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Ruling

Subject: Am I in business

Question

Were you in business in the 2006-07, 2007-08, 2008-09 and 2009-10 financial years?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You conduct your activities on a rural property. Since the commencement of the activity you purchased a very small number of different kinds of animals. There have been a very small number of natural increases but most of those have died or disappeared for various reasons. You also planted a number of fruit trees but they were eaten by some of the animals.

You keep accounting and stock/breeding records.

During the financial years 2006-07 to 2009-10, you incurred large expenses in relation to your primary production activities; during the same period you received a very small amount in income. Consequently losses were made in all four years.

You have plans for the future of expanding your activities. This expansion is far in excess of what you had in place during the years in question.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

It is considered that you were not in business in the 2006-07, 2007-08, 2008-09 and 2009-10 financial years. It appears that you did not have a clear strategy in place or any reasonable prospect of making a profit. The quantities of each different breed of animal were not of a commercial quantity to become a profitable venture.

Detailed reasoning

Taxation Ruling TR 97/11 discusses the issues to be considered to determine if you are carrying on a business of primary production. Paragraph 13 of TR 97/11 lists the following indicators as relevant:

§ 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 out in a business like manner such that it is directed at making a profit

§ 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

§ whether the activity has a significant commercial purpose or character; this indictor comprises many aspects of the other indicators.

Other indicators which support the main indicators include:

§ whether records are kept

§ whether a business plan exists

§ whether there has been commercial sales of the product

§ the taxpayer's knowledge or skill.

It is clear that the quantities of animals purchased were not sufficient to establish a commercial venture. From the initial purchases and for the next four years you did not increase the quantities of any animals to any significant degree. It is clear that the number of animals on hand were not a commercial quantity. This contrasts with a commercial operation where commercial quantities of animals would be purchased at an early stage to generate sales and ultimately result in profits being made as early as possible. With the very small quantity of animals you had there was never a real prospect of a profit being made.

It appears that the activities conducted during the four years were preparatory or preliminary as you have included in your business plan that you intend to purchase a commercial quantity of animals and process the animal carcasses on site. You have also stated you will be planting a quantity of nut trees.

Since your last application for a private ruling it appears that you have drawn up a business plan. This would indicate that prior to the business plan being drawn up there was no serious plan in place as to how you were going to run the activity and/or the direction you were going to take to make a profit. This also shows that there was not a serious commercial intent.

Information provided states that from the time the activity commenced and for the next four years the activity has only received a very small amount of income from the sale of a very small number of animals. In each of those years your expenses far outweighed your income and you therefore made losses in all those years.

Instead of concentrating on one or two activities and putting all your efforts into those activities you have decided to go into a lot of activities in a very small way. The small numbers of animals purchased indicates that the size and scale of all activities is not sufficient for the overall operation to be considered a business.

For a venture to be considered a business, activities need to be conducted on a continuing and repetitive basis, for example commercial quantities of animals need to be purchased, bred and sold regularly or land needs to be prepared for crops and harvested on a regular basis. You purchased a very small quantity of a range of animals but there were only very limited sales of one of those animals. Profit cannot be contemplated when such small quantities of animals are purchased. With the lack of a business plan it is not apparent how you were ever going to make a profit from the activities which were undertaken.

You are not considered to be in business because of the lack of commerciality and low animal numbers and the activities were considered preparatory and preliminary.