Edited version of private ruling

Authorisation Number: 1011485410576

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Ruling

Subject: Are you carrying on a business

Question

Are you carrying on a business of primary production?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse have a farming property.

You have a small number of animals for your own consumption and a number some crop.

You and your spouse were in partnership growing small crops. You ceased growing any small crops as it proved not to be viable financially and cancelled your ABN.

For the past financial years you have not made a profit and have made large losses which you have not been able to apply.

During the last financial year the partnership received financial support from a Government agency. In the same year your spouse also withdrew funds to help supplement the family income.

Your spouse commenced working full time to support the family as the farm was not producing adequate income to support both the family and the farm. You have no staff other than your family to work on the farm.

You sold your first crop on the metropolitan markets as you do not have local markets and received payment that had only covered costs. You state that there is not a large demand for the crop and you do not have enough plants to make it a paying proposition. Any returns from the markets do not cover costs.

You have no business plan and do not intend to expand as you do not have the financial resources or the time to look after the crop.

Your intention for having a farm was a lifestyle choice as you wanted to semi retire and grow your own vegetables.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Summary

Your activities are consistent with that of a hobby farm and rather than carrying on a business. Therefore any money you earn from this activity is not assessable income and you are not entitled to deduct any expenses incurred in carrying out this activity.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

- 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 regularity and repetition of the activity

- whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

- whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Applying the indicators to your circumstances

(1) Significant commercial purpose or character

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

You own a farming property on which you reside.

You have been growing small crops for a number of years. You sell some of these at the metropolitan markets. You have ceased the growing of small crops as it proved not to be financially viable.

(2) Intention to carry on a Business

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

Your intention of having a farm was lifestyle choices in wanting to semi retire and hope to grow your own vegetables.

(3) Prospect of Profit

A person who is carrying on a business normally has an intention to make a profit and it is important for someone who claims to be carrying on a business to show that the activity or venture can make a profit. One way of showing this is evidence of research into the profitability of the venture or of advice that has been received from industry experts.

You have stated that under your current farming activity of growing some crops, it is likely that you will not make a profit as the scale is too small to cover costs. You have sold excess crops at the metropolitan market and from the number of crops you do not have a sufficient number to make it a paying proposition. You do not have the financial resources to expand and there is not a large demand.

(4) Repetition and Regularity

It is often a feature of a business that similar activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis leans towards an activity being classified as a business.

Your spouse works full time to support the family income and has little time to maintain growing of the crops as a commercial activity. You maintain the family home along with your interests of a hobby farm looking after the small number of animals and growing your own vegetables.

(5) Whether carried on in a manner that is characteristic of the industry

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

You do not have evidence of any research, careful inquiry or assessment of the possible commercial marketing of particular crops.

(6) Organisation in a businesslike manner and the use of a system

It is usual for taxpayers to have a business plan when demonstrating their intention to carry on a business. Although not compulsory, the fact that you do not have a business plan further suggests that it is not your intention to conduct a business of producing crops.

(7) Size or scale of the activity

The larger the scale of the activity the more likely it will be that a taxpayer is carrying on a business. However, the size or scale of the activity is not a determinative test and a person can carry on a business in a small way. However, the smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business of primary production.

You have a small number of plants and have no intentions of expanding on this. You ceased growing small crops.

(8) Hobby or non-commercial activity

Although the crop that is produced will be well in excess of domestic needs, the small scale of the activity, absence of commercial character and lack of any business plan would lend its character more towards a hobby farm or non-commercial activity than a business of primary production.

Conclusion

Overall, the above factors point to your growing activity being a hobby farm rather than a business. It appears that your efforts are not driven towards making the activity profitable but were pursued for other reasons. Your activity is conducted on a small scale and you have not shown evidence of any careful inquiry or assessment of the possible market for your crop. Your activity is therefore not regarded as carrying on a business of primary production.

Therefore, any income you may receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997. In addition, any expenses that may be incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.