorisation Number: 1011834531484

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Agistment income - Main use to derive rent

Relevant facts

You acquired a property after September 1985.

This property is your home and you reside there full-time.

The property is currently utilised as following:

· x acres of crops

· y acres of bushland

· z acres of driveway and gardens

· a significant number of acres to earn agistment income.

You have engaged in rural activities with the intention of the farm providing a source of income. During the period you have owned the property you have run livestock, established crops, and agisted cattle.

You are no longer operating the crops as the returns did not justify the considerable effort and expense involved. Also, the past year has been too wet for any harvest.

You received informal but 'knowledgeable' advice that there was a market for the high quality agistment of dairy heifers. Due to your veterinary qualifications and the facilities available on the property you determined this to be a sensible option. You determined that you could derive as much income offering high quality agistment and associated services as you could from buying, feeding and selling cattle.

The partnership commenced to agist the significant area of the property 2 years after purchase. The land has been used exclusively for this purpose since that time.

You allow unrelated clients to graze their cattle on the land for determined periods of time, in return for agistment fees. You charge an annual fee for agistment. For the herd currently being agisted, this equates to around $Z per head. The current 'going rate' for agistment in the local area is around $X (slightly less) per head.

The services provided for this charge are:

· pasture and supplementary feeding when appropriate

· maintenance of fences - you state this is substantial as the property is bordered on 3 sides by large trees which often fall onto the fences

· ensuring safe and clean water supply - cleaning troughs and filling from bore

· daily surveillance of cattle for health and welfare

· treatment of cattle when sick

· maintenance and repair of cattle handling facilities

· yarding and assistance with loading for transport, and

· moving stock between paddocks.

The cattle on agistment are dairy cattle that are being rested. The owners of the cattle are not from the area. They transport the cattle to and from the property only. The cattle are in the sole care of the taxpayers during the agistment period. The cattle owners are permitted to access the property

You provide any treatments required, such as vaccinations and basic vet care. These services are included in the charges. Additional veterinarian care that may be provided is charged to the client.

The livestock carrying capacity of the property is 50 head of cattle.

You currently have on agistment 30 head of cattle. The usual headcount varies according to the season, but is usually around 50 head. For periods during the drought, no cattle could be agisted.

The agistment enterprise requires:

· surveillance of 1 hour per day, and

· maintenance of the water troughs, treatments and other activities requires around 30 minutes per day.

One partner is employed in other employment in a full time capacity, and also works a further 18 hours or so per month in related activities.

The other partner has retired from full time paid employment and works away from the property for around 5 hours per month.

You do not enter into written agreements with the cattle owners.

Your insurance policy covers the grazing of the cattle.

You provide agistment for one client only at any given time.

The agistment tenures vary, and have been for periods of 1 year, 2 years, 9 years and 1.2 years.

You do not advertise as you are regularly approached to see if agistment is available.

You state the agistment income is not in the form of rent as:

· exclusive use of the land is not granted

· you retain access to the land.

· you retain the right to agist other customers cattle on the land, or to use the land for any other purpose

· clients are not able to assign their right to use the land to others, or to use the land for any purpose other than the agistment of their cattle.

You have requested that the scope of the ruling be limited to 'the main use to derive rent'. As such, it is beyond the scope of this ruling to consider whether the property actually satisfies the definition of active asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40
Income Tax Assessment Act 1997 section 152-40(4)(e)

Reasons for decision

Question 1

Summary

The agistment income is not considered to be 'rent' for the purposes of paragraph 152-40(4)(e) of the ITAA 1997.

Detailed reasoning

Active asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used or held ready for use in the course of carrying on a business. However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Main use to derive rent

Taxation Determination TD 2006/78 discusses circumstances in which premises used in a business of providing accommodation for reward may satisfy the active asset test, notwithstanding the exclusion of properties deriving rental income. It provides that where premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Rental derives from lease type arrangements which as outlined above require exclusive possession. Agistment on the other hand is often more of a short term nature and does not require the granting of exclusive possession. Indeed agistment fundamentally differs from rent in that it is the act of taking in anothers animals to graze, pasture or feed them on land for payment, with an implied agreement that stock will be redelivered to the owner on demand (R v Croft (Inhabitants) (1819) 3 B & AId 171; Sinclair vJudge j930J St R Qd 220). Therefore as the arrangement between the parties is more akin to bailment/licence than a lease the payments may not be regarded as "rent". Further it is possible to carry on a business of agistment: see AAT Case 10,331 (1995) 31 ATR 1146.

Subject to any specific agreement which amounts in substance to the lease of land between the parties, an agistment arrangement is at law more in the nature of a licence and what is received are simply fees and thus are commonly referred to as agistment fees.

Ultimately, whether a payment is in the form of rent or an agistment fee is a question of fact depending on all the circumstances involved. Relevant factors to consider in determining this question (in addition to whether the occupier has a right to exclusive possession) include the degree of control retained by the owner over the land and the extent of any services provided by the owner.

In your case, the property is leased to an unrelated entity in an informal arrangement. Under the arrangement the entity does not receive any right for exclusive possession and the cattle are only allowed to graze on the property on terms and conditions satisfactory to the Partnership. We note that this is consistent with general practice in that most agistment agreements are informal as opposed lease arrangements which are often more formal in nature.

The cattle are transported to and collected from your property by the owner. You provide all day to day care for the cattle, including basic veterinarian and heath care, water and feed. You maintain the property, pastures and fencing.

Lease arrangements, under which rents are payable, involve the lessee taking possession of the land. The lessee would then use the land as it considered appropriate subject only to the lease agreement and agreed constraints. Generally, the arrangement will not be by reference to the number of cattle etc but relate to the land.

This is clearly a different arrangement from an agistment arrangement. The lease arrangement involving the derivation of rent is a passive land holding arrangement being the type of arrangement targeted by the exception in section 152-40(4)(e) of the ITAA 1997. The exception does not target the agistment arrangement which does not derive rent and extends well beyond passive landholding by the Partnership.

Conclusion

Fundamentally the agistment fees must be rent for the exclusion in section 152-40(4)(e) to be applicable. It is submitted that applying the ATO test in TD 2006/78, as outlined above, to the arrangements the agistment fees being derived are not rent, and therefore the exclusion does not apply.

Note: The status of the CGT asset (the property) as an active asset for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) has not been considered in this ruling.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).