Private ruling: Active Asset – sharefarming
Date of advice: 24 April 2018
Published: July 2018
Ruling period: For the income year ended 30 June 2018

Ruling: Q1: Does the farming land qualify as an ‘active asset’ within the meaning of that term in section 152-40 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The taxpayer and their spouse are the registered owners of farming land. The taxpayer and their spouse have owned the farming land for more than 15 years. The farming land consists of a certain amount of acreage of which a portion is cropped on a rotational basis. A copy of the agreement between the taxpayer’s spouse and Company X was furnished with the taxpayer’s application. The agreement, which was entered into more than 15 years ago, is signed by the taxpayer’s spouse and a representative of Company X. The taxpayer is not a party to this agreement. The agreement provides that Company X is in the business of primary production. It also stipulates that the taxpayer’s spouse wishes to make the land available for the purposes of primary production and Company X wishes to utilise the land for the purposes of primary production. Further, it provides that the taxpayer’s spouse shall for the consideration and on the terms and conditions set out in the arrangement make the land available to Company X for primary production. Under the terms of the agreement, payments for use of the land are made directly to the taxpayer’s spouse. Company X is not an affiliate of the taxpayer or the taxpayer’s spouse. Also, Company X is not connected to either the taxpayer or their spouse for the purposes of section 152-40 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 paragraph 152-40(1)(ii) | Income Tax Assessment Act 1997 paragraphs 152-40(1)(iii) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-47 | Income Tax Assessment Act 1997 paragraph 328-10

Reasons for decision: Summary: For a CGT asset to be an active asset under subsection 152-40 of the Income Tax Assessment Act (ITAA 1997), it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Subsection 152-40(1) relevantly states that a CGT asset is an active asset if at a time, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your *affiliate; or (iii) another entity that is *connected with you; Carrying on a business Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production provides general guidance as to whether activities undertaken amount to the 'carrying on of a business’. At paragraph 13, a number of indicators by reference to case law are listed which are relevant to determining whether activities constitute carrying on a business, which are as follows: ● whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators; ● whether the taxpayer has more than just an intention to engage in business; ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; ● whether there is repetition and regularity of the activity; ● whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; ● whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity. TR 97/11 explains that the facts of each case must be examined. No one indicator is decisive and the and there is often a significant overlap of these indicators. The indicators must be considered in combination and as a whole. 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. In the present circumstances, there is no evidence of the taxpayer using the farming land in the course of carrying on a business. It should be noted that although the taxpayer is a co-owner of the farming land, they are not a party to the sharefarming arrangement as set out in the agreement with Company X, an unrelated party. The agreement permits Company X to conduct its primary production business on this property. No obligations are imposed on the taxpayer under this agreement. Therefore, this sharefarming agreement is of no consequence in determining whether this property is an active asset of the taxpayer under Division 152. As such, the farming land does not qualify as an active asset under the first limb in paragraph 152-40(1)(i) of the ITAA 1997. Alternatively, the farming land may qualify as an active asset under paragraphs 152-40(1)(ii) or 152-40(1)(iii) of the ITAA 1997 where an *affiliate or an entity *connected to the taxpayer respectively uses this farming land in the course of carrying out a business. Company X which uses the farming land to conduct their business of primary production under the terms of the agreement is not the taxpayer’s affiliate, or an entity connected with the taxpayer. With regard to the taxpayer’s spouse who co-owns the property, it has been determined by the Commissioner that the sharefarming arrangements entered into by the spouse and Company X does not amount to carrying on a business by the taxpayer’s spouse. Accordingly, the taxpayer’s spouse does not use or hold ready for use the farming land in the course of carrying on a business. Therefore, the farming land fails to qualify as an active asset under the second and third limbs in paragraphs 152-40(1)(ii) and 152-40(1)(iii) respectively. In conclusion, as the farming land was not used or held ready for use by the taxpayer, an affiliate or an entity connected to the taxpayer in the course of carrying on a business, the property does not qualify as an active asset of the taxpayer under section 152-40. It should be noted that as the farming land is not an active asset, the active asset test in section 152-35 of the ITAA 1997 will also not be passed in relation to this property. Accordingly, the taxpayer will not be entitled to access the small business CGT concessions in Division 152 for any gain made upon disposal of this property as the basic conditions for relief in section 152-10 of the ITAA 1997 will not be fully satisfied. One of the basic conditions in section 152-10 that is required to be met is that the CGT asset satisfies the active asset test, which in this case has not been met – see paragraph 152-10(1)(d) of the ITAA 1997.