Edited version of private advice

Authorisation Number: 1052267019627

Date of advice: 27 June 2024

Ruling

Subject: Primary production - non-commercial loss

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your primary production activities in your calculation of taxable income in the relevant financial year?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You purchased land XX years ago.

After purchase you installed a shed on the land.

Since purchasing the property you have built dams and excavated contours to run water to those dams and away from the shed.

You have also improved the property by growing different grasses on the land to improve the quality of the pasture.

You have previously worked for over XX years in agriculture, and you have family that have worked on the land.

You have conducted 3 different activities on the land since you purchased it.

A resident at the property spends 5 hours a week checking for maintenance issues and the welfare of your produce. You stay on the property for 4 - 5 days a month working on the activities you are engaged in at the time.

You have made a loss on the activities you have conducted on this land in each year you have been engaged in these activities.

You have kept settlement documents, invoice books, receipts and related records, and bank statements for each of the activities you have engaged in through these years.

You plan to continue with these activities as they form part of your retirement plan.

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

Activity 1

When you purchased the land, livestock belonging to the former owner remained on your property.

You have also agisted livestock belonging to other neighbours.

You normally agist a small amount of such livestock at any one time.

You have done not done any research and not consulted experts on this activity.

You believe it is common sense to put something on the land if it is vacant.

You do not believe you will make a profit from this activity as expenses, including interest rates, outweigh your income from this activity.

You have not been able to make a profit from this activity in the relevant period.

Agreements with neighbours have been verbal. You have started charging a set annual amount regardless of the amount of produce accommodated. You believe this constitutes a lease.

You have confirmed with a local stock and station agent that the rates you are charging for this activity are market rates.

You advertise your property as available for produce accommodation by word of mouth.

You and the property resident watch over the livestock you are agisting, notifying the owners of issues or problems.

You renew your state biosecurity registration as required.

You are not liable for loss or injury to any of the produce accommodated.

You do not have a business plan for this activity.

Activity 2

You commenced farming livestock with a purchase several years ago.

You recently purchased a small number of livestock for this activity and sold them back again in the same year.

You believed you could make a profit in this activity by capitalising on seasonal conditions.

You consulted with neighbours, other experienced producers, and suppliers in this industry before commencing this activity.

You believe you made a profit on this activity in one financial year but attribute your losses in other years to poor timing.

You have met the legal, accounting, insurance, property registration, council, and biosecurity requirements for this activity.

Activity 3

You commenced breeding animals in the final year of the relevant period.

You sold a small number of animals in that year.

You are in the process of establishing yourself as a breeder and building a reputation. You advertise your animals by word of mouth.

You are hoping to develop your own breeding stock and that this will reduce the amount you are paying for ancillary breeding services.

You consulted with industry experts before commencing this activity so you could source the best breeding stock.

You also researched this activity through online forums and joined a relevant association.

In your first year you lost a number of offspring and had to pay large start-up costs.

You have not made a profit with this activity but believe you can in the future.

The time you spend on this activity varies.

You currently have 3 breeding females, one not yet at breeding age.

Your expenses and the services you use are similar to those paid by others in the industry.

You have met the legal requirements for registration as a breeder.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-5(2)

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

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

Income Tax Assessment Act 1997 Division 35

Reasons for decision

For the purposes of considering the discretion in subsection 35-55(1) of the ITAA 1997 it is a requirement that Division 35 applies.

Subsection 35-5(2) of the ITAA 1997 specifies that Division 35 is not intended to apply to activities that do not amount to carrying on a business.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the 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 and 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 on in a businesslike manner such that it is directed at making a profit

•         the size, scale and permanency of the activity, and

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

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

We have considered how the above indicators apply to the 3 activities you have engaged in on your property and in this case the Commissioner is not satisfied that you were carrying on a business in relation to any of these activities in the relevant period. As you were not carrying on a business, Division 35 of the ITAA 1997 does not apply.

Accordingly, as Division 35 of the ITAA 1997 is not applicable in this case the Commissioner will not exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow you to include losses from this activity to offset other assessable income in the calculation of your taxable income for the relevant period.

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