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Notional Annual Rate of Ordinary Income - farms
Last amended: 10 October 2007
Unrealisable assets, including farms, are deemed to produce a notional income, except where special provisions apply.
Notional ordinary income – person's farm
Where the unrealisable asset is a farm being worked to its full capacity solely by the pensioner or their partner, notional income is not assessed. In this situation, only the actual income derived from the property is taken into account.
Notional ordinary income – person's farm being used by a family member
Special provisions apply if the farm is being worked by a family member. In this case, the notional ordinary income for a person's farm that is an unrealisable asset is the lower of:
- 2.5% of the value of the farm, or
- the commercial lease value, or
- the rent that the family member can reasonably be expected to pay (reasonable rent) minus any rent actually received by the person from the family member.
Reasonable rent is defined by the following formula:
Reasonable rent = (Income – FTB free area) ? 2
Example: A pensioner's son and his partner are sole occupants of the farm. The annual net farm income is $32,000. The partner's annual salary is $12,000. Therefore their total income is $44,000. The maximum family income free area for 2007 is $41,318. Reasonable rent is $1,341 calculated as ($44,000 - $41,318) ? 2
The farm is valued at $240,000. Therefore 2.5% of $240,000 = $6,000
The commercial lease value of the farm is $8,000 per annum.
Reasonable rent is $1,341
Therefore notional income for the property is $1,341
Net value of a farm
The net value of a farm is the value of :
- the farm, plus
- the land, improvements, livestock plant and machinery, minus
Example of net value of a farm
The value of the farm includes improvements, livestock, plant and machinery.
The farm value does not include the value of a person's:
- principal home,
- household contents and personal effects, and
- motor vehicle.
Notional annual rate of ordinary income – other farming situations
When the farm is not operated by a pensioner, their partner or a family member, reasonable rent does not need to be calculated. In this case, the notional income for the farm is the lower of:
- 2.5% of the net value, or
- the commercial lease value.
For non-farming properties, the commercial lease value of an asset is the value that can reasonably be obtained by using the asset. Generally this is the asset's market rental value.
For farming properties, the commercial lease value is assessed by the AVO. Reassessment may be requested if the valuation does not sufficiently take into account any of the following:
- inherent characteristics of the land, eg soil conditions, erosion, salinity, condition of fencing,
- demand for the land,
- general farm incomes,
- legal impediments to commercial use, eg an existing lease,
- expenses incurred if the farm is leased, eg rates, insurance, interest,
- value of water licences (if relevant), or
- value of tobacco quotas (if relevant).
Note: If the asset does not have commercial lease value then notional income for the asset cannot be assessed.