Edited version of your written advice

Authorisation Number: 1051190265656

Date of advice: 15 February 2017

Ruling

Subject: Assessable income - harvest proceeds received from a forestry interest owned by a subsequent participant

Question 1:

Will amounts received for agricultural thinnings by the family trust be assessable income on revenue account?

Answer:

Yes.

Question 2:

Will harvest proceeds received by the family trust be assessable on revenue account to the extent the proceeds match deductions obtained under Division 394 of the Income Tax Assessment Act 1997, with the balance subject to capital gains tax (CGT)?

Answer:

Yes.

This ruling applies for the following periods:

Year ending 30 June 20BB

Year ending 30 June 20CC

Year ending 30 June 20DD

Year ending 30 June 20EE

Year ending 30 June 20FF

Year ending 30 June 20GG

Year ending 30 June 20HH

Year ending 30 June 20II

The scheme commenced on:

1 July 20AA

Relevant facts and circumstances

The family trust does not carry on any business activities such as trading in, or buying or selling, forestry interests.

An individual intends to transfer ownership of several lots held in a forestry managed investment scheme (the forestry interest) to the family trust.

Harvest proceeds from the forestry interest is expected to be received in several years' time.

The family trust intends to claim ongoing fees and expenses in respect of the forestry interest.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 394-25

Income Tax Assessment Act 1997 section 394-30

Reasons for decision

All legislative references below are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Forestry managed investment schemes

Generally income is assessable and expenditure is deductible under sections 6-5 and 8-1 respectively. However, some amounts that may not be assessable or deductible under those general provisions may be made specifically assessable or deductible by particular legislative provisions.

For example, the tax treatment of forestry managed investment schemes (FMIS) is specifically provided for by Division 394.

A FMIS can have two different types of investors - initial participants (section 394-25) and subsequent participants (section 394-30).

Subsequent participants

In most situations, a subsequent participant will hold their interest on capital account (unless, for example, it is held by a subsequent participant as trading stock). A subsequent participant who holds their interest on capital account cannot claim a deduction for the cost of acquiring a forestry interest from an initial investor.

For a subsequent participant who holds their interest on capital account, their acquisition costs are included in the cost base or reduced cost base of the interest for CGT purposes when the interest is subsequently disposed of prior to harvest or if harvest proceeds are received.

Note: Where a secondary participant holds their interest on capital account and acquired that interest in a non-arm's length transaction which constituted a CGT event for the other entity, the CGT market value substitution rule applies for the purposes of working out the secondary participant's acquisition costs for the interest (section 112-20).

In this case, as the family trust does not carry on a business of trading in securities or buying and selling forestry interests, the holding of the forestry interest will be on capital account.

Agricultural Thinnings

Amounts received by initial and secondary participants for agricultural thinnings will be assessable income on revenue account. Agricultural thinnings are specifically excluded from the CGT treatment for secondary participants that hold interests in a forestry scheme on capital account. (paragraph 394-30(1)(c ))

Sale or harvest proceeds

The Explanatory Memorandum that accompanied the introduction of Division 394 (The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No.3) Bill 2007) explains the tax effect of section 394-30 as follows:

Treatment of sale or harvest proceeds received by secondary investors

9.15 The first part of any sale or harvest proceeds received by secondary investors will be treated as assessable income to the extent that the proceeds represent the value of (or 'match') deductions obtained for ongoing contributions under the new deduction provision. Where investors hold interests on revenue account as trading stock, the balance of the proceeds will be included in assessable income. If held on capital account, the proceeds will be subject to a modified CGT treatment in addition to the matching revenue treatment.

9.16 This seeks to ensure there is matching treatment for investors for amounts that they pay and receive. The initial purchase of the interest for most investors is expected to be on capital account and so the proceeds should also be on capital account. This is only modified to the extent that some deductions have been claimed on revenue account…

9.18 To ensure that neither an asymmetrical outcome nor a double benefit arises for secondary investors that would otherwise obtain both deductions for ongoing contributions and CGT treatment for the capital gains made on the sale or harvest proceeds, the proceeds received are matched as assessable income to the extent the investor obtained deductions under the specific deduction provision.

9.19 Some modifications are made to the CGT rules to ensure that these rules apply appropriately when secondary investors include some of the proceeds received in assessable income on revenue account.

The Explanatory Memorandum provides the following example on the treatment of harvest proceeds received by secondary participants:

Example 9.12

Following on from Example 9.10, Dana acquired the AFL interests from Julian in March 2017 for $20,000. Dana receives gross harvest proceeds in September 2018 of $25,000 and a net amount of $23,500 as AFL was entitled under the terms of the scheme to $1,500 for harvesting and marketing fees.

Dana paid $1,000 in annual management and services fees in each of the income years ended 30 June 2017 and 2018.

Dana has not received any incidental forestry scheme receipts amounts such as for agricultural thinnings.

Dana holds the interests on capital account.

For the year of income ended 30 June 2019, Dana:

● obtains deductions totalling $2,500 for the annual management and services fee of $1,000 and the harvesting and marketing fee of $1,500 under section 394-10;

● matches as assessable income an amount of $3,500 for total forestry scheme deductions obtained under subsection 394-30(2). This includes deductions of $2,500 in the current year and the annual management and services fee of $1,000 obtained in the year of income ended 30 June 2018; and

● includes in her assessable income a net capital gain worked out from a capital gain of $1,500 for capital proceeds that are harvest proceeds of $25,000 less a cost base of $23,500 for acquisition costs of $20,000 increased by the matched assessable income of $3,500 under subsection 394-30(9). Dana may offset against her capital gain of $1,500 any 'net capital losses' from previous years and any 'capital losses' from this income year and if entitled may apply the CGT discount.

As the family trust will be a secondary participant holding its interest on capital account, under section 394-30, the harvest proceeds it will receive will be assessable on revenue account to the extent the proceeds match deductions obtained under Division 394, with the balance subject to capital gains tax.