Treatment of costs for acquiring a forestry interest in an FMIS
If you are a subsequent participant in an FMIS and hold your forestry interest on capital account, you are not able to claim a deduction for the costs of acquiring the forestry interest. Instead, you include these costs in the cost base or reduced cost base of your forestry interest for CGT purposes when the interest is subsequently disposed of prior to harvest or when the harvest proceeds are received.
Example 48: Acquiring a forestry interest in a forestry managed investment scheme
Julian acquires a forestry interest in Australian Forests Limited (AFL), an FMIS, from Caroline in August 2013 for $14,000 (at market value). As Julian did not purchase the interest from the forestry manager of the scheme, he is a subsequent participant and also holds the interest on capital account as he does not trade in securities.
Julian is not entitled to a deduction for the $14,000 paid to Caroline for the acquisition of the interest. Instead, this amount will form part of the cost base or reduced cost base of the interest when Julian later sells the interest or receives harvest proceeds.
End of exampleOngoing costs of ownership
You can claim a deduction for the ongoing costs of holding your forestry interest if the amounts would have been deductible were they paid by an initial participant. That is, you do not include these costs in your cost base or reduced cost base.
Treatment of thinning receipts
Amounts you receive for thinning are excluded from the CGT treatment of your forestry interest. These amounts are included in your assessable income. Include this amount at A item 23 Forestry managed investment scheme income on your tax return (supplementary section).
Example 49: Treatment of ongoing fees and thinning receipts
Julian pays $1,000 to AFL in annual management and services fees in each year of income after acquiring the interest from Caroline. These amounts are not included in the cost base or reduced cost base of the forestry interest and Julian can claim a deduction for these amounts. This is because Julian would have been able to deduct these amounts if he was an initial participant.
Julian receives $1,500 for thinning in December 2013 from AFL. This amount is not subject to CGT and is instead included in his assessable income for the income year ended 30 June 2014.
End of exampleTreatment of sale and harvest proceeds
Amounts you receive from a CGT event that happens to your forestry interest, for example the sale of your forestry interest or as harvest proceeds, are capital proceeds for CGT purposes; see What are capital proceeds?
Sale and harvest receipts: forestry interest no longer held
If you cease to hold your forestry interest as a result of the CGT event, (for example you sell your interest or receive the harvest proceeds), you will also need to include at A item 23 Forestry managed investment scheme income on your tax return the lesser of the following two amounts:
- the market value of your forestry interest (at the time of the CGT event)
- the amount (if any) by which the total forestry scheme deductions (ongoing costs of ownership) exceeds the incidental forestry scheme receipts (for example, thinning).
To work out any capital gain or capital loss, the cost base or reduced cost base of your forestry interest increases by this amount.
Example 50: Sale of a forestry interest in an FMIS
Julian is a subsequent participant who sells his forestry interest on 30 May 2014 at the market value of $20,000. He purchased the forestry interest for $14,000. A CGT event happens when he sells the forestry interest. The original cost base of his forestry interest is $14,000.
While holding his forestry interest, he has claimed $4,000 in deductions (total forestry scheme deductions). This amount relates to lease fees, annual management fees, and the cost of felling that he has paid to the forestry manager. Julian has also received $1,500 as thinning proceeds (incidental forestry scheme receipts) during the same period. This amount was shown at A item 23 Forestry managed investment scheme income on his tax return for that income year.
In 2013–14 Julian will also need to include $2,500 ($4,000 – $1,500) as income at A item 23 on his tax return, as this amount is less than the market value of the interest at the time of the sale ($20,000).
Julian’s cost base increases from $14,000 to $16,500 ($14,000 + $2,500).
Julian calculates the capital gain as follows:
capital proceeds |
$20,000 |
less cost base |
$16,500 |
capital gain |
$3,500 |
Julian may apply capital losses (if any) and the CGT discount (if applicable) to the capital gain in determining the net capital gain to be included in his assessable income at item 18 Capital gains on his tax return (supplementary section). See the sample worksheet (PDF, 84KB).
End of exampleIf you still hold your forestry interest after the CGT event, for example you sold part of your interest or you received partial harvest proceeds over two or more income years, you will need to apportion your income as follows:
Step 1: Work out the following two amounts:
- the market value of the forestry interest (at the time of the CGT event)
- the amount (if any) by which the total forestry scheme deductions exceeds the incidental forestry scheme receipts.
Step 2: Use the lesser of the two amounts above in the following formula:
Amount worked out from step 1 |
X |
The decrease (if any) in the market value |
Step 3: Include the resulting amount at A item 23 Forestry managed investment scheme income on your tax return.
Step 4: For CGT purposes, to calculate the new cost base or reduced cost base of your forestry interest:
- apportion the original cost base and reduced cost base of your forestry interest by the change in market value of your forestry interest, and then
- add the amount from step 3.
This apportioned cost base or reduced cost base should then be used to calculate your capital gain or capital loss.
Example 51: Harvest proceeds over two income years
John is a subsequent participant who receives harvest proceeds over two income years. He receives his first harvest payment of $5,000 in the 2012–13 income year.
The market value of John’s forestry interest is $20,000 just before he received his first harvest payment (which is a CGT event). After John received this first harvest payment, the market value of his forestry interest was reduced to $15,000. His original cost base was $14,000.
In the time that he has held his interest, he has claimed $4,000 in deductions (his total forestry scheme deductions). This relates to lease fees, annual management fees and the cost of felling that he has paid to the forestry manager. John has also received $1,500 from thinning proceeds (his incidental forestry scheme receipts) in the same period.
Step 1
- the market value of the forestry interest (at the time of the CGT event) = $20,000
- the amount by which the total forestry scheme deductions exceed the incidental forestry scheme receipts: $4,000 – $1,500 = $2,500
The amount to use in step 2 of the calculation is $2,500
Step 2
$2,500 |
X |
$5,000 |
= |
$625 |
Step 3
John will need to include $625 at A item 23 Forestry managed investment scheme income on his tax return.
Step 4
The market value of John’s forestry interest has been reduced by 25%
(5,000 ÷ 20,000 × 100).
John’s adjusted cost base is:
(25% × $14,000) + $625 = $4,125.
Accordingly, he calculates his capital gain to be $5,000 – $4,125 = $875. This amount should be included in the calculation of John’s net capital gain or loss at item 18 Capital gains on his tax return.
In the 2013–14 income year, John receives his final harvest payment (which is a CGT event) of $15,000. He has not paid any other fees in the 2013–14 income year.
John will need to include the following amounts on his 2013–14 tax return:
- the remainder of $1,875 (that is, $2,500 – $625) from step 2 at A item 23 Forestry managed investment scheme income
- his capital gain of $2,625 (see below) in the calculation of his net capital gain or loss at item 18
Adjusted cost base: |
(75% x 14,000) + $1,875 |
$12,375 |
capital gain: |
capital proceeds |
$15,000 |
|
less adjusted cost base |
$12,375 |
Net capital gain |
$2,625 |
End of example