Private ruling: Am I carrying on a business
Date of advice: 16 November 2018
Published: March 2019
Ruling period: Financial year ended 30 June 2016 | Financial year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you carrying on a business primary production business? | A1: Yes. You meet the relevant factors contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? Further information about carrying on a business can be found by searching 'QC 31733' on ato.gov.au | Q2: Are losses carried forward from a prior year taken into account when calculating your taxable income for the purposes of the income requirement under subsection 35-10(2E) of the Income Tax Assessment Act 1997 ? | A2: Yes. Section 36-15 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if your total assessable income for the later income year exceeds your total deductions (other than tax losses), you deduct the tax loss from that excess. This means that a tax loss from a prior year is an available deduction in calculating your taxable income in the current year. | Q3: Do you pass the income requirement under subsection 35-10(2E) of the ITAA 1997 for the 2016-17 financial year? | A3: Yes. The sum of the elements listed at in subsection 35-10(2E) of the ITAA 1997 are less than $250,000. | Q4: Do the deferral rules in section 35-10 of the ITAA 1997 apply to defer your primary production business loss for the 2016-17 financial year? | A4: No. You pass the real property test in section 35-40 of the ITAA 1997.

Relevant facts and circumstances: You purchased large property (property 1) for the purpose of carrying on a primary production business (the activity). You also own other properties on which you carry out separate primary production activities. You and your spouse manage the farming operations on a daily and ongoing basis, and engage the services of unrelated contractors as needed for specialist operational matters. You have commissioned and obtained multiple written reports providing professional advice and management strategies for developing a sustainable primary production activity at Property 1. These reports have formed the basis of the day to day operation and have been utilised in improving the activity operations. You also regularly consulted with normal sources of rural consultancy, including your stock and station agent, who has been involved throughout your ownership and operation of Property 1. Since commencement the activity has endured one of the most severe droughts recorded in the area’s history, which resulting in you having to restrict stock levels. On advice from industry experts, you implemented a long-term pasture renewal and water infrastructure program to improve the carrying capacity of the land. This was in-line with the overall strategy of re-establishing a long-term sustainable farming operation. To further progress the farmland renewal program at Property 1 you used one of your other properties in conjunction with the activity. You transport stock between the properties to ensure neither farm’s pastures are overworked or overstocked, and to take advantage of the different rainfall events and patterns at each property. In 2009 one of your properties were destroyed in the Black Saturday bushfires, including all pastures and farm infrastructure. As a result you diverted virtually all available financial resources form Property 1 into re-establishing, rebuilding and replenishing the damaged property. This effort is still ongoing. As a result, the capital and pasture improvement programs originally planned and undertaken at Property 1 have spanned a much longer period then you anticipated. You have been able to progressively increase the quality of pasture land, stock numbers, weight and overall return per head are at the best levels since you acquired the properties. You can now produce significant volumes of feed, as long as seasons permit, which is cut, baled and stored and this has in turn somewhat reduced the long-term need for buying feed, resulting in a significant cost reduction. In the 2016-17 financial year stock sales dropped significantly from the prior year. This was a result of a changeover in breeding stock when you purchased a number of new stock with improved genetics in the 2015-16 financial year, and sold all of the existing breeders soon after. The new breeders required approximately 9 to 12 months to grow and then calve, and therefore there were limited sales in the 2016-17 financial year. Income from the activity will again increase in future financial years. You passed the non-commercial loss income requirement for the 2015-16 financial year, and in that income tax return you indicated that you passed the one of the four tests for the activity. For the purpose of calculating the non-commercial loss income requirement for the 2016-17 financial year: ● your prior year carried forward losses reduced your taxable income to zero, and ● the net of your total reportable fringe benefits, reportable superannuation contributions and total net investment losses were less than $250,000. The activity passes the real property test, as the property used in the activity is valued well in excess of $500,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 4-15 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-5 | Income Tax Assessment Act 1997 Section 12-5 | Income Tax Assessment Act 1997 Section 35-10 | Income Tax Assessment Act 1997 Subsection 35-10(2E) | Income Tax Assessment Act 1997 Section 35-30 | Income Tax Assessment Act 1997 Section 35-40 | Income Tax Assessment Act 1997 Section 36-15