Edited version of your written advice

Authorisation Number: 1051343980826

Date of advice: 23 March 2018

Ruling

Subject: Am I in business as a primary producer

Question and answer

Are you a primary producer?

Yes.

Is the amount you receive for the harvesting income?

Yes.

Are you entitled to use the farm management deposit scheme?

No.

This ruling applies for the following periods:

Year ending 30 June 2018

The scheme commenced on:

1 July 2017

Relevant facts and circumstances

You own an amount of land.

You leased your land to a third party in the 2006 income year for them to grow a crop.

The terms and conditions of the lease, provided that the lessee plant the crop on the land owned by you at their cost and maintain the crop for the duration of the lease, also at their cost. At the end of the lease, the lessee would harvest the crop and collect 100% of the proceeds to keep for themselves.

You granted to the lessee the lease of the land to be used by the lessee to grow a crop. Under the lease the timber trees remain the ownership of the lessee.

In return for leasing the land you were to receive an annual lease fee as indicated in the lease document.

You had no financial benefit being derived from the sale of the crop once harvested.

The intention to enter into this lease agreement was purely to receive an income stream and allow you to retire.

In the 2010 income year the lessee went into administration at which time you could have executed the termination clauses of the lease at which time the crop would have reverted to you taking ownership of the crop.

You decided not to terminate the lease but rather allow another company, to take out a sub-lease with the administrators of the lessee to allow the continuation of the lease as the crop had only been planted for three years by this time. The contents of the sub-lease were exactly the same lease payments and terms & conditions of the head lease with no change.

The second company also went into liquidation.

Since this time you have engaged lawyers at your expense to have both the head lease & sub lease terminated and the crop revert to your ownership under the leases. However this has been a drawn-out and timely exercise. Both leases were finally surrendered in the 2018 income year, some five years later.

You receive no income stream and you have very little assessable income and you rely on your spouse to work to produce your family income.

You had to expend money in the maintenance of pest control sprays, weed sprays and whatever else necessary to ensure their continued growth.

The crop will be ready to harvest in the 2017/18 financial year and will return you approximately $XX,XXX.XX..

You do not intend on planting another crop once harvesting has ceased.

You intend on leasing the land to a family member and running some cattle for personal use on the remainder of the land.

You are not a primary producer of cattle.

Your taxable non-primary production income is greater than $100,000.00.

You intend on opening a farm management deposit account once you have received our ruling.

Any deposit you make to the farm management account will be made by you.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 393-5

Reasons for decision

Where an individual is carrying on a business, the proceeds received from that activity are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all the relevant indicators. No one indictor determines whether or not a business is being carried on.

Taxation Ruling TR 97/11 income Tax: am I carrying on a business of primary production (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

● Whether the activity has a significant commercial purpose or character,

● Whether the taxpayer has more than an intention to engage in business,

● Whether a 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 that is 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 out in a businesslike manner,

● The size, scale and permanency of the activity,

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

The Commissioner is satisfied that you are carrying on a primary production business because you will make a profit from the harvesting of the crop , the operation you entered into was planned and carried out in a organised and business like manner.

the amount you receive from the harvesting of the crop is income and is assessable under section 6-5 of the ITAA 1997.

Farm Management Deposit Scheme

Subsection 393-5 of the ITAA 1997 states:

(1) You can deduct the amount of a farm management deposit for an income year if

(a) You are the owner of the deposit: and

(b) the deposit is made at a time during the year when you are an individual carrying on a primary production business in Australia; and

(c) if during the year, at a time after the deposit was made, you stopped carrying on a primary production business in Australia--you started carrying on such a business again within 120 days (whether or not during the year); and

(d) your * taxable non-primary production income for the year is not more than $100,000; and

(e) you do not die or become bankrupt during the year.

You are not eligible to use the farm management deposit scheme as your taxable non-primary production income is greater than $100,000.00.

ATO view documents

Taxation Ruling TR 97/11

Cases

Does Part IVA or any other anti-avoidance provision apply to this ruling?

The application of Part IVA of the ITAA 1936 has not been considered as this topic is in the SBIT low risk PART IVA list as specified in ORCLA.