As you sip a drop from the latest vintage you’ve crushed with the toes of your family and friends, is it possible that turning these vines into wine has ventured into primary production, and this happy hobby has become a business?
How can you tell? Defining “primary production” and “business” is no problem. Figuring out if a business of primary production is being carried on in your particular case is not so easy.
First, let’s look at the definitions. “Business” is clearly defined to include any profession, trade, employment, vocation or calling (other than an occupation as an employee), and “primary production” broadly refers to plant or animal cultivation (or both); fishing or pearling (or both); or tree farming or felling (or both).
Determining whether a business of primary production is being carried on requires both these definitions to be satisfied, but neither provides a simple test for when the nature and extent of your activities amounts to the carrying on of a business.
Fortunately, there are a number of indicators, courtesy of case law, that give some direction, but the ATO emphasises that no one indicator will nail it.
It’s a matter of weighing up all the relevant indicators in each individual case. The indicators include things like the intention of the taxpayer (do they intend to engage in business and to make a profit?), the size and scale of activities, whether there is repetition and regularity, and many other factors.
But why does it matter? Defining whether you are carrying on a hobby or a primary production business matters because there are tax considerations for both activities, such as the following.
If it’s a hobby you can enjoy the activity without any reporting obligations. You don’t need to declare any profit from the activity, but you can’t claim any losses. Also, without an ABN, to supply another business requires the completion of some paperwork, otherwise tax will be withheld at the highest rate.
If your hobby becomes a primary production business, you need to declare your income to the ATO, get an ABN and keep tax records. You can also take advantage of tax concessions (like the $30,000 instant asset write-off) and claim general business deductions for your expenses (unless you’re offsetting a loss against other income, in which case you need to satisfy the ATO’s “non-commercial loss” tests or defer your loss until you make a profit).
If it’s all enough to turn you to drink, come and see us for some expert advice and guidance on the most tax-effective way forward for your farm!