Edited version of private advice

Authorisation Number: 1051649471439

Date of advice: 26 March 2020

Ruling

Subject: Am I a small business entity

Question

Is the entity (the Company) a small business entity for the purposes of section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Section 328-110 of the ITAA 1997 states that you will be a small business entity for an income year if;

(a) you carry on a business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million.

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

Taxation Ruling TR 2019/1 provides the Commissioner's views on when a company is carrying on a business for the purposes of section 328-110 of the ITAA 1997.

Based on the facts provided, the Company is carrying on a business for the purposes of section 328-110 of the ITAA 1997 and will also meet the relevant conditions contained in section 328-110 of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

The entity (the Company) is an Australian private company.

The company's activities consist of primary production operations carried out on a large property (the Property) located in a state of Australia. The Property was purchased by the Company many years ago.

Currently, the main activity of the company is the breeding of livestock. Until recently, the Company also retained another type of livestock for the purposes of breeding.

Business strategy

The Company's overall business plan involves utilising the Property for the purpose of breeding livestock. Currently, this involves retaining between XXX to XXX breeding livestock (excluding offspring), with the progeny being sold into the commercial livestock exchanges. The company aims to sell around XXX yearlings per year. The Company aims to retain a minimum of XX replacement livestock each year.

Until early 20XX the Company had also retained a significant number of different livestock for breeding purposes. The decision to sell the Company's different livestock which had aged in 20XX was made because of unusually dry conditions, increased kangaroo numbers (which affects feed and fencing), and the impact of a lice infection from a neighbouring property.

The Company is currently considering returning to breeding the different livestock. If the Company chooses to move back to this other activity, it will aim to maintain a maximum of XXX livestock. This aims to achieve a minimum of $XXX gross annual income from these other livestock sales alone and is based on a very significant stocking capacity for the property.

Each year the Company prepares budgets to plan income and expenditure, manage cash flow and seek to maximise profitability from the land.

The Company's business plan focuses on sustainability. This involves matching livestock numbers to pasture and stock water availability. This has meant that the Company has needed to destock some livestock in response to particularly dry periods.

The Company operates in a systematic way based on significant research, decision tools and agricultural knowledge, and is held accountable to its shareholders.

Operations

The Company's usual practice is to sell during two special yearling sales organised by agents. These sales occur annually in December and January. In December, the Company sells its young male and female livestock bred for commercial use. In January, the Company sells the males from the replacement breeding group. The females from this group are retained and assessed in April, using a point scoring system to evaluate various aspects of their body and selling those livestock that do not make the grade. The livestock that are retained are placed with a low-birth-weight male, which has been bred by the Company, and their feed requirements are adjusted so that they are cycling by late May/early June when they are on average 15 months old.

Day to day operations are carefully planned to ensure the efficient utilisation of the land including pasture management. Livestock management schedules are prepared in advance on a quarterly basis to plan operational activities including the regular movement of livestock within the property.

Expertise of management and employees

One of the Company's directors performs the role of Farm Manager. This director has significant expertise in agricultural business, including from formal studies in Agricultural Science and business at an Australian University and a number of short courses including one on maximising livestock enterprise profits and another on whole farm planning. This director is an active member of a number of industry groups.

The Company also employs staff that have significant knowledge and experience in agriculture. The two part-time employees both have a Diploma in Agriculture & Agronomy. The Company has also recently started mentoring an Agricultural Science university student.

Property

There are three dwellings on the Property, the main homestead, and two cottages. The homestead houses a manager's office and is not currently used as a residence. The cottages have been used in the past to house farm workers but are currently not required for this purpose and are rented.

One cottage shares its water supply with the main farm, and its occupation allows the operation of a critical water pump to be monitored continuously.

The Company also agists livestock on the Property from time to time where capacity allows in the ordinary course of its own livestock operations.

The leasing of the two cottages, and the agistment activities are considered to be incidental to and form part of the business activities of the Company in utilising the Property for a profit-making purpose.

Financial performance

In recent years, the Company's overall activities have generally produced modest losses, however the company returned to profitability in the 20XX income year. Throughout the period of losses, the Company continued to generate a profit in most years from its primary production activities before general expenses including financing and landholding expenses.

The years of losses are considered to be attributable to unusually difficult conditions experienced across the industry, including lower than average rainfall over an extended period. The return to profitability in 20XX is expected to continue in future years based on current conditions.

The Company was in operation in the 20XX-XX and 20XX-XX financial years and had an aggregated turnover of less than $XXX in each of those financial years.

The Company had an aggregated turnover of less than $XXX for the 20XX financial year. The Company is expected to have an aggregated turnover of less than $XXX in the 20XX and 20XX income years.

Assumptions

It is assumed the Company will have aggregated turnover of less than $XXX in the 20XX income year, and its current activities will continue in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-110