Taxation Laws Amendment Bill (No. 4) 1995

Income Tax (Franking Deficit) Amendment Bill 1995

Income Tax (Deficit Deferral) Amendment Bill 1995

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
This Memorandum Takes Account of Amendments Made by the House of Representatives to the Bill as Introduced

Chapter 7 - Forestry plantations


7.1 The amendments contained in Part 2 of Schedule 4 of the Bill amend the Income Tax Assessment Act 1936 (the Act) to ensure that where a taxpayer who conducts timber operations purchases an established forest or plantation and sells that forest or plantation before the trees are felled, the taxpayer only pays tax on the net proceeds from the sale of the trees.

Summary of the amendments

Purpose of the amendments

7.2 The purpose of the amendments is to remove an anomaly in the income tax law that may operate to disadvantage taxpayers who purchase an established but immature plantation or immature forest and subsequently sell it with the timber still standing. At present, these taxpayers may be taxed on the gross profits of such a sale of standing timber.

7.3 The amendments will tax only the net proceeds from the sale of the immature plantation or forest.

Date of effect

7.4 Applies to sales of standing timber after 9 May 1995.

Background to the legislation

7.5 In preparing its ruling TR95/6, Income Tax: primary production and forestry, the Australian Taxation Office (ATO) became aware that there was a taxation anomaly affecting sales of immature forests and plantations. This anomaly operates to disadvantage some of those taxpayers who purchase a pre-existing forest or plantation and subsequently sell it with the timber still standing.

7.6 In most circumstances, only the net proceeds of the sale of timber are taxed. The proceeds from the sale of timber are taxed, and related costs are allowed, either when incurred or against the proceeds of the sale.

7.7 Where a grower plants and tends trees in a plantation, an immediate deduction is available for the costs of establishing the plantation (IT 2296). Where a grower buys an established plantation or a forest and subsequently fells the timber for sale, a deduction of the original price of the trees is available at the time of felling them (section 124J).

7.8 But, it is possible for the seller of an immature plantation or forest to be taxed on the gross value of the standing timber rather than the net profit. This occurs when a grower has bought an established plantation or forest and then disposes of it without having felled the timber. In these circumstances, the grower is taxed on the total value of the timber (under subsection 36(1) of the Act) and is permitted no deduction for any part of the original purchase price of the plantation.

7.9 This differential tax treatment between taxpayers in essentially similar activities is inequitable.

Explanation of the amendments

7.10 The anomaly arises through the interaction between subsection 36(1) and section 124J which apply to the sale of an immature plantation outside the ordinary course of business and the sale of felled timber where a taxpayer has purchased an established forest or plantation respectively.

7.11 Section 36 brings trading stock to account as income on a revenue basis at the trading stock's market value when the unsold trading stock is being disposed of outside the carrying on of the taxpayer's normal business. For this section's purposes trees which have been planted and tended for sale are treated as trading stock.

7.12 The amendment to correct the anomaly has been inserted into section 36 because this continues the trading stock-like treatment accorded to the sale of immature plantations. This treatment is the most appropriate for these plantations and fits within the structure of the Act.

7.13 A taxpayer who satisfies all the criteria listed below will have any profits on the sale of an immature plantation or forest taxed on a net basis. These criteria are:

the taxpayer must acquire land on which there are trees;
within the purchase price of the land, there must be an amount attributable to the value of the trees;
the trees must be tended for the purposes of sale by the taxpayer, and held by the taxpayer in connection with timber operations. Those operations are defined in section 124E, and mean the planting or tending of trees for felling, felling of standing timber, removing felled timber, or milling or processing felled timber;
the trees were assets of the taxpayer's business;
the taxpayer disposed of the trees, after 9 May 1995; and
the disposal of the trees was not in the ordinary course of carrying on the taxpayer's business.

The anomaly does not arise for other taxpayers. [Item 2, new subsection 36(7A)]

7.14 If all these criteria are satisfied, then the original acquisition costs of trees plus any associated acquisition costs are allowed as deductions (to the extent they are not already deductible) in the income year in which the standing trees are disposed of. [Item 2, new subsection 36(7A)]

7.15 There are three safeguards in this legislation. Firstly, if any capital expense is allowed or is allowable as a deduction, then that capital expense is not taken into account in determining the net profit from the sale of the land and trees. [Item 2, new subsection 36(7B)]

7.16 Secondly, in circumstances where the vendor and taxpayer (purchaser) are not dealing with each other at arm's length and the price paid for the land was greater than was reasonable, the price will be one that is reasonable if the parties were dealing with each other at arm's length. [Item 2, new subsection 36(7C)]

7.17 Finally, where the vendor and the taxpayer (purchaser) are again not dealing with each other at arm's length, and the amount spent on acquiring the trees was greater than what should have been reasonable, the price will be at a level which is reasonable between the parties. [Item 2, new subsection 36(7D)]

7.18 An additional subsection is being added to section 124J. This additional subsection provides that where a taxpayer acquires land on which there are trees, or a right to cut trees, and the parties were not dealing with each other at arm's length and the price paid by the taxpayer for either the land or right is greater than was reasonable, the price will be taken to be one that is reasonable. [Item 3, new subsection 124J(2)]

7.19 This reflects new subsection 36(7C) and insures that section 124J is not now to be read as having a different effect to section 36 because of these amendments.


7.20 The amendments to section 36 will apply to disposals of standing timber which occur after 9 May 1995.

7.21 The amendment to section 124J will apply to timber which is felled after the date of introduction of the Bill. [Item 4]

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