Edited version of private ruling

Authorisation Number: 1011743439177

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Ruling

Subject: Am I in business

Question 1

Does your animal breeding activity constitute the carrying on of a business from the 2010-11 year of income?

Answer

Yes.

Question 2

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 business activities of animal breeding in the calculation of your taxable income for the 2010-11 to 2013-14 income years?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You and your spouse purchased a farming property in 200X.

Since purchasing the property, you have made improvements including:

· Residential home

· Yards

· Paddocks

· Equipment and feed shed

· Machinery shed

Animals are sold ready for use.

You have provided a copy of your business plan for breeding animals which was made during the 2010-11 year of income.

Prior to 2010-11 year of income, all of your efforts went toward setting up the business and not running a business.

You currently have more than ten animals.

You provided a projected cash flow statement for the 2010-11 to 2016-17 years of income which shows income from sales of animals, animal services and agistment fees will be more than $20,000 in the 2014-15 year of income.

Your income from unrelated sources is greater than $40,000.

You do not expect to meet any or the four tests until the 2014-2015 year of income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 35

Reasons for decision

Am I in business

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 facts.

Taxation Ruling TR 97/11 which deals with whether a taxpayer is carrying on a primary production business states that in deciding whether a business is being carried on, regard should be had to the following indicators:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business or to commence in the future

· 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 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 or form of recreation.

Every case must be decided on its own particular facts. In essence, whether a business is being carried on will depend upon whether the indicators, as a whole, provide the activities with a commercial flavour: Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310; 79 ATC 4261; (1979) 9 ATR 873.

In your case, the level of commitment shown in the improvements to the property, the animals you have on hand and the development of a business plan indicate that the venture has developed into significantly more than a hobby.

We are satisfied based on your cash flow projections that the activity demonstrates a commercial purpose from the 2010-11 year of income. The operation appears to be carried out in a systematic and organised manner.

Accordingly, any receipts associated with the activities are assessable under section 6-5 of the ITAA 1997 and deductions are allowable under section 8-1 of the ITAA 1997.

Lead time

Losses from activities that do not meet any of the four tests under Division 35 of the ITAA 1997, or the exception in subsection 35-10(4) of the ITAA 1997 will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997, unless the Commissioner exercises a discretion under paragraph 35-55(1)(b) of the ITAA 1997 that it would be unreasonable to defer the loss.

It is accepted that it is in the nature of your activity that there will be a lead time before a profit can be expected or one of the tests passed. It is accepted that meeting a test within five years of commencing your animal breeding activity will be within a commercially viable period for your industry.

The information you have provided demonstrates that there is an objective expectation that your business activity will pass one of the tests (the assessable income test) or will produce a taxation profit by the 2014-15 income year.

Therefore, the Commissioner's discretion under paragraph 35-55(1)(b) has been granted for the 2010-11 to 2013-14 years of income.