Few areas of tax law generate more discussion than the “hobby farm” question. Many taxpayers purchasing a block of land seek to claim their expenses (particularly mortgage interest) on account of running a farming enterprise. The early years of most farming enterprises run at a loss and if this loss can be applied against salary or investment income, a useful tax refund results.
Well, as you would expect the Australian Taxation Office have got there first. You first have to satisfy the basic criteria to get an Australian Business Number (ABN) and meet the requirements of a Taxation Ruling which asks searching questions such as:
- do you have a clear intention and prospect of profit ?
- is the scale of your activity consistent with other businesses in your industry?
- is your size sufficient to allow you to make a sustainable profit?
- is your activity planned, organised and carried on in a business-like manner?
- are you operating in a business-like manner, and so on.
If you satisfy these criteria you then fall into three different sets of rules depending on your non-farm income: there are rules for taxpayers earning less than $ 40,000 non-farm income a year, rules for taxpayers earning more than $ 250,000 a year, and rules for taxpayers in between.
The “four tests” below are quite well known but do not automatically apply to everyone, and we advise clients to understand the rules for their own circumstances well before starting their enterprise:
- There must be at least $20,000 of livestock / produce sales (excl GST) for this income year – the income test
- The business has produced a profit for tax purposes in 3 out of the past 5 years, including this year – the profits test.
- The value of your farmland (excluding any homestead) used is worth at least $500,000 – the real property test.
- The value of farm equipment is at least $100,000 – the other assets test.
Blackburn ‘ Prior offer a standard $ 750 + GST package to explain these rules to you in person, which includes:
- a pro-forma Business Plan and Budget
- a full explanation of the ABN and Taxation Ruling TR 97/11 criteria
- an explanation of the rules as they apply to your income level
- how the “$ 20,000 a year turnover test” works and whether it applies to you
- an assessment of whether the three other tests than could potentially help you
- introduction to professional property valuers to assess whether you meet the $ 500,000 test for “land used in primary production”
To make an appointment please contact William Ford on 6621 2257.