Edited version of private advice

Authorisation Number: 1051530026275

Date of advice: 15 June 2019

Ruling

Subject: Am I in business as a primary producer?

Question

Are you carrying on a primary production business (forestry operations)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You own land. On the whole of this land trees were planted after you entered into a lease agreement to grow trees on this land.

You also own an additional XX hectares of farm land which at present is not utilised for agricultural purposes.

In return for leasing the land you were to receive an annual lease fee as indicated in the lease document.

You had no financial benefit being derived from the sale of the timber once harvested.

The lessee went into administration at which time you could have executed the termination clauses of the lease resulting in the standing trees reverting to you taking ownership of the trees.

Since XX XXX XXXX you have been caring for the development and maintenance of the standing trees all at your costs as the trees are now your property.

You had to expend money in the maintenance of pest control sprays, weed sprays and whatever else necessary to ensure their continued growth.

In the XXXX/XX financial year, the trees became mature enough to harvest. In XXXX/XXXX, a number of hectares of trees were harvested which returned $XXXX. The remaining hectares of trees will be harvested in the XXXX/XXXX financial year and is expected to return $XX of timber sales.

The entire process to fell the trees rests solely with the timber processor engaged, including harvesting, transporting, storage and sale of the timber. This process is to be undertaken by a third party timber processor all at their cost with no involvement by the taxpayer or financial costs to them.

After the initial harvest of trees, you organised to have the stumps removed and return the land to pasture.

In XXXX/XXXX the remainder of the trees will be harvested.

The remaining hectares of stumps will be allowed to regrow until maturity to allow harvesting in approximately 10 years. This is anticipated to return $XXXX revenue (in today's pricing).

The taxpayer will continue to follow the same business like process of maintenance and care for the trees ensuring they reach maturity.

After the initial harvest you will return the land to pasture, seed the area, repair fences and will return the land to grazing. Initially they will graze approximately 30 head of cattle increasing this to 50 head over time as pastures become more mature and the second harvest is completed.

It is also anticipated that in the XXXX year the primary production business will cut and sell approximately $XXXX in hay sales.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for Decision

Where an individual is carrying on a business, the proceeds received from that activity are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all the relevant indicators. No one indictor determines whether or not a business is being carried on.

Taxation Ruling TR 97/11 income Tax: am I carrying on a business of primary production (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

·         Whether the activity has a significant commercial purpose or character,

·         Whether the taxpayer has more than an intention to engage in business,

·         Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,

·         Whether there is repetition and regularity of the activity,

·         Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

·         Whether the activity is planned, organised and carried out in a businesslike manner,

·         The size, scale and permanency of the activity,

·         Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The Commissioner is satisfied that you are carrying on a primary production business because you will make a profit from the harvesting of the trees, the operation you entered into was planned and carried out in an organised and business like manner.

The amount you receive from the harvesting of the trees is income and is assessable under section 6-5 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).