Edited version of private advice

Authorisation Number: 1051668146499

Date of advice: 30 April 2020

Ruling

Subject: Am I in business?

Question 1

During the 2017-18 financial year were you considered to be carrying on a business in relation to your primary production activity (the activity)?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses in relation to the activity in your calculation of taxable income for the 2017-18financial year?

Answer

Not applicable.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commenced on:

1 July 2017

Relevant facts and circumstances

It was your intention to commence a primary production business activity of growing produce in a specific area of Australia, which according to the research you completed was deemed to be a suitable area for that activity.

An ABN was registered late 2017 for the partnership (comprising of Partner A and Partner B).

A consultant was engaged to provide initial advice in late 2017.

Soil testing was completed in late 2017 where a specific property (the property) was found to be suitable for the growing activity.

The property was then purchased a short time later, also in late 2017 (sale contract signed) but it didn't settle until mid-2018 (prior to 30 June 2018) due to council issues and delays.

You both attended a 'lifestyle farming course' in early 2018 to look at the suitability of running some livestock on the property in the future.

Several items were required to be purchased in 2018 to start the initial set up of the property in readiness for the preparations for the plot of land where the trees would initially be planted, however according to the business plan the farming equipment were all purchased in late 2018 (in the 2018-19 year).

A consultant was engaged in late 2018 to prepare the required documentation for the farm establishment project, and the final recommendation was received in early 2019.

You chose a specific species of the produce to be grown.

The produce forms during summer, grows in size during autumn and is generally harvested over winter.

Partner A visited Country Y in late 2018 to do a site inspection of a farm growing the same type of produce you intended to grow.

Your intention is to establish the farm in two stages as follows:

-          Stage one includes just under 1.5 hectares with a few hundred trees to be planted in Autumn 2020 (classed as a medium sized farm).

-          Stage two will include additional land just over 1.5 hectares with a few hundred more trees to be planted in Autumn 2022 (classed as a large farm).

Work commenced to prepare the plot of land cultivated to grow the produce in early 2019, but several items were required to be purchased in 2018 to start the initial set up of the property in readiness for the preparations for that plot of land. The required processes were followed to have first lot of trees planted in Autumn 2020.

The process of establishing the plot of land is one that takes time as the soil conditions in Australia need to be adjusted to suit the growing of the produce. The work involved was over a timeframe of just over a year (between Autumn 2019 and Autumn 2020). Planting of the trees in the plot of land must be in Autumn.

You ordered the trees in Autumn 2019 where you paid a 25% deposit and as the new trees require a 12 month inoculation program, you were not able to plant the trees until Autumn 2020.

Certain specialised jobs had to be done by external contractors, with the main one being preparation of the soil for the lime spreading and the actual spreading of the lime (which needs special machinery) and irrigation and fencing.

Site analysis is planned for late 2020 for the next new site, and if a new site is deemed appropriate, soil testing will occur shortly after (phase two).

The implementation of phase 2 will follow the same principle as phase 1, with earthworks etc. commencing in Autumn 2021. The new trees will be pre-ordered in Autumn 2021 as they will also require a 12 month inoculation program. The final stages are planned in Autumn 2022. Phase two is expected to add another area of land just over 1.6 hectares in size to add an additional few hundred trees, bringing the entire number of trees up to 1000 (classed as a large farm).

You project a profit in the 2027-28 financial year from the farming activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(1)

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Income Tax Assessment Act 1997 Paragraph 35-55(1)(b)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Non-commercial losses and the Commissioner's discretion

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

·                you satisfy the income requirement and you pass one of the four tests

·                the exceptions apply

·                the Commissioner exercises his discretion.

However, for this division to apply, you must be carrying on a business.

In your case, your activities for the 2017-18 financial year are considered preliminary to the carrying on of your intended business. As such you are not carrying on a business for the 2017-18 financial year, and the non-commercial loss provisions will have no application.

Detailed reason for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

·                you satisfy the income requirement and you pass one of the four tests

·                the exceptions apply

·                the Commissioner exercises his discretion.

However, for this division to apply, your activity should be carried on as a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. The facts of each case must be examined. In Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, Webb J said:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

When does a business activity commence?

The actual date of commencement of a business activity is a question of fact (Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26) (Goodman Fielder Wattie).

For a business activity to have commenced a person must have:

·                purpose, intention and decision to commence the business activity

·                acquired a minimum level of business assets to allow that business activity to be carried on, and

·                actually commenced business operations (Calkin v. CIR [1984] 1 NZLR 440).

A mere intention start carrying on the business activity will not be sufficient.

The indicators above are also set out in paragraph 69A of Taxation Ruling (TR) 2001/14, and we must examine these indicators in light of the characterisation of your business activity.

For example, if your business activity is characterised as a primary production activity, involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as the manufacturing and selling of a product, the business would generally be considered to commence once you have manufactured and begun selling the product.

In your case the business activity you intended to carry on is characterised as a primary production activity, involving the planting and cultivating of trees which will eventually bare produce to be sold.

We can now consider the indicators set out above to determine whether this business activity has commenced.

Purpose, Intention and Decision

The intention and purpose of a taxpayer in engaging in an activity is relevant to when a business commences. However, an intention to commence a business will not determine that the business activity has actually commenced.

The chain of events leading to the commencement or start-up of a business activity often begins with a mere intention to establish the business activity. This is developed by researching the proposed business and, in some instances, by experiment. This process culminates in a final decision on whether to commence business. However, not all businesses commence in such an orderly manner.

It is clear from the information you have provided that you have researched your proposed business activity, decided on the form of that business and have committed yourself to it.

Acquisition of a minimum level of business assets to allow that business activity to be carried on

Most business activities have a structure that provides the framework of the business. It is usually a collection of capital assets. What the particular capital assets are will depend on the particular business activity.

In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

Clearly it is not sufficient that the taxpayer has made a commitment to engage in business:he must first establish a profit-making structure and begin ordinary business operations.

For a business activity to commence, an appropriate business structure should be in place and begin ordinary business operations.

As to what the business structure will consist of, and its size, will be a question of fact and degree, and will depend on the nature of the business activity.

Your activity is as a primary production activity, involving the planting and cultivating of trees which will eventually bare produce to be sold.

In the 2017-18 financial year, whilst you had arranged for appropriate soil testing and completed the property purchase, you had not established the plot of land where the trees would be planted, nor had you purchased / ordered the actual plants. As such you did not yet have the necessary business structure in place for you to commence your business activity in the 2017-18 financial year.

Commencement of Business Operations

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

In Hadlow and FC of T [2002] AATA 1250; (2002) 2002 ATC 2294; (2002) 51 ATR 1197 the Small Taxation Claims Tribunal considered the amounts incurred by a taxpayer to research and develop a book. The question for decision was whether the activities were merely preparatory and preliminary or whether the activity had reached a stage where it was able to be characterised as a business.

In concluding that the activity was not carried on as a business in the relevant years, member Mowbray stated at paragraph 26:

Clearly Mr Hadlow has the subjective intention to carry on a business, but that is not sufficient. There must be business activity. There is a real question whether the activities to date are merely preparatory or preliminary (see Goodman Fielder Wattie at 4447), and whether the project has reached the stage where it is able to be characterised as a business. There has been much activity but the concept of business does not equate with being busy (Goodman Fielder Wattie at 4447; 386; 339)

Mr Hadlow has researched, undertaken travel, and visited museums, libraries and farms in pursuit of a particularly interesting topic. He has expended money but has made no sales, received no advances nor signed any contracts.

It is accepted that you have gone beyond merely having an intention to engage in business and there has been some activity. For example, you had arranged for appropriate soil testing and completed the actual property purchase. However, it is important to evaluate this activity in regards to the characterisation of your business, which is the planting and cultivating of trees which will eventually bare produce to be sold.

The systematic and regular transactions from which you will produce revenue as part of your business operations, that is, the planting and cultivating of the trees, has not actually commenced in the 2017-18 financial year.

Therefore your activities undertaken during the 2017-18 financial year were preliminary to the carrying on of your intended business and were instead directed at initial establishment and investigation. As such you are not considered to be carrying on a business for the 2017-18 financial year.

Ferguson v FC of T

Your authorised tax agent has made reference to Ferguson v FC of T 79 ATC 4261 (Ferguson) where after the NSW Supreme court held that the taxpayer was not carrying on a business of primary production, the Full Federal Court allowed the taxpayers appeal, where they observed that activities in advance of carrying out the ultimate intention of establishing a cattle production business on the taxpayer ' s own property may have such a commercial character as to amount to trading operations and, on this basis, the Court found that the taxpayer ' s activities in building up a herd were conducted in such a systematic and businesslike manner as to amount to the carrying on of a business, despite it being carried out on a small scale.

Your authorised tax agent contends that your circumstances may be aligned to Ferguson, and as such they believe that your truffle activity was being carried on as a business during the 2017-18 financial year.

However there is a contrast between your circumstances and those outlined in Ferguson, in that the activities you completed in the 2017-18 financial year (purchase of the property, engagement of the consultant and testing of the soil) did not have the same level of system and organisation to the point where it could be seen as a commercial business.

As such we do not consider that your circumstances fully align with those outlined in the Ferguson case.