Edited version of private advice

Authorisation Number: 1051616168181

Date of advice: 3 December 2019

Ruling

Subject: Assessable income- royalties

Question 1

Is the income you receive from the sale of the tree logs assessable as royalties under section 15-20 of the ITAA1997?

Answer

Yes

Question 2

Is the income you receive from the sale of the tree logs to be treated as capital proceeds from any capital gains tax event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, however the anti-overlap CGT provisions reduce any capital gain by amounts included in your assessable income (see above).

This ruling applies for the following periods:

Years ended 30 June 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You own a rural property on which you operate a beef cattle operation.

When you purchased the property in 19XX, there were trees sporadically growing on the property.

You are not in the business of planting and selling trees.

You allowed a contractor to enter your property to undertake the falling, snigging, carting and selling of the tree logs. The contractor used all their own equipment.

You have no participation in this activity and were paid an amount per cubic metre of Lancewood logs.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 15-20

Income Tax Assessment Act 1997 Division 104

Reasons for decision

Taxation Ruling TR 95/6 provides the tax treatment of forestry operations. Relevant to your circumstances, paragraph 18 discusses when proceeds from the sale of timber is included in your assessable income: where royalties have been received for granting rights to others to fell and remove timber and/or proceeds from the sale of felled or standing timber.

Section 15-20 of the ITAA 1997 states your assessable income includes an amount that you receive as or by way of royalty if the amount is not assessable as ordinary income under section 6-5 of the ITAA 1997. Royalties are statutory income.

The Commissioner's view on the definition of a royalty is provided by Taxation Ruling IT 2660. The ordinary meaning of the term 'royalty' has been considered by the Courts on many occasions. In Stanton v. FC of T (1955) CLR 630, the High Court of Australia described the essence of a royalty and stated that:

...the modern applications of the term seem to fall under two heads, namely the payments which the grantees of monopolies such as patents and copyrights receive under licences and payments which the owner of the soil obtains in respect of the taking of some special thing forming part of it or attached to it which he suffers to be taken.

Paragraph 10 of IT 2660 provides that in the Commissioner's view there are four key characteristics of a common law royalty:

·         it is a payment made in return for the right to exercise a beneficial privilege or right, for example to remove minerals or natural resources such as timber (McCauley v. FC of T (1944) 69 CLR 235)

·         the payment is made to the person who owns the right to confer that beneficial privilege or right (Barrett v. FC of T (1968) 11 CLR 666)

·         the consideration payable is determined on the basis of the amount of use made of the right required (McCauley, Stanton), and

·         the consideration will usually be paid as and when the right acquired is exercised. However, a lump sum payment will be a royalty where it is a pre-estimate or an after the event recognition of the amount of use made of the right acquired (IR Commissioners v. Longmans Green & Co Ltd (1932) 17 TC 272).

In your case you have entered into an agreement with a contractor whereby the contractor will harvest the trees on your land for their activities. You will receive payments for the volume of tree logs taken.

Consequently, it is considered that the payment for each cubic metre of tree logs will be a payment by way of royalty and assessable under section 15-20 of the ITAA 1997.

While it is likely a CGT event happened in relation to the removal of the timber by the contractor, the anti-overlap provisions in section 118-20 of the ITAA 1997 reduce any capital gain by amounts otherwise included in your assessable income. As the proceeds are included in your assessable income as a royalty under section 15-20 of the ITAA 1997, practically there are no CGT consequences.