Edited version of private advice

Authorisation Number: 1051877908118

Date of advice: 2 August 2021

Ruling

Subject: Share farming

Question

Is the receipt by entity A of a share of the proceeds from the share farming arrangements not 'ordinary income that the entity derives in an income year in the ordinary course of carrying on a business', for the purposes of section 328-120 of the Income Tax Assessment Act 1997?

Answer

No, the proceeds from the share farming arrangements are income derived in the ordinary course of carrying on a business.

This ruling applies for the following periods

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commenced on

1 July 2017

Relevant facts

From approximately xxxx, entity B and entity C had conducted a mixed primary production business in partnership.

The Partnership conducted a farming business.

The partnership comprises significant farming real estate, livestock, plant and equipment.

Entity B died on xxxx leaving a Will dated xxxx.

The partnership that now exists between entity C and the Executors (the Continuing Partnership), has operated the farming business uninterrupted since xxxx.

Details of the Will and deed of Family Arrangement and finalising the deceased estate have been provided.

It is proposed to transfer the partnership real estate.

The Continuing Partnership has primary production income on its own account less than $2m.

The Continuing Partnership has entered into 'share farming arrangements' with two unrelated parties whereby the unrelated party operates a primary production business using the land, improvements and stock owned by the continuing partnership. In return for providing these resources, the Continuing Partnership receives xx percent of the specified proceeds and sales.

Approximately, xx% of the primary production land by area is dedicated to the share farming arrangements. Approximately xxxx acres is used for the share farming of the overall approximately xxx acres.

As at xxxx, there were xxxx livestock.

Separate recipient created tax invoices are issued to the Continuing Partnership and sharefarmer(s).

The Continuing Partnership hold independent bank accounts from each of the share farmers. There are no joint bank accounts between the parties. The share farming arrangement does not have a trading name.

Each party keep their own accounting and taxation records. No joint reporting occurs.

The Continuing Partnership holds the majority of the store accounts, namely, rural merchandise. If rural merchandise is required, it is expected that the share farmer(s) will call seeking permission to book necessary items up to the Continuing Partnership's store accounts. Where this is not possible, the Continuing Partnership will reimburse the sharefarmers for the cost of the merchandise.

Under the first share farming agreement, a primary production business is carried out on the share farm land, from xxxx.

The share farm land is situated at xxxx comprising approximately xxxx acres.

The share farming agreement shall continue until such time as either party in the agreement by giving the other party 60 days written notice. The share farming agreements have been provided.

Subject to certain requirements, all decisions concerning the livestock to be maintained, and the farming practices to be followed shall be made jointly by the owners and sharefarmers.

The owners shall have access to the share farm land at any reasonable time.

The second share farming agreement was made on xxxx and has similar terms and conditions. The share farm land for this agreement is situated at xxxx.

Given the asset base at stake, only experienced sharefarmers are engaged by the Continuing Partnership.

The joint farming decisions in respect of the share farming operations are made on an ad hoc basis. The parties are continually in contact with each other, via phone or email, regarding an array of farming matters. The frequency of discussions and communications varies depending upon the time of year. No formal minutes are kept for these ongoing communications.

Time spent each week by the Continuing Partnership on the share farming varies, depending on the time of year and the decisions required at that time.

Access to share farming land by the Continuing Partnership also varies, depending upon the time of year.

Addresses of land used in the other operations have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Section 960-100

Income Tax Assessment Act 1997 Section 995-1

Detailed reasoning

The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•     A CGT event happens in relation to a CGT asset of yours in an income year,

•     The event would have resulted in a gain (apart from Division 152),

•     The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•     At least one of the following applies;

-       you are a small business entity for the income year,

-       you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

-       you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

-       you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Small business entity

An entity is a CGT small business entity if:

(a) it carries on a business in the current year, and

(b) one or both of the following applies:

(i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and

(ii) its aggregated turnover for the current year is likely to be less than $2m (subsections 152-10(1AA) and 328-110(1) of the ITAA 1997).

Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you.

Under subsection 328-120(1) of the ITAA 1997, an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

In this case, we need to determine if the income from the share farming arrangements is ordinary income derived in the ordinary course of carrying on a business.

Taxation Determination TD 95/62 Income tax: will the owner (or lessor) of land who allows the land to be used in a sharefarming arrangement be considered to be engaged in a business of primary production as defined by the Income Tax Assessment Act 1936 ('the Act')? provides relevant guidelines.

Please note that TD 95/62 was written before the ITAA 1997. Where relevant the ITAA 1997 references will be used.

As highlighted in TD 95/62, there are many possible variations in the share farming agreements and each case has to be dealt with on its merits.

Under section 995-1 of the ITAA 1997, the definition of primary production business includes maintaining animals for the purpose of selling them or their bodily produce (including natural increase).

In some 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 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships).

As stated in TR 94/8, the question of whether a partnership exists is one of fact. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

The following factors are relevant in deciding whether persons are carrying on business as partners in a given year of income:

• Intention, that is, the mutual assent and intention of the parties, and
• Conduct

(a) joint ownership of business assets

(b) registration of business name

(c) joint business account and the power to operate it

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlements to a share of net profits

(g) business records

(h) trading in joint names and public recognition of the partnership

The above list of factors is not exhaustive and no single factor is decisive, although the entitlement to a share of net profits is essential.

Partnership is defined in section 995-1 of the ITAA 1997 to include an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly.

If a partnership is in existence then each partner will of course be considered to be carrying on that business.

As highlighted in TD 95/62, many arrangements do not amount to the carrying on of a business in partnership. The fact that the land is used 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 that 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.

Where no involvement exists, the landowner would not be regarded as being engaged in the business of primary production. The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production.

In this case, the relevant factors include:

• The written share farming agreement is evidence of a mutual assent and intention to act as partners;
• the Continuing Partnership (the owners) provide all the stock and land for the share farm operation as well as the necessary plant and equipment;
• The Continuing Partnership holds the majority of the store accounts;
• The owners maintain insurance on all farm buildings and other items;
• The sharefarmers supply all labour for the business and for the working of the share farm land;
• The sharefarmer(s) are responsible for the 'day-to day' management of the livestock;
• The share farmers supply product exclusively to the entity nominated by the owners, unless the owners otherwise agree;
• All decisions concerning the livestock to be maintained, and the farming practices to be followed shall be made jointly by the owners and sharefarmers;
• The owners receive xx percent of the listed sales;
• The owners have liability for animal health, herd improvement, agistment and other listed items;
• Most other expenses are shared xx%/xx%;
• Each party keep their own accounting and taxation records;
• The owners shall have access to the share farm land at any reasonable time;
• Access to share farming land by the Continuing Partnership varies, depending upon the time of year;
• The parties are continually in contact with each other, via phone or email, regarding an array of farming matters;
• Time spent each week by the Continuing Partnership on the share farming varies, depending on the time of year and the decisions required at that time;

A balanced view of these observations, with no one feature being determinative in isolation, reasonably leads to a conclusion that the level of involvement by the continuing partnership goes beyond being passive.

Although the share farmers do specified activities and other day to day management, the continuing partnership provide the stock and are continually in contact with the share farmers. All decisions regarding the livestock and farming are made jointly with the continuing partnership making regular visits to the share farming properties. The continuing partnership does more that merely provide the land and pay for the associated expenses.

The ongoing participation and the mutual agreement between the parties does not equate to a passive landlord/tenant arrangement. The Continuing Partnership owns the stock that are used for the production of sales. The receipt of xx% of the sales and other income from the share farming arrangement is not regarded as rental income from property. The level of control and involvement and the overall arrangement with the sharefarmers amounts to carrying on a business of primary production.

Based on the facts of this situation, the income derived from the share farming arrangement is regarded as ordinary income derived in the ordinary course of carrying on a business. It follows that this income is included when calculating the annual turnover.