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Ruling

Subject: Agistment

Question

Is the total amount of the expenses relating to the property such as interest, rates and repairs, deductible?

Answer

No, the total amount of deductions allowed in relation to the property is limited to the amount of income received from the property.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts

A family member had debts against their farm.

You mortgaged your own house to finance the transfer of the farm into your name.

You incurred interest on the loan.

You have entered into a contract with a third party to lease the farm for a nominal amount per year for grazing their herd of animals.

The farm purchase and loan have only been undertaken to avoid a mortgagee auction from taking place.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

It is our view that the 'lease' of rural land to another farmer to pasture their livestock is actually an agistment arrangement.

Given the disproportion between the expenses and the income earned from the lease of rural land for agistment and that there are other purposes (that is, you did not purchase the property only to receive the small amount of income from agistment), we consider it reasonable to limit the amount of the deductions to the amount of the assessable income actually received in the year.

We have determined in your circumstances that you will be entitled to a deduction for expenses incurred (including interest) only up to the level of agistment income earned.

Detailed explanation

Based on the information you have provided, we hold the view that the 'lease' arrangement actually constitutes an agistment arrangement as the calculation of the fee appears to be based on a figure that is consistent with agistment.

The ordinary meaning of agistment is taking in and feeding or pasturing animals for a fee. Although your agreement may be termed a lease of rural property, according to the facts of the arrangement described it appears no different to agisting animals for a fee.

Generally the agistor (farm owner) provides a fenced paddock, water and seasonal grazing. The agistee (the owner of the livestock being agisted) is responsible to provide all the needs of his livestock other than fence and water. Usually, the agistee is allowed some measure of access, and may or may not be allowed to use the facilities available at the farm (i.e. yards, sheds etc).

In your case, we consider that the leasing out of land for agistment purposes does not alter the fact that essentially the arrangement is an agistment arrangement.

Expenditure will be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if it is incurred in gaining or producing assessable income unless it is of a capital, private or domestic nature.

It is necessary to consider the essential character of the expenditure incurred to determine whether there is a sufficient connection with the assessable income earned. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

Expenditure may have been incurred, in part, for a purpose other than the production of assessable income. If this is the case, the expenditure must be apportioned and a deduction allowed only to the extent that the expenditure was incurred for the income producing purpose. The appropriate method of apportionment will depend on the facts of each case and the method must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin NL & Tongkah Compound NL v. FC of T (1949) 78 CLR 47; (1949) 8 ATC 431). For example, in Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613 (Fletcher's case), the High Court suggested a 'commonsense' or 'practical' weighing of all the factors and in that case found that it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.

In Fletcher's case the assessable income derived from the annuity in each of the tax years was less than one-eighth of the relevant amount of interest outgoings in that year. The High Court accepted the Commissioner's position that the deduction for interest outgoings should be allowed to the extent of the assessable income received from the annuity investment plan.

Although the decision in Fletcher's case was made in the context of an artificial tax avoidance scheme, we can see no basis for limiting it in this way. Therefore, the principles adopted in Fletcher's case apply generally to all cases involving the application of section 8-1 of the ITAA 1997.

Taxation Ruling TR 95/33 considers the implications of Fletcher's case and outlines the Commissioner's view on the importance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings. The ruling states that if an outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure, including an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing, to determine whether the outgoing is wholly deductible. If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective, then the outgoing must be apportioned between the pursuit of assessable income and the other objective.

The Court took the view that if, on consideration of all those factors, the whole of the interest could be characterised as 'genuinely and not colourably incurred in gaining or producing assessable income', the interest would be fully deductible. If only part of the outgoing could be so characterised, apportionment between the pursuit of assessable income and of other objectives was necessary.

AAT Case 38/97 97 ATC 397; (1997) 36 ATR 1154 specifically dealt with the treatment of interest expenses incurred in relation to agistment income. In that case it was held that the outgoings to pay the interest on the loan to purchase the property were more properly characterised as an outgoing to maintain the asset base than to produce assessable income and that the Commissioner was correct in allowing a deduction to the extent of the income received from agistment.

Generally, the income from leasing a property for agistment purposes is disproportionate to the level of expenses incurred, particularly in cases where borrowed funds were used to purchase the property. This is not seen as a commercial arrangement, as it would usually take many years of income to recoup the expenses for even one year.

You state that your intention in purchasing the property was to avoid a mortgagee auction from taking place. It is evident that you did not purchase the property merely for the purpose of gaining a small amount of assessable income from agistment.

In cases where a property is used for activities that lack a commercial character (that is, where income will rarely equate to the running costs of the property, such as agistment), it is usual to apportion to allow expenses to the extent of income received. This treatment would also be applied in your case, where there is more than one purpose. Multiple purposes would also include where land is purchased for potential capital growth. In those cases, the interest is included in the cost base for CGT purposes.

Therefore, a deduction for expenses incurred for the property, such as interest, rates and repairs, would be allowed only to the extent of income received.