It's believed the Government is looking at changing the tax ruling which until now has enabled hobby farms and other lifestyle assets to be claimed as tax deductions.
The Government hopes the move, to be included in this year's Federal Budget, will save as much as $700 million a year.
Under the current tax provisions, a salaried employee can claim expenses from other businesses they own which make a loss.
While hobby farmers have never been considered genuine farmers, in recent years they have injected huge amounts of money into struggling rural communities, and in some instances have revitalised ghost towns into happening lifestyle hamlets.
The sea change and tree change boom also drove up property prices in many regions within a few hours drive of the big smoke.
The phenomenon was also behind a carve-up of prime farming land into subdivided lifestyle acreage.
It's feared a crackdown could see that private investment in regional communities disappear overnight, according to some rural supply merchants, many of whom have survived on the hobby farm trade during the drought and downturn in mainstay commodities like wool.
It's also feared drought-affected farmers, who have been forced to find off-farm income after making successive losses in their farm businesses, could also be caught up in the crackdown.
Up to half of all income earned by farmers could now be made off farm, according to the National Farmers Federation, which is lobbying to have the Government carefully consider the move and the definition of hobby farmer.
The classification of a hobby farm varies within the Government – ABARE's definition determines farm income of less than $22,000 a year to be a hobby farm operation, while the Australian Bureau of Statistics is somewhere around the $5000-mark.
There is no specific classification at the Australian Tax Office, but there are pages of rules setting out what can and cannot be deducted under certain circumstances for primary industries.
Rural merchandise businessman, Roger Willoughby, owns Gunning Rural Supplies about 60 kilometres from the national capital, Canberra, and says the Government would be wrong to include this measure in the budget because hobby farmers give far more to communities and regional communities than what the Government hopes to save.
Mr Willoughby says the hobby or lifestyle farmers now make up 28 per cent of his business in what was a predominantly fine-wool growing region.
He said while many of the larger farmers were struggling to carry out the environmental services needed to look after the land, hobby farmers had the money and enthusiasm to regenerate their smaller properties and the country was visibly better for it.
Mr Willoughby recently started an "out of town group" as a network for lifestyle farmers.
He holds the meetings at night, after business hours, so Canberra commuters can still attend.
He said the smaller farmers on 200-acre blocks would spend equal or greater on weed control, for example, than farmers on the 2000-acre blocks.
"Bigger farmers have been doing it tough, and when you don't have a lot of money, the environment suffers," Mr Willoughby said.
"We've seen Gunning grow and grow as a little town, our pre-school is in good shape, the environment on many of these smaller blocks is improving, and it's because these hobby farmers are adopting more services, they're spending more money and they're supporting their local communities."
He said the hobby farmer market enabled him to keep on the staff and resources needed to service the larger farmer.