Private ruling: Income – primary production – forestry operations
Date of advice: 22 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the payments you received from the sale of standing timber considered primary production income? | A1: Yes

Relevant facts and circumstances: You acquired a property in 20XX. The total land area of the property is XXX acres, which you primarily use for business purposes. The property consists of XXX acres of cleared land and approximately XXX acres of remnant forest (containing standing timber). You have applied for and received the required Department permits for category B (remnant) vegetation under the Managing native forest code of practice – vegetation clearing code. You complete the following activities in relation to the standing timber: ● Selected clearing: Dozer work selectively removing unwanted trees retaining suitable trees for future growth. ● Weed control: chemical control of woody weeds, grasses and pest weeds. ● Monitoring of growth rates ● Chemical thinning and harvest thinning ● Burning to encourage new seedlings You are completing the activities in relation to the standing timber with the intention to sell the felled timber in the future. You have a 5 year business plan incorporating both your current business and standing timber activities. The business plan includes forecasted profit and loss figures in which you anticipate making profits. The business plan provides a schedule of activities to be completed throughout the five year period. You have entered into two agreements from which you have received payments for the sale of timber. Both agreements that you entered into provided the respective entities the right to enter your property and harvest timber at a pre-negotiated price. The payments from both agreements were received in instalments after the timber had been cut and sent to the mill for processing. You received a private binding ruling issued 30 June 2017, authorisation number 1051245133554, which determined that the payments received in relation to the two agreements entered into were assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1)

Reasons for decision: Summary: The definition of the term ‘primary production’ in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) includes ‘forest operations’. The term ‘forest operations’ is defined in subsection 6(1) of the ITAA 1936 as: ● The planting or tending in a plantation or forest of trees intended for felling; or ● The felling of trees in a plantation or forest; and includes: ● The transport, by a person who has felled trees in a plantation or forest, of those trees or parts of those trees from the plantation or forest to a place where they are to be first subjected to milling or processing (including processing for the production of posts, poles or railway sleepers) or to a place from which they are to be transported to such a place; where ● The operations are carried on in the course of, or for the purposes of, a business. Taxation Ruling TR95/6 provides guidance on forest operations. TR 95/6 provides that a taxpayer who is engaged in ‘forest operations’ is a primary producer for income tax purposes if those forestry activities constitute the carrying on of a business. The planting or tending of trees in a plantation or forest qualifies as forest operations if the trees planted or tended are intended for felling. The planting or tending of trees other than in a plantation or forest does not qualify as forest operations. The planting or tending of tress is also not forest operations if they are intended solely for decorative purposes or to provide shelter, irrespective of where they are grown. The definition of ‘tend’ in the Macquarie Dictionary includes ‘to look after, watch over and care for….’. Therefore, the tending of trees in a plantation or forest includes the maintenance of the trees and activities to improve the growth of the trees. A person who receives royalties under a right to fell or remove tress on land owned by that person is not regarded as conducting forest operations if the tress were not planted or tended for the purpose of felling. Carrying on a business The planting, tending or felling of trees will only be forest operations if those operations amount to the carrying on of a business. A person who plants, tends or fells tress but is not carrying on a business is not conducting forest operations. This is even though the person may be conducting another form of primary production business. The question of whether a taxpayer’s activities amount to the carrying on of a business depends on the facts of each particular case. Activities that have a commercial or profit making purpose and are organised in a business-like way will generally amount to carrying on a business. To satisfy the definition of ‘primary production’ in relation to forest operations you must be planting or tending to a plantation or forest of trees intended for felling and these activities need to be carried on in the course of a business. In your case, you are completing activities including selective clearing, chemical and harvest thinning, weed control and burning to encourage future seedlings which would be considered maintenance of and activities to improve the growth of those trees. It is therefore considered that these activities would constitute the ‘tending to the trees of a plantation or forest’. You have obtained the required permits and previously entered into and completed two agreements for the sale of timber. Your business plan shows you have the intention to continue this practice in the future; therefore it is considered the trees are being ‘tended for the purpose of felling’. The activities you have already undertaken and those scheduled within your business plan show that you are undertaking these activities in a business-like manner for the purpose of making a profit, therefore it would be considered that your activities would amount to the carrying on of a business. It would therefore be considered that your activities would meet the definition of ‘forest operations’ and as such these activities would be considered primary production activities. Any income received from your forest operations, including the payments received for the sale of timber, would be considered primary production income.