Edited version of your private ruling

Authorisation Number: 1012513555416

Ruling

Subject: Primary production business

Question 1

Is the Company carrying on a primary production business in accordance with section 995-1 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

· The Company is the head company of a consolidated group with 2 wholly owned subsidiaries

· Subsidiary 1 maintains animals to take bodily produce for the purpose of manufacturing veterinary goods for sale

· Subsidiary 2 holds property

· The animals and the taken bodily produce are not sold

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 701-1 and

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

The Company is the head of a consolidated group which has 2 subsidiary members (subsidiary 1 and subsidiary 2). As such, any decision on whether the Company is carrying on a primary production business has to be made in the context of the single entity rule (the SER) in Division 701 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 701-1 of the ITAA 1997 provides:

701-1 Single entity rule

701-1(1)  If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period.

The meaning and application of the SER are considered in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. The ruling explains the SER principle and its application to members of consolidated groups as follows:

3.  Section 701-1 of the ITAA 1997 is a key provision of the consolidation regime. It is the means by which the members of a consolidated group are treated as a single entity (being the head company) for income tax purposes.

4.  The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity.

… 

Consequences of the SER

 

7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation…; and

(d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

…

17.  The principle underlying the SER is to treat a consolidated group as a single entity, with the head company being that entity for income tax purposes. To this end the SER deems the subsidiary members of the consolidated group to be parts of the head company rather than separate entities.

The activities of each member of the consolidated group are as follows:

The Company - holds shares in the subsidiaries. It does not otherwise operate

Subsidiary 1 - manufactures veterinary goods. Subsidiary 1 owns animals and takes bodily produce from the animals. The bodily produce is processed to manufacture veterinary goods, which are packaged and sold.

Subsidiary 2 - owns property relating to the maintenance of animals and the manufacturing process. It does not otherwise operate.

In accordance with the SER, the activities of subsidiary 1 and subsidiary 2 are treated as activities of the Company.

The definition of 'primary production business' in section 995-1 of the ITAA 1997 includes carrying on a business of:

(b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase)

The Company maintains animals to collect their bodily produce which is used to manufacture veterinary goods. The Company does not sell any raw bodily produce, and does not otherwise sell the animals. Although the Company maintains animals and uses their bodily produce in carrying on its business, it cannot be said that the Company is in the business of selling the animals or the bodily produce of the animals. Rather, the Company's business is to commercially manufacture veterinary goods for distribution.

The Company does not produce primary production as described in subsection 995-1 of the ITAA 1997. As such, the Company is not considered to be carrying on a primary production business