Edited version of private advice

Authorisation Number: 1052303072535

Date of advice: 18 September 2024

Ruling

Subject: Proceeds from forced sale following flood disasters

Question 1:

Are the proceeds on the sale of cattle received from the forced sale due to loss of pasture, feed and disease, as a result of the natural disaster of flooding, included in the aggregated turnover for the assessment of meeting the definition of a Small Business Entity ('SBE') for access to the Small Business capital gains tax ('CGT') concessions?

Answer 1:

No. The proceeds may be deferred or spread over 5 income years.

Question 2:

Are flood grants received as compensation for flood losses excluded from the calculation of aggregated turnover?

Answer 2:

No.

This ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

This ruling commenced on:

DD MM YYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background information

1.              Taxpayer A of XXX and Taxpayer B of XXX are primary producers, based in XXX and lately engaged in the YYY area.

2.              Taxpayer A and B's farming enterprise is conducted through Company ABC as Trustee for the XYZ Family Trust.

Floods in NSW - November 2021 and August 2022

3.              Taxpayer A and B endured a series of challenging events outside the ordinary course of carrying on their business that have inadvertently led to their increased turnovers for the years ended DD MM YYYY, YYYY and YYYY. They have suffered much hardship through multiple floods in the YYYY and YYYY financial years and made the decision to destock both sheep and cattle due to circumstances beyond their control.

4.              In MM YYYY, Property AAA had a natural flooding disaster resulting in the loss of pasture, stock and the entire winter crop. Property AAA was completely destocked as an animal welfare decision due to the loss of pasture, fencing, water infrastructure, and shelter. The repeated inundations made the paddocks waterlogged and boggy and the entire heard was at risk of death or disease.

5.              In MM YYYY, the flood waters from the XYZ River inundated Property BBB, causing significant loss of pasture, fencing and death of livestock.

Affected annual turnovers

6.              The primary production business has been subjected to a succession of natural flood disasters that have resulted in the annual turnover for the financial years ended DD MM YYYY, YYYY and YYYY to include income earned which is not in the ordinary course of business. This has resulted in turnover for the years ending DD MM YYYY and YYYY exceeding $2,000,000 aggregated turnover, as the income includes turnover derived not in the ordinary course of income.

7.              The winter crop at Property AAA was lost for the second year in a row. Both Shires declared the flooding as a natural disaster event. In the immediate recovery period, cattle sales totalling $xyz were received. The disaster in both geographic regions meant that the stock was unable to be transferred between properties, and fodder stores in both properties were lost. It was not possible to restore paddocks and fencing, and acquire sufficient feed required to maintain herd numbers.

8.              Further, the increased mosquito activity as a result of the stagnant water, resulted in the forced sale of diseased stock, as breeding stock infected with Leptospirosis will abort calves. Without the exceptional circumstance of the flood, the aggregated turnover for the years ended DD MM YYYY and YYYY would not have exceeded $2,000,000.

9.              Cattle and sheep have needed to be sold out of the ordinary course of business again in the years ended DD MM YYYY and YYYY. During both those years there were major flood events. During the YYYY financial year, there was there was a natural disaster flooding event at Property AAA. During the YYYY financial year there were flooding events on properties operated by the business, including Property AAA and Property BBB. Livestock needed to be sold during and after such events because flooding caused enormous loss and degradation of pasture and native grasses leaving livestock without the necessary feed and nutrition requirements.

10.          Not only did the flooding cause loss of pasture and native grasses, but it also destroyed fencing, which led to the loss of cattle and efficient resource management. Stagnant water after the flood waters resided led to increased livestock diseases and destocking was essential to minimise losses.

11.          The decision was made to completely destock of sheep and to no longer continue with that enterprise due to unforeseen circumstances surrounding Covid, and not having the workforce available to provide the necessary care required to maintain the animals' health. There was no plan to purchase replacement sheep. The business did not have sufficient funds to restock its cattle numbers. It was not considered economical to purchase cattle to restock and it was decided to replace numbers by breeding over time to increase the herd size.

Payment of flood grant

12.          No flood grants were received by Taxpayer A and B for the MM YYYY floods. Taxpayer A and B were in the process of relocating to XYZ and were unaware of the grants available. Applications for disaster recovery assistance had closed by the time they had become aware of their eligibility.

13.          The State and Federal Governments announced Special Disaster Grants of up to $75,000 to support the recovery of primary producers impacted by severe flooding events that began on DD MM YYYY and DD MM YYYY (AGRNs 1030 and 1034).

14.          The disaster payments received by Taxpayer A and B were Special Disaster Grants, Australian Government Reference Number (AGRN) - AGRN 1030 and AGRN 1034 (Category D).

15.          Following the floods in MM YYYY, Taxpayer A and B received a recovery disaster payment of $75,000, in 2 instalments.

Information provided

16.          You have provided several documents containing detailed information in relation to the applicants' application, including:

•                Private Binding Ruling ('PBR') Application

•                Responses to request for further information

17.          We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-1

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997section 152-125

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

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 385-90

Income Tax Assessment Act 1997 section 385-95

Income Tax Assessment Act 1997 section 385-100

Income Tax Assessment Act 1997 section 385-105

Income Tax Assessment Act 1997 section 995-1

Further issues for you to consider

Not applicable.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

Summary - question 1:

The proceeds from the sale of cattle received from the forced sale due to loss of pasture, feed and disease, as a result of the natural disaster of flooding, are not included in the aggregated turnover for the assessment of meeting the definition of a SBE for access to the Small Business CGT concessions, but they may be deferred or spread over 5 income years.

Summary - question 2:

The flood grants received as compensation for floods which occurred in MM YYYY are included in the calculation of aggregated turnover.

Detailed reasoning

Question 1:

Aggregated turnover - section 328-115 ITAA 1997

18.          As defined in subsection 328-115 of the ITAA 1997, 'aggregated turnover' is defined as the sum of all relevant annual turnovers. The relevant annual turnovers are outlined in subsection 328-115(2) and exclude any amounts covered by subsection 328-115(3).

19.          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.

20.          Subject to the exceptions in section 328-115 and 328-120, a receipt will be included in aggregated turnover if it is both:

1.      'ordinary income', and

2.      derived in the 'ordinary course' of carrying on a business.

21.          The phrase 'ordinary course of carrying on a business' is not defined, so its meaning must be taken from its ordinary usage and context. The Macquarie Dictionary outlines the meanings of:

3.      'ordinary' includes 'commonly met with, of the usual kind' or 'customary; normal'

•                'course' includes 'customary manner of procedure; regular or natural order of events', 'a mode of conduct; behaviour' or 'a particular manner of proceeding'.

Forced disposal or death of livestock - subsection 385-95(1)

22.          Subdivision 385-E of the ITAA 1997 allows a primary producer to elect to spread or defer tax on profit from the forced disposal or death of livestock that was held as assets of a primary production business carried on in Australia.

23.          Subsection 385-95(1) states that the excluded profit is then brought into their assessable income over a 5 year period in one of 2 ways:

•                to spread the profit on the disposal or death over the income year of the disposal or death and the next 4 income years (election to spread); or

•                to defer including the profit in your assessable income, if you will use the proceeds of the disposal or death mainly to replace the livestock (election to defer).

24.          Subsection 385-95(2) of the ITAA 1997 states that if you make an election to defer, the profit is "used" over the next 5 income years, as follows:

•                by reducing the amount for which you are taken to have bought replacement stock (as a result, your tax profit on the disposal of the replacement stock is increased); and

•                by including in your assessable income amounts for replacement stock that you breed.

25.          Section 385-100 of the ITAA 1997 outlines the conditions when a taxpayer (primary producer) can make an election either to:

•                spread the 'tax profit on the disposal or death' of livestock over a 5-year period (section 385-105), or

•                defer the inclusion of the 'unused tax profit on the disposal or death' of livestock in assessable income, if the proceeds of the disposal are to be used mainly to buy replacement livestock or to maintain breeding stock for the purpose of replacement of the livestock that were disposed of or died (section 385-110).

26.          The 2 options are as follows:

Spread over 5 years

You can elect, under subsection 385-105(1) of the ITAA 1997:

•                to include in your assessable income for the disposal year the proceeds of the disposal or death, reduced by the tax profit on the disposal or death and

•                20% of the tax profit on the disposal or death in your assessable income for the disposal year and

•                20% of the tax profit on the disposal or death in your assessable income for each of the next 4 income years.

Defer the income

There is an alternative where you can elect to defer the tax profit and reduce the cost of replacement livestock (section 385-110 of the ITAA 1997). This election can be used if the proceeds of disposal were mainly used 'to buy replacement livestock' or 'to maintain breeding stock' for the purpose of replacing the livestock that were disposed of (subsection 385-110(2) of the ITAA 1997).

Under this election you can:

a)             in the disposal year, include in your assessable income the proceeds of the disposal or death reduced by the tax profit on the disposal or death, and

b)             reduce the cost of replacement livestock purchased in the disposal year (or any of the next 5 income years) by, but not more than, the profit on the disposal or death, and

c)              include any unused tax profit on the disposal or death in the assessable income of the last of the 5 income years after the disposal year.

27.          Subsection 385-100(1) of the ITAA 1997 states that a taxpayer can make an election if:

(a) the taxpayer disposes of 'livestock', or they die, because:

(i) land is compulsorily acquired or resumed under an Act; or

(ii) a State or Territory leases land for a cattle tick eradication campaign; or

(iii) pasture or fodder is destroyed by fire, drought or flood and you will use the proceeds of the disposal or death mainly to buy replacement stock or to maintain breeding stock for the purpose of replacing the livestock; or

(iv) they are compulsorily destroyed under an Australian law for the control of a disease, or they die of such a disease; or

(v) you receive an official notification under an Australian law dealing with contamination of property; and

(b) the taxpayer held the livestock as assets of a primary production business they carry on in Australia; and

(c) apart from this Subdivision, their assessable income for any income year would include the proceeds of the disposal or death.

28.          A 'primary production business' is defined in subsection 995-1(1) of the ITAA 1997 to include a business of 'maintaining animals for the purpose of selling them or their bodily produce (including natural increase)'.

29.          The definition of 'livestock' excludes 'animals used as beasts of burden or working beasts in a business other than a primary production business' (subsection 995-1(1) of the ITAA 1997).

Question 2:

Grants received as compensation for flood losses

30.          The Disaster Recovery Funding Arrangements 2018 applies from 1 November 2018 in respect of eligible events that have occurred on or after that date. Under the joint Australian Government-State Disaster Recovery Funding Arrangements 2018, assistance is provided to alleviate the financial burden on states and territories. It also supports the provision of urgent financial assistance to disaster affected communities.

31.          Bounties and subsidies received in relation to carrying on a business are assessable income under section 15-10 of the ITAA 1997 if they are not assessable as ordinary income under section 6-5 of the ITAA 1997. Grant payments are assessable under section 15-10 of the ITAA 1997, unless they are declared non-assessable non-exempt (NANE) under a provision of Division 59 of the ITAA 1997.

32.          Division 59 of the ITAA 1997 makes provision for specific forms of income to be neither assessable income nor exempt income (NANE). Income that is non-assessable non-exempt is in effect tax free and expenses incurred in deriving this income are not deductible. A specific example of income made non-assessable non-exempt through the operation of the provisions in Division 59 is some disaster recover grants made under the Disaster Recovery Funding Arrangements 2018 agreement for damage caused by floods and storms on or after 1 November 2018 (section 59-99 of the ITAA 1997).

33.          Specifically, section 59-99 of the ITAA 1997 outlines:

A payment is not assessable income and is not exempt income if:

(a) for the purposes of the Disaster Recovery Funding Arrangements 2018 (set out in a determination made by the Minister for Law Enforcement and Cyber Security on 5 June 2018), the payment is a recovery grant made to a small business or primary producer as part of a Category D measure; and

(b) the payment relates to:

(i) floods commencing in Australia as a consequence of rainfall events occurring in the period between 19 February 2021 and 31 March 2021; or

(ii) storms occurring in Australia in that period.

34.          Any flood grant payments specifically described as non-assessable non-exempt (NANE) income, are not included in the taxpayer's tax return and the taxpayer does not pay tax on it.

Application to your circumstances

Question 1:

Proceeds from forced sales

35.          In MM YYYY, Taxpayer A and B's Property AAA had a natural flooding disaster resulting in the loss of pasture, stock and the entire winter crop. Taxpayer A and B's primary production business decided to make significant structural changes to their business following the breaking of the most recent drought and Covid-19 lockdowns.

36.          In MM YYYY, the flood waters from the XYZ River inundated Property BBB causing significant loss of pasture, fencing and death of livestock.

37.          The winter crop at Property AAA was lost for the second year in a row. Both Shires declared the flooding as a natural disaster event. The disaster in both geographic regions meant that the stock was unable to be transferred between properties, and fodder stores in both properties were lost. It was not possible to restore paddocks and fencing, and acquire sufficient feed required to maintain herd numbers.

38.          Further, the increased mosquito activity as a result of the stagnant water, resulted in the forced sale of diseased stock, as breeding stock infected with Leptospirosis will abort calves.

39.          Subdivision 385-E of the ITAA 1997 allows a primary producer to elect to spread or defer tax on profit from the forced disposal or death of livestock that was held as assets of a primary production business carried on in Australia. The election may be made, relevantly, if the disposal was because pasture or fodder is destroyed by flood and the proceeds will be used to maintain breeding stock for the purpose of replacing the livestock.

40.          Subsection 385-95(1) states that the excluded profit is then brought into their assessable income over a 5 year period in one of 2 ways:

•                to spread the profit on the disposal or death over the income year of the disposal or death and the next 4 income years (election to spread); or

•                to defer including the profit in your assessable income, if you will use the proceeds of the disposal or death mainly to replace the livestock (election to defer).

41.          As such, Taxpayer A and B do not need to include the entire proceeds on the sale of cattle received from the forced sale due to loss of pasture, feed and disease, as a result of the floods, in the aggregated turnover for the assessment of meeting the definition of a Small Business Entity ('SBE') for access to the Small Business capital gains tax ('CGT') concessions.

42.          They may instead elect to either spread the proceeds over 5 income years or defer including the profit in their assessable income, if they will use the proceeds of the disposal/death mainly to replace the livestock.

43.          Taxpayer A and B's pastoral company was carrying on a primary production business in Australia and was forced to dispose of their livestock because floods destroyed pasture and fodder. Further, they will replace the cattle by breeding over time to increase their reduced herd size. As such, they are eligible to make an election under Subdivision 385-E of the ITAA 1997 to spread the profit on the disposal of the cattle over 5 years.

Question 2:

Grants received as compensation for flood losses

44.          The State and Federal Governments announced Special Disaster Grants of up to $75,000 to support the recovery of primary producers impacted by severe flooding events that began on DD MM YYYY and DD MM YYYY (AGRNs 1030 and 1034).

45.          The disaster payments received by Taxpayer A and B were Special Disaster Grants.

46.          Taxpayer A and B were paid were paid $xyz by the XYZ for the floods which occurred in MM YYYY. They received $xyz on DD MM YYYY and a further $xyz on DD MM YYYY.

47.          The grants made for floods which occurred in MM YYYY have not been declared to be non-assessable non-exempt (NANE) income in section 59-99 of the ITAA 1997 or any other provision, and as such, they are taxable and should be included in the taxpayer's aggregated turnover calculations.

ATO view documents

Taxation Ruling TR 97/11 - "Income Tax: Am I carrying on a business of primary production?"('TR 97/11').

ATO Interpretative Decision ATO ID 2002/780 - "Income Tax: Forced disposal of livestock - drought conditions".

Other relevant comments

Not applicable

Key words

Primary production income

Disposal of trading stock

Forced sale due to floods

Livestock disposal

Primary production

Livestock industry