Edited version of private advice

Authorisation Number: 1051752743237

Date of advice: 11 September 2020

Ruling

Subject: Am I in business - cattle - hobby

Question

Are you carrying on a business as a farmer?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commences on:

1 July 2020

Relevant facts

You have x acres of farmland.

You use x acres of the land for the grazing of livestock.

You have x females, and a male to breed.

You have reduced your stock due to drought.

You do not have a breeding program, and your male is housed in the same area as your females.

You sell some of the resulting offspring at the local market, once they reach the appropriate size.

You expect that the income from selling the offspring will be approximately $x per year.

Due to the high price of hay you recently engaged someone to sow a small area to keep the feed cost down.

You spent $x last year on feed.

You also buy water to fill your water troughs.

You don't foresee making a profit as expenses outstrip any income.

You undertake the activities because you enjoy them and have named each of your livestock.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The nature of your farming activities does not constitute the carrying on of a business and would be considered to be a hobby.

Detailed reasoning

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This ordinary income includes income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Carrying on a business

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

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 incorporates the general factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

·   whether the activity has a significant commercial purpose or character

·   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 regularity and repetition of the activity

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

·   whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. Conversely, any expenses incurred will not be deductible.

Businesslike manner

A "businesslike manner" is not defined, however if we analyse how your activities are conducted we can determine if they are businesslike in nature. The following factors support the position that you are not carrying on a business:

·   Lack of organised or systematic approach to breeding activities

·   You engaged in the activities for your personal enjoyment

·   the activity is conducted on a small scale

Prospect of profit

In the carrying on of a business it is usual that activities are engaged in for the purpose of profit on a continuous and repetitive basis.

You have identified that the activities being undertaken are not likely to make a profit nor do you intend on making a profit.

You have not conducted planning activities that enable you to demonstrate how the farming activities could be undertaken in a manner that if followed would position you to be able to make a profit.

A lack of organisation to the activities that you are undertaking is an indicator that you are not conducting the activities in a businesslike manner, or with a prospect of profit driving the decision making process behind your activities.

Application to your circumstances

Overall, the above factors point to your activity being a hobby farm rather than a business. Your activity is conducted on a small scale and it appears that your efforts are not driven towards making the activity profitable but are pursued for other reasons. Consequently, your activities do not amount to the carrying on of a business and can be better described as a recreational pursuit or a hobby.

Therefore, any amounts you receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that you have incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.