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Edited version of your written advice
Authorisation Number: 1013022788831
Date of advice: 24 May 2016
Ruling
Subject: Non Commercial Losses - separate business activities
Question 1
Is the rental activity considered to be a separate activity from the farming business activity?
Answer
Yes.
Question 2
Can the rental income form part of the assessable income of the farming business for Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) purposes?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You run a farming business. The farm has been operating for several years.
You are also in full time employment.
You need to employ a farm manager to handle the day to day operations. You wish for the farm manager to live on the property in order to attend to any emergencies as they occur.
You have built a building on the farm which includes a caretaker's residence, and a commercial kitchen and packaging facility.
You plan to rent the residence at market value to the caretaker and pay a standard wage for labour
It is essential for the farm caretaker to live on the property in order to perform daily chores which include early morning and late evening husbandry of livestock, and address any emergencies as they occur.
The caretaker's residence is connected to the commercial kitchen where the processing and packaging is conducted.
There is one toilet for the caretaker and farm staff, which is located in the caretaker's residence section.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 35.
Reasons for decision
Where there are separate business activities, Division 35 of the ITAA 1997 needs to be applied to each business activity separately.
Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses provides guidelines on the meaning of a business activity and whether there is a separate activity.
The question of whether there are one or multiple business activities is a question of fact and overall impression. There are a number of factors which can be considered to help determine whether there are one or multiple business activities. These include the location of each activity, the assets used in each activity, the goods and services produced by each activity, the interdependency of the activities and any commercial links between the activities.
An activity that forms part of a taxpayer's overall business will not be a separate 'business activity' unless it is capable of standing alone as an autonomous commercial undertaking of some sort. (paragraph 38 of TR 2001/14)
In your case, the residence is located on the same property as your farming business.
The assets used in each activity are different and there is no equipment that is utilised in both activities. The caretaker's residence is not necessary in order for the farm to produce income. Although the toilet is located within the caretaker's residence, it is not an inherent requirement of each business activity.
The goods produced in each activity are vastly different and service vastly different markets. The farming business produces plants and animals that are sold or are processed on site for sale. The caretaker's residence produces rental income.
The activities are not interdependent and any commercial links are incidental. Each activity is capable of standing alone and being profitable. It is acknowledged that it is convenient for the farm manager to be living on site, however it is not considered that this activity is a core component of your farming business. The residence can also be rented to others who are not farm employees.
The renting of the residence on your farm does not significantly impact the primary production activities of your farming business. The working capital, customer base and manner in which you carry out your farming operations have little or no relationship to the renting of the residence. Similarly the residence rental has little impact on the farming business.
Based on the facts and the overall impression, your rental activities and your farming business are considered to be two separate activities for Division 35 of the ITAA 1997.
Please note that renting the residence is not regarded as a business and therefore Division 35 of the ITAA 1997 does not apply.