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Ruling

Subject: Taxation treatment of apiary trees

Question 1

Will you be able to claim deductions for decline in value (depreciation) for trees planted for pollens & nectars in relation to your business of honey production?

Answer

No.

Question 2

Will your ongoing maintenance costs in relation to the above mentioned trees be deductible expenses under section 8-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have recently commenced a business of honey production.

You are planning to plant trees, such as bottle brush and grevillea, as part of your apiary.

This will enhance the variety of trees available, provide year round pollen and nectar and reduce the need to transport the bees.

You will incur ongoing expenses in respect of the maintenance of these trees, such as watering and pest control.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 40-515

Income Tax Assessment Act 1997 Section 40-520

Income Tax Assessment Act 1997 Section 40-535

Income Tax Assessment Act 1997 Section 40-545

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Trees as capital assets

In Taxation Ruling TR 2004/13, the issue of what an asset is was addressed. That ruling considers an asset is anything recognised in commerce and business as having economic value.

In your situation, the trees you intent to plant will provide pollens and nectars for your apiary. It is therefore accepted that these trees will have an economic value and are assets.

Trees as horticultural plants

Section 40-30 of the ITAA 1997 defines a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

· land; or

· an item of trading stock; or

· an intangible asset (unless it is mentioned in subsection (2)).

Subdivision 40-F of the ITAA 1997 provides special rules for depreciating assets that are horticultural plants used in commercial horticulture.

Section 40-520 of the ITAA1997 states a horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts.

Section 40-535 of the ITAA 1997 states horticulture includes propagation and cultivation of a horticultural plant in any environment (whether natural or artificial); propagation and cultivation of seeds, bulbs, spores and similar things; and propagation and cultivation of fungi.

Section 40-535 of the ITAA 1997 states the phrase 'use in commercial horticulture' means as for the purpose of producing assessable income in a business of horticulture.

Section 40-515 of the ITAA 1997 allows a deduction an amount equal to the decline in value for an income year of a depreciating asset that is a horticultural plant.

However, subsections 40-535(2) and 40-545(2) of the ITAA 1997 limit the deduction available under section 40-515 of the ITAA 1997 to horticultural plants used for commercial horticulture, which means use for the purpose of producing assessable income in a business of horticulture.

Section 995-1 of the ITAA 1997 defines a primary production business, as follows:

· cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; or

· maintaining animals for the purpose of selling them or their bodily produce (including natural increase); or

· manufacturing dairy produce from raw material that you produced; or

· conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans or aquatic molluscs; or

· conducting operations relating directly to taking or culturing pearls or pearl shell; or

· planting or tending trees in a plantation or forest that are intended to be felled; or

· felling trees in a plantation or forest; or

· transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed.

Taxation Determination TD 2008/26 states that a business of keeping bees for the production and sale of honey constitutes a primary production business, namely, maintaining animals for the purpose of selling them or their bodily produce (in accordance with paragraph (b) above).

This categorisation of your business distinguishes it from the definition of a business of horticulture, found in paragraph (a) in the above definition of a primary production business, and also found in section 40-535 of the ITAA 1997 (mentioned above).

Therefore, in your situation, the trees you intend to plant are live plants or fungi cultivated or propagated for their products or parts, per the definition found in section 40-520 of the ITAA1997. However, you are not carrying a business of horticulture. Instead, you are carrying on a business of maintaining animals for the purpose of selling them or their bodily produce.

It follows subsections 40-535(2) and 40-545(2) of the ITAA 1997 prohibit you to claim a deduction under section 40-515 of the ITAA 1997 for the decline in value of the trees you intend to plant.

Decline in value prohibit under general provisions

As previously mentioned, section 40-30 of the ITAA 1997 defines what a depreciating asset is and excludes land, trading stock and certain items of intellectual property from the definition of a depreciating asset.

Subsection 40-30(3) of the ITAA 1997 defines certain improvements to land or fixtures on land to be depreciating assets, as if they were assets separate from the land. For example, a gully dam constructed from earth and clay is an improvement to land that qualifies as a depreciating asset, for which a deduction for decline in value can be claimed.

As planted trees may also be an improvement to land, subsection 40-30(3) of the ITAA 1997 applies to them as if they were an asset separate from the land.

However, Note 1 to subsection 40-30(3) requires the trees to satisfy the definition of a depreciating asset in subsection 40-30(1) in their own right. In other words, the application of subsection 40-30(3) to an asset does not automatically make it a depreciating asset. An asset that is treated as a separate asset because of the operation of subsection 40-30(3) must still fall within the meaning of depreciating asset given in subsection 40-30(1). Subsection 40-30(1) excludes land from being a depreciating asset.

There are many factors which can lead to the accepted view that trees are part of land.

First, at common law, fixtures on land and improvements to land are generally considered to be part of the land. It has been long standing practice and policy to consider plants and trees on land as part of the land and no deductions are allowed for the planting of those plants unless specifically provided for under the legislation.

Second, paragraph 67 of Taxation Ruling 95/6 states that even though trees are attached to the land, the land and the trees are considered to be a single asset owned by the taxpayer for capital gains tax purposes.

Third, in the Supreme Court case of Seas Sapfor Ltd v Comr of Stamps (SA) 97ATC 4535, the taxpayer's contention was that the pinus radiata trees were chattels and not part of the land for the purposes of assessing stamp duty. However, the court held that the trees were part of the land and referred to terms such as fructus industriales and fructus naturales.

Fructus industriales are fruits or crops such as corn or other annual produce of the earth produced not spontaneously but by labour and industry. They have been described as the fruits or crops produced in the year by the labour of the year in sowing and reaping, planting and gathering. Whilst growing in the ground this class of produce is not treated as part of the land but has the character of personal chattels.

Fructus industriales are to be distinguished from fructus naturales being the natural growth of the soil such as grass, timber and fruit on trees which are regarded at common law as part of the soil.

In the above court case, the decision was that certain plants such as fructus naturales become part of the soil. The growing pines were characterised as fructus naturales.

Similarly, trees grown on land to sequester carbon or to serve as windbreaks for fruit plantations would not be regarded as chattels; they would be characterised as fructus naturales.

Consequently, these trees would be part of the land.

Therefore, in your situation, it is reasonable to conclude that the trees you intend to plant for your apiary will become part of the land. It follows, they will not lose their essential character as land and they fall within the exclusion of paragraph 40-30(1)(a) of the ITAA 1997. Their decline in value cannot be deducted under Division 40 of the ITAA 1997.

Maintenance costs are deductible 

Section 8-1of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

The trees you intent to plant will provide pollens and nectars for your apiary, which supports the notion that these trees will be used in carrying on a business for the purpose of producing your assessable income.

It follows, relevant costs you may incur in maintaining these trees, such as watering and pest control will be deductible operating expenses under section 8-1 of the ITAA 1997.