Taxation Ruling TR 97/11

What this ruling is about: [Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]

Class of entities or scheme: 3. This Ruling applies to persons who carry on activities which might be described as 'primary production' in the ITAA 1997 (see the definition in paragraph 8 below). 4. The Ruling does not deal with the situation of a taxpayer who receives a payment from a one-off transaction, where there is no question as to whether he/she is carrying on a business. | Other relevant Rulings and Determinations: 5. The following Taxation Rulings and Taxation Determinations consider whether specific activities come within the meaning of primary production: 6. Taxation Ruling TR 2008/2 expresses our views on a number of issues to do with the horse industry and when a taxpayer might be considered to be carrying on a business of primary production with respect to horses. 7. This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). | What is primary production: 8. Subsection 995-1(1) of the ITAA 1997 defines 'primary production business' as carrying on a business of: 9. A person is carrying on a business of primary production for the purposes of the ITAA 1997 if: 10. Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law. 11. The cases provide a number of indicators that are relevant to determining whether primary production activities constitute the carrying on of a business. These indicators are set out below. The indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business. | Some indicators of carrying on a business of primary production: 12. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Therefore, although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined below provide general guidance. This is explained further at paragraph 25 of this Ruling. 13. The courts have held that the following indicators are relevant: 14. A taxpayer does not need to derive all his/her income from the primary production activity. The taxpayer may also be employed in some other occupation or profession. What is important is that the taxpayer's primary production activity amounts to the carrying on of a business. This activity is considered separately from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary production activity is also a business. 15. We stress that no one indicator is decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased. 16. 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' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. 17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business . 18. The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators. | Private rulings: 19. A person can apply for a Ruling under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) on whether he/she is carrying on a business: (see TR 2006/11). 20. A person may seek a private ruling on the application of a tax law to a particular primary production activity. 21. [Omitted] 22. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. 'Sufficient information' in relation to a private ruling, where the matter(s) in issue include the carrying on of a business of primary production, includes information which covers the indicators set out at paragraph 13 (see also paragraphs 104 to 109). | Indicators of a business of primary production: 23. There are no hard and fast rules for determining whether a taxpayer's activities amount to the carrying on of a business of primary production. The facts of each case must be examined. In Martin at CLR 474; AITR 551 Webb J said: 24. The nature of the activity, the taxpayer's intention and the method of operation help determine whether a business of primary production is being carried on. Many of the relevant indicators are stated in the decision of the Full Federal Court in Ferguson . Bowen CJ and Franki J said in their joint judgment at FLR 314; ATC 4264-4265; ATR 876-877: 25. In Evans , Hill J agreed that no one indicator could determine whether a business is being carried on. He said at ATC 4555; ATR 939: Profit motive (but see cf. I.R. Commrs v. Incorporated Council of Law Reporting (1888) 22 Q.B. 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on ( I.R. Commrs v. Livingston (1927) 11 T.C. 538), repetition and a permanent character, continuity ( Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9; Ferguson v. FC of T 79 ATC 4261 at p. 4264), and system ( Newton v. Pyke (1908) 25 T.L.R. 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.' 26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are: 27. Note: | Significant commercial purpose or character: 28. It is frequently those taxpayers, who earn income from employment or other sources and/or enter into some sort of primary production activity in a small way, who want to show that they are in a business of primary production. These taxpayers usually claim deductions for losses for taxation purposes in the first years of being involved in this activity. In showing that a business is being carried on, it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, i.e., that the activity is carried on for commercial reasons and in a commercially viable manner. 29. The phrase 'significant commercial purpose' is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (refer to paragraph 81) and discussed further by Gibbs CJ and Stephen J in Hope . The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity (refer to paragraphs 77 to 85), the repetition and regularity of activity (refer to paragraphs 55 to 62) and the profit indicators (refer to paragraphs 47 to 54). A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas . In that case, Walsh J found that the taxpayer's activities in growing macadamia nut trees and avocado pear trees amounted to the carrying on of a business. The court was influenced by the scale of the activity, and the taxpayer's expectation of an ongoing financial return. Consideration should also be given to whether the taxpayer is a pioneer in the activity or has developed a new method of undertaking the activity, whether successful or not. 30. In order to show that there is a significant commercial purpose or character we suggest that it may help to know whether the taxpayer has: These suggestions will assist the taxpayer to show that he/she is carrying on a business of primary production. It will assist the taxpayer if he/she is able to provide evidence in writing to support these activities and plans.

Ruling: 5. The following Taxation Rulings and Taxation Determinations consider whether specific activities come within the meaning of primary production: 6. Taxation Ruling TR 2008/2 expresses our views on a number of issues to do with the horse industry and when a taxpayer might be considered to be carrying on a business of primary production with respect to horses. 7. This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). | What is primary production: 8. Subsection 995-1(1) of the ITAA 1997 defines 'primary production business' as carrying on a business of: 9. A person is carrying on a business of primary production for the purposes of the ITAA 1997 if: 10. Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law. 11. The cases provide a number of indicators that are relevant to determining whether primary production activities constitute the carrying on of a business. These indicators are set out below. The indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business. | Some indicators of carrying on a business of primary production: 12. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Therefore, although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined below provide general guidance. This is explained further at paragraph 25 of this Ruling. 13. The courts have held that the following indicators are relevant: 14. A taxpayer does not need to derive all his/her income from the primary production activity. The taxpayer may also be employed in some other occupation or profession. What is important is that the taxpayer's primary production activity amounts to the carrying on of a business. This activity is considered separately from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary production activity is also a business. 15. We stress that no one indicator is decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased. 16. 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' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. 17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business . 18. The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators. | Private rulings: 19. A person can apply for a Ruling under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) on whether he/she is carrying on a business: (see TR 2006/11). 20. A person may seek a private ruling on the application of a tax law to a particular primary production activity. 21. [Omitted] 22. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. 'Sufficient information' in relation to a private ruling, where the matter(s) in issue include the carrying on of a business of primary production, includes information which covers the indicators set out at paragraph 13 (see also paragraphs 104 to 109).

Examples: Example 1: significant commercial purpose or character Example 1 - significant commercial purpose or character 31. Mark, a barrister, and his wife Tina, a medical researcher, bought 8 hectares of land on which they built a home. They realised that the land was fertile and capable of producing fruit. Mark spent a year seeking advice from the Department of Primary Industries and local farmers. He collected technical literature on citrus farming and obtained soil and water analyses of the land which showed the land was fertile and suitable for the intended activity. He drew up a business plan and a budget of capital and recurrent costs. After clearing the land he and Tina planted 700 mandarin trees, 700 orange trees and 700 lemon trees. They did not expect to make a profit for eight years. Mark also installed an irrigation system. Mark and Tina spent many months investigating the market for citrus fruit and established that there would be no problems in selling their product to wholesalers if it was of good quality. They complied with all registration and licensing requirements. The trees grew well. Mark and Tina devoted a substantial part of their weekends to looking after the trees. They employed casual labour to spray for weeds and pests and to prune the trees. But, before they received any income from the sale of fruit, the trees were destroyed by fire. Were Mark and Tina carrying on a business of citrus fruit farming? 32. Yes - despite no income being gained - because: 33. What if Mark and Tina had not done the above research and analysis, had only planted a small number of different types of trees to test which would grow best, and were still investigating the likelihood of potential buyers? This would suggest that their activity was only of a 'preliminary or preparatory' nature and did not amount to the carrying on of a business (refer to paragraph 41). | Example 2: significant commercial purpose or character Example 2 - significant commercial purpose or character 34. Nick, a tax lawyer and avid fisherman, owned a 60-foot yacht which he used to go fishing. Several years ago he took advantage of an opportunity to purchase a commercial fishing licence. He rescheduled other commitments so he could spend every second weekend fishing. His crew comprised his sons, David and Michael, and a couple of their acquaintances. Usually Nick and his crew were successful and caught a lot of fish. The crew were paid with fish and the remaining fish were sold to a fish wholesaler. Nick had not conducted any research into the market or methods of fishing. He fished for the best sport fish, and was not concerned with finding fish with the best market returns. Nick had no business plan and was not particularly worried whether his costs were covered by the sale of the fish or not. Further, trips were only made in sunny conditions. Was Nick carrying on a business of fishing? 35. No, this does not appear to be a business. Where the activity is one in which many other people take part for sport or recreational purposes we believe there is a need to show a strong 'commercial flavour' about the activity before it would ordinarily be regarded as a business (refer to paragraph 86). In this case: | Example 3: significant commercial purpose or character Example 3 - significant commercial purpose or character 36. Naida and her family kept twelve chickens. Twelve was the minimum that she liked to have around. She knew that her relatives and friends liked her home grown eggs, especially the double yolks that were often produced. The chickens produced about six dozen eggs per week. Of these Naida and her family consumed one dozen. She sold the remaining five dozen eggs to relatives and friends. She found that after taking into account her direct feed costs she usually managed, in her estimation, to make a modest profit of $5.00 per week. Was Naida carrying on the business of egg production? 37. No. Even though she had repetition and regularity in her operations and was making a modest gross profit: 38. If Naida's activities changed significantly and she: had considerably more chickens; sold the eggs to the public at large at market prices or to retail egg sellers; and established by research that this level of activity was profitable after taking all her costs into account; this would point to a significant commercial character and a profit motive. She may then be carrying on a business of egg production. The intention of the taxpayer 39. The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas . However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: See also J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 at 347 and Case K9 78 ATC 98 at 103; 22 CTBR (NS) Case 29 at 302. 40. This indicator is particularly related to: Preparatory activities 41. Sometimes a taxpayer may have incurred expenses before commencing a particular business of primary production. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible: see Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101 and Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26. Experimental or pilot activities of this nature should be distinguished from the activities in Ferguson , which were found to have a sufficient commercial character to be regarded as a business in their own right. However, where a business has commenced, expenses may be deductible even if no income is derived in the relevant year: see Thomas . | Example 4: the intention of the taxpayer Example 4 - the intention of the taxpayer 42. Pat and Laurie purchased 1,500 acres of rural land in 1980. They heard of an experimental variety of cattle which was bred on the other side of the country. Their friends told them that if this breed became successful they might make a lot of money from establishing a herd. Through friends, they arranged for the transport of one steer to their property. This steer remained on the property from 1980 to 1985 when it died due to lack of veterinary care. They took no further action with respect to the land, preferring to save for the purchase of either cows or sheep in the future. Were Pat and Laurie carrying on a business of primary production? 43. Pat and Laurie were not carrying on a business of primary production as: | Example 5: the intention of the taxpayer Example 5 - the intention of the taxpayer 45. Lindsay and Loretta bought 700 hectares of run down rural land in 1980. They intended to start a cattle farming business. Over the next five years they spent several thousand dollars on farm machinery. They used this to clear the land, build roads and mend fences. They also bought and erected some farm buildings. No income was derived from the property until 1986 when they stocked the property with 100 cattle. Were Lindsay and Loretta carrying on a business from 1980 to 1985? 46. No, because: Prospect of profit 47. We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are: In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that: In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said: 48. We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. However, it is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. Thus, a taxpayer may be carrying on a business of primary production even though he/she is making a small profit or a loss in any given year of income. 49. The situation may arise where a taxpayer is carrying on a business and has an intention to make a profit but the objective evidence is such that a profit is unlikely to be made in the short term. Bowen CJ and Franki J in Ferguson at ATC 4264; ATR 876 stated that '... an immediate purpose of profit-making in a particular income year does not appear to be essential ...'. Thus, where short term losses are expected it may be that a business is nevertheless being carried on: see Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360. 50. Where an activity is carried on and the objective evidence is that it is unlikely a profit will ever be made, this fact in itself does not necessarily mean that a business is not being carried on, if the taxpayer believes that the activity will become profitable. As Walsh J said in Thomas at ATC 4100; ATR 171: See also Tweddle's case at ATD 190; AITR 364. Taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. A number of Board of Review and Administrative Appeals Tribunal decisions show that a taxpayer in this situation bears a heavy onus: see Case M50 80 ATC 349; 24 CTBR (NS) Case 24 ; Case K9 78 ATC 98; 22 CTBR (NS) Case 29 ; Case L16 79 ATC 84; 23 CTBR (NS) Case 20 and Case L22 79 ATC 106; 23 CTBR (NS) Case 25 . | Example 6: prospect of profit Example 6 - prospect of profit 51. For a number of years Peter used his four hectare property to cultivate 100 pawpaw trees on the outskirts of Fremantle. He had planted the trees on his return from a trip to the tropics. He had thought that there must be a good market for locally grown tropical fruit in Fremantle. However, he had not conducted any research into the growing conditions they would need, including climate, their care or potential markets. He had not undertaken any soil analysis. He was always unable to market the limited amount of produce that he did obtain, because of its poor quality. His only disposals of fruit were to friends and relatives for which no money was received. Expert advice was that commercially saleable fruit would never grow in the location, and that there was little likelihood of a profit ever being made. Was Peter carrying on a business of primary production? 52. No. Not only was there no reasonable expectation that the activity would be profitable, there was also: | Example 7: prospect of profit Example 7 - prospect of profit 53. Fay's friends were avid growers of olive trees and were making a small profit on the sale of olive oil they produced from their olives. Fay decided to grow olive trees on her modest property. She researched the varieties and selected those best for olive oil production. Fay planted 50 olive trees on her property. She knew they were hardy trees which required minimum maintenance. She spent the minimum amount of time necessary to care for the trees. She had spoken to her friends and had calculated that after four years she would be able to make a profit on the production of olive oil from the olives she picked. The trees thrived. In the fifth year after planting, a sizeable crop was produced. Fay employed casual labour to pick the olives, borrowed a friend's trailer and took the olives to be pressed. She sold the barrels of olive oil to friends, work colleagues and members of the public who responded to her newspaper advertisements. She derived a substantial profit in that year, which she was told by her friends in the industry was typical. Was Fay carrying on a business of olive production? 54. Yes. The activities were carried out with a purpose to make a profit, even if no income was made in the first four years of operation. In addition: Repetition and regularity 55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats. 56. The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale. It may be that there are no minimum levels for this activity. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business of primary production. | Example 8: repetition and regularity Example 8 - repetition and regularity 57. George owned a pastoral property, 'Wytelaidee', which consisted of 600 hectares. He had acquired the property in 1970. Two hundred hectares were suitable for cultivation and the rest was open grazing country. Cattle and sheep were grazed for a number of years. George grew his own feed for the animals and also grew 200 olive trees. The cattle and sheep were the main primary production activities. The olive trees were a secondary activity because they required limited care. George did ensure that they were adequately sprayed and watered. The olives were bottled and pickled or olive oil was extracted from them, and the produce was sold on a regular basis. He usually made a profit from his primary production activities. 58. However, George was drawn into a legal battle over 'Wytelaidee' in 1990. He was unable to spend any time on the property and sold all stock, plant and equipment to finance the legal battle. The olive trees were left untended and grew wild. The olives were left to rot. No income was derived from the property from 1991 until the legal battle ended in 1995. George always intended to recommence operations on 'Wytelaidee' after the legal battle. Was George carrying on a business of primary production for the years 1991 to 1995? 59. No. As the property was left untended for the period and stock and equipment was sold there was no activity being carried on; thus there was a lack of: 60. If George had made arrangements for the olives to be picked, processed and sold, he may have been able to claim that he continued to carry on a business of olive production and sale. | Example 9: repetition and regularity Example 9 - repetition and regularity 61. John, a commercial lawyer, owned 500 apricot trees on a weekend retreat property located 250 km from his home in Brisbane. The trees had been in commercial production when he bought the property. John knew at the outset that he could, with proper management, run the enterprise at a profit. However, due to his employment, he was busy in the city and was unable to attend to the trees on a regular basis. Thus, he did not spray the trees for pests, irrigate or prune them. He decided that he could not be bothered hiring someone to look after the trees. He picked what he could in the hope of making some return but owing to the lack of care the apricots were not of a suitable quality for the commercial market. They were rejected by a wholesaler he approached after he had picked a small quantity of the fruit. He left what fruit he had picked with an honesty box on the side of the road and estimated that he got $50. Was John carrying on a business of apricot growing? 62. No, despite the impression given by the size and scale of his activity. Further: Is the activity of the same kind and carried on in a manner that is characteristic of the industry? 63. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that: 64. In considering this indicator the following factors might be compared with the characteristics of others engaged in the same type of business: 65. The aspects mentioned in the above paragraph would be compared to the same aspects of how others in the industry conduct their business of primary production. The activity should also be compared to that of the activity of a keen amateur. A taxpayer who: | Example 10: activity of same kind and carried on in a manner characteristic of industry Example 10 - activity of same kind and carried on in a manner characteristic of industry 66. Geoff and Heather purchased a small property in the Adelaide Hills after returning from a holiday in Japan where they had noticed not only the sale price but also the remarkable size and flavour of the apples. They had determined that the land was suitable for apple trees. Both spent a considerable amount of time researching, talking to experts and collecting technical literature on apples for the Japanese market. They determined from discussion with wholesalers that if their apples were of superior quality they would have a ready market and would be able to make a substantial profit from selling them They both changed their employment from full-time to part-time so that at all times one of them was on the property. They selected varieties for the Japanese market based on their research and planted one hundred trees. Heather devised a unique irrigation system which they installed. They carefully sprayed and pruned the trees and protected the growing fruit from the elements. From their research they ensured they would meet stringent overseas market rules regarding spraying and quality, etc. They distinguished their product by individually wrapping their fruit and putting 'quality one' labels on them. They made losses for four years in a row. In the fifth year, although making significant sales, their production was still insufficient to generate a profit. However, based on current market conditions and anticipated production levels, they were confident that in future years they would make a profit. Were Geoff and Heather carrying on a business of apple production? 67. Yes, because despite the size and scale of operation and the fact that the activity was not carried on in a similar manner to that of the ordinary trade of apple growing: Organisation in a businesslike manner and the use of system 68. In Newton v. Pyke the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. 69. In Ferguson the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884: In JR Walker Ryan J was satisfied, at ATC 4182; ATR 335, that the taxpayer was in the business of goat breeding as he had 'organised his activities in a business-like way through the keeping of books of account'. 70. The weight that is attached to this indicator will depend on the facts of the situation and a taxpayer may still carry on a business of primary production despite having poor organisational skills. | Example 11: organisation in a businesslike manner and the use of system Example 11 - organisation in a businesslike manner and the use of system 71. Rob had a passion for Topiary plants. He had 500 plants which he had potted and tended on his modest property. There was no local market for the plants. The nearest major city was Melbourne but it was too expensive for him to transport the plants to the city on a regular basis to sell them. He tried unsuccessfully to sell the plants, on irregular occasions, at the Melbourne markets. Rob had no credit facilities and only accepted cash. Was Rob carrying on a business of primary production? 72. No, because: 73. In some cases it is essential that specific records are kept, e.g., breeding records for a stud farm. Other matters that may demonstrate that a systematic approach is taken to record keeping are the keeping of records of: 74. For taxation purposes, certain records are required to be kept where a business is being carried on. The keeping of records which monitor the flow of cash, stock and production assists in showing that a business is being carried on (see also Taxation Ruling TR 96/7 and the record keeping provisions of section 262A of the ITAA 1936). | Example 12: organisation in a businesslike manner and the use of system Example 12 - organisation in a businesslike manner and the use of system 75. Leon owned a property of twenty hectares in Queensland, an hour's drive from his home. He bred race horses and had begun with six brood mares, a stallion and a colt which he had built into a modest-sized stable. Over the years he had conducted extensive research into horse breeding activities and had collected a great deal of literature. Through his contacts with local and overseas breeders he developed a number of ideas for a successful and profitable breeding program. He had established that he could make a reasonable profit, had identified relevant markets and had a business plan. He had set up a computer system to monitor the breeding program, costs and the record keeping requirements of the ITAA 1936. His activity was well organised and conducted in a systematic manner. Was Leon carrying on a business of primary production? 76. Yes. Given the presence of the other indicators, the fact that he carried on his activity in an organised and systematic manner added weight to the conclusion that he was carrying on a business of horse breeding. See also the discussion in Taxation Ruling TR 2008/2 dealing with issues relating to the horse industry. Size or scale of the activity 77. The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business of primary production. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way ( Thomas at ATC 4099; ATR 171). 78. For example, the case of JR Walker involved five Angora goats, two of which died. Whilst the scale was small, the court held that a goat breeding business was being carried on because there was a profit making purpose and repetition and regularity in the taxpayer's activities. Research, based on authenticated sources, showed that a profit could be made from the significant capital allocated to breeding stock. 79. In JR Walker , Ryan J said at ATC 4182; ATR 334: 80. The scale of the activities may be small but still result in more produce than is required for the taxpayer's own domestic needs. Where this is so, and there is also an intent to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale. 81. Similarly, in Thomas at ATC 4099; ATR 171 Walsh J in the High Court said: 82. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business of primary production. | Example 13: size or scale of the activity Example 13 - size or scale of the activity | Example 14: size or scale of the activity Example 14 - size or scale of the activity | Example 15: size or scale of the activity Example 15 - size or scale of the activity | Example 3: Hobby or recreation 86. The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877: Expenses incurred in relation to the hobby activity are not allowable deductions. However, we recognise that a hobby can sometimes turn into a business. 87. Often it will be the case that there is a hobby when: | Example 16: hobby or recreation Example 16 - hobby or recreation 88. Norm was a keen gardener. His two favourite vegetables were broccoli and pumpkin. He enjoyed growing these in his garden and exhibiting the larger specimens at vegetable shows for which he often won prizes. He had been doing this for the last twenty years. Norm always kept up with the latest advances in growing techniques of broccoli and pumpkin. He had always been keen to talk to other growers of the vegetables and had subscribed to the relevant magazines. He also stayed in regular contact with the Department of Primary Industries to keep up with the latest information about vegetable growing. Norm had no business plan. He kept no records of his expenses. His only intention was to grow the biggest and best broccoli and pumpkin. To this end he often experimented with different growing techniques. Usually he gave away his broccoli and pumpkin to relatives and friends. However, he found that in the last 12 months people approached him at the shows to purchase his prize winning specimens. He has been happy to sell these. Was Norm carrying on a business of primary production? 89. No. Rather his activities amounted to a hobby for the following reasons: 90. As a result of being approached at shows, Norm realised that there was a potential market for his produce and that he could turn his hobby into a business. He developed a profit making intention. He worked out the economics of his activities and calculated that by using extra land he would make a profit. He rented a block of land on which he grew broccoli and pumpkins on a larger scale. He kept detailed records of his activities and established his markets mostly as a result of approaches by people to him. Was Norm carrying on a business of primary production? 91. Yes, Norm would be regarded as carrying on a business of primary production when the nature of the activity changed being a hobby to a business. At this time, in addition to his experience and skill in the activity: | Example 17: hobby or recreation Example 17 - hobby or recreation 92. Richard was a musician and singer in a rock band. He was also interested in dressage. Richard owned a substantial land holding on which he bred horses to obtain better mounts for his dressage competitions. He trained his own horses. He belonged to the local dressage club and usually sold any unwanted and untrained offspring through his club and the local newspaper. The sale prices were well below the expenses associated with maintaining the horses. He conducted research into breeding and training techniques and tried to keep up to date with the latest information. He kept detailed records of breeding and all expenses associated with the horses. When the horses became too old to compete he put them out to pasture, as he could not bear to part with his old companions. Was Richard carrying on a business of horse breeding? 93. No, despite the keeping of records, the organisation, the repetition and regularity of activity and the research conducted, because: Application of all the indicators | Example 18: Application of all the indicators Example 18 - Application of all the indicators 94. George and Desi grew tired of living in the suburbs. They moved, with their two young children, to a 20 hectare property about 50 kilometres away from the capital city where they had lived. As part of their rural lifestyle they wanted to use their new property for primary production activities. 95. In July 1993 they planted oats, Japanese Millet, phalaris and clover. The land was fertilised in expectation that they would be able to graze some beef cattle on it, fatten and sell them. They noted that a number of the larger properties in the area were used for this purpose. 96. Due to a shortage of funds, it was not until May 1994 that they purchased 10 cattle. They did no analysis of whether the grazing of beef cattle on their land would be profitable. George and Desi had no clear idea of what all their costs would be for such an activity. They spoke to a number of their neighbours about the maximum number of cattle that their land could carry, but they received conflicting advice. Most of the advice suggested however that they did not have enough land to make the venture profitable. 97. The first sale, of 5 head, was in March 1995. At that time Desi accepted a redundancy offer and applied herself full time to their cattle grazing activity. With the money from the pay-out she purchased 20 additional cattle on the advice of her neighbour (a cattle farmer for a number of years). At the same time she developed a plan based on expert advice from the Department of Primary Industries for maximising the carrying capacity of their land and achieving profitability. She travelled with neighbours and purchased 20 weaners, and she arranged to share costs with these neighbours in transporting their cattle to various markets for sale. 98. By June 1996, 35 more cattle had been sold and 10 were on hand. Market conditions were poor and the sale prices they received had not been much greater than the price they had paid. However, Desi calculated that they could cut their costs further and noted from the rural press that long term forecasts of beef prices were good. On the basis of improved prices and a doubling of the herd size, she calculated that their activities could produce a reasonable profit. With her redundancy money she calculated that they could buy an adjoining 20 hectares for this purpose. 99. Were George and Desi carrying on a business of cattle grazing? If so, when did this business commence? 100. This example is meant to illustrate the importance of considering all the indicators of whether a business is being carried on and how the facts related to some of those indicators can materially change over time. In this particular case there was a marked change in the character of the cattle grazing activity after March 1995. 101. Before March 1995 George and Desi were not carrying on a business of primary production because there was: 102. After March 1995 there was a considerable change in the way that the cattle grazing activity was carried on. In particular, there was then: 103. We consider that from March 1995 George and Desi were carrying on a business of cattle grazing. Private rulings 104. A person can obtain a Private Ruling under Division 359 of Schedule 1 to the TAA on whether he/she is carrying on a business (see TR 2006/11). 105. [Omitted] 106. [Omitted] 107. [Omitted] 108. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. Where insufficient information is provided the Commissioner must request the relevant information under section 357-105 of Schedule 1 to the TAA. Where information has been requested and the applicant does not provide the information to the Commissioner within a reasonable time, the Commissioner may decline to make the Ruling: subsection 357-105(2). 109. 'Sufficient information' includes information which covers the eight indicators, and any other matter which the taxpayer considers relevant. We expect to see information about: Business plan 110. We emphasise that, whilst a business plan will help a taxpayer to establish that he/she is carrying on a business of primary production, it is not compulsory. Nor will the existence of a business plan be conclusive evidence that the taxpayer's activity amounts to the carrying on of a business. 111. A business plan is particularly relevant to establishing that there is an intention to make a profit, that the activity will be profitable and that the activity has a significant commercial purpose. This is especially so where it is capable of authentication by reference to texts, publications by relevant authorities or organisations and local experience in the industry. A business plan may include many things. However, we recommend that the basic elements of the business plan should include information about: Business plan example 112. Business - Jeff's passionfruit 2000 Passion fruit vines. To be planted beginning financial year 1996. Markets Sell primary / A-grade fruit to Brisbane markets - up to 10 trays in good weeks, seconds, etc., for pulping and fruit juice markets. Research Spoke with local fruit growers about pests, etc., collected DPI information on types and spraying cycles. Passion Fruit Growers Association in Brisbane provided literature on the latest practices re growing passion fruit and which passion fruit varieties to grow given future markets. Obtained DPI copy of 'Passionfruit in Queensland'. Combined with my knowledge of farming from several years on a fruit tree farm I feel that I have the knowledge and time available to undertake the activity successfully. Property 4 hectare block, 20 km from my home in Mackay, will require additional watering given varying rainfall. Existing bore water quality and quantity tested and found sufficient for my crop size. Irrigation to be installed. Soil tested and found to be suitable. Expected expenses / outlays Travel to block 3 times a week after work and weekends as needed. Estimate travel expenses using my existing utility will be $3,500 a year - including delivery of produce. Estimate that about half of this will be deductible, when carrying bulky farm materials. Electricity will need to be connected for pump and shed lights with an estimated running cost of $500 per year. These and other one-off expenses include: I will take out a loan of $10,000 to cover the above expenses plus use my existing savings. Given my other income I should have the loan paid out in 5 years. The vines will last 5 years from the time of planting and then I will replace them. 113. Table of anticipated receipts and costs (in 1996 dollars) 114. Depreciation and capital write-offs Jeff approached his accountant who gave him some additional information on capital and equipment write-offs and depreciation. He suggested using sections 70A and 75B to write off the electricity connection and irrigation expenses and Division 10F to write-off the capital value of the vines, although he noted that this would produce timing differences compared with an accounting write-off. However, using these rates of write-off would mean that the outcome would produce a correct tax result. Jeff noted as part of his business plan that: 115. Note: This business plan example is an illustration only. It is not definitive of the deductions a taxpayer may claim or the calculation of profit. Detailed contents list 116. Below is a detailed contents list for this Ruling: Commissioner of Taxation 4 June 1997 Previously released in draft form as TR 97/D1

Appendix: Indicators of a business of primary production: 23. There are no hard and fast rules for determining whether a taxpayer's activities amount to the carrying on of a business of primary production. The facts of each case must be examined. In Martin at CLR 474; AITR 551 Webb J said: 24. The nature of the activity, the taxpayer's intention and the method of operation help determine whether a business of primary production is being carried on. Many of the relevant indicators are stated in the decision of the Full Federal Court in Ferguson . Bowen CJ and Franki J said in their joint judgment at FLR 314; ATC 4264-4265; ATR 876-877: 25. In Evans , Hill J agreed that no one indicator could determine whether a business is being carried on. He said at ATC 4555; ATR 939: Profit motive (but see cf. I.R. Commrs v. Incorporated Council of Law Reporting (1888) 22 Q.B. 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on ( I.R. Commrs v. Livingston (1927) 11 T.C. 538), repetition and a permanent character, continuity ( Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9; Ferguson v. FC of T 79 ATC 4261 at p. 4264), and system ( Newton v. Pyke (1908) 25 T.L.R. 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.' 26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are: 27. Note: | Significant commercial purpose or character: 28. It is frequently those taxpayers, who earn income from employment or other sources and/or enter into some sort of primary production activity in a small way, who want to show that they are in a business of primary production. These taxpayers usually claim deductions for losses for taxation purposes in the first years of being involved in this activity. In showing that a business is being carried on, it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, i.e., that the activity is carried on for commercial reasons and in a commercially viable manner. 29. The phrase 'significant commercial purpose' is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (refer to paragraph 81) and discussed further by Gibbs CJ and Stephen J in Hope . The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity (refer to paragraphs 77 to 85), the repetition and regularity of activity (refer to paragraphs 55 to 62) and the profit indicators (refer to paragraphs 47 to 54). A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas . In that case, Walsh J found that the taxpayer's activities in growing macadamia nut trees and avocado pear trees amounted to the carrying on of a business. The court was influenced by the scale of the activity, and the taxpayer's expectation of an ongoing financial return. Consideration should also be given to whether the taxpayer is a pioneer in the activity or has developed a new method of undertaking the activity, whether successful or not. 30. In order to show that there is a significant commercial purpose or character we suggest that it may help to know whether the taxpayer has: These suggestions will assist the taxpayer to show that he/she is carrying on a business of primary production. It will assist the taxpayer if he/she is able to provide evidence in writing to support these activities and plans. Example 1 - significant commercial purpose or character 31. Mark, a barrister, and his wife Tina, a medical researcher, bought 8 hectares of land on which they built a home. They realised that the land was fertile and capable of producing fruit. Mark spent a year seeking advice from the Department of Primary Industries and local farmers. He collected technical literature on citrus farming and obtained soil and water analyses of the land which showed the land was fertile and suitable for the intended activity. He drew up a business plan and a budget of capital and recurrent costs. After clearing the land he and Tina planted 700 mandarin trees, 700 orange trees and 700 lemon trees. They did not expect to make a profit for eight years. Mark also installed an irrigation system. Mark and Tina spent many months investigating the market for citrus fruit and established that there would be no problems in selling their product to wholesalers if it was of good quality. They complied with all registration and licensing requirements. The trees grew well. Mark and Tina devoted a substantial part of their weekends to looking after the trees. They employed casual labour to spray for weeds and pests and to prune the trees. But, before they received any income from the sale of fruit, the trees were destroyed by fire. Were Mark and Tina carrying on a business of citrus fruit farming? 32. Yes - despite no income being gained - because: 33. What if Mark and Tina had not done the above research and analysis, had only planted a small number of different types of trees to test which would grow best, and were still investigating the likelihood of potential buyers? This would suggest that their activity was only of a 'preliminary or preparatory' nature and did not amount to the carrying on of a business (refer to paragraph 41). Example 2 - significant commercial purpose or character 34. Nick, a tax lawyer and avid fisherman, owned a 60-foot yacht which he used to go fishing. Several years ago he took advantage of an opportunity to purchase a commercial fishing licence. He rescheduled other commitments so he could spend every second weekend fishing. His crew comprised his sons, David and Michael, and a couple of their acquaintances. Usually Nick and his crew were successful and caught a lot of fish. The crew were paid with fish and the remaining fish were sold to a fish wholesaler. Nick had not conducted any research into the market or methods of fishing. He fished for the best sport fish, and was not concerned with finding fish with the best market returns. Nick had no business plan and was not particularly worried whether his costs were covered by the sale of the fish or not. Further, trips were only made in sunny conditions. Was Nick carrying on a business of fishing? 35. No, this does not appear to be a business. Where the activity is one in which many other people take part for sport or recreational purposes we believe there is a need to show a strong 'commercial flavour' about the activity before it would ordinarily be regarded as a business (refer to paragraph 86). In this case: Example 3 - significant commercial purpose or character 36. Naida and her family kept twelve chickens. Twelve was the minimum that she liked to have around. She knew that her relatives and friends liked her home grown eggs, especially the double yolks that were often produced. The chickens produced about six dozen eggs per week. Of these Naida and her family consumed one dozen. She sold the remaining five dozen eggs to relatives and friends. She found that after taking into account her direct feed costs she usually managed, in her estimation, to make a modest profit of $5.00 per week. Was Naida carrying on the business of egg production? 37. No. Even though she had repetition and regularity in her operations and was making a modest gross profit: 38. If Naida's activities changed significantly and she: had considerably more chickens; sold the eggs to the public at large at market prices or to retail egg sellers; and established by research that this level of activity was profitable after taking all her costs into account; this would point to a significant commercial character and a profit motive. She may then be carrying on a business of egg production. | The intention of the taxpayer: 39. The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas . However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: See also J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 at 347 and Case K9 78 ATC 98 at 103; 22 CTBR (NS) Case 29 at 302. 40. This indicator is particularly related to: Preparatory activities 41. Sometimes a taxpayer may have incurred expenses before commencing a particular business of primary production. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible: see Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101 and Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26. Experimental or pilot activities of this nature should be distinguished from the activities in Ferguson , which were found to have a sufficient commercial character to be regarded as a business in their own right. However, where a business has commenced, expenses may be deductible even if no income is derived in the relevant year: see Thomas . Example 4 - the intention of the taxpayer 42. Pat and Laurie purchased 1,500 acres of rural land in 1980. They heard of an experimental variety of cattle which was bred on the other side of the country. Their friends told them that if this breed became successful they might make a lot of money from establishing a herd. Through friends, they arranged for the transport of one steer to their property. This steer remained on the property from 1980 to 1985 when it died due to lack of veterinary care. They took no further action with respect to the land, preferring to save for the purchase of either cows or sheep in the future. Were Pat and Laurie carrying on a business of primary production? 43. Pat and Laurie were not carrying on a business of primary production as: 44. Pat and Laurie's experimental activities did not have a sufficient commercial character to be regarded as a business. These activities pointed to a decision not yet having been made to carry on business and a lack of commitment at that time to do so (see also the contrasting situations described in Example 1 at paragraph 31). Example 5 - the intention of the taxpayer 45. Lindsay and Loretta bought 700 hectares of run down rural land in 1980. They intended to start a cattle farming business. Over the next five years they spent several thousand dollars on farm machinery. They used this to clear the land, build roads and mend fences. They also bought and erected some farm buildings. No income was derived from the property until 1986 when they stocked the property with 100 cattle. Were Lindsay and Loretta carrying on a business from 1980 to 1985? 46. No, because: | Prospect of profit: 47. We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are: In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that: In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said: 48. We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. However, it is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. Thus, a taxpayer may be carrying on a business of primary production even though he/she is making a small profit or a loss in any given year of income. 49. The situation may arise where a taxpayer is carrying on a business and has an intention to make a profit but the objective evidence is such that a profit is unlikely to be made in the short term. Bowen CJ and Franki J in Ferguson at ATC 4264; ATR 876 stated that '... an immediate purpose of profit-making in a particular income year does not appear to be essential ...'. Thus, where short term losses are expected it may be that a business is nevertheless being carried on: see Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360. 50. Where an activity is carried on and the objective evidence is that it is unlikely a profit will ever be made, this fact in itself does not necessarily mean that a business is not being carried on, if the taxpayer believes that the activity will become profitable. As Walsh J said in Thomas at ATC 4100; ATR 171: See also Tweddle's case at ATD 190; AITR 364. Taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. A number of Board of Review and Administrative Appeals Tribunal decisions show that a taxpayer in this situation bears a heavy onus: see Case M50 80 ATC 349; 24 CTBR (NS) Case 24 ; Case K9 78 ATC 98; 22 CTBR (NS) Case 29 ; Case L16 79 ATC 84; 23 CTBR (NS) Case 20 and Case L22 79 ATC 106; 23 CTBR (NS) Case 25 . Example 6 - prospect of profit 51. For a number of years Peter used his four hectare property to cultivate 100 pawpaw trees on the outskirts of Fremantle. He had planted the trees on his return from a trip to the tropics. He had thought that there must be a good market for locally grown tropical fruit in Fremantle. However, he had not conducted any research into the growing conditions they would need, including climate, their care or potential markets. He had not undertaken any soil analysis. He was always unable to market the limited amount of produce that he did obtain, because of its poor quality. His only disposals of fruit were to friends and relatives for which no money was received. Expert advice was that commercially saleable fruit would never grow in the location, and that there was little likelihood of a profit ever being made. Was Peter carrying on a business of primary production? 52. No. Not only was there no reasonable expectation that the activity would be profitable, there was also: Example 7 - prospect of profit 53. Fay's friends were avid growers of olive trees and were making a small profit on the sale of olive oil they produced from their olives. Fay decided to grow olive trees on her modest property. She researched the varieties and selected those best for olive oil production. Fay planted 50 olive trees on her property. She knew they were hardy trees which required minimum maintenance. She spent the minimum amount of time necessary to care for the trees. She had spoken to her friends and had calculated that after four years she would be able to make a profit on the production of olive oil from the olives she picked. The trees thrived. In the fifth year after planting, a sizeable crop was produced. Fay employed casual labour to pick the olives, borrowed a friend's trailer and took the olives to be pressed. She sold the barrels of olive oil to friends, work colleagues and members of the public who responded to her newspaper advertisements. She derived a substantial profit in that year, which she was told by her friends in the industry was typical. Was Fay carrying on a business of olive production? 54. Yes. The activities were carried out with a purpose to make a profit, even if no income was made in the first four years of operation. In addition: | Repetition and regularity: 55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats. 56. The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale. It may be that there are no minimum levels for this activity. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business of primary production. Example 8 - repetition and regularity 57. George owned a pastoral property, 'Wytelaidee', which consisted of 600 hectares. He had acquired the property in 1970. Two hundred hectares were suitable for cultivation and the rest was open grazing country. Cattle and sheep were grazed for a number of years. George grew his own feed for the animals and also grew 200 olive trees. The cattle and sheep were the main primary production activities. The olive trees were a secondary activity because they required limited care. George did ensure that they were adequately sprayed and watered. The olives were bottled and pickled or olive oil was extracted from them, and the produce was sold on a regular basis. He usually made a profit from his primary production activities. 58. However, George was drawn into a legal battle over 'Wytelaidee' in 1990. He was unable to spend any time on the property and sold all stock, plant and equipment to finance the legal battle. The olive trees were left untended and grew wild. The olives were left to rot. No income was derived from the property from 1991 until the legal battle ended in 1995. George always intended to recommence operations on 'Wytelaidee' after the legal battle. Was George carrying on a business of primary production for the years 1991 to 1995? 59. No. As the property was left untended for the period and stock and equipment was sold there was no activity being carried on; thus there was a lack of: 60. If George had made arrangements for the olives to be picked, processed and sold, he may have been able to claim that he continued to carry on a business of olive production and sale. Example 9 - repetition and regularity 61. John, a commercial lawyer, owned 500 apricot trees on a weekend retreat property located 250 km from his home in Brisbane. The trees had been in commercial production when he bought the property. John knew at the outset that he could, with proper management, run the enterprise at a profit. However, due to his employment, he was busy in the city and was unable to attend to the trees on a regular basis. Thus, he did not spray the trees for pests, irrigate or prune them. He decided that he could not be bothered hiring someone to look after the trees. He picked what he could in the hope of making some return but owing to the lack of care the apricots were not of a suitable quality for the commercial market. They were rejected by a wholesaler he approached after he had picked a small quantity of the fruit. He left what fruit he had picked with an honesty box on the side of the road and estimated that he got $50. Was John carrying on a business of apricot growing? 62. No, despite the impression given by the size and scale of his activity. Further: | Is the activity of the same kind and carried on in a manner that is characteristic of the industry?: 63. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that: 64. In considering this indicator the following factors might be compared with the characteristics of others engaged in the same type of business: 65. The aspects mentioned in the above paragraph would be compared to the same aspects of how others in the industry conduct their business of primary production. The activity should also be compared to that of the activity of a keen amateur. A taxpayer who: Example 10 - activity of same kind and carried on in a manner characteristic of industry 66. Geoff and Heather purchased a small property in the Adelaide Hills after returning from a holiday in Japan where they had noticed not only the sale price but also the remarkable size and flavour of the apples. They had determined that the land was suitable for apple trees. Both spent a considerable amount of time researching, talking to experts and collecting technical literature on apples for the Japanese market. They determined from discussion with wholesalers that if their apples were of superior quality they would have a ready market and would be able to make a substantial profit from selling them They both changed their employment from full-time to part-time so that at all times one of them was on the property. They selected varieties for the Japanese market based on their research and planted one hundred trees. Heather devised a unique irrigation system which they installed. They carefully sprayed and pruned the trees and protected the growing fruit from the elements. From their research they ensured they would meet stringent overseas market rules regarding spraying and quality, etc. They distinguished their product by individually wrapping their fruit and putting 'quality one' labels on them. They made losses for four years in a row. In the fifth year, although making significant sales, their production was still insufficient to generate a profit. However, based on current market conditions and anticipated production levels, they were confident that in future years they would make a profit. Were Geoff and Heather carrying on a business of apple production? 67. Yes, because despite the size and scale of operation and the fact that the activity was not carried on in a similar manner to that of the ordinary trade of apple growing: | Organisation in a businesslike manner and the use of system: 68. In Newton v. Pyke the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. 69. In Ferguson the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884: In JR Walker Ryan J was satisfied, at ATC 4182; ATR 335, that the taxpayer was in the business of goat breeding as he had 'organised his activities in a business-like way through the keeping of books of account'. 70. The weight that is attached to this indicator will depend on the facts of the situation and a taxpayer may still carry on a business of primary production despite having poor organisational skills. Example 11 - organisation in a businesslike manner and the use of system 71. Rob had a passion for Topiary plants. He had 500 plants which he had potted and tended on his modest property. There was no local market for the plants. The nearest major city was Melbourne but it was too expensive for him to transport the plants to the city on a regular basis to sell them. He tried unsuccessfully to sell the plants, on irregular occasions, at the Melbourne markets. Rob had no credit facilities and only accepted cash. Was Rob carrying on a business of primary production? 72. No, because: 73. In some cases it is essential that specific records are kept, e.g., breeding records for a stud farm. Other matters that may demonstrate that a systematic approach is taken to record keeping are the keeping of records of: 74. For taxation purposes, certain records are required to be kept where a business is being carried on. The keeping of records which monitor the flow of cash, stock and production assists in showing that a business is being carried on (see also Taxation Ruling TR 96/7 and the record keeping provisions of section 262A of the ITAA 1936). Example 12 - organisation in a businesslike manner and the use of system 75. Leon owned a property of twenty hectares in Queensland, an hour's drive from his home. He bred race horses and had begun with six brood mares, a stallion and a colt which he had built into a modest-sized stable. Over the years he had conducted extensive research into horse breeding activities and had collected a great deal of literature. Through his contacts with local and overseas breeders he developed a number of ideas for a successful and profitable breeding program. He had established that he could make a reasonable profit, had identified relevant markets and had a business plan. He had set up a computer system to monitor the breeding program, costs and the record keeping requirements of the ITAA 1936. His activity was well organised and conducted in a systematic manner. Was Leon carrying on a business of primary production? 76. Yes. Given the presence of the other indicators, the fact that he carried on his activity in an organised and systematic manner added weight to the conclusion that he was carrying on a business of horse breeding. See also the discussion in Taxation Ruling TR 2008/2 dealing with issues relating to the horse industry. | Size or scale of the activity: 77. The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business of primary production. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way ( Thomas at ATC 4099; ATR 171). 78. For example, the case of JR Walker involved five Angora goats, two of which died. Whilst the scale was small, the court held that a goat breeding business was being carried on because there was a profit making purpose and repetition and regularity in the taxpayer's activities. Research, based on authenticated sources, showed that a profit could be made from the significant capital allocated to breeding stock. 79. In JR Walker , Ryan J said at ATC 4182; ATR 334: 80. The scale of the activities may be small but still result in more produce than is required for the taxpayer's own domestic needs. Where this is so, and there is also an intent to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale. 81. Similarly, in Thomas at ATC 4099; ATR 171 Walsh J in the High Court said: 82. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business of primary production. Example 13 - size or scale of the activity 83. See Example 9 (John and his 500 apricot trees) at paragraph 61. In this example, despite the size/scale of activity by John, he was not carrying on a business of primary production. Example 14 - size or scale of the activity 84. See Example 10 (Geoff and Heather and the Japanese apple market) at paragraph 66. In this example, Geoff and Heather carried on a business of very small scale apple production for the Japanese market. Their research has shown that their activities will result in a profit. Example 15 - size or scale of the activity 85. See Example 3 (Naida and her chickens) at paragraph 36. The small scale of her operations counted against there being a commercial purpose or character to the activities. | Hobby or recreation: 86. The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877: Expenses incurred in relation to the hobby activity are not allowable deductions. However, we recognise that a hobby can sometimes turn into a business. 87. Often it will be the case that there is a hobby when: Example 16 - hobby or recreation 88. Norm was a keen gardener. His two favourite vegetables were broccoli and pumpkin. He enjoyed growing these in his garden and exhibiting the larger specimens at vegetable shows for which he often won prizes. He had been doing this for the last twenty years. Norm always kept up with the latest advances in growing techniques of broccoli and pumpkin. He had always been keen to talk to other growers of the vegetables and had subscribed to the relevant magazines. He also stayed in regular contact with the Department of Primary Industries to keep up with the latest information about vegetable growing. Norm had no business plan. He kept no records of his expenses. His only intention was to grow the biggest and best broccoli and pumpkin. To this end he often experimented with different growing techniques. Usually he gave away his broccoli and pumpkin to relatives and friends. However, he found that in the last 12 months people approached him at the shows to purchase his prize winning specimens. He has been happy to sell these. Was Norm carrying on a business of primary production? 89. No. Rather his activities amounted to a hobby for the following reasons: 90. As a result of being approached at shows, Norm realised that there was a potential market for his produce and that he could turn his hobby into a business. He developed a profit making intention. He worked out the economics of his activities and calculated that by using extra land he would make a profit. He rented a block of land on which he grew broccoli and pumpkins on a larger scale. He kept detailed records of his activities and established his markets mostly as a result of approaches by people to him. Was Norm carrying on a business of primary production? 91. Yes, Norm would be regarded as carrying on a business of primary production when the nature of the activity changed being a hobby to a business. At this time, in addition to his experience and skill in the activity: Example 17 - hobby or recreation 92. Richard was a musician and singer in a rock band. He was also interested in dressage. Richard owned a substantial land holding on which he bred horses to obtain better mounts for his dressage competitions. He trained his own horses. He belonged to the local dressage club and usually sold any unwanted and untrained offspring through his club and the local newspaper. The sale prices were well below the expenses associated with maintaining the horses. He conducted research into breeding and training techniques and tried to keep up to date with the latest information. He kept detailed records of breeding and all expenses associated with the horses. When the horses became too old to compete he put them out to pasture, as he could not bear to part with his old companions. Was Richard carrying on a business of horse breeding? 93. No, despite the keeping of records, the organisation, the repetition and regularity of activity and the research conducted, because: | Application of all the indicators: Example 18 - Application of all the indicators 94. George and Desi grew tired of living in the suburbs. They moved, with their two young children, to a 20 hectare property about 50 kilometres away from the capital city where they had lived. As part of their rural lifestyle they wanted to use their new property for primary production activities. 95. In July 1993 they planted oats, Japanese Millet, phalaris and clover. The land was fertilised in expectation that they would be able to graze some beef cattle on it, fatten and sell them. They noted that a number of the larger properties in the area were used for this purpose. 96. Due to a shortage of funds, it was not until May 1994 that they purchased 10 cattle. They did no analysis of whether the grazing of beef cattle on their land would be profitable. George and Desi had no clear idea of what all their costs would be for such an activity. They spoke to a number of their neighbours about the maximum number of cattle that their land could carry, but they received conflicting advice. Most of the advice suggested however that they did not have enough land to make the venture profitable. 97. The first sale, of 5 head, was in March 1995. At that time Desi accepted a redundancy offer and applied herself full time to their cattle grazing activity. With the money from the pay-out she purchased 20 additional cattle on the advice of her neighbour (a cattle farmer for a number of years). At the same time she developed a plan based on expert advice from the Department of Primary Industries for maximising the carrying capacity of their land and achieving profitability. She travelled with neighbours and purchased 20 weaners, and she arranged to share costs with these neighbours in transporting their cattle to various markets for sale. 98. By June 1996, 35 more cattle had been sold and 10 were on hand. Market conditions were poor and the sale prices they received had not been much greater than the price they had paid. However, Desi calculated that they could cut their costs further and noted from the rural press that long term forecasts of beef prices were good. On the basis of improved prices and a doubling of the herd size, she calculated that their activities could produce a reasonable profit. With her redundancy money she calculated that they could buy an adjoining 20 hectares for this purpose. 99. Were George and Desi carrying on a business of cattle grazing? If so, when did this business commence? 100. This example is meant to illustrate the importance of considering all the indicators of whether a business is being carried on and how the facts related to some of those indicators can materially change over time. In this particular case there was a marked change in the character of the cattle grazing activity after March 1995. 101. Before March 1995 George and Desi were not carrying on a business of primary production because there was: 102. After March 1995 there was a considerable change in the way that the cattle grazing activity was carried on. In particular, there was then: 103. We consider that from March 1995 George and Desi were carrying on a business of cattle grazing. | Private rulings: 104. A person can obtain a Private Ruling under Division 359 of Schedule 1 to the TAA on whether he/she is carrying on a business (see TR 2006/11). 105. [Omitted] 106. [Omitted] 107. [Omitted] 108. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. Where insufficient information is provided the Commissioner must request the relevant information under section 357-105 of Schedule 1 to the TAA. Where information has been requested and the applicant does not provide the information to the Commissioner within a reasonable time, the Commissioner may decline to make the Ruling: subsection 357-105(2). 109. 'Sufficient information' includes information which covers the eight indicators, and any other matter which the taxpayer considers relevant. We expect to see information about: | Business plan: 110. We emphasise that, whilst a business plan will help a taxpayer to establish that he/she is carrying on a business of primary production, it is not compulsory. Nor will the existence of a business plan be conclusive evidence that the taxpayer's activity amounts to the carrying on of a business. 111. A business plan is particularly relevant to establishing that there is an intention to make a profit, that the activity will be profitable and that the activity has a significant commercial purpose. This is especially so where it is capable of authentication by reference to texts, publications by relevant authorities or organisations and local experience in the industry. A business plan may include many things. However, we recommend that the basic elements of the business plan should include information about: Business plan example 112. Business - Jeff's passionfruit 2000 Passion fruit vines. To be planted beginning financial year 1996. Markets Sell primary / A-grade fruit to Brisbane markets - up to 10 trays in good weeks, seconds, etc., for pulping and fruit juice markets. Research Spoke with local fruit growers about pests, etc., collected DPI information on types and spraying cycles. Passion Fruit Growers Association in Brisbane provided literature on the latest practices re growing passion fruit and which passion fruit varieties to grow given future markets. Obtained DPI copy of 'Passionfruit in Queensland'. Combined with my knowledge of farming from several years on a fruit tree farm I feel that I have the knowledge and time available to undertake the activity successfully. Property 4 hectare block, 20 km from my home in Mackay, will require additional watering given varying rainfall. Existing bore water quality and quantity tested and found sufficient for my crop size. Irrigation to be installed. Soil tested and found to be suitable. Expected expenses / outlays Travel to block 3 times a week after work and weekends as needed. Estimate travel expenses using my existing utility will be $3,500 a year - including delivery of produce. Estimate that about half of this will be deductible, when carrying bulky farm materials. Electricity will need to be connected for pump and shed lights with an estimated running cost of $500 per year. These and other one-off expenses include: I will take out a loan of $10,000 to cover the above expenses plus use my existing savings. Given my other income I should have the loan paid out in 5 years. The vines will last 5 years from the time of planting and then I will replace them. 113. Table of anticipated receipts and costs (in 1996 dollars) 114. Depreciation and capital write-offs Jeff approached his accountant who gave him some additional information on capital and equipment write-offs and depreciation. He suggested using sections 70A and 75B to write off the electricity connection and irrigation expenses and Division 10F to write-off the capital value of the vines, although he noted that this would produce timing differences compared with an accounting write-off. However, using these rates of write-off would mean that the outcome would produce a correct tax result. Jeff noted as part of his business plan that: 115. Note: This business plan example is an illustration only. It is not definitive of the deductions a taxpayer may claim or the calculation of profit.


What this Ruling is about | Class of person/arrangement | Explanations and examples | Is the activity of the same kind and carried out in a manner that is characteristic of the industry | What this Ruling is about: 1. This Ruling considers the meaning of 'business' of 'primary production' in the Income Tax Assessment Act 1997 (ITAA 1997). It provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production. It also indicates the extent to which the Australian Taxation Office ('ATO') is able to provide further guidance to taxpayers on this question with private rulings. | 2. The phrase 'carrying on a business of primary production' appears in a number of provisions in the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936). However, this Ruling does not consider the detailed operation of any of these provisions . | Indicators which suggest a business is being carried on | Indicators which suggest a business is not being carried on | a significant commercial activity | not a significant commercial activity | purpose and intention of the taxpayer in engaging in the activity | no purpose or intention of the taxpayer to carry on a business activity | an intention to make a profit from the activity | no intention to make a profit from the activity | the activity is or will be profitable | the activity is inherently unprofitable | little repetition or regularity of activity | activity is carried on in a similar manner to that of the ordinary trade | activity carried on in an ad hoc manner | activity organised and carried on in a businesslike manner and systematically - records are kept | activity not organised or carried on in the same manner as the normal ordinary business activity - records are not kept | size and scale of the activity | not a hobby, recreation or sporting activity | a hobby, recreation or sporting activity | there is no business plan | commercial sales of product | sale of products to relatives and friends | taxpayer has knowledge or skill | taxpayer lacks knowledge or skill | 'The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.' | 'Section 6 of the Income Tax Assessment Act [1936] defines 'business', stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities , particularly whether they have the purpose of profit-making , may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' (emphasis added) | 'The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation. | "There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade." | 'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' | '... engaged in for the purpose of profit on a continuous and repetitive basis.' | '... anything which occupies the time and attention and labour of a man for the purpose of profit is business.' | 'In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit ...' | 'It is not in doubt that he made mistakes. But many persons carry on a business for the competent conduct of which they have not previously acquired much knowledge or experience.' | '... the test, which must be used to determine whether a venture ... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.' | '... the venture as a whole had a commercial flavour, was conducted systematically and, ... in a business like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity.' | '... the respondent's activities had the purpose of profit making. ... There was also repetition and regularity in his activities. ... The activities of the taxpayer were limited but ... he maintained communications with the expert and he tried to make himself informed about market conditions through membership of the Angora Breed Society and reading publications ... He organised his activities in a business-like way through the keeping of books of account ...' | 'But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with relatively small outlay of time and money, and that this return would continue for a very long time.' | '... if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' (emphasis added) | Connection of electricity | Purchase of vines @ $3.00 per vine | Installation of irrigation | Rent of tractor / post digger for trellises (from neighbour) | Posts / wire / for trellises and to fix up property fencing | Labour (brother will help on posts) | Ride-on mower / spray unit (2nd hand) | Repairs and Maintenance / fuel | Net Profit / Loss on trading before write-off and depreciation | Depreciation on sprayer / mower, fences / improvements and trellises | Write-off of vines - Div 10F, starting 1 May 96 | Write-off electricity connection costs (10 years - section 70A) | Write-off irrigation expense (3 years - section 75B) | Total Write-off and Depreciation | Net Profit / Loss on trading after write-off and depreciation | 'I have not yet seen published any Division 10F "safe harbour" write-off rates issued by the Commissioner, so in my business plan calculation I will use a four year write-off of the cost of the vines, commencing from when they become income producing, which I estimate to be 1 May 1996.'


Related rulings: IT 219 IT 2006 TR 93/26 TR 95/6 TR 96/7 TD 93/39 TD 93/95 TD 96/16
Legislative references: ITAA 1936 ITAA 1936 6 ITAA 1936 262A ITAA 1997 ITAA 1997 995-1(1) TAA 1953 Sch 1 357-105 TAA 1953 Sch 1 357-105(2) TAA 1953 Sch 1 357-110 in TAA 1953 Sch 1 Div 359
Case references: CTC Resources NL v. FC of T 94 ATC 4072 (1994) 27 ATR 403
Subject references: primary production whether carrying on a business of primary production