Edited version of private ruling

Authorisation Number: 1011722300019

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Ruling

Subject: Capital gains tax

Question 1

Will you be required to apportion the sale price between the land and the standing timber at your property?

Answer

Yes.

Question 2

Will the "market value" of the standing timber on the day of disposal be included in your assessable income under subsection 70-90(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You purchased your land after September 1985. The land contained standing timber at the time of purchase. The agreement for the purchase of the land shows a purchase price for the land and trees. There was not a separate value placed on the sale of the trees.

At various times since you purchased the land, the trees have been felled and the proceeds have been included as assessable income. In addition expenses in respect of the property have been claimed as deductions in income tax returns.

The property was sold with no value ascribed to standing timber.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-90

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1936 Section 36

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

For capital gains tax (CGT) purposes the felling of timber or the 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 (the land and the timber). Any net capital gain arising on the disposal of the timber (or land) is assessable income of the year of income in which the disposal occurs or is deemed to have occurred under section 104-10.

Sale of Timber

Taxation Ruling TR 95/6 deals with the application of the subsection 36(1) of Income Tax Assessment Act 1936 (ITAA 1936) (the predecessor of section 70-90) to standing timber. It states that a disposal of trees owned by a taxpayer and which have been planted (not necessarily by the taxpayer) and tended for the purpose of sale may result in subsection 36(1) of the ITAA 1936 applying to the value of those trees in the year of disposal, so long as the taxpayer is carrying on a business (not necessarily of forestry operations) and the disposal is not in the ordinary course of carrying on that business. What is required is that the trees constitute the whole or part of the assets of that business.

Where subsection 70-90(1) is applied and the market value of the item is included as assessable income, the amount actually received is excluded from the taxpayer's assessable income under subsection 70-90(2).

A taxpayer will have a capital gain only if a CGT event happens. Section 104-10 specifies that a CGT event A1 happens if a taxpayer disposes of a CGT asset.

Section 118-20 prevents double taxation by reducing a capital gain arising from a CGT event to the extent that an amount has already been included in a taxpayer's assessable income or exempt income in any income year under a provision of the Act outside Part 3-1 of the CGT provisions.

In this case, you have been selling felled timber from the land during your period of ownership. You have now sold your land including the standing timber.

In our opinion, as you are embarking on the disposal of a certain asset (standing timber) outside the ordinary course of your business that you are carrying on and the standing timber are an asset of your business, you satisfy the conditions of section 70-90. Therefore, your share of the market value of the standing timber on the day of disposal should be included in your assessable income under subsection 70-90(1) and the amount you actually receive is excluded from your assessable income under subsection 70-90(2).

The disposal of the standing timber will result in a CGT event A1 occurring (disposal of a CGT asset) and you will make a capital gain pursuant to section 104-10. However, as the market value of the standing timber on the day of disposal is also assessable under section 70-90 the anti-overlay provisions of section 118-20 apply and the capital gain on the tree component is reduced to zero.

Sale of Land

The sale of your land is subject to the ordinary CGT provisions and will be a CGT event A1. As your Contract for Sale of land had a single price for the sale of the timber and land, the capital proceeds received will need to be apportioned.

For example, if you obtain a market valuation for the standing timber (a requirement of subsection 70-90(1)) and deduct the amount from the capital proceeds received for the sale of the land and timber, the balance will represent the capital proceeds received for the sale of the land.

Alternatively, you may choose another reasonable method of valuing the land and timber for apportionment.