Edited version of private advice

Authorisation Number: 1052385799319

Date of advice: 15 April 2025

Ruling

Subject: Am I in business - forestry operations

Question 1

Is the income you received for the harvest of trees on your property by a third-party assessable income?

Answer 1

Yes.

This ruling applies for the following periods:

Year ended DD MM 20XX

Year ended DD MM 20XX

Year ended DD MM 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You and your late spouse purchased a property in the 19XXs. You soon after planted trees on the property. The property was used as a dwelling and no business activities were conducted on the land.

Your spouse passed away. You held onto the property and let the trees grow for over XX years as they held sentimental value to you and your family. No timber was harvested during this time, and you did not thin the forest or maintain it in a way that would normally be done in a commercial enterprise.

Several years ago, your region experienced a significant bushfire season. During these bushfires, you were contacted by a forestry services provider to consider cutting down the trees on your property. During your correspondence with them, you communicated your intentions not to harvest the timber due to the sentimental value that they hold to your family.

On DD MM 20XX, the forestry services provider sent you a letter urging you to reconsider your position on harvesting the trees. Their risk assessment of the property showed that it presented a very high fire risk due to rising temperatures and drought conditions in the region. The risk to the local township was also high from the actual fire and surrounding smoke. You have provided us with a copy of this letter.

Due to the risks that your property presented to the local community, you agreed to harvest the trees. The forestry services provider organised the harvest and the trees were cleared off-site to minimise danger. After deducting the costs, they paid you for the loss of the trees.

You have provided a copy of the agreement. The agreement contains the following relevant terms:

•                     The duties of the forestry services provider included road construction and maintenance, contractor management and payment, harvest, loading and haulage to timber to the destination, sale of tree crop to credible and reputable customers, invoicing of customers and receipt of sale proceeds, regular inspections and monitoring, and post-harvest clean up.

•                     The forestry services provider would pay for direct costs on your behalf and be reimbursed by you as invoiced monthly.

•                     Net stumpage would be calculated as $X per tonne and paid monthly to you following deliveries in the preceding month.

As per advice from the forestry services provider, you reactivated your ABN for the timber harvest proceeds. Your ABN had been used in the past for providing services aligned with your profession, which is unrelated to the forestry activities.

You have reported the income received from the harvest of the trees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-20

Income Tax Assessment Act 1997 subsection 15-20(1)

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

Reasons for decision

Assessable income from forestry operations

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) ordinary income is referred to as income 'according to ordinary concepts'.

This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts. Typical examples of ordinary income include salaries, wages, and proceeds of carrying on a business, rent, interest, and dividends.

Paragraph 18 of Taxation Ruling TR 95/6 Income tax: primary production and forestry (TR 95/6) provides that in addition to income derived from carrying on a business, the following receipts will constitute assessable income for forestry operations:

•                     proceeds from the sale of felled timber;

•                     proceeds from the sale of standing timber;

•                     royalties received from granting rights to other persons to fell and remove timber;

•                     insurance recoveries; or

•                     reafforestation incentive grants or payments.

Income derived from an isolated transaction involving forestry operations may also give rise to assessable income under paragraph 62 of TR 95/6. This may occur if you have a profit-making intention or purpose, and the transaction was entered into in carrying out a business operation or commercial transaction.

Carrying on a business of forestry

'Business' is defined under subsection 995-1(1) of the 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 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 set out 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 business indicators as follows:

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

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

•                     whether the 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 and 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 on in a businesslike manner such that it is directed at making a profit;

•                     the size, scale and permanency of the activity; and

•                     whether 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.

Royalties

Section 15-20 of the ITAA 1997 states your assessable income includes an amount that you receive as or by way of royalty if the amount is not assessable as ordinary income under section 6-5 of the ITAA 1997.

The Commissioner's view on the definition of a royalty is set out in Taxation Ruling IT 2660: Income tax: definition of royalties (IT 2660).

The ordinary meaning of the term 'royalty' has been considered by the Courts on many occasions. In Stanton v Federal Commissioner of Taxation (1955) CLR 630, the High Court of Australia described the essence of a royalty and stated that:

The modern applications of the term seem to fall under two heads, namely the payments which the grantees of monopolies such as patents and copyrights receive under licences and payments which the owner of the soil obtains in respect of the taking of some special thing forming part of it or attached to it which he suffers to be taken.

Paragraph 10 of IT 2660 provides that in the Commissioner's view there are four key characteristics of a common law royalty:

•                     it is a payment made in return for the right to exercise a beneficial privilege or right, for example to remove natural resources such as timber (McCauley v Federal Commissioner of Taxation (1944) 69 CLR 235);

•                     the payment is made to the person who owns the right to confer that beneficial privilege or right (Barrett v Federal Commissioner of Taxation (1968) 11 CLR 666);

•                     the consideration payable is determined on the basis of the amount of use made of the right required (McCauley, Stanton); and

•                     the consideration will usually be paid as and when the right acquired is exercised. However, a lump sum payment will be a royalty where it is a pre-estimate or an after the event recognition of the amount of use made of the right acquired (IR Commissioners v Longmans Green & Co Ltd (1932) 17 TC 272).

Isolated commercial transaction

Paragraph 113 of TR 95/6 states that even if you are not carrying on a business of forest operations, you may dispose of trees or standing timber at a profit in circumstances where the amount received is not a royalty.

Profits arising from an isolated business or commercial transaction will be ordinary income if your purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of your business (Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 (Myer Emporium case)).

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Paragraph 1 of TR 92/3 provides that the definition of 'isolated transactions' includes transactions entered into by non-business taxpayers.

It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

Under paragraph 6 of TR 92/3, if you make a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of your business but:

•                     your intention or purpose in entering into the profit-making transaction or operation was to make a profit or gain; and

•                     the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

You must have the requisite purpose at the time of entering into the relevant transaction or operation. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits can be assessed as ordinary income within section 6-5 of the ITAA 1997.

Application to your circumstance

Carrying on a business

The Commissioner accepts that you were not carrying on a business of forestry operations. This is because:

•                     there was no commercial character;

•                     there was no intention to engage in business;

•                     there was no purpose or prospect of profit;

•                     there was no repetition or regularity of the activity;

•                     the activity was not carried on in a businesslike manner or in a similar manner to other forestry businesses; and

•                     the activity could be better described as a hobby or a form of recreation.

You are therefore not in the business of forestry operations.

Royalties

Even if you are not carrying on a business, income that has the characteristics of a royalty will be assessable income.

In your case, you entered into an agreement with a forestry services company where they harvested trees from your property for profit. You received a payment in exchange which was calculated based on the volume of logs harvested, minus costs.

The payment you received was made in return for the right to enter your property and harvest standing timber. It was made to you as the owner of the land and therefore the person able to grant the right. The proceeds you received were determined based on the volume of logs harvested. It therefore has the characteristics of a royalty.

As the payment has the characteristics of a royalty, it will form part of your assessable income under section 15-20 of the ITAA 1997.

Isolated commercial transaction

Even if the income derived from the harvesting of the trees was not a royalty, it would still be assessable income. Taking all of the available facts into consideration, the proceeds received from the harvest would be derived in the course of a one-off commercial transaction. The proceeds that you received from the harvest would therefore be ordinary income and assessable under section 6-5 of the ITAA 1997.

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