Edited version of your private ruling

Authorisation Number: 1012475860929

Ruling

Subject: Am I in business and small business 15 year exemption

Question 1

Did the company carry on a business?

Answer

No

Question 2

Is the company eligible for the small business 15 year exemption in relation to the sale of the property?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

The company owned a property.

The company carried out livestock breeding activities on the property.

The company disposed of the property; the ownership period of the property exceeded 15 years.

The director of the company was also a significant individual of the company for the entire period of ownership of the property.

The director of the company was over 55 years old at the time the property was sold.

Livestock breeding activities

At the height of the activity, the company held X livestock.

The activities incurred significant losses, especially in terms of infrastructure costs.

The directors of the company had conducted similar operations previously, giving them a reasonable working knowledge of the industry.

The owners of the company carried out the activities themselves and did not hire any external employees. Advice from experts within the industry would occasionally be sought in relation to the breeding activities.

The owners spent approximately X hours per day during the week on the breeding activities as they had regular employment. They devoted the majority of their weekends to the breeding activities.

Professionals (eg veterinarians) were consulted regarding the health and wellbeing of the livestock.

Memberships with organisations within the industry were maintained by the company.

Several additional facilities were built on the property to cater for additional breeding stock.

The livestock were serviced and produced progeny that were all retained as breeding stock.

You have provided a list from an industry association detailing the livestock that were bred that the company had an ownership interest in.

In an email your tax agent indicated that no barren stock was maintained on the property during the period of ownership.

No livestock were ever involved in professional activities.

You have provided financial statements for the company for the relevant period of time. During this entire period, the company did not receive any income from the sale or activities of the livestock. The company received interest income and nominal income from the sale of livestock.

During the earlier stages of ownership of the property, there were other surrounding properties that could have been purchased to add to the breeding activities.

The activities were intended to be permanent in nature; however, due to family considerations of the owners, the company sold the property and ceased breeding activities.

The company currently still holds X livestock with a possible intention to recommence breeding activities in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40(1)

Reasons for decision

Carrying on a business

It is a question of fact as to whether a taxpayer's activities amount to the carrying on of a business. Taxation Ruling TR 97/11 lists the relevant indicators to consider in determining whether a taxpayer's activities amount to the carrying on of a primary production business. These indicators are equally relevant when determining whether a taxpayer is carrying on a business in general.

The relevant indicators compiled from various case authorities are 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 profitability of the activity,

· the repetition and regularity of the activity,

· whether the activity is 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 business-like manner such that it is directed at making a profit,

· the size, scale and permanence of the activity.

From the many court and tribunal decisions in regard to the 'carrying on of a business' it is gathered that a determination as to whether particular activities constitute a business in general is a question of fact, degree and impression in each case. The various factors are only matters to be taken into account and weighed up in a given situation and the weight will vary with the situation.

Significant commercial purpose or character

This indicator is linked to some of the other indicators in TR 97/11, and generally requires a taxpayer to have shown that its activities were carried on for commercial reasons and in a commercially viable manner.

Amongst other things, this would require that the size and scale of the activity, the repetition and regularity of the activity, and the intention and prospect of profit from the activity together indicate that the venture has a commercial purpose.

To be in business, it is expected that efforts be directed towards making a profit from regular sales. It is also usual for someone planning a business to investigate carefully the projected income and costs to determine whether their activities could be viable.

In this case, the activities were not profitable over a significant period. The information provided in the private ruling application advised that the owners of the company believed the activity could be profitable. However, no information such as business or breeding plans were provided to demonstrate a commercial purpose.

More than just an intention to engage in business

As indicated in paragraph 39 of TR 97/11, this indicator is about the intention of a taxpayer in engaging in business activities. There must be an intention to engage in business, and there must be activities that support the stated intentions to demonstrate that the taxpayer is carrying on a business.

This indicator is particularly related to the intention to make a profit.

It was indicated in the private ruling application that the owners of the company had the intention to engage in business in relation to the livestock breeding activities, albeit on a relatively small scale. However based on the financial statements provided and a lack of sales over a significant period, there is little indication that the activities carried out were ever likely to produce a profit

Purpose of profit as well as profitability of the activities

To be considered to be carrying on a business, a taxpayer has to demonstrate that the expectation of profit is reasonable (TR 97/11). It will be a question of fact in each case whether available evidence points to an activity being pursued with profit making in mind, or whether the taxpayer is driven solely by the personal enjoyment and satisfaction they derive from their activities, so as not to constitute the carrying on of a business.

It is not necessary that a profit be made immediately and it may be that the activity experiences short term losses. It was observed in Ferguson v F C of T 79 ATC 4261; 37 FLR 310 (1979); 26 ALR 307 (1979); 9 ATR 873 (Ferguson's case) that:

'It may be held a person is carrying on a business notwithstanding his profit is small or even where he is making a loss. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. Repetition and regularity of the activities is also important'.

It is accepted that a livestock breeding business may incur some short term losses before producing a profit. However, there must be an indication of the prospect of a profit within a commercially viable period. It is not accepted that over a fifteen year period, little or no income would be produced from the activity, as has occurred in this case.

There is no opportunity for profit when livestock are neither sold nor used in other activities to produce income.

Repetition and regularity of the activities

A common feature of a business is that activities are repeated on a regular basis. Accordingly, this indicator requires that a taxpayer is able to show that they have at least undertaken the minimum level of actions required to maintain the activity at a commercial level.

In the context of breeding livestock for sale, the level of repetition and regularity should be sufficient to maintain a commercial quantity and quality of saleable progeny.

The progeny produced by the livestock owned by the company were all retained as breeding stock. It is accepted that other businesses in this industry may occasionally retain progeny to increase breeding stock numbers. However, over the significant period of time in question, regardless of the size of the operation, it is expected that some sales of progeny would be made.

Activity is carried on in a similar manner to that of ordinary trade in that line of business

Paragraph 64 of TR 97/11 lists the factors that need to be compared with the characteristics of others engaged in the same type of business in considering this indicator. Relevant factors include:

· the volume of sales (it is accepted that in the early stages of an activity, there may be no sales or sales may be low;

· the sort of expenses incurred by the taxpayer;

· the amount invested in capital items;

· previous experience of the taxpayer; a taxpayer who does not have any knowledge or experience may be expected to have sought advice from experts.

In this case, it is accepted that the owners of the company carried previous industry experience and on occasion, consulted industry professionals in relation to the breeding activities.

There were no sales relating to the horse breeding activities over the entire relevant period. Additionally no livestock were used to build the credentials of the company's stock.

Activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit

Activities that are conducted in a systematic and organised manner are more likely to amount to a business than one which is conducted on an ad hoc basis. However, the lack of a proper system would not be sufficient on its own to conclude that there is no business being carried on. Further, the degree of record keeping required may vary depending on the type of activity being carried on.

In this case, no information was provided in relation to a formal business plan followed by the company. However, the owners of the company had previous experience in similar ventures.

The activities were not carried out on a full time basis, as the owners of the company had alternative employment and did not hire any external employees.

Size, scale and permanence of the activity

As discussed in paragraphs 77 and 78 of TR 97/11, the larger the scale of the activity the more likely it will be that a taxpayer is carrying on a business. However, this is not always the case. It has been established that the size or scale of the activity is not a determinative test and that a person may carry on a business though in a small way.

It was indicated in the application for a private ruling that the company's activities were carried out on a smaller scale than other businesses in the industry. The property owned by the company determined the scale of the operations.

Additional indicators for livestock breeding activities

Taxation Ruling TR 2008/2 expresses the Commissioner's views on a number of issues specific to the livestock industry.

In regards livestock breeding activities, TR 2008/2 lists additional industry factors that should be taken into account in determining if the activities amount to carrying on a business of livestock breeding. These include:

· the quality and number of horses;

· whether the taxpayer is regularly selling stock to the general public;

· whether the mares are being serviced regularly;

· whether the taxpayer is using their stallion rights; and

· whether the taxpayer maintains livestock which are inappropriate for breeding (excluding livestock that are being raced).

In this case, it appears the company maintained a number of livestock throughout the relevant period, however no information has been provided in relation to the quality or commerciality of the livestock.

While it has been indicated that the livestock were serviced, over the relevant period not one was sold.

It is unclear if the company held any livestock that were inappropriate for breeding. In an email from the company's tax agent it was advised that no barren stock was maintained on the property for the relevant period. However, in the list from an industry association detailing the livestock that the company had an ownership interest in.

Conclusion

After taking the above factors into account, we do not consider that the livestock breeding activities were carried out in a commercial manner. The operation of activities on a smaller scale to others in the industry will not always be conclusive in determining if a business is being carried on. However, in this case, the fact that no income was produced from the breeding of livestock over a significant period supports the opinion that there was no prospect of profit from the activities.

Accordingly, the company was not carrying on a livestock breeding business.

Small business concessions

In order to be eligible for the small business retirement exemption, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). One of the basic conditions is that the asset must satisfy the active asset test.

Under section 152-35 of the ITAA 1997, a CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period; or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.

The term 'active asset' is defined in subsection 152-40(1) of the ITAA 1997 as an asset you own and use (or hold ready for use) in the course of carrying on a business; or in the course of carrying on a business by a connected entity under paragraph 152-40(1)(c) of the ITAA 1997.

Accordingly the asset can not be an active asset as it is not held in the course of carrying on a business for the purposes of paragraph 152-40(1)(a) of the ITAA 1997. As the property is not an active asset, it does not satisfy the basic conditions and you will not be entitled to the small business 15 year exemption.