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Are you a small-scale or a hobby farmer? Here’s why it matters
A small-scale farmer is a genuine farmer operating a business at a sufficient scale. Their expected turnover is likely to produce a profit if the season works out. They pay tax on their profits in good years and can claim their losses against other assessable income in bad years. GST applies to sales and can be claimed against inputs.
A hobby farmer is enjoying the fruits of their labour but is not doing so in a business-like way or on a sufficient scale. They do not declare profits, but neither can they claim losses – it is just a hobby. GST does not apply.
Why it matters
The Australian Tax Office (ATO) is vigilant about potential revenue loss. It’s crucial to understand that misclassification, whether intentional or not can have consequences. Hobby farmers who attempt to claim losses as real farmers, or small-scale farmers who try to evade tax by posing as hobby farmers, risk penalties.
The ATO plays a crucial role in providing guidance. Their tax ruling is explained in a way that’s as simple as possible, considers possible factors like size and complexity, business-like approach, likelihood of achieving necessary scale and profit, and adherence to common farming practices.
In New South Wales, the case of Archibald vs Scone Council indicates that a viable economic cattle operation typically requires a minimum of 40 breeding cows. However, guidelines outside of the ATO for other types of farming operations are harder to locate.
Income sweet spot
To ensure that farming regulations in Australia are upheld, measures have been put in place to prevent individuals, often referred to as “Pitt Street” farmers, from exploiting these rules. Specifically, if a farmer’s off-farm income exceeds $250,000, they are ineligible to claim farm losses. Instead, these losses can be carried forward and offset against any future profits generated from primary production.
Conversely, farmers with off-farm income of less than $40,000 can access all farm losses without restriction. This creates a clear delineation in the regulations.
The income range between $40,000 and $250,000 becomes particularly significant, as this is where the ATO ruling and Case Law provides guidance. Understanding this “sweet spot” is crucial for farmers navigating their income sources and tax implications in the ever-evolving agricultural landscape.
The four-way test
Next, you must pass one or more of the following four rules:
- You must turnover at least $20,000
- You must have been profitable in three of the last five years
- You have at least $100,000 in stock and plant
- Your land and buildings must exceed $500,000
Navigating GST
With a turnover under $20,000, you are a hobby farmer and cannot register for GST as you are not in business. Between $20,000 and $75,000 you can choose to register for GST. Above $75,000, you must register for GST.
Seeking expert guidance
Small-scale farmers: If you’re uncertain about your tax status or want to claim your farm losses but earn over $250,000 from off-farm activities, consider applying for a Private Ruling from the Australian Tax Office. This process allows you to seek clarity and tailored advice regrading specific situations, ensuring you understand how to comply with tax regulations while maximising your entitlements.
All farmers: For hobby farmers or those whose losses may not be claimable, maintaining thorough and accurate records is crucial. Many of the expenses you incur can potentially mitigate future capital gains when you decide to sell your property. By keeping comprehensive documentation, you can safeguard against unexpected tax liabilities and ensure you’re making the most of your agricultural investments in the long run.
FOR MORE INFORMATION
For more information, don’t hesitate to get in touch with your local RSM Agribusiness Specialist.
