Private ruling: Non-primary production income
Published: November 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the profit on the sale of livestock, which have been leased to another entity, be considered primary production income? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: The receipt by you of an annual payment from the lessee for the use of the land and your livestock would be in the nature of income from property rather than from the carrying on of a business of primary production. When the livestock are sold the income is not considered primary production income as you are not in the business of primary production. | Detailed Reasoning - Detailed reasoning: Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in part states you carry on a primary production business if you carry on a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase). Taxation Determination TD 95/62 discusses whether the owner of land who allows the land to be used in a sharefarming arrangement is considered to be engaged in a business of primary production. Sharefarming or share cropping is a common farming practice where a farmer is allowed to farm and harvest a crop on someone else's land in return for payment to the owner of that land a percentage of the harvest proceeds. Subsection 6(1) of the Act defines those activities which amount to primary production for the purposes of the Act. The cultivation of land is included among those activities. It is therefore necessary to determine whether the landowner is involved in a business of cultivation of land. To be carrying on a business, the 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. In the absence of such an involvement, the landowner would not be regarded as being engaged in the business of primary production. The receipt by the landowner of a payment from the farmer for the use of the land would be in the nature of income from property rather than from the carrying on of a business of primary production. These principles would also apply if instead of cultivation of the land, the activity conducted was any of those mentioned in the definition of primary production in subsection 6(1). In your case you were previously in a primary production business. You entered into a leasing agreement to lease out your livestock to another entity who would use their own equipment and your land to maintain the livestock during the term of the lease. During the lease term you have had no involvement in the maintenance of the livestock as the lessee is responsible for the maintenance. The receipt by you of an annual payment from the lessee for the use of the land and your livestock would be in the nature of income from property rather than from the carrying on of a business of primary production. It is considered that your involvement is passive only and therefore you are not considered to be in the business of primary production from the date of the lease agreement. The subsequent sale of the livestock will not be considered primary production income as you are not in the business of primary production and consequently the income from the sale of the livestock will be non-primary production income.

Relevant facts: You operated a primary production business involving livestock. | During the 2011-12 financial year you decided to cease your activity as a livestock farmer. | During the 2011-12 financial year you entered into a lease agreement with another entity who agreed to lease your livestock while using their equipment on your land. | The lessee will pay you an annual leasing fee. | The lessee is responsible to maintain the fencing, road-tracks, creek crossings and livestock yards in the same condition (as a minimum) as at the commencement of the lease. | The lessee will receive all income returns from the sale of the livestock. In doing so the lessee accepts all production and market risks associated with the sale of the livestock. | You intend to cease your primary production business, sell your livestock and your property.