Appendix 2: Forestry managed investment schemes

Forestry managed investment schemes

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 2 different types of investors:

• initial participants
• subsequent participants.

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 label A Net capital gain in Section B
• income from an FMIS at label X Forestry managed investment scheme in Section B
• deductible and non-deductible payments made to an FMIS at labels 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 and restructure of agribusiness managed investment schemes – participant information.

FMIS income

The FMIS income for initial and subsequent participants are outlined below.

Initial participants in an FMIS

As an initial participant in FMIS, consider:

• Thinning receipts
• Sale and harvest receipts – forestry interest no longer held
• Sale and harvest receipts – forestry interest still held.

Thinning receipts

Include at label 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 label X Forestry managed investment scheme income if the SMSF:

• ceased holding its forestry interest as a result of a CGT event (because it sold its interest or it received harvest proceeds) and
• has claimed a deduction, or can claim a deduction, 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 label 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 (because it sold part of its interest or there was a partial harvest) and
• the SMSF has claimed a deduction, or can claim a deduction, 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

As a subsequent participant in FMIS, consider:

• Thinning receipts
• Sale and harvest receipts: forestry interest no longer held
• Sale and harvest receipts: forestry interest still held.

Thinning receipts

Include at label 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 (because it sold its interest or it received harvest proceeds), and
• can deduct or has deducted amount 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 2 amounts at label 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 label X Forestry managed investment scheme income where the SMSF sold its forestry interest. It also shows the capital gains tax consequences.

Write the SMSF's net capital gains in Section B at label A Net capital gain rather than at label 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

Include at label X Forestry managed investment scheme income in Section B the amount worked out below if the foresty interest is still held, and both:

• a CGT event happened and the SMSF still held its forestry interest (because it sold part of its interest or it received partial harvest proceeds)
• the SMSF can deduct, or has deducted, or could have deducted an amount if the SMSF had paid the amount under the FMIS in relation to the forestry interest.

Use the following steps to work out the amount included at label X Forestry managed investment scheme income in Section B.

Step 1: Work out the lesser amount

• 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).

Step 2: Work out the income amount

Use the lesser of the 2 amounts you worked out above in the following formula:

Lesser of the 2 amounts worked out above multiplied by [the decrease (if any) in the market value of the forestry interest (as a result of the CGT event), divided by the market value of the forestry interest just before the CGT event].

In a future income year (a year in which the SMSF receives further proceeds from a harvest or the sale of its forestry interest), disregard the amount of the net deductions that has already been included at label U1 in Section C.

Step 3: Complete this label

Add up all the amounts your worked out for the SMSF's FMIS income and write the total at label X Forestry managed investment scheme income

Show the SMSF's net capital gains in Section B at label A Net capital gain rather than at label X Forestry managed investment scheme income. For more information on the CGT treatment of the SMSF’s forestry interests, see Capital gains tax.

See Example: harvest receipts: forestry interest still held for how to calculate the amount to include at label X Forestry managed investment scheme income, where the SMSF:

• receives a harvest payment
• still holds the forestry interest.

It also shows the capital gains tax consequences.

FMIS expenses

Write payments made to an FMIS at either label U1 or U2 Forestry managed investment scheme expense in Section C.

The SMSF may be entitled to claim a deduction at label 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 2023–24
• 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
• 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 4 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 can't 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 can't claim a deduction at label 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.

Return to:

• Appendixes for the SMSF annual return
• Instructions to complete your SMSF annual return 2024