Edited version of private advice

Authorisation Number: 1052258038898

Date of advice: 12 June 2024

Ruling

Subject:Am I in business

Question

Are you carrying on a primary production business as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

Company A commenced trading business in 20XX.

In MM 20XX, Company A purchased farmland which included a main residence as well as a number of other income streams.

The property had been used in the previous owner's business for many years. Company A took over the business operations. You continue to operate the same activities and use the land for primary production in a number of ways.

Livestock

The property is situated amongst other agricultural land which has been used extensively by neighbouring landholders for livestock production for many decades.

Since acquiring the property, you have maintained and naturally increased the number of livestock. You have been breeding and selling livestock to generate income.

You keep records of your sales, natural increases and losses and report them in your annual company tax returns.

You have obtained a soil analysis of the land in order to undertake pasture improvement and the seeding of paddocks for livestock food and hay baling.

You have sought advice and assistance from the adjoining landowners to help manage your livestock. You use the same freight, bailing and stock agents as your farming neighbours.

You are in the process of negotiating a purchase of more livestock. You intend to continue farming livestock as this activity has been generating income.

Fruit

At the time you purchased the property, the property had well-established fruit. The previous owners had an arrangement to sell the fruit to another business for processing.

Since the purchase of the property, you decided not to harvest the fruit due to the impact of smoke from bushfires and flooding. The processing business also had a temporary shutdown. You have been maintaining the fruit in the meantime.

The processing business has reopened again recently. You intend to harvest the fruit and sell them to the processing business in the future once the weather, labour and capacity is suitable. You have been preparing for this by maintaining the fruit so that the produce will be in a condition to sell.

Other preliminary activities

You have a background growing plants as a hobby prior to purchasing the business. You have started to grow plants on the property on a commercial scale. You intend to sell the plants to generate a profit once established.

Since you purchased the property, the company has made losses. This is mainly because you have concentrated on improving the longevity of the business through capital works to the property. The livestock farming activities are profitable and you expect to see an overall profit once interest rates begin to come down.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

'Business' is defined under subsection 995-1(1) of the ITAA 1997. It includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The definition of 'primary production business' is contained under subsection 995-1(1) of the ITAA 1997. You carry on a primary production business if you carry on a business maintaining animals for the purpose of selling them or their bodily produce, including natural increase. You also carry on a primary production business if you carry on a business cultivating or propagating plants, fungi or their products or parts in any physical environment.

The Commissioner considers various indicators to determine whether a business of primary production is being carried as contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Paragraph 13 of TR 97/11 lists the 8 business indicators 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 repetition and regularity of the activity

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

No single indicator will be decisive in determining whether a business is carried on. The indicators must be considered in combination and as a whole. Where there is no overall profit motive and the activity looks like it will never produce a profit, it is unlikely that the activity will be considered to be a business.

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) outlines the Commissioner's view as to whether a company is carrying on a business. TR 2019/1 provides that companies have an underlying commercial nature. The activities carried on by a company are more likely to amount to the carrying on of a business than if the same activities were carried out by an individual or a trust.

TR 2019/1 sets out the following indicators to consider when determining if the activities carried on by an entity amount to carrying on a business:

•         whether the person intends to carry on a business

•         the nature of the activities, particularly whether they have a profit-making purpose

•         whether the activities are

o   repeated and regular

o   organised in a business-like manner, including the keeping of books, records and the use of a system

•         the size and scale of a company's activities including the amount of capital employed in them, and

•         whether the activity is better described as a hobby, or recreation.

Application to your circumstance

Your activity satisfies the specific definition of 'primary production business' under the ITAA 1997.

You have sought advice from experienced farmers that work in the area of primary production which you intend to carry on. You have obtained a soil analysis of the land to improve the pastures for your livestock. The property has been used for the same type of activities for many years prior to your acquisition of the land and is therefore suitable for the activities you are carrying on.

You have regard to the market due to seeking advice from adjoining landowners who are also in the same industry and use the same methods and contacts. You also have been looking into other potential commercial markets and have taken preparatory steps to begin selling in this market once established. These factors, amongst the other indicators, shows that the activity appears to be carried on for commercial reasons and in a commercially viable manner.

Some of your activities are currently preliminary to the ultimate activity however this is not the case with the livestock. Although you are in the early stages, the farming of the livestock is not merely preparatory or preliminary. You are actively involved in the farming of the livestock with the intention to make a profit. The activities could not be better described as a hobby or recreational activity, therefore it appears you have more than just an intention to operate a business of primary production.

Although you have not yet generated an overall profit from the activity, there appears to be a general impression that the activity has a prospect and purpose of profit. The company entity also has a prospect of profit and the company who owns the property operates the business. The company is not merely holding personal use assets.

You conduct the activities related to the livestock repetitively and on a regular basis and keep records reflecting same. Although you entered into the business having no prior experience in farming, you have formed connections with local primary producers. You have sought advice and assistance from neighbouring landowners who operate similar businesses. It appears that you carry on your farming activities in the same way as experienced farmers in your community do.

You keep records of your sales, natural increases and losses. You also carry on your business in the same way as other similar businesses in your community. It appears that you are conducting the activity in a systemic and business-like manner.

You conduct your farming activities on a significant scale. You have also employed capital into the property since acquisition to grow and benefit the business, including being in the process of purchasing more livestock. This supports that the activity is being conducted at the size, scale and permanency of a commercially viable business rather than a hobby.

The activity could not be better described as a hobby or recreation. It is evident that you intend to make a profit from the activity due to the size and scale of the activity and the manner in which it is conducted. There is repetition and regularity in the activity. The activity is carried out in the same manner as other primary production businesses. There is no intention by you to be carrying on a hobby or recreation rather than a business. You sell livestock to the public at large and intend to sell other products commercially once established.

The Commissioner is satisfied that the activities undertaken by the company indicate carrying on a primary production business. The activity demonstrates the required business indicators albeit not having made a profit yet. There is a commercial flavour to the activity, it is organised and conducted in a business-like manner similar to other primary production businesses, and the size and scale of the activity indicates that you are conducting a commercial farming business.