Private ruling: Non-commercial losses and the Commissioner’s discretion
Date of advice: 1 September 2017
Published: December 2017
Ruling period: Year ended 30 June 2016. | Year ended 30 June 2017.
Date scheme commenced: DDMMYY

Ruling: Q1: Are you carrying on a business of cattle farming? | A1: Yes. | Q2: Will the Commissioner exercise the discretion in section 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your cattle farming activity in your calculation of taxable income for the relevant financial years? | A2: Yes.

Relevant facts and circumstances: You have run a small cattle operation for a number of years. You considered this operation to be a hobby for tax purposes. You have always regarded the operation as a hobby due to the small scale of the activity carried out. You considered this activity to be successful. Some time later, you acquired further farmland (the property). The property was purchased by you and another individual, and was financed by a loan from a financial institution. The previous owners of the property used it for cattle farming activities; and you have acquired it in order to expand your cattle operation into a commercial business as a sole trader. Approximately 50% of the property is arable land suitable for row cropping and the balance suitable for grazing. You produce hay for your own use, at the property. You moved a number of cattle to the property approximately two weeks after settlement. After acquiring the property, you met with your accountant to discuss setting up the farm in a profitable way. You have invested a significant amount of capital in the form of infrastructure. You have incurred losses in the first year of operation at the property as a result of purchasing capital equipment, repairs to fencing and infrastructure, and capital expenditure on water facilities. At the end of the first year, you had a number of cattle at the property. Approximately one year later, your current stock included a number of mixed breed cattle, and stud bulls. You incurred a loss in the first year, and a gross operating loss. Financial records are currently being prepared for the second year. You have no formal projected profit and loss figures for future years, but expect it to be a profitable year. You have provided the capacity of the property, along with another property you own nearby which includes bulls, and number of replacement heifers which would be too young to breed. You project that you will turn over a specified number of cattle a year, plus replacement stock, subject to weather conditions. Based on your estimates, you expect to receive an approximate amount of money from the sale of calves every twelve months. You have provided a receipt from your stock agent which indicates a credit for the sale of a number of cattle on a particular day. Stock are sold at the local markets to various buyers. You hold relevant qualifications. You have previous experience as a farm hand and share farmer, and have been keeping cattle for a number of years. You maintain contact with your neighbours who assist with local knowledge when required. You reside at the property during weekends and most evenings. You are involved in performing cattle farming activities including hay production, spraying, providing water for stock, supplementary feeding and fencing works. In the second year of operation, you received income from other sources, and incurred investment losses. You are employed elsewhere fulltime.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: You are carrying on a business of primary production. The Commissioner considers it reasonable and will exercise his discretion in relation to the relevant financial years. | Detailed Reasoning - Detailed Reasoning: Carrying on a business Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner’s view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. The factors considered important are: ● whether the activity has a significant commercial purpose or character ● 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 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. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. Application to your situation In your situation, you initially ran a small cattle farming operation as a hobby. You subsequently acquired further land with the intention of carrying on a business. Your product is sold at the markets through stock agents in a manner that is consistent with the industry. Although the size and scale of the operation is relatively small, you have sought advice and hold the relevant qualifications, indicating that your activity is planned and organised in a businesslike manner. Therefore, upon consideration of the above factors, it is considered that you are carrying on a business of primary production for income tax purposes. Commissioner’s discretion Paragraph 35-55(1)(b) of the ITAA 1997 provides that the Commissioner may exercise a discretion not to apply the loss deferral rule in section 35-10 where the income requirement is met but the objective tests are not satisfied because of the nature of the business activity. This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. The relevant discretion may be exercised for the income year in question where: ● it is in the nature of the business activity that there will be a period of time before it can be expected to pass one of the four tests, or ● there is an objective expectation your business activity will produce a tax profit or meet one of the four tests within a commercially viable period for your industry. Having regard to your full circumstances, it is accepted that it is in the nature of the business activity that has prevented one of the four tests being passed. It is also accepted that you will pass one of the four tests or make a tax profit within the commercially viable period for your industry. Therefore, the Commissioner considers it reasonable and will exercise his discretion in relation to the relevant financial years. | Detailed Reasoning - Future years: You should note that conducting an activity that has been described as a business is a 'status'. You can change from being carried on as a business to conducting that activity as a hobby and vice-versa over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business.