Edited version of private advice

Authorisation Number: 1051891346721

Date of advice: 27 August 2021

Ruling

Subject: Deduction under section 70-120 of the Income Tax Assessment Act 1997

Question 1

Can you claim a deduction under section 70-120 of the Income Tax Assessment Act 1997 for an amount attributable for the value of the trees at time of purchase?

Answer

Yes.

Question 2

Is an independent valuation an appropriate method of calculating the amount attributable for the value of the trees at time of purchase?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

25 September 20XX

Relevant facts and circumstances

You purchased the property and final settlement occurred.

The property was purchased for a price of $XXX plus stamp duty and settlement costs.

Purchase and ownership of the property is 50% with XXXXX and 50% with the XXX

The property included a standing timber plantation. You have indicated the purpose of purchase was due to commercial opportunity involving the value of the standing timber which you intended to harvest.

You have significant experience and knowledge in the forestry business.

You entered into a contract to sell the timber.

The timber has subsequently been harvested and payment received in full. For XXX and XXXX this represented $XXXX of assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 70-120

Reasons for decision

Paragraphs 31 to 36 of Taxation Ruling TR 95/6 discuss the availability under section 124J of the Income Tax Assessment Act 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 31 provides the following:

A deduction is not generally allowable for expenditure incurred on the acquisition of a plantation or forest in the year of income in which the expenditure is incurred. However, where part of the purchase price of land is attributable to timber standing on that land, section 124J (re-enacted as section 70-120 of the ITAA 1997) of the Act may apply"

Paragraph 36 provides the following:

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.

You have evidenced that at time of the purchase, due to your significant business experience in the forestry industry you entered into the transaction due to the value of the trees located on the land. You also sourced insurance quotes to insure the trees subsequent to purchase of the land. The transfer and condition of the trees on the land are specifically noted in the purchase contract.

We are satisfied that you had the requisite intention of purchasing the trees on the land and that part of the purchase price is attributable to the timber standing on the land at time of purchase. Applying paragraph 31 of TR95/6 you will be entitled to a deduction for an amount attributable to the timber standing on the land.

To identify the amount attributable for the deduction, the market value of the trees at time of purchase is appropriate. To establish the market value of the trees, it is generally accepted practice that the valuation should be performed by a party independent of those requesting it. In accordance with the guidance provided in Taxable Determination 96/8 Income tax: how do you determine the market value of mature trees acquired and used for non-forest operations, but later ventured into a new business, as contemplated by paragraph 45 of Taxation Ruling TR 95/6? an independent party should be a reputable forester with at least three years experience in the industry.