Private ruling: Taxation implications on quarry products
Date of advice: 7 September 2017
Published: January 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 01 July 2017

Ruling: Q1: Are the sale profits from type A and type B materials quarried from my property, assessable as ordinary income? | A1: Yes

Relevant facts and circumstances: You acquired a parcel of land. (The property) The property is X hectares in size. The XY Government introduced an Act that sets aside an area of land for future industrial use. The property is included in, and its use is restricted by, the Act. You have been approached by a company to quarry type A and type B materials from the property. You will demolish your dwelling and outbuildings to facilitate the quarrying. You will permit the company to remove type A and type B from your property. You will be paid royalty amount per cubic metre that is removed by the company. The company will remove an amount of cubic metres.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 15-20 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 118-20

Reasons for decision: Summary: The sale proceeds of type A and type B materials from the property will be a profit making undertaking and will be assessable as income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) | Detailed Reasoning - Carrying on a business: Income earned by a taxpayer in the ordinary course of carrying on a business of mining operations will be assessable as ordinary income. In your case, you are not considered to be conducting a mining operations business, as you are merely selling the type A and type B materials on a metre basis. Therefore, the proceeds you are receiving from the sale of type A and type B materials are not assessable income from carrying on a business of mining operations. | Detailed Reasoning - Income derived from non-business sources: A taxpayer who is not in the business of mining operations may also earn assessable income from the sale of type A and type B materials. Income may be earned through ● The sale of type A and type B materials ● Royalties received from granting rights to quarry and remove the type A and type B materials ● Profits from an isolated transaction | Detailed Reasoning - Proceeds from the sale of type A and type B materials: In your case, you will enter into a contract with a company to enter your property to remove type A and type B materials. You will not receive an amount of money based on the sale of these products. Accordingly, the income earned is not from the sale of type A and type B materials. | Detailed Reasoning - Royalties received from granting rights to other persons to quarry type A and type B materials.: An amount paid to a land owner for granting the right to quarry products, and which is calculated by the amount of product removed is considered to be a royalty payment. In your case, the agreement between you and the company will amount to the removal of the type A and type B materials on a per metre payment arrangement. This is considered to be a royalty payment. | Detailed Reasoning - Profits from isolated transaction: If an isolated transaction has sufficient indicators of a business, then it will generate ordinary income even though it is a one off transaction. In your case, your activities are not similar to a business and are not considered to be profits from an isolated transaction. | Detailed Reasoning - Capital gains tax (CGT): For CGT purposes, the type A and type B materials or the sale of type A and type B materials from an asset previously acquired but created on or after 20 September 1985 results in the original asset (the property containing the type A and type B materials) being split into two post-CGT assets (the land and the materials). Any net capital gain arising on the disposal of the type A and type B materials (or land) are then assessable income in the year of income in which the disposal occurs. This means that the income earned from the sale of your type A and type B materials are assessable as both ordinary income from an isolated transaction, and as a capital gain. However, section 118-20 of the ITAA 1997 prevents the amount from being taxed twice by reducing any capital gain from the disposal of the type A and type B materials by any amount included in your assessable income. This will have the effect of avoiding double taxation. | Detailed Reasoning - Conclusion: The payment that you receive from the quarrying of type A and type B materials from your property is considered to be a royalty payment. A royalty payment is assessable income, and would be included in your tax return in the income year it is received.