Tree farming (forestry operations)

Overview

If you are running a business of forestry operations (often referred to as tree farming), you need to declare the income and can claim deductions for costs associated with purchasing, establishing or maintaining the trees. For information, see our Tree farming (forestry operations) – income and expensesThis link will download a file fact sheet.

You may be running a tree farming business even if you also have other primary production activities on your land, such as a dairy farm.

This information does not apply if you are participating in forestry managed investment schemes, or you plant trees for other purposes, such as:

• shelterbelts
• carbon sink forests
• horticulture plants.

More information can be found in Taxation Ruling TR 95/6 Income tax: primary production and forestry.

If you are carrying on a tree farming business

The deductions you can claim and the income you must declare depend on whether you are carrying on a tree farming business (even if you are also carrying on other primary production business on your land).

To be carrying on a tree farming business, you must:

• intend to fell the trees for sale at a profit
• run your activities in an organised and business-like way.

Your individual circumstances will determine if you are carrying on a tree farming business.

If you incur the type of expenses under Costs you can claim immediately and reasonably expect to make a profit, it's likely you are carrying on a tree farming business.

However, if you don't actively tend and maintain the trees, you may not be carrying on a tree farming business. An example could be when you purchase a plantation but do not take any further action in relation to it.

If you are unsure whether you are carrying on a business, contact us or your registered tax advisor for advice.

For more information, see Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Income you need to declare

If you are carrying on a tree farming business, you need to declare the following sources of income:

• proceeds from the sale of felled timber
• proceeds from the sale of standing timber
• royalties received from granting rights to others to fell and remove timber
• insurance recoveries
• re-afforestation incentive grants or payments.

Market value of standing timber

In some cases, the market value of standing timber may be assessable income and therefore will need to be declared. An example is when you sell the land on which the trees are growing – trees that were planted and tended for the purpose of sale.

In this case you need to establish the market value of the trees before you sell the land. You can do this using someone who has expertise in the value of standing timber. The market value is the price a typical arm's length purchaser would be willing to pay.

If the market value of standing timber is assessable income, capital gains tax (CGT) may apply to the remaining value of the land. But you won't be taxed twice on the standing value of the timber.

In most cases, CGT will not apply to profits from the sale of standing or felled timber. This is because the profits will be assessable as either ordinary business income or income from an isolation commercial transaction that was entered into to make a profit.

Primary production concessions

You may be able to access primary production concessions in relation to the income from your tree farming activities, such as farm management deposits and primary production tax averaging.

Expenses you can claim

If you are carrying on a tree farming business, you can claim a deduction for most of the costs you incur when running the business.

Costs you can claim immediately

You can deduct the following expenses when you incur them:

• costs to establish and tend a tree plantation, including  
  • costs of seedlings and plants
  • expenses which relate to the planting process, such as deep ripping, mound ploughing, raking, levelling and weed control
  • watering and fertilising costs
  • capital costs of installing dams, sprinkler systems and fences (boundary or internal)
  • firebreak and track maintenance
  • costs of shooting or baiting feral animals
  • forest health surveys and consultant advice
  • felling and transport costs related to diseased trees or thinning operations
• costs to fell and transport timber for sale.

Initial expenses for clearing or preparing the land for planting – such as costs incurred in the initial pushing out and windrowing of stumps and debris – are not deductible as they are capital expenses. However, these costs are deductible after the first harvest for subsequent plantings on that land.

Costs you claim when you fell trees for sale

You can deduct the following expenses when you fell the trees for sale (including by thinning) or when someone else fells them and you receive a royalty:

• purchase price paid to acquire a plantation or forest
• value of existing trees introduced into a new business (for example, when your farm land has a native forest and you later decide to tend the trees for future felling and sale)
• the amount you can deduct is the proportion of the purchase cost that reasonably relates to the actual trees felled (but not including the cost of the land) – for existing trees, you apportion the market value of the trees when you started carrying on the forestry business.

You must be able to identify the part of the purchase price that relates to the trees at the time you purchase the plantation or forest. You should obtain documentary evidence to support this (for example, a valuation provided by the seller or having the amount specifically stated in the contract).

For more information, see Taxation Determination TD 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?

Other capital expenses

You can claim a depreciation (decline in value) deduction for capital items such as:

• specialised forestry equipment
• tractors
• vehicles
• the cost of construction of an access road.

You may be able to claim an immediate deduction for these expenses. To find out if you're eligible and for more information, visit Depreciation and capital expenses and allowances.

If you are not carrying on a tree farming business

Even if you are not carrying on a tree farming business, you must still declare the following sources of income:

• proceeds from the sale of standing timber
• royalties received from granting rights to others to fell and remove timber.

Note: you can claim a deduction for the cost of the trees, see Costs you claim when you fell trees for sale.

Your tax obligations when running a forestry operation – otherwise known as tree farming.