When is a small farm considered a business?

Page last updated: Wednesday, 1 November 2017 - 2:29pm

Please note: This content may be out of date and is currently under review.

Your small scale farming operation may classify you as a primary producer for tax purposes and this can have a significant impact on your tax reporting requirements.

Determining if an activity is classed as primary production requires two steps. The first is to establish that the activity is classed as a business and not a hobby and if so, the second step is to determine if the business is carrying out primary production.

What defines an activity as a business?

To determine the definition of ‘carrying on a business’ the Australian Taxation Office (ATO) uses case law. This means there is no conclusive test but a list of indicators, which are used to determine if the activity is classified as a business or not.

Business indicators

Indicators a business is being carried on

Indicators a business is not being carried on

Significant commercial activity

Not a significant commercial activity

Purpose and intention of the activity

No purpose or intention of the activity

Intention to make a profit

No intention to make a profit

The activity is or will be profitable

The activity is inherently unprofitable

Repetition and regularity of activity

Little repetition or regularity of activity

Activity is carried on in a similar manner to ordinary trade

Activity carried on in an ad-hoc manner

Activity organised and carried on in a business-like manner and systematically - records kept

Activity not organised or carried on in a business-like manner - no records kept

Size and scale of the activity

Small size and scale

Not a hobby, recreation or sport

A hobby, recreation or sporting activity

A business plan exists

No business plan

Commercial sales of product

Sale of products to relatives and friends

Taxpayers knowledge or skill

Lack of knowledge or skill

None of the indicators is decisive on its own. The ATO consider all of the indicators in combination to determine an overall impression of the activity and the intent of the operation.

What is primary production?

For the purpose of the Tax Act, a primary production business must produce primary production under one of the following categories:

  • cultivation of land                    
  • maintenance of animals for the purpose of selling them or their bodily produce
  • fishing operations
  • forest operations
  • horticulture.

A taxpayer does not need to derive all of their income from the primary production activity to qualify, so they may also be employed in some other occupation or profession.

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