Private ruling: Cessation of primary production business
Published: February 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers: | 1. Upon leasing your farm in May 2012, will you still be considered as a primary producer in relation to grain sold in the financial year ending 30 June 2013? | No. | 2. After you cease to be a primary producer in May 2012, if your grain is stored at the co-operative for sale, will your stored grain be trading stock? | No. | 3. After you cease to be a primary producer in May 2012, if your grain is stored at the co-operative for sale, will your stored grain be deemed to have been sold to your individual partners as individuals for its cost? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You carry on a primary production business of livestock and grain farming. In March 2012, you will cease carrying on this business and will lease your land to a third party, which will include some livestock. In preparation of this, you sold the remainder of your livestock in the current financial year. You also performed your last grain harvest in December 2011. The grain is currently stored in silos. You wish to sell your grain during the next financial year ending 30 June 2013 to spread your income over two years and also because the grain prices have been low and you hope to secure a better price.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 70-10 | Income Tax Assessment Act 1997 Section 70-110 | Income Tax Assessment Act 1997 Section 392-10

Reasons for decision: Summary: You will cease to carry on a business of primary production when you lease your farm land in May 2012. Therefore, you will not be a primary producer for taxation purposes in relation to the grain you plan to sell during the year ending 30 June 2013. Due to the trading stock rules in section 70-110 of the Income Tax Assessment Act 1997 (ITAA 1997), any unsold trading stock will be deemed to have been sold to your individual partners as individuals for its cost. | Detailed Reasoning - Ceasing to carry on a business versus termination of an enterprise: Paragraph 98 of Taxation Ruling TR 2001/14 states for a business activity to have commenced a person must have: (i) made a decision to commence the business activity; (ii) acquired the minimum level of 'business assets' to allow that business activity to be carried on; and (iii) actually commenced 'business operations'. Therefore, for income tax purposes, the cessation of a primary production business will occur when the disposal or leasing of the relevant land occurs (which makes up the minimum level of business assets to allow that business activity to be carried on). For example, in the Full Federal Court case of Coal Developments (German Creek) Pty Ltd v FCT (2008) 71 ATR 96, it was concluded that once the business had been sold (and was being conducted by new owners), any activities being conducted by the taxpayers could not be characterised as carrying on or winding-down the same business. The 'cessation of a business', for income tax purposes, is different from the 'termination of an enterprise', for ABN and GST purposes. Miscellaneous Taxation Ruling MT 2006/1, which is about the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number, provides the following example, which is applicable to your situation: Joel, who has been farming cotton for a number of years, decides to retire, sell up everything and move to town. All assets are sold with the exception of a number of bales of cotton. Joel expects to sell the cotton at some future time and pays to have it stored in a commercial warehouse. The enterprise has not terminated until the cotton is sold or is determined to be worthless or of little value. In your case, your carrying on a business will end when you lease your land because you will no longer have the minimum level of business assets to allow that business activity to be carried on. Although you will continue to carry on an enterprise for ABN and GST purposes, you will cease to carry on a business for income tax purposes. | Detailed Reasoning - Primary production averaging: Division 392 of the ITAA 1997 is about long-term averaging of primary producers' tax liability. Section 392-10 of the ITAA 1997 states this Division applies to your assessment for the current year if you are an individual and you have carried on a primary production business in Australia for two or more income years in a row (the last of which is the current year). In your case, you will not be able to use primary producers' averaging for the year ending 30 June 2013 because you will have ceased to carry on a business in the year ended 30 June 2012. | Detailed Reasoning - Trading Stock: Section 70-10 of the ITAA 1997 defines trading stock as including anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business and live stock. Section 70-110 of the ITAA 1997 is about when you stop holding an item as trading stock but still own it, which is applicable to situations when a taxpayer stops carrying on a business. The Supplementary Explanatory Memorandum to the Tax Law Improvement Bill 1997 included the following discussion on section 70-110 in relation to when a taxpayer stops carrying on a business: These proposed rules will only apply to genuine changes in an assets use. Whether there is a genuine change is determined objectively. For example, if an asset is still held for trading, then putting it to another minor use will not amount to a conversion from trading stock. On the other hand, if a taxpayer stops carrying on business, any remaining stock will be converted to another use. Therefore, section 70-110 of the ITAA 1997 states if you stop holding an item as trading stock, but still own it, you are treated as if: (a) just before it stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost; and (b) you had immediately bought it back for the same amount. In your case, you will stop carrying on a business in May 2012. Section 70-110 of the ITAA 1997 will provide you, as a partnership business, will cease to have any trading stock at that time. When your partnership business ends, you, as a business, will be deemed to have sold the grain at its cost and then, your individual partners, as individuals, will be deemed to have bought the grain, at its cost. As you, as a partnership business, will not hold any trading stock, your trading stock will be converted to another use, namely, property held by your individual partners as individuals for the purpose of an isolated commercial transaction, to be sold when grain prices improve. Therefore, while the partnership may deduct the cost of producing your grain, but as the partnership is deemed to have sold the grain at its cost, these transactions will in effect cancel each other out. Instead, the effect is that cost of producing your grain will offset the gross grain income of your individual partners in the income year in which your stored grain is sold and these profits may be treated as isolated commercial transactions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.