Division 394 of the ITAA 1997 sets out rules about deductions for contributions to forestry managed investment schemes (FMIS). It also sets out the tax treatment of proceeds from the sale of interests in such schemes, and of proceeds from harvesting trees under such schemes.
The treatment of FMIS also allows for secondary market trading of interests in such schemes. As a result, there are two different types of investors:
The FMIS income and FMIS deductions that the SMSF must report depend on whether it is an initial or subsequent participant.
An SMSF that invests in an FMIS shows:
- capital gains from an FMIS at A Net capital gain in Section B
- income from an FMIS at X Forestry managed investment scheme in Section B
- deductible and non-deductible payments made to an FMIS at U1 or U2 Forestry managed investment scheme expense in Section C.
If the SMSF is a member of a collapsed agribusiness managed investment scheme, then to help you calculate the SMSF's income and deductions, see Collapse of agribusiness managed investment schemes: participant information.
FMIS income
Initial participants in an FMIS
Thinning receipts
Include at X Forestry managed investment scheme income in Section B the amount of thinning proceeds received by the SMSF from its forestry interest.
Sale and harvest receipts: forestry interest no longer held
Include the market value of the forestry interest at the time of the CGT event at X Forestry managed investment scheme income if:
- the SMSF ceased holding its forestry interest as a result of a CGT event (for example, it sold its interest or it received harvest proceeds), and
- the SMSF can deduct or has deducted amounts paid under the FMIS for an income year, or would be entitled to deduct such amounts but for a CGT event happening within 4 years after the end of the income year in which the SMSF first pays an amount under the FMIS.
Sale and harvest receipts: forestry interest still held
Include at X Forestry managed investment scheme income in Section B the amount by which the market value of the forestry interest was reduced as a result of the CGT event if:
- a CGT event happened and the SMSF still holds its forestry interest (for example, it sold part of its interest or it received partial harvest proceeds), and
- the SMSF can deduct or has deducted amounts paid under the FMIS for an income year, or would be entitled to deduct such amounts but for a CGT event happening within 4 years after the end of the income year in which the SMSF first pays an amount under the FMIS.
Subsequent participants in an FMIS
Thinning receipts
Include at X Forestry managed investment scheme income in Section B the amount of thinning proceeds received by the SMSF from its forestry interest
Sale and harvest receipts: forestry interest no longer held
If the SMSF:
- ceased holding its forestry interest as a result of a CGT event (for example, it sold its interest or it received harvest proceeds), and
- can deduct or has deducted amounts paid under the FMIS for an income year, or could deduct such amounts for an income year if the SMSF had paid the amount under the FMIS in that income year
include the lesser of the following two amounts at X Forestry managed investment scheme income in Section B:
- the market value of the forestry interest at the time of the CGT event, or
- the amount, if any, by which the total forestry scheme deductions exceed the incidental forestry scheme receipts (‘net deductions’).
Example: Sale receipts – forestry interest no longer held shows how to calculate the amount to include at X Forestry managed investment scheme income where the SMSF sold its forestry interest. It also shows the capital gains tax consequences.
Show the SMSF's net capital gains in Section B at A Net capital gain rather than at X Forestry managed investment scheme income. For more information on the CGT treatment of the SMSF’s forestry interests, see Capital gains tax.
Sale and harvest receipts: forestry interest still held
If:
- a CGT event happened and the SMSF still held its forestry interest (for example, it sold part of its interest or it received partial harvest proceeds), and
- the SMSF can deduct or has deducted amounts paid under the FMIS for an income year, or could deduct such amounts for an income year if the SMSF had paid the amount under the FMIS in that income year
then 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 exceed the incidental forestry scheme receipts (‘net deductions’).
Use the lesser of the two amounts you worked out above in the following formula:
Include the result of this formula at X Forestry managed investment scheme income. Include the remainder in a future income year in which the SMSF receives further proceeds from a harvest or the sale of the forestry interest.
Example: Harvest receipts: forestry interest still held shows how to calculate the amount to include at X Forestry managed investment scheme income, where the SMSF:
- receives a harvest payment, and
- still holds the forestry interest.
It also shows the capital gains tax consequences.
Show the SMSF's net capital gains in Section B at A Net capital gain rather than at X Forestry managed investment scheme income. For more information on the CGT treatment of the SMSF’s forestry interests, see Capital gains tax.
Example: Sale receipts: forestry interest no longer held
Cedar Superannuation Fund is an SMSF and a subsequent participant in an FMIS. Cedar Superannuation Fund sold its forestry interest (held on capital account) for $20,000 (market value). The sale of the forestry interest is a CGT event. The original cost base for the forestry interest is $14,000.
During the time that Cedar Superannuation Fund held the forestry interest, it claimed $4,000 in deductions (its total forestry scheme deductions) for lease fees, annual management fees and the cost of felling that it paid to the forestry manager.
During the same period, Cedar Superannuation Fund received $1,500 from thinning proceeds (its incidental forestry scheme receipts).
Cedar Superannuation Fund include $2,500 (that is, $4,000 minus $1,500) at X Forestry managed investment scheme income in its SMSF annual return, because this amount is less than the market value of its forestry interest at the time of the CGT event.
Capital gains tax notes
- Cedar Superannuation Fund will take the amount that it included at X Forestry managed investment scheme income into account when working out the amount to include at A Net capital gain.
- The capital gain would be $3,500, which is capital proceeds of $20,000 less cost base of $16,500 (made up of $14,000 plus $2,500 that was included in assessable income).
Example: Harvest receipts: forestry interest still held
Oakey Superannuation Fund is an SMSF and a subsequent participant in an FMIS. Oakey Superannuation Fund holds the forestry interest on capital account and received a harvest proceeds payment of $5,000 in 2016–17. Oakey Superannuation Fund’s interest has been reduced by 25%.
The market value of Oakey Superannuation Fund’s forestry interest just before it received payment for the harvest (a CGT event) is $20,000. After Oakey Superannuation Fund received this harvest payment, the market value of its forestry interest was reduced to $15,000. The original cost base for the forestry interest is $14,000.
During the time Oakey Superannuation Fund has held the forestry interest, it claimed $4,000 in deductions (its total forestry scheme deductions) for lease fees, annual management fees and the cost of felling that it paid to the forestry manager.
During the same period, Oakey Superannuation Fund received $1,500 from thinning proceeds (its incidental forestry scheme receipts).
Step 1
Work out the lesser of the market value and net deductions
The market value of the forestry interest (at the time of the CGT event) is $20,000.
The amount by which the total forestry scheme deductions exceed the incidental forestry scheme receipts is $2,500 (that is, $4,000 minus $1,500) net deductions.
The amount used in step 2 is $2,500 (net deductions).
Step 2
Using the formula:
You calculate:
$2,500 × ($5,000 ÷ $20,000) = $625
Step 3
Oakey Superannuation Fund will need to include $625 at X Forestry managed investment scheme income on its 2016–17 annual return.
The remainder of each of total forestry scheme deductions and incidental forestry scheme receipts ($2,500 minus $625, that is, $1,875) that is not included at X Forestry managed investment scheme income in 2016–17 will be reported in a future income year (the year in which the SMSF receives further proceeds from the harvest or sale of its forestry interest).
For example, if in 2017–18 Oakey Superannuation Fund received the balance of harvest proceeds of $15,000 (at the time of the CGT event, the market value of its forestry interest is $15,000) and it had no further forestry scheme deductions or incidental forestry scheme receipts, it would include the balance of $1,875 as assessable income in 2017–18.
Capital gains tax notes
- Oakey Superannuation Fund has disposed of 25% of its forestry interest. The SMSF will take the amount that it included at X Forestry managed investment scheme income into account when working out the amount to include at A Net capital gain.
- For 2015–17, the capital gain would be $875 (capital proceeds of $5,000 less apportioned original cost base of $4,125 (made up of $3,500 (25% of $14,000) plus $625) that is included in assessable income).
FMIS expenses
Show payments made to an FMIS at either U1 or U2 Forestry managed investment scheme expense in Section C.
The SMSF may be entitled to claim a deduction at U1 Deductible forestry managed investment scheme expenses in Section C for payments made to an FMIS if:
- the income from the FMIS is not exempt – see exempt current pension income
- the SMSF currently holds a forestry interest in an FMIS, or held a forestry interest in an FMIS during 2016–17
- the SMSF paid an amount to a forestry manager of an FMIS under a formal agreement
- the forestry manager has advised the SMSF that the FMIS satisfies the 70% direct forestry expenditure rule in Division 394 of the ITAA 1997
- the SMSF does not have day to day control over the operation of the scheme
- there is more than one participant in the scheme or, the forestry manager or an associate of the forestry manager manages, arranges or promotes similar schemes, and
- all the trees are established within 18 months of the end of the income year in which an amount is first paid under the FMIS by a participant in the scheme.
If the SMSF is an initial participant in an FMIS it can claim a deduction for initial and ongoing payments at this question. The SMSF cannot claim a deduction if a CGT event happens in relation to its forestry interest in an FMIS within four years after the end of the income year in which it first made a payment under the FMIS. However, the deduction will not be denied for that reason if the CGT event happens because of circumstances outside of the SMSF's control, provided the SMSF could not have reasonably foreseen the CGT event happening when it acquired the interest. CGT events happening that would generally be outside the SMSF's control may include compulsory acquisition, insolvency of the SMSF or the scheme manager, or cancellation of the interest due to fire, flood or drought.
If the SMSF is a subsequent participant, it cannot claim a deduction for the amount paid to acquire the interest. The SMSF can only claim a deduction for ongoing payments.
The deduction is claimed in the income year in which the payment is made.
Excluded payments
The SMSF cannot claim a deduction at U1 Deductible forestry managed investment scheme expenses in Section C for any of the following payments:
- payments for borrowing money
- payments of interest and payments in the nature of interest (such as a premium on repayment or redemption of a security, or a discount of a bill or bond)
- payments of stamp duty
- payments of goods and services tax (GST)
- payments that relate to transportation and handling of felled trees after the earliest of the following
- sale of the trees
- arrival of the trees at the mill door
- arrival of the trees at the port
- arrival of the trees at the place of processing (other than where processing happens in-field)
- payments that relate to processing
- payments that relate to stockpiling (other than in-field stockpiling).
While the payments are not deductible under Division 394 of the ITAA 1997, the payments may be deductible under other provisions of the ITAA 1997 or ITAA 1936 and claimable at other questions.