Edited version of private ruling

Authorisation Number: 1011753200775

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Ruling

Subject: Am I carrying on a business?

Question

Am I in business of farming for the purposes of the small business CGT concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Relevant facts

 You purchased a rural property and sold it realising a capital gain.

You did not sub-divide the land. You are not a land developer.

You did not acquire the property for the purpose of profit.

During the period in which you owned the property, you and another party grew crops on it.

The arrangement was informal.

The arrangement is not a partnership.

The business records for the arrangement are mainly contained in the individual's bank records.

The income from crops was distributed 50/50

This was the only income you received from the arrangement. The other party did not pay you rent or lease the property from you.

If there was no crop income, you did not receive any income from this activity.

You returned the following income from this arrangement. Figures provided.

Expenses were sometimes borne by you & sometimes the other (unrelated) party.

In regard to the arrangement, you did not physically work the property ( you are aged in your 70`s) however, you were involved in the decision making as to the selection of crops to be planted and who they would be sold to, fertiliser to be used and how the soil was to be maintained.

You derive other income from passive investments.

Relevant legislative provisions

Income Tax assessment Act 1997 Division 152.

Reasons for decision

Taxation Determination 95/62 considers whether an owner (or lessor) of land who allows the land to be used in a share farming arrangement be considered to be engaged in a business of primary production. This determination provides the following guidelines relevant to your situation;

1. Sharefarming or share cropping is a common farming practice where a farmer is allowed to farm and harvest a crop on someone else's land in return for payment to the owner of that land a percentage of the harvest proceeds. There are, of course, many possible variations in the share farming agreements and each case has to be dealt with on its merits.

3. In certain circumstances, a share farming arrangement may amount to the carrying on of a business in partnership. Factors which are considered by the Commissioner to be relevant to the existence or otherwise of a partnership generally are set out in Taxation Ruling TR 94/8. If a partnership is in existence then each partner will of course be considered to be carrying on that business.

You have stated that your arrangement is not a partnership.

4. Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

5. To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.

6. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production. The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production.

7. Similar reasoning would apply if the sharefarming agreement was for the provision of machinery or items of plant.

EXAMPLES

Example 1: Sharefarmer Y agrees to pay to landowner X a designated share of crop proceeds in consideration for use of the land owned by X. X does not participate in the cultivation of the land. Only Y involves himself in the farming activities.

Y would be considered to be engaged in a business of primary production.

The share of crop proceeds received by X is not considered to be income from primary production. It is not personal exertion income and would in essence be income from property.

Application to your circumstances

From the facts you have submitted, the arrangement as described is one of sharefarming.

Paragraph 5, states, to be carrying on a business, a taxpayer must be involved in the activities that make up the business. The involvement should be direct and immediate. A partnership was not being carried on and the payment of some expenses and involvement in some decisions would not, without more, be sufficient.

Your involvement as submitted in your facts is not considered to be sufficient to satisfy the above requirement. Therefore, the income you receive from the arrangement is income from property and not income from carrying on a business.