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Ruling

Subject: Income from sale of standing timber

Question

Are the payments you receive from a logging contractor for the right to remove timber from your land considered to be royalties?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You operate a primary production business.

You entered a contract to sell all millable timber together with the right to cut and remove the timber from that land.

Thirty days from the end of each month during the term of the contract you will receive payment for any timber cut during that month.

You are not in the business of forestry operations.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 15-20

Reasons for decision

Summary

It is considered that the payments you receive for the right to enter your property to remove standing timber are royalties. The royalties received form part of your assessable income.

Detailed reasoning

The question of assessability of the proceeds from the sale of standing timber is considered in Taxation Ruling TR 95/6.

It is stated in the Ruling that the income from the sale of standing timber may be income from carrying on a business of forestry operations or income from a profit making undertaking or scheme under section 6-5 of the ITAA 1997. It may also be assessable as a royalty under section 15-20 of the ITAA 1997 where it is not assessable as ordinary income under section 6-5 of the ITAA 1997. Therefore, we need to consider if the proceeds you received from the sale of standing timber fall under any of the following categories:

· a business of forestry operations; or

· an isolated profit making undertaking or scheme; or

· a royalty

You state you are not carrying on a business of forestry operations, therefore, the income is not assessable under section 6-5 of the ITAA 1997 on this basis.

Profits from Isolated Transaction

TR 95/6 states that a taxpayer although not carrying on a business of forestry operations, may dispose of standing timber at a profit in circumstances where the amount is not a royalty. If the taxpayer makes a profit in these circumstances, that profit is assessable income if:

(a) the intention or purpose of the taxpayer entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction (paragraph 16 of Taxation Ruling TR 92/3).

Whilst you are carrying on a business of cattle grazing, we do not consider that the sale of the rights to harvest the timber on your land is a commercial transaction. This is a one-off transaction resulting in an amount of money that is relatively minor. As such, the income received is not assessable as an isolated profit-making undertaking under section 6-5 of the ITAA 1997.

Royalty

Section 15-20 of the ITAA 1997 includes in assessable income, amounts that are received as, or by way of, royalty within the ordinary meaning of royalty if the amount is not assessable as ordinary income under section 6-5 of the ITAA 1997.

TR 95/6 states that royalties received by a taxpayer, from the grant of a right to fell timber on land owned by the taxpayer, are assessable income of the taxpayer, even if the taxpayer granting the right is not carrying on a business of forest operations.

The term 'royalty' is defined in the Macquarie Dictionary to mean any such rights granted by their owner to another and the payment made for such right. A number of court cases have considered the ordinary meaning of royalty.

In McCauley v. FCT (1944) 69 CLR 235 (McCauley's Case), the High Court held that amounts received by a dairy farmer who granted the right for another to purchase, cut and remove timber which was situated on land which he owned to be a royalty. The purchaser had agreed to cut and remove all of the timber from the land within a 12 month period and pay each month three shillings for every hundred feet of timber cut. The Court ruled that consideration for the right to cut and remove the timber from the land was within the ordinary business usage of the term 'royalty'.

Your case is similar to McCauley's case as you have given a right to another entity to remove the standing timber from your property. From the time they remove the timber, you no longer have control over the movements of the timber and what is done with the timber. The payments are considered to be for the right to enter your property and remove standing timber.

The proceeds from the sale of standing timber is assessable as royalties to you under section
15-20 of the ITAA 1997.

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