Edited version of your written advice

Authorisation Number: 1012888215883

Date of advice: 12 August 2015

Ruling

Subject: Primary production business

Question 1

Will the XXX Family Trust be considered to be carrying on a business of primary production under the proposed joint venture agreement?

Answer

The XXX Family Trust will be considered to be carrying on a business of primary production under the proposed joint venture agreement.

Question 2

If the controller of the XXX Family Trust ceases to be actively involved in the day to day business activities of the joint venture, would the Trust then be considered to be in receipt of passive income and not carrying a business?

Answer

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business, but instead would be regarded as the passive receipt of income from property.

Question 3

If the XXX Family Trust did not pay any of the operating expenses and was only paid a percentage of the gross amount, would the XXX Family Trust not be considered to be carrying on a business and would the income then be considered passive income?

Answer

In the absence of any involvement by the controller of the XXX Family Trust the receipt of a percentage of the gross amount would be in the nature of income from property rather than from carrying on a business of primary production.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 October 2015

Relevant facts and circumstances

The Trustee for the XXX Family Trust and an associated trust, the YYY Family Trust are proposing to establish a joint venture arrangement, commencing on early October 20AA, to carry on a business.

The proposed joint venture arrangement is % YYY Family Trust and % XXX Family Trust. No formal agreement has been established; however the proposed joint venture is not for a specific period of time as it is proposed to continue indefinitely.

The XXX Family Trust will provide the vessel in an appropriate condition with all necessary equipment and pay for the annual survey costs and repairs to the vessel. The XXX Family Trust will also provide the majority of the units of quota to be used.

The YYY Family Trust will provide the staff to operate the vessel. The YYY Family Trust will be responsible for the wages and the workers compensation cost. The YYY Family Trust will also provide some units of quota to be used.

Both trusts will lease jointly additional supplies from a third party. Both trusts run their own quota monitoring system on their computers which will be crossed once a fortnight with each other.

The goods will be dealt with independently through the local specialised co-op.

Each trust will receive a statement from the co-op for their share of the goods and a percentage of the expenses incurred through the co-op.

The trusts will share the main expenses, according to their relevant percentage.

The controller of the XXX Family Trust will be actively involved in the running of the proposed joint venture in the following ways:

• Providing specific licences

• Assist with the loading and unloading of the goods

• Attend to any maintenance required on the vessel or equipment

• Liaise with the co-op regarding the day to day management of the goods and expenses

• Payment of expenses on behalf of the joint venture and monitoring of business performance

• Maintenance of records

• Backup staff should one be required.

The industry is based on a quota system. This allows the operators to choose the best time and therefore maximise their average price. The operation will be carried out with the intention of making a profit.

Relevant legislative provisions

Income Tax Assessment Act 1997

Subsection 995-1(1)

Income Tax Assessment Act 1936

Subsection 6(1)

Part X

Section 317

Section 446

Reasons for decision

Question 1

Summary

The XXX Family Trust will be considered to be carrying on a business of primary production under the proposed joint venture agreement.

Detailed reasoning

A primary production business is defined in subsection 995-1(1) of the ITAA 1997 as:

Carrying on a business of:

(a) cultivating or propagating pants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

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

(c) manufacturing dairy produce from raw material that you produced; or

(d) conducting operations relating directly to taking or catching fish, turtles, dugong, beche-de-mer, crustaceans or aquatic molluscs; or

(e) conducting operations relating directly to taking or culturing pearls or pearl shell; or

(f) planting or tending trees in a plantation or forest that are intended to be felled; or

(g) felling trees in a plantation or forest; or

(h) transporting trees, or parts of trees, that you felled in a plantation or forest to the place:

(i) where they are first to be milled or processed; or

(ii) from which they are to be transported to the place where they are first to be milled or processed.

The joint venture arrangement that you propose to enter into with the YYY Family Trust is for the purpose of a particular business. The proposed split of the goods from the arrangement is % to the XXX Family Trust and % to the YYY Family Trust.

Under the proposed arrangement the XXX Family Trust will provide the vessel and some of the licences to be used. The YYY Family Trust will provide the appropriate staff. The entities will also jointly lease additional supplies. The XXX Family Trust and the YYY Trust will split the main expenses, in the same proportion that they split the goods.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) considers the meaning of 'business' of 'primary production' in the ITAA 1997 and provides a guide to the indicators that are relevant as to whether or not a person is carrying on a business of primary production. These indicators are listed below:

i) whether the activity has a significant commercial purpose or character ( Thomas v FC of T 72 ATC 4094)

(ii) whether the taxpayer has more than just an intention to engage in business

(Inglis v FC of T 80 ATC 4001)

(iii) whether the taxpayer has a purpose of profit as well as the profitability of the activity ( FC of T v Walker 85 ATC 4179)

(iv) whether there is repetition and regularity of the activity (Walker)

(v) whether the activity is of the same kind and carried on in the same manner to that of the ordinary trade in that line of business ( IR Commissioners v Livingston (1926) 11 TC 538)

(vi) whether the activity is planned, organised and carried on in a businesslike manner such that it is directed to making a profit ( Ferguson v FC of T 79 ATC 4261)

(vii) the size, scale and permanence of the activity (Thomas, Walker), and

(viii) whether the activity is better described as a hobby, a form of recreation or a sporting activity (Ferguson).

No one factor is decisive and all factors are to be considered in combination and as a whole in deciding if a business is being carried on.

A summary of the main indicators which suggest you will be carrying on a business of primary production is set out below:

Significant commercial activity

The trust operates a vessel and has the necessary licences to undertake their specific business. There is a market for this, which will be sold to the local co-op. The size and scale of the venture and the resources to be used suggests that it is sufficient for a commercial enterprise. The trust has a reasonable expectation that the venture will be profitable.

Purpose and intention of the taxpayer engaging in the activity

The intention of a taxpayer in engaging in an activity is a relevant indicator. The purpose of the joint venture is to carry on a business with a view to making a profit. Both trusts will each provide their supplies and lease other supplies and will employ staff to assist with the operation of the business. The scale of the operation suggests that it is more than the pursuit of a recreational or sporting activity.

An intention to make a profit from the activity

It is important that a taxpayer be able to show how the proposed activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into the proposed activity, consulted experts, or received advice on the running of it and the profitability of it before setting up the business. The proposed joint venture has all the necessary resources to undertake the business with a strong likelihood that it will be a profitable activity.

The activity is or will be profitable

Information from a specific Department suggests that an entity with a sufficient quota is likely to make this business a profitable activity if the business is conducted in an organised manner and sufficient time and resources are invested in the activity.

Repetition and regularity of the activity

It is often a feature of a business that similar sorts of activities are carried on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the "carrying on" of a business. The business clearly involves a series of activities which are repeated on a regular basis.

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

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities.

The proposed activity appears to be similar to the manner in which other participants in the business carry on their business. The XXX Family Trust owns or will lease commercial supplies and intends to sell the goods to the local co-op. The XXX Family Trust will keep records of the goods. Both trusts will operate a quota monitoring system which is cross checked with each other on a fortnightly basis.

Activity organised and carried on in a businesslike manner and systematically - records are kept

A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. In JR Walker, Ryan J was satisfied that the taxpayer was in the business of goat breeding as he had "organised his activities in a business-like way through the keeping of books of account."

The proposed venture will keep records and monitor quotas as well as keep records of expenses incurred. The XXX FamilyTrust will keep records of wages paid to the staff and other associated costs.

Size and scale of the activity

Generally, the larger the size and scale of the activity the more likely it will be that the taxpayer is carrying a business of primary production.

The proposed undertaking appears to be similar in size and scale to the activities carried on by other entities involved in the same business.

Not a hobby, recreation or sporting activity

The pursuit of a hobby is no the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and is therefore not assessable.

The proposed venture can be distinguished from a hobby for the following reasons:

• The proposed activity has a profit making purpose

• The size and scale of the activity is in excess of what would be expected from a person indulging in a hobby

• Detailed records of income and expenses will be kept

• There is an established market for the catch.

• The activity will be carried on in a business-like manner

• The venture will employ crew to assist in the carrying on of the business

In addition the XXX FamilyTrust will be actively involved in the undertaking through its controller who will assist with the loading and unloading of the goods, provide on-going maintenance, keep records, monitor business performance and act as backup staff.

Conclusion

As the proposed arrangement meets the criteria set out in TR 97/11 and there is active involvement in the scheme by the controller of the Trust, it is accepted that the XXX Family Trust will be carrying on a business of primary production.

Question 2

Summary

The Trust will not be considered to be carrying on a business of primary production if there is no active involvement by the Trust in the business which generates the income.

Detailed reasoning

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v McDonald 87 ATC 4541; (1987) 18 ATR 957), but would generally be the passive receipt of income from property. Taxation Determination TD 95/62 explains how this concept applies in the context of a share-farming arrangement. Relevantly, the TD states at paragraphs 5 to 8:

5. To be carrying on a business, the taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of the land would not, without more, be sufficient.

6. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production. The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather from the carrying on a business of primary production.

7. Similar reasoning would apply if the share-farming agreement was for the provision of machinery or items of plant.

8. These principles would also apply if instead of the cultivation of the land, the activity conducted was any of those mentioned in the definition of primary production in subsection 995-1(1) of the ITAA 1997.

As noted in paragraph 8 above, the principles set out in TD 95/62 apply to any primary production activities including:

conducting operations relating directly to taking or catching fish, turtles, dugong, beche-de-mer, crustaceans or aquatic molluscs;

Where the asset that is used in a business is a boat, Taxation Ruling TR 2003/4 (boat hire arrangements) relevantly states:

• 'If the boat owner's involvement in the activity amounts to no more than the passive receipt of income for the lease or hire of the boat, then they are not carrying a business in respect of that boat and does not satisfy the requirements of the exception.' (para 41)

• 'The provision of a boat under a lease does not of itself indicate that the taxpayer is participating in the business of the person who uses the asset in the ordinary course of their business.' (para 42)

• 'Payment to the taxpayer made in the form of a percentage of the charter income from the boat held and used by the charter operator or other party does not of itself result in the taxpayer carrying on a business in common with the charter operator.' (para 43).

Conclusion

If there is no direct or immediate involvement by the controller of the Trust, the XXX Family Trust will not be considered to be carrying on a business of primary production and any income received from this activity will treated as passive income.

Question 3

Summary

In the absence of any involvement by the controller of the Trust the receipt of a percentage of the gross goods would be in the nature of income from property rather than from carrying on a business of primary production

Detailed reasoning

In AAT Case 71 ATC 233, the taxpayer, who was a bank manager and a skilled cray fisherman, entered into an agreement with four persons whereby he agreed to lease to them for 12 months a fishing boat and equipment of which he was the licenced owner. The consideration was to be '25% of the gross proceeds of the vessel' during the term of the lease. All running expenses associated with the cray fishing operations were met by the lessees, the expenses of engine overhauls, slipping, painting and insurance being met by the taxpayer. The lessees disposed of the haul, received payment and from time to time drew cheques in the taxpayer's favour for the amounts owed to him.

The taxpayer claimed an investment allowance in respect of the cost of the boat and also the benefit of the application of the primary production averaging provisions.

The Board of Review held that the taxpayer was not conducting fishing operations either on his own account or jointly with others and consequently the boat was not for use by the taxpayer for the purpose of carrying on a business of primary production nor was the taxpayer a 'primary producer'.

Accordingly, if the Trust does not have any direct or immediate involvement in the business the receipt of a percentage of the goods will not of itself result in the Trust carrying on a business of primary production. The payment will be regarded as a passive receipt of income from property, as explained in our response to Question 2.

Conclusion

If there is no direct or immediate involvement by the controller of the Trust, the XXX Family Trust will not be considered to be carrying on a business of primary production and any income received from this activity will treated as passive income.