ATO Interpretative Decision
ATO ID 2003/631 (Withdrawn)
Income Tax
Non Commercial Losses: forestry - business not being carried onFOI status: may be released
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This ATO ID is withdrawn as the principles to be applied in determining whether a person is carrying on a business are covered by TR 97/11 'Income tax: am I carrying on a business of primary production?'.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a business being carried on by an individual with a forestry activity where the property is expected to be bequested prior to the harvest of the trees?
Decision
No. There is no business being carried on by an individual with a forestry activity where the property is expected to be bequested prior to the harvest of the trees.
Facts
An individual taxpayer requested the exercise of the Commissioner's discretion under paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2002 to 2051 income years.
The elderly taxpayer, commenced a forestry activity in July 2001 on a small acreage by planting hardwood trees. The taxpayer stated that the trees will be harvested in 50 years and this is supported by independent evidence provided by a forestry consultant, that the timber will be at its peak commercial value then.
The activity has produced taxation losses since commencement and is not expected to produce a profit until the 2052 income year.
The taxpayer intends the land to be part of their estate on their death and the income from the harvest be derived by the executor.
Reasons for Decision
The taxpayer requested the exercise of the Commissioner's discretion in paragraph 35-55(1)(b) of the ITAA 1997. This arm of the discretion can only be exercised for the period from when the business activity first commenced until it could be expected to satisfy one of the four tests or make a taxation profit, so long as that occurs within 'the period that is commercially viable for the industry concerned' (as per subparagraph 35-55(1)(b)(ii)).
For Division 35 of the ITAA 1997 to apply however, there must be a business being carried on.
For an activity to be regarded as a business for Division 35 of the ITAA 1997 purposes the individual must be able to demonstrate the presence of the business indicators, including that they have a profit motive in relation to their activity. If a profit motive is absent 'it is unlikely that the activity will amount to a business' (see paragraph 17 of Taxation Ruling TR 97/11). It is therefore necessary to show how their activity can make a profit, and when and to what extent this is reasonably likely to occur.
The taxpayer has provided information, supported by independent evidence, that demonstrates that their activity is likely to produce a taxation profit within 50 years from the time of commencing the activity.
Therefore, it is reasonable to expect that the harvest will not occur or be otherwise exploited in a way that will produce assessable income during the taxpayer's lifetime. Additionally, the taxpayer's stated purpose relates not to them deriving assessable income from the activity, but to the executor of their estate doing so. Accordingly, the individual taxpayer cannot be said to have a reasonable expectation of profit, nor a purpose of carrying on business for the purpose of that individual deriving assessable income. Therefore, the individual is not considered to be carrying on a business.
This ATOID does not address capital gains or any other tax implications.
Date of decision: 25 June 2003Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1997
section 35-10
section 35-55
paragraph 35-55(1)(b)
Related Public Rulings (including Determinations)
Taxation Ruling TR 97/11
Taxation Ruling TR 2001/14
Taxation Ruling TR 2001/14A - Addendum
Keywords
Forestry
Forestry income
Losses
NCL carrying forward non commercial losses
NCL carrying on a business
NCL commercially viable
NCL commissioner's discretion lead time
NCL primary production losses
Non commercial losses
Primary production
ISSN: 1445-2782
| Date: | Version: | |
| 25 June 2003 | Original statement | |
| You are here | 16 April 2010 | Archived |