Edited version of private ruling

Authorisation Number: 1011794976141

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Ruling

Subject: income - isolated transactions

Questions and answers

Does the receipt of money for the sale of timber result in non taxable income?

No

Does the receipt of money for the sale of timber result in a capital gain?

No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

The scheme that is the subject of the ruling

Your residence on the property has been used as their principal place of abode and the land has never been used for any commercial purpose.

At the time of purchase of the property contained an established timber reserve.

No value was placed on the timber reserve at the time of purchase.

You experienced extreme weather conditions. The resulting high wind gusts caused extensive damage. Especially hard hit were trees and fencing on your property

As a consequence of this extreme weather condition many trees were either blown over or were in such a state that they needed to be felled as they were a safety hazard.

You approached a contractor to clean up the fallen timber and also fell any trees that were precarious at the time.

The income received was not in the ordinary course of business.

You were not involved in forest operations or any other business utilising the land.

The income was received as a consequence of the storm damage and it was not your intention to fell the timber prior to this occurrence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Explanation (this does not form part of the ruling)

Isolated business transactions

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in your assessable income, where you are an Australian resident, all ordinary income which you derive during an income year. Ordinary income is defined as income according to ordinary concepts.

Ordinary income generally includes income that arises in the ordinary course of a taxpayers business. However, in certain circumstances proceeds not within the ordinary course of the taxpayers business may form part of their ordinary income.

The principle has been established that profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 discusses the application of the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are ordinary income and therefore assessable under section 6-5.

According to Paragraph 16 of Taxation Ruling TR 92/3, if a taxpayer not carrying on a business makes a profit, that profit is income if:

a) The intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain: and

b) The transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

The acquisition and sale of the trees is outside the ordinary course of the activities from which you derive your income. The transaction will not occur within the ordinary course of business being carried on by you as you are not involved in the forestry industry. Therefore, the activity would be best described as an isolated transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. In Myer Emporium, the High Court did not set out guidelines as to what constitutes a business operation or commercial transaction. However, paragraph 13 of TR 92/3 lists the following factors which may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d) the nature, scale and complexity of the operation or transaction

e) the manner in which the operation or transaction was entered into or carried out

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

h) the timing of the transaction or the various steps in the transaction.

In applying these principles, the following facts have been considered:  

· You have not been involved in any timber disposal previously.

· The proposed transaction has no connection to your normal income earning.

· The proposed transaction is not complex or on a large scale.

· The trees were sold as a one off transaction.

It can be said that the activity has a significant commercial component and that there is an intention to make a profit.

Considering all of the above, the proceeds from the sale of timber will be ordinary income and will be assessable under section 6-5 ITAA 1997 and are not considered to be a capital gain.

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