Edited version of your written advice

Authorisation Number: 1013034183615

Date of advice: 16 June 2016

Ruling

Subject: CGT - SBC - active asset - share farming

Question

Is land an active asset when used for share farming?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You acquired land

You entered into a share farming agreement.

The terms of the agreement included:

• you were entitled to a percentage of the gross proceeds

• the farmer was solely responsible for all costs relating to the farming of the land

• the farmer was to reimburse some of your costs of ownership of the land

• the farmer had the use of your Plant for the purpose of farming and working of the land

• the farmer was to maintain and repair all of your Plant and return it to you at the end of the agreement in as good and proper state of repair as existed at the date of commencement of the agreement

• the farmer had the unrestricted use of the fixed improvements on the land (including sheds and workshops) for all purposes relating to the farming of the land

• the farmer was to keep all fences, buildings and other improvements on the land in good and tenantable repair, reasonable wear and tear excepted

• you were to insure all your Plant for risk of damage by the farmer; however, the farmer was to reimburse you for the insurance premiums paid

• the farmer agreed to occupy and use the land at its own risk and you were not liable to the farmer for any damage to any property of or in the possession of the farmer and contained in or about the land howsoever occurring or for any loss of profits resulting therefrom except to the extent that such loss or damage was caused or contributed to by your negligence.

You carried out the following during the period of the agreement:

• supervision of all property maintenance and production on the property

• supervision and review of payments received, reporting and receipts

• paid insurance and maintained all sheds and irrigation equipment, and

• paid rates on the property.

You disposed of the land.

The farmer is not your affiliate or an entity connected with you.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision

Summary

The land was not used or held ready for use in the course of carrying on a business that was carried on by you, your affiliate or another entity that was connected with you during the period it was used for share farming. As such, the land was not an active asset during that time.

Detailed reasoning

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

A CGT asset is an active asset (subject to the exclusions) at a time if at that time it is owned and used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate, or another entity that is connected with you (paragraph 152-40(1)(a) of the ITAA 1997).

However, an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary) (paragraph 152-40(4)(e) of the ITAA 1997). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

In your case, as the farmer was not your affiliate, or an entity connected with you, the land must have been used or held ready for use in the course of carrying on a business carried on by you.

Carrying on a business

Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to determining whether primary production activities constitute the carrying on of a business.

The courts have held that the following indicators are relevant:

• whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators

• 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 there is repetition and regularity of the activity

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

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

• the size, scale and permanency of the activity, and

• whether the activity is better described as a hobby, a form of recreation or a sporting activity.

All the facts and circumstances in each case must be examined. No one indicator is decisive and the indicators often overlap significantly. The indicators must be considered in combination and as a whole. Whether activities amount to the carrying on of a business will depend on the 'large or general impression gained' and whether the operations overall have a 'commercial flavour'.

Share farming

Taxation Determination TD 95/62 discusses whether the owner of land who allows the land to be used in a share farming arrangement would be considered to be engaged in a business of primary production and states:

In certain circumstances, a share farming arrangement may amount to the carrying on of a business in partnership. Factors which are considered by the Commissioner to be relevant to the existence or otherwise of a partnership generally are set out in Taxation Ruling TR 94/8. If a partnership is in existence then each partner will of course be considered to be carrying on that business.

Many arrangements do not amount to the carrying on of a business in partnership. In such cases, the fact that the land is used for cultivation in a business of primary production does not necessarily mean that the owner of the land is also carrying on that business.

To be carrying on a business, the taxpayer must be involved in the activities that make up the 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.

Taxation Ruling TR 94/8 provides that there are no statutory rules in the income tax law for deciding whether entities are carrying on business as partners. The question of whether a partnership exists is one of fact.

The essential element for a partnership to exist is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties. Relevant factors in deciding whether persons are carrying on business as partners include:

• joint ownership of business assets

• registration of business name

• joint business account and the power to operate it

• extent to which parties are involved in the conduct of the business

• extent of capital contributions

• entitlements to a share of net profits, and

• business records

• trading in joint names, and

• public recognition of the partnership.

Having regard to the indicators of carrying on a business and the relevant factors for determining if a partnership exists, the land was not used or held ready for use in a business carried on by you because:

• it appears that the intention of the parties in entering into the share farming agreement was to enter into a mutually beneficial arrangement; however, there is no suggestion that there was any intention to act as partners

• there was no joint ownership of business assets

• no joint business name was registered, there were no joint bank accounts held and no joint business records were kept

• the payments you received were not a share of net profits equal to a share of business income less business expenses; rather the payments were a percentage of the gross proceeds, from which you paid your own expenses

• while you paid expenses (some of which were reimbursed) in relation to the land, Plant and improvements, the farmer was solely responsible for all costs relating to the farming of the land, and

• although you supervised and reviewed payments received, reports and receipts, and supervised property maintenance and production on the property, you were not actively involved in the farming activities, nor is there any evidence that you had any element of control over these activities.

As the land was not used or held ready for use in the course of carrying on a business that was carried on by you, your affiliate or another entity connected with you, the land was not an active asset during the period it was used for share farming.

It should also be noted that, if the land was considered to have been used by you in the course of carrying on a business (in your own right), the payments you received for the use of the land would be in the nature of income from property. In that case, the rental exclusion in paragraph 152-40(4)(e) of the ITAA 1997 would apply and the land would not be an active asset.