GST issues registers

Primary production industry partnership

9 Timber

9.1 Acquisitions

9.1.1 - Are the supplies of timber between forestry companies taxable?

Non-interpretative - straight application of the law

Question

Are the supplies of timber between forestry companies taxable?

Background

Some forestry companies (mills) own timber plantations. They process their own logs but can only handle logs of a certain size. For example, one company may process large diameter logs while another only handles small diameter logs. These companies trade the logs that they cannot process with each other. The companies account on a non-cash basis.

Answer

Yes.

Explanation

The supplies of timber would be taxable if section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) is satisfied.

Section 9-5 of the GST Act provides:

You make a taxable supply:

•: you make the supply for consideration; and
•: the supply is made in the course or furtherance of an enterprise that you carry on; and
•: the supply is connected with Australia; and
•: you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Supply

The definition of supply as provided for in section 9-10 of the GST Act is very broad and includes the supply of goods.

The provision of timber would fall within this definition, as a supply of goods under paragraph 9-10(2)(a) of the GST Act.

Consideration

A taxable supply must be for consideration, which includes everything that the supplier has received for the goods. Section 9-15 of the GST Act states consideration includes any payment, act or forbearance done in connection with the supply of the thing.

The return of timber or any payment in cash would be consideration for the supply of timber.

Provided that paragraphs 9-5 (b) - (d) of the GST Act are also satisfied, the supplies of the timber between the forestry companies will be taxable.

9.1.2 - Timber acquisitions

Question

Are the acquisitions of timber creditable acquisitions?

Non-interpretative - straight application of the law.

Background

Answer

Yes.

Explanation

The acquisition of timber by the forestry companies would be creditable acquisitions if section 11-5 of the GST Act is satisfied.

Section 11-5 of the GST Act provides:

You make a creditable acquisition if:

•: you acquire anything solely or partly for a creditable purpose; and
•: the supply of the thing to you is a taxable supply; and
•: you provide, or are liable to provide, consideration for the supply; and
•: you are registered, or required to be registered.

Acquisition

Acquisition is defined in section 11-10 of the GST Act to include an acquisition of goods.

The acquisition of timber would satisfy this section.

Creditable purpose

Subsection 11-15(1) of the GST Act provides that a thing is acquired for a creditable purpose to the extent that it is acquired in the carrying on of an enterprise.

As the timber is acquired by the companies to be processed, the timber would be acquired for a creditable purpose.

Therefore, provided the other provisions of section 11-15 of the GST Act are met, the acquisitions of timber will be creditable acquisitions.

9.1.3 - Timber value

Question

What would the value of the timber be?

Non-interpretative - straight application of the law

Background

Answer

The value of the timber would be based on the GST inclusive market value at the time of supply.

9.1.4 - Non-cash GST liability and input tax credit entitlement

Question

When does the GST liability and input tax credits entitlement occur when a forestry company accounts on a non-cash basis?

Non-interpretative - straight application of the law

Background

Answer

Please refer to explanation below.

Explanation

Where the supplies are taxable supplies, each party will be liable for GST on the supply of timber that they make.

When a company accounts on a non-cash (accruals) basis, the following rules apply with regard to GST liability and input tax credit entitlement.

Subsection 29-5(1) of the GST Act states that GST payable on a supply is attributed to the tax period in which:

•: any consideration is received for the supply; or
•: an invoice is issued for the supply;
•: whichever is the earlier.

Subsection 29-10(1) of the GST Act states that eligibility for an input tax credit arises in the tax period in which:

•: payment is made for the supply; or
•: an invoice was issued for the acquisition;
•: whichever is the earliest.

In order to claim input tax credits, a tax invoice is required from the entity making the taxable supply, see paragraph 29-10(3)(a) of the GST Act.

9.2 Registration

9.2.1 - GST turnover and unregistered suppliers

Question

Where a supplier is unregistered, are the following disregarded for the purposes of section 188-25 of the GST Act in determining whether the supplier has a GST turnover which meets the registration threshold:

The sale to a single purchaser of:

(a)(i): land with standing timber on the land at time of sale of the land;
(a)(ii): land together with already felled timber;
(b): grazing permits?

For the source of the ATO view refer to GSTR 2001/7 - Goods and services tax: meaning of GST turnover, including the effect of section 188 25 on projected GST turnover.

Answer

(a)(i) Land with standing timber

Until the timber is severed from the land it is considered to be part of the land. Provided the land is considered to be a capital asset, the proceeds from the sale will be excluded from the vendor's projected GST turnover. Please note, where the standing trees are acquired as trading stock, Section 188-25 of the GST Act will not apply.

In addition, if the sale is solely as a consequence of the supplier ceasing to carry on his enterprise or permanently reducing the size or scale of his enterprise, the proceeds from the sale of the timber and land will be excluded from the supplier's projected GST turnover.

Whether or not the timber is ready for harvest at the time of sale of the land will not affect the application of section 188-25 of the GST Act in respect of the sale. The important point is whether or not the timber is separate from the land at the time of the sale.

(a)(ii) Land together with already felled timber

Where the timber is felled and therefore severed from the land and is sold prior to the sale of the land, the supply of the timber will be considered to be a separate supply. The proceeds from the sale of the land (capital asset) will not be included in calculating the supplier's projected GST turnover. The proceeds from the sale of the timber will only be excluded from the calculation if the sale is solely as a consequence of the supplier ceasing to carry on his enterprise or permanently reducing the size or scale of his enterprise.

(b) grazing permits

The proceeds from the sale of grazing permits will be excluded from the supplier's projected GST turnover as they are from the supply by way of transfer of ownership of a capital asset.

Explanation

Subject to any specific statutory provision to the contrary, anything growing on the land is considered to be part of the land. In Taxation Ruling TR 95/6 (HL), a number of issues concerning forestry operations are discussed. Trees form part of the land on which they grow and while standing do not constitute trading stock. However, trees on hand at the end of a year of income that have been felled for the purpose of manufacture or sale in the course of carrying on a business of forest operations constitute trading stock.

Capital assets are those assets that are used to yield profit. Unlike trading stock, capital assets are not bought and sold to generate a trading profit in the course of carrying on an enterprise.

Section 188-25 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides:

In working out your projected GST turnover, disregard:

•: any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and
•: any supply made, or likely to be made, by you solely as a consequence of:
•: ceasing to carry on an enterprise; or
•: substantially and permanently reducing the size or scale of an enterprise.

This section provides that when calculating projected GST turnover, supplies that fall within paragraph 188-25(a) or paragraph 188-25(b) are not included.

Question (a) (i) and (ii)

Where land is sold with standing timber as a capital asset, paragraph 188-25(a) will apply and the proceeds of the sale will not be included in calculating the supplier's projected GST turnover. If paragraph 188-25(a) cannot be satisfied, paragraphs 188(b)(i) and (ii) need to be considered.

To satisfy sub-paragraphs 188-25(b)(i) or (ii), the sale of the timber and land must be solely due to the fact that the supplier is ceasing the business altogether or because the size and scale of the business is being permanently reduced. Only then will the proceeds of the sale not be included in calculating the supplier's projected GST turnover.

If the timber is severed and sold it is considered to be trading stock and the proceeds from the sale will be included in calculating the supplier's projected GST turnover. However, if the timber is sold solely as a consequence of the supplier ceasing to carry on his enterprise or permanently reducing the size or scale of his enterprise then the supply will not be included in the supplier's projected GST turnover.

Question (b)

As grazing permits are generally considered to be capital assets, paragraph 188-25(a) will usually apply and the proceeds of the sale will not be included in calculating the supplier's projected GST turnover.

For further information on GST turnover for GST purposes see: GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover.

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