Private ruling: Determine if you are in the business of water allocation rights trading
Date of advice: 14 June 2016
Published: July 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Am I in the business of water allocation rights trading? | A1: No.

Relevant facts and circumstances: In 20XX you sold part of your land. You derived a capital gain on the sale of you land. You self-assessed that you were eligible to apply the small business replacement roll-over concession to your capital gain. The land you still own is leased to a primary producer. Prior to the sale of your land you had been in the business of primary production for AA years. You own permanent water rights entitlements that you used in your primary production activity. Upon sale of the land you kept these water rights entitlements. The holder of a permanent right can sell a temporary right to someone else. A permanent right holder has a right to water every year while a temporary right holder only has a right to that amount of water that year. You own the rights to a designated amount of water. Each year you are informed by the regulator the percentage of your permanent water allocation rights that you are able to use or sell, for example 20% or 70% of your total. This amount depends on the total water available to allocate to the rights holders. The price for the water is brokered by the regulator and set by the market. You are able to sell the temporary right yourself. However, all sales go through the regulator as they are delivering the water and need to know about the sales to ensure that the permanent rights holder does not exceed the limits set by them. Prior to the sale of your farmland you would regularly trade any excess water allocation rights you held. You are intending to acquire an additional amount of permanent water rights to continue trading water rights even though you no longer operate your primary production business. You also work on a casual basis. Your employment income was approximately $BB for the year ended 30 June 20XX and $CC for the year ended 30 June 20YY. When determining the quantity and sale price per mL for the above sales you took into consideration the following: • Weather conditions in the area • Time of the year the sale was taking place • Farmer's market conditions, e.g. the value of crops, etc • Farmer's circumstances at time of sale There are markets that water allocation rights can be traded through that you operate through, you also engage a broker to assist you in trading your water allocation rights. To date you have had several "off-market" (not done through a broker or water trade website) sales by using your contacts and professional networks that you made while operating your farming business. You incur expenses such as access fees, government fees, broker fees and transfer fees. You keep records of all expenses you incur and sales that you make throughout the year. You spend several hours a week undertaking water rights allocation trading. You have no business plans or budgets in place.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 152-40

Reasons for decision: Summary: The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11. Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include: • whether the activity has a significant commercial purposes or character • whether the taxpayer has more than just an intention to engage in business • whether there is regularity and repetition of the activity • whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' from looking at all the indicators and whether these factors provide the operations with a 'commercial flavour. However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). To be carrying on a business, a taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The payment of expenses relating to the ownership of property would not, without more, be sufficient. In the absence of such an involvement, an owner of property would not be regarded as being engaged in the business. The mere receipt by the property owner of a payment from users for the use of the item of property would be in the nature of income from property rather than from the carrying on of a business. A taxpayer should undertake at least minimum activities necessary to maintain a commercial quantity and quality of product for sale. Although business owners do not necessarily have to manage the day-to-day operations themselves, it is expected that they would have control over the assets and business performance. In your case, you sold part of your land and kept the water allocation rights to temporarily trade in order to generate income. You are only able to trade the water that is apportioned to you every year by the regulator, which means you cannot always trade all of your water allocation rights and your potential trades are reliant on what is actually allocated from year to year. The times at which you trade your water allocation rights are dictated by the primary production businesses and the cyclical nature of industry. You have no ability to increase your profits through cost cutting or to instigate strategies to increase revenue, which would be normal practice for an entity in business. This indicates that the elements that are usually indicative of a business are absent in the present case. Your lack of control over the amounts of water allocation rights you can sell each year, the limited times over the year when you are able to sell the rights and your inability to apply normal business practices to maximise profit indicates that the size and scale and repetition and regularity of your activity is not enough to say that you are in the business of water rights trading. Together with the lack of business plan the activity appears to lack commerciality that is usually seen in business activities. After considering all of the relevant indicators discussed in TR 97/11 and the circumstances of this case, it is considered that you are not carrying on a business of water rights trading.