Primary vs non-primary production income: What does it mean for your farm's tax position?

Australian producers are increasingly diversifying their income streams. From renewable energy projects and biodiversity markets to agritourism and carbon farming, today’s farming businesses often generate income far beyond traditional agriculture activities.

Yet while the agricultural sector has evolved, the tax rules determining what qualifies as primary production income have remained largely unchanged.

This disconnect is one of several issues highlighted in AgriFutures Australia report, co-authored by BDO, on the future of Australia’s agricultural tax system. With proposed changes to the taxation of discretionary trusts currently before Parliament, the distinction between primary production and non-primary production income is becoming more important than ever.

An outdated definition in a changing industry

Many tax concessions available to primary producers rely on whether income is derived from a "primary production business". The definition, contained in subsection 995-1(1) of the Income Tax Assessment Act 1997, focuses on traditional farming activities such as:

• Cultivating plants and crops
• Maintaining livestock for sale or their produce
• Fishing, aquaculture and pearling operations
• Forestry and plantation activities
• Manufacturing dairy products from raw materials produced by the business.

Importantly, this is an exhaustive definition. Activities falling outside the definition are generally not considered primary production, even when they are undertaken as part of a broader farming enterprise.

For many modern agricultural businesses, this creates a growing mismatch between the way farms operate and the way the tax law classifies income.

The rise of alternative farm income

As producers seek to build resilience and diversify revenue, many are generating income from activities that sit alongside traditional farming operations.

Examples can include:

• Carbon credit projects
• Biodiversity and nature repair initiatives
• Renewable energy hosting arrangements
• Easements and access agreements
• Agritourism ventures
• On-farm processing activities

In many cases, these activities make commercial sense and support the long-term viability of farming businesses. However, the income generated from them may not qualify as primary production income for tax purposes.

For example, a vineyard may derive primary production income from growing grapes, but income generated through winemaking activities is generally not considered primary production income. The notable exception is dairy processing, which is specifically included within the definition.

Why the distinction matters

The classification of income has significant tax consequences for individual primary producers.

Access to important concessions such as, Farm Management Deposits (FMDs) and primary production income averaging can depend on the proportion of a taxpayer's income that qualifies as primary production income.

Where non-primary production income becomes a larger part of the business, it can affect eligibility for these measures.

The distinction may soon become even more significant due to proposed trust taxation reforms currently before Parliament.

Under the proposed measures, certain trust income could be subject to a minimum tax rate of 30 per cent. However, income derived from primary production activities is proposed to be excluded from these rules.

As a result, correctly identifying what constitutes primary production income will become increasingly important for farming families and structures that operate through discretionary trusts.

One farm, multiple tax treatments

Consider a mixed farming operation that generates income from grain production, a wind farm hosting agreement and biodiversity credits.

Although all three income streams may arise from the same property:

• Income from grain production would generally qualify as primary production income.
• Income from renewable energy hosting arrangements would generally not.
• Income from biodiversity credits may also fall outside the definition.

Under the proposed trust tax measures, these income streams could potentially receive different tax treatment despite being derived from a single farming business.

This outcome highlights the growing gap between modern agricultural business models and a tax framework designed around a much narrower concept of farming activity.

A case for modernisation

The AgriFutures report argues that Australia's agricultural tax settings should evolve alongside the sector itself.

As producers respond to changing market opportunities, sustainability initiatives and new revenue streams, there is a strong case for reviewing whether the primary production business definition remains fit for purpose.

A modernised definition could better reflect how contemporary farming businesses operate while ensuring tax concessions remain appropriately targeted.

With trust taxation reforms attracting significant widespread attention, the debate around what constitutes primary production income is no longer a technical tax issue. It has become a practical commercial consideration for many Australian producers.

As agriculture continues to diversify, policymakers face an important question: should the tax law continue to define farming as it existed decades ago, or as it exists today?

How BDO can help

The recent AgriFutures report highlights the growing gap between Australia's agricultural tax settings and the realities of modern farming businesses. As producers embrace new income opportunities beyond traditional production activities, understanding the tax treatment of these revenue streams is becoming increasingly important.

BDO’s food & agribusiness team helps producers assess the tax implications of diversification, review business and trust structures, and navigate changing tax rules with confidence. Whether you're considering carbon farming, renewable energy agreements, biodiversity projects or other alternative income streams, obtaining advice early can help minimise risks and identify planning opportunities.

If you would like to discuss how these issues may affect your business, contact us today.