Edited version of your written advice

Authorisation Number: 1051304773890

Date of advice: 7 November 2017

Ruling

Subject: Sale of timber - assessable income

Question 1

Are the proceeds you receive from sales of timber assessable as ordinary income?

Answer

No

Question 2

Are the proceeds you receive from sales of timber assessable under the capital gains tax (CGT) provisions?

Answer

Yes

This ruling applies for the following periods

Years ending 30 June 2017 and 2018

The scheme commences on

1 July 2016

Relevant facts and circumstances

You purchased land located in NSW (the property) in 20XX as joint tenants. The property comprised of native timber.

The property was originally part of a larger area of land owned by your parents. While your parent was alive some land was gifted to an Educational facility to use for research purposes and subsequently the facility gifted this area to State A National Parks.

When your parent passed away, an area of land (X parcels) passed to your parent. Following your parent’s death in around 20XX, you purchased the property from the estate for market value allowing cash to be available for other beneficiaries of the estate. You wanted the property ownership to remain in the family.

You have incurred costs since acquiring the property including rates and insurance and fencing part of the property.

You have not carried out any income producing activity on the property since its acquisition.

You purchased the property as an investment where the cash value could be realised in your retirement.

In 20XX you identified neighbouring properties had commenced harvesting their timber. You later met with a contractor to explore options for harvesting and delivering felled timber to local sawmills.

You entered into an Agreement with the contractor for them to provide consulting and management services for a fee. No additional services have been provided.

The contractor identifies the individual trees to be logged and cuts down the identified trees, prepares them for transportation to the mill and organises transport of the timber to the mill.

You are only responsible for providing and maintaining adequate access to the log dumps at the location of the log trucks on the property.

You have or will receive proceeds from the sales of cut timber to the mills.

You entered into the services agreement to harvest your timber seeing the proceeds could fund outgoings in relation to maintaining ownership of the property.

You applied for an ABN as a partnership in 20XX income year. The turnover from sales of timber was expected to exceed $75,000 for the tax period ended 30 June 20XX so the partnership registered for GST.

You are treated as the supplier of the timber and the contractor is your agent.

The partnership tax returns for 20XX and 20XX income years have been lodged with nil income.

The contractor did not have the capacity to commence harvesting your timber until February 20XX. Since harvesting commenced in February 20XX more than 50% of the timber was harvested by June 20XX and the remaining portion will be harvested and sold in July and August 20XX.

The harvesting operation results in a very small reduction in the amount of trees and vegetation on the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-20

Income Tax Assessment Act 1997 section 102-5

Reasons for decision

You are seeking a private ruling on the treatment of proceeds from the sale of timber on the property.

‘Ordinary income’ is defined in section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean income according to ordinary concepts. A substantial body of case law has evolved over time that identifies various factors that are taken into account in determining when an amount is ‘income according to ordinary concepts’.

Ordinary income includes income that arises in the normal scope of a taxpayer’s business. In addition, in limited circumstances, gains not within the ordinary scope of the taxpayer’s business may form part of ordinary income.

Taxation Ruling 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 TR 95/6 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.

Royalties received from granting rights to other persons to fell and remove timber

An amount paid to a land owner for granting the right to remove trees, and which is calculated by the amount of timber removed is considered to be a royalty payment.

In your case, the Agreement between you and the contractor amounted to them removing and selling the timber on your behalf, and is not considered to be a royalty payment.

Isolated profit making transaction

Receipts from the disposal of trees by a person who is not carrying on a primary production business of forestry operations may be assessable income under section 6-5 of the ITAA 1997 if the receipts are from an isolated profit making transaction.

A profit from an isolated transaction is generally assessable income when both of the following elements are present:

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

(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.

In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

The intention or purpose of the taxpayer is discerned from an objective consideration of the facts and circumstances of the case. If the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income.

Paragraph 13 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income lists factors that the Commissioner will take into account in considering whether an isolated transaction amounts to a business operation or commercial transaction.

These factors are:

(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 your situation, you do not carry on a business or any income producing activity on the property. You have engaged a contractor for their services to harvest and fell selective trees to transport to saw mills. Your sole participation in this process is to provide and maintain adequate access to the log dumps at the location of the log trucks on your property. You have or will receive proceeds as a result of selling cut timber. No rights to enter your property have been granted in the Agreement.

You entered into the Agreement to harvest timber after making enquiries with neighbours and local sawmills on its commercial viability, this was approximately five years after acquiring ownership of the property. After entering the agreement, harvesting did not commence until approximately four years in February 20XX and ceases in August 20XX. No other agreements or harvesting occurred. You harvested timber to realise proceeds to use in maintaining ownership of the property.

After taking into consideration your facts and circumstances, your activity does not amount to a commercial transaction for which profits from an isolated transaction are brought to account as ordinary income.

Therefore the application of the CGT provisions is relevant to your proceeds.

Capital gains tax

Section 102-5 of the ITAA 1997 provides that a taxpayer's assessable income includes a net capital gain. The felling of timber or sale of standing timber on land acquired on or after 20 September 1985 results in the original asset (the land with the trees) being split into two post CGT assets. Any net capital gain arising on the disposal of the timber is assessable income in the year of income in which the disposal occurs.

In your case as discussed above, your activity does not amount to a business operation, royalty or profit making undertaking; therefore the proceeds received from selling timber on the property are assessable under the CGT provisions.

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