Private ruling: Income-sale of timber
Date of advice: 7 September 2017
Published: January 2018
Ruling period: Year ending 30 June 201F
Date scheme commenced: 1 July 201D

Ruling: Q1: Will the proceeds from the sale of timber be included in your assessable income? | A1: Yes

Relevant facts and circumstances: K and L (you), together purchased two titles of land (the land) in 201A as joint tenants. Located on both titles of land was an amount of standing timber. You have incurred minor expenditure since purchasing the land for rates, insurance and fencing improvements. You have not carried out any income producing activity on the land since it was purchased. In 201B you made an application and were granted a right to take timber from your land. In 201C you approached local businesses to determine if there was a market for the type of timber that was growing on your land. You met with a contractor, Z to arrange for the harvesting and delivery of felled timber to the local business. In early 201G entered into an Agreement with Z to provide the following services: ● Apply for a Private Native Forestry property Vegetation Plan. ● Investigate the need for and obtain any other government approvals. ● Develop a Forest Operations Plan for the property in accordance with the private native forestry property vegetation plan for the land. ● Negotiate and prepare agreements with timber processors and forest products. ● Negotiate and engage suitably qualified roading, harvesting and haulage contractors. ● Supervise harvesting operations in accordance with the forest operation plan. ● Oversee supply of timber products to timber processors and forest products to customers. ● Invoice forest products and timber customers, collect monies and pay parties. ● Audit environmental performance of contractors and established revenue safeguards. These services were to be provided for a fee based on the percentage of residual stumpage removed and after deductions associated with the cost of harvesting, haulage and log snigging were removed. The agreement provides that Z’s relationship to you is that of an independent contractor. The payment terms of the Agreement include: ● Z will invoice mills monthly for deliveries made ● Z will create recipient created invoices for harvest and haulage contractors, ● Payments received from mills will be made to Z, who will also pay expenses incurred. The Agreement also states that ownership of the timber will not pass from you to the customer (mill) until the timber is fully paid for by the mill. Z commenced harvesting activities on the land in early 201E and more than half the timber was harvested in the 201E income year and the remaining portion will be harvested in the 201F income year.

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: Your activities of felling, cutting and transporting timber through a third party intermediary to commercial mill operators is a profit making undertaking and is 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 forestry operations will be assessable as ordinary income. In your case, you are not considered to be conducting a business of forestry operations, as you have not planted or tended the standing timber on your property. You are merely selling the standing timber on a selective basis. Therefore, the proceeds you are receiving from the sale of the standing timber are not assessable income from carrying on a business of forest operations. | Detailed Reasoning - Income derived from non business sources: A taxpayer who is not in the business of forest operations may also earn assessable income from the sale of timber. Income may be earned through ● The sale of standing timber ● Royalties received from granting rights to fell and remove timber ● Profits from an isolated transaction | Detailed Reasoning - Proceeds from the sale of standing timber: In your case, you have entered into a contract for Z to enter your property to fell and remove the timber. Z receives sale proceeds on your behalf from businesses relating to the sale of cut timber, not standing timber. After Z deducts all costs incurred in felling and hauling the timber to the businesses, it retains a percentage of the sale proceeds and transfers you the remaining proceeds. Accordingly, the income earned is not from the sale of standing timber. | Detailed Reasoning - Royalties received from granting rights to other persons to fell and remove timber: An amount paid to a land owner for granting the right to remove trees, and which is calculated by the amount of timber removed is considered to be a royalty payment. In your case, the Agreement between you and Z amounted to them removing and selling the timber on your behalf, and is not 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. An isolated transaction that satisfies three requirements will be ordinary income. The three requirements are: 1. There was a business operation or commercial transaction. TR 92/3 Income Tax: Whether profits on isolated transactions are income (TR 92/3) considers matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction They include: ● The nature of the entity undertaking the operation or transaction; ● The nature and scale of other activities undertaken by the taxpayer; ● The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; ● The nature, scale and complexity of the operation or transaction; ● The manner in which the operation or transaction was entered into or carried out; ● The nature of any connection between the relevant taxpayer and any other party to the operation or transaction; ● If the transaction involves the acquisition and disposal of property, the nature of that property; and ● The timing of the transaction or the various steps in the transaction. 2. There was a profit making intention upon entering the transaction. The relevant intention or purpose of the taxpayer of making a profit or gain is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer’s intention or purpose discerned from an objective consideration of the facts and circumstances of the case. A profit making intention need not be the taxpayer’s sole or dominant intention. It is sufficient if profit making is a significant purpose. 3 The profit was made by means consistent with the original intention. In your case, you have taken the action that is consistent with a profit making undertaking, as follows: ● You have sought and obtained approval to harvest timber on your land ● You have engaged a contractor to cut and transport timber on your behalf ● Your contractor administers approvals, invoicing, collection of money ● You retain ownership of your timber until such time as the receiving mill has paid for the timber ● The amount of money you will receive on the sale of the timber is significant. Overall, your operation has been carried out in a business-like manner in a way that would be in keeping with a commercial business of forestry operations. However, as you do not have the repetition and regularity of a business it is considered that your income earned is profits from an isolated transaction, and is assessable as ordinary income. | Detailed Reasoning - Capital gains tax (CGT): For CGT purposes, the felling of timber or the sale of standing timber on land acquired on or after 20 September 1985 results in the original asset (the land with the trees) being split into two post-CGT assets (the land and the timber). Any net capital gain arising on the disposal of the timber (or land) is assessable income in the year of income in which the disposal occurs. This means that the income earned from the sale of your timber is 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 timber by any amount included in your assessable income so that the income is only included in your tax return once.