House of Representatives

Tax Laws Amendment (2007 Measures No. 3) Bill 2007

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 9 Disposals of interests in forestry managed investment schemes

Outline of chapter

9.1 Schedule 8 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to clarify the tax treatment for sale and harvest proceeds that are received by secondary investors in forestry managed investment schemes (forestry schemes), and payments made by secondary investors in relation to forestry schemes.

9.2 These amendments are introduced together with a specific deduction provision for investors in forestry schemes. The specific deduction is explained in the preceding chapter of this explanatory memorandum (Chapter 8).

Context of amendments

9.3 In the previous chapter, the uncertainty regarding the deductibility of investors' contributions to forestry schemes is discussed. This uncertainty extends to whether an investor that disposes of their interest in the scheme prior to harvest had the intention of carrying on a business until harvest. This intention is required to qualify for the deduction under section 8-1 of the ITAA 1997 and relates to section 82KZMG of the ITAA 1936. In practice, this has limited trading of interests in forestry schemes except in cases of hardship. Where interests are disposed of due to reason of hardship, there is also uncertainty as to how an acquiring investor's acquisition costs and proceeds are treated.

9.4 Due to case law developments, the Commissioner of Taxation (Commissioner) has indicated that they will withdraw their previous ruling on the treatment of such investments, taxation ruling TR 2000/8, and has released a reconsidered view in draft taxation ruling TR 2007/D2.

9.5 Accordingly, the Government has decided to provide certainty to investors and industry by providing a specific deduction for investments in forestry managed investment schemes. As investors are no longer required to have an intention to hold the interests until harvest under the specific deduction, this change facilitates secondary market trading of interests.

9.6 The Government supports secondary markets for forestry scheme interests. A secondary market is a market where intangible assets, such as securities, are bought and sold after their initial issue and purchase. Examples of secondary markets are stock exchanges and 'over-the-counter' markets. The existence of secondary markets should increase the financial transparency of forestry scheme investments by introducing pricing information into the market and increasing liquidity. Increased liquidity should also increase the relative attractiveness of forestry investments.

Summary of new law

9.7 Schedule 8 introduces amendments that ensure that secondary investors can obtain deductions for on-going contributions to forestry scheme arrangements under the new deduction provision. Secondary investors cannot obtain a deduction for their acquisition costs under this provision.

9.8 This Schedule also ensures that sale or harvest proceeds received by a secondary investor are assessable income to the extent the proceeds match deductions obtained by the investor under the new deduction provision. Where secondary investors hold the interests on revenue account as trading stock, the balance of the proceeds will be assessable income. Where secondary investors hold the interests on capital account, the proceeds will be subject to a modified capital gains tax (CGT) treatment.

9.9 Proceeds received by initial investors will be treated on revenue account. In order to limit tax arbitrage that may arise from the different treatments and differences in tax rates between investors, this Schedule introduces a pricing rule and a four-year holding period rule for initial investors.

9.10 In addition, aggressive arrangements intended to exploit any opportunities for arbitrage, for instance, through transfers to tax-preferred entities (eg, self-managed superannuation funds or certain non-residents) just before receipt of harvest proceeds, may be subject to the general anti-avoidance rule in Part IVA of the ITAA 1936.

Comparison of key features of new law and current law

New law Current law
The specific deduction will not contain a requirement that a business be carried on, or that payments relate to revenue expenses. As such, a perceived income tax barrier to secondary trading will not exist. Investors in forestry schemes may be considered as not carrying on a business if, before harvest, they dispose of their interests, or if the interests are bought back (see paragraph 48 of TR 2000/8). In this situation, deductions for establishment costs, lease and management fees and for other contributions to the schemes obtained in earlier income years may be denied.
A market value pricing rule applies for disposals of forestry schemes interests by initial investors. No equivalent.
Where an initial investor disposes of interests within four years, any deductions obtained by the investor under the new deduction provision will be denied in the income years claimed. No equivalent.
Sale or harvest proceeds received by an initial investor are included in the investor's assessable income on revenue account. Where a disposal of a forestry scheme interest takes place for reasons of hardship, the proceeds received have generally been treated on revenue account for a disposal of trading stock (standing trees) outside the ordinary course of business, with a market value amount included in the investor's assessable income (section 70-90 of the ITAA 1997).

Secondary investors do not obtain deductions under the new specific deduction provision for the costs of acquiring the relevant interests.

Secondary investors obtain deductions under the new specific deduction provision for contributions to the forestry scheme provided that the amounts would be deductible if paid by initial investors.

Where a secondary investor subsequently disposes of interests, the proceeds received will be assessable income on revenue account to the extent the proceeds match deductions obtained under the new deduction provision. If investors hold the interests on revenue account (ie, the investor holds interests as trading stock), the balance of the proceeds will be assessable income. If on capital account, the proceeds will be subject to CGT treatment.

Harvest proceeds received by a secondary investor will be treated in the same manner as sale proceeds.

A four-year holding period rule and a market value pricing rule will also apply for existing forestry interests that are traded by initial investors.

Where interests are acquired from an initial investor, there is uncertainty regarding the tax treatment of the secondary investor. It is possible that the consideration and ongoing contributions should be treated as on capital account. Should the secondary investor hold until harvest, it is also possible that the harvest proceeds would be on revenue account. As a consequence, secondary investors who hold until harvest may derive assessable income on the gross harvest proceeds and may generate a capital loss on the cessation of the interest in the forestry scheme.

Detailed explanation of new law

9.11 This measure inserts rules into the ITAA 1997 and the ITAA 1936 to provide certainty of income tax treatment for investors that acquire interests in forestry schemes through a secondary market and subsequently receive sale or harvest proceeds. In particular, the rules provide for the deductibility of ongoing contributions made by a secondary investor to a forestry scheme and clarify the income tax treatment of sale or harvest proceeds.

9.12 This measure also inserts a four-year holding period rule and a market value pricing rule into the ITAA 1997 for initial investors that dispose of forestry scheme interests prior to harvest.

9.13 In order to facilitate a sufficiently deep market for investment in forestry schemes, trading in interests in existing schemes will also be allowed. Existing forestry scheme interests will also be required to be held for four years after the initial acquisition and a market value pricing rule will apply to the sale proceeds. These requirements are made by inserting sections 82KZMGA and 82KZMGB into the ITAA 1936.

9.14 Throughout this chapter:

·
the term 'investor' is used to refer to a participant in a forestry scheme. A 'participant in a forestry scheme' is defined in subsection 394-15(4) as an entity that holds an interest in the scheme (other than the manager of the scheme); and
·
the term 'scheme manager' includes a 'responsible entity'.

Treatment of sale or harvest proceeds received by secondary investors

9.15 The first part of any sale or harvest proceeds received by secondary investors will be treated as assessable income to the extent that the proceeds represent the value of (or 'match') deductions obtained for ongoing contributions under the new deduction provision. Where investors hold interests on revenue account as trading stock, the balance of the proceeds will be included in assessable income. If held on capital account, the proceeds will be subject to a modified CGT treatment in addition to the matching revenue treatment.

9.16 This seeks to ensure there is matching treatment for investors for amounts that they pay and receive. The initial purchase of the interest for most investors is expected to be on capital account and so the proceeds should also be on capital account. This is only modified to the extent that some deductions have been claimed on revenue account. This is discussed further in paragraphs 9.47 to 9.54 of this chapter.

9.17 The Commissioner's draft taxation ruling (TR 2007/D2) indicates that the preferred view as to the character of investors' contributions in such schemes is that they are payments to acquire an interest in a trust over the scheme property and are thus on capital account. Where secondary investors receive harvest proceeds on revenue account, it may be argued that the investors may either make a capital loss that cannot be offset against the revenue receipt or be unable to make a capital loss due to the operation of the CGT anti-overlap rule. This treatment is not symmetrical and is arguably inequitable.

9.18 To ensure that neither an asymmetrical outcome nor a double benefit arises for secondary investors that would otherwise obtain both deductions for ongoing contributions and CGT treatment for the capital gains made on the sale or harvest proceeds, the proceeds received are matched as assessable income to the extent the investor obtained deductions under the specific deduction provision.

9.19 Some modifications are made to the CGT rules to ensure that these rules apply appropriately when secondary investors include some of the proceeds received in assessable income on revenue account.

Initial investor's sale or harvest proceeds treated as on revenue account

9.20 To provide symmetry between the upfront revenue deduction and the proceeds of sale or harvest, where an initial participant in a scheme can deduct or has deducted an amount under section 394-10 (or could have done so if the investor had not disposed of the interests within four years), and a CGT event occurs in relation to the interests, the proceeds arising from the CGT event will be treated as assessable income on revenue account in the income year of receipt. [Schedule 8, item 2, section 394-25]

9.21 This is achieved by requiring the assessable income of the investor to include the market value of the interests when a CGT event happens to the interests under the scheme. A CGT event will happen in relation to the interests if they are sold, bought back by the manager prior to harvest, or harvest proceeds are received, or if the CGT event reduces the value of the interests (eg, a sale of part of the interests or a partial harvest). The market value that is included in the initial investor's assessable income is the value of the interest just before the event, or if the investor continues to hold some of the interests after the CGT event, the amount by which the market value of the interests is reduced. [Schedule 8, item 2, subsection 394-25(2 )]

9.22 Treating the initial investor's interest as capital would result in the initial investor obtaining a double benefit of a 100 per cent deduction (on revenue account) on acquiring the interest and the potential application of concessional CGT treatment, including the CGT discount and the application of capital losses to their proceeds on disposal.

Definition of 'initial investors'

9.23 An initial investor acquires interests in a forestry scheme from a scheme manager and not from another investor in the scheme. The investor's acquisition costs flow through as contributions to the scheme for establishing trees. [Schedule 8, item 2, subsection 394-15(5 )]

9.24 Where a scheme manager buys back interests from investors, neither the manager, nor an investor that subsequently acquires those interests from the manager, is an initial investor.

9.25 If the manager, after the trees have been planted, subsequently issues new interests in the scheme, the acquiring investors will not be initial investors as the acquisition costs will not result in the establishment of trees.

9.26 Where an initial investor obtains deductions for acquisition costs and contributions under section 394-10, all proceeds received will be treated as assessable income on revenue account. [Schedule 8, item 2, section 394-25]

Example 9.1 Helen subscribed to a forestry scheme managed by Australian Forests Limited (AFL) for $9,000 in June 2008. Investors in AFL interests are required to contribute an annual management and services fee of $1,000 in each July starting July 2009.In October 2012, Helen sells the interests for $11,000.Helen includes the amount of $11,000 in her assessable income on revenue account for the year ended 30 June 2013 in accordance with section 394-25.Helen will have also obtained under section 394-10 a deduction of $9,000 for the acquisition costs of the AFL interests in the year of income ended 30 June 2008 and of $1,000 for the annual management and services fee in each income year ended 30 June 2010 to 30 June 2013.

Pricing rule

9.27 To minimise tax arbitrage opportunities (in particular, shifting of a gain from revenue to capital account), an initial investor is taken to receive the market value of the interests when a CGT event happens to the interests. [Schedule 8, item 2, subsection 394-25(2 )]

9.28 Where part of the interests is subject to a CGT event, the investor is taken to receive the amount by which the market value of the interests decreases. This is consistent with the rule in section 108-5 of the ITAA 1997 that a CGT asset includes a part of, or an interest in, a CGT asset. [Schedule 8, item 2, paragraph 394-25(2)(b )]

9.29 To prevent double counting, where an investor receives a different amount from the market value amount, the actual amount received is not included in assessable income nor is it exempt income. [Schedule 8, item 2, subsection 394-25(3 )]

9.30 A 'CGT event' is widely defined and will apply to situations where the interests are sold or are bought back by the scheme manager.

Example 9.2 Following on from Example 9.1, if the market value of Helen's interests in October 2012 is $14,000, Helen instead includes the amount of $14,000 in her assessable income on revenue account for the year ended 30 June 2013 in accordance with paragraph 394-25(2)(a).Helen does not include the amount of $12,000 she actually received in her assessable income nor is the $12,000 exempt income under subsection 394-25(3).

9.31 Where an acquiring secondary investor holds the interests on capital account, the CGT market value substitution rule applies for the purposes of working out the secondary investor's acquisition costs for the interests (section 112-20 of the ITAA 1997).

Holding period

9.32 Deductions obtained by an initial investor for acquisition costs and contributions to a forestry scheme are denied for the income years the amounts are paid if a CGT event happens to the interests within four years. [Schedule 8, item 2, subsection 394-10(5 )]

9.33 Consistent with the rule in section 108-5 of the ITAA 1997, where a CGT event happens to the interests within four years, but the investor still holds the interests after the event, then the deductions are denied to the extent of the decrease in the market value of the interests.

9.34 An implication of this is that an initial investor is taken to dispose of the interests under the scheme at the time of entering into an agreement for the disposal. This is because some CGT events are subject to this timing rule (see for example subsections 104-10(3) and 104-25(2) of the ITAA 1997 respectively for sales and for when an asset comes to an end). A secondary investor that holds the interests on capital account is taken to acquire the interests at the time of entering into an agreement to acquire the interests (case 1 in the table in subsection 109-5(2) of the ITAA 1997).

9.35 An initial investor's assessment(s) may be amended within two years of the end of the income year that the investor disposed of the interests. This may mean that the initial investor is subject to a longer review period than would normally be the case. [Schedule 8, item 2, subsection 394-10(6 )]

9.36 Where deductions for contributions made by an initial investor are denied in the income year(s) the amounts are paid, the sale or disposal proceeds received will continue to be treated as assessable income on revenue account. [Schedule 8, item 2, subparagraph 394-25(1)(b)(ii) and subsection 394-25(2 )]

Example 9.3 Following on from Example 9.2, if Helen instead sold her interests in August 2010 at a market value of $12,000, then:

·
Helen includes $12,000 in her assessable income on revenue account in the income year ended 30 June 2011 under subsection 394-25(2);
·
the deduction for $9,000 acquisition costs for the year ended 30 June 2008 is denied in accordance with subsection 394-10(5);
·
the deductions for management and services fees of $1,000 in each income year ended 30 June 2010 and 2011 are denied under subsection 394-10(5); and
·
Helen does not make a capital loss due to the operation of the CGT rules and their interaction with provisions about assessable income.

Acquisition costs of secondary investors

9.37 Where a secondary investor acquires an interest in a forestry scheme through secondary market trading, the investor does not obtain a deduction under the new deduction provision for the acquisition costs. [Schedule 8, item 2, subsection 394-10(3 )]

9.38 However, the acquisition costs may be deductible to a secondary investor that holds the interests on revenue account as trading stock under another provision of the income tax laws.

9.39 The costs of acquiring interests from a scheme manager are not deductible under the new deduction provision if the interests replace interests that were previously bought back. This is because the acquisition costs do not relate to the establishment of new trees under the scheme and because the manager is not a participant. [Schedule 8, item 2, subsections 394-10(3) and 394-15(4) and (5 )]

9.40 For secondary investors that hold the interests on capital account, the acquisition costs are included in the cost base or reduced cost base of the interests for CGT purposes when the interests are subsequently disposed of prior to harvest or if harvest proceeds are received. It is expected that most secondary investors are likely to hold the interests on capital account.

Example 9.4 Julian acquires the AFL interests from Helen in August 2012 for $14,000 (at market value). Julian holds the interests on capital account as he does not trade in securities.Julian does not obtain a deduction for $14,000 paid to Helen in accordance with subsection 394-10(3). Instead, this amount will form part of the cost base or reduced cost base of the interests when Julian later sells the interests or receives harvest proceeds.

Contributions made by secondary investors are deductible

9.41 Contributions made by secondary investors to a forestry scheme will be deductible if the amounts would be deductible if paid by initial investors. [Schedule 8, item 2, subsection 394-10(1 )]

9.42 This reduces the incentive to front-load ongoing fees into the acquisition costs and contributions paid by initial investors.

Example 9.5 Julian may deduct $1,000 in annual management and services fees that he pays AFL in each year of income he pays the fee after acquiring the interests from Helen.

Amounts that are received by investors for thinnings, are assessable income

9.43 Amounts received by initial and secondary investors for thinnings will be assessable income on revenue account. Thinnings are specifically excluded from the CGT treatment for secondary investors that hold interests in a forestry scheme on capital account. [Schedule 8, item 2, paragraph 394-30(1)(c )]

Example 9.6 Julian receives $1,500 for thinnings in December 2015 from AFL. Julian includes this amount in his assessable income for the year of income ended 30 June 2016.

9.44 Thinnings include a selective harvest of immature trees to facilitate better outcomes when mature trees are harvested.

9.45 A clear fell of a percentage of mature trees is not thinnings for this purpose. Instead, amounts received for this are treated as harvest proceeds received over two or more income years. See discussion in paragraphs 9.55 to 9.57.

Example 9.7 Raylee has an interest in one hectare of forest. In 2011, half of the hectare is clear felled. The following half is clear felled in 2012. The proceeds are not considered amounts of thinnings.

9.46 The CGT treatment for secondary investors that sell their interests in either secondary market trading or to the scheme manager prior to harvest, or that receive harvest proceeds, is discussed below.

Sale proceeds received by secondary investors

9.47 A secondary investor that subsequently disposes of forestry scheme interests prior to harvest is treated as receiving assessable income to the extent the investor's sale proceeds match the 'net deductions'. The net deductions are the total forestry scheme deductions (obtained by the investor under the new deduction provision) less incidental forestry scheme receipts. [Schedule 8, item 2, paragraph 394-30(2)(b) and subsections 394-30(3) to (5 )]

Example 9.8 Julian sells the AFL interests to Dana in March 2017 for $20,000 (at market value).Julian has obtained deductions for annual management and services fees of $1,000 in each income year since the year ended 30 June 2013, a total of $4,000 under section 394-10.Julian also included $1,500 in his assessable income for thinnings in the income year ended 30 June 2016.Julian includes $2,500 of the sale proceeds received as assessable income for the income year ended 30 June 2017. This amount is calculated from total forestry scheme deductions of $4,000 Julian has claimed under section 394-10 for the purposes of subsection 394-30(3) less the amount of incidental forestry scheme receipts of $1,500 Julian included in assessable income for thinnings for the purposes of subsection 394-30(4).The amount of net capital gains that Julian should also include in his assessable income is discussed in Example 9.10.

9.48 However, if the sale proceeds received by a secondary investor are less than the total forestry scheme deductions for the amount of deductions obtained by the investor under the new deduction provision (as reduced by an amount included in assessable income as incidental forestry scheme receipts for thinnings if any) all of the proceeds are assessable income. [Schedule 8, item 2, paragraph 394-30(2)(a )]

Example 9.9 If the market value of the AFL interests in March 2017 was $2,000 and Julian sold the interests to Paul for this amount, the excess of total forestry scheme deductions over incidental forestry scheme receipts for thinnings ($2,500) is more than the proceeds of sale. Julian includes all of the $2,000 in his assessable income for the income year ended 30 June 2017.The CGT outcomes for Julian in this example are discussed in Example 9.11.

9.49 As secondary investors obtain the benefit of being able to deduct ongoing contributions under the new deduction provision, the matching principle ensures that proceeds received by these investors are not also subject to concessional CGT treatment to the extent the proceeds 'recoup' the deductions.

9.50 The sale proceeds received by a secondary investor that holds the interests on capital account are capital proceeds for CGT purposes. The normal CGT rules are modified to avoid issues that arise from the operation of the CGT anti-overlap rule and its interaction with ordinary income, statutory income, exempt income and non-assessable non-exempt income. [Schedule 8, item 2, subsections 394-30(7) and (8 )]

9.51 The cost base or reduced cost base of the interests is also modified for CGT purposes. The amount of the sale proceeds matched as assessable income under subsection 394-30(2) is included in the cost base or reduced cost base of the interests. No adjustments are made to either the capital proceeds or the cost base or reduced cost base of the interests sold if no part of the proceeds is matched as assessable income (eg, where the amount of total forestry scheme deductions is less than incidental forestry scheme receipts). [Schedule 8, item 2, subsection 394-30(9 )]

Example 9.10 Following on from Example 9.8, Julian has sold his AFL interests to Dana in March 2017 for $20,000 (at market value).Julian includes $2,500 in his assessable income for the income year ended 30 June 2017. This is made up of total forestry scheme deductions of $4,000 that Julian obtained under section 394-10 less incidental forestry scheme receipts of $1,500 for thinnings that Julian included in his assessable income for the year of income ended 30 June 2016.Julian's capital proceeds are the sale proceeds of $20,000.The cost base of Julian's interests is $16,500, made up of the acquisition costs of $14,000 increased by the net amount matched as assessable income of $2,500 under subsection 394-30(9). Julian's capital gain is $3,500. Julian may apply capital losses if any and the CGT discount to the gain in determining the net capital gain to include in his assessable income for the year of income ended 30 June 2017. Julian includes the net capital gain amount in addition to the $2,500 included in assessable income under subsection 394-30(2). Example 9.11 Following on from Example 9.9, Julian has sold his interests to Paul in March 2017 for $2,000 (at market value).Julian includes $2,000 in his assessable income for the income year ended 30 June 2017. This occurs as subsection 394-30(2) requires the lesser of the market value of the interests (which is $2,000) or the amount of total forestry scheme deductions claimed less incidental forestry scheme receipts received (which is $2,500, being $4,000 less $1,500) to be included in assessable income.Julian's capital proceeds are the sale proceeds of $2,000.The reduced cost base of Julian's interests is $16,000 made up of the acquisition costs of $14,000 and modified under subsection 394-30(9)[0] to include the sale proceeds of $2,000 matched as assessable income in accordance with subsection 394-30(2). Julian makes a capital loss of $14,000[0]. Julian may apply the capital loss to other capital gains made in the income year ended 30 June 2017 or carry the capital loss forward to apply against capital gains in a later income year in addition to the $2,000 included in assessable income under subsection 394-30(2).

9.52 In calculating the capital gain, an approach that could have been taken would have been to reduce the amount of capital proceeds by the amount included in assessable income. This would more directly reflect the concept that the first part of the proceeds is taken to match the deductions claimed on revenue account. However, the legislation achieves the same result by increasing the cost base or reduced cost base rather than decreasing the sale proceeds. This approach requires fewer consequential amendments to achieve the desired policy outcome.

9.53 Where a secondary investor sells or otherwise disposes of part of their interests, the total forestry scheme deductions and incidental forestry scheme receipts are apportioned to the extent of the interests sold or disposed of. The remainder of each of total forestry scheme deductions and incidental forestry scheme receipts that is not matched as assessable income in an income year that partial sale proceeds are received is used for matching purposes in the next income year that sale or harvest proceeds are received. The remainder amounts are reflected in the cost base or reduced cost base in that next income year. [Schedule 8, item 2, subsections 394-30(2) to (6 )]

Harvest proceeds received by secondary investors

9.54 Harvest proceeds received by a secondary investor are treated in the same way as sale proceeds.

Example 9.12 Following on from Example 9.10, Dana acquired the AFL interests from Julian in March 2017 for $20,000. Dana receives gross harvest proceeds in September 2018 of $25,000 and a net amount of $23,500 as AFL was entitled under the terms of the scheme to $1,500 for harvesting and marketing fees.Dana paid $1,000 in annual management and services fees in each of the income years ended 30 June 2017 and 2018.Dana has not received any incidental forestry scheme receipts amounts such as for thinnings.Dana holds the interests on capital account.For the year of income ended 30 June 2019, Dana:

·
obtains deductions totalling $2,500 for the annual management and services fee of $1,000 and the harvesting and marketing fee of $1,500 under section 394-10;
·
matches as assessable income an amount of $3,500 for total forestry scheme deductions obtained under subsection 394-30(2). This includes deductions of $2,500 in the current year and the annual management and services fee of $1,000 obtained in the year of income ended 30 June 2018; and
·
includes in her assessable income a net capital gain worked out from a capital gain of $1,500 for capital proceeds that are harvest proceeds of $25,000 less a cost base of $23,500 for acquisition costs of $20,000 increased by the matched assessable income of $3,500 under subsection 394-30(9). Dana may offset against her capital gain of $1,500 any 'net capital losses' from previous years and any 'capital losses' from this income year and if entitled may apply the CGT discount.

Harvest proceeds received over two or more income years

9.55 Where a secondary investor receives harvest proceeds over two or more income years then:

·
the amounts matched as assessable income for the total forestry scheme deductions less the total forestry scheme receipts (for deductions obtained under the new deduction provision) are apportioned over the income years that harvest proceeds are received [Schedule 8, item 2, subsections 394-30(2) to (5 )]; and
·
the acquisition costs used in working out the cost base or reduced cost base of the interests for investors that hold the interests on capital account are also apportioned over the income years that harvest proceeds are received (section 112-30 of the ITAA 1997):

-
the relevant proportion is worked out by reference to the proportion that the amount of the reduction in the market value of the interests the investor continues to hold are of the market value of the interests just before the CGT event [Schedule 8, item 2, subsection 394-30(5 )]; and
-
scheme managers will need to notify investors of the proportion of interests to which a harvest relates;

·
any remainder of each amount of total forestry scheme deductions and incidental forestry scheme receipts in an income year in which partial harvest proceeds are received is used in the same manner as discussed for sale proceeds in paragraph 9.53 [Schedule 8, item 2, subsection 394-30(6 )].

9.56 Harvest proceeds may be received over two or more income years under a scheme either because the same plantation is harvested over more than one income year or because two or more plantations subject to the one scheme are harvested in different income years.

9.57 Where a scheme has two or more plantations of different trees, the scheme manager will need to keep records that document the relevant proportion of the scheme to which each plantation relates.

Example 9.13 Following on from Example 9.12, Dana instead receives from AFL partial harvest proceeds in September 2018 of $11,000 and proceeds of $14,000 from the balance of the harvest in September 2019.Under the terms of the scheme, Dana is not required to pay an annual management and services fee in July 2019. Dana pays harvesting and marketing fees of $660 in the income year ended 30 June 2019 and $840 in the income year ended 30 June 2020.Dana is advised by AFL that the harvest proceeds of $11,000 she received in September 2018 represent 44 per cent of her interests in the AFL scheme. That is, the market value of Dana's interests has decreased by 44 per cent due to the partial harvest.For the year of income ended 30 June 2019, Dana:

·
obtains deductions totalling $1,660 for the annual management and services fee of $1,000 and the harvesting and marketing fee of $660 under section 394-10;
·
matches as assessable income an amount of $1,170 for 44 per cent of the total forestry scheme deductions of $2,660 under subsection 394-30(2) that she has obtained under section 394-10 since acquiring the interests. The total amount includes the $1,660 in the current year and the annual management and services fees of $1,000 obtained in the year of income ended 30 June 2018; and
·
includes in her assessable income a net capital gain worked out from a capital gain of $1,030 for capital proceeds that are harvest proceeds. This is calculated as harvest proceeds of $11,000 less a cost base of $9,970. The cost base is the proportion of acquisition costs of $8,800 increased by the matched assessable income of $1,170 under subsection 394-30(9). Dana may offset the capital gain of $1,030 by any 'net capital losses' from previous years and any 'capital losses' from this income year and if entitled may apply the CGT discount.

For the year of income ended 30 June 2020, Dana:

·
obtains a deduction of $840 for the harvesting and marketing fee under section 394-10;
·
matches as assessable income an amount of $2,330 for the current year deduction of $840 and the remainder of previous year deductible contributions not previously matched as assessable income, of $1,490. The amount of $1,490 reflects total forestry scheme deductions not included in Dana's assessable income in the previous income year under subsection 394-30(6); and
·
includes in her assessable income a net capital gain worked out from a capital gain of $470. This amount is equal to harvest proceeds of $14,000 less a cost base of $13,530. The cost base is the proportion of acquisition costs of $11,200 and the matched assessable income of $2,330. Dana may offset against the capital gain of $470 any previous or current year capital losses if any and if entitled by the CGT discount.

Similar outcomes would arise if Dana sold 44 per cent of her interests in September 2018 for $11,000 and either sold the remainder of her interests or received harvest proceeds for $14,000 in September 2019. In the sale situations, Dana would not have obtained deductions for harvesting and marketing fees and so does not match (nor apportion the matching amount) for deductions for this fee. Example 9.14 Greg acquired interests in the Pine and Blue Gum 2008 scheme (PBG 2008) in secondary market trading in April 2013 for $15,000. Greg holds the interests on capital account and is not entitled to a deduction for the acquisition costs under subsection 394-10(3).Under the terms of the PBG 2008 scheme, Greg is required to pay an annual management fee in each July of $250. Greg is also required to pay a harvest and marketing fee of 5 per cent of any gross harvest proceeds. In each income year Greg pays an annual management fee or a harvest and marketing fee, the amount of the fee is deductible in the income year paid under section 394-10.PBG 2008 has two plantations, a blue gum plantation and a pine plantation. The scheme manager's records indicate that the blue gum plantation makes up 40 per cent of the interests that investors hold in the scheme, and the pine plantation makes up 60 per cent of the interests that investors hold in the scheme. The blue gum plantation is to be harvested in January 2016 (representing a decrease in the market value of Greg's interests of 40 per cent at that time) and the pine plantation in January 2018.In January 2016, Greg receives $9,500 for the harvest of the blue gum plantation. The scheme manager has deducted $500 from gross proceeds of $10,000. In January 2018, Greg receives $14,250 for the harvest of the pine plantation. The scheme manager has deducted $750 from gross proceeds of $15,000.

Diagram:  Example 9.14

H & M = harvest and marketingFor the income year ended 30 June 2016, Greg:

·
obtains deductions in accordance with section 394-10 for $750 (for a harvesting and marketing fee of $500 and an annual fee of $250);
·
includes an amount of $500 in assessable income on revenue account (40 per cent of $1,250 being the total of current year fees of $750 and total prior year annual fees of $500) under subsection 394-30(2); and
·
makes a capital gain of $3,500 (capital proceeds of $10,000 less a cost base of $6,500 made up of $6,000 (40 per cent of acquisition costs) and $500 for matched income included by subsection 394-30(9)). Assuming Greg has no capital losses and is entitled to the 50 per cent CGT discount, Greg includes a net capital gain of $1,750 in his assessable income.

For the income year ended 30 June 2018, Greg:

·
obtains deductions in accordance with section 394-10 for $1,000 (for a harvesting and marketing fee of $750 and annual fee of $250);
·
includes an amount of $2,000 in assessable income on revenue account under subsection 394-30(2). This is worked out as the total of current year fees of $1,000 and of fees from prior income years not matched as assessable income of $1,000. The later amount of $1,000 reflects total forestry scheme deductions not included in Greg's assessable income in the year ended 30 June 2016 under subsection 394-30(6); and
·
makes a capital gain of $4,000 (capital proceeds of $15,000 less a cost base of $11,000 made up of $9,000 (remainder of acquisition costs) and $2,000 for matched income included by subsection 394-30(9)). Assuming Greg has no capital losses and is entitled to the 50 per cent CGT discount, Greg includes a net capital gain of $2,000 in his assessable income.

Similar outcomes would arise if Greg sold 40 per cent of his interests in January 2016 for $10,000 and either sold the remainder of his interests or received harvest proceeds for $15,000 in January 2018. In the sale situations, Greg would not have obtained deductions for harvesting and marketing fees and so does not match (nor apportion the matching amount) for deductions for this fee.

Existing forestry scheme interests

9.58 In order to ensure a sufficient depth in the market for forestry scheme interests, the Government will facilitate trading of existing forestry scheme interests.

9.59 An initial investor may dispose of existing interests on or after 1 July 2007. Disposals of existing forestry scheme interests will be subject to the four-year holding period and market value pricing rules, which are identical to those outlined above for new investors. [Schedule 8, item 1, sections 82KZMGA and 82KZMGB]

9.60 Initial investors are assessed on sale or harvest proceeds in the same manner as for initial investors in forestry schemes subject to Division 394. [Schedule 8, item 1, section 82KZMGB]

9.61 Similarly, any amount received for thinnings will be treated on revenue account. [Schedule 8, item 1, paragraph 82KZMGB(1)(d )]

Application and transitional provisions

9.62 This measure commences from the date of Royal Assent. It applies to disposals of interests held in forestry schemes on or after 1 July 2007. [Schedule 8, item 26, section 394-220]

Consequential amendments

9.63 This Schedule amends the table in section 112-97 of the ITAA 1997 to include item 22A to ensure the list of cost base and reduced cost base adjustments includes an adjustment made pursuant to subsection 394-30(9). [Schedule 8, item 16, section 112-97, item 22A]


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