Private ruling: Income test for Farm Management Deposit deduction
Date of advice: 5 May 2016
Published: June 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Do you satisfy the non-primary production income requirement under paragraph 393-5(1)(d) of the Income Tax Assessment Act 1997 for the purpose of claiming a deduction for your Farm Management Deposit? | A1: Yes.

Relevant facts and circumstances: You have been carrying on a primary production business since 20XX. This business was conducted in partnership with your spouse and another individual. Your share of the partnership is YY%. You were a part of a co-operative. As a requirement of being a part of the co-operative the partnership was required to hold a minimum number of shares and was required to acquire additional shares based on the quantity of products supplied to the co-operative. In 20AA the co-operative public listed its shares. Since this listing the partnership has been informed that it is no longer required to hold shares to be a part of the co-operative. Since the public listing of the shares the partnership has been selling its shares. No further shares have been acquired since the public listing. Your gain on the shares sold in the 20AA-BB income year was $XXX. You also received dividends for the shares not yet sold in the amount of $XXX for the 20AA-BB income year. Your other non-primary production assessable income for the 20AA-BB year is approximately $XXX. In the 20AA-BB income year you made a $XXX farm management deposit for your primary production business.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 392-80 | Income Tax Assessment Act 1997 - Section 393-5 | Income Tax Assessment Act 1997 - Section 995-1

Reasons for decision: Summary: The capital gain made on the sale of your shares in the co-operative and the dividends you have received are considered assessable primary production income. For the purposes of paragraph 393-5(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) your taxable non-primary production income would be less than $100,000. | Detailed Reasoning - Detailed reasoning: The amount of a deposit that can be a Farm Management Deposit and allowed as a deduction under section 393-5 of the ITAA 1997 depends on the taxpayer's taxable primary production income for the current income year. Taxable primary production income is worked out by comparing assessable primary production income and primary production deductions as per subsection 392-80(1) of the ITAA 1997. A taxpayer's assessable primary production income for the year of income is the amount of their basic assessable income for the year of income that was 'derived from or resulted from' carrying on a primary production business as per subsection 392-80(2) of the ITAA 1997. | Detailed Reasoning - Are the receipts considered primary production income?: Section 995-1 of the ITAA 1997 provides that you carry on a primary production business if (amongst other things) you carry on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase). The Income Tax legislation does not provide guidance as to when an amount was derived from, or results from, the carrying on of 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', indicates that the relationship between the income and the primary production business is to be close and direct rather than indirect or remote. This would mean that assessable primary production income would be considered to be '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 your primary production business. This is because the partnership is required to hold a minimum number of shares, and to continue to purchase shares in the co-operative (based on the quantity of products supplied), in order to supply products to the co-operative. The number of shares the partnership holds in the co-operative is a direct result of the quantity of products supplied to the co-operative. As the dividends received were calculated by direct reference to the number of shares held by you in the co-operative, this constitutes a close and direct relationship between the dividends received and your 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' as per subsection 392-80(2) of the ITAA 1997. The dividends received from shares acquired by you 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. In regards to the sale of these shares and the capital gains or losses made by the sale, this would also be considered primary production income. As established above you were required to purchase shares in the co-operative as part of your primary production business. The capital gains would be considered to be derived from the result of you carrying on your primary production business and the shares are only being sold as they are no longer required to be a part of the co-operative and therefore operate your business. As the proceeds from your dividends and the sale of shares in the co-operative are considered to be primary production income and for the purposes of paragraph 393-5(1)(d) you must only consider non-primary production income to determine if you meet the income requirement to deduct a Farm Management Deposit. Given the amounts of non-primary production income mentioned above are below the $100,000 threshold you meet this test.