Edited version of private advice

Authorisation Number: 1051801635471

Date of advice: 02 February 2021

Ruling

Subject: Am I in business - agistment activities

Question 1

Is entity A carrying on a business for the 2020-21 income year?

Answer

No.

Question 2

Do you satisfy the requirements in subparagraph 152-10(1)(c)(iv) and subsection 152-10(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2020-21 income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2021

The scheme commenced on

1 July 2020

Relevant facts

You and your spouse each own a xx% interest in a property.

Entity B acquired their interest prior to 20 September 1985.

You acquired your interest in or around xxxx.

The property has an area of approximately xxxx acres.

The property was previously used by:

(a)  Entity D to conduct primary production operation. The activities reduced over the last few years with the last of the stock sold in the xxxx year.

(b)  Entity A to conduct primary production operations until the xxxx year.

Current use of the property:

(a)  Since the xxxx year, entity D continues to operate on xxxx acres of the property to conduct a business.

(b)  On xxxx, entity A entered into an agistment agreement with entity E in relation to the remaining approximately xxxx acres.

Since at least the xxxx year entity A has been engaged in agistment activities on the property with the given amounts derived from agistment:

The expenses of entity A were also provided.

The given amounts have been derived in relation to the business by entity D. Expense details have also been provided.

Entity D's expenses include expenses relating to the previous business operations carried on by entity D in the xxxx years as well as interest expenses. Excluding the expenses relating to these operations and interest expense, the business was profitable from at least the xxxx year.

Under the terms of the agistment agreement, entity E pays a monthly agistment fee of $xxxx (including GST). The initial term of the agreement is for x years ending on xxxx with further options.

You and your spouse have the following obligations under the agistment agreement:

•         Ensure that there is adequate water supply for the livestock.

•         Ensure that all fences and gates are stock proof.

•         Move any solar pumps out of harm's way in the event of flooding. Flooding is a major issue on a large part of the property.

•         Ensure that the fence around the irrigated land on the property is stock proof.

•         Organise helicopters (at the Stockowner's expense) to enable the livestock to be moved out of harm's way in the event of a possible flood.

•         Notify the Stockowner if it becomes aware of livestock from the neighbouring properties entering the agisted area or livestock escaping from the agisted area. They also muster cattle that have got out of the property and bring them back for the owner.

•         Not depasture any livestock on the agisted area nor permit any other person's livestock to be depastured on the agisted area.

•         Provide and consent to the Stockowner using the PIC associated with the land.

Under the agistment agreement, the Livestock is at the risk of the Stockowner. You and your spouse are not liable for any loss or injury to the Livestock except for any loss or injury caused by their negligent act or omission.

Due to the size of the property and number of stock significant time is required to ensure that:

•         the agisted cattle have adequate water;

•         the fences are maintained; and

•         the property is maintained to ensure that there is adequate pasture for the stock.

One of your relations have always been involved in assisting with the agistment activities. This would equate to approximately xx hours a week on average. Your relations and family live on the property and also assists with the business of entity D.

As the Stockowner lives approximately xx kilometres away, your spouse or relation would attend to recovering stock which have escaped from the agisted area (either by walking the stock back to the property or using their trucks to transport them back).

Your spouse also spends considerable time clearing undergrowth and regrowth to ensure there is adequate pasture for the stock.

There was a high level of personal involvement required in attending to weed control and pasture maintenance, property maintenance and monitoring stock.

You and your spouse are looking at selling their interests in the property in the 2020-21 income year.

Entity A and entity D had an aggregated turnover for the 2019-20 income year and will have for the 2020-21 income year of an amount less than $2 million.

The following documents are included in the Scheme for the purpose of section 359-5 of Schedule 1 of the Taxation Administration Act 1953

Financial Statements of entity D for the xxxx years.

Financial Statements of entity A for the xxxx years.

Agistment agreement

Information memorandum for the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 995-1

Detailed reasoning

The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997). The definition of a small business entity is relevant for Division 152 purposes.

Small business entity

You are a small business entity for a year if you carry on a business in the current year and one or both of the following apply:

1) you carried on a business in the previous year and your aggregated turnover for the previous year was less than $2 million

2) your aggregated turnover for the current year is likely to be less than $2 million

We therefore need to consider if you were carrying on a business in the 2020-21 income year.

Carrying on a business

Business is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•   whether the activity has a significant commercial purpose or character,

•   whether the taxpayer has more than just an intention to engage in business,

•   whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity,

•   whether there is regularity and repetition of the activity,

•   whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business,

•   whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit,

•   the size, scale and permanency of the activity, and

•   whether the activity is better described as a hobby, a form of recreation or sporting activity.

Whether a business is being carried on is a question of fact to be ascertained objectively based on the specific facts of a case (Evans v FCT (1989) 20 ATR 922 at 939; Hart v FCT (2003) 53 ATR 371). Several factors are typically relevant in making this determination (Martin v. FC of T (1953) 90 CLR 470 at 474). These indicia must be considered in combination and as a whole; no one factor is typically decisive (TR 97/11 [15]; Evans v. FC of T 89 ATC 4540).

The nature of agistment activities has been judicially considered in a number of cases which are relevant in the circumstances of this case.

'Agistment' was defined in Sinclair v Judge [1930] St R Qd 220 (Sinclair case) as "...the act of taking another's stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand."

As per Taxation Ruling IT 225 Primary production - agistment income (IT 225), income derived solely from agistment will not typically constitute income from a business of primary production for tax purposes. The Australian Taxation Office (ATO) has previously used the following reasoning in prior decisions to explain the view expressed in IT 225:

"...in cases where the property is used solely for agistment, income will rarely equate to the running costs of the property, therefore lacking a commercial character. We consider that, in most cases, the agistment of the property occurs as a prelude to the use of the property for some other purpose, for example a business of primary production or private use. It is usual to apportion these cases to allow expenses to the extent of income received."

The question of whether agistment activities amount to carrying on a business was discussed in the AAT decision of Case 47/95 95 ATC 404 (Case 47/95), in which Associate Professor Fayle stated:

"Agisting another's livestock does not ordinarily constitute the carrying on of a business. Agistment fees ordinarily are in the nature of rent. However, where the land owner is charged with management, maintenance and care of the animals agisted then it is possible that the person is carrying on a business, the reward for which is the agistment fee. This is more likely if the level of the agistment fee depended on the effective management, maintenance and care of the animals." (Emphasis added).

In Case 47/95, the applicant claimed deductions for a partnership loss incurred by a partnership known as 'C Hills'. The ATO reduced these claims by $2,627 and $5,310 for each respective year on the basis that there was no business of primary production being carried on at the 400-acre (180 hectare) property owned by the partnership. The only income returned by the partnership was from agistment. There was no evidence to indicate that that partnership intended to conduct a business of primary production on the property in the future. The applicant did not provide any evidence to refute this conclusion.

Case 38/97 (1997) 36 ATR 1154 also supports the conclusion that agistment activities will not amount to carrying on a business. In this case, the taxpayers were a husband and wife who operated as a partnership. In the 1989 financial year, they purchased a 16-hectare farm near Cairns in Queensland. They carried out improvements to the property, such as weed control, fencing, connecting electricity, installing cattle troughs and building cattle yards, and used the property for the agistment of cattle owned by a neighbouring farmer. The maximum carrying capacity of the property was 40 animals, and the rate paid for agistment ranged between $2 per week per beast to $2.50. One of the taxpayers visited the property around two times a week to check it and the cattle, but he otherwise relied on neighbours to call him if the cattle strayed or ran out of water. All other aspects of the cattle's care were their owner's responsibility.

It was held that the taxpayers were not engaged in the business of agistment. The level of the taxpayers' activity, when taken with the lack of a planned approach to a business, and the disproportionate level of expenses when compared with income led to the conclusion that there was no business in the ordinary sense of the word. There were two purposes in holding the property: the generation of income and its value as an asset. On the basis of the evidence presented, the taxpayers were found not to be engaged in a business of agistment or primary production and that their activities were not directed to gaining or producing an assessable income.

There are also a number of cases where agistment activities were considered to amount to carrying on a business.

In Hope v Bathurst City Council, (1980) 144 CLR 1 (Hope v. Bathurst City Council case), the taxpayer was the owner and occupier of land near Bathurst. He appealed to the Land and Valuation Court against the decision of the Bathurst City Council that his land was not rural land, and therefore he was not entitled to the benefit of a lower general rate. 'Rural land' was defined as "...a parcel of ratable land... which is wholly or mainly used for the time being by the occupier for carrying on one or more of the businesses or industries of grazing...''. Over 80% of the land's total area (15.47 acres) was used by the appellant for the agistment of other persons' cattle or horses. Most of the land had been pasture improved and maintained; the appellant erected fences to ensure good stock control, kept the fences in repair and installed and maintained troughs for stock watering. The appellant had agisted stock on the land continuously since 1965 and had advertised the availability of the land since this time. The appellant kept detailed records of income and expenditure and sought and received expert advice on the care and use of the land.

Rath J. observed there appeared to be a minimum of activity on the appellant's land and held that "as a matter of fact the appellant's use of the land, albeit for commercial purposes and for the purpose of profit, was not significant enough to bring it within the scope of the common or general meaning of either of the words 'business' or 'industry'". This decision was appealed to both the Court of Appeal and High Court. The High Court allowed the appeal, and held that the appellant was in fact carrying on a business:

"Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit. The activity had a permanent character in that it had been carried on without interruption since 1965. The appellant sought customers by advertising and kept appropriate financial records. The land, though small in area, was put to its best potential use and the pastures were improved and facilities including fences were provided for that use. There is nothing in the findings to suggest that the activities were other than genuine and real." (Emphasis added)

Mason J also observed that the expression "carrying on the business of grazing" meant "... grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis".

The AAT determined that the agistment activities conducted in Case K53/78 78 ATC 514 also amounted to carrying on a business. The taxpayer, a private company, was incorporated in June 1973 to acquire a pastoral property. At the same time a wholly owned subsidiary of the taxpayer acquired the cattle then on the land. The taxpayer agreed to permit the subsidiary to agist the cattle on the property for a fixed figure per head. The agistment fee ($22,000) constituted the taxpayer's sole source of income in the year ended 30 June 1974. Both the taxpayer and the subsidiary had a common directorate which was responsible for the care and maintenance of the property and the agisted cattle and which owned an extensive area of land. It was agreed that the subsidiary would pay the insurance, rates and repairs, and be responsible for the general upkeep of the property in consideration of an agistment fee less than the rate then prevailing in the area. The taxpayer employed no labour and the workforce required from time to time to water the cattle, repair fences etc. was engaged by the subsidiary. It was admitted that the subsidiary had full and exclusive use of the property together with the plant and structural improvements.

The Chairman and Dr. Gerber both held:

"The payment was income consisting of the proceeds of a business carried on by the taxpayer and therefore constituted income from personal exertion. The payment could not be regarded as rent. The taxpayer's argument that the holding company of a wholly owned subsidiary must carry on the same business as its subsidiary must be rejected."

Dr. Beck, dissenting, ruled that "the fee received by the taxpayer was not an agistment fee. The fee was rent and it therefore constituted income from property. The taxpayer was not during the year under review carrying on primary production."

From the various court and tribunal decisions surrounding this issue, the following factors are particularly relevant - that is, when assessed objectively, their presence indicates a business is being carried on:

•   the level and nature of the agistment activities (Case 47/95, Hope v. Bathurst City Council case);

•   the person's purpose and intention as they engage in the activities (Case Q101 (1983) 83 ATC 495);

•   the intention to make a profit from the activities, even if only a small profit is made or a small loss incurred. (If a loss is incurred every year for a number of years, however, that suggests the activity may be more of a hobby.) It seems that an intention to make a profit is not of itself sufficient (Case 38/97 (1997) 36 ATR 1154);

•   the size and scale of the activities - they must be in excess of domestic needs, but do not need to be the person's only activities and can be carried on in a small way (Ferguson v FCT (1979) 9 ATR 873);

•   repetition and regularity of the activities - although the expression "carry on" does not necessarily require repetition, and an isolated activity may constitute beginning a business (Hope v. Bathurst City Council case; FCT v Consolidated Press Holdings Ltd; CPH Property Pty Ltd v FCT (2001) 47 ATR 229 at 245);

•   the activities being carried on in a systematic and businesslike way, as usual for that type of business (for example, keeping detailed, up-to-date records and accounts) (Hope v. Bathurst City Council case); and

•   the existence of a business plan (Hope v. Bathurst City Council).

When assessing several of these indicia - such as the level and nature of the agistment activities, consideration of current industry standards and agistment guidelines may assist in the determination of whether the activities undertaken are those that would be expected to be provided where agistments services are offered.

When agisting an animal, the 'person in charge' (typically the person with custody of the animal) has a duty of care to the animal under the various state and territories, for example, Animal Care and Protection Act 2001(Qld). Proprietors of the land occupied by the livestock are therefore responsible for the reasonable or proper care for the health, welfare and safety of an agisted animal/s. This includes providing appropriate food and water, accommodation, treatment for any disease or injury, and ensuring proper handling of the animal. Typically, this involves ensuring that their property or enclosure is, and remains, safe and free from hazards, ensuring that the animals are agisted in the manner agreed with their owner (for example, if there is an agreement to house an animal alone, then that animal cannot be housed in a paddock or enclosure with other animals), and ensuring animals have proper access to water and feed.

Section 26-102 of the ITAA 1997 is also of relevance when considering whether agistment activities will amount to a business. Broadly speaking, section 26-102 provides carve-outs to the denial of vacant land deductions, with one such carve-out specifically relating to carrying on a business and carrying on a business of primary production. If these criteria are not met, deductions for expenses associated with holding vacant land will be denied. Section 26-102 is an integrity measure to address concerns that deductions are being improperly claimed for expenses, such as interest costs, related to holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. As a consequence, ascertaining whether agistment activities will amount to a business will have significant implications to the application of section 26-102.

Feedback from stakeholders provided during the consultation process prior to the introduction of this measure indicated a level of concern that taxpayers undertaking agistment activities would be adversely impacted. Their responses, extracts of which are provided below, demonstrate a level of consensus that while the undertaking of agistment activities would mean the taxpayer has assessable income in the form of agistment fees, the deductions available would be limited because of the inability to demonstrate the land is being used in the carrying on of a business.

For example, in a media release BDO in BDO Australia, 'Changes to Vacant Land Tax deductions', BDO Australia (Media Release, 18 September 2019) have acknowledged that:

"A deduction will still be available where the land is ... used or held available for use, in carrying on a business of the taxpayer, an affiliate or connected entity (A non-corporate land owner is generally not considered to carrying on business in relation to the leasing or the land or agistment activity)."

Thompson Geer, in Thomson Geer Lawyers, 'Denial of Tax Deduction for Vacant Land Legislation Released', Thomson Geer lawyers (Tax Advocacy Release, 26 July 2019) in a tax advocacy submission, stated that:

"For primary producers, deductions will likely be denied where primary production activities (that do not constitute a primary production business) such as agistment, hobby/lifestyle farms or small-scale farms (and possibly share farming) are being conducted."

Finally, the National Tax and Accountants Association in National Tax & Accountants' Association Ltd, 'RE: Enhancing the integrity of tax deductions in relation to vacant land', NTAA, (Tax Advocacy Release, 30 October 2018), have expressed their concerns that:

"If section 26-105 is enacted as proposed, the land owning taxpayer in this case would be denied any deduction for costs associated with holding the vacant land that is leased for agistment purposes, despite the fact that the agistment income would continue to be fully assessable to the taxpayer. This is because s 26-105(1) prevents a deduction in respect of the leased land unless the land is either:

•   not vacant, which will only be the case if there is a substantive permanent building or other substantive permanent structure on the land, that is in use or ready for use. This would often not be the case in an agistment scenario where the leased land consists simply of fenced vacant farming paddocks; and/or

•   broadly, the land is being used in carrying on a business of the taxpayer or a specified (related) entity. This would not be the case in an agistment scenario where the land is leased to an unrelated neighbour."

These various media and tax advocacy submissions support the position adopted by the ATO that agistment activities will ordinarily not constitute a business.

Application of the law in your circumstances

In this case, entity D has been involved in operating an activity on a small part of the property since xxxx. Agistment activities started in xxxx on an area covering approximately xx% of the property. In xxxx, entity A entered into an agistment agreement in relation to the approximately xxxx acres for a x year term. You are intending to sell the property in the xxxx income year.

Under the terms of the agistment agreement, you receive a monthly agistment fee of $xxxx. Under the agistment agreement, you are responsible for ensuring that there is adequate water supply for the livestock, that all fences and gates are stock proof, that the fence around the irrigated land is stocke proof and also bears the responsibility for moving any solar pumps out of harm's way in the event of flooding. You are also required to organise helicopters (at the stockowner's expense) to enable the livestock to be moved out of harm's way in the event of a possible flood. You notify the stockowner if they become aware of any livestock from neighbouring properties entering the agisted area, or if livestock escape from the agisted area. You also muster stock that have escaped from the property and return them to the property for the owner.

Under the agistment agreement, the livestock is at the risk of the stockowner. You are not liable for any loss or injury to the livestock except for any loss or injury caused by their negligent act or omission. Stock numbers agisted is between xxxx to xxxx head. Your relation spends approximately xx hours a week on average on the agistment activities. This includes recovering stock that have escaped from the agisted area, clearing undergrowth and regrowth to ensure there is adequate pasture for the stock, weed control, property maintenance and monitoring stock.

In your circumstances, several factors support the conclusion that you may be carrying on a business of agistment based on indicia enunciated in case law. You assert the agistment activities are also carried out on a large scale, and based on your submissions, were conducted in a planned, organised and continuous manner over a x year period. As landowner, you undertook an active role in management and care for the stock. The profit and loss statements provided demonstrate that you maintained financial records for the agistment activities. You have derived a profit from the agistment agreements in some income years. Your relation has also been involved continuously in the agistment activities. They spend approximately xx hours per week on average assisting. Again, this may indicate that the agistment was more than a passive undertaking, and that it involved a substantial level of activity on your behalf.

However, despite these positive indicators, it is unlikely that the nature of your activities is sufficient to be characterised as carrying on a business. You are merely agisting livestock in an ordinary manner, to the expected standard of the industry, even if the scale of the activity was regarded as being large. The scale of the business will not be a determinative factor, as per the Bathurst City Council case:

"it has been said that it is not necessary that the business should be a large one... but there must be some activity of which it can be said that it has a significant commercial purpose or character."

The majority of your actions (such as supplying food and water to livestock, stock-proofing the property, protection and rescue of stock in the event of floods, and mustering escaped stock) merely fall within the industry standards of agistment, as well as within their duty of care to the animals under the relevant legislation. The livestock remains the stockowner's responsibility, and you are not liable for any loss or injury that does not result from negligence. The weed control and property maintenance activities undertaken by your relation also fall within the scope of ordinary landowner responsibilities, and therefore are unlikely to indicate a business is being conducted. Also, while the agistment activities have been profitable in some income years, the overall profit derived by you from agistment contracts is quite small when compared to the overall income. This supports the conclusion that the agistment activities were therefore carried on "...merely as a prelude to the use of the property for some other purpose, for example a business of primary production or private use", rather than as a business "of significant commercial purpose or character".

On the basis of the information supplied, the Commissioner does not consider you or entity A are carrying on a business in relation to the agistment activities.

Subsection 152-10(1A) of the Income Tax Assessment Act 1997

The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a CGT small business entity for the income year; and ...

(d) in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

The phrase 'in relation to' is not defined in the legislation, however the Macquarie Dictionary definition of 'relation' is '...an existing connection; a particular way of being related: the relation between cause and effect.'

Paragraph 152-40(1) (a) of the ITAA 1997 requires an asset to be used in the course of carrying on a business. This requirement does not require exclusive use of the asset for business purposes but a use that is sufficient to establish the required connection between the asset and the operations of the business. The degree of connection required is expressed by the words in the course of, which connotes the idea that the use of the asset is an integral part of the process by which the business is carried on.

The CGT asset referred to in subsection 152-10(1A) of the ITAA 1997 refers to the whole property.

Entity D carries on its activities on xxxx acres of the xxxx acres of the property. It cannot be said that entity D carries on the activities in relation to the xxxx acres, which is the CGT asset. That is, the activities did not operate on most of the property.

In determining whether a CGT asset has been 'used in the course of carrying on a business', the courts have stated that it must be established that the whole, or predominately the whole, of the asset has been so used (Rus v FC of T [2018] AATA 1854 and FC of T v Eichmann [2019] FCA 2155 (Eichmann's case)).

In Eichmann's case, the extent of the use of the land was far from minimal, or incidental to the carrying on of the business. This cannot be said in your circumstances.

When looking at the property as a whole, it cannot be said that the property, that is the CGT asset, is being usedin the course of carrying on a business. The use of the land for the activities in terms of area is considered very minimal.

An incidental connection between the business and the asset is insufficient to establish that it was used or held ready for use in the course of carrying on a business.

As only a very small portion of the property was used by entity D for their activities, the use of this small portion of the property does not change the entire property to be used in relation to entity D's activities. That is, entity D cannot be said to be carrying on a business in relation to the CGT asset. Therefore, the requirements in subsection 152-10(1A) of the ITAA 1997 have not been met.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).