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Authorisation Number: 1012071791541

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Ruling

Subject: Carrying on a business of primary production

Question

Are you carrying on a business of primary production?

Answer: No

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

Your principal income earning activity is that of an employee.

You have been involved in a beef cattle production activity since the 2002-03 financial year.

You came into the possession of the original cattle through a testamentary estate settlement.

You have not invested any capital into the activity.

You do not own the property on which the cattle are kept. The land belongs to another party who makes all decisions relating to the care of the cattle. You are not charged any fees for keeping the cattle.

You do not involve yourself in any aspect of the ongoing breeding or management of the cattle. Periodically you may attend the property and perform various jobs for your uncle, however there is never any set times, or set hours or days that you do this.

You do not have a business plan for the activity.

You do not maintain records of the number of cattle you hold and, you have not purchased any further cattle. However, you estimate that the number of cattle at any one time is approximately 20-30.

The cattle are sold when the owner of the land does a muster, and your cattle are transported to sale with the land owner's cattle from the property. The amount of your cattle sold on any one occasion ranges between 1 and 11 head (recipient created invoices supplied).

The activity has produced a profit in four of the last five financial years however, you state that you do not intend that the activity is a profit making enterprise.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

Your activity of beef cattle farming is not considered to be carrying on a business of primary production as the activity does not have a significant commercial purpose or character and fails to satisfy the relevant indicators that determine whether a business is being carried on.

Detailed reasoning

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

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business.

Taxation Ruling TR 97/11 provides a list of these indicators as follows;

· 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.

In applying the business indicators to your circumstances, we make the following observations:

· you have not invested any capital into the operation

· you have made no attempts to increase the quantity or quality of the cattle

· you do not keep any records of the cattle on hand

· you are not involved in the care of the cattle

· you do not incur any recurring expenses in relation to the care of the cattle

· the activity is conducted on a small scale

· you only make occasional sales of the cattle to saleyards at irregular intervals

· you do not have a business plan or any system in place to ensure the activity succeeds

· you spend little time devoted to the activity

Therefore, the large and general impression gained, after examining the activity against the business indicators identified in TR 97/11, is that your beef cattle farming activity does not amount to the carrying on of a business of primary production.

Further issues for you to consider

We have not considered whether the net income received from the activity is assessable income. We have only considered the question in your private ruling in relation to whether or not you were carrying on a business of primary production.