Private ruling: Business income
Date of advice: 30 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is your agistment income classed as primary production income for income tax purposes? | A1: No.

Relevant facts and circumstances: You own and live on a rural property. You operate a business of agistment on the property. The owners of the stock agisted at the property do not hold sole right of occupancy. You retain the right to manage the property, including setting stocking rates. The agistment income is calculated on a 'per head' rate and varies depending on the number of stock held on agistment. Many of your clients have their main farm operations located several hours from your property. Because of this, you are responsible for ensuring the animals on agistment are checked on a regular basis and any health issues, including veterinary care, are attended to. You ensure fences and pastures are maintained on a continual basis, including fertilising and weed control. You are responsible for moving stock around the property to ensure correct grazing and pasture management. Decisions on when and how to sell the animals are made by the owners of the animals, though if required, you will assist in yarding the animals or you may recommend selling agents to the owners. You contribute a significant amount of time to ensure pastures are managed, maintained and improved in order to provide the best pasture possible. You contend that you are engaged in the business of primary production as the agistment income generated is dependent on the quality of pasture available. The quality of the pasture is determined in large part by actions taken by you, including fertilising, weed control and grazing management.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: For the purpose of this ruling, it is assumed that you are carrying on a business of animal agistment. Consideration is now given to the question of whether the business is one of primary production. Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'primary production business' as carrying on a business of: (a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment; or (b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or (c) manufacturing dairy produce from raw material that you produced; or (d) conducting operations relating directly to taking or catching fish, turtles, dugong, bèche-de-mer, crustaceans or aquatic molluscs; or (e) conducting operations relating directly to taking or culturing pearls or pearl shell; or (f) planting or tending trees in a plantation or forest that are intended to be felled; or (g) felling trees in a plantation or forest; or (h) transporting trees or parts of trees, that you felled in a plantation or forest to the place: (i) where they are first to be milled or processed; or (ii) from which they are to be transported to the place where they are first to be milled or processed. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production states at paragraph 9 that: A person is carrying on a business of primary production for the purpose of the ITAA 1997 if: a. he/she produces 'primary production' as defined in subsection 995-1(1) of the ITAA 1997; and b. that activity amounts to the carrying on of a business. Therefore, it is necessary to determine if you meet any one of the eight definitions of 'primary production business' under subsection 995-1(1) of the ITAA 1997. Upon reviewing the information you have provided, as well as your arguments put forward concerning the activities of your business, only the first two definitions may have a possible connection to your activities. We will now look at each of those two definitions and apply them to your circumstances: (a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment; or A business that would fit into this category is one that produces by way of cultivating or propagating for the sole end purpose of the sale of that product, such as wheat farmers, sugar cane farmers, fruit and vegetable farmers or more relevant to your argument, turf farmers. These businesses generate sales directly from the product that is grown on their land. You contend that you are in the business of cultivating pastures or grass. The agistment income generated is dependent on the quality of the pasture available and you have spent considerable time, effort and money on improving your pastures. You also undertake active weed control measures and monitor this regularly. Whilst it is acknowledged that the quality of your pastures is of utmost importance to you and would make your property more desirable to current and potential customers, it does not alter the fact that you are in the business of agisting or renting your land and providing a animal management and care service and generate your income directly from these activities. You do not market or sell your grass as an end product to the public. This may be viewed in a similar way to an example of a restaurant business: A restaurant owner wanted to create and serve meals with the freshest seasonal ingredients available. He wanted to promote his restaurant as one that used the freshest, home grown produce in the region in their menus. To achieve this, the owner cultivated a ten acre herb and vegetable garden in order to supply this produce to the restaurant. The owner spent a substantial amount of time, effort and money on this garden; planting, weeding, fertilising, watering and continual soil improvement, growing a vast array of fresh seasonal produce to be used in the dishes sold at his restaurant. He did not sell his garden produce directly to the general public. This concept proved very popular with diners, making the restaurant a desirable eating establishment. The restaurant owner is still considered to be in the business of owning and operating a restaurant, rather than in the business of growing herbs and vegetables. The fact that he chooses to produce high quality ingredients for his business does not alter the type of business he is in, no matter how desirable his vegetables make his restaurant to his customers. Similarly in your case, your business cannot be described as a producer and seller of pastures and or grasses as an end product. The quality of your pastures simply makes your agistment business more desirable to your customers rather than changing the nature of your agistment business and therefore your business cannot be considered to fit this definition. (b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or The activities conducted in your business include day to day care, maintenance and management of animals, agisted on your property. You ensure any health and safety issues are attended to and you keep the stock rotated through paddocks when necessary to ensure there is no over or under grazing. In your submission, you have referred to AAT Case 10,331 (1995) 31 ATR 1146 ( Case 47/95 ), in particular, paragraph 29, where it states: "…if a land owner agreed with the owner of a herd of cattle to ensure their good health, proper veterinary care and husbandry of the progeny, marketing of their bodily produce and maintenance of the herd, then that land owner may be carrying on a business of primary production as that term is defined in s 6(1) of the Act, which, so far as it is relevant provides: ``6(1) `primary production' means production resulting directly from: (a) the cultivation of land; (b) the maintenance of animals or poultry for the purpose of selling them or their bodily produce, including natural increase; (c)... (d)...; or (e)... ' | Detailed Reasoning - (emphasis added): Although the legislative reference in this case is to section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), the current legislative reference under subsection 995-1(1) of the ITAA 1997 holds essentially the same definition. In your case, whilst we acknowledge that you maintain the stock agisted on your property as an inherent and necessary part of your business activities, we do not consider that your activities are for the purpose of selling them as you do not have any responsibility or control of any sales of the animals or their bodily produce, including natural increase. As this is a mandatory criterion in this definition under both the ITAA 1936 and the ITAA 1997, your business does not fit within this definition. You have cited several definitions of 'primary production' and 'primary production activity' found in other legislation, such as the Native Title Amendment Bill 1997 and the Native Title Act 1993 . However, a ruling on how your situation is regarded for the purpose of tax treatment under tax law must be considered and applied under tax legislation. You have referred to Taxation Ruling No. IT 225: Primary production - agistment income (IT 225). This ruling provides that agistment income may be included as forming part of the income of an existing primary production business if, for example, it was received as: (i) The grant of short term agistment rights to other primary producers; (ii) Short term hiring of plant from one primary producer to another; (iii) Amounts received for the use of stud stock. 4. On the other hand, however, the general proposition would not extend to a situation where property or a substantial part of a property is used solely for agistment, nor would it include receipts for the use of plant by a primary producer in general contract work. IT 225 refers to a business of primary production that may also receive a small amount of agistment (non-primary production) income and may allow those primary producers to include that small amount of agistment income as part of their overall primary production income. Paragraph 4 of IT 225 specifically excludes from primary production income, a situation where the whole or substantial part of a property is used solely for agistment. In your case, the income you receive from your agistment business is consistent with paragraph 4 of IT 225 in that a substantial part of your property is used solely for agistment and therefore, with application to this Ruling, you do not meet the criteria for describing your income as primary production income. As such, after careful consideration of all presented facts and contentions, your agistment and pasture cultivation activities are not considered to be a primary production business as defined in subsection 995-1(1) of the ITAA 1997.