Edited version of private advice

Authorisation Number: 1052316512517

Date of advice: 11 October 2024

Ruling

Subject: CGT - small business concessions

Question 1

Was person A carrying on a primary production business from the 20XX to the 2023 income year?

Answer

Yes. There was more than an intention to engage in business, as well as repetition and regularity of activities. The activities were organised in a business like-manner, and it was not considered a hobby. Though the size and scale of the activity was smaller than those in the same industry, it is considered the low number of cattle held was appropriate for the typography of the land and the regenerative farming methods used, and approximately the same ratio of cattle per acre were maintained by a larger cattle farmer on the neighbouring property. Therefore, the Commissioner accepts that John was carrying on a primary production business from 20XX to 2023.

Question 2

Does the property satisfy the active asset test as defined in sections 152-35 and 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Under section 152-35 of the ITAA 1997 the property satisfies the active asset test. Person A and person B owned the properties for over 15 years. The property had been used by person A to carry on a primary production business for over 7.5 years. As person B owns part of the property that their spouse uses to carry on a business, they will be considered their affiliate.

This ruling applies for the following period:

Year Ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Person A and person B acquired the property in March 19XX.

Person A and person B are spouses.

The property had a small cottage and minimal infrastructure.

The topography of the property ranged from hilly country with very little topsoil to dry creek flats.

The intention was to use the property to earn income to support their pending retirement from teaching, which they planned for approximately six years after acquisition.

Person A did the following to prepare for the business operations:

•         Researched methods to improve the property and considered suitable business activities. It was decided that a cattle business based on sustainable farming practices could be conducted profitably on the land.

•         Sought advice on the type of cattle to raise, and whether to trade in steers or breed calves. It was decided that breeding black angus calves was a more profitable activity on a small scale than trading in steers.

•         Carried out various works to improve the Property's condition, including installation of electric fencing, creating a wildlife corridor, restoring gullies, providing shelter for cattle, planting tube stock, constructing a top dam to provide water for cattle troughs and laying rock.

Person A had by then primarily retired from the teaching profession and was ready to commit their time to operating the cattle business.

There was no business plan.

The intention was to own approximately XX breeding cows, and to either hire a bull or use artificial insemination to breed, then sell the calves after weaning.

The first cattle acquired were XX Angus cows and XX calves in 20XX. During the period that the business was operated, there were generally approximately XX to XX breeding cows on the farm, plus XX to XX calves.

Approximately the same ratio of cattle per acre was maintained by a larger cattle farmer on the neighbouring property.

Person A's model revolved around regenerative farming so breeding quality cattle, while ensuring the practices were environmental and sustainable. This included ensuring the property was not overstocked and limiting chemical input.

During the period of ownership, considerable progress was made towards developing a profitable regenerative farming operation. The property was highly regarded as an environmentally sustainable farm. As an example of this, the property was frequently used for field days to illustrate the benefits of shelter belts and laneways to protect stock and increase biodiversity.

Information from the Common Ground fact sheet for the Small Rural Landholder Network in Table 1 states that the appropriate number of cows per hectare is between 0.46 to 1.15 (i.e. between 2.1 and 5.2 acres per cow) for lands similar to the property.

Stocking numbers were impacted by:

• Regenerative farming methods: person A wanted to breed cattle in an environmentally friendly way and based on the regenerative farming approach. This can be a slow approach, particularly for smaller farmers, and comes at an initial cost.
• Weather conditions: The rainfall and temperature variation over the last 100 years ranged from 300mm to 1200mm and there has been a gradual increase in temperature, especially in the last 30 years.
• Farm topography:

­   The topography of the farm ranged from hilly country with very little topsoil to dry creek flats, again with little topsoil because of leaching. John was very keen to improve the quality of the soil.

­   This also impacted the grass cover on the farm, and there was a high cost of supplementary food (hay).

• Quality of Property: At the time of purchase, the property was badly degraded and required significant amounts of capital to implement the regenerative approach they wished to adopt. The introduction of laneways, cell grazing, and new yards was also done to reduce personal risk in handling cattle and to improve the health of the stock.
• The initial use of artificial insemination to improve the quality of the breeds but resulting in the success rate being lower than expected (at 50%).
• General business conditions (for example, the age of the herd in the 20XX and 20XX year required the acquisition of more heifers and a lead time until they could be bred).

Person A was generally able to achieve strong prices for their cattle based on the quality, compared to average market prices. The stock was generally sold by auction via a stock agent.

During the period of operation person A and person B spent on average three to four hours a day each running the business which included the following activities:

• Maintaining the farm, including repairs, soil testing and general upkeep.
• Moving stock.
• Inseminating cows.
• Selling lesser quality cows to maintain the breeding herd at around 20 cows.
• Planting shelter belts around grazing cells to protect the cattle.
• Purchasing hay to support poor pasture growth in low rainfall.
• Engaging veterinary services.

During the year the following would be done:

• Sell Weaners.
• Calving.
• Have the hired bull with the herd.
• Mark and tag calves.
• Pregnant test cows
• Inoculations and drench cows.
• Wean and drench cows.

Person A continued to obtain advice on operating a sustainable and profitable farming operation from conservation experts on water usage, erosion and pasture management as well as organisations.

Person A also continued to invest capital improvements to the property for long-term benefits. This includes:

• Constructing laneways through the property to allow for easier movement of stock, and to reduce compaction in the paddocks.
• Larger paddocks being divided into fourteen smaller grazing cells.
• Irrigation for the transfer of water from dams and a large water tank to the new troughs in the grazing cells.
• Planting eucalypts and wattles along the fence lines to provide shade for the cattle.
• Adding minerals to the paddocks, and rocks to the gullies to reduce erosion.
• Construction of a hay shed.
• Construction of cattle yards.
• Fencing.

The activity was not profitable until the 2023 income year, when calf prices were higher. The 2022 year also included the sale of some pregnant cows, due to the impending sale of the property.

Profitability in other years were affected by the following factors:

• In the initial years from 20XX to 20XX, drought conditions resulted in low cattle prices and the need to purchase stock feed at higher than normal prices.
• Expenditure was incurred to improve the property and business activities, which was expected to increase income in future years.
• Artificial insemination being used to improve the quality of the breeds but resulting in the success rate being lower than expected, at 50%. This subsequently led to the decision to move away from artificial insemination in 20XX and instead hire well-bred bulls for insemination.
• Further drought in the 20XX year resulting in person A having to partially destock.
• The forecasted El Nino seasons resulted in some farmers reducing their stock levels, causing high supply and cattle prices to fall.

Records of sales and expenses were kept at all times.

Records of cattle purchased, sold and on hand were also kept.

The property was sold in early 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-47

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