Edited version of your written advice

Authorisation Number: 1012863608857

Date of advice: 31 August 2015

Ruling

Subject: Capital gains tax - profit a prendre

Question:

Is your share of the amount received from the company subject to tax in the current financial year?

Answer:

No

This ruling applies for the following period:

Year ending 30 June 2016

This scheme commenced on:

1 July 2015

Relevant facts:

You and your spouse (you) purchased a property several years ago.

The previous owner of the property had many years prior to selling you the property, entered into a profit a prendre agreement with the company.

Under the agreement the owner agreed to transfer and granted the company the right for the term of the agreement to enter and establish, maintain and to the exclusion of the owner and all other parties, to harvest trees and sell the goods obtained from the harvest.

Your intention at the time of purchasing the property was to live on the property as your main residence.

You did not to enter into the agreement to make a profit as you believed the agreement was a liability as you held land you were required to upkeep and that you could not use.

You agreed to take over the remaining term of the agreement as part of the conditions to purchase the property.

You did not receive any income for agreeing to accept the remaining term of the agreement.

During the period of agreement you did not receive any income.

You received a payment upon termination of the agreement.

Relevant legislative provision

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-20

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-35.

Reasons for Decision

Receipts from the sale of standing timber may be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if the receipts are income according to ordinary concepts (ordinary income). Receipts derived from a primary production business of forest operations are ordinary income. Receipts from a profit making undertaking or scheme may also be ordinary income.

Receipts that are not ordinary income may also be included in a taxpayer's assessable income as statutory income under section 6-10 of the ITAA 1997 if they are included by a specific provision in the ITAA 1997.

Section 15-20 of the ITAA 1997 includes receipts that are royalties and section 102-5 of the ITAA 1997 includes a taxpayer's net capital gain for the income year.

In your case from the information provided the income is not from carrying out a forestry business operation, a profit from an isolated transaction or a payment in the form of a royalty.

Capital gains tax (CGT)
Where a person, after 20 September 1985, owns land enters into a contract for the sale of uncut timber which grants the purchaser certain rights over the land, the transaction may constitute the grant of a profit a prendre (Taxation Determination TD 93/81).

A profit a prendre is an interest in land and is a CGT asset separate from the land. It is created at the time it is granted and as such constitutes the happening of CGT event D1 (creating contractual or other rights).

The circumstances in which a profit a prendre may arise are summarised in paragraph 70 of Taxation Ruling TR 95/6. Where at the time of the contract, it is contemplated that the purchaser will derive a benefit from the further growth of the trees, then the purchaser will acquire an interest in the land, that is a profit a prendre.

The Ruling also states that the terms of each individual agreement must be examined to determine whether it is an agreement for the sale of goods to which the right to enter and remove the goods is ancillary, or whether it is an agreement for the sale or creation of an interest in the land (a profit a prendre).

When predominantly mature timber is sold, it is likely that the purchaser desires to acquire only the timber warehoused on the land rather than a benefit from the land itself. Such an arrangement is not a profit a prendre, it is an agreement for the sale of goods to which the right to enter and sever the timber is ancillary.

In this case, the company has acquired an ongoing interest in the land and the future growth of the trees as the company has agreed to establish, maintain, harvest the trees and sell the timber to the exclusion of the owner and all other parties. Therefore, the payment you received is for the granting of a profit a prendre which constitutes the CGT event D1 in the financial year in which you became a party to the agreement. Consequently the capital gain from the agreement is assessable in that financial year when the granting of a profit a prendre had occurred (TD 96/35).