Edited version of private advice

Authorisation Number: 1052145530798

Date of advice: 31 July 2023

Ruling

Subject: Non-commercial loss primary production industry

Question 1

Are you required to include the income received from the primary production activity as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you offset your loss from the 2021-22 financial year from your primary production activity against your profit from this activity in the 2022-23 financial year in accordance with the provisions in subsection 35-10(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You have been breeding and raising livestock for sale to markets for over XX years. You initially undertook this activity as a hobby but have since then developed a business plan and have sought to conduct it as a business.

The property you use for this activity is in a well-known location for the livestock you are working with and is of a scale appropriate to the industry.

In the relevant financial year you sold a number of animals and also purchased a smaller quantity. You held twice as many, along with their associated offspring, on 1 July in the relevant year and then again as at 30 June in that year. You have a business plan for this activity that you update each July. You made a loss on this activity in the previous financial year and are anticipating a profit for the relevant financial year. Your business plan includes long term goals for your activity.

You have built up your own knowledge and expertise through experience. You have researched the requirements and markets for your activity.

You developed a business plan and update it annually to maximise income and profit. You have researched the location and the capital requirements for your venture and sourced the capital for those requirements from income generated while engaged in this activity as a hobby. You maintain your knowledge of market opportunities and keep regular updates from current sales outlets.

You are a member of the relevant standards programs and schemes for your industry and have organised the required registration of your assets, have your own ABN, and have obtained required permits and licenses.

You estimate you spend quite a number of hours a week on average on this activity, with many more hours required to meet seasonal demand.

The activity you are operating works on a model commonly used in the industry whereby your breed and then raise your animals for sale. Your animals are managed and moved in line with industry standards and practices. You have invested money into standard items for the industry.

You keep both paper and digital records for your business, including receipts and invoices, and create profit and loss statements. You track the condition of your animals and keep market updates related to that condition.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Question 1

Summary

Your beef cattle breeding and grazing activity in the 2022-23 financial year can be considered a business for taxation purposes.

Reasons for decision

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, allowances received as an employee, and proceeds from carrying on a business. Proceeds from a hobby are not considered ordinary income and are not included as assessable income.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

An activity can be considered to have significant commercial purpose or character if it has a business plan and a profit-making purpose. The business planning process itself includes knowledge of or research into marketing the product or service provided, capital requirements and how these might be met, legal requirements, and the size and scale needed for commercial viability. Commercial purpose and character is often supported by experience or expert advice from the relevant authorities, and research into the activity based on technical literature.

You have a business plan for your activity that is revised and updated annually. You have identified and are following a strategy to increase your profit through appropriate market channels. You have researched the capital requirements and size and scale of activity needed for commercial viability and met these, and ensured your activity meets the relevant legal requirements. You have built on your experience undertaking this activity as a hobby by seeking expert advice and reading technical literature published through the websites of professional associations and relevant government departments.

To be recognised as a business there must be activity that goes beyond the intent to engage in business or preparing for or researching the possibility of starting a business. You have demonstrated more than the intent to engage in business through your activity, having already prepared for and researched your undertaking. You are actively breeding and raising animals and in the relevant financial year you sold a number of them.

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You have a business plan that shows how you intend to maximise your income and increase your profit from this activity. As at 30 June 2023 you held a number of animals, capacity for twice as many, and are working to increase your stock to that capacity as conditions allow. You work to improve your commercial viability by adopting new practices as the need or opportunity arises and monitoring market conditions for your product.

Activity must be undertaken on a continuous and repetitive, as appropriate to the industry, basis for it to be considered a business. You spend at least 15 hours a week on your activity, including daily and weekly checks on the condition of the animals and the facilities on the property you are using. You estimate that, with seasonal demand, you spend significantly more time on this activity.

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. The business model you are using is common and has been successful for many others operating in this industry. You have identified and sourced facilities and equipment commonly used for this activity and adopt new practices to solve problems as they arise or to improve efficiency or outcomes. have undertaken training so you can participate in industry programs and obtained the relevant registrations and licenses for your activity.

An activity can more readily be characterised as a business when it is carried on in a planned, organised and businesslike manner such that it is directed at making a profit. You plan for your financial information needs and manage your records systematically so you can direct your work in this activity towards making a profit and meeting your legal obligations. You keep both paper and digital records for your business, including receipts and invoices, and create profit and loss statements. You track the condition of your animals and keep market updates related to that condition.

An activity would be expected to be of a size, scale and permanency suitable to the industry it is operating in to be recognised as a business. You have learnt from experience and your research the scale at which your activity can be expected to make a profit and have arranged the use of sufficient land and maintain enough stock to achieve that profit. The permanent nature of your activity is supported by the inclusion of long-term goals in your business plan.

An activity can be described as a hobby, a form of recreation or a sporting activity if it evident that there is no intention to make a profit. Your activity is better described as a business as it is motivated to make a profit, is of a similar scale as, and organised and carried on in a similar fashion to, other businesses in this industry.

When assessed against these indicators both individually and together your production activity in the relevant financial year can be considered a business for taxation purposes. Income from this activity in the relevant financial year will be ordinary income and assessable under section 6-5 of the ITAA 1997.

Question 2

Summary

You can offset your loss from the previous financial year from your primary production activity against your profit from this activity in the relevant financial year.

Detailed reasoning

Under section 35-10 of the ITAA 1997 business losses must be deferred and then offset against assessable income from the next year that the activity is carried on unless the activity meets one of the 4 tests specified in that section. You made a loss from your primary production activity in the previous financial year and your activity did not meet any of the specified tests. As you are considered to be in business with this activity and you have made a profit in the relevant financial year you must offset your loss against your assessable income for that year.