Forestry managed investment schemes (Division 394)

Overview

Rules about deductions for contributions to a forestry managed investment scheme (MIS) where that scheme is a qualifying scheme came into effect from 1 July 2007. The rules aim to encourage the expansion of commercial plantation forestry in Australia through the establishment and tending of new plantations for felling.

If you are an initial participant in a qualifying forestry MIS you can deduct amounts in the year of payment.

The treatment of a qualifying forestry MIS also allows for secondary-market trading of interests in such schemes. As a result, there are two different types of investors:

• initial participants – who can claim statutory deductions
• subsequent participants – who cannot claim a statutory deduction and hold the forestry interest on capital account (unless held as trading stock).

Qualifying schemes

To be considered a qualifying scheme, the forestry manager needs to show both of the following:

• there is a reasonable expectation at least 70% of investor contributions will be spent on direct forestry costs during the life of the project
• the plantation is established as intended within 18 months of the end of the income year in which an amount is first paid under the scheme by an investor.

Notification requirements

Forestry managers need to notify us when they first receive a contribution from an initial participant in a qualifying scheme.

Forestry managers also need to tell us if the plantation is not established as intended within the required 18-month period.

Investigate before you invest

You need to investigate any schemes before you invest – be cautious about schemes that promise substantial tax benefits. If an investment seems too good to be true, it probably is.

See also:

• Agribusiness managed investment schemes
• Tax-effective investing

Early termination of an agribusiness (forestry) managed investment schemes

There may be tax consequences if you are a participant in a forestry managed investment scheme (MIS) that is to be terminated or has been wound up early.

If we have previously issued a product ruling on the tax consequences for participants of a forestry MIS, whether it is a Division 394 forestry managed investment scheme or not, you can find both specific and general guidance on what you need to do.

Next step:

• Check the status of your forestry agribusiness by  
  • accessing the Tables of affected schemes (XLS, 508KB)This link will download a file
  • searching the ATO Legal Database for the product ruling number using the format: PR YYYY/NN or by adding a W after the number where the product ruling has been withdrawn: PR YYYY/NNW
  • browsing the published product rulings by year and name where you do not know the product ruling number
   

See also:

• Early termination of an agribusiness (forestry) MIS – general information on the possible tax consequences for an investor in a collapsed agribusiness (forestry) MIS

Initial participants

A forestry managed investment scheme (MIS) can have two different types of investors – initial participants and subsequent participants.

You are an initial participant if you meet all of the following conditions:

• the scheme is a qualifying scheme
• you obtained your forestry interest from the forestry manager of the scheme
• the payment you make for your interest results in the establishment of trees.

As an initial participant, you will be able to claim an immediate deduction for your contributions in the year you make them.

If you have not acquired your forestry interest as an initial participant, you are a subsequent participant and cannot claim a deduction for your acquisition costs.

If you are a promoter, arranger or manager of a forestry MIS, you cannot be a participant in that scheme.

See also:

• Keeping records
• Subsequent participants
• Information for promoters

Before you claim a deduction

You need to make sure your scheme is a qualifying scheme before you can claim a deduction as an initial participant. Contact the forestry manager and check the scheme documentation first.

For many forestry managed investment schemes, we have issued a product ruling that explains the tax consequences of the arrangement. It provides protection to investors as long as the scheme is implemented as described in the product ruling.

To check whether a product ruling has issued for your scheme, you can access the list of published product rulings on our legal database.

Tax treatment of thinning receipts

As an initial participant of a forestry managed investment scheme, the actual amount you receive from commercial thinning of trees is treated as assessable income in the year in which you receive it.

Tax treatment of sale and harvest receipts

Forestry interest no longer held

You must include the market value of the forestry interest at the time of the CGT event in your assessable income if you:

• cease holding your forestry interest because a CGT event happens (for example, you sold your interest or received harvest proceeds)
• have claimed a deduction, or can claim a deduction, or would be entitled to deduct such amounts, but for a CGT event happening within four years after the end of the income year in which you first pay an amount under the forestry managed investment scheme.

Forestry interest still held

You must include the amount by which the market value of the forestry interest was reduced as a result of the CGT event in your assessable income, and not the amount you actually receive. This is if both:

• a CGT event happens because you sold part of your forestry interest or there was a partial harvest and you still hold your interest
• you have claimed a deduction, or can claim a deduction, or would be entitled to deduct such amounts, but for a CGT event happening within four years after the end of the income year in which you first pay an amount under the forestry managed investment scheme.

Selling a forestry interest held for less than four years

As an initial participant, you can trade your interest in the forestry managed investment scheme (MIS) at any time. However, to continue to be entitled to a deduction for the amount paid for your forestry interest, you must hold that interest for four years after the income year in which you first pay an amount under the scheme.

If you do not hold your forestry interest for four years, you:

• will no longer be entitled to the deduction for the amount paid for your interest, including an amount you may already have claimed in previous years
• will still be assessed on the proceeds of the sale
• may be liable to pay interest and penalties on any tax underpaid as a result.

However, if you dispose of your interest because of circumstances outside your control, a deduction will continue to be allowed. This is provided you could not have reasonably foreseen the circumstances of the disposal happening when you first acquired the interest.

Circumstances generally outside your control may include:

• compulsory acquisition
• insolvency of yourself or the forestry manager
• cancellation of the interest due to fire, flood or drought.

This also applies to investors in a non-Division 394 forestry MIS who dispose of their interest after 1 July 2007 and within four years of the first income year in which they claimed a deduction for that scheme.

Selling a forestry interest held for four years or more

If you sell your forestry interest after you've held it for four years or more, your right to the deduction for your contributions to the forestry managed investment scheme will be preserved.

Subsequent participants

You are a subsequent participant if you obtain your interest in a forestry managed investment scheme (MIS) through secondary market trading. This means you acquired your forestry interest other than as an initial participant, usually by purchasing that interest from an initial participant in the scheme.

If you are a promoter, arranger or manager of a forestry MIS, you cannot be a participant in that scheme.

See also:

• Keeping records
• Initial participants
• Information for promoters

Deductions for subsequent participants

As a subsequent participant, you cannot claim a deduction for the cost of acquiring your forestry interest. In most situations, you will hold that interest on capital account (unless, for example, you hold it as trading stock).

Expenses like lease fees, annual management fees or costs of felling will be deductible to you. However, these deductions will affect calculations relating to capital gains tax (CGT) events for that interest.

Tax treatment of thinning receipts

As a subsequent participant of a forestry managed investment scheme (MIS) an amount you receive from commercial thinning of trees is treated as assessable income for the year in which you receive it.

Tax treatment of sale and harvests receipts

Forestry interest no longer held

• If you ceased holding your forestry interest because a CGT event happens (that is, you sold your interest or received harvest proceeds), and
• you can deduct or have deducted an amount in relation to the forestry interest or you could deduct an amount if you had paid the amount under the forestry MIS in relation to the forestry interest.

you must include the lesser of the two following amounts in your assessable income:

• the market value of the forestry interest at the time of the CGT event, or
• the amount (if any) by which the total forestry MIS deductions in relation to the forestry interest exceeds the incidental forestry scheme receipts.

This means you must disregard the amount you actually received.

Forestry interest still held

If:

• a CGT event happens because you sold part of your forestry interest, or there was a partial harvest and you still hold your interest, and
• you have claimed a deduction, or can claim a deduction, or could have deducted an amount if you had paid the amount under the FMIS in relation to the forestry interest.,

you need to work out the following two amounts:

• market value of the forestry interest at the time of the CGT event
• amount (if any) by which the total forestry MIS deductions exceeded the incidental forestry scheme receipts.

Use the lesser of the two amounts in the following formula to calculate the amount you must include in your assessable income:

Keeping records

You need to keep records of your involvement in a forestry MIS for either:

• five years after you sell your interest
• the year the interest ends.

See also:

• Keeping your tax records
• Product rulings
• Interest and penalties

Information for promoters

As a promoter, you must ensure your forestry managed investment scheme (MIS) meets the requirements of a qualifying scheme. This will allow investors to get the upfront deductions for their acquisition costs and subsequent contributions.

Qualifying scheme requirements

Reasonable expectation test

The scheme will be defined as a qualifying scheme if it can be shown there is a reasonable expectation that direct forestry expenditure for the scheme will equal or exceed 70% of contributions by investors at 30 June of the income year in which an investor first makes a contribution to that scheme.

70% direct forestry expenditure rule

Direct forestry expenditure (DFE) is expenditure directly relating to establishing, tending, felling and harvesting of trees.

A qualifying scheme is one where no less than 70% of investor contributions are used for DFE over the life of the project.

Market value is to be substituted for the prices actually used in determining DFE where the transaction is not at arm's length, and the amount to be paid by the forestry manager under the scheme is, or will be, more or less than the market value of what the amount is for.

Calculating net present value

We accept that future costs can be increased by the consumer price index (CPI) before calculating the net present value of all costs for the DFE calculation. CPI rates are published by the Australian Bureau of Statistics and reproduced by us to provide figures based on 'All groups CPI weighted average of eight capital cities'.

The amount spent on DFE over the life of the project will be determined in net present value terms. The discount rate used for calculating net present value is the yield on Australian Government Securities that are Treasury bonds with a maturity closest to 10 years (as published by the Reserve Bank of Australia). The forestry manager should use the current quoted rate as a proxy for the rate on 30 June.

If the forestry manager is applying for an ATO product ruling they should use the current quoted rate at the time of the application, however we will use the latest quoted rate.

See also:

• PS LA 2008/2 Forestry managed investment schemes (MIS)

18-month establishment rule

To be a qualifying scheme, trees must be established within 18 months of the end of the income year in which an amount is first paid under the scheme by an investor.

If trees are not established within this 18-month period, the forestry manager must provide a statement to us showing why the trees were not established. This statement must be made in the approved failure to establish notification form, and submitted within three months after the end of the 18-month period.

Starting a scheme

The promoter, arranger or manager of a forestry managed investment scheme must provide a statement to us regarding the initial contributions to the scheme. It must be in the approved initial contributions notification form, and submitted within three months after the end of the income year in which the forestry manager receives the contributions.

See also:

• PS LA 2008/2 Forestry managed investment schemes (MIS)
• Product rulings
• Agribusiness product rulings (forestry and non-forestry)

Information for participants and promoters of forestry managed investment schemes.