Edited version of your private ruling

Authorisation Number: 1012510764899

Ruling

Subject: Primary production business

Question 1

Was the Partnership in the business of primary production as described in section 995-1 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

Financial year ended 30 June 2011

Financial year ended 30 June 2012

Relevant facts and circumstances

The facts and the description of the scheme as set out below are based on information provided by the applicant. The following documents, or relevant parts of them, form part of and are to be read with these facts and the description of the scheme:

The Partnership registered for GST in 2000.

In late 2004, the Partnership purchased a Property

At the around the same time as purchasing the Property the Partnership also secured the use of X Hectare block to agist cattle (Agistment block).

The area where the Property and Agistment block were located was drought declared from 20YY until 20ZZ.

The partners resided permanently at the Property throughout the ruling period.

The Partnership's decision to purchase the Property was based on the Property being suitable for its purpose.

The Partnership made improvements to its Property.

The Partnership projected that it would make a profit from the business within five years of startup.

The start-up costs for the business were funded through a bank loan and capital injections by the partners.

The Partnership maintained separate books and had a separate bank account which was mainly used for capital purchases.

The Partnership claimed input tax credits and remitted GST from sales.

The partners reported losses from the Partnership in their income tax returns as carried forward non-commercial losses.

ATO view documents

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Other references (non ATO view)

Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548

Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873

Evens v FC of T 89ATC 4540

Case M50 80 ATC 349

Case 26 (1981) 24 CTBR 200

Case K9 78 ATC 98

Case 29 (1979) 22 CTBR 296

Case L16 79 ATC 84

Case 20 (1980) 23 CTBR 154

Case L22 79 ATC 106

Case 25 (1980) 23 CTBR 183)

Case H11 76 ATC 59

Case 65 (1976) 20 CTBR(NS) 601

Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360

FC of T v JR Walker (1985) 79 FLR 161; 85 ATC 4179; (1985) 16 ATR 331

Case D3 72 ATC 13

Case 86 (1972) CTBR 562

Thomas v FC of T 72 ATC 4094

McInnes v. FC of T 77 ATC 4167; (1977) 7 ATR 373

IR Commissioners v. Livingston (1927) 11 TC 538

Inglis v FC of T 80 ATC 4001; (1980) 10 ATR 493

Case H30 76 ATC 271

Case J62 77 ATC 532

Case N101 81 ATC 560

Case P9 82 ATC 48

Case Q2 83 ATC 4

Case Q105 83 ATC 530

Case Q107 83 ATC 554

Case R14 84 ATC 171

Southern Estates Pty Ltd v FC of T (1967) 117 CLR 481; 14 ATD 543

Reasons for decision

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

2. The definition of 'primary production business' in section 995-1 of the ITAA 1997 includes maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

3. The question of whether a taxpayer is 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.

4. The courts have developed a series of indicators that can be applied to the taxpayer's circumstances to determine whether the taxpayer is carrying on a business. 

5. Many of the indicators of whether a taxpayer is carrying on a business of primary production are stated in the decision of the Full Federal Court in Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873. Bowen CJ and Franki J said in their joint judgment at ATC 4264-4265; ATR 876-877:

Section 6 of the Income Tax Assessment Act defines 'business' stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organisation of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.

6. In Evans v FC of T 89 ATC 4540, Hill J. agreed that no one indicator could determine whether a business is being carried on. He said at ATC 4555:

The question of whether a particular activity constitutes a business is often a difficult one, involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation

7. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) summarises these indicators. The relevant indicators of whether a taxpayer is carrying on a business are:

· 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 the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

· 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.

8. No one indicator is decisive. The indicators must be considered in combination and as a whole. 

Prospect of profit / profit motive or intention

9. TR 97/11 explains that in the Commissioners view, the prospect of profit and the profit motive or intention is a very important indicator in deciding where a taxpayer is carrying on a business of primary production.

10. Where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it will be the exception rather than the rule that the activity will amount to a business.

11. Where an activity is being carried on and it is objectively unlikely that a profit will ever be made, this fact in itself will not necessarily mean that a business is not being carried on. However, a number of Board of Review and Administrative Appeals Tribunal decisions show that a taxpayer in this situation bears the burden of proof. (See Case M50 80 ATC 349; Case 26 (1981) 24 CTBR 200; Case K9 78 ATC 98; Case 29 (1979) 22 CTBR 296; Case L16 79 ATC 84; Case 20 (1980) 23 CTBR 154 and Case L22 79 ATC 106; Case 25 (1980) 23 CTBR 183). The taxpayer will need to show that the other indicators of business are present in sufficient strength to outweigh the objective view that the activity is inherently unprofitable.

12. In determining whether a business is being carried on, it is proper to consider as one of the elements whether the activities under consideration could ever result in a profit; Case H11 76 ATC 59, at 61; Case 65 (1976) 20 CTBR(NS) 601, at 603.

13. It is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. Thus a taxpayer may be carrying on a business of primary production even though they are making a small profit or a loss.

14. In Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360 at 7, Williams J explained:

It is not the function of income tax Acts or of those who administer them to dictate to taxpayers in what business they shall engage or how to run their businesses profitably or economically. The Act must operate upon the result of a taxpayer's activities as it finds them.

15. However, it is important for the taxpayer to be able to show how the activity can make a profit. Where the taxpayer has conducted research into their proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting the business up there will be stronger evidence of an intention to make a profit, FC of T v JR Walker (1985) 79 FLR 161; 85 ATC 4179; (1985) 16 ATR 331

16. The Partnership submits that it expected to make a profit from its business within 5 years of start up however the amount of stock purchased, the level of sales and the increase by way of natural increase do not support this expectation.

17. Whilst the Partnership may have intended to make a profit when it commenced its operation, based on the level of activity over the period, it is not considered that the Partnership had any prospect of profit from its activities.

Size or Scale of the Activity

18. There is no authority which says that an enterprise must be carried on in such a scale as to be capable of providing an adequate means of living before it can qualify as a business; Case D3 72 ATC 13 at p.14; Case 86 (1972) CTBR 562 at p.563.

19. An activity carried on in a small scale may constitute the carrying on of a business if the taxpayer has the purpose of making a profit, there is repetition and regularity in the taxpayers activities, the taxpayer keeps himself informed of market conditions and the taxpayer organises his activities in a business like way through the keeping of books of account; FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331.

20. It is clear enough that activities may be said to be a business even though carried on in a small way but nonetheless before such activities can be said to be a business it must be possible to attribute some significant commercial purpose or character to the activity; Thomas v FC of T 72 ATC 4094 at 4099; (1972) 3 ATR 165 at 171.

21. It is also relevant to compare the operations involved in the taxpayer's activities with those which would readily be conceded, as a matter of ordinary use of language, to amount to carrying on a business of those activities; McInnes v. FC of T 77 ATC 4167; (1977) 7 ATR 373.

22. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business.

23. It is unlikely that the enterprise would ever be profitable or would be in a position to produce the forecasted amount of cattle, as submitted.

Repetition and Regularity

24. It is often a feature of a business that similar sorts of transactions are repeated on a regular basis. The repetition of transactions by the same person over a period of time on a regular basis will help to determine whether a business is being carried on. The taxpayer should undertake at least the minimum activities that are necessary to maintain a commercial quantity and quality of product. It may be that there are no minimum levels for the activity, but where there are minimum levels necessary for the activity and the taxpayer fails to maintain them it may be that for a period the taxpayer has ceased to carry on a business of primary production.

25. There are some industries where repetition and regularity is not the norm. Where a sufficient amount of time is given to performing the tasks of the activity that is necessary to ensure production continues it is more likely that a business will be carried on. Much depends on the particular activity as to whether or not a lack of repetition and/or irregularity of activity show a hobby, lack of intention to make a profit or lack of commercial purpose.

26. This criterion is based on the activity of buying and selling of which, as discussed, there is little.

27. Repetition and regularity, therefore, being low and irregular, indicates that a business was not being conducted.

Activities are of the same kind as in the industry

28. The test to be used to determine if a venture is or is not, -in the nature of trade, is whether the operations involved in it are of the same kind and carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was made; IR Commissioners v. Livingston (1927) 11 TC 538 per Lord Clyde.

29. In considering this indicator the following will be taken into account:

· the manner and volume of sales;

· the types of customers the taxpayer sells their product to;

· what sort of expenses are incurred by the taxpayer;

· the amount invested in capital items; and

· previous experience of the taxpayer.

30. The Partnership submits that one of the partners has considerable experience working in the cattle industry and that this experience assisted the Partnership in its endeavour. It is accepted that this experience would have assisted the Partnership in its activities.

31. The Partnership also sold its product through the local abattoirs, a practice consistent with others in the cattle industry. However, the Partnership's operations were consistently unprofitable due to the low level of sales and the large expenses incurred and it is not considered that these activities are of a similar kind as in the industry.

Organisation in a Businesslike manner

32. A business should be carried on in a systematic and organised manner rather than in an ad hoc, haphazard or disorganised way; Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873, FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. Regard may be had to whether it is being carried on in a manner that conforms with ordinary commercial principles.

33. The weight that is attached to this indicator will depend on the facts of the situation. A taxpayer may still carry on a business of primary production despite being naive or a poor business person.

34. The Partnership states it maintained separate books and had a separate bank account which it used for capital purchasers. It is accepted that the Partnerships activities were conducted in a business-like and organised manner.

The intention of the taxpayer

35. The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. Little activity may suffice for carrying on a business which does not call for much activity, as in Thomas & Ferguson cases. It must be remembered that business is not confined to being busy; in many businesses long intervals of inactivity occur; Inglis v FC of T 80 ATC 4001; (1980) 10 ATR 493 per Brennan J. at 4004-4005; 496-497.

36. At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree. The taxpayer's intention to carry on a business of primary production must be looked at objectively and in the light of the other indicators.

37. When looking at the intention of the taxpayer to carry on a business one looks at the acts that are done in connection with the business, i.e., what is the taxpayer's involvement in the business.

38. As discussed above, the ability of the venture to make a profit in any given year and activity levels do not support the conclusion that the Partnership intended to carry on a business.

Significant commercial purpose or character

39. This indicator generally covers aspects of all the other indicators. The business should be carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and that the taxpayer's involvement in the activity is capable of producing a tax profit.

40. Paragraph 28 of TR 97/11 states:

It is frequently those taxpayers, who earn income from employment or other sources and/or enter into some sort of primary production activity in a small way, who want to show that they are in a business of primary production. These taxpayers usually claim deductions for losses for taxation purposes in the first years of being involved in this activity. In showing that a business is being carried on, it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, ie., that the activity is carried on for commercial reasons and in a commercially viable manner.

41. The Partnership states the Property was suitable for the purpose of running a cattle business.

42. A partner to the Partnership had experience in cattle production gained form his previous employment.

43. However as previously discussed, the level of activities undertaken does not support a conclusion that the Partnership was carrying on a business of primary production.

44. The activities conducted by the Partnership were more in keeping with a purpose of improving the Property rather than carrying on a business as the majority of activities carried out by the Partnership were centred on the improvement of this land

45. The mere engagement in steps preparatory to the commencement of a business, or laying the groundwork for the commencement of a business, is not carrying on a business of primary production; Case H30 76 ATC 271; Case J62 77 ATC 532; Case N101 81 ATC 560; Case P9 82 ATC 48; Case Q2 83 ATC 4; Case Q105 83 ATC 530; Case Q107 83 ATC 554 and Case R14 84 ATC 171

46. To prepare land for primary production, even for primary production thereon by the person making the improvement is not of itself to engage in primary production. Where land is, at the time when the expenditure is incurred, incapable of being used for primary production and the expenditure is incurred in order to bring it into a condition in which it will be possible to use it for primary production it cannot be said that the taxpayer is engaged in primary production on that land; Southern Estates Pty Ltd v FC of T (1967) 117 CLR 481; 14 ATD 543.

47. When considering the activities undertaken by the Partnership regarding its herd management and the activities directed towards improving the Property, it is not considered that the enterprise was conducted with a significant commercial purpose in mind.

48. Therefore it is not considered that the Partnership was in the business of primary production.