It might be a business! In a celebrated case from the mid 80’s, having one angora stud goat kept for breeding was found to be a primary production business. But that was an exceptional case.
You might not have a stud goat, but a hankering for a hobby farm or a few shimmering vines. Maybe you’re already “farming”. 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.
The indicators explore a few issues, including the following:
- the nature of the activity – has it started, does it have a “significant commercial purpose or character”, what is its scale (large enough to make a profit), will it be profitable, etc?
- the intention of the taxpayer – does the taxpayer intend to engage in business and to make a profit, has the taxpayer carried out research and analysis, etc?
So many questions! Here’s another one: why does it matter?
Weighing up the tax considerations
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.
Don’t hear it on the grapevine
If it’s all enough to turn you to drink, come and see us for some expert advice and guidance on the most tax-effective way forward for your farm!