Edited version of private advice

Authorisation Number: 1051735190116

Date of advice: 12 August 2020

Ruling

Subject: Business - primary production

Question:

Are you carrying on a business of primary production?

Answer:

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Background

You own a property (the Property) with a land area of XXX hectares, and on which plantation trees were planted on a portion of the Property.

You applied for a private ruling in relation to whether your activities on the Property were viewed as the carrying on of a business of primary production (forestry operations) with which included the following information:

·         You had entered into a lease agreement with Company A to grow trees on a portion of the Property for which you would receive an annual fee, but no proceeds in relation to the sale of the timber once it was harvested

·         Company A went into administration and you allowed Company B to take out a sub-lease with the administrators of Company A to allow the lease to continue in relation to the trees on the Property, with the sub-lease having the same terms and conditions and lease payments as the original lease.

·         Company B went into administration you cared for the development and maintenance of the standing trees at your own expense with the trees being your property

·         After several years the trees became mature enough to be harvested and some of the trees were harvested which returned $XXX,XXX (excluding Goods and Service Tax (GST)). The tree stumps were removed with the land being returned to pasture

·         The remaining XX hectares of trees were to be harvested in a future income year with an expected return of $XXX,XXX from timber sales

·         XX hectares of tree stumps would be allowed to regrow to maturity to allow harvesting in a specified period with an anticipated return of $XXX,XXX with the remaining X hectares of tree stumps to be cleared

·         After the initial harvest the land would be returned to pasture, seeding the area, repairing fences and returning the land to grazing. It was anticipated that you would initially graze XX head of cattle, increasing that number as the pasture became more mature and the second harvest of timber was completed

·         It was anticipated that you would cut and sell stock fodder for approximately $XX,XXX once the pasture had been established in a future income year; and

·         You would continue to follow the same business-like process of maintenance and care of the trees ensuring they reach maturity.

A ruling decision was issued confirming that you were carrying on a business of primary production on the facts provided in the ruling.

As of 30 June 20XX, all trees on the Property have been harvested, with more than $XXX,XXX being received for the timber.

After receiving advice, you have cleared the stumps on the XX hectares rather than letting them regrow as had been your previous intention and anticipate undertaking the following activities in relation to the Property:

Proposed activities on the Property

You propose using the Property as follows:

·         XX hectares of bushland that will not be used

·         XX hectares on which trees will be planted

·         XX hectares to be used for cattle grazing; and

·         XX hectares using for producing fodder.

These activities are discussed in more detail below:

XX hectares of trees

It is anticipated that trees will be planted on the XX Hectares during a specified period covering a number of months dependent on the availability of when contractors will be available to undertake the following preparation and planting activities:

·         Engaging the services of a bulldozer contractor to clear and clean the XX hectares for planting

·         Burn the area

·         Engage the services of a contractor to deep rip tree furrows for planting the seedlings

·         Organise a contractor to supply, plant and fertilise trees

·         Fence the plantation

·         Conduct ongoing annual maintenance such as putting in firebreaks, spraying blackberries and other pests, weeding, fertilising when necessary, maintaining fences and attending to the health of the trees.

The trees will be mature for harvesting in a specified number of years and are estimated to produce XXX tonnes per hectare of timber with a return of $XXX,XXX (GST exclusive) based on the current price per tonne.

XXX hectares returned to grazing and fodder production activities

The XXX hectares that has been cleared of tree stumps will be returned to pasture for cattle grazing and fodder growing activities.

Following the growing of the trees it is anticipated that it will take several years to get the soil into the condition required to allow full production of the land.

It is anticipated that:

• XXX cattle will be grazed on the XX hectares at any one time for the purpose of selling annually with an average price of $X,XXX per head, with estimated profit margins of $XXX per head after costs resulting in annual revenue of $XXX,XXX and profit of $XX,XXX after costs.
• XX hectares will be used for the growing of fodder which will be sold on an annual basis, anticipated to be XXX rolled bales selling for an average price of $XX per bale with estimated gross annual revenue of $XX,XXX.
• Fences will need to be repaired, and/or erected, around the land used for stock fodder production. The services of a contractor/s will be engaged to bulldoze trees along the boundary of the fence line and to complete the fencing over several years.

Preparation of Property to return it to pasture

The activities to prepare the Property so that it can be returned to cattle grazing and fodder growing will be undertaken as follows:

Year 1

• Grind tree stumps
• Pickup sticks and burn heaped stumps and residue timber
• Level paddocks
• Repeat above activities up to two more times
• Cultivate paddocks
• Level paddocks
• Seed pasture
• Fertilise and lime paddocks; and
• Spray paddocks with surfactant to enable water penetration

Year 2

·         Stick rake and burn heaps

·         Cultivate

·         Level

·         Sow more seed

·         Fertilise and lime paddocks; and

·         Spray with surfactant.

It is anticipated that light grazing of the first paddocks should occur in the second year which will initially involve XX to XX head of cattle, being increased as the pasture improves.

It will take several years for the pasture to become fully productive which will enable XXX head of cattle to be run on the Property and the use of XX hectares to produce fodder to sell.

Anticipated time frame to transform the land to cattle grazing and fodder production

·         Several years - Plant tree plantation on XX hectares and commence pasture related activities as outlined above

·         Next year - Grazing XX head of cattle

·         Next year - Grazing XXX head of cattle

·         Several years - Grazing XXX head of cattle and using XX hectares for fodder production for sale

·         Next year onwards - Full production, grazing XXX head of cattle and selling fodder produced on XX hectares; and

·         Future year - Harvest tree plantation when mature.

Costs for preparation and planting

It is estimated that costs totalling $XXX,XXX will be incurred to return the Property to pasture by undertaking the following activities:

·         Bulldozing

·         Stump grinding

·         Purchasing pasture seed

·         Fencing materials and fencing contractors

·         General expenses, such as fuel, repairs

·         Purchasing fertiliser and lime

·         Planting plantation saplings; and

·         Costs to repair dams.

Estimated returns and costs in relation to the various activities

·         Cattle and fodder sale activities:

At full production, it is estimated that these activities will return the following annual revenue:

-        $XXX,XXX - cattle production; and

-        $XX,XXX - fodder sales.

It is estimated that you will incur costs of $XXX,XXX per annum with an estimated net profit of $XX,XXX.

It is not anticipated that you will return a profit from these activities until full production is reached in a future income year.

·         Afforestation activities on XX hectares:

It is estimated that you will make a net profit of $XXX,XXX, with revenue from the sale of the timber when it is harvested of $XXX,XXX, with $XXX,XXX for costs incurred in relation to maintaining the trees until they are mature.

Activities undertaken since 1 July 20XX

The following activities have been undertaken from 1 July 20XX to the present time:

·         tree stumps from the previous harvest have been removed

·         burning of timber in windrows

·         levelling of paddocks

·         reseeding of XX hectares, with the remaining XX hectares not being able to be worked until they are drier

·         a significant length of fencing has been completed; and

·         all boundaries have been bulldozed in preparation for the remaining fencing.

Assumptions:

This ruling has been provided based on the following assumptions that will occur during the period covered by this ruling:

·         The reforestation activities being undertaken on the XX hectares, and the transforming of the XXX hectares of land to pasture to be used for cattle grazing and fodder production will occur in accordance with the scheme as outlined in the ruling; and

·         The estimated costs/expenses and the revenue amounts provided in the ruling reasonably represent the amounts that will be paid to undertake the activities in relation to the Property, and the revenue amounts received from the grazing, fodder production and sale of the timber.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Carrying on a business of primary production

Where an individual is carrying on a business, the proceeds received from that activity are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

A 'primary production business' is defined in subsection 995-1(1) of the ITAA 1997 as a business of:

·         cultivating or propagating plants or fungi in any physical environment

·         maintaining animals for the purpose of selling them or their bodily produce

·         manufacturing dairy produce from raw material that a taxpayer has produced

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

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

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

·         felling trees in a plantation or forest, or

·         transporting trees, or parts of trees, felled in a plantation or forest, directly to the place where they are first to be milled or processed, or transporting them to the place from which they are to be transported to be milled or processed.

Whether or not a person is carrying on a business is a question of fact. The determination of whether a business is being carried on is generally a process of weighing up all the relevant indicators. No one indictor determines whether a business is being carried on.

Taxation Ruling TR 97/11 income Tax: am I carrying on a business of primary production (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

·         Whether the activity has a significant commercial purpose or character,

·         Whether the taxpayer has more than an intention to engage in business,

·         Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,

·         Whether there is repetition and regularity of the activity,

·         Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

·         Whether the activity is planned, organised and carried out in a businesslike manner,

·         The size, scale and permanency of the activity,

·         Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Application to your situation

You grew trees on XX hectares of the Property which have all been harvested.

You had originally intended letting the tree stumps on XX hectares of the Property to regrow for the purpose of harvesting in addition to using other portions of your land for grazing cattle and fodder production after the land had been made suitable for those purposes. A private ruling decision was issued in relation to this scheme ruling that you were carrying on a business of primary production.

Your plans in relation to the Property have altered from the scheme provided in the ruling decision and you have now removed all of the tree stumps rather than letting some of them regrow and will plant trees on XX hectares of the Property in addition to undertaking activities to return the other XXX hectares previously used for the growing of trees to pasture to be used for cattle grazing and the production of fodder.

Based on the information provided with this ruling and having regard to the relevant factors provided in TR 97/11 it is viewed that you are carrying on a business of primary production during the period covered by this ruling because:

·         your proposed activities are planned and will be carried out in an organised and businesslike manner as provided

·         you have a profit-making purpose in relation to the proposed activities to be undertaken on the Property

·         there is a prospect of you making a profit from your activities based on the information provided; and

·         your activities cannot be viewed as being undertaken in relation to a hobby or recreation.