Private ruling: Income derived by a strata body from tree-felling
Date of advice: 12 November 2021
Published: February 2022
Ruling period: Year ended 30 June 20XX | Quarter ended 30 June 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is the supply of the felled trees by the Owners of A, a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes | Q2: Is the tree-felling activity considered a hobby and not treated as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: If No to Question 2, are the proceeds from the sale of logs for milling or chipping assessable to the Owners of A? | A3: Yes

Relevant facts and circumstances: A is a Strata Titled property with X privately owned residential lots. In addition to the residential lots, the property includes a large area of common land comprising pasture and a variety of trees including a plantation planted before the establishment of A. The common land provides open space for recreation and a pleasant outlook for residents. The estate is managed by B Strata and a Council of Owners (CoO) comprising X resident owners. In line with the state legislation, a strata company exists to collect levies and maintain the common land and property of A. At an Annual General Meeting of the strata company in 20XX, it was resolved to remove some of the trees from common land because of concerns about safety. Until 20XX, no action had been taken by A to remove the trees because of the high cost of felling, removing the logs and clean-up of the area. In XXX 20XX, the CoO became aware of a contractor felling trees nearby. With equipment already on site, A were able to negotiate a fair price for the felling and in return received $X from the sale of logs for milling or chipping. The expenses were about $X to $X for cutting, transporting, milling and chipping. A is registered for GST.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | Income Tax Assessment Act 1997 subsection 6-5(1)

Reasons for decision: Summary: As A meets all the requirements for making a taxable supply GST applies on the sale of the felled trees. | Detailed Reasoning - The supply of the felled trees is a taxable supply.: Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply where you meet the following requirements: • You make a supply for consideration. That is, you receive a payment of some kind for the supply you make. • The supply is made is the course or furtherance of an enterprise that you carry on, and • The supply is connected with the indirect tax zone (Australia) • You are registered, or required to be registered for GST. However a supply is not a taxable supply where it is either GST-free or input taxed. In this case the supply of the felled trees by A is not GST-free or input taxed. Consequently as the supply by A meets the remaining requirements listed above it will make a taxable supply and GST applies to the sale of the felled trees. | Detailed Reasoning - The tree-felling activity is not considered a hobby.: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes income according to ordinary concepts. There are three ways profits from sales can be treated for taxation purposes: 1. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of carrying on a business, involving the sale of the felled trees as trading stock. 2. As ordinary income under section 6-5 of the ITAA 1997, on revenue account, as a result of entering into a profit-making undertaking or scheme (including an isolated transaction). 3. As a hobby, or a form of recreation. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. The factors that are considered important in determining the question of business activity at paragraph 13 are: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. Whether an activity is a hobby or private recreational pursuit is a question of fact. Paragraph 87 of Taxation Ruling TR 97/11 lists a number of indicators which are relevant to determine whether an entity's activities amount to a hobby or private recreational pursuit, being: • it is evident that the taxpayer does not intend to make a profit from the activity • losses are incurred because the activity is motivated by personal pleasure and not to make a profit • there is no plan to show how a profit can be made • the transaction is isolated and there is no repetition or regularity of sales • there is no system to allow a profit to be produced in the conduct of the activity • the activity is carried out on a small scale • there is an intention by the taxpayer to carry on a hobby, recreation or sport rather than a business, and • any produce of the activity is sold to friends and relatives and not to the public at large. Taxation Determination TD 2018/15 considers the disposal of certain assets. Where post-CGT land with timber on it is acquired, felling the timber would create another asset and any gain from the sale is not disregarded (paragraph 11 of TD 2018/5). The profit is considered as income or a capital gain. Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693 ( Myer Emporium case )). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Paragraph 1 of TR 92/3 defines the term 'isolated transactions' as: • 'those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers'. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayer's business but (TR 92/3 paragraph 6): • the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and • the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case. Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits can be assessed as ordinary income within section 6-5 of the ITAA 1997. Taking all of the available facts into consideration, the proceeds received from the sale of the felled timber would be derived in the course of a one-off commercial transaction. The proceeds that the strata corporation will receive from the felled timber are ordinary income and assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 3: The income is assessable to the owners of the common property A strata scheme is a legally recognised arrangement whereby a building and the land upon which it is erected is subdivided into lots, or lots and common property. The lots (commonly called units) have a separate title, which can generally be bought and sold without restriction. Common property is that part of a strata plan not comprised of any proprietor's lot and includes the stairways, lifts, passages, common gardening areas, and any other fixtures intended for common use. The ownership of common property varies under different State Acts and Territorial Ordinances. In this state the ownership of common property is vested in the proprietors as per the schedule of unit entitlements and profits will be distributed on the basis of unit entitlement. Taxation Ruling TR 2015/3 provides the Commissioner's view on income tax and 'matters relating to strata title bodies constituted under strata title legislation'. Where a strata title body distributes to proprietors out of profits, it constitutes dividends which are assessable and can be franked (paragraph 33 of TR 2015/3). A strata body lodges an income tax return for any income year in which they have derived assessable income (paragraph 100 of TR 2015/3). When a disposal of an asset held under a strata title arrangement occurs in an isolated profit-making transaction, each unit holder would receive income in line with their interest in the asset. Any income/loss would then be included in the assessable income of each lot holder. This is regardless of whether it was received by the lot holder, if the funds were dealt with on their behalf such as being placed in a fund. The strata corporation itself will not be assessable on any income from the disposal of the timber

This ruling applies for the following periods: