You might see your rural acres as a hobby, but your idyllic vision may not be one shared by the ATO if it morphs into a business. Which may not be such a bad thing! Find out whether your farm is a hobby or a primary production business and why it matters.
What’s the difference and how can you tell? Defining “primary production” and “business” is no problem. Figuring out if a business of primary production is being carried on is not so easy and you may need to seek professional advice.
Are You Carrying On A Primary Production Business?
First, let’s look at the definitions. “Business” is clearly defined to include any profession, trade, employment, vocation or calling (other than an occupation as an employee), and “primary production” broadly refers to plant or animal cultivation (or both); fishing or pearling (or both); or tree farming or felling (or both).
Determining whether a business of primary production is being carried on requires both these definitions to be satisfied, but neither provides a simple test for when the nature and extent of your activities amounts to the carrying on of a business.
Fortunately, there are several indicators from the case law that give some direction, but no one indicator will determine the issue.
It’s a matter of weighing up all the relevant indicators in each individual case.
There are some exceptions though that could make the ATO accept it as a genuine business. This includes the following criteria:
- Does the activity have a genuine commercial purpose or character?
- Does the taxpayer seriously intend to engage in business?
- Is there the intent or genuine belief on behalf of the taxpayer that a profit will be turned?
- Is the activity the taxpayer engages in regular and repeated (that is, does the taxpayer spend a significant amount of time working on the farm)?
- Is the activity organised in a business-like manner?
- Is the activity carried out in a similar way to an ordinary trade?
So many questions! Here’s another one: why does it matter?
Defining whether you are carrying on a hobby or a primary production business matters because there are tax considerations for both activities, such as the following.
If it’s a hobby you can enjoy the activity without any reporting obligations. You don’t need to declare any profit from the activity, but you can’t claim any losses. Also, without an ABN, to supply another business you will need to complete a special form and provide a written statement to the payer, otherwise tax will be withheld at the highest rate.
If your hobby becomes a primary production business, you need to declare your income to the ATO, get an ABN and keep tax records. You can also claim general business deductions for your expenses (unless you’re offsetting a loss against other income, in which case you need to satisfy the “non-commercial loss” tests or defer claiming your loss until you make a profit). You can also claim the new instant asset write-off for SMEs of up to $30,000 and take advantage of tax concessions available to primary producers such as tax offsets and deductions.
While such farms can range in size from a single cow and a few chooks to fairly substantial holdings that are genuinely capable of providing a living for the farmer, that doesn’t mean just anyone with a pair of gumboots can start to take advantage of these by offsetting them against other income.
While a significant profit doesn’t necessarily have to be turned, it could be shown, for example, that the farmer has sought advice or consultation on the quality of soil, or that significant investment has been made in materials, which would satisfy some of these points. It is on the point regarding profit however, that the taxman is most interested in.
The non-commercial losses rule is the point of most interest here though. This is what allows the opportunity to claim losses on the farm against other income. Apart from the taxpayer needing a total, taxable income of less than $250,000, one of four other conditions must be met.
- Produce an income from the farm of at least $20,000 during the year
- Have made a profit in three of the past five years
- Have land and buildings valued at $500,000 or more
- Use other assets, such as tractors and machinery, valued at over $100,000
However, if your hobby farm still does not meet at least one of these criteria, then there is still the chance that the ATO can use discretion to allow this on a case-by-case basis.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.