Edited version of private advice

Authorisation Number: 1052249213627

Date of advice: 9 May 2024

Ruling

Subject: Am I in business - share farming activities

Question

Was the taxpayer a connected entity to Trust 2 from 2014 to 2023?

Answer

Yes, Trust 2 acts in accordance with Person 1 who also has control of the trustee. The condition in subsection 328-125(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) has been met.

Question

Was Trust 2 carrying on a business due to the share farming activities for the period between 2014 and 2023?

Answer

Yes, after assessing business indicators outlined in TR 97/11, it is considered Trust 2 carried on a share farming business on the relevant property.

This ruling applies for the following periods:

2014 to 2023

The scheme commenced in:

2014

Relevant facts and circumstances

Company 1 (trustee for Trust 1) acquired the property during the 2014 income year.

•         Person 1 and their spouse have been the shareholders/directors of Company 1 since acquisition, and jointly control this entity.

Prior to transfer, the property had been held by individuals within the family since prior to September 1985.

•         The property was originally acquired by Person 2 (Person 1's parent).

Person 1's parent and siblings also owned numerous adjacent properties. The total land size of all blocks of land was over XXX acres (referred to as the 'farming land').

•         XXX crops and XXXX crops (numerous crops) are grown on the property.

Company 1 sold the property during the 20XX income year for over $XXXX. The remainder of the farming land was also sold by Person 1's siblings in either the 20XX income year or the 20XX income year.

Both Person 1 and their spouse received over 40% of the distribution from Company 1 in the 20XX and 20XX years.

Share farming agreement

Company 2 (trustee for Trust 2) was established in early 19XX, and has historically been used to conduct a farming business on the farming land.

•         The trustee was originally controlled by Person 2.

During the 20XX income year:

•         Person 1 and their siblings were appointed directors of the trustee company; and

•         Person 1 and Sibling 1 acquired the shares in the trustee company in equal proportions (one share each).

In late 20XX, Trust 2 entered into a multiple year share farming arrangement with a neighbouring farmer ('the sharefarmer') in respect of the farming land.

•         This was originally a written agreement, however, the share farming arrangement continued without a written agreement until the farming land was sold.

The original agreement was only for part of the land specified in the agreement, then in the 2013 income year further blocks of land were added to the agreement (with the same parties).

The land included in the share farming agreement is:

•         The two blocks included in the original share farming agreement were owned by two of Person 1's siblings (one block each).

•         The three blocks of land added to the agreement in the 2013 year, were owned by Person 1 and their two siblings.

•         Therefore, there were five blocks in total, one owned by Person 1 and four of their siblings.

The oral share farming agreement for the entire period of ownership of the Property by the Taxpayer was:

•         Trust 2 received a percentage of farm income from sales.

•         All major decisions made in respect of the farming operations were made jointly. In particular, crop rotations, fertilising and cutting of hay and bale were required to be mutually agreed by Trust 2 and the sharefarmer.

•         The sharefarmer was responsible for costs associated with the farming operations, such as grain, fertiliser, etc.

•         Trust 2 was responsible for paying for all costs associated with the farming land including repairs and maintenance.

Person 1, as representative and actual controller of Trust 2 spent an average of 10 hours per week on the share farming activities, engaging in both physical and advisory roles. They performed the following duties:

•         Inspection of the farming land, with timing dependent on season. During growing season, inspection was approximately every 6 weeks to check on the health of the crops, spraying, fences, tanks, pipes, rabbits and the farm in general. During the off season, inspection was at least once every 2 months to check on weeds and spraying.

•         Assisted with physical labour, including preparing paddocks, sowing and harvesting.

•         Generally maintained the farming land, including repairing and improving the fences, and fixing water leaks in the farm pipeline.

•         Carried out the rabbit control.

•         Engaged in all major decisions relating to the farming operations. This included meetings and telephone discussions with the sharefarmer approximately 20 times a year to decide on the type of grains to be planted and relevant planning considerations (for example, time of planting and harvesting). The frequency of meetings and discussions varied dependent on the season. During growing season, meetings/discussions would occur weekly or fortnightly. During off season, these generally occurred once a month.

•         Managed the finances and grain cards, which includes verifying or changing information for the National Grower Register.

•         Had weekly meetings / discussions with their siblings to update them on the farm activities.

The share farming agreement was not treated as a partnership for general law or tax law purposes (due to the sharefarmers not being in receipt of income jointly).

Trust 2's share farming operation has been profitable from the 2014 - 2022 income years.

Person 1 has actual control of the trustee and has done so since prior to the 2014 income year as per below:

•         They have sole access to the bank accounts, is the contact person for the bank manager and gives all instructions to the bank.

•         They make all decisions to regarding the trust including financial decisions and decisions regarding the share farming activities.

•         They perform all work required by Trust 2 in respect of the share farming arrangement.

•         They make payments of all the bills and banks all funds for the trust.

•         They are responsible for determining annual trust distributions to the various beneficiaries.

•         They manage the accounting and tax affairs of the trust and provides the instructions to the accountant. They review, approve and sign all trust's financial statements, tax returns, BAS and ASIC returns.

•         They report to the other Directors and shareholder in respect of the trust operations but do not need to seek approval for decisions.

Only Person 2 has received at least 40% of the distributions from Trust 2 for the 2019 to 2022 years (relevant for the application of subsection 328-125(4) of the Income Tax Assessment Act 1997).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Taxation Ruling TR 97/11