It is true that small rural landholders may be pursuing “lifestyle” dividends rather than a genuine livelihood, but the option to claim the tax concessions that are available to bona fide primary producers is still available, should these small farm holders prove eligible.
The extra tax concessions available make securing primary producer status tempting — such as the three-year write-off for water facilities, deferral of profits in certain circumstances, and the ability to average income (ask us if you would like more information).
Hobby farms can range from a modest block with a cow and a few chooks to quite substantial small working farms capable of generating some income for the erstwhile tree-changers.
In business or not?
The vital question that needs to be settled is whether the small farm is indeed a “hobby”, and therefore operates with no expectation of making a profit, or if it is run like a business.
If the latter, the land owner will be looking to make money from the farming operations, and needs to show they are carrying on a productive business, with sound business principles and commercial intention.
This is not to say they need to be making a lot of money, but to qualify as a business, certain eligibility factors need to be satisfied. There is a substantial body of case law that has considered whether a taxpayer is conducting a farming business, with some factors established that contribute to forming a conclusion. None of these factors are decisive on their own, and the ATO considers all of them in combination to determine an overall impression of the activity and its intent.
The indicators that the ATO considers relevant include the following:
|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|
|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
records kept systematically
|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|
|Tax knowledge or skill
||Lack of such knowledge|
Examining the factors
The “prospect of profit” is something that the ATO considers to be an important indicator when determining the status of whether the activities relate to a hobby farm or a genuine primary producing business.
For example, if it could be shown that a business plan has been drawn up, or that expert advice was sought from relevant authorities or experienced farmers or consultants in an area of primary production, then this may lead to the conclusion that the taxpayer has the intent of conducting a farming business.
Further, soil and water analysis could have been undertaken for the purpose of determining suitability for a particular agricultural use, which can be viewed as evidence of commercial intent, as well as the investigation of potential markets.
Note however that agistment is not considered by the ATO to be a business activity as the taxpayer in such cases is deriving passive income from such activities. Contact this office if you need help with establishing whether your activities constitute a business.
It is normally the case that these farming activities typically give rise to losses in the early stages before the farming business turns over a profit.
However under the tax law, losses from non-commercial business activities conducted by an individual can only be deductible against other income (such as salary and wages) in the same income year if the activity meets certain criteria,
and the taxpayer has an adjusted taxable income of less than $250,000.
There are four criteria, and at least one must be met. The activity must:
- Produce assessable income of at least $20,000 during the year
- Make a profit in three of the past five years (including the current year)
- Use land and buildings (“real” property) valued at $500,000 or more
- Use other assets (tractor, machinery, but not cars) valued at $100,000 or more.
Losses can be quarantined where none of the above criteria are met and used in a later year, with no time limit. Note however that the non-commercial loss rules do not extend to companies or trusts. Another exception that is of specific relevance here is that primary production businesses, even if they don’t meet the above criteria, can still offset losses if other taxable income is less than $40,000.
The ATO however maintains wider discretionary powers over these tax laws, so a small rural landholder can always apply for discretion if circumstances beyond their control unduly influence the financial outcomes in any income year.
Not sure if you qualify? Call us on 6362 1533 in Orange, 6332 5946 in Bathurst or 6366 8049 in Molong. Alternatively you can email firstname.lastname@example.org if you’d like us to help.