Edited version of private advice

Authorisation Number: 1052378500700

Date of advice: 28 March 2025

Ruling

Subject: Deductions

Question 1

Can you claim a deduction for the market value of the trees at the time that they were ventured into the business against the harvest proceeds received?

Answer 1

Yes.

This ruling applies for the followingperiods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You are the trustee for a family discretionary trust which was established over X years ago. You were the sole beneficiary and sole trustee for majority of the period since the trust was established. You have provided a copy of the trust deed and a copy of the deed of change of trustee.

Your late parent owned farmland which was acquired prior to 20 September 1985. The property contained a tree plantation. The property also contained other trees which your parent leased to a third-party company prior to their death.

Your parent passed away on DD MM 20XX. Their Will directed that the property be transferred to your trust on their death. A copy of the deceased's Will was provided.

The deceased's Will stated that the tree plantation must first be offered to specific beneficiaries for lease, and if they chose to take up the lease, then they would be entitled to the proceeds from the first harvest. The lease would cease following the first harvest, and there would be no further entitlements relating to the tree plantation.

Under the Will, the lessees were required to pay annual rent which was calculated at the same rate as the existing lease to the third-party company entity.

An informal lease agreement was entered into with the beneficiaries in their individual names based on the terms set out under the deceased's Will. You attempted to get lease agreements signed by the beneficiaries, but they did not agree to this. You have provided sample invoices which were made out to the individuals for payment of rent under the lease arrangement.

The lessees engaged harvest contractors and the first harvest occurred approximately X years after the deceased's death. The individuals who had taken up the lease were paid their share of the proceeds. At this time, the lessees only accounted for the expenses relating to the rent paid under the lease arrangement. No acquisition costs were claimed for the trees.

You have tended the trees since acquiring the property, and following the expiry of the lease to the beneficiaries under the deceased's Will, you have continued to tend and regrow them as your main business activity.

You have provided the following information about your forestry operations:

•       rees were already on the property at the time that the property was transferred to your trust. You tended the trees throughout the entire period of ownership and it was always your intention to harvest the trees to make a profit, after meeting any initial obligations to the beneficiaries under the deceased's Will.

•        acquisition, you have travelled to and worked on the property for an average of 2-3 times per week. Activities carried out include fertilising and coppicing the trees, planting seedlings, manual weed control, maintaining firebreaks, dams, and boundaries to meet fire control regulations, meeting with neighbours for bushfire planning, maintaining irrigation systems and internal access roads, inspecting, and maintaining fences, seeking advice from forest management organisations, other foresters and local tree growers as needed.

•       o not have a written business plan. At the time that the lease to the beneficiaries ended, you identified that your options were to cease the activity, lease the plantation, or regrow the trees for further harvesting. You considered the costs involved and the projected income from each option. You decided that the only financially viable outcome was to regrow the trees for further harvesting.

•       ad relevant experience and expertise in the activity due to working on the family farm over many years. Although the proceeds of sale are dictated by the local market, you expected the proceeds to outweigh your costs based on previous harvests. The expenses included land rates as well as the costs associated with tending the trees. You have paid for expenses using accumulated savings as well as the rental income.

•        from the plantation, improvements include boundary fences, dams, and fertilising. Farm equipment used includes equipment required for fire control and property maintenance, as mentioned above. All farm equipment has been fully depreciated or expensed under the temporary full expensing concessions.

•       ave not been employed in any other area since operating the tree farming activity. The income earned by your trust has been your main source of income for many years. The trust has derived income from the tree farm and an investment unit, as well as interest from bank accounts. You have relied upon the trees as your main source of income as a self-funded retiree, as the rental and interest income were not enough to cover your living expenses.

•       ole activity conducted on the property is tree farming. There is no private residence located on the property. You do not have any livestock on the property. No licences are required for forestry operations; however, you are required to meet fire control regulations.

•       onduct the activity in line with industry standards and relevant laws. You lodge quarterly BAS and annual financial records which are prepared by your tax agent as well as interim accounts for planning purposes as needed. You have had regular meetings with foresters, lawyers, and accountants to seek farming, business succession planning, financial and taxation advice about your forestry activity.

•       roceeds from your tree farming activity were $XX in 20XX and $XX in 20XX. The size and scale of the activity is approximately X hectares of plantation trees, of which approximately XX% relates to the most recent harvest.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Carrying on a business of forestry

'Business' is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). It includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The definition of 'primary production business' relating to trees is contained under subsection 995-1(1) of the ITAA 1997. You carry on a primary production business if you carry on a business planting or tending trees in a plantation that are intended to be felled, or if you fell trees in a plantation.

Whether or not a taxpayer is engaged in the forestry industry is discussed in paragraphs 14-15 of Taxation Ruling TR 95/6 Income tax: primary production and forestry (TR 95/6). Planting, tending or felling of trees will only be forest operations if those operations amount to carrying on a business. The question of whether a taxpayer's activities amount to carrying on a business depend on the facts of each particular case. Activities that have a commercial or profit-making purpose and are organised in a business-like way will generally amount to carrying on a business.

The Commissioner considers various indicators to determine whether a business of primary production is being carried as contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Paragraph 13 of TR 97/11 lists the 8 business indicators as follows:

•       er the activity has a significant commercial purpose or character;

•       er the taxpayer has more than just an intention to engage in business;

•       er the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•       er there is repetition and regularity of the activity;

•       er the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•       er the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•       ize, scale and permanency of the activity; and

•       er the activity is better described as a hobby, a form of recreation or a sporting activity.

No single indicator will be decisive in determining whether a business is carried on. The indicators must be considered in combination and as a whole. Where there is no overall profit motive and the activity looks like it will never produce a profit, it is unlikely that the activity will be considered to be a business.

Land and trees ventured into a new business

Paragraph 45 of TR 95/6 provides that where trees are ventured into a new business, the market value is used to reduce the sale proceeds.

Where land and the trees thereon are originally acquired and used for purposes other than forest operations, but are later ventured into a business of forest operations, the net profit from the sale of the timber when felled will be assessable income of the taxpayer. In calculating the net profit, the sale proceeds are reduced by an amount based on the market value of the timber at the time the trees were ventured into the business.

When this occurs, neither the land nor the trees are trading stock and, therefore, the trading stock provisions under Division 70 of ITAA 1997 do not apply. This is confirmed by paragraph 110 of TR 95/6.

The market value of the trees may be calculated in accordance with Taxation Determination TD 96/8 Income tax: how do you determine the market value of mature trees acquired and used for non-forest operations, but later ventured into a new business, as contemplated by paragraph 45 of Taxation Ruling TR 95/6?

Application to your circumstance

The Commissioner considers that you began operating your forestry business after the lease to the beneficiaries ceased. This is because the activity meets the definition of a 'primary production business' under the ITAA 1997 and because the activity demonstrates the business indicators under TR 97/11.

You are actively involved in forestry operations with the intention to make a profit. You entered into the business having prior experience in farming. You have sought advice and assistance from about your business. It appears that you carry on your forestry activities in the same way as other foresters do and are conducting the activity in a systemic and business-like matter. This supports that the activity is being conducted at the size, scale and permanency of a commercially viable business rather than a hobby.

The Commissioner is satisfied that the activities undertaken by you indicate carrying on a primary production business. There is a commercial flavour to the activity, it is organised and conducted in a business-like matter similar to other primary production businesses, and the size and scale of the activity indicates that you are conducting a forestry business.

We consider that the trees were ventured into the business after the lease to the beneficiaries ceased. It is therefore appropriate to reduce the sale proceeds from the harvest by the market value of the trees at the time that they were ventured into the business.

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