Edited version of private advice

Authorisation Number: 1051812976423

Date of advice: 05 August 2021

Ruling

Subject: Forestry management scheme

Question 1

Is the compensation for the loss of trees assessable income?

Answer

Yes.

Question 2

Will the Commissioner exercise his discretion to allow further time to make the election under Section 385-130 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You bought shares in an agricultural project.

You are an original subscriber to the scheme.

The forestry scheme is facilitated by a company.

Your investment is the equivalent to less than 10 hectares of plantation land.

Early in the year, bushfires destroyed a large part of the trees in your holding.

Subsequently you received an insurance payment for the loss of the timber.

You still have a substantial portion of your original holding and expect to produce income from it in the future.

You sought advice on the tax treatment of the compensation payment.

You have lodged the income tax return for the relevant year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-5(2)

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 385-130

Income Tax Assessment Act 1997 section 385-150

Reasons for decision

Question 1

Ordinary income

Subsection 6-5(2) of the Income Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

•                 are earned;

•                 are expected or relied upon

•                 have an element of periodicity, recurrence or regularity

•                 replace income.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82).

In order to determine if the insurance proceeds are capital in nature it must first be established whether or not you are carrying on a business of forestry operations or if scheme was entered into with the intention to make a profit.

Product Ruling PR 2005/5 states that participants of the Australian Forestry Management Pty Limited (AFM) 2005 Softwood Project are considered to be carrying on a business of primary production.

As a result of this, the proceeds from the harvesting of the trees would have been assessable income under section 6-5 of the ITAA 1997.

The insurance proceeds you received were due to the loss of the timber and as a result, you were compensated for the loss of income that you would have earned had the fire had not occurred.

Therefore, the insurance proceeds are a replacement of income and assessable under section 6-5 of the ITAA 1997.

While a CGT event would have also occurred, section 118-20 of the ITAA 1997 acts to prevent the amount from being taxed twice by reducing any capital gain by any amount included in your assessable income so that the income is only included in your tax return once.

Question 2

Subsection 385-130 of the Income Tax Assessment Act 1997 (ITAA 1997) prescribes that where a taxpayer in a primary production business receives insurance for the loss of trees, an election may be made to spread the insurance proceeds over five years.

Section 385-150 of the ITAA 1997 provides that the election must be made before the tax return for the relevant year has been lodged unless the Commissioner allows further time to make the election.

In your case, you were advised to lodge the income tax return without being informed of the nature of the insurance payment or that there was an election available to you which would allow you to spread the payment across multiple years.

Due to the circumstance outlined above, the Commissioner will allow you to elect to spread the income from the insurance payment over five years, commencing in the year in which the insurance payment was received.

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