Edited version of private advice

Authorisation Number: 1051975867887

Date of advice: 3 May 2022

Ruling

Subject: Commissioner's discretion - non-commercial loss

Issue 1 Income Tax

Question 1

Are you carrying on a business of primary production in the 20XX and 20XX financial years?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business activities in your calculation of taxable income for the 20XX and 20XX financial years?

Answer

No.

Issue 2 Goods and Services Tax (GST)

Question 3

May you register for GST under Division 23 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Prior to the ruling years, you planned to establish a farm. You did research, started planning and registered an Australian Business Number (ABN).

In XX 20XX, you identified a property, known as XX (the Property) and inspected it. You had consultant visiting the Property to assess suitability for the A growing activity.

In XX 20XX, you entered a contract to purchase the Property.

Between XX and XX 20XX, you continued with planning, was in the process of finalising funding strategies and registered for GST.

In XX 20XX, you

•         settled the Property's purchase

•         received delivery of primary production tools, machinery and equipment

•         appointed a part-time employee

•         conducted soil and water testing

•         purchased insurances

•         undertook some leave from your employment to work for the farm.

The Property is a XX-acre (XX hectare) farm, at the point of purchase consisting:

•         XX-hectare house paddock

•         X principal paddocks

•         X-hectare planted with mature C plants but in disrepair condition

•         Good pasture - from which the previous property owner (the Vendor) ran an activity similar to your B activity

•         Excellent fencing

•         Good water including water rights and X irrigation licence.

The 'planned state' of the farm include:

•         within X years, the A growing activity will be profitable. A is expected to be productive for many years.

•         a sound program for the B livestock activity, providing reasonable profits. The activity is expected to be self-regenerative through breeding.

•         the C activity will provide XX for local X makers. It has an extended productive period.

You prepared a business plan.

Capital investment and infrastructure requirements are planned as:

•         Fencing, soil preparation, water infrastructure;

•         New machinery shed to house XX preparation area, XX equipment, with water and electricity connected;

•         A tractor;

•         General equipment;

•         A farm vehicle for transport tools, equipment and other purposes such as distribution;

•         Purchase of initial breeding B livestock; and

•         Establishment of site office.

It is also stated that during establishment additional labour costs are anticipated.

It's been stated that your business plan outlines that your 'primary intention' is to grow and sell A.

The A growing activity

Before the purchase of the Property, you

•         attended seminar that was ran by the recognised leaders of A farming. It involved classroom lecture and site visit.

•         undertook extensive research on available papers.

•         joined the A growing Association, attended the conferences and watched pre-recorded videos of previous conferences.

•         had site visits to existing farms and spoke with producers.

•         had conversations with distributors to understand available distribution strategies.

After careful considerations, you decided that X variety with X as host trees are the best option for your farm.

You obtained a report, prepared by the President of XX Association and industry consultant, based on genuine industry experience and feedback, to assist in the preparation of business plans and budget forecasts. Based on this report,

•         your A field with XX host trees would be at the 'upper end of small farms'.

You explained that the A field's size is maximised on current land allocation, due to:

•         Exiting C yard

•         Creek flats are unsuitable for it due to XXX

•         This size also minimises the need for permanent external labour and decreases the risk of unable to source reliable labour.

If the A activity is successful, you may make a decision to reduce the allocation of the C yard for A.

It is estimated that your activity could produce XX kilogram of A per annum.

Based on the provided 'Timeline and Task Summary',

•         'Project planning' started in X 20XX, with tasks of:

-        Obtaining quotes and bookings for fencing, earthworks and surveying

-        Order XX (as fertiliser of the A)

•         'Project preparation' starting in XX 20XX, with tasks of:

-        Preparing the site

-        Weed spraying

-        Grass seed purchase

•         Earthworks starting in XX 20XX, with tasks of:

-        Deep ripping

-        Soil cultivation

-        X spreading

-        Sowing inter-row grasses

•         Ordering A's host trees in XX 20XX, including

-        Order host trees, tree guards and takes

Some other tasks include:

•         Irrigation system design in XX 20XX

•         Irrigation system installation - stage 1 in XX 20XX

•         Planting of host tree preparation:

-        Final soil test in XX 20XX

-        Order weed mat system in XX 20XX

-        Irrigation installation - stage 2 in XX 20XX

•         Planting of host tree and weed mats planned to commence in XX 20XX.

It's been confirmed that

•         you ordered X (as fertiliser), with an expectation that the X would be delivered in X 20XX.

•         It is further stated that you may order the XX host trees earlier than planned, after the completion of the earthworks, which is weather dependent. To date, the supplier of the host trees was made aware of the planned order, but the order has not been made yet.

The B livestock activity

Although the Vendor ran similar activity on the Property, when you purchased the Property, there was no livestock retained.

You sought expert advice from a local XX.

According to your business plan,

•         You selected XX as preferred breed of B after careful considerations

•         Your primary intention is to grow B for meat.

•         You would rest the paddocks for 12 months, then purchase XX pregnant B in 20XX and another 3 pregnant B in 20XX.

•         With maturity of B at XX months and a X months breeding cycle, you could establish a herd of X head with the aim to sell X head per year.

You then claimed in the response to further information request that the purchase of 4 B could be delivered earlier than planned. But to date, you have not obtained any B livestock yet.

The C activity

The C was established over ten years ago but it is currently unproductive as it has been poorly managed by the Vendor. It's infrastructure, including water, fencing, irrigation and fertigation system are in good condition.

You sought advice from a local consultant C manger.

You considered three options for the C:

1.    Remove the C plants and use the land for other purposes

2.    Lease the C to a local X maker

3.    Restore the C and sell the X to local XX makers.

You selected the option 3 as it is the most profitable amongst the three options after discussions with local XX makers and confirmed the option is possible.

In the 20XX financial year, at the point of the Property purchase settlement, the harvest season had passed.

In the 20XX financial year, as the pruning work was not undertaken early enough by the Vendor, it is not expected that you could have sufficient crop for sale.

It is expected that the C will begin sales in 20XX, growing to full capacity by 20XX taking into account the need for remediation works and the time required to return the C plants to full capacity. When reached full capacity, the estimate of production is XX tonnes for the X-hectare C, with selling price at $X per tonne, based on market research and conversations with local grower.

You provided a photo and claimed that XX worked in C in X 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Division 23

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Issue 1 Income Tax

Question 1

Are you carrying on a business of primary production in the 20XX and 20XX financial years?

Summary

It is considered that you are carrying on a business of primary production in the 20XX and 20XX financial years.

Detailed reasoning

A 'primary production business' is defined in subsection 995-1(1) of the ITAA 1997 as a business of:

•         cultivating or propagating plants or fungi in any physical environment

•         maintaining animals for the purpose of selling them or their bodily produce

•         manufacturing dairy produce from raw material that a taxpayer has produced

•         conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer (sea cucumbers), crustaceans or aquatic molluscs

•         conducting operations relating directly to taking or culturing pearls or pearl shell

•         planting or tending trees in a plantation or forest that are intended to be felled

•         felling trees in a plantation or forest, or

•         transporting trees, or parts of trees, felled in a plantation or forest, directly to the place where they are first to be milled or processed, or transporting them to the place from which they are to be transported to be milled or processed.

Whether or not a person is carrying on a business is a question of fact. The determination of whether a business is being carried on is generally a process of weighing up all the relevant indicators. No one indictor determines whether a business is being carried on.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

•         Whether the activity has a significant commercial purpose or character,

•         Whether the taxpayer has more than an intention to engage in business,

•         Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,

•         Whether there is repetition and regularity of the activity,

•         Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

•         Whether the activity is planned, organised and carried out in a businesslike manner,

•         The size, scale and permanency of the activity,

•         Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Based on the information provided with this ruling and having regard to the relevant factors provided in TR 97/11, it is viewed that you are carrying on a business of primary production in the 20XX and 20XX financial years because:

•         the existing and the proposed activities are planned and will be carried out in an organised and businesslike manner;

•         you have a profit-making purpose in relation to the existing and the proposed activities on the Property;

•         there is a prospect of you making a profit from your activities based on the information provided; and

•         your activities cannot be viewed as being undertaken in relation to a hobby or recreation.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production business activities in your calculation of taxable income for the 20XX and 20XX financial years?

Summary

•         The A growing activity and the B activity are not considered 'commenced' in the 20XX and 20XX financial years.

•         The C activity's lead time had ended before your purchase of the Property.

Therefore, the Commissioner will not exercise his discretion.

Detailed reasoning

For the 2009-10 income year and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

•         you satisfy the income requirement, and you pass one of the four tests;

•         the primary production or the professional arts exception applies; or

•         the Commissioner exercises his discretion.

For this division to apply, an activity should be carried on as a business.

In your case, you did not satisfy the income requirement or met the primary production or the professional arts exception. You will need to defer the loss unless the Commissioner exercises his discretion.

Consideration on business activities 'of similar kind'

For the purposes of applying Division 35 of the ITAA 1997 subsection 35-10(3) of the ITAA 1997 allows you to group business activities 'of a similar kind'.

Subsection 35-10(3) of the ITAA 1997 states in applying Division 35 you may group together business activities of a similar kind. In certain situations the taxpayer's business activities may be so discrete in character and in the manner they are conducted that the question arises whether they are carrying on separate and distinct business activities for Division 35 purposes. Whether this is so is a question of fact and degree.

As discussed in paragraph 51 of Taxation Ruling TR 2001/14: Income tax: Division 35 - non-commercial business losses (TR 2001/14) determining whether business activities are of a similar kind to one another will involve comparing and contrasting them in relation to characteristics such as:

•         the location(s) where they are carried on;

•         the type(s) of goods and/or services provided;

•         the market condition(s) in which those goods and/or services are traded;

•         the type(s) of assets employed in each; and

•         any other features affecting the manner in which the activities are conducted.

Some of these characteristics may be the same for the business activities being compared however some difference must always be expected. The presence or absence of similarity in respect of a single characteristic will rarely be determinative (Goodfellow v. FC of T 77 ATC 4086 at 4094; (1977) 7 ATR 265 at 274). An overall comparison of the separate business activities will be called for, weighing up the extent of the characteristics which are the same or similar against those where there are significant differences.

In your circumstances, the three activities

•         Although to be operated on one property, they are on distinct paddocks, without 'shared area'. In addition, it's been provided that if you chose to expand the A growing activity in the future, it will be expanded to occupy part of the current C activity area, potentially involving removal of some existing C plants. The Commissioner considers that it is an indicator that they are 'mutually exclusive' to each other in terms of the land use.

•         Produce different products, with distinct nature in relation to grow time/lead time.

•         Are destined to be sold to different consumers and/or agents.

•         Require different knowledge and techniques from the operator.

•         At different stages of operational cycle: some have existing plants while some are starting from new.

While the three activities share some primary production tools and equipment and the storage area, it is difficult to reach the overall impression of similar kind. It is therefore not appropriate to group them for the purposes of Division 35 of the ITAA 1997.

When does a business activity commence?

The actual date of commencement of a business activity is a question of fact (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) (Goodman Fielder Wattie).

For a business activity to have commenced it must meet all of the three indicators below:

•         purpose, intention and decision to commence the business activity

•         acquired a minimum level of business assets to allow that business activity to be carried on, and

•         actually commenced business operations (Calkin v. CIR [1984] 1 NZLR 440).

A mere intention to start carrying on the business activity will not be sufficient.

The indicators above are also set out in paragraph 69A of TR 2001/14. These indicators must be examined in light of the characterisation of your business activity.

In Goodman Fielder Wattie, Hill J stated at 4,447:

'Critical to the resolution of the present controversy, is the characterisation of the business activity itself which is said to have commenced. It was conceded properly by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982...'

For example, if your business activity is characterised as a primary production activity, involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as the manufacturing and selling of a product, the business would generally be considered to commence once you have manufactured and begun selling the product.

In your case, as discussed earlier, it is not appropriate to group your three activities for the purposes of Division 35 of the ITAA 1997. Your three activities are examined separately as below:

The A growing activity

•         Purpose, Intention and Decision

The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced.

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 clear from the information you have provided that you have researched your proposed activity, decided on the form of that activity and have committed yourself to it.

•         Acquisition of a minimum level of business assets to allow that business activity to be carried on

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.

In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations.

For a business activity to commence, an appropriate business structure should be in place and begin ordinary business operations.

As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity.

Your A growing activity involving the cultivating of A to be sold, which will eventually be produced from the host trees.

In the 20XX and 20XX financial years, whilst you had completed the purchase of the Property and obtained some primary production tools and equipment, you had not completed the 'earthworks' for the land where the host trees would be planted, nor had you acquired or planted the host trees. As such you had not yet obtained the required business structure for you to commence the activity in the 20XX and 20XX financial years.

•         Actual 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.

In Hadlow and FC of T [2002] AATA 1250; (2002) 2002 ATC 2294; (2002) 51 ATR 1197 the Small Taxation Claims Tribunal considered the amounts incurred by a taxpayer to research and develop a book. The question for decision was whether the activities were merely preparatory and preliminary or whether the activity had reached a stage where it was able to be characterised as a business.

In concluding that the activity was not carried on as a business in the relevant years, member Mowbray stated at paragraph 26:

Clearly Mr Hadlow has the subjective intention to carry on a business, but that is not sufficient. There must be business activity. There is a real question whether the activities to date are merely preparatory or preliminary (see Goodman Fielder Wattie at 4447), and whether the project has reached the stage where it is able to be characterised as a business. There has been much activity but the concept of business does not equate with being busy (Goodman Fielder Wattie at 4447; 386; 339)

Mr Hadlow has researched, undertaken travel, and visited museums, libraries and farms in pursuit of a particularly interesting topic. He has expended money but has made no sales, received no advances nor signed any contracts.

In your case, it is accepted that you have gone beyond merely having an intention to engage in business and there have been some activities undertaken in relation to your proposed A growing activity. For example, you had arranged for appropriate soil testing, completed the Property purchase, attended relevant training courses and commenced the 'earthworks'. However, it is important to evaluate these activities in regard to the characterisation of the business operation, which is the cultivating of A to be sold, which will eventually be produced from the host trees.

The systematic and regular transactions from which you will produce revenue as part of your operations, that is, the cultivating of A, has not actually commenced in the 20XX and 20XX financial years.

Therefore, your activities undertaken during the 20XX and 20XX financial years were preliminary to the carrying on of your intended A growing activity and were instead directed at initial establishment.

TheB livestock activity

For the similar reasons as analysed above for the A growing activity, the main part of your B activity is the growing of the livestock to be sold. However, before you obtain any livestock, it is not considered that the systematic and regular transactions from which you will produce revenue has commenced in the 20XX and 20XX financial years.

The C activity

As you purchased an established C yard, it can be accepted that this activity has commenced. But in relation to the non-commercial loss requirements, a note under paragraphs 35-55(1)(b) and (c) provides, the lead time considerations are intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. This means, in your case, as the C yard had reached the point of producing assessable income before your purchase, the lead time had ended prior to your purchase. As a result, the Commissioner will not exercise his non-commercial loss discretion for the C activity.

Issue 2 Goods and Services Tax (GST)

Question 3

May you register for GST under Division 23 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

Your business activities constitute the carrying on of an enterprise for GST purposes. As you are carrying on an enterprise, you may register for GST pursuant to Division 23 of the GST Act.

Detailed reasoning

Section 23-5 of the GST Act provides that you are required to register for GST if you are carrying on an enterprise and your GST turnover meets the registration turnover threshold.

Section 23-10 of the GST Act provides that you may be registered for GST if you are carrying on an enterprise (whether or not your GST turnover is at, above or below the registration turnover threshold) or if you intend to carry on an enterprise from a particular date.

Carrying on an enterprise:

The terms 'carrying on an enterprise' and 'enterprise' are defined under section 195-1 of the GST Act as follows:

carrying on an enterprise to includes doing anything in the course of the commencement or termination of the enterprise.

enterprisehas the meaning given by section 9-20.

Under section 195-1 of the GST Act, 'carrying on' is defined to include the commencement or termination of your enterprise.

'Enterprise' is broadly defined in section 9-20 of the GST Act and includes activities where you are engaged in a business.

Paragraph 9-20(1)(a) of the GST Act provides that an enterprise is an activity, or series of activities, done in the form of a business.

Whether or not you are carrying on an enterprise is a question of fact.

In this case, for income tax purposes, we consider that you are carrying on a business of primary production in the relevant financial years.

Therefore, on the facts, your business activities constitute the carrying on of an enterprise for GST purposes. As you are carrying on an enterprise, you may register for GST pursuant to Division 23 of the GST Act.

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