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Ruling

Subject: Land clearing expenses

Question 1

Are you entitled to a deduction for costs of clearing a newly purchased property, which previously was a tree plantation, in order to commence different income earning activities?

Answer

No.

Question 2

Are you entitled to a deduction for costs of clearing land you own, on which you operated a tree plantation activity, in order to commence different income earning activities?

Answer

Yes.

Relevant facts and circumstances

You own a plantation.

You intend to purchase another property, which also is being used for a plantation.

You want to return both pieces of land to a state suitable for different income earning activities.

You will incur expenses to do this.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct a loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or is necessarily incurred in carrying on your business.

However, you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 to the extent that the loss or outgoing is capital or of a private or domestic nature.

There have been a number of instances in which Australian courts have held that an outgoing is not deductible because it is incurred before a business has commenced. An outgoing may be 'too soon' in the sense that the advantage conferred by the expenditure is necessary for, but not found 'in', the regular income earning activities of the business (see for example FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 54).

Taxation Ruling TR 95/6 discusses primary production and forestry. Paragraph 107 of TR 95/6 provides several examples of deductible expenditure and non-deductible expenditure. Subparagraph 107(b) of TR 95/6 states (noting that the reference to subsection 51(1) is now applicable to section 8-1 of the ITAA 1997):

Where a taxpayer is already conducting a business of forest operations on the land in question (e.g., the taxpayer has harvested timber from the land which has been sold as part of the business), then costs of clearing or preparing the land, such as pushing out and windrowing of stumps and debris, will be deductible under subsection 51(1) as they form expenditure incurred in carrying on a business.

Therefore, when in a business of forest operations, a taxpayer will be able to deduct the costs of clearing the land after the plantation has been harvested.

In your case

You want to clear two different blocks of land, which were previously used for plantations, in order to make them suitable for different income earning activities.

In relation to the property that you own, as you are already carrying out activities associated with the plantation, the cost to clear the land is considered to be incurred in gaining or producing your assessable income.

Therefore, these costs will be deductible under section 8-1 of the ITAA 1997.

However, in regards to the property that you intend to purchase, there is a notable distinction; you have not previously been carrying on forestry operations on that land. You intend to use the property, once cleared, for different income earning activities.

This does not align with subparagraph 107(b) of TR 95/6, as where a business of forestry operations are not being conducted, the costs of clearing land will not be deductible.

We consider that the costs of clearing the land will be incurred 'too soon' before the different income earning activities are commenced.