Edited version of your written advice

Authorisation Number: 1051444484725

Date of advice: 9 November 2018

Ruling

Subject: Carrying on a business of primary production

Question 1

Does your activity amount to carrying on a business of primary production?

Answer

Yes.

Question 2

Can you claim a deduction under section 70-120 of the Income Tax Assessment Act 1997 (formerly section 124J of the Income Tax Assessment Act 1936)?

Answer

No.

Question 3

In calculating the net profit on the sale of the timber, can you reduce the sale proceeds by an appropriate amount based on the market value of the timber at the time the trees were ventured into the business?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You (the Partnership) purchased a property.

The property has been leased to a related entity since being purchased, for use in the related entity's cattle business.

You are also engaging in activities to improve the property such as erecting fences, constructing dams, thinning and clearing suckers on the property.

You were unaware that the trees/timber located on the property was of significant value and this did not form part of your decision to purchase the property.

There was no amount attributed to the standing timber in the purchase contract.

Later you became aware that the timber was valuable and you have started selling the timber.

Details about the activity

The activity entails maintaining trees for sale purposes, which encompasses silviculture activities.

As part of the operation of the activity, you are required to maintain firebreaks, tracks and engage in thinning.

Silviculture activities are ongoing with a view of managing the valuable resource available.

A business plan was made.

Individuals acting on your behalf spend XX hours per week on this activity. These individuals have a background in agriculture. The individuals also work in the beef/cattle business that also operates on the property. They spend on average approximately XX hours per week on that activity.

In additional, contractors were sourced to complete most of the associated work required for the forestry activity.

You have now engaged a new employee to work XX hours per week tending to the trees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 70-120

Reasons for decision

Question 1

A primary production business is defined in section 995-1 of the ITAA 1997 to include the carrying on of a business of tending trees in a plantation or forest that are intended to be felled. Having regard to the relevant factors contained within Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? and TR 95/6 Income tax: primary production and forestry, it is considered that you are carrying on a business of tending trees for felling.

Question 2 and Question 3

Purchase price of land and trees

Paragraphs 31 to 36 of Taxation Ruling TR 95/6 discuss the availability under section 124J of the ITAA 1936 (re-enacted as section 70-120 of the ITAA 1997) of a deduction for the attributed cost of each tree felled in relation to a taxpayer’s forestry activities. Paragraph 36 provides the following:

36. If none of the purchase price of the plantation or forest is attributable to the standing timber at the time of purchase, then no deduction will be allowable under section 124J on a subsequent felling of that timber. The part of the purchase price attributable to the trees must be identifiable at the time the plantation or forest is purchased. Although the amount relating to the trees does not need to be specifically stated in the contract, there should be documentary evidence that part of the purchase price is attributable to the trees. The onus will always remain with the purchaser to establish this amount.

At the time you purchased the property you were unaware that the trees located on it were of significant value. Therefore, this did not form part of your decision to purchase the property and no amount attributed to the standing timber was included in the purchase contract.

Applying paragraph 36 of TR 95/6, you will not be entitled to a deduction under section 70-120 of the ITAA 1997 as it is not possible to identify a portion of the purchase price attributable to the trees.

Taxpayer appropriates land and trees to a new business

TR 95/6 provides an alternative option for taking into account the value of the trees used in a forestry business. Paragraph 45 discusses appropriating the cost of trees that were not originally used in forestry operations to a new business of forestry operations based on their market value:

45. If land and the trees thereon, originally acquired and used for purposes other than forest operations, are later ventured into a business of forest operations, the net profit from the sale of the timber when felled will be assessable income of the taxpayer under subsection 25(1). In calculating the net profit, the sale proceeds are reduced by an appropriate amount based on the market value of the timber at the time the trees were ventured into the business: Gutwenger v. FC of T 95 ATC 4008 at 4023; (1995) 30 ATR 82 at 98.

As the Commissioner has accepted that you ventured into a business of forestry operations at a date later than when you purchased the property, paragraph 45 of TR 95/6 will apply to your circumstances. Therefore, in calculating the net profit on the sale of the timber, you can reduce the sale proceeds by an appropriate amount based on the market value of the timber at the time the trees were ventured into the business.

Note:

Any amount deducted for the market value of a tree will not form part of the cost base of the property on sale as per the application of subsection 110-45(2) of the ITAA 1997.