Edited version of your written advice

Authorisation Number: 1051245133554

Date of advice: 30 June 2017

Ruling

Subject: Lump sum

Question 1

Do the proceeds from the sale of timber form part of your assessable income?

Answer

Yes.

Question 2

Does the receipt of proceeds from the sale of timber result in a capital gain?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You are employed on a full-time basis.

You own a property which you use for primary production purposes.

A section of your property contains remnant forest (containing naturally standing hardwood).

You have entered into an 'Agreement for Sale of Timber’ This agreement gives a third party the right to enter your property and harvest timber for a price set out in the schedule.

The timber has been cut and the contract has now been finalised.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-20

Income Tax Assessment Act 1997 subsection118-20(2)

Income Tax Assessment Act 1997 subsection 118-20(3)

Reasons for decision

Taxation Determination TR 95/6 Income tax: primary production and forestry, deals with the extent to which receipts derived from the sale of timber constitute assessable income, whether or not the taxpayers are engaged in the forestry industry.

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 Income Tax Assessment Act 1997 (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

To be carrying on a business, you must intend to fell the trees in question for sale at a profit and your activities must be organised and run in a business-like way. This generally means that you actively tend and maintain the trees.

From the information you have provided you are not considered to be in the business of forestry.

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 Income Tax: whether profits on isolated transactions are income).

Whilst you are carrying on a business of primary production, we do not consider that the sale of the rights to harvest the timber on your land is a commercial or business like transaction. This is a one-off transaction where you have had minimal involvement by just entering into the contract. It is the other party that has completed the work of a business nature. As such, the income received is not assessable as in isolated profit-making undertaking under section 6-5 of the ITAA 1997.

Royalty

TR 95/6 explains that payments received for a right to remove trees on the basis of the amount of timber cut or removed under a right to do so are receipts as or by way of royalty and constitute assessable income under section 15-20 of the ITAA 1997.

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.

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 entered into a contract for a third party to enter your property to fell and remove timber. 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 and you are paid on the basis of the amount of timber taken.

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

Where the disposal of an asset gives rise to assessable income and a capital gain, the amount of the income received is included in assessable income and the capital gain is reduced by that amount in accordance with subsections 118-20(2) and 118-20(3) of the ITAA 1997.

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