Taxation Ruling IT 2486 – Income tax: children’s savings accounts Taxation Ruling IT 2486 – Income tax: children’s savings accounts PREAMBLE This Ruling considers the question of who should pay tax on the interest earned on accounts often referred to as children's savings accounts. 2. Children's savings accounts may be held with a bank, credit union, building society or other financial institution. The requirements and practices of the financial institutions may vary. The accounts are usually opened and operated by parents but some may be opened by others such as grandparents. In some cases children open and operate their own accounts. Many accounts are opened in the names of the children while others are called trust accounts. 3. The problem for the Taxation Office is that some people are using children's savings accounts to hide their own money to avoid paying tax on the interest they earn. RULING 4. Regardless of the name and type of the account, the essential question that must be asked is: 'Whose money is it?'. If the money really belongs to the parent, in the sense that the parent provided the money and may spend it as he or she likes, then the parent should include the interest in his or her return. If it belongs to the child and the child's total income from all sources is less than $416 no tax is payable and no tax returns will be required. 5. The answer to the question 'Whose money is it?' must inevitably depend upon the facts of each case. If, for example, the account is made up of money the child has received as birthday or Christmas presents, pocket-money or money from newspaper rounds, childminding, etc., then the money in the account should be regarded as that of the child. 6. On the other hand, if the account contains a large sum of money careful examination is needed to decide where it came from and whose money it really is. There will be other cases where, although an account is opened by a parent in a child's name, the parent spends or intends to use the funds in the account as if they belonged to the parent. In such cases the money in the account will be treated as belonging to the parent. 7. As a general rule, where the Taxation Office is satisfied that the money in the account really belongs to the child, it will not insist on a strict application of the trust provisions of the Income Tax Assessment Act where the account is operated by a parent as trustee. Where the interest is shown in a tax return lodged by a child a trust tax return will not be necessary. 8. In contrast, the Taxation Office will rely on all arguments available to it to combat the practice by some people of using children's savings accounts to invest their own money and avoid paying tax on the interest they earn. COMMISSIONER OF TAXATION 18 July 1988 References ATO references: NO 88/4843-2 Date of effect: Immediate Subject References: CHILDREN'S SAVINGS ACCOUNTS TRUSTS - CHILDREN'S SAVINGS ACCOUNTS INTEREST - CHILDREN'S SAVINGS ACCOUNTS Legislative References: SECTION 25 DIVISION 6 DIVISION 6A DIVISION 6AA Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases Please note that the PDF version is the authorised version of this ruling. Note: Where a residence is purchased by a family trust and is leased to beneficiaries in the trust at commercial rates (paragraph 29), the rent paid by the beneficiaries is assessable income of the trustee and losses and outgoings attributable to the residence are deductible, unlike the view expressed in paragraph 30. This reflects the decision of the Federal Court in FCT v. Janmor Nominees Pty Ltd 87 ATC 4813; (1987) 15 FCR 348. The priority given to updating/rewriting this ruling to correctly reflect the law depends on the ATO resources available to do so when weighed against other ATO priorities (Note added on 8 August 2013). FOI status: May be released PREAMBLE From time to time questions arise about the extent to which losses and outgoings incurred in connection with rent producing properties are allowable as income tax deductions. The sorts of situations in which the questions arise are:- 1. Arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence. 2. Letting of property to relatives 3. Payment by family members of an amount for board and lodging. 4. Occupancy of part of a residence on the basis of occupants sharing household costs such as food, electricity, heating, etc. 5. Letting of a holiday home or potential retirement home for part only of a year. 6. Letting of a residence during a transfer in place of employment. 7. Purchase of a residence by a family trust and the subsequent leasing of it to family beneficiaries in the trust. 2. Before canvassing how the relevant provisions of the income tax law are considered to operate in these situations, it is appropriate to make some general comments. 3. In Press Release, No. 45 of 30 June 1983, the Treasurer announced that the Commissioner of Taxation would not be changing the long standing practice of allowing deductions in full for interest on moneys borrowed to invest in rent-producing properties where the interest and other outgoings exceeded the rental income in any year. There is nothing in this Ruling which would detract from the Treasurer's statement. In the situations to which this Ruling applies the questions which arise are concerned with apportionment of losses and outgoings where a property is not wholly used for rental purposes and with determining whether particular receipts are assessable income. 4. The second point to be made is that, ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. This is illustrated by the decision in FCT v Kowal, 84 ATC 4001: 15 ATR 125. 5. It is necessary to make the qualification "ordinarily" because some cases may arise, particularly where the arrangements are not at arm's length, where an amount described as or said to be rent is not of income nature and, therefore, not assessable income. In FCT v Groser, 82 ATC 4478: 13 ATR 445, for example, the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The arrangements were simply not of a kind which produced a receipt of income as that term is normally understood. 6. A third point to make is, that in determining the extent to which losses and outgoings incurred in connection with rent producing properties are allowable as income tax deductions, there is no basis for distinguishing between fixed costs, such as interest and insurance, and other costs. It has been suggested that, in cases where part of a private residence is let, the reasoning of the Courts in the home office cases would lead to the conclusion that the fixed costs attributable to the private residence, e.g. interest, insurance, etc., are essentially of a private or domestic nature and that no part of them is allowable as an income tax deduction. 7. The suggestion does not accord with the official approach. In paragraph 5 of Taxation Ruling No. IT 191 it is stated that, where a taxpayer derives assessable income from self-employed activities carried out at his home, an income tax deduction may be allowed up to a reasonable amount in respect of rent, interest, insurance, etc. paid in respect of the home. The employee accountant who conducts a tax agent's practice from his home, the employee architect who does freelance work at a room in his home are examples of situations to which paragraph 5 of Ruling No. IT 191 applies. It is considered that a taxpayer who derives assessable income from letting part of his private residence is in the same category as the examples referred to and is entitled to appropriate income tax deductions for rent, interest, insurance, etc. 8. The final point to be made is that, while this Ruling deals with the apportionment of losses and outgoings incurred in connection with rent producing properties, not all losses and outgoings will necessarily be apportioned. For example, there will be no queston of apportioning depreciation on furniture in a room which is let to a tenant for the whole of a year. On the other hand there would be a need to apportion depreciation on jointly-used facilities, e.g. refrigerator, washing machine, etc. Expenditure on repainting a room let to a tenant for the whole of a year would qualify for deduction in full under section 53 but the cost of repainting the entire house would need to be apportioned. It will be a question of applying the relevant provisions of the income tax law to each claim for decuction. Arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas 9. This heading typifies a situation which is commonly encountered. A variety of arrangements may occur in situations of this nature. The rent payable may cover variable or running costs such as electricity, heating, etc. or the arrangements may require the tenant to pay, in addition to rent, a separate amount towards variable or running costs. The heading would also cover situations where board and lodging is provided. 10. The situations represented under this heading call for apportionment of expenditures incurred in respect of the residence to determine what amounts may be allowed as income tax deductions. Inevitably it will be a question for decision in each case. As a general approach apportionment should be made on a floor area basis, i.e. by reference to the floor area of the residence to which the tenant/lodger has sole occupancy together with a reasonable figure for access to the general living areas including garage and outdoor areas. If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment. In some cases access to the general living area may be restricted to the kitchen, bathroom, a laundry - it would be necessary to restrict the reasonable figure for access to general living areas to those rooms. 11. Where the tenant/lodger, in addition to paying rent, or an amount for board and lodging, is required to make a separate contribution to specific variable or running costs such as electricity, heating, etc., the question arises whether the separate contribution is assessable income. On the basis that the separate contribution represents part of the reward of the owner of letting part of his residence, the amounts are considered to be assessable income. If the arrangements are such that the separate contribution is made on a precise sharing of costs basis the assessable income will be offset by allowable deductions. If the separate contribution is a fixed amount income tax deductions will be allowed for the part of the variable or running costs attributable to the tenant/lodger's use of the relevant facilities. 12. The approach to be followed in cases arising under this heading has been framed on the basis that the rent charged by the owner represents a normal commercial rent. If the amount charged is significantly less than the normal commercial rate, enquiries would be justified to ascertain the reason for the lower charge. The basis of apportionment in cases of this nature will be determined on the facts of each case having regard to the reason for the lower charge. Letting of property to relatives 13. Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation. 14. If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser referred to earlier, the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives. 15. In the Kowal case, for example, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings falling within sub-sections 51(1) and 67(1). In the Groser case, on the other hand, the Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction under sub-section 51(1) - the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income. 16. As has been said earlier, decisions in these cases will ultimately depend upon the facts of each case. As a matter of experience it is unlikely that there will be sufficient information provided in return forms to enable a final decision to be made. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer. Payment by family members of an amount for "board and lodging" 17. Arrangements of this nature, whether the payment is said to be for board only or for lodging only or for both, are considered to be in the nature of domestic arrangements not giving rise to the derivation of assessable income by the recipient of the payments. It follows that the question of income tax deductions for losses and outgoings does not arise. Occupancy of part of a residence on the basis of the occupants' sharing household costs such as food, electricity and cleaning, etc. 18. What will be decisive in cases of this nature will be the characterization of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise. 19. Care should be taken to ensure, however, that what may be termed ordinary tenancy arrangements are not dressed up in the form represented by the above heading. If the owner were not party to the sharing arrangements or if the occupants made a fixed contribution to the owner for household costs, there would be a presumption that the payments made by the occupants contained an element of reward to the owner for the occupancy of the residence. Enquiries will be necessary in these cases to establish the extent of the benefit to the owner which should be included in his assessable income. Income tax deductions for losses and outgoings attributable to the residence would be determined on the same basis as applies under the heading "arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence". Letting of a holiday home or potential retirement home for part only of the year 20. The problem involved under this heading relates to properties which are essentially private residences. They are located in holiday resort-areas or away from mainstream residential areas. The properties may be let for short periods of time, e.g. during school holidays. In some instances friends or relatives of an owner may occupy a property for holidays at no or minimal cost. For the greater part of the year, however, the properties will be either occupied by the owner for short periods or remain unoccupied. 21. The minimal amounts received from friends or relatives in these cases are not considered to be assessable income. The occupancy arrangements in these cases are in the nature of domestic or family arrangements and the amounts received by the owner from friends or relatives are re-imbursements for costs incurred during the period of occupancy. 22. On the other hand the rent received from the commercial letting of the properties i.e. the letting of the properties, at a commercial rental, is clearly assessable income. It is a question of deciding what amount of the losses and outgoings incurred in connection with the properties is allowable as an income tax deduction. 23. Again this will be a question to be determined in the light of individual cases. In Case No. P116, 82 ATC 590 : Case No. 49, 26 CTBR (NS) 372, a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a decuction for the proportion that the property was let, i.e. 4.4%. 24. As a general rule the approach of the Board in the case cited should be followed in comparable cases, i.e. the time basis should be used to determine the income tax deduction allowable in respect of the relevant losses and outgoings. Where the information supplied in a return of income is insufficient to enable a final decision to be made, the income tax deductions allowed should be limited to the amount of rent received. Whether a further deduction is to be allowed will depend upon the nature of any additional information provided by the taxpayer. 25. A question which may arise in cases coming under this heading is whether the apportionment of losses and outgoings attributable to a property should take into account the periods during which the property was not only let at a commercial rental but also available for letting at a commercial rental. The question is, of course, one for decision in individual cases. Nevertheless, a period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period. 26. An associated problem that arises in cases under this heading is the extent to which travelling expenses incurred by the owner of the property in inspecting and maintaining the property are allowable as income tax deductions. The answer will depend, of course, on the nature of the travel. If, for example, it is undertaken to prepare the property for incoming tenants or to inspect the property at the conclusion of the tenancy, the costs of travel would be allowable as an income tax deduction. If, on the other hand, the travelling is associated with the owner's personal use of the property or with the general maintenance of it, the costs of travel would not be allowable as an income tax deduction. Letting of a residence during a transfer in place of employment 27. Where a residence is let on a normal commercial basis during the period of transfer, losses and outgoings in relation to the residence and which are eligible for income tax deduction would be allowable as income tax deductions. 28. There would be a need for apportionment on a time basis if the residence was let for less than a year. Purchase of a residence by a family trust and the subsequent leasing of it to family beneficiaries in the trust. 29. Situations under this heading are designed to obtain an income tax deduction for losses and outgoings which would otherwise be characterized as private or domestic expenditure. By way of illustration, a family trust may be established to acquire what is in fact the private residence of the beneficiaries of the trust. Financial arrangements for the purchase of the residence by the trustee may be highly geared. The trustee will let the residence to one or both parents at a commercial rental and the family would occupy the residence as the family home. The trustee lodges a return of income disclosing the rental as assessable income and claiming income tax deductions for the losses and outgoings attributable to the residence. Income from other sources is channelled into the trust to absorb the losses arising from the rental of the residence to the parents. 30. In situations such as this it is apparent that, had the parents acquired the residence in their own right, the losses and outgoings attributable to the residence would not have been allowable as income tax deductions - they would have been private or domestic expenditure. In cases of this nature that have arisen, the deductions claimed by the trustee have been reduced. A case in point has been heard by a Taxation Board of Review and is currently awaiting decision. In the meantime it should not be accepted in cases of this nature that the rent payable by the parents is assessable income of the trustee or that the losses and outgoings attributable to the residence are allowable as income tax deductions. COMMISSIONER OF TAXATION 4 July 1985 References ATO references: NO 84/990-1 BO VIC: VJ 342/1 Subject References: RENTAL PROPERTIES INTEREST AND OTHER DEDUCTIONS NON-ECONOMIC RENTAL HOLIDAY HOME SHARE OF RESIDENCE AND SIMILAR CASES FAMILY TRUST CASES Legislative References: 51 53 Case References: FCT v. Kowal 84 ATC 4001 15 ATR 125 FCT v. Groser 82 ATC 4478 13 ATR 445 Case No. P116 82 ATC 590 Case No. 49 26 CTBR (NS) 372 Tax Administration Act 1953 Schedule 1 Chapter 2 2-5 10 5 Summary of withholding payments (1) The payments and other transactions covered by PAYG withholding are called withholding payments. They are summarised in the table. Note: The obligation to pay an amount to the Commissioner is imposed on the entity making the withholding payment (except for items 17, 19 and 22, and 26 (to the extent that it covers subsection 12-390(4))). Summary of withholding payments Item - Withholding payment - Section 1 - A payment of salary etc. to an employee - 12-35 2 - A payment of remuneration to the director of a company - 12-40 3 - A payment of salary etc. to an office holder (e.g. a member of the Defence Force) - 12-45 3A - a payment to a * religious practitioner - 12-47 4 - A return to work payment to an individual - 12-50 5 - A payment that is covered by a voluntary agreement - 12-55 6 - A payment under a labour hire arrangement or a payment specified by regulations - 12-60 7 - A * superannuation income stream or an annuity - 12-80 8 - A * superannuation lump sum or a payment for termination of employment - 12-85 9 - An unused leave payment - 12-90 10 - A social security or similar payment (e.g. old age pension) - 12-110 11 - A Commonwealth education or training payment - 12-115 12 - A compensation, sickness or accident payment - 12-120 13 - A payment arising from an investment where the recipient does not quote its tax file number, or in some cases, its ABN - 12-140 14 - Investor becoming presently entitled to income of a unit trust - 12-145 14A - A trustee of a closely held trust distributing an amount from the trust income to a beneficiary, where the beneficiary does not quote its tax file number - 12-175 14B - A beneficiary of a closely held trust becoming presently entitled to income of the trust, where the beneficiary does not quote its tax file number 12-180 15 - A payment for a supply where the recipient of the payment does not quote its ABN - 12-190 16 - A dividend payment to an overseas person - 12-210 17 - A dividend payment received for a foreign resident - 12-215 18 - An interest payment to an overseas person - 12-245 19 - An interest payment received for a foreign resident - 12-250 20 - An interest payment derived by a lender in carrying on business through overseas permanent establishment - 12-255 21 - A royalty payment to an overseas person - 12-280 22 - A royalty payment received for a foreign resident - 12-285 22A - A departing Australia superannuation payment - 12-305 22AA - An * excess untaxed roll-over amount - 12-312 22B - A payment (of a kind set out in the regulations) to a foreign resident - 12-315 22C - A payment (of a kind set out in the regulations) received for a foreign resident - 12-317 22D - A payment of salary, wages etc. to an employee under the Seasonal Labour Mobility Program - 12-319A 23 - A mining payment 12-320 24 - A natural resource payment - 12-325 25 - A payment by a managed investment trust - 12-385 26 - A payment by a * custodian or other entity - 12-390 (2) These can also be treated as withholding payments: (a) alienated personal services payments (see Division 13); (b) non-cash benefits (see Division 14). Note: The obligation to pay an amount to the Commissioner is imposed on the entity receiving the alienated personal services payment or providing the non-cash benefit. Income Tax Assessment Act 1997 2 2-40 83A 1 through to 340 Division 83A—Employee share schemes Table of Subdivisions Guide to Division 83A 83A A Objects of Division and key concepts 83A B Immediate inclusion of discount in assessable income 83A C Deferred inclusion of gain in assessable income 83A D Deduction for employer 83A E Miscellaneous Guide to Division 83A 83A 1 What this Division is about Your assessable income includes discounts on shares, rights and stapled securities you (or your associate) acquire under an employee share scheme. You may be entitled: (a) to have the amount included in your assessable income reduced; or (b) to have the income year in which it is included deferred. Subdivision 83A A—Objects of Division and key concepts Table of sections 83A 5 Objects of Division 83A 10 Meaning of ESS interest and employee share scheme 83A 5 Objects of Division The objects of this Division are: (a) to ensure that benefits provided to employees under *employee share schemes are subject to income tax at the employees’ marginal rates under *income tax law (instead of being subject to *fringe benefits tax law); and (b) to increase the extent to which the interests of employees are aligned with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire *shares under such schemes. 83A 10 Meaning of ESS interest and employee share scheme (1) An ESS interest, in a company, is a beneficial interest in: (a) a *share in the company; or (b) a right to acquire a beneficial interest in a share in the company. (2) An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees’ employment. Note: See section 83A 325 for relationships similar to employment. Subdivision 83A B—Immediate inclusion of discount in assessable income Guide to Subdivision 83A B 83A 15 What this Subdivision is about Generally, a discount you receive on shares, rights or stapled securities you acquire under an employee share scheme is included in your assessable income when you acquire the beneficial interest in those shares, rights or securities. You may be entitled to reduce the amount included in your assessable income if you meet certain conditions which seek to limit the concession to genuine schemes broadly available to all permanent employees who do not already have anything other than a minor interest in their employer. The income year in which you are taxed may be deferred if there is a real risk of forfeiture, or you acquired the shares or securities under particular salary sacrifice arrangements (see Subdivision 83A C). If you are a foreign resident, only the part of the discount that relates to your employment in Australia is included in your assessable income. Table of sections Operative provisions 83A 20 Application of Subdivision 83A 25 Discount to be included in assessable income 83A 30 Amount for which discounted ESS interest acquired 83A 35 Reduction of amounts included in assessable income Operative provisions 83A 20 Application of Subdivision (1) This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. Note 1: This Subdivision does not apply if Subdivision 83A C applies: see section 83A 105. Note 2: If an associate of yours acquires an interest in relation to your employment, this Division applies as if you, rather than your associate, acquired the interest: see section 83A 305. Note 3: Regulations made for the purposes of section 83A 315 may be relevant to working out whether you acquire the ESS interest at a discount. (2) However, this Subdivision does not apply if the *ESS interest is a beneficial interest in a *share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an *employee share scheme. 83A 25 Discount to be included in assessable income (1) Your assessable income for the income year in which you acquire the *ESS interest includes the discount given in relation to the interest. (2) Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia. Note: For the CGT treatment of employee share schemes, see Subdivision 130 D. 83A 30 Amount for which discounted ESS interest acquired For the purposes of this Act (other than this Division), the *ESS interest (and the *share or right of which it forms part) is taken to have been acquired for its *market value (rather than for its discounted value). Note: Regulations made for the purposes of section 83A 315 may substitute a different amount for the market value of the ESS interest. 83A 35 Reduction of amounts included in assessable income Reduction and income test (1) Reduce the total amount included in your assessable income under subsection 83A 25(1) for an income year by the total of the amounts included in your assessable income under that subsection, for the income year, for *ESS interests to which subsections (3) to (9) of this section apply. (2) However: (a) do not reduce the total amount by more than $1,000; and (b) only make the reduction if the sum of the following does not exceed $180,000: (i) your taxable income for the income year (including any amount that would be included in your taxable income if you disregarded this section); (ii) your *reportable fringe benefits total for the income year; (iii) your *reportable superannuation contributions (if any) for the income year; (iv) your *total net investment loss for the income year. Employment (3) This subsection applies to an *ESS interest in a company if, when you acquire the interest, you are employed by: (a) the company; or (b) a *subsidiary of the company. Employee share scheme relates only to ordinary shares (4) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, when you acquire the interest, all the ESS interests available for acquisition under the scheme relate to ordinary *shares. Integrity rule about share trading and investment companies. (5) This subsection applies to an *ESS interest in a company unless, when you acquire the interest: (a) the predominant business of the company (whether or not stated in its constituent documents) is the acquisition, sale or holding of *shares, securities or other investments (whether directly or indirectly through one or more companies, partnerships or trusts); and (b) you are employed by the company; and (c) you are also employed by any other company that is: (i) a *subsidiary of the first company; or (ii) a holding company (within the meaning of the Corporations Act 2001) of the first company; or (iii) a subsidiary of a holding company (within the meaning of the Corporations Act 2001) of the first company. Scheme must be non discriminatory (6) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, when you acquire the interest, both: (a) the employee share scheme; and (b) any scheme for the provision of financial assistance in respect of acquisitions of ESS interests under the employee share scheme; are operated on a non discriminatory basis in relation to at least 75% of the permanent employees of your employer who have completed at least 3 years of service (whether continuous or non continuous) with your employer and who are Australian residents. No risk of losing interest or share under the conditions of the scheme (7) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, when you acquire the interest: (a) if the ESS interest is a beneficial interest in a *share—there is no real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it); or (b) if the ESS interest is a beneficial interest in a right to acquire a beneficial interest in a *share: (i) there is no real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse); and (ii) there is no real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it). Minimum holding period (8) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, at all times during the period that: (a) starts when you acquire the interest; and (b) ends at the earlier of: (i) 3 years later; and (ii) when you cease being employed by your employer; the scheme is operated so that: (c) you are not permitted to dispose of: (i) any ESS interest (the scheme interest) you acquire under the scheme; or (ii) a beneficial interest in a *share you acquire as a result of a scheme interest; before the earlier of: (iii) the end of the period of 3 years after you acquire the scheme interest; and (iv) when you cease being employed by your employer; and (d) everyone else who acquires ESS interests under the scheme is subject to a corresponding restriction. Note: This subsection is taken to apply in the case of a takeover or restructure: see subsection 83A 130(3). 5% limit on shareholding and voting power (9) This subsection applies to an *ESS interest in a company if, immediately after you acquire the interest: (a) you do not hold a beneficial interest in more than 5% of the *shares in the company; and (b) you are not in a position to cast, or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the company. Subdivision 83A C—Deferred inclusion of gain in assessable income Guide to Subdivision 83A C 83A 100 What this Subdivision is about If there is a real risk you might forfeit the share, right or stapled security you acquired under an employee share scheme, you don’t include the discount in your assessable income when you acquired it. Instead, in the first income year you are able to dispose of the share, right or security, your assessable income will include any gain you have made to that time. If you cease employment earlier, or if 7 years pass, the gain is included in that income year instead. A share or stapled security you acquire under salary sacrifice arrangements can also be subject to this deferred taxing point if you get no more than $5,000 worth of shares under those arrangements. Table of sections Main provisions 83A 105 Application of Subdivision 83A 110 Amount to be included in assessable income 83A 115 ESS deferred taxing point—shares 83A 120 ESS deferred taxing point—rights to acquire shares 83A 125 Tax treatment of ESS interests held after ESS deferred taxing points Takeovers and restructures 83A 130 Takeovers and restructures Main provisions 83A 105 Application of Subdivision Scope of Subdivision (1) This Subdivision applies, and Subdivision 83A B does not apply, to an *ESS interest in a company if: (a) Subdivision 83A B would, apart from this section, apply to the interest (see section 83A 20); and (b) subsections 83A 35(3), (4), (5) and (9) apply to the interest; and (c) if the interest is a beneficial interest in a *share: (i) subsection (2) of this section applies to the interest; and (ii) subsection (3) or (4) applies to the interest; and (d) if the interest is a beneficial interest in a right to acquire a beneficial interest in a share—subsection (3) applies to the interest. Note: Subsections 83A 35(3), (4), (5), and (9) contain conditions relating to the following: (a) your employment; (b) the types of shares available under the employee share scheme; (c) share trading and investment companies; (d) your shareholding and voting power in the company. Broad availability of schemes (2) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, when you acquire the interest, at least 75% of the permanent employees of your employer who have completed at least 3 years of service (whether continuous or non continuous) with your employer and who are Australian residents are, or at some earlier time had been, entitled to acquire: (a) ESS interests under the scheme; or (b) ESS interests in: (i) your employer; or (ii) a holding company (within the meaning of the Corporations Act 2001) of your employer; under another employee share scheme. Real risk of losing interest or share under the conditions of the scheme (3) This subsection applies to an *ESS interest you acquire under an *employee share scheme if, when you acquire the interest: (a) if the ESS interest is a beneficial interest in a *share—there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it); or (b) if the ESS interest is a beneficial interest in a right to acquire a beneficial interest in a share: (i) there is a real risk that, under the conditions of the scheme, you will forfeit or lose the ESS interest (other than by disposing of it, exercising the right or letting the right lapse); or (ii) there is a real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it). Salary sacrifice arrangement (4) This subsection applies to an *ESS interest you acquire under an *employee share scheme during an income year at a discount if: (a) the interest is provided: (i) because you agreed to acquire the interest in return for a reduction in your salary or wages that would not have happened apart from the agreement; or (ii) as part of your remuneration package, in circumstances where it is reasonable to conclude that your salary or wages would be greater if the interest was not made part of that package; and (b) at the time you acquire the interest: (i) the discount equals the *market value of the ESS interest; and (ii) all of the ESS interests available for acquisition under the scheme are ESS interests to which subsection (3) applies, beneficial interests in *shares, or both; and (iii) the governing rules of the scheme expressly state that this Subdivision applies to the scheme (subject to the requirements of this Act); and (c) the total *market value of the *ESS interests in your employer and any holding company (within the meaning of the Corporations Act 2001) of your employer: (i) that you acquire during the year under any employee share scheme or schemes; and (ii) to which both this Subdivision and this subsection apply; does not exceed $5,000. (5) For the purposes of paragraph (4)(c), work out the *market value of each *ESS interest as at the time you acquire it. Note: Regulations made for the purposes of section 83A 315 may substitute a different amount for the market value of the ESS interest. 83A 110 Amount to be included in assessable income (1) Your assessable income for the income year in which the *ESS deferred taxing point for the *ESS interest occurs includes the *market value of the interest at the ESS deferred taxing point, reduced by the *cost base of the interest. Note: Regulations made for the purposes of section 83A 315 may substitute a different amount for the market value of the ESS interest. (2) Treat an amount included in your assessable income under subsection (1) as being from a source other than an *Australian source to the extent that it relates to your employment outside Australia. Note: For the CGT treatment of employee share schemes, see Subdivision 130 D. 83A 115 ESS deferred taxing point—shares Scope (1) This section applies if the *ESS interest is a beneficial interest in a *share. Meaning of ESS deferred taxing point (2) The ESS deferred taxing point for the *ESS interest is the earliest of the times mentioned in subsections (4) to (6). (3) However, the ESS deferred taxing point for the *ESS interest is instead the time you dispose of the interest, if that time occurs within 30 days after the time worked out under subsection (2). No restrictions on disposing of share (4) The first possible taxing point is the earliest time when: (a) there is no real risk that, under the conditions of the *employee share scheme, you will forfeit or lose the *ESS interest (other than by disposing of it); and (b) if, at the time you acquired the interest, the scheme genuinely restricted you immediately disposing of the interest—the scheme no longer so restricts you. Cessation of employment (5) The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends. Maximum time period for deferral (6) The 3rd possible taxing point is the end of the 7 year period starting when you acquired the interest. 83A 120 ESS deferred taxing point—rights to acquire shares Scope (1) This section applies if the *ESS interest is a beneficial interest in a right to acquire a beneficial interest in a *share. Meaning of ESS deferred taxing point (2) The ESS deferred taxing point for the *ESS interest is the earliest of the times mentioned in subsections (4) to (7). (3) However, the ESS deferred taxing point for the *ESS interest is: (a) the time you dispose of the ESS interest (other than by exercising the right); or (b) if you exercise the right—the time you dispose of the beneficial interest in the *share; if that time occurs within 30 days after the time worked out under subsection (2). No restrictions on disposing of right (4) The first possible taxing point is the earliest time when: (a) you have not exercised the right; and (b) there is no real risk that, under the conditions of the *employee share scheme, you will forfeit or lose the *ESS interest (other than by disposing of it, exercising the right or letting the right lapse); and (c) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the ESS interest—the scheme no longer so restricts you. Cessation of employment (5) The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends. Maximum time period for deferral (6) The 3rd possible taxing point is the end of the 7 year period starting when you acquired the interest. No restrictions on exercising right and disposing of share (7) The 4th possible taxing point is the earliest time when: (a) there is no real risk that, under the conditions of the scheme, you will forfeit or lose the *ESS interest (other than by disposing of it, exercising the right or letting the right lapse); and (b) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately exercising the right—the scheme no longer so restricts you; and (c) there is no real risk that, under the conditions of the scheme, if you exercise the right, you will forfeit or lose the beneficial interest in the *share (other than by disposing of it); and (d) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right—the scheme no longer so restricts you. 83A 125 Tax treatment of ESS interests held after ESS deferred taxing points For the purposes of this Act (other than this Division), the *ESS interest (and the *share or right of which it forms part) is taken to have been acquired immediately after the *ESS deferred taxing point for the interest for its *market value, unless the ESS deferred taxing point occurs at the time the interest is disposed of. Note: Regulations made for the purposes of section 83A 315 may substitute a different amount for the market value of the ESS interest. Takeovers and restructures 83A 130 Takeovers and restructures Object and scope (1) The object of this section is to allow this Division to continue to apply if: (a) at least one of the following applies: (i) an *arrangement (the takeover) is entered into that is intended to result in a company (the old company) becoming a *100% subsidiary of another company; (ii) *ESS interests in a company (the old company) acquired under *employee share schemes can reasonably be regarded as having been replaced, wholly or partly, by ESS interests in one or more other companies as a result of a change (the restructure) in the ownership (including the structure of the ownership) of the old company; and (b) just before the takeover or restructure, you held ESS interests (the old interests) in the old company that you acquired under an employee share scheme. Treat new interests as continuations of old interests (2) For the purposes of this Division, treat any *ESS interests (the new interests) in a company (the new company) that you acquire in connection with the takeover or restructure as a continuation of the old interests, to the extent that: (a) as a result of the arrangement or change, you stop holding the old interests; and (b) the new interests can reasonably be regarded as matching any of the old interests. Note: In determining to what extent something can reasonably be regarded as matching any of the old interests, one of the factors to consider is the respective market values of that thing and of the old interests. (3) Subsection 83A 35(8) (about the 3 year rule) is taken to apply to the *ESS interests. (4) Subsections (2) and (3) only apply if the new interests relate to ordinary *shares. Old interest not matched by new interests (5) For the purposes of this Division, treat yourself as having disposed of the old interests to the extent that, in connection with the takeover or restructure, you acquire anything that: (a) can reasonably be regarded as matching any of the old interests; but (b) is not treated by subsection (2) as a continuation of those interests. Continuation of your employment (6) For the purposes of this Division, treat your employment by: (a) the new company; or (b) a *subsidiary of the new company; or (c) a holding company (within the meaning of the Corporations Act 2001) of the new company; or (d) a subsidiary of a holding company (within the meaning of the Corporations Act 2001) of the new company; as a continuation of the employment in respect of which you acquired the old interests. Apportionment of cost base of old interests (7) Treat yourself as having given, as consideration for the assets mentioned in subsection (8), the amount worked out by apportioning among those assets, according to their respective *market values immediately after the takeover or restructure, the total of: (a) the *cost bases of the old interests when you stop holding them; and (b) the cost bases of the assets mentioned in paragraph (8)(b) immediately after the takeover or restructure (ignoring the effect of this subsection). (8) The assets are: (a) the things that: (i) you acquired in connection with the takeover or restructure; and (ii) can reasonably be regarded as matching the old interests; (including all of the new interests); and (b) in a case covered by subparagraph (1)(a)(ii)—any *ESS interests in the old company that: (i) you held just before, and continue to hold just after, the restructure; and (ii) that can reasonably be regarded as matching the old interests. Exceptions (9) This section only applies if: (a) at or about the time you acquire the new interests, you are employed as mentioned in subsection (6); and (b) at the time you acquire the new interests: (i) you do not hold a beneficial interest in more than 5% of the *shares in the new company; and (ii) you are not in a position to cast, or to control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the new company. Subdivision 83A D—Deduction for employer Guide to Subdivision 83A D 83A 200 What this Subdivision is about You can deduct an amount for shares, rights or stapled securities you provide to your employees under an employee share scheme if they are eligible for a reduction in their assessable income under section 83A 35. The amount you can deduct is equal to that reduction. You must defer any deduction you are entitled to for amounts you provide to finance your employees acquiring interests in shares, rights or stapled securities under an employee share scheme until the employees have actually acquired those interests. Table of sections Operative provisions 83A 205 Deduction for employer 83A 210 Timing of general deductions Operative provisions 83A 205 Deduction for employer (1) You can deduct an amount for an income year if: (a) during the year you provided one or more *ESS interests to an individual under an *employee share scheme; and (b) you did so as: (i) the employer of the individual; or (ii) a holding company (within the meaning of the Corporations Act 2001) of the employer of the individual; and (c) section 83A 35 applies to reduce the amount included in the individual’s assessable income under subsection 83A 25(1) in relation to some or all of the interests. (2) Disregard paragraph 83A 35(2)(b) (income test) for the purposes of paragraph (1)(c) of this section. (3) The amount of the deduction is the amount of the reduction mentioned in paragraph (1)(c). Deduction to be apportioned if interest provided by multiple entities (4) The amount of the deduction worked out under subsection (3) must be apportioned between 2 or more entities on a reasonable basis if the entities jointly provide an *ESS interest for which an amount can be deducted under subsection (1). 83A 210 Timing of general deductions If: (a) at a particular time, you provide another entity with money or other property: (i) under an *arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an *ESS interest under an *employee share scheme in relation to the ultimate beneficiary’s employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the *ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Subdivision 83A E—Miscellaneous Table of sections 83A 305 Acquisition by associates 83A 310 Forfeiture etc. of ESS interest 83A 315 Market value of ESS interest 83A 320 Interests in a trust 83A 325 Application of Division to relationships similar to employment 83A 330 Application of Division to ceasing employment 83A 335 Application of Division to stapled securities 83A 340 Application of Division to indeterminate rights 83A 305 Acquisition by associates If an *associate (other than an *employee share trust) of an individual acquires an *ESS interest in relation to the individual’s employment (including past or prospective employment), then, for the purposes of this Division: (a) treat the interest as having being acquired by the individual (instead of the associate); and (b) treat any circumstance, right or obligation existing or not existing in relation to the interest in relation to the associate as existing or not existing in relation to the individual; and (c) treat anything done or not done by or in relation to the associate in relation to the interest as being done or not done by or in relation to the individual. Example 1: The following are attributed to the employee, rather than to the associate: (a) the associate’s voting rights; (b) the associate’s ability or inability to dispose of the ESS interest; (c) whether there is a real risk that the associate may lose the ESS interest; (d) the associate’s cost base for the ESS interest. Example 2: If the associate disposes of the ESS interest, the employee is taken to have disposed of the ESS interest instead. 83A 310 Forfeiture etc. of ESS interest This Division (apart from this Subdivision) is taken never to have applied in relation to an *ESS interest acquired by an individual under an *employee share scheme if: (a) disregarding this section, an amount is included in the individual’s assessable income under this Division in relation to the interest; and (b) either: (i) the individual forfeits the interest; or (ii) in the case of an ESS interest that is a beneficial interest in a right—the individual forfeits or loses the interest (without having disposed of the interest or exercised the right); and (c) the forfeiture or loss is not the result of: (i) a choice made by the individual (other than a choice by that individual to cease particular employment); or (ii) a condition of the scheme that has the direct effect of protecting (wholly or partly) the individual against a fall in the *market value of the interest. 83A 315 Market value of ESS interest (1) Whenever this Division uses the *market value of an *ESS interest, instead use the amount specified in the regulations for the purposes of this section in relation to the interest, if the regulations specify such an amount. (2) To avoid doubt, apply the rule in subsection (1) to the *market value component of any calculation for the purposes of this Division that involves market value. Example: If the regulations specify an amount in relation to an ESS interest, use that amount instead of the market value of the interest in working out: (a) whether there is a discount given in relation to interest; and (b) if so—the amount of the discount. 83A 320 Interests in a trust (1) This section applies if, at a time: (a) you hold an interest in a trust whose assets include *shares; and (b) that interest corresponds to a particular number of the shares (even if the interest does not correspond to particular shares). (2) For the purposes of this Division, treat yourself as holding at that time a beneficial interest in each of a number of the *shares included in the assets of the trust equal to the number mentioned in paragraph (1)(b). (3) If there are 2 or more classes of *shares included in the assets of the trust, this section operates separately in relation to each class as if the shares in that class were all the shares included in the assets of the trust. (4) This section applies to rights to acquire beneficial interests in *shares in the same way it applies to shares. Note: For the CGT treatment of employee share schemes, see Subdivision 130 D. 83A 325 Application of Division to relationships similar to employment This Division applies to an individual covered by column 1 of an item in the table as if: (a) he or she were employed by the entity referred to in column 2 of that item; and (b) the thing referred to column 3 of that item constituted that employment. Application of Division to relationships similar to employment Item Column 1 This Division applies to an individual who: Column 2 as if he or she were employed by: Column 3 and this constituted that employment: 1 receives, or is entitled to receive, *work and income support withholding payments (otherwise than as an employee) the entity that pays or provides the work and income support withholding payments (or is liable to do so) the relationship because of which the entity pays or provides the work and income support withholding payments to the individual (or is liable to do so). 2 is engaged in service in a foreign country as the holder of an office the entity by whom the individual is so engaged the holding of the office. 3 provides services to an entity (other than services covered by a previous item in this table and services provided as an employee) the entity the *arrangement between the individual and the entity under which those services are provided. 83A 330 Application of Division to ceasing employment For the purposes of this Division, you are treated as ceasing employment when you are no longer employed by any of the following: (a) your employer in that employment; (b) a holding company (within the meaning of the Corporations Act 2001) of your employer; (c) a *subsidiary of your employer; (d) a *subsidiary of a holding company (within the meaning of the Corporations Act 2001) of your employer. 83A 335 Application of Division to stapled securities (1) This Division applies in relation to a stapled security in the same way as it applies in relation to a *share in a company, if at least one of the *ownership interests that are stapled together to form the stapled security is a share in the company. Note: This means the Division also applies to rights to acquire such a stapled security in the same way it applies to rights to acquire a share. (2) This Division applies in relation to a stapled security in the same way as it applies in relation to an ordinary *share in a company, if at least one of the *ownership interests that are stapled together to form the stapled security is an ordinary share in the company. (3) For the purposes of this Division, in relation to a stapled security or right to acquire a beneficial interest in a stapled security, a company is taken to include (as part of the company) each *stapled entity for the stapled security, if at least one of the *ownership interests that are stapled together to form the stapled security is a *share in the company. 83A 340 Application of Division to indeterminate rights (1) This section applies if: (a) you acquire a beneficial interest in a right; and (b) the right later becomes a right to acquire a beneficial interest in a *share. Example 1: You acquire a right to acquire, at a future time: (a) shares with a specified total value, rather than a specified number of shares; or (b) an indeterminate number of shares. Example 2: You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses. (2) This Division applies as if the right had always been a right to acquire the beneficial interest in the *share. Taxation Ruling TR 97/11 Taxation Ruling TR 97/11 Taxation Ruling Income tax: am I carrying on a business of primary production? other Rulings on this topic IT 219; IT 2006; TR 93/26; TR 95/6; TR 96/7; TD 93/39; TD 93/95; TD 96/16 contents para Detailed contents list 116 What this Ruling is about 1 Class of person/arrangement 3 Date of effect 7 Ruling 8 What is primary production 8 1. Some indicators of carrying on a business of primary production 12 Private rulings 19 Explanations and examples 23 Indicators of a business of primary production 23 Significant commercial purpose or character 28 appears iThe intention of the taxpayer 39 Prospect of profit 47 Repetition and regularity 55 Is the activity of the same kind and carried out in a manner that is characteristic of the industry63 might be dOrganisation in a businesslike manner and the use of system 68 Size or scale of the activity 77 Hobby or recreation 86 receivesquestionApplication of all the indicators 94 Private Rulings 104 Business plan 110 This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner. [Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.] What this Ruling is about This Ruling considers the meaning of 'business' of 'primary production' in the Income Tax Assessment Act 1997 (ITAA 1997). It provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production. It also indicates the extent to which the Australian Taxation Office ('ATO') is able to provide further guidance to taxpayers on this question with private rulings. 2. The phrase 'carrying on a business of primary production' n a number of provisions in the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936). However, this Ruling does not consider the detailed operation of any of these provisions. Class of person/arrangement 3. This Ruling applies to persons who carry on activities which escribed as 'primary production' in the ITAA 1997 (see the definition in paragraph 8 below). 4. The Ruling does not deal with the situation of a taxpayer who a payment from a one-off transaction, where there is no as to whether he/she is carrying on a business. Other relevant Rulings and Determinations 5. The following Taxation Rulings and Taxation Determinations consider whether specific activities come within the meaning of primary production: • Income Tax Ruling IT 219 - artificial breeding services; • Income Tax Ruling IT 2006 - kelp harvesting; • Taxation Ruling TR 95/6 - forest operations; • Taxation Determination TD 93/39 - beach worming; • Taxation Determination TD 93/95 - live sheep export. 6. Taxation Ruling TR 2008/2 expresses our views on a number of issues to do with the horse industry and when a taxpayer might be considered to be carrying on a business of primary production with respect to horses. Date of effect 7. This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Ruling What is primary production 8. Subsection 995-1(1) of the ITAA 1997 defines ‘primary production business’ as carrying on a business of: (a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or (b) maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or (c) manufacturing dairy produce from raw material that you produced; or (d) conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans or aquatic molluscs; or (e) conducting operations relating directly to taking or culturing pearls or pearl shell; or (f) planting or tending trees in a plantation or forest that are intended to be felled; or (g) felling trees in a plantation or forest; or (h) transporting trees, or parts of trees, that you felled in a plantation or forest to the place: (i) where they are first to be milled or processed; or (ii) from which they are to be transported to the place where they are first to be milled or processed. 9. A person is carrying on a business of primary production for the purposes of the ITAA 1997 if: a. he/she produces 'primary production', as defined in subsection 995-1(1) of the ITAA 1997; and b. that activity amounts to the carrying on of a business. 10. Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law. 11. The cases provide a number of indicators that are relevant to determining whether primary production activities constitute the carrying on of a business. These indicators are set out below. The indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business. Some indicators of carrying on a business of primary production 12. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Therefore, although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined below provide general guidance. This is explained further at paragraph 25 of this Ruling. 13. The courts have held that the following indicators are relevant: • whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (see paragraphs 28 to 38); • whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46); • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54); • whether there is repetition and regularity of the activity (see paragraphs 55 to 62); • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (see paragraphs 63 to 67); • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (see paragraphs 68 to 76); • the size, scale and permanency of the activity (see paragraphs 77 to 85); and • whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93). 14. A taxpayer does not need to derive all his/her income from the primary production activity. The taxpayer may also be employed in some other occupation or profession. What is important is that the taxpayer's primary production activity amounts to the carrying on of a business. This activity is considered separately from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary production activity is also a business. 15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased. 16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case. 17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business. 18. The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators. Indicators which suggest a business is being carried on Indicators which suggest a business is not being carried on a significant commercial activity not a significant commercial activity purpose and intention of the taxpayer in engaging in the activity no purpose or intention of the taxpayer to carry on a business activity an intention to make a profit from the activity no intention to make a profit from the activity 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 that of the ordinary trade activity carried on in an ad hoc manner activity organised and carried on in a businesslike manner and systematically - records are kept activity not organised or carried on in the same manner as the normal ordinary business activity - records are not kept size and scale of the activity small size and scale not a hobby, recreation or sporting activity a hobby, recreation or sporting activity a business plan exists there is no business plan commercial sales of product sale of products to relatives and friends taxpayer has knowledge or skill taxpayer lacks knowledge or skill Private rulings 19. A person can apply for a Ruling under Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) on whether he/she is carrying on a business: (see TR 2006/11). 20. A person may seek a private ruling on the application of a tax law to a particular primary production activity. 21. [Omitted.] 22. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. 'Sufficient information' in relation to a private ruling, where the matter(s) in issue include the carrying on of a business of primary production, includes information which covers the indicators set out at paragraph 13 (see also paragraphs 104 to 109). Explanations and examples Indicators of a business of primary production 23. There are no hard and fast rules for determining whether a taxpayer's activities amount to the carrying on of a business of primary production. The facts of each case must be examined. In Martin at CLR 474; AITR 551 Webb J said: 'The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.' 24. The nature of the activity, the taxpayer's intention and the method of operation help determine whether a business of primary production is being carried on. Many of the relevant indicators are stated in the decision of the Full Federal Court in Ferguson. Bowen CJ and Franki J said in their joint judgment at FLR 314; ATC 4264- 4265; ATR 876-877: 'Section 6 of the Income Tax Assessment Act [1936] defines 'business', stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' (emphasis added) 25. In Evans, Hill J agreed that no one indicator could determine whether a business is being carried on. He said at ATC 4555; ATR 939: 'The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation. There is no one factor that is decisive of whether a particular activity constitutes a business. As Jessel M.R. said in the famous dictum in Ericksen v. Last (1881) 8 Q.B. 414 at p.416: "There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade." Profit motive (but see cf. I.R. Commrs v. Incorporated Council of Law Reporting (1888) 22 Q.B. 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on (I.R. Commrs v. Livingston (1927) 11 T.C. 538), repetition and a permanent character, continuity (Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9; Ferguson v. FC of T 79 ATC 4261 at p. 4264), and system (Newton v. Pyke (1908) 25 T.L.R. 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.' 26. From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are: • does the activity have a significant commercial purpose or character? • does the taxpayer have more than a mere intention to engage in business? • is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable? • is there repetition and regularity in the activity? i.e., how often is the activity engaged in? How much time does the taxpayer spend on the activity? • is the activity of the same kind and carried on in a similar way to that of the ordinary trade? • is the activity organised in a businesslike manner? • what is the size or scale of the activity? • is the activity better described as a hobby, a form of recreation or a sporting activity? 27. Note: • The following Explanations and Examples have generally been designed to highlight the importance or significance of one indicator or several indicators in certain situations, before considering the next indicator. • The Examples are not meant to detract from our view that all the relevant indicators need to be considered when deciding whether a primary production activity amounts to a business. • Similarly, the amount of detail contained in the Examples is well short of the amount of information needed to properly determine the question of whether the taxpayer is carrying on a business of primary production. Refer to CTC Resources NL v. FC of T 94 ATC 4072; (1994) 27 ATR 403 about the need for sufficient information, and note, for example, that the High Court in Hope could not determine the question of whether the activities amounted to a grazing business on the case stated before the court. • The Examples are not intended to set a minimum number of plants or animals, required by a taxpayer before he/she can show that he/she is carrying on a business of primary production. Significant commercial purpose or character 28. It is frequently those taxpayers, who earn income from employment or other sources and/or enter into some sort of primary production activity in a small way, who want to show that they are in a business of primary production. These taxpayers usually claim deductions for losses for taxation purposes in the first years of being involved in this activity. In showing that a business is being carried on, it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, i.e., that the activity is carried on for commercial reasons and in a commercially viable manner. 29. The phrase 'significant commercial purpose' is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (refer to paragraph 81) and discussed further by Gibbs CJ and Stephen J in Hope. The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity (refer to paragraphs 77 to 85), the repetition and regularity of activity (refer to paragraphs 55 to 62) and the profit indicators (refer to paragraphs 47 to 54). A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas. In that case, Walsh J found that the taxpayer's activities in growing macadamia nut trees and avocado pear trees amounted to the carrying on of a business. The court was influenced by the scale of the activity, and the taxpayer's expectation of an ongoing financial return. Consideration should also be given to whether the taxpayer is a pioneer in the activity or has developed a new method of undertaking the activity, whether successful or not. 30. In order to show that there is a significant commercial purpose or character we suggest that it may help to know whether the taxpayer has: • drawn up a business plan (refer to paragraphs 110 to 115); • where the taxpayer is not an expert, sought expert advice from the relevant authorities, experienced farmers or agents that work in the area of primary production that the taxpayer intends to carry on; • where the taxpayer is not an expert, obtained technical literature on the activity which the taxpayer intends to carry on; • obtained soil and water analyses of the land that will be used for the activity; • established that his/her land is suitable for the activity which the taxpayer intends to carry on; • considered whether there is a market for his/her product and looked into potential markets for the product (the taxpayer is more likely to be regarded as carrying on a business if he/she sells in a commercial market instead of casual sales to relatives, friends or the public); • investigated properly the capital requirement of the venture and has a plan that shows how that capital will be obtained and used; • conducted research into the activity. This should confirm that profits can be expected based on the market prospects, the expected level of production and the running costs of the business (support for this research by reference to authenticated source material assists the taxpayer); • ensured that the size and scale of the activity is sufficient for a commercial enterprise; • complied with any legal requirements, i.e., that he/she has obtained any necessary licences, permits and registrations required to operate on a commercial level or can show that these requirements can and will be complied with at the appropriate time, e.g., at the time that produce becomes available for sale; and • an intention to make a profit. (This could be shown, for example, by a business plan. Further, the taxpayer should have a reasonable belief that the activity is likely to generate a profit.) These suggestions will assist the taxpayer to show that he/she is carrying on a business of primary production. It will assist the taxpayer if he/she is able to provide evidence in writing to support these activities and plans. Example 1 - significant commercial purpose or character 31. Mark, a barrister, and his wife Tina, a medical researcher, bought 8 hectares of land on which they built a home. They realised that the land was fertile and capable of producing fruit. Mark spent a year seeking advice from the Department of Primary Industries and local farmers. He collected technical literature on citrus farming and obtained soil and water analyses of the land which showed the land was fertile and suitable for the intended activity. He drew up a business plan and a budget of capital and recurrent costs. After clearing the land he and Tina planted 700 mandarin trees, 700 orange trees and 700 lemon trees. They did not expect to make a profit for eight years. Mark also installed an irrigation system. Mark and Tina spent many months investigating the market for citrus fruit and established that there would be no problems in selling their product to wholesalers if it was of good quality. They complied with all registration and licensing requirements. The trees grew well. Mark and Tina devoted a substantial part of their weekends to looking after the trees. They employed casual labour to spray for weeds and pests and to prune the trees. But, before they received any income from the sale of fruit, the trees were destroyed by fire. Were Mark and Tina carrying on a business of citrus fruit farming? 32. Yes - despite no income being gained - because: • the scale of their activity was far in excess of their personal needs, and large enough to ensure the venture would be profitable; • there was a clear intention to make a profit, even though this would take some time to occur; • the intention to make a profit was based on reasonable grounds and backed up by appropriate research; • there were likely to be buyers for their produce for some time ahead; • the trees were looked after in a manner consistent with business operations; • they established and conducted the activity in a businesslike manner; • they asked for and followed advice from professionals; and • there was an overall permanence about their activity, and the trees would have yielded fruit for a number of years. 33. What if Mark and Tina had not done the above research and analysis, had only planted a small number of different types of trees to test which would grow best, and were still investigating the likelihood of potential buyers? This would suggest that their activity was only of a 'preliminary or preparatory' nature and did not amount to the carrying on of a business (refer to paragraph 41). (Note: refer to paragraph 27.) Example 2 - significant commercial purpose or character 34. Nick, a tax lawyer and avid fisherman, owned a 60-foot yacht which he used to go fishing. Several years ago he took advantage of an opportunity to purchase a commercial fishing licence. He rescheduled other commitments so he could spend every second weekend fishing. His crew comprised his sons, David and Michael, and a couple of their acquaintances. Usually Nick and his crew were successful and caught a lot of fish. The crew were paid with fish and the remaining fish were sold to a fish wholesaler. Nick had not conducted any research into the market or methods of fishing. He fished for the best sport fish, and was not concerned with finding fish with the best market returns. Nick had no business plan and was not particularly worried whether his costs were covered by the sale of the fish or not. Further, trips were only made in sunny conditions. Was Nick carrying on a business of fishing? 35. No, this does not appear to be a business. Where the activity is one in which many other people take part for sport or recreational purposes we believe there is a need to show a strong 'commercial flavour' about the activity before it would ordinarily be regarded as a business (refer to paragraph 86). In this case: • there was no apparent intention to make a profit; • the activity lacked the degree of organisation and system that would be found in the activities of people who normally would be regarded as carrying on a business of fishing; • the scale of the activity was not small and exceeded the personal needs, but this did not outweigh the sporting or recreational motive behind the fishing trips; and • similarly, the trips were conducted regularly, as were sales of the fish, but this also could be explained by the fact that Nick just likes to go fishing often. (Note: refer to paragraph 27.) Example 3 - significant commercial purpose or character 36. Naida and her family kept twelve chickens. Twelve was the minimum that she liked to have around. She knew that her relatives and friends liked her home grown eggs, especially the double yolks that were often produced. The chickens produced about six dozen eggs per week. Of these Naida and her family consumed one dozen. She sold the remaining five dozen eggs to relatives and friends. She found that after taking into account her direct feed costs she usually managed, in her estimation, to make a modest profit of $5.00 per week. Was Naida carrying on the business of egg production? 37. No. Even though she had repetition and regularity in her operations and was making a modest gross profit: • she was not conducting the activity in the same way as that of a commercial poultry farmer; • she did not try to sell in a commercial market; • she did not seek the best price for her eggs; • she did not sell chickens that were culled because of falling productivity; • the scale of her operations were such that she could never produce a net profit; • she had not conducted any research into the egg industry; and • she had not looked at the full costs of production and distribution in determining the commercial viability of her enterprise. 38. If Naida's activities changed significantly and she: had considerably more chickens; sold the eggs to the public at large at market prices or to retail egg sellers; and established by research that this level of activity was profitable after taking all her costs into account; this would point to a significant commercial character and a profit motive. She may then be carrying on a business of egg production. (Note: refer to paragraph 27.) The intention of the taxpayer 39. The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' See also J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 at 347 and Case K9 78 ATC 98 at 103; 22 CTBR (NS) Case 29 at 302. 40. This indicator is particularly related to: • whether the activity is preparatory or preliminary to the ultimate activity; • whether there is an intention to make a profit; and • whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity. Preparatory activities 41. Sometimes a taxpayer may have incurred expenses before commencing a particular business of primary production. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible: see Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101 and Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26. Experimental or pilot activities of this nature should be distinguished from the activities in Ferguson, which were found to have a sufficient commercial character to be regarded as a business in their own right. However, where a business has commenced, expenses may be deductible even if no income is derived in the relevant year: see Thomas. Example 4 - the intention of the taxpayer 42. Pat and Laurie purchased 1,500 acres of rural land in 1980. They heard of an experimental variety of cattle which was bred on the other side of the country. Their friends told them that if this breed became successful they might make a lot of money from establishing a herd. Through friends, they arranged for the transport of one steer to their property. This steer remained on the property from 1980 to 1985 when it died due to lack of veterinary care. They took no further action with respect to the land, preferring to save for the purchase of either cows or sheep in the future. Were Pat and Laurie carrying on a business of primary production? 43. Pat and Laurie were not carrying on a business of primary production as: • they had no clear purpose of how they would use the land to earn money; • the one steer was purely experimental; • the steer was incapable of breeding; and • the scale of this activity was insufficient to constitute a business. 44. Pat and Laurie's experimental activities did not have a sufficient commercial character to be regarded as a business. These activities pointed to a decision not yet having been made to carry on business and a lack of commitment at that time to do so (see also the contrasting situations described in Example 1 at paragraph 31). (Note: refer to paragraph 27.) Example 5 - the intention of the taxpayer 45. Lindsay and Loretta bought 700 hectares of run down rural land in 1980. They intended to start a cattle farming business. Over the next five years they spent several thousand dollars on farm machinery. They used this to clear the land, build roads and mend fences. They also bought and erected some farm buildings. No income was derived from the property until 1986 when they stocked the property with 100 cattle. Were Lindsay and Loretta carrying on a business from 1980 to 1985? 46. No, because: • the activities of Lindsay and Loretta from 1980 to 1985 would be regarded as preparatory to the commencement of business; • whilst they had a clear purpose to engage in cattle farming, they recognised that certain things needed to be done to the land before they were able to buy the cattle and put them on the land; • until 1986 there was no size or scale of the relevant activity in the sense that there was no stock; and • there was no repetition or regularity of activity with respect to cattle farming until the land was stocked. (Note: refer to paragraph 27.) Prospect of profit 47. We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are: '... engaged in for the purpose of profit on a continuous and repetitive basis.' In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that: '... anything which occupies the time and attention and labour of a man for the purpose of profit is business.' In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said: 'In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit ...' 48. We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. However, it is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. Thus, a taxpayer may be carrying on a business of primary production even though he/she is making a small profit or a loss in any given year of income. 49. The situation may arise where a taxpayer is carrying on a business and has an intention to make a profit but the objective evidence is such that a profit is unlikely to be made in the short term. Bowen CJ and Franki J in Ferguson at ATC 4264; ATR 876 stated that '... an immediate purpose of profit-making in a particular income year does not appear to be essential ...'. Thus, where short term losses are expected it may be that a business is nevertheless being carried on: see Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360. 50. Where an activity is carried on and the objective evidence is that it is unlikely a profit will ever be made, this fact in itself does not necessarily mean that a business is not being carried on, if the taxpayer believes that the activity will become profitable. As Walsh J said in Thomas at ATC 4100; ATR 171: 'It is not in doubt that he made mistakes. But many persons carry on a business for the competent conduct of which they have not previously acquired much knowledge or experience.' See also Tweddle's case at ATD 190; AITR 364. Taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. A number of Board of Review and Administrative Appeals Tribunal decisions show that a taxpayer in this situation bears a heavy onus: see Case M50 80 ATC 349; 24 CTBR (NS) Case 24; Case K9 78 ATC 98; 22 CTBR (NS) Case 29; Case L16 79 ATC 84; 23 CTBR (NS) Case 20 and Case L22 79 ATC 106; 23 CTBR (NS) Case 25. Example 6 - prospect of profit 51. For a number of years Peter used his four hectare property to cultivate 100 pawpaw trees on the outskirts of Fremantle. He had planted the trees on his return from a trip to the tropics. He had thought that there must be a good market for locally grown tropical fruit in Fremantle. However, he had not conducted any research into the growing conditions they would need, including climate, their care or potential markets. He had not undertaken any soil analysis. He was always unable to market the limited amount of produce that he did obtain, because of its poor quality. His only disposals of fruit were to friends and relatives for which no money was received. Expert advice was that commercially saleable fruit would never grow in the location, and that there was little likelihood of a profit ever being made. Was Peter carrying on a business of primary production? 52. No. Not only was there no reasonable expectation that the activity would be profitable, there was also: • a lack of system and organisation about the activity, including inadequate preparation; • a lack of use of the type of methods commercial pawpaw growers use, including suitability of location for growing the fruit; and • a general lack of 'significant commercial purpose or character' about the activity. (Note: refer to paragraph 27.) Example 7 - prospect of profit 53. Fay's friends were avid growers of olive trees and were making a small profit on the sale of olive oil they produced from their olives. Fay decided to grow olive trees on her modest property. She researched the varieties and selected those best for olive oil production. Fay planted 50 olive trees on her property. She knew they were hardy trees which required minimum maintenance. She spent the minimum amount of time necessary to care for the trees. She had spoken to her friends and had calculated that after four years she would be able to make a profit on the production of olive oil from the olives she picked. The trees thrived. In the fifth year after planting, a sizeable crop was produced. Fay employed casual labour to pick the olives, borrowed a friend's trailer and took the olives to be pressed. She sold the barrels of olive oil to friends, work colleagues and members of the public who responded to her newspaper advertisements. She derived a substantial profit in that year, which she was told by her friends in the industry was typical. Was Fay carrying on a business of olive production? 54. Yes. The activities were carried out with a purpose to make a profit, even if no income was made in the first four years of operation. In addition: • Fay clearly had a plan to make the activity succeed. She had conducted research by consulting friends in the industry and the local growers association; • though the activity was small it was organised. By its nature the activity required minimum maintenance. It was not carried on in an ad hoc manner. Rather, it was carried on in a manner similar to that of other olive producers; and • there was repetition and regularity of the activity. (Note: refer to paragraph 27.) Repetition and regularity 55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats. 56. The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale. It may be that there are no minimum levels for this activity. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business of primary production. Example 8 - repetition and regularity 57. George owned a pastoral property, 'Wytelaidee', which consisted of 600 hectares. He had acquired the property in 1970. Two hundred hectares were suitable for cultivation and the rest was open grazing country. Cattle and sheep were grazed for a number of years. George grew his own feed for the animals and also grew 200 olive trees. The cattle and sheep were the main primary production activities. The olive trees were a secondary activity because they required limited care. George did ensure that they were adequately sprayed and watered. The olives were bottled and pickled or olive oil was extracted from them, and the produce was sold on a regular basis. He usually made a profit from his primary production activities. 58. However, George was drawn into a legal battle over 'Wytelaidee' in 1990. He was unable to spend any time on the property and sold all stock, plant and equipment to finance the legal battle. The olive trees were left untended and grew wild. The olives were left to rot. No income was derived from the property from 1991 until the legal battle ended in 1995. George always intended to recommence operations on 'Wytelaidee' after the legal battle. Was George carrying on a business of primary production for the years 1991 to 1995? 59. No. As the property was left untended for the period and stock and equipment was sold there was no activity being carried on; thus there was a lack of: • any size or scale of activity; • an intention to make a profit; • repetition or regularity of activity; • a significant commercial purpose. 60. If George had made arrangements for the olives to be picked, processed and sold, he may have been able to claim that he continued to carry on a business of olive production and sale. (Note: refer to paragraph 27.) Example 9 - repetition and regularity 61. John, a commercial lawyer, owned 500 apricot trees on a weekend retreat property located 250 km from his home in Brisbane. The trees had been in commercial production when he bought the property. John knew at the outset that he could, with proper management, run the enterprise at a profit. However, due to his employment, he was busy in the city and was unable to attend to the trees on a regular basis. Thus, he did not spray the trees for pests, irrigate or prune them. He decided that he could not be bothered hiring someone to look after the trees. He picked what he could in the hope of making some return but owing to the lack of care the apricots were not of a suitable quality for the commercial market. They were rejected by a wholesaler he approached after he had picked a small quantity of the fruit. He left what fruit he had picked with an honesty box on the side of the road and estimated that he got $50. Was John carrying on a business of apricot growing? 62. No, despite the impression given by the size and scale of his activity. Further: • there was no repetition and regularity of activities that would produce a commercial quantity and quality of fruit for sale; • there was no clear evidence that he intended to make a profit from this activity; • the way he conducted it meant it was extremely unlikely that he would ever cover his costs; • he did not adopt methods used by commercial orchardists; and • there was a general lack of system and organisation about his apricot growing activity. (Note: refer to paragraph 27.) Is the activity of the same kind and carried on in a manner that is characteristic of the industry? 63. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that: '... the test, which must be used to determine whether a venture ... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.' 64. In considering this indicator the following factors might be compared with the characteristics of others engaged in the same type of business: • the volume of sales. If there is a small number of sales it is less likely that a business is being carried on. The volume of sales should be capable of producing a profit at some time. However, allowance is made for droughts, fires and other uncontrollable events which may effect the volume of sales. We also accept that in the early stages of an activity, sales may be low; • the types of customers the taxpayer sells his/her product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place; • the sort of expenses incurred by the taxpayer; • the amount invested in capital items; • previous experience of the taxpayer. A taxpayer who does not have any knowledge or experience may be expected to have sought advice from experts. However, it is recognised that a taxpayer may be a pioneer in the industry. The taxpayer may have conducted research into the activity, decided that the traditional approach is wrong. He/she may be trying to conduct the activity with a view to profit in a new but businesslike way; and • the activity should also be compared with that of a keen amateur. The sales of a keen amateur may only be a way of obtaining 'new' funds to continue with the personal interest. 65. The aspects mentioned in the above paragraph would be compared to the same aspects of how others in the industry conduct their business of primary production. The activity should also be compared to that of the activity of a keen amateur. A taxpayer who: • has no knowledge or experience of the primary production activity that he/she intends to enter into; and • does not seek advice or conduct research; and • starts the activity; may have difficulty in proving that he/she is carrying on a business of primary production. This will be especially so when the above points add to a general impression that there is no profit motive behind the activity and that there is very little likelihood that the activity will ever be profitable. Example 10 - activity of same kind and carried on in a manner characteristic of industry 66. Geoff and Heather purchased a small property in the Adelaide Hills after returning from a holiday in Japan where they had noticed not only the sale price but also the remarkable size and flavour of the apples. They had determined that the land was suitable for apple trees. Both spent a considerable amount of time researching, talking to experts and collecting technical literature on apples for the Japanese market. They determined from discussion with wholesalers that if their apples were of superior quality they would have a ready market and would be able to make a substantial profit from selling them They both changed their employment from full-time to part-time so that at all times one of them was on the property. They selected varieties for the Japanese market based on their research and planted one hundred trees. Heather devised a unique irrigation system which they installed. They carefully sprayed and pruned the trees and protected the growing fruit from the elements. From their research they ensured they would meet stringent overseas market rules regarding spraying and quality, etc. They distinguished their product by individually wrapping their fruit and putting 'quality one' labels on them. They made losses for four years in a row. In the fifth year, although making significant sales, their production was still insufficient to generate a profit. However, based on current market conditions and anticipated production levels, they were confident that in future years they would make a profit. Were Geoff and Heather carrying on a business of apple production? 67. Yes, because despite the size and scale of operation and the fact that the activity was not carried on in a similar manner to that of the ordinary trade of apple growing: • there was an apparent significant commercial purpose or character to their activity; • there was a clear intention to make a profit and their research had shown that the activity would be profitable; • despite lacking previous experience of apple production they conducted specific research into the methods required to succeed in servicing a specialty market; • there was repetition and regularity of the activity given the amount of time they spent attending to the trees; • there was an intention to engage in business and a plan for its successful and profitable operation; and • unlike Peter in Example 6 (paragraph 51), Geoff and Heather are able to show that they are pioneering new methods or servicing specialty markets. (Note: refer to paragraph 27.) Organisation in a businesslike manner and the use of system 68. In Newton v. Pyke the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. 69. In Ferguson the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884: '... the venture as a whole had a commercial flavour, was conducted systematically and, ... in a business like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity.' In JR Walker Ryan J was satisfied, at ATC 4182; ATR 335, that the taxpayer was in the business of goat breeding as he had 'organised his activities in a business-like way through the keeping of books of account'. 70. The weight that is attached to this indicator will depend on the facts of the situation and a taxpayer may still carry on a business of primary production despite having poor organisational skills. Example 11 - organisation in a businesslike manner and the use of system 71. Rob had a passion for Topiary plants. He had 500 plants which he had potted and tended on his modest property. There was no local market for the plants. The nearest major city was Melbourne but it was too expensive for him to transport the plants to the city on a regular basis to sell them. He tried unsuccessfully to sell the plants, on irregular occasions, at the Melbourne markets. Rob had no credit facilities and only accepted cash. Was Rob carrying on a business of primary production? 72. No, because: • his activity did not appear to have an element of commerciality; • he had not conducted research into the activity, potential markets, or the profitability of the activity; • his markets were restricted; • he placed restrictions on his ability to sell the plants by his inability to cater for anything other than cash; • he had no plan or system in place to make the activity succeed; and • he engaged in the activity because of his passion for the plants. (Note: Refer to paragraph 27.) 73. In some cases it is essential that specific records are kept, e.g., breeding records for a stud farm. Other matters that may demonstrate that a systematic approach is taken to record keeping are the keeping of records of: • inputs and costs of production; • seasonal and other conditions affecting production; and • how growing and market conditions have varied. 74. For taxation purposes, certain records are required to be kept where a business is being carried on. The keeping of records which monitor the flow of cash, stock and production assists in showing that a business is being carried on (see also Taxation Ruling TR 96/7 and the record keeping provisions of section 262A of the ITAA 1936). Example 12 - organisation in a businesslike manner and the use of system 75. Leon owned a property of twenty hectares in Queensland, an hour's drive from his home. He bred race horses and had begun with six brood mares, a stallion and a colt which he had built into a modest- sized stable. Over the years he had conducted extensive research into horse breeding activities and had collected a great deal of literature. Through his contacts with local and overseas breeders he developed a number of ideas for a successful and profitable breeding program. He had established that he could make a reasonable profit, had identified relevant markets and had a business plan. He had set up a computer system to monitor the breeding program, costs and the record keeping requirements of the ITAA 1936. His activity was well organised and conducted in a systematic manner. Was Leon carrying on a business of primary production? 76. Yes. Given the presence of the other indicators, the fact that he carried on his activity in an organised and systematic manner added weight to the conclusion that he was carrying on a business of horse breeding. See also the discussion in Taxation ruling TR 2008/2 dealing with issues relating to the horse industry. (Note: refer to paragraph 27.) Size or scale of the activity 77. The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business of primary production. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way (Thomas at ATC 4099; ATR 171). 78. For example, the case of JR Walker involved five Angora goats, two of which died. Whilst the scale was small, the court held that a goat breeding business was being carried on because there was a profit making purpose and repetition and regularity in the taxpayer's activities. Research, based on authenticated sources, showed that a profit could be made from the significant capital allocated to breeding stock. 79. In JR Walker, Ryan J said at ATC 4182; ATR 334: '... the respondent's activities had the purpose of profit making. ... There was also repetition and regularity in his activities. ... The activities of the taxpayer were limited but ... he maintained communications with the expert and he tried to make himself informed about market conditions through membership of the Angora Breed Society and reading publications ... He organised his activities in a business-like way through the keeping of books of account ...' 80. The scale of the activities may be small but still result in more produce than is required for the taxpayer's own domestic needs. Where this is so, and there is also an intent to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale. 81. Similarly, in Thomas at ATC 4099; ATR 171 Walsh J in the High Court said: 'But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with relatively small outlay of time and money, and that this return would continue for a very long time.' 82. The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business of primary production. Example 13 - size or scale of the activity 83. See Example 9 (John and his 500 apricot trees) at paragraph 61. In this example, despite the size/scale of activity by John, he was not carrying on a business of primary production. (Note: refer to paragraph 27.) Example 14 - size or scale of the activity 84. See Example 10 (Geoff and Heather and the Japanese apple market) at paragraph 66. In this example, Geoff and Heather carried on a business of very small scale apple production for the Japanese market. Their research has shown that their activities will result in a profit. (Note: refer to paragraph 27.) Example 15 - size or scale of the activity 85. See Example 3 (Naida and her chickens) at paragraph 36. The small scale of her operations counted against there being a commercial purpose or character to the activities. (Note: Refer to paragraph 27.) Hobby or recreation 86. The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877: '... if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' (emphasis added) Expenses incurred in relation to the hobby activity are not allowable deductions. However, we recognise that a hobby can sometimes turn into a business. 87. Often it will be the case that there is a hobby when: • it is evident that the taxpayer does not intend to make a profit from the activity; • losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made; • the transaction is isolated and there is no repetition or regularity of sales; • any activity is not carried on in the same manner as a normal, ordinary business activity; • there is no system to allow a profit to be produced in the conduct of the activity; • the activity is carried on a small scale; • there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business; • any produce is sold to friends and relatives and not to the public at large. Example 16 - hobby or recreation 88. Norm was a keen gardener. His two favourite vegetables were broccoli and pumpkin. He enjoyed growing these in his garden and exhibiting the larger specimens at vegetable shows for which he often won prizes. He had been doing this for the last twenty years. Norm always kept up with the latest advances in growing techniques of broccoli and pumpkin. He had always been keen to talk to other growers of the vegetables and had subscribed to the relevant magazines. He also stayed in regular contact with the Department of Primary Industries to keep up with the latest information about vegetable growing. Norm had no business plan. He kept no records of his expenses. His only intention was to grow the biggest and best broccoli and pumpkin. To this end he often experimented with different growing techniques. Usually he gave away his broccoli and pumpkin to relatives and friends. However, he found that in the last 12 months people approached him at the shows to purchase his prize winning specimens. He has been happy to sell these. Was Norm carrying on a business of primary production? 89. No. Rather his activities amounted to a hobby for the following reasons: • the size and scale of his activity was small, as it was in his backyard; • he had no plan or intention to make a profit and his activities were motivated by his passion for growing broccoli and pumpkins; • his produce was usually given away to friends and family rather than sold to the general public; and • records were not kept and the activity was not carried on in the same manner as that of the ordinary business activity of commercial pumpkin and broccoli growers. 90. As a result of being approached at shows, Norm realised that there was a potential market for his produce and that he could turn his hobby into a business. He developed a profit making intention. He worked out the economics of his activities and calculated that by using extra land he would make a profit. He rented a block of land on which he grew broccoli and pumpkins on a larger scale. He kept detailed records of his activities and established his markets mostly as a result of approaches by people to him. Was Norm carrying on a business of primary production? 91. Yes, Norm would be regarded as carrying on a business of primary production when the nature of the activity changed being a hobby to a business. At this time, in addition to his experience and skill in the activity: • the activity had a profit making purpose; • he expanded the size of the activity; • he kept detailed records; and • he established markets. (Note: refer to paragraph 27.) Example 17 - hobby or recreation 92. Richard was a musician and singer in a rock band. He was also interested in dressage. Richard owned a substantial land holding on which he bred horses to obtain better mounts for his dressage competitions. He trained his own horses. He belonged to the local dressage club and usually sold any unwanted and untrained offspring through his club and the local newspaper. The sale prices were well below the expenses associated with maintaining the horses. He conducted research into breeding and training techniques and tried to keep up to date with the latest information. He kept detailed records of breeding and all expenses associated with the horses. When the horses became too old to compete he put them out to pasture, as he could not bear to part with his old companions. Was Richard carrying on a business of horse breeding? 93. No, despite the keeping of records, the organisation, the repetition and regularity of activity and the research conducted, because: • the activity was primarily motivated by his desire to compete and any returns were merely incidental to this purpose; • no profit was made from the activity; • there was no intention to carry on a business or to make a profit; the keeping of records, the research and the sales were all associated with Richard's dressage activities; and • there was no significant commercial purpose or character to the activity. (Note: refer to paragraph 27.) Application of all the indicators Example 18 - Application of all the indicators 94. George and Desi grew tired of living in the suburbs. They moved, with their two young children, to a 20 hectare property about 50 kilometres away from the capital city where they had lived. As part of their rural lifestyle they wanted to use their new property for primary production activities. 95. In July 1993 they planted oats, Japanese millet, phalaris and clover. The land was fertilised in expectation that they would be able to graze some beef cattle on it, fatten and sell them. They noted that a number of the larger properties in the area were used for this purpose. 96. Due to a shortage of funds, it was not until May 1994 that they purchased 10 cattle. They did no analysis of whether the grazing of beef cattle on their land would be profitable. George and Desi had no clear idea of what all their costs would be for such an activity. They spoke to a number of their neighbours about the maximum number of cattle that their land could carry, but they received conflicting advice. Most of the advice suggested however that they did not have enough land to make the venture profitable. 97. The first sale, of 5 head, was in March 1995. At that time Desi accepted a redundancy offer and applied herself full time to their cattle grazing activity. With the money from the pay-out she purchased 20 additional cattle on the advice of her neighbour (a cattle farmer for a number of years). At the same time she developed a plan based on expert advice from the Department of Primary Industries for maximising the carrying capacity of their land and achieving profitability. She travelled with neighbours and purchased 20 weaners, and she arranged to share costs with these neighbours in transporting their cattle to various markets for sale. 98. By June 1996, 35 more cattle had been sold and 10 were on hand. Market conditions were poor and the sale prices they received had not been much greater than the price they had paid. However, Desi calculated that they could cut their costs further and noted from the rural press that long term forecasts of beef prices were good. On the basis of improved prices and a doubling of the herd size, she calculated that their activities could produce a reasonable profit. With her redundancy money she calculated that they could buy an adjoining 20 hectares for this purpose. 99. Were George and Desi carrying on a business of cattle grazing? If so, when did this business commence? 100. This example is meant to illustrate the importance of considering all the indicators of whether a business is being carried on and how the facts related to some of those indicators can materially change over time. In this particular case there was a marked change in the character of the cattle grazing activity after March 1995. 101. Before March 1995 George and Desi were not carrying on a business of primary production because there was: • little evidence of any system or organisation about the activity; • doubt as to whether there was an overall profit-making purpose; • a strong suggestion that the activity, as it was being conducted at that time, was inherently unprofitable; and • little repetition or regularity about the activity, and the small scale of the activity. 102. After March 1995 there was a considerable change in the way that the cattle grazing activity was carried on. In particular, there was then: • a clear focus on how to make a profit from the activity. This was demonstrated by the drawing up of a plan to make a profit based on expert advice, the search for the most profitable markets for the sale of the cattle and efforts to reduce the costs of obtaining and maintaining the cattle; • an increase in repetition and regularity, particularly an increase in purchases and sales of cattle; • more similarity between the activities of George and Desi and those of a person who would clearly be considered to be carrying on a business of cattle grazing; and • a greater sense of permanency, and scale of the activity as evidenced by the purchase of the neighbouring property, together with a greater capacity to make the operations profitable. 103. We consider that from March 1995 George and Desi were carrying on a business of cattle grazing. (Note: refer to paragraph 27.) Private rulings 104. A person can obtain a Private Ruling under Division 359 of Schedule 1 to the TAA on whether he/she is carrying on a business (see TR 2006/11). 105. [Omitted.] 106. [Omitted.] 107. [Omitted.] 108. An application should contain 'sufficient information' to enable the Commissioner to give the ruling. Where insufficient information is provided the Commissioner must request the relevant information under section 357-105 of Schedule 1 to the TAA. Where information has been requested and the applicant does not provide the information to the Commissioner within a reasonable time, the Commissioner may decline to make the Ruling: subsection 357-105(2). 109. 'Sufficient information' includes information which covers the eight indicators, and any other matter which the taxpayer considers relevant. We expect to see information about: • purpose and intention - the reason the taxpayer has entered into the activity; whether the taxpayer is employed in some other area; • profit motive and profitability of the activity - e.g., the existence of a business plan; the results of research on viability; realistic sales forecasts; cost projections until the activity is expected to become profitable; details of how capital is to be employed; the source and cost of funds; taxpayer's expertise in the activity; • repetition and regularity of the activity - how much time is spent on the activity; a breakdown of the tasks that are performed on a regular basis; regularity of purchases and sales; • activity of the same kind - such as descriptions of methods used in the activity with regard to cultivation, livestock raising, obtaining the relevant licences and complying with the relevant laws; • organisation - how the activity is conducted; how and what records are kept; what advice is sought; • the size and scale of the activity - e.g., the area of the land; details of any private residence on the land; details of improvements to the land such as fences and sheds, clearing and fertilising; details of equipment/plant purchase including depreciation schedules; the numbers of livestock involved; level of capital investment; • whether the activity could be viewed as a hobby or recreation; • significant commercial purpose - this will generally follow from all of the above. Business plan 110. We emphasise that, whilst a business plan will help a taxpayer to establish that he/she is carrying on a business of primary production, it is not compulsory. Nor will the existence of a business plan be conclusive evidence that the taxpayer's activity amounts to the carrying on of a business. 111. A business plan is particularly relevant to establishing that there is an intention to make a profit, that the activity will be profitable and that the activity has a significant commercial purpose. This is especially so where it is capable of authentication by reference to texts, publications by relevant authorities or organisations and local experience in the industry. A business plan may include many things. However, we recommend that the basic elements of the business plan should include information about: • a description of the business; • the markets to which the taxpayer proposes to sell and realistic estimates of quantity and volume of sales; • income expected from the activity; • the research that has been conducted by the taxpayer - e.g., who the taxpayer has spoken to, what literature he/she has collected; what previous knowledge he/she has; • information about the property on which the taxpayer proposes to conduct the business - e.g., its area, distance from the taxpayer's home, whether irrigated, whether soil and water tested, whether rainfall sufficient for the activity; • information about expected expenses and capital outlays - e.g., cost of travel, electricity, gas and water, cost of plant and equipment and stock; and • information about how the taxpayer proposes to pay for the expenses and capital outlays - e.g., if the taxpayer takes out a loan what is the interest rate and how long will the loan take to repay. Business plan example 112. Business - Jeff's passionfruit 2000 Passion fruit vines. To be planted beginning financial year 1996. Markets Sell primary / A-grade fruit to Brisbane markets - up to 10 trays in good weeks, seconds, etc., for pulping and fruit juice markets. Research Spoke with local fruit growers about pests, etc., collected DPI information on types and spraying cycles. Passion Fruit Growers Association in Brisbane provided literature on the latest practices re growing passion fruit and which passion fruit varieties to grow given future markets. Obtained DPI copy of 'Passionfruit in Queensland'. Combined with my knowledge of farming from several years on a fruit tree farm I feel that I have the knowledge and time available to undertake the activity successfully. Property 4 hectare block, 20 km from my home in Mackay, will require additional watering given varying rainfall. Existing bore water quality and quantity tested and found sufficient for my crop size. Irrigation to be installed. Soil tested and found to be suitable. Expected expenses / outlays Travel to block 3 times a week after work and weekends as needed. Estimate travel expenses using my existing utility will be $3,500 a year - including delivery of produce. Estimate that about half of this will be deductible, when carrying bulky farm materials. Electricity will need to be connected for pump and shed lights with an estimated running cost of $500 per year. These and other one-off expenses include: Connection of electricity $1,000 Purchase of vines @ $3.00 per vine $6,000 Installation of irrigation $1,000 Rent of tractor / post digger for trellises (from neighbour)$500 Posts / wire / for trellises and to fix up property fencing$1,500 Labour (brother will help on posts) Free Ride-on mower / spray unit (2nd hand) $3,500. I will take out a loan of $10,000 to cover the above expenses plus use my existing savings. Given my other income I should have the loan paid out in 5 years. The vines will last 5 years from the time of planting and then I will replace them. 113. Table of anticipated receipts and costs (in 1996 dollars) Year 1995/ 1996 1996/ 1997 1997/ 1998 1998/ 1999 1999/ 2000 Expected Sales A Grade (avg price) 0 2500 4000 4000 3000 Seconds (pulping) 2000 3000 5000 5500 6000 Gross Receipts 2000 5500 9000 9500 9000 Running Costs Accounting Fees 200 250 300 350 400 Bank Charges 50 50 50 50 50 Interest 1200 1000 800 600 300 Protective Clothing 50 50 50 50 50 Repairs and Maintenance / fuel 300 500 500 500 500 Motor Vehicle 1750 1750 1750 1750 1750 Telephone 100 100 100 100 100 Sprays and Chemicals 250 250 250 250 250 Rates and Taxes 300 325 350 375 400 General Expenses 200 200 200 200 200 Total Costs 4400 4475 4350 4225 4000 Net Profit / Loss on trading before write- off and depreciation (2400) Loss 1025 Profit 4650 Profit 5275 Profit 5000 Profit 114. Depreciation and capital write-offs Depreciation on sprayer / mower, fences / improvements and trellises 960 960 960 960 960 Write-off of vines - Div 10F, starting 1 May 96 4081 24002 24003 7924 Write-off electricity connection costs (10 years - section 70A) 100 100 100 100 100 Write-off irrigation expense (3 years - section 75B) 333 333 334 Nil Nil Total Write-off and Depreciation 1801 3793 3794 1852 1060 Net Profit / Loss on trading after write-off and depreciation (4201) Loss (2768) Loss 856 Profit 3423 Profit 3940 Profit Jeff approached his accountant who gave him some additional information on capital and equipment write-offs and depreciation. He suggested using sections 70A and 75B to write off the electricity connection and irrigation expenses and Division 10F to write-off the capital value of the vines, although he noted that this would produce timing differences compared with an accounting write-off. However, using these rates of write-off would mean that the outcome would produce a correct tax result. Jeff noted as part of his business plan that: 'I have not yet seen published any Division 10F "safe harbour" write-off rates issued by the Commissioner, so in my business 1 Calculated from 1 May 1996: 62/365 days x $6,000 capital cost x 40% rate for plants with 4 year life from date first become income producing - see section 124ZZI of the ITAA 1936. 2 Full year write-off of $6,000 capital cost @ 40% rate. 3 Full year write-off of $6,000 capital cost @ 40% rate. 4 Write-off of balance of the $6,000 over the 2 years and 183 days allowed for by section 124ZZI. plan calculation I will use a four year write-off of the cost of the vines, commencing from when they become income producing, which I estimate to be 1 May 1996.' 115. Note: This business plan example is an illustration only. It is not definitive of the deductions a taxpayer may claim or the calculation of profit. Detailed contents list 116. Below is a detailed contents list for this Ruling: paragraph What this Ruling is about 1 Class of person/arrangement 3 Other relevant Rulings and Determinations 5 Date of Effect 7 Ruling 8 What is primary production 8 Some indicators of carrying on a business of primary production 12 Private Rulings 19 Explanations and examples 23 Indicators of a business of primary production 23 Significant commercial purpose or character 28 Example 1 31 Example 2 34 Example 3 36 The intention of the taxpayer 39 Preparatory activities 41 Example 4 42 Example 5 45 Prospect of profit 47 Example 6 51 Example 7 53 Repetition and regularity 55 Example 8 57 Example 9 61 Is the activity of the same kind and carried on in a manner that is characteristic of the industry 63 Example 10 66 Organisation in a businesslike manner and the use of system 68 Example 11 71 Example 12 75 Size or scale of the activity 77 Example 13 83 Example 14 84 Example 15 85 Hobby or recreation 86 Example 16 88 Example 17 92 Application of all the indicators 94 Example 18 94 Private rulings 104 Business plan 110 Business plan example 112 Commissioner of Taxation 4 June 1997 ISSN 1039 - 0731 ATO references NO 96/5590-5 97/545-1 973882-7 BO PUL A.1270 Previously released in draft form as TR 97/D1 Price $3.80 FOI index detail reference number I 1017231 subject references - primary production - whether carrying on a business of primary production legislative references - ITAA 1936 - ITAA 1936 6 - ITAA 1936 262A - ITAA 1997 - ITAA 1997 995-1(1) - TAA 1953 Sch 1 357-105 - TAA 1953 Sch 1 357-105(2) - TAA 1953 Sch 1 357-110 - TAA 1953 Div 359 case references - CTC Resources NL v. FC of T 94 ATC 4072; (1994) 27 ATR 403 - Erichsen v. Last (1881) 8 QB 414 - Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922 - FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331 - Ferguson v. FC of T (1979) 37 FLR 310; 79 ATC 4261; (1979) 9 ATR 873 - Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26 - Hope v. The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231 - Inglis v. FC of T 80 ATC 4001; (1979) 10 ATR 493 - IRC v. Incorporated Council of Law Reporting (1888) 22 QB 279 - J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 - Martin v. FC of T (1953) 90 CLR 470; 5 AITR 548 - Newton v. Pyke (1908) 25 TLR 127 - Smith v. Anderson (1880) 15 Ch D 247 - Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101 - The Commissioners of Inland Revenue v. Livingston and Others (1927) 11 TC 538 - Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165 - Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360 - Case H11 76 ATC 59; 20 CTBR (NS) Case 65 - Case K9 78 ATC 98; 22 CTBR (NS) Case 29 - Case L16 79 ATC 84; 23 CTBR (NS) Case 20 - Case L22 79 ATC 106; 23 CTBR (NS) Case 25 - Case M50 80 ATC 349; 24 CTBR (NS) Case 24 Income Tax Assessment Act 1997 52 52-40, 52-75 52 40 Provisions of the Social Security Act 1991 under which payments are made This table lists the provisions of the Social Security Act 1991 under which social security payments are made that are wholly or partly exempt from income tax under this Subdivision. Provisions under which social security payments are made Item Category of social security payment Ordinary payment Payment made because of a person’s death (unless covered by next column) Lump sum payment made because of your partner’s death 1 Advance pharmaceutical supplement Part 2.23 Not applicable Not applicable 2 Age pension Part 2.2 Sections 83, 86 and 91 Section 84 2AA Australian Government Disaster Recovery Payment Part 2.24 Not applicable Not applicable 2AB Australian Victim of Terrorism Overseas Payment Part 2.24AA Not applicable Not applicable 2A Austudy payment Part 2.11A Section 592A Section 592B 3 Bereavement allowance Part 2.7 Section 359 Not applicable 3A Carer allowance Part 2.19 Sections 992K and 992M Not applicable 4 Carer payment Part 2.5 Sections 236A, 238, 241 and 246 Section 239 4A Clean energy payment Part 2.18A Not applicable Not applicable 5 Crisis payment Part 2.23A Not applicable Not applicable 6 Disability support pension Part 2.3 Sections 146G, 146K and 146Q Section 146H 9 Double orphan pension Part 2.20 Sections 1034 and 1034A Not applicable 13A Fares allowance Part 2.26 Not applicable Not applicable 15 Mature age allowance (paid under Part 2.12A) Part 2.12A Sections 660XKB, 660XKE and 660XKG Section 660XKC 16 Mature age allowance (paid under Part 2.12B) Part 2.12B Section 660YKD Section 660YKE 17 Mature age partner allowance Part 2.12A Sections 660XKK and 660XKM Section 660XKL 18 Mobility allowance Part 2.21 Not applicable Not applicable 19 Newstart allowance Part 2.12 Section 660LB Section 660LC 21A Parenting payment (benefit PP (partnered)) Part 2.10 Sections 513A and 514B Section 514C 21C Parenting payment (pension PP (single)) Part 2.10 Section 513 Not applicable 22 Partner allowance Part 2.15A Section 771NW Section 771NX 22A Pensioner education supplement Part 2.24A Not applicable Not applicable 22B Seniors supplement Part 2.25B Not applicable Not applicable 22C Quarterly pension supplement Part 2.25C Not applicable Not applicable 23 Sickness allowance Part 2.14 Section 728PB Section 728PC 25 Special benefit Part 2.15 Section 768B Section 768C 26 Special needs age pension Section 772 Sections 823, 826 and 830 Section 824 27 Special needs disability support pension Section 773 Sections 823, 826 and 830 Section 824 29 Special needs widow B pension Section 778 Not applicable Not applicable 30 Special needs wife pension Section 774 Sections 823, 826 and 830 Section 824 31 Telephone allowance Part 2.25 Not applicable Not applicable 31A Utilities allowance Part 2.25A Not applicable Not applicable 32 Widow allowance Part 2.8A Not applicable Not applicable 33 Widow B pension Part 2.8 Section 407 Not applicable 34 Wife pension Part 2.4 Sections 189 and 191 Section 190 35 Youth allowance Part 2.11 Section 567A Section 567B Income Tax Assessment Act 1997 3 3-45 394 394-10 SECTION 394-10 Deduction for amounts paid under forestry managed investment schemes 394-10(1) You can deduct an amount if: (a) you hold a *forestry interest in a *forestry managed investment scheme; and (b) you pay the amount under the scheme; and (c) the scheme satisfies the *70% DFE rule (see section 394-35) on 30 June in the income year in which a *participant in the scheme first pays an amount under the scheme; and (d) you do not have day to day control over the operation of the scheme (whether or not you have the right to be consulted or give directions); and (e) at least one of these conditions is satisfied: (i) there is more than one participant in the scheme; (ii) the *forestry manager of the scheme, or an *associate of the forestry manager, manages, arranges or promotes similar schemes; and (f) the condition in subsection (4) is satisfied. 394-10(2) You deduct the amount for the income year in which you pay it. 394-10(3) For the purposes of this Division, do not treat an amount as being paid under a *forestry managed investment scheme if: (a) you pay the amount in connection with a *CGT event in relation to a *forestry interest in the scheme; and (b) as a result of the CGT event: (i) another *participant in the scheme no longer holds the forestry interest; and (ii) you start to hold the forestry interest. 394-10(4) For the purposes of paragraph (1)(f), the condition in this subsection is satisfied unless: (a) 18 months have elapsed since the end of the income year in which an amount is first paid under the *forestry managed investment scheme by a *participant in the scheme; and (b) the trees intended to be established in accordance with the scheme have not all been established before the end of those 18 months. 394-10(5) You cannot deduct an amount under subsection (1) if: (a) you hold the *forestry interest mentioned in paragraph (1)(a) as an *initial participant; and (b) a *CGT event happens in relation to the forestry interest within 4 years after the end of the income year in which you first pay an amount under the scheme. If you have already deducted it, your assessment may be amended to disallow the deduction. 394-10(5A) Paragraph (5)(b) does not apply to a *CGT event if: (a) the CGT event happens because of circumstances outside your control; and Example: The forestry interest is compulsorily acquired. (b) when you acquired the *foresty interest, you could not reasonably have foreseen the CGT event happening. 394-10(6) Despite section 170 of the Income Tax Assessment Act 1936, the Commissioner may amend your assessment at any time within 2 years after the *CGT event, for the purpose of giving effect to subsection (5). 394-10(7) Sections 82KZMD and 82KZMF of the Income Tax Assessment Act 1936 do not affect the timing of a deduction under this section. Income Tax Assessment Act 1997 2 2-25 70 70c 70-45 SECTION 70-45» Value of trading stock at end of income year 70-45(1) You must elect to value each item of *trading stock on hand at the end of an income year at: (a) its *cost; or (b) its market selling value; or (c) its replacement value. Note: An item's market selling value at a particular time may not be the same as its market value. 70-45(1A) In working out the *cost, market selling value or replacement value of an item of *trading stock (other than an item the *supply of which cannot be a *taxable supply) at the end of an income year, disregard an amount equal to the amount of the *input tax credit (if any) to which you would be entitled if: (a) you had *acquired the item at that time; and (b) the acquisition had been solely for a *creditable purpose; and Note: Some assets, such as shares, cannot be the subject of a taxable supply. 70-45(2) The rest of this Subdivision deals with cases where the normal operation of this section is modified, or where a different valuation method may or must be used. The table sets out other cases where that happens because of provisions outside this Subdivision. Rules about the value of trading stock Item For this situation: See: 1 (Repealed by No 23 of 2005) ........... 2 In working out the attributable income of a non-resident trust estate, trading stock is taken to be valued at cost. Section 102AAY of the Income Tax Assessment Act 1936 ........... 3 In working out the attributable income of a controlled foreign corporation, the corporation must value at cost. Section 397 of the Income Tax Assessment Act 1936 ........... 4 Some anti-avoidance provisions reduce the amount that is taken to be the cost of an item of trading stock. Subsections 52A(7), 82KH(1N), 82KL(6) and 100A(6B) of the Income Tax Assessment Act 1936 ........... 5 The value of the item at the end of an income year may be the same as at the start of the year for a small business entity Subdivision 328-E of this Act Taxation Ruling TR 92/18 Taxation Ruling TR» «92/18 Income tax: bad debts Please note that the PDF version is the authorised version of this ruling. FOI status: may be released contents para What this Ruling is about 1 Ruling 2 Date of effect 22 Explanations 23 Preamble This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner. What this Ruling is about 1. This Ruling clarifies the circumstances in which a deduction for bad debts will be allowable. In particular, the Ruling explains the operation of paragraph 63(1)(b) of the Income Tax Assessment Act 1936 (the Act) in relation to taxpayers in the business of the lending of money. The Ruling does not attempt to provide guidance on bad debts in relation to consumer lending such as small personal loans or credit card debts. A separate Ruling will issue on consumer lending. Ruling SECTION 63 Debt (paragraph 25) 2. To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity. Bad debt (paragraphs 26 - 33) 3. A debt need not necessarily be bad in the strict sense as described in paragraph 26. The question of whether a debt is bad is a matter of judgment having regard to all the relevant facts. Guidelines for deciding when a debt is bad are at paragraphs 31-32. Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63 purposes. The debt, however, must not be merely doubtful. 4. Where a trustee in bankruptcy, receiver or liquidator advises a creditor of the amount expected to be paid in respect of the debt (i.e. the extent to which the amount likely to be received is less than the debt) is accepted as bad when the advice is given. Writing-off of bad debts (paragraphs 34 - 39) 5. The bad debt has to be written off in the year of income before a bad debt deduction is allowable under section 63. The writing-off of a bad debt does not necessarily require highly technical accounting entries. It is sufficient that some form of written record is kept to evidence the decision of the taxpayer to write off the debt from the accounts. Debt brought to account as assessable income - paragraph 63(1)(a) (paragraphs 40 - 41) 6. If a taxpayer is not carrying on a business of money lending, a bad debt deduction is not allowable under paragraph 63(1)(a) unless the debt has been previously included in assessable income. A taxpayer who is not a money lender and returns income on the basis of cash receipts will not be entitled to a deduction for bad debts because the debts have not been brought to account by the taxpayer as assessable income. Money-lending business - paragraph 63(1)(b) (paragraphs 42 - 46) 7. Paragraph 63(1)(b) applies to taxpayers who are engaged in a money lending business. The question of whether a taxpayer is carrying on a money-lending business is a question of fact. For the purposes of paragraph 63(1)(b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it. 'In respect of' (paragraphs 47 - 48) 8. The term 'in respect of money lent' in paragraph 63(1)(b) is to be given its widest meaning and it includes not only the principal of the loan, but also any capitalised interest and associated costs, charges, fees etc. incurred in the course of lending money. Money-lending business at the time of lending (paragraphs 49 - 52) 9. For the purposes of paragraph 63(1)(b), the taxpayer must be carrying on a money lending business at the time the loan was made. However, it is accepted that a taxpayer does not have to be carrying on a business of money lending at the time the debt is written off in order to satisfy the requirements of paragraph 63(1)(b). SECTION 51 (paragraphs 57 - 68) 10. Certain taxpayers who fail to satisfy the requirements under section 63 may be entitled to a bad debt deduction under subsection 51(1). Any business losses or outgoings of a revenue nature are an allowable deduction under subsection 51(1) when incurred. Whether or not a loss occasioned by a bad debt is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case. 11. A loss occasioned by a bad debt is clearly incurred when the loan is disposed of, settled, compromised or otherwise extinguished. Where a debt is not disposed of, settled, compromised or otherwise extinguished, it is accepted that the loss of the debt is incurred under subsection 51(1) when it is written off as bad in the same way as in section 63. SUBSECTION 63(3) (paragraphs 69 - 71) 12. Where a taxpayer recoups an amount which has previously been allowed as a bad debt deduction under either of subsections 63(1) or 51(1) the taxpayer will have to include this amount in assessable income pursuant to subsection 63(3). PARTIAL DEBT WRITE-OFFS (paragraphs 72 - 83) 13. It is not necessary for a taxpayer to write off an entire debt to obtain a bad debt deduction under section 63. A taxpayer is entitled to a deduction for that part of a debt which is bad and is written off. The same tests for deductibility apply as for the whole of a debt. 14. A partial bad debt deduction may arise where debt is secured by property. Where the debt is discharged only to the extent of the net amount realised from the sale of the security and the remaining debt is still outstanding, the remaining debt (i.e. any deficiency between the net proceeds of the sale of the security and the amount of the debt) would be deductible as a partial bad debt only if and when it is found that the remaining debt could not be recovered from the debtor (i.e. the requirements of section 63 are met). The same principle applies where the security is held, for example as mortgagee in possession, rather than sold. In this situation, the remaining debt that may be written off as bad is the deficiency between the market value of the security and the amount of debt. 15. Where the security is taken in full satisfaction of the debt , no bad debt deduction is allowable under section 63 unless the bad debt is written off before the debt is extinguished. 16. If a deduction is not available under subsection 63(1) any deficiency between the market value of the security and the amount of the debt may, depending upon the circumstances, be an allowable deduction under subsection 51(1) or taken into account as a capital loss under Part IIIA of the Act. 17. Any profit or loss on the subsequent disposal of the security will need to be taken into account under sections 25 and 51 or Part IIIA. DEBT/EQUITY SWAPS (paragraphs 84 - 91) 18. Sections 63E and 63F are specific provisions allowing deductions for losses arising out of debt for equity swaps entered into after 26 February 1992. The allowable deduction is the amount by which the amount of the debt exceeds the value of the equity received in the swap. 19. Prior to 27 February 1992 a bad debt deduction arising out of a debt for equity swap may, depending on the circumstances, be allowable under either of subsections 63(1) or 51(1). 20. A deduction is allowable under subsection 63(1) if the taxpayer had written off that portion of the debt that was bad (ie. the deficiency between the debt owed and the market value of the equity to be issued) before the equity was issued and the debt was extinguished. 21. Where a bad debt deduction is not allowable under subsection 63(1) a deduction may, depending upon the circumstances, be allowable under subsection 51(1) for the loss arising out of a debt for equity swap. Date of effect 22. This Ruling applies (subject to any limitations imposed by statute) for years of income commencing both before and after the date on which it is issued. Explanations 23. Subsection 63(1) provides that: 'Debts which are bad debts and are written off as such during the year of income, and; (a) have been brought to account as assessable income of any year; or (b) are in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer who carries on that business, shall be allowable deductions.' 24. Four conditions must be satisfied in order to qualify for a bad debt deduction. First , a debt must exist. Second , the debt must be bad. Third , the debt must be written off as a bad debt during the year of income in which the deduction is claimed. Fourth , the debt must have been brought to account as assessable income in any year or, in the case of a money lender, the debt must be in respect of money lent in the ordinary course of the business of lending of money by a taxpayer who carries on that business. What constitutes a 'debt' for section 63? 25. A debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 63. There is a debt for the purposes of section 63 where a taxpayer has merely an equitable entitlement to the debt ( G.E. Crane Sales Pty Ltd v. F.C. of T. (1971) 126 CLR 177, 71 ATC 4268, 2 ATR 692). When will a debt be bad? 26. Whether a debt is bad depends upon an objective consideration of all the relevant circumstances of each case. Strictly speaking , in the case of an individual debtor, a debt is not 'bad' until the debtor has died without assets, or has become insolvent and his estate has been distributed, or the debt has become statute barred. In the case of a corporate debtor a similar situation would arise on receipt of the liquidator's final distribution or when the company is completely wound up. 27. However, because subsection 63(3) contemplates that an amount may subsequently be received in respect of a debt previously written off as bad, it is considered that, for the purposes of section 63, the debt need not necessarily be 'bad' in the strict sense as indicated in paragraph 26 above. 28. In support of the view expressed in paragraph 27, Harvey ACJ in Elder Smith & Co Ltd v. Commissioner of Taxation (NSW) (1931) 1 ATD 241, (affirmed in Elder Smith v. F.C. of T. (1932) 47 CLR 471) considered a similar bad debts provision in the State Income Tax (Management) Act 1928 (NSW). He made an obiter observation that the legislation contemplated a debt being bad where it was 'a conjectural bad debt for the time being' (at p. 242). Similarly, in Anderson and Halstead Ltd v. Birrell (1932) 16 TC 200 Rowlatt J, in considering the English legislative provision for bad debts, said that an 'estimate' was required as to the extent a debt is bad for the purpose of a profit and loss account. Such an estimate he said 'was a valuation of an asset (the debt) upon the facts and probabilities at the time the writing off of the debt takes place'. The Taxation Board of Review in Case 26 (1945) 11 CTBR (OS) 94 also observed at p.94 that '[i]t may happen - although it seems quite improbable - that through some turn of fortune portion of the amount in question will yet be recovered, but any such consideration cannot affect the issue.' 29. As long as the commercial judgment pointing to the relevant facts indicates that a debt is bad for the time being, the debt is accepted as bad for section 63 purposes. It is not essential that a creditor take all legally available steps to recover the debt. What is necessary is that the creditor make a bona fide assessment, based on sound commercial considerations, of the extent to which the debt is bad. 30. Although the debt need not be bad in the strict sense it must nonetheless be more than merely doubtful. For example, a debt will not be accepted as bad merely because a certain set period of time for payment (e.g. 180 days or 270 days) has elapsed with no payment or contact having been made by the debtor. 31. A debt may be considered to have become bad in any of the following circumstances: (a) the debtor has died leaving no, or insufficient, assets out of which the debt may be satisfied; (b) the debtor cannot be traced and the creditor has been unable to ascertain the existence of, or whereabouts of, any assets against which action could be taken; (c) where the debt has become statute barred and the debtor is relying on this defence (or it is reasonable to assume that the debtor will do so) for non-payment; (d) if the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt; (e) where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, is alleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered. 32. While individual cases may vary, as a practical guide a debt will be accepted as bad under category (e) above where, depending on the particular facts of the case, a taxpayer has taken the appropriate steps in an attempt to recover the debt and not simply written it off as bad. Generally speaking such steps would include some or all of the following, although the steps undertaken will vary depending upon the size of the debt and the resources available to the creditor to pursue the debt: (i) reminder notices issued and telephone/mail contact is attempted; (ii) a reasonable period of time has elapsed since the original due date for payment of the debt. This will of necessity vary depending upon the amount of the debt outstanding and the taxpayers' credit arrangements (e.g. 90, 120 or 150 days overdue); (iii) formal demand notice is served; (iv) issue of, and service of, a summons; (v) judgment entered against the delinquent debtor; (vi) execution proceedings to enforce judgment; (vii) the calculation and charging of interest is ceased and the account is closed, (a tracing file may be kept open; also, in the case of a partial debt write-off, the account may remain open); (viii) valuation of any security held against the debt; (ix) sale of any seized or repossessed assets. While the above factors are indicative of the circumstances in which a debt may be considered bad, ultimately the question is one of fact and will depend on all the facts and circumstances surrounding the transactions. All pertinent evidence including the value of collateral securing the debt and the financial condition of the debtor should be considered. Ultimately, the taxpayer is responsible for establishing that a debt is bad and bears the onus of proof in this regard. 33. Subsection 63(2) provides for a debt being bad where the debtor has become bankrupt or has executed a deed of assignment or scheme of arrangement. The debt will be bad to the extent to which the amount of the debt owed to a taxpayer exceeds the amount, if any, which will be received by the taxpayer. Where the trustee in bankruptcy, receiver or liquidator advises the creditor of the amount expected to be paid in respect of the debt, the remainder of the debt can be written off as bad when the advice is given. A deduction for a bad debt is allowable in the year of income in which the debt is written off 34. It is not enough to simply make a provision for a bad debt. The debt has to be written off as a bad debt and it has to be written off before year's end. The question has often arisen as to what the term 'written off' means. In Case 33 (1941) 10 TBRD 101 the Taxation Board of Review expressed at p.103 the view that: '... the writing off of a bad debt does not necessitate a particular form of book entry or even a book entry at all. It is sufficient, we think, if there are written particulars - there must, of course, be something in writing - which indicates that the creditor has treated the debt as bad.' 35. There is a requirement that the debt has to be physically written off. Note the following relevant comments of the Chairman of the Taxation Board of Review in Case 28 (1947) 13 TBRD 223 at p.239: '"Bad debts written off as such in the year of income": I am unable to share the view that the condition denoted by these words can be satisfied where, in respect of a debt owed to the taxpayer concerned, there is no evidence whatever that anything was put in writing, in the year of income, from which it could be gathered that the taxpayer intended to treat the debt as bad. The words are plain and positive and they are so clearly objective that their very purpose seems to me to be to put the onus upon any taxpayer who seeks to obtain the benefit provided by the section to prove (if so required) by sufficient evidence that there was a physical writing off of the debt in the year of income..... However, the need for the condition as to the writing off of bad debts is fairly apparent. Against any suggestion that the condition that the debts must be bad makes the further condition superfluous, it has to be borne in mind that in the average case that taxpayer must be allowed a considerable latitude in the exercise of his judgment as to the extent to which any particular debt is bad, the reason being that it is frequently impossible to foresee future events which might affect the worth of the debt. The Commissioner is in no better position and, although Section 63(3) is the logical and necessarily intended corrective of the excessive writing off of bad debts by reason of errors of judgment or the unavoidable failure of careful forecasts, the statutory condition as to writing off is a necessary corrective of the difficulties which would arise ... as to which year among several a debt is to be claimed or treated as bad.' 36. The requirements of section 63 may be satisfied even though a debt is not written off in the books of account , for example, section 63 will still be satisfied in the following circumstances: (a) a Board meeting authorises the writing off of a debt and there is a physical recording of the written particulars of the debt and Board's decision before year end but the writing off of the debt in the taxpayer's books of account occurs subsequent to year end; (b) a written recommendation by the financial controller to write off a debt which is agreed to by the managing director in writing prior to year end followed by a physical writing off in the books of account subsequent to year end. 37. No deduction will be allowed in a year, if the debt is written off after the year's end at the time when the books of account are being prepared (i.e. as a balance day adjustment made after the close of the income year). The decision of Owen J in Point v. F.C. of T. (1970) 119 CLR 453, 70 ATC 4021, 1 ATR 577 makes this requirement quite clear. At CLR p. 458, ATC p. 4023, ATR p. 580 Owen J said: 'The fact is, however, that during that year neither that nor any other figure was written off by the appellant as a bad debt. The entry purporting to write off $X as a bad debt was not made until many months after the end of that year and, in my opinion, the Commissioner rightly refused to apply section 63. For the appellant, however, it was argued that the words in the section, "written off as such during the year of income", are not to be given what appears to me to be their plain meaning and that the section is sufficiently complied with if the debt is not written off "during the year of income" but at some later date, provided that the writing off relates back to the year of income. I am unable to accept this proposition. "During the year of income" means in my opinion "in the course of the year of income". No doubt if a debt is written off as bad after a year of income has passed, it will be allowable as a deduction in the year in which the writing off takes place, provided of course that the other conditions laid down by the section are fulfilled.' 38. Furthermore, it is essential that a debt be in existence in order that it may be written off as bad. Point v. F.C. of T. (supra) also demonstrates that a debt cannot be written off after it has been settled, compromised, otherwise extinguished or assigned. In that case, the taxpayer released a debtor from a debt under a scheme of arrangement in the 1964 income year. In the following income year the taxpayer purported to write off the debt as bad under section 63. Owen J held that at the time of the purported writing off there was simply no debt in existence because it had been extinguished in the previous income year. A similar conclusion was reached in Franklin's Selfserve Pty Ltd v. F.C. of T. (1970) 125 CLR 52, 70 ATC 4079, 1 ATR 673 and G.E. Crane Sales Pty Ltd v. F.C. of T. (supra). Therefore, once a debt has been settled, compromised, otherwise extinguished or assigned no further amounts can be claimed as bad debts for the purposes of section 63. This principle equally applies where the extinguishment of the debt and the writing off of the debt occur in the same financial year. If the writing-off of the debt occurred after the extinguishment or the disposal of the debt, no deduction is allowable under section 63. It is, therefore, important that a creditor should not delay the writing-off process until after the debt is extinguished. 39. The mere writing-off of a debt does not necessarily relieve the debtor from ever having to pay the liability. If the financial position of the debtor subsequently improves or the circumstances which led to the debt being written off alter, action may be taken to collect the debt. However, no amount is to be treated as assessable income under subsection 63(3) until such time as the debt (or part of it) is recovered. The debt must have been brought to account as assessable income 40. The requirement of paragraph 63(1)(a) that the debt was previously brought to account as assessable income presupposes a non-cash basis of returning income for tax purposes. For a taxpayer who operates on a cash receipts basis and lodges returns of income on that basis the taxpayer is not entitled to a deduction for bad debts. As the outstanding amount has not been received it has never been included in the assessable income of the taxpayer. Support for this view can be found in Case P78 82 ATC 381; 26CTBR(NS)Case10 (at ATC p.385, CTBR p. 92) which states that '[s]peaking generally, it is impossible for a taxpayer to properly claim a bad debt as a deduction under sec.63 if he is conducting his business on a cash basis; the requirement of sec.63(1)(a) simply cannot operate in regard to such a business.'. 41. If a taxpayer is carrying on the business of lending money, it is not necessary that the debt be previously brought to account as assessable income provided it is in respect of money lent by the taxpayer in the ordinary course of a money lending business (paragraph 63(1)(b)). Who is a 'money-lender'? 42. Paragraph 63(1)(b) is a specific provision relating directly to taxpayers who carry on the business of lending money and in the ordinary course of that business suffer a bad debt in respect of any money lent. 43. The question of whether a taxpayer is carrying on the business of lending money is necessarily a question of fact. However, the following passage of Bowen CJ in F.C. of T. v. Marshall and Brougham Pty Ltd 17 FCR 541, 87 ATC 4522, 18 ATR 859 at ATC p. 4528, ATR p. 866 provides some useful general guidelines on determining whether a taxpayer is a money-lender: 'It is generally accepted that in order to be regarded as carrying on a business one must demonstrate continuity and system in one's dealings. In the case of money lending it has been said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness): see Litchfield v. Dreyfus [1906] 1 KB 584. It is not decisive whether the lender is a registered money-lender or not, although this will be a factor to take into account. It should be mentioned that it need not be the only business or the principal business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by looking at all the circumstances involved: see Newton v. Pyke (1908) 25 TLR 127.' 44. The frequently quoted statement of Farwell J in Litchfield v. Dreyfus [1906] 1 KB 584 at p. 589 that: 'Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible' should not restrict the meaning of 'money-lender' for taxation purposes in light of the more recent Australian cases of Fairway Estates Pty Ltd v. F.C. of T. (1970) 123 CLR 153, 70 ATC 4061, 1 ATR 726; F.C. of T. v. Marshall and Brougham Pty Ltd (supra); and F.C. of T. v. Bivona Pty Ltd 90 ATC 4168, 21 ATR 151. 45. These recent cases have highlighted the differences between the laws relating to the control of money-lenders and the laws relating to the taxing of money-lenders. In particular, the joint judgment in FCT v. Bivona Pty Ltd (supra) at ATC p.4173, ATR p.156 concluded that '[w]hether Farwell J.'s statement (in the Litchfield case) is consistent with modern authority is not a matter for us to consider because it is used in the context of moneylending legislation, whereas a different inquiry is involved in this case.'. Litchfield v. Dreyfus (supra) was a case under the Moneylenders Act 1900 (UK) and not under a taxing statute. 46. Accordingly, for the purposes of paragraph 63(1)(b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it. What does 'in respect of' mean? 47. The term 'in respect of' in the context of paragraph 63(1)(b) was considered by the Full Federal Court in F.C. of T. v. National Commercial Banking Corporation of Australia Ltd 83 ATC 4715,15 ATR 21. At ATC p. 4719, ATR p. 25 Bowen CJ, Fisher and Lockhart JJ in a joint judgment observed that: 'Bad debts which are "in respect of money lent in the ordinary course" of a money-lending business would in ordinary parlance encompass all constituents of the debt including principal and interest. To exclude interest from the subject matter of para. (b) is to depart from the natural and ordinary sense of the provisions. ... Once it is clear that the principal amount of the loan is within the scope of the paragraph then it becomes impossible in our view to construe the paragraph by including items such as costs and charges but excluding a basic component of the loan, namely interest.' 48. The term 'in respect of money lent' in paragraph 63(1)(b) is, therefore, to be given its widest meaning, and it includes not only the principal of the loan, but also any capitalised interest and associated costs, charges, fees etc. Money lent in the ordinary course of the business of lending money by a taxpayer who carries on that business 49. The question has been raised as to whether the test that 'a taxpayer who carries on that business' in paragraph 63(1)(b) requires the taxpayer to be in the business of a money lender both at the time the loan was made and also when the bad debt is written off. It is clear that the money lending business must have been carried on at the time the loan was made. In Fairway Estates (supra) Barwick CJ (at ATC p. 4066, ATR p. 732) gave judicial support to this view. He took the view '... that the advance of the money in question should have been made by the claimant taxpayer in the ordinary course of the business of lending money then carried on by him.' [emphasis added] 50. In Marshall and Brougham (supra) Bowen CJ took a similar view (at ATC p. 4528, ATR p. 866): "...the taxpayer must be in the business of lending money at the time of making the advance in respect of which the deduction is claimed." [emphasis added] 51. It is not so clear that a taxpayer must also be carrying on a money lending business at the time the debt is written off. There is some support from old Board of Review decisions that paragraph 63(1)(b) requires that a business of money lending be carried on at the time of writing off the debt. However, statements by Bowen CJ in Marshall and Brougham (supra) and Barwick CJ in Fairway Estates (supra) at ATC 4063, ATR 728, indicate that a taxpayer must only be in the business of money lending at the time the loan was made. 52. On balance we accept that a taxpayer does not have to be carrying on a business of money lending at the time the debt is written off in order to satisfy the requirements of paragraph 63(1)(b). Sections 63A, 63B and 63C 53. Where the taxpayer claiming the bad debt deduction is a company the deductibility under either section 63 or section 51 is subject to the operation of sections 63A, 63B and 63C. 54. The effect of sections 63A and 63B is that a bad debt is not deductible unless there is a continuity of beneficial ownership of the company existing at all times both in the year the debt arose and in the year when the bad debt is written off or the loss is incurred. 55. Section 63C qualifies the operation of sections 63A and 63B in that where there is a continuity of carrying on the same business existing at the time immediately before the change in ownership and in the year in which the bad debt is written off or the loss is incurred, sections 63A and 63B will not operate to deny the deduction. 56. It is, therefore, clear that one or other of the tests outlined above must be satisfied by a company if it is to qualify for a deduction in respect of bad debts. Section 51 57. Where a deduction for a bad debt is not allowable under section 63 it may nevertheless be allowable under section 51. Support for this view can be found in the following comments made by Jacobs J in Marshall and Brougham Pty Ltd v. F.C. of T. 86 ATC 4469 at p. 4474; 17 ATR 834 at p. 840: "It is now well settled that a loss being a bad debt which may not be an allowable deduction under sec. 63(1) may nevertheless be an allowable deduction under sec. 51(1)..." On appeal the Full Federal Court (87 ATC 4522, 18 ATR 859) endorsed the view of Jacobs J. 58. For a loss to be an allowable deduction pursuant to subsection 51(1) it must have been incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income. In addition, the loss must not be of a capital, private or domestic nature. 59. In the circumstances of this Ruling the two important considerations will be whether a loss occasioned by a bad debt has been incurred and whether it is of a capital nature. 60. If a creditor realises a loss at the time it disposes of, settles, compromises or otherwise extinguishes a debt such a loss will, for the purposes of subsection 51(1), be incurred at that time. 61. Where, however, a debt could be considered to be bad but has not been disposed of, settled, compromised or otherwise extinguished a question may arise as to whether a loss has been incurred for the purposes of subsection 51(1). Dicta of Barwick CJ and Mason J (as he then was) in AGC (Advances) Ltd. v. F.C. of T. 75 ATC 4057; 5 ATR 243 suggest that a bad debt deduction is allowable under subsection 51(1) provided that the debt has been written off. 62. In AGC (Advances) Barwick CJ observed (at ATC p. 4065, ATR p. 252) that: "The loss from an accounting point of view must occur at the time when the appellant accepts the position that the debt is irrecoverable. If a hire purchase company decided to wind up and to discontinue the granting of hire purchase agreements in a particular year, and in a subsequent year the company in liquidation found itself unable to recover instalment of hire on the goods in circumstances which caused it to write the amount off as a bad debt , it seems to me not merely unjust but unacceptable to hold that it could not deduct that loss as a loss which it had incurred in the course of gaining assessable income."(EMPHASIS ADDED) 63. Comments of Mason J (ATC pp. 4071-4072, ATR p. 260) are also relevant. His Honour observed that: 'a loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off . . . the loss may be said to be one which was incurred in the carrying on of a business . . . notwithstanding that its true character as a loss is not finally ascertained until the debt is written off'. 64. Support for the view that a bad debt deduction is not allowable under subsection 51(1) until such time as the debt is written off can also be found in the wording of sections 63A to 63C. These sections deny a bad debt deduction to companies under subsections 51(1) and 63(1) unless certain conditions are met. These conditions include the requirements that the debt be bad and be written off as such. 65. We are of the view, therefore, that a bad debt deduction is allowable under subsection 51(1) when it is written off. The tests in section 63 will apply in this situation (see paragraphs 31 to 36). 66. The availability of a deduction under subsection 51(1) for a loss occasioned by a bad debt is also dependant upon the loss not being of a capital nature. 67. The question of whether or not such a loss is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case. It is necessary to ascertain the circumstances which occasioned the loss and the relation that these circumstances bear to the taxpayer's income earning activities. If the loss is an ordinary incident of the taxpayer's income earning activities then the loss will be on revenue account. For example, a bad debt loss incurred by a financial institution would generally be expected to be a revenue loss. 68. In Marshall and Brougham Pty Ltd v. F.C. of T. (supra), for example, the taxpayer carried on business as a building contractor. The taxpayer frequently had to handle substantial cash funds in excess of its immediate needs. It placed these surpluses in interest bearing deposits, usually at call. An amount of $500,000 was placed on deposit with a finance company which subsequently collapsed. The loss was not an allowable deduction under subsection 63(1) because the Court did not consider that the taxpayer was carrying on the business of a moneylender. The Court determined, however, that the loss was an allowable deduction pursuant to subsection 51(1) because of the connection between the loss and the activities of the taxpayer which where productive of assessable income. Subsection 63(3) 69. In recognition of the difficulties in determining the extent to which a debt may be bad the Act contains a specific provision in subsection 63(3) to recoup any excessive write off of a debt. 70. Where a debt has been written off as bad but the whole debt or some portion of it is subsequently received, the receipt will constitute assessable income of the taxpayer in the year of receipt. 71. The allowance of a bad debt deduction under section 51, in lieu of section 63, does not affect the operation of subsection 63(3) to bring into assessable income any amount of the debt recovered by the taxpayer. A recent amendment made to subsection 63(3) clarifies that where a taxpayer receives an amount in respect of a debt for which a deduction has been previously allowed under section 51, the recovered amount is assessable under subsection 63(3). Although the amendment only applies after 26 February 1992, it does no more than confirm our view of the law before the amendment was made. Partial debt write-offs 72. A taxpayer may write off a bad portion of a debt (partial debt) and be entitled to a deduction for that part only. Subsection 63(4) clarifies this position. Although the amendment only applies after 26 February 1992, it does no more than confirm our view of the law before the amendment was made. Securities and partial debt write-offs 73. Generally, property in assets may be transferred to the creditor as security against the debt, or in satisfaction of the debt when the debt or a part of the debt becomes irrecoverable. Where the property is held as security against the debt, the legal title may be transferred to the creditor or the creditor may become a mortgagee in possession and obtain an equitable interest in the security (this would occur, for example, where a creditor enters into a power of sale arrangement). The right to deal with the security property does not usually crystallise until the debt cannot be paid (i.e. generally when the debt becomes bad). On the other hand, where the property is transferred to the creditor in satisfaction of the debt, the creditor is able to deal with it upon transfer. 74. Once the creditor is able to deal with the property, several options are open to the creditor. One option that is generally adopted is to sell the property immediately to recover the debt. The other options include the holding of the property expecting a more favourable market situation, or to further develop the property for future sale or retain for own use. 75. In any of these situations, the provision of the property may either: (1) satisfy the debt only to the extent of the net amount realised from the sale or the value of the property if it is not sold immediately; or (2) fully satisfy the existing debt . (1) Partial satisfaction of the debt 76. Where property held as security against a debt is sold and the debt is discharged only to the extent of the net proceeds realised from the sale and the remaining debt is still outstanding, the remaining debt will be deductible as a partial bad debt if the requirements of section 63 are met . The remaining debt is any deficiency between the net proceeds of the sale of the property and the amount of the debt. 77. Where the property is valued but not sold and its market value is less than the debt outstanding, the difference between the market value of the property and the amount of the debt may be allowed as a partial bad debt deduction provided also the requirements of section 63 are met . 78. A deduction may also be available under subsection 51(1) in the circumstances outlined in paragraphs 76 & 77.. Whether or not such a deduction would be allowable under subsection 51(1) will depend upon the requirements in paragraphs 65 to 67 being met. 79. Upon eventual sale or disposal of the property, subsection 63(3) would operate to bring to account as assessable income any amount received that was in excess of the value of the property as determined when the debt was written off as bad. The subsection 63(3) amount is, however, limited to the amount previously allowed as a deduction. If the amount received upon the sale or disposal of the property exceeds the sum of the market value of the property at the time the debt was written off and the subsection 63(3) amount, the excess would generally be assessable under the ordinary income or capital gains provisions depending on the nature of the business carried on by the taxpayer. (2) Full satisfaction of the debt 80. If property is taken in full satisfaction of the debt in such a way that the debt is fully discharged or extinguished (e.g. by foreclosure) and the market value of the property is less than the debt outstanding, the difference between the market value of the property and the amount of the debt is allowable as a partial bad debt deduction provided the requirements of section 63 are met . This means that a bad debt must be written off before the debt is extinguished (see paragraph 38 above). If this test is not met no deduction is allowable under section 63. 81. Where a bad debt deduction is not allowable under section 63, the loss may nonetheless be deductible under subsection 51(1) if the loss is of a revenue nature or taken into account under the capital gains tax provisions if it is of a capital nature. 82. When the property is subsequently sold, any profit or loss on disposal will be taken into account in the calculation of taxable income either under the general income/deduction provisions or under the capital gains tax provisions. Whether a deduction for any loss is allowable under section 51 will necessarily turn on the nature of the taxpayer's business and the property sold. The same considerations will need to be given to the inclusion of any profit on sale of the security under section 25. In the event that sections 25 and 51 do not apply the capital gains tax provisions may apply. 83. Assume, for example, that a financial institution forecloses a debt of $150 and receives property with a market value of $100 at that time. The $50 loss will be an allowable deduction under subsection 63(1) provided that the institution has written off $50 as a bad debt prior to the foreclosure. In the circumstances of this case the loss will also be an allowable deduction pursuant to subsection 51(1), although a deduction could not be claimed twice. For the purposes of calculating any gain or loss in respect of a subsequent disposal of the property the property will have an acquisition cost of $100. Debt for equity swaps 84. A debt for equity swap occurs in circumstances where the debtor is unable to repay a debt, or part of a debt, and, after agreement with the lender, issues equity (usually shares) to replace the debt outstanding. The effect of the agreement is that the issue of the equity to the creditor is in full satisfaction of the debt such that the debt is discharged. 85. Sections 63E and 63F are specific provisions allowing deductions for losses (called "swap losses") in respect of debts extinguished in this manner after 26 February 1992. The allowable loss is the amount by which the amount of the debt exceeds the value of the equity received in the swap. 86. Sections 63E and 63F only apply in respect of debt for equity swaps in which the debtor is a company, a trading trust, or a public unit trust and the debtor issues shares or units, as the case may be. The explanatory memorandum accompanying the introduction of sections 63E and 63F contains step by step examples which illustrate the operation of these provisions. 87. Prior to 27 February 1992 a bad debt loss arising out of a debt for equity swap may, depending on the circumstances, be an allowable deduction under either of subsections 63(1) or 51(1). 88. A deduction is allowable under subsection 63(1) provided that the requirements of section 63 are met, i.e., if the taxpayer had written off that portion of the debt that was bad (the deficiency between the debt owed and the market value of the equity to be issued) before the debt was discharged under the debt for equity swap agreement. 89. The following examples demonstrate the application of section 63 to debt for equity swaps carried out before 27 February 1992. A . A financial institution has a debt of $150, none of which has been written off as a bad debt. The institution and the borrower agree to enter into a debt for equity swap whereby $100 of the debt is to be applied in issuing the institution with 100 shares, with a par value of $1.00 each, in the borrower. These shares have a market value of $25.00 at the time of the swap. The remaining $50 of debt, which is not involved in the debt for equity swap, is clearly a bad debt. The tax treatment of the institution is: . $50 can be written off as a bad debt and a deduction claimed under paragraph 63(1)(b). . a further deduction would be allowable under paragraph 63(1)(b) for $75 (the difference between the amount of the debt involved in the debt for equity swap and the market value of the equity obtained in the swap) if the debt was written off as bad prior to the discharge of the debt under the debt for equity swap agreement. . for the purposes of determining whether a gain or loss is made on the subsequent disposal of the shares, the shares will have a cost of $25. B . A financial institution has a debt of $150 which has been written off as bad and in respect of which a deduction has been allowed under section 63. Subsequently the institution and the borrower enter into a debt for equity swap agreement whereby $100 of the debt is applied in issuing the institution with 100 shares, with a par value of $1.00 each, in the borrower. These shares have a market value of $25.00 at the time of the swap. In this case the tax treatment of the institution is: . $25 will be included in the institution's assessable income pursuant to subsection 63(3). The market value of the shares ($25) received in the debt for equity swap is a recovery in respect of a debt for the purposes of subsection 63(3). . the shares, the shares will have a cost of $25. 90. Where a bad debt deduction is not allowable under subsection 63(1) a deduction may be allowable under subsection 51(1) for the loss arising out of a debt for equity swap. The availability of a deduction in these circumstances depends upon considerations such as the nature of the taxpayer's business and the degree of connection between the loss and the activities of the taxpayer which are productive of assessable income. For example, it is expected that a financial institution would generally be entitled to a deduction under subsection 51(1). 91. The explanation at paragraphs 80 to 83 above is also applicable to debt for equity swaps undertaken before 27 February 1992. Commissioner of Taxation 17 December 1992 Previously released in draft form as EDR 42 References ATO references: NO 86/7532-5; 91/3875-7; 92/4372-1 ISSN 1039 - 0731 Subject References: bad debts debt/equity swaps Legislative References: ITAA 25 ITAA 51(1) ITAA 63 ITAA 63A-63C ITAA 63E-F ITAA Part IIIA Case References: AGC (Advances) Ltd v. F.C. of T. 75 ATC 4057 5 ATR 243 Anderson and Halstead Ltd v. Birrel (1932) 16 TC 200 F.C. of T. v. Bivona Pty Ltd 90 ATC 4168 21 ATR 151 Case 26 (1945) 11 CTBR(OS) 94 Case 28 (1947) 13 TBRD 223 Case 33 (1941) 10 TBRD 101 Case P78 82 ATC 381 Elder Smith & Co. Ltd v. Commissioner of Taxation (NSW) (1931) 1 ATD 241 Fairway Estates Pty Ltd v. F.C. of T. 123 CLR 153 70 ATC 4061 1 ATR 726 Franklins Selfserve Pty Ltd v. F.C. of T. 125 CLR 52 70 ATC 4079 1 ATR 673 G.E. Crane Sales Pty Ltd v. F.C. of T. 126 CLR 177 71 ATC 4268 2 ATR 692 Litchfield v. Dreyfus [1906] 1 KB 584 F.C. of T. v. Marshall and Brougham 86 ATC 4469 17 ATR 834 F.C. of T. v. Marshall and Brougham 17 FCR 541 87 ATC 4522 18 ATR 859 F.C. of T. v. National Commercial Banking Corporation of Australia Ltd 83 ATC 4715 15 ATR 21 Point v. F.C. of T. 119 CLR 453 70 ATC 4021 1 ATR 577 Other References Explanatory Memorandum: Taxation Laws Amendment Bill (No.3) 1992 Income Tax Assessment Act 1936 3 2 A 26BB SECTION 26BB ASSESSABILITY OF GAIN ON DISPOSAL OR REDEMPTION OF TRADITIONAL SECURITIES View history reference 26BB(1) [Definitions] View history reference In this section: acquire , in relation to a security, means acquire, on issue, purchase, transfer, assignment or otherwise, the security or the right to receive payment of the amount or amounts payable under the security. connected entity has the same meaning as in the Income Tax Assessment Act 1997. View history note dispose , in relation to a security, means sell, transfer, assign or dispose of in any way the security or the right to receive payment of the amount or amounts payable under the security. eligible return has the same meaning as in Division 16E. periodic interest has the same meaning as in Division 16E. security has the same meaning as in Division 16E. traditional security , in relation to a taxpayer, means a security held by the taxpayer that: (a) is or was acquired by the taxpayer after 10 May 1989; (b) either: (i) does not have an eligible return; or (ii) has an eligible return, where: (A) the precise amount of the eligible return is able to be ascertained at the time of issue of the security; and (B) that amount is not greater than 1½% of the amount calculated in accordance with the formula: Payments × Term where: Payments is the amount of the payment or of the sum of the payments (excluding any periodic interest) liable to be made under the security when held by any person; and Term is the number (including any fraction) of years in the term of the security; (c) is not a prescribed security within the meaning of section 26C; and (d) is not trading stock of the taxpayer. 26BB(2) [Disposal or redemption of traditional security] Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place. 26BB(3) [Commissioner's discretion] Where the Commissioner, having regard to any connection between the parties to the transaction by which the taxpayer disposed of the traditional security or by which it was redeemed, or by which the taxpayer acquired the traditional security, is satisfied that the parties were not dealing with each other at arm's length in relation to the transaction, then, for the purposes of determining under subsection (2) the amount of any gain on the disposal or redemption, the consideration for the transaction shall be taken to be: (a) the amount that might reasonably be expected for the transaction if the parties were independent parties dealing at arm's length with each other; or (b) where, for any reason it is not possible or practicable for the Commissioner to ascertain that amount - such amount as the Commissioner determines. 26BB(4) [Disposals, etc, to issuer] Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if: (a) the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company that is: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (b) the traditional security was issued on the basis that it will or may convert into ordinary shares in: (i) the issuer of the traditional security; or (ii) the connected entity. 26BB(5) [Disposals, etc, to issuer for other shares] Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if: (a) the disposal or redemption is in exchange for ordinary shares in a company that is neither: (i) the issuer of the traditional security; nor (ii) a connected entity of the issuer of the traditional security; and (b) in the case of a disposal - the disposal is to: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (c) the traditional security was issued on the basis that it will or may be: (i) disposed of to the issuer of the traditional security or to the connected entity; or (ii) redeemed; in exchange for ordinary shares in the company. INCOME TAX ASSESMENT ACT 1997 2 2-1 15 15-50 Division 15 - Some items of assessable income Operative provisions SECTION 15-50 15-50 Work in progress amounts Your assessable income includes a *work in progress amount that you receive. Military Rehabilitation and Compensation Act 2004 a special rate disability pension under Part 6 of Chapter 4 of the Military Rehabilitation and Compensation Act 2004 a payment of compensation under section 68, 71 or 75 of the Military Rehabilitation and Compensation Act 2004 a payment of the weekly amount mentioned in paragraph 234(1)(b) of the Military Rehabilitation and Compensation Act 2004.