Edited version of private advice

Authorisation Number: 1052189271269

Date of advice: 08 November 2023

Ruling

Subject: GST - assessable income

Question

Is income from your primary production activities assessable under 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question

Are you considered to be an enterprise and required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods:

Period Ended 30 June 20XX

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are currently registered for GST.

You purchased a farm in a specified month and year with the intent of producing wine, oil, and specialty olives. It was purchased for a specified amount.

You provided the location of the farm.

You provided a detailed business plan.

Your activity is growing olives to produce olive oil, wholesaling olives and the production of grapes for wine.

Personal funds were used to establish the farm.

You have the intent of offering investor ownership in the future whilst remaining a family-owned and operated business.

You estimate you will make a profit by a specified financial year.

The farm was previously operating several businesses under previous ownership.

You undertook various testing and engaged industry consultants.

You provided details on how the farm was advertised. Details included the size of the entire property, the land size apportioned for olive groves and the land size apportioned to vineyards.

The farm has an extensive irrigation system and a specified number of dams.

You have hired a farm manager to oversee the estate and all seasoned employees.

You have also hired a bookkeeper and use a specified accounting system to record all business transactions.

You provided an outline of equipment and tools required for the activity and their expected costs.

You anticipate selling a specified number of litres of olive oil in the first year of production and a specified weight of specialty olives. You estimate this will increase by a specified percentage each year.

You provided the year you expect wine production to commence, the approximate expected number of bottles to be sold, and the percentage you expect it will increase by each year.

You provided a breakdown of milestones expected to be achieved each year, for each year for a specific number of years.

You had a net loss in one of the relevant financial years and provided the exact value of the loss.

You joined the Australian Olive Association on a specified date.

You have previous experience in agriculture and have previously had olive and other plantations.

Repairs on the trees commenced on settlement of the property. Repairs included:

§  Removing overgrowth in the plantation

§  Repairs to irrigation

§  Pruning the vineyard

You have not planted any new trees or vines.

You currently work a specified number of days per week carrying out the following duties:

§ Repair works to the plantation, irrigation, equipment, and internal roads

§ Maintaining checks on dams

You work in another industry providing salary and wages to ensure that enough capital is injected into the activity.

A farm manager is hired full time and their duties involve:

§  Supervising and organising the subcontractors

§  Maintenance of equipment

§ Oversight of operations and safety

§ Wildlife control and cleaning

The farm manager resigned on a specified date and has not yet been replaced. You intend to find a fulltime replacement.

Seasonal staff are hired for a specified number of months of the year and their responsibilities include:

§  Operating harvest equipment to remove olives

§  Transportation of crop

§  Pressing of the olives into oil>

§  Disposal of the waste and cleaning

§ Harvesting grapes of vines

§  Cleaning of equipment

§  Transportation to the wine maker

Contentions

You claim the farm was neglected by the previous owners for an approximate number of years before your ownership and specified percentage of the farm was unused and left neglected.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 995-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Division 23

A New Tax System (Goods and Services Tax) Act 1999 Division 188

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

•         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.

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Applying the relevant indicators to your circumstances

Significant commercial purpose or character

As discussed in TR 97/11 at paragraph 29, 'The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators'.

This indicator covers aspects of all the other indicators, and broadly requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

Considering the information provided, the following indicates a commercial purpose or character:

•         You have a detailed business plan

•         You have previous experience with agriculture and olive growing

•         You employ staff

•         You have regularity and repetition in the maintenance and repair work undertaken

•         The business plan outlines the prospect and intent to make profit and how the business will be scaled in future years

Intention to engage in business

You have previous experience in agriculture and olive growing and have an intention to engage in your olive growing, olive oil production and grape growing to produce wine activities.

Purpose of profit as well as a prospect of profit from the activity

Due to required maintenance and repair of the groves you incurred a specified loss in a specified financial year, and do not expect to make a profit until a specified future financial year. However, it is accepted that your activity has a purpose and prospect of generating profit. The repair and maintenance work undertaken are being done in preparation for optimal growth of the olives and grapes and is being completed to increase the prospect of profit. Your business plan illustrates a marketing and production strategy displaying how you intend to reach the profit in the projected timeframe.

Regularity and repetition of the activity

You currently work a specified number of days per week on the property, employed a fulltime farm manager and seasonal staff. The duties that both you and the staff undertake each day include removing overgrowth in the planation, cleaning and pruning of the trees and vines, and removal of waste. The work is carried out in a systematic, regular, and organised manner.

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

This indicator requires a comparison between the activity in question and those undertaken by a person in business in the same type of industry. The indicators that demonstrate you carry on your activity in a similar manner to that of ordinary trade in that line of business is:

•         You sought industry advice prior to commencement

•         You had testing completed to ensure the land was optimal for growing product, therefore ensuring it was a viable activity

•         You have a business plan and employ staff

•         You have acquired the minimum level of assets required to commence the activity

Activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business.

In your circumstances, there is a detailed business plan outlining budget, profit targets and a personnel plan. You also have a plan for discontinuing the activity if it were to remain unprofitable. The employment of a bookkeeper to assist with appropriate record keeping using a specific platform shows that records are kept in a businesslike manner.

The size, scale and permanency of the activity

You have purchased a property that covers a substantial number of acres. Land is apportioned with several acres for the olive grove, and several acres for the vineyard. The olive grove has an extensive number of olive trees, and the vineyard has a significant number of vines. You have provided a plan that spans a specified number of years, displaying the intent of increasing the size and scale of operation by incorporating new olive varieties and the production of wine.

Your activity shows the size and scale expected of an entity carrying on a business of olive growing, olive oil production and wine production.

Better described as a hobby, a form of recreation or sporting activity.

Your activity would not be better described as a hobby, recreation, or a sporting activity.

Conclusion

In weighing up the relevant factors discussed above, it is considered you were carrying on a business of growing olives to produce olive oil, wholesaling olives and the production of grapes for wine in the relevant financial years. Therefore, your income is considered ordinary income, and is assessable under 6-5 of ITAA 1997 and any losses are deductible under 8-1 of the ITAA 1997.

Issue 2 - GST

Question

Are you considered to be an enterprise and required to be registered for GST pursuant to section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

It is considered you are carrying on an enterprise as per paragraph 9-20(1)(a) of the GST Act. As such, you satisfy paragraph 23-5(1)(b) of the GST Act in that the Commissioner is satisfied that you are carrying on an enterprise and have continued to carry on an enterprise, regardless of whether you meet the registration turnover threshold or not, you can register for GST.

Detailed Reasoning

Note that all legislative references are to the GST Act unless stated otherwise.

GST registration

Division 23 considers who is required to be registered and who may be registered. In particular, section 23-5 states you are required to registered under this Act if you are carrying on an enterprise and your GST turnover meets the registration threshold. In your case, the threshold is $75,000.

Section 23-10 provides that an entity that is carrying on an enterprise may register for GST. An entity may choose to register for GST if the entity is carrying on an enterprise or the entity intends to carry on an enterprise from a particular date.

Section 195-1 states that the phrase 'carrying on' in the context of an enterprise includes 'doing anything in the course of the commencement or termination of the enterprise'.

Enterprise

Section 9-20 provides that the term 'enterprise' includes, among other things, an activity or series of activities done, in the form of a business; or in the form of an adventure or concern in the nature of trade; or occurs on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Paragraphs 170 to 179 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) discuss factors to consider when determining whether an activity or series of activities are done in the form of a business. Paragraph 178 of MT 2006/1, with reference to Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production lists indicators of carrying on a business:

(i)            a significant commercial activity;

(ii)           an intention of the taxpayer to engage in commercial activity;

(iii)          an intention to make a profit from the activity;

(iv)          the activity will be profitable;

(v)           the recuring or regular nature of the activity;

(vi)          the activity is systematic, organised and carried out in a business-like manner and records are kept;

(vii)        the activities are of a reasonable size and scale;

(viii)       a business of product; and

(ix)          the entity has relevant knowledge and skill.

Applying these factors to your circumstances, it is considered you are carrying on an enterprise as per section 9-20(1) of the GST Act.

The Commissioner also considers that the proposed sale of a significant number of litres of olive oil in the first year of production and significant number of kilograms of specialty olives would produce an annual turnover in excess of $75,000. As such, your registration turnover will exceed the threshold and you are required to be registered for GST.