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.
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
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.
Extra taxation concessions for primary producers
Primary producers have some extra tax concessions, which are not available to other business.
Primary producers can claim an immediate deduction for conducting landcare operations for activities such as undertaking drainage work to prevent salinity, erosion control measures or erecting fences under an approved management plan.
Non-primary producers are usually only able to claim a deduction for these assets over a period of time, or may even have to add the expense to the cost base of their land.
Three-year write off for water facilities
Expenditure incurred by a primary producer on a water facility for the predominant purpose of conserving or conveying water for use in the primary production business is deductible in equal instalments over three years. Examples of eligible water facilities include dams, tanks, bores, wells, irrigation channels, water towers, windmills, pipes and pumps.
Tradeable water rights
There are capital gains tax (CGT) and/or general taxation consequences from the sale, transfer or ending of water licences, allocations, quotas and entitlements. Water rights, such as licences and water allocations, are CGT assets. The permanent trade of a water right constitutes the disposal of a CGT asset. A temporary trade of a water right also constitutes a CGT event.
Carbon sequestration rights
Farmers and other landowners may manage or plant forests to participate in carbon sequestration activities. A carbon sequestration right is a CGT asset. You are not a primary producer if you plant, manage or establish trees for the sole purpose of carbon sequestration activities and those trees are not intended to be felled in a business of forestry operations.
Ten year write-off for electricity connections and telephone lines
A primary producer can claim a deduction, in equal instalments over a ten year period, for connecting mains electricity or installing a telephone line to land on which a primary production business is conducted.
Deduction for horticultural plants
Horticultural plants are considered to be depreciating assets for tax purposes and are eligible for deductions. Your deduction for the decline in value of horticultural plants is based on the capital expenditure incurred establishing the plants. This does not include the cost of purchasing or leasing land, expenditure on draining swamp or low-lying land or on clearing the land. It would include:
- the costs of acquiring and planting the seeds
- part of the cost of ploughing, contouring, fertilising, stone removal and topsoil enhancement relating to the planting.
Horticultural plants with an effective life of less than three years are immediately deductible and those with an effective life of 30 years or more can be written-off over 14 years and 105 days.
Deferral of profit on the forced disposal or death of livestock
Generally the profit on trading stock is assessable when the stock is sold. However, where a primary producer derives a profit on livestock due to a forced disposal (e.g. due to compulsory acquisition of the land, or sale due to drought, fire or flood) the profit can be spread over five years or used to reduce the cost of replacement stock over the same period.
Deferral of profit on insurance recoveries
Where there is an assessable insurance recovery for loss of livestock or loss by fire of trees, a primary producer can elect to include the amount of assessable income in equal instalments over five years.
Deferral of profit on double wool clips
If due to fire, flood or drought, a primary producer is forced to undertake an early shearing and therefore sells two wool clips in one income year, the grower can elect to defer the profit on sale of the second clip to the following year.
Due to the fluctuating nature of profits of primary producers, the tax legislation includes provision for income averaging to even out the ‘income bumps’ and ensure that a primary producer pays no more tax than a taxpayer on a stable income. Broadly, under this provision, tax is calculated on your income for the current year. An averaging offset, or complementary tax, is then applied to your primary production income, based on tax paid in the preceding five-year period.
Farm management deposits
If the non-primary production income does not exceed $65 000 in a financial year, a primary producer can choose to place funds (up to a maximum amount of $400 000) in a farm management deposit. This scheme allows a deduction to be claimed when the deposit is made, and declared as income only at the time of withdrawal, subject to certain conditions.
Non-commercial business loss rules
In general, to offset losses from a business against income from other activities the taxpayer must satisfy one of four tests, or be granted discretion by the Tax Commissioner to prove that the scale of the business is commercial.
Primary producers however, do not need to meet any of these tests to use the primary production losses where the assessable income from other sources is less than $40 000 (excluding net capital gains).
Obtain advice first
There are many appealing potential tax benefits available to primary producers. However it is important to speak with your accountant if you are considering applying for primary producer classification and wish to access the associated tax advantages
Information in this article is a general guide only and taxpayers must consult their accountant or the ATO for specific advice.