ATO ID 2010/149: Primary production: assessable primary production income - dividends
Date of decision: 15 July 2010
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
Are the dividends received from shares acquired by the taxpayer under the compulsory share acquisition scheme assessable primary production income as defined under subsection 392-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The dividends received from shares acquired by the taxpayer under the compulsory share acquisition scheme are assessable primary production income as defined under subsection 392-80(2) of the ITAA 1997 because there is a close and direct relationship between the dividends received and the primary production business.

Facts
The taxpayer, who is an individual, carries on a primary production business and is a member of a dairy co-operative. The taxpayer is required to hold a minimum number of shares in the co-operative and is required to acquire additional shares based on the quantity of dairy products supplied to the co-operative, subject to the maximum number of shares allowed to be held by any one member. The number of shares the taxpayer holds in the co-operative is as a direct result of the quantity of dairy products supplied to the co-operative. The shares are unable to be traded as it is a requirement of the co-operative that the taxpayer holds the shares in order to continue to supply dairy products to the co-operative. During the income year, the taxpayer received a dividend distribution calculated based on the number of shares held.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997 unless otherwise stated.) A taxpayer's assessable primary production income for an income year is the amount of their basic assessable income for the income year that 'was *derived from, or resulted from, your carrying on a *primary production business' (subsection 392-80(2)). The Income Tax legislation does not provide guidance as to when an amount was derived from, or results from, your carrying on a primary production business. However, the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 2) 1978, which first used the words 'assessable primary production income' in the corresponding provision in the Income Tax Assessment Act 1936 (ITAA 1936), indicates that the relationship between the income and the primary production business is to be close and direct rather than indirect or remote. The definition of 'assessable primary production income' in the corresponding provision in the ITAA 1936 uses the phrase 'in consequence of the carrying on of a business of primary production'. In AAT Case 6254, AAT Case X82 21 ATR 3708; 90 ATC 599, Dr Gerber observed: The term "in consequence of " connotes causality - in this case whether the interest was "caused" to be derived as the "predominant" or "proximate" or "direct" result of the carrying on of the business of primary production. This is a question of fact. In this case, it is considered that purchasing shares in the co-operative is a direct consequence of carrying on the taxpayer's business. This is because the taxpayer is required to hold a minimum number of shares, and to continue to purchase shares in the co-operative (based on the quantity of milk supplied), in order to supply dairy products to the co-operative. The number of shares the taxpayer holds in the co-operative is a direct result of the quantity of dairy products supplied to the co-operative. As the dividends received were calculated by direct reference to the number of shares held by the taxpayer in the co-operative, this constitutes a close and direct relationship between the dividends received and the taxpayer's primary production business of production and supply of dairy products. That is, the reason for receiving the dividends is as a direct result of carrying on of the primary production business. Therefore, the relationship between the dividends received and the carrying on of the primary production business is such that the dividends are '*derived from, or resulted from, your carrying on a *primary production business' (subsection 392-80(2)). The dividends received from shares acquired by the taxpayer under the compulsory share acquisition scheme are assessable primary production income as defined under subsection 392-80(2) because there is a close and direct relationship between the dividends received and the primary production business.

Legislative references: Income Tax Assessment Act 1997 subsection 392-80(2)
Case references: AAT Case 6254, AAT Case X82 21 ATR 3708 90 ATC 599
Related public rulings and determinations: Taxation Determination TD 2008/16
Related ATO interpretative decisions: ATO ID 2002/773
Other references: Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 2) 1978
Subject references: Primary production income