Restriction of Benefit of Primary Production Provisions
18.30. A number of submissions to the Committee have suggested that the only persons who should receive the benefit of the application of the primary production provisions are those whose principal activity is engagement in primary production. Other submissions indicate that the benefit of the averaging provisions should be extended only to those persons whose income from primary production is more than 50 per cent of their total income.
18.31. The question of whether a person engaged in primary production should be entitled to the benefit of the averaging provisions would, under the Committee's recommendations proposed in Chapter 14, require the application of the further test that the activity should provide his chief source of income.
18.32. In general the primary production provisions of the Act are available only to a person who carries on a business of primary production. The question of whether an activity is carried on as a business or as a hobby poses problems in the administration of income tax. It is often difficult for the Commissioner to refute a claim by a taxpayer that his activities constitute a business even though there is little likelihood of any profit being derived. The High Court in Tweddle's Case note has held that a profit motive is not essential in carrying on a business and it is not for the Courts or the Commissioner to say how much a taxpayer should spend in earning his income. Thus, even though a taxpayer carries on no more than minimal activities on a farming property, which can only result in losses (for example, when the activity involves hobby or pleasure farming), the losses will in all probability be deductible from other income derived by him.
18.33. This problem has been recognised in overseas countries. In the United Kingdom, Canada and the United States special provisions have been enacted to deal with losses from hobby or pleasure farming. In West Germany, too, losses from hobby farms are not deductible unless profits arise over several years. In the United Kingdom a loss is not allowable as a set-off against other income if it arises from carrying on a trade, profession or vocation in respect of which there is not a reasonable expectation of profit. The provision, though aimed at hobby farmers, applies to other kinds of hobby businesses. In the United States deduction is similarly denied for losses arising from an activity not engaged in for profit.
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18.34. In Canada farm losses, which are not necessarily hobby losses, are allowed on a restricted basis as deductions from other income where the taxpayer's chief source of income is not farming. This compares with the recommendation of the Carter Commission which proposed that, if business losses have been incurred in three years out of a five-year period, the loss for the latest year should not be deductible from other income: losses would again be deductible, in the year the business again became profitable. The Commission made this recommendation because it found difficulty in defining what constitutes a hobby business.
18.35. Of the alternative methods for dealing with the problem of hobby or pleasure farming suggested by the experience of these countries, those used by the United Kingdom and the United States would seem the most appropriate. Accordingly, the Committee recommends that a loss arising from a primary production activity should not be allowable as a set-off against income from other sources nor should it be available for set-off against the income of any other year, unless the inference can be drawn from the extent and manner of the activity that it was engaged in for profit and in fact there was a reasonable expectation that a profit would result.