Tax Laws Amendment (2007 Measures No. 3) Act 2007 (79 of 2007)
Schedule 8 Forestry managed investment schemes
Part 1 Main amendments
Income Tax Assessment Act 1997
2 After Division 392
Insert:
Division 394 - Forestry managed investment schemes
Guide to Division 394
394-1 What this Division is about
This Division sets out rules about deductions for contributions to forestry managed investment schemes. 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.
Table of sections
394-5 Object of this Division
394-10 Deduction for amounts paid under forestry managed investment schemes
394-15 Forestry managed investment schemes and related concepts
394-20 Payments on behalf of participant in forestry managed investment scheme
394-25 CGT event in relation to forestry interest in forestry managed investment scheme - initial participant
394-30 CGT event in relation to forestry interest in forestry managed investment scheme - subsequent participant
394-35 70% DFE rule
394-40 Payments under forestry managed investment scheme
394-45 Direct forestry expenditure
394-5 Object of this Division
The object of this Division is to encourage the expansion of commercial plantation forestry in Australia through the establishment and tending of new plantations for felling. This is achieved by:
(a) permitting investors to deduct amounts paid under a forestry scheme in the year of payment, if certain conditions are met (for example, that it is reasonable to expect that the manager of the scheme will spend at least 70% of investors’ contributions, on a market value basis, on activities that establish, tend, fell and harvest trees); and
(b) allowing secondary market trading of interests in such schemes, while minimising tax arbitrage and providing tax certainty for investors.
394-10 Deduction for amounts paid under forestry managed investment schemes
(1) You can deduct an amount if:
(a) you hold a *forestry interest in a *forestry managed investment scheme; and
(b) you pay the amount under the scheme; and
(c) the scheme satisfies the *70% DFE rule (see section 394-35) on 30 June in the income year in which a *participant in the scheme first pays an amount under the scheme; and
(d) you do not have day to day control over the operation of the scheme (whether or not you have the right to be consulted or give directions); and
(e) at least one of these conditions is satisfied:
(i) there is more than one participant in the scheme;
(ii) the *forestry manager of the scheme, or an *associate of the forestry manager, manages, arranges or promotes similar schemes; and
(f) the condition in subsection (4) is satisfied.
(2) You deduct the amount for the income year in which you pay it.
(3) For the purposes of this Division, do not treat an amount as being paid under a *forestry managed investment scheme if:
(a) you pay the amount in connection with a *CGT event in relation to a *forestry interest in the scheme; and
(b) as a result of the CGT event:
(i) another *participant in the scheme no longer holds the forestry interest; and
(ii) you start to hold the forestry interest.
(4) For the purposes of paragraph (1)(f), the condition in this subsection is satisfied unless:
(a) 18 months have elapsed since the end of the income year in which an amount is first paid under the *forestry managed investment scheme by a *participant in the scheme; and
(b) the trees intended to be established in accordance with the scheme have not all been established before the end of those 18 months.
(5) You cannot deduct an amount under subsection (1) if:
(a) you hold the *forestry interest mentioned in paragraph (1)(a) as an *initial participant; and
(b) a *CGT event happens in relation to the forestry interest within 4 years after the end of the income year in which you first pay an amount under the scheme.
If you have already deducted it, your assessment may be amended to disallow the deduction.
(6) Despite section 170 of the Income Tax Assessment Act 1936, the Commissioner may amend your assessment at any time within 2 years after the *CGT event, for the purpose of giving effect to subsection (5).
(7) Sections 82KZMD and 82KZMF of the Income Tax Assessment Act 1936 do not affect the timing of a deduction under this section.
394-15 Forestry managed investment schemes and related concepts
(1) A *scheme is a forestry managed investment scheme if the purpose of the scheme is for establishing and tending trees for felling in Australia.
(2) The entity that manages, arranges or promotes a *forestry managed investment scheme is the forestry manager of the scheme.
(3) A forestry interest in a *forestry managed investment scheme is a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not).
(4) An entity that holds a *forestry interest in a *forestry managed investment scheme (other than the *forestry manager of the scheme) is a participant in the scheme.
(5) A *participant in a *forestry managed investment scheme holds a *forestry interest in the scheme as an initial participant if:
(a) the participant obtains the forestry interest from the *forestry manager of the scheme; and
(b) the payment by the participant to obtain the forestry interest results in the establishment of trees.
394-20 Payments on behalf of participant in forestry managed investment scheme
For the purposes of this Division, treat a payment to the *forestry manager of a *forestry managed investment on behalf of a *participant in the scheme as a payment by the participant to the forestry manager.
394-25 CGT event in relation to forestry interest in forestry managed investment scheme - initial participant
(1) This section applies if:
(a) you hold a *forestry interest in a *forestry managed investment scheme as an *initial participant in the scheme; and
(b) at least one of these conditions is satisfied:
(i) you can deduct or have deducted an amount for an income year under section 394-10 in relation to the forestry interest;
(ii) the condition in subparagraph (i) would be satisfied if subsection 394-10(5) were disregarded; and
(c) a *CGT event happens in relation to the forestry interest, other than a CGT event that happens in respect of thinning.
(2) Your assessable income for the income year in which the *CGT event happens includes:
(a) if, as a result of the CGT event, you no longer hold the *forestry interest - the *market value of the forestry interest (worked out as at the time of the event); or
(b) otherwise - the decrease (if any) in the market value of the forestry interest as a result of the CGT event.
(3) Any amount that you actually receive because of the *CGT event is not included in your assessable income (nor is it *exempt income).
394-30 CGT event in relation to forestry interest in forestry managed investment scheme - subsequent participant
(1) This section applies if:
(a) you hold a *forestry interest in a *forestry managed investment scheme otherwise than as an *initial participant in the scheme; and
(b) at least one of these conditions is satisfied:
(i) you can deduct or have deducted an amount for an income year under section 394-10 in relation to the forestry interest;
(ii) you could deduct an amount for an income year under section 394-10 if you had paid the amount under the scheme in that year; and
(c) a *CGT event happens in relation to the forestry interest, other than a CGT event that happens in respect of thinning.
(2) Your assessable income for the income year in which the *CGT event happens includes the lesser of the following:
(a) the *market value of the forestry interest (worked out as at the time of the event);
(b) the amount (if any) by which the *total forestry scheme deductions in relation to the forestry interest exceeds the *incidental forestry scheme receipts in relation to the forestry interest.
(3) The total forestry scheme deductions in relation to the *forestry interest is the total of each amount that you can deduct or have deducted under section 394-10 for each income year in relation to the forestry interest.
(4) The incidental forestry scheme receipts in relation to the *forestry interest is the total of each amount that you have received under the scheme in each income year in relation to the forestry interest for a reason otherwise than because of the *CGT event.
(5) However, if you still hold the forestry interest despite the *CGT event, work out the amount included in your assessable income under subsection (2) using this formula (instead of using the amount worked out under subsection (2)):
((Amount worked out under subsection (2)) X ((Decrease (if any) in the *market value of the *forestry interest as a result of the CGT event) / (*Market value of the *forestry interest just before the CGT event))
(6) If this section has operated previously in relation to the *forestry interest, disregard an amount for the purposes of subsections (3) and (4) to the extent that it has already been reflected in your assessable income under that previous operation in relation to the forestry interest.
(7) These provisions do not apply to the *CGT event:
(a) section 6-5 (about *ordinary income);
(b) any other provision that includes an amount in assessable income, other than the following:
(i) a provision in Part 3-1 or 3-3;
(ii) subsection (2) of this section;
(c) section 8-1 (about amounts you can deduct);
(d) any other provision that allows you to deduct an amount from your assessable income;
(e) section 118-20.
(8) However, the provisions referred to in subsection (7) can apply to the *CGT event if a *capital gain or *capital loss from the event is disregarded because of section 118-25.
(9) Just before the *CGT event, increase the *cost base and *reduced cost base of the *forestry interest by the amount included in your assessable income under subsection (2).
394-35 70% DFE rule
(1) A *forestry managed investment scheme satisfies the 70% DFE rule on 30 June in an income year if it is reasonable to expect on that 30 June that the amount of DFE under the scheme (see subsection (2)) is no less than 70% of the amount of the payments under the scheme (see subsection (3)).
(2) The amount of DFE under the scheme is the amount of the net present value (on that 30 June) of all *direct forestry expenditure under the scheme that the *forestry manager of the scheme has paid or will pay under the scheme.
(3) The amount of payments under the scheme is the amount of the net present value (on that 30 June) of all amounts that all current and future *participants in the scheme have paid or will pay under the scheme.
(4) In working out the net present value of an amount paid before that 30 June:
(a) unless paragraph (b) applies - treat the amount as having been paid on that 30 June; or
(b) if the amount was paid in an income year ending before that 30 June - treat the amount as having been paid on the 30 June in that income year.
(5) In working out the net present value of an amount expected to be paid after that 30 June, treat the amount as having been paid on 1 January in the income year in which it is expected to be paid.
(6) Reduce an amount worked out under subsection (2) or (3) to the extent (if any) to which that amount can reasonably be expected to be recouped.
(7) In working out the net present value of an amount for the purposes of this section, use the yield on Australian Government Treasury Bonds with the maturity closest to 10 years (as published by the Reserve Bank of Australia).
(8) For the purposes of subsection (2), if:
(a) the *forestry manager of the scheme has paid or will pay an amount under the scheme in a transaction; and
(b) the forestry manager and at least one other party to the transaction did not or will not deal at *arm’s length in relation to the transaction; and
(c) the amount is or will be more or less than the *market value of what it is for;
treat the amount as that market value.
394-40 Payments under forestry managed investment scheme
For the purposes of this Division, do not treat the following payments as payments under a *forestry managed investment scheme by a *participant in the scheme:
(a) payments for *borrowing money;
(b) payments of interest and payments in the nature of interest;
(c) payments of stamp duty;
(d) payments of *GST;
(e) payments that relate to one or more of the matters mentioned in paragraphs 394-45(4)(a), (b) or (c).
394-45 Direct forestry expenditure
(1) Direct forestry expenditure under a *forestry managed investment scheme means:
(a) an amount paid under the scheme that is attributable to establishing, tending, felling and harvesting trees; and
(b) notional amounts reflecting the *market value of goods, services or the use of land, provided by the *forestry manager of the scheme, for establishing, tending, felling and harvesting trees.
Example 1: Notional amounts reflecting the value of the use of land owned by the forestry manager that is provided for establishing, tending, felling and harvesting trees.
Example 2: Notional amounts reflecting the value of tree felling services provided by the forestry manager.
(2) Treat *direct forestry expenditure covered by paragraph (1)(b) as paid annually for each income year of the *forestry manager of the scheme based on the *market value of the goods, services, or the use of the land. Treat the day on which it is paid as:
(a) unless paragraph (b) or (c) applies - 1 January in the income year; or
(b) if the first time an amount is paid under the scheme is later than the first day of the income year - the last day of the income year; or
(c) if the scheme comes to an end on a day before the end of the income year - that day.
Exclusions - general
(3) However, direct forestry expenditure under the scheme does not include amounts paid under the scheme to the extent that they relate to any of the following:
(a) marketing of the scheme;
Example: Advertising, sales, sponsorship and entertainment.
(b) insurance, contingency funds or provisions (other than provisions for employee entitlements);
(c) financing;
(d) lobbying;
(e) general business overheads (but not overheads directly related to forestry);
(f) subscriptions to industry bodies;
(g) commissions for financial planners or financial advisers;
(h) compliance with requirements related to the structure and operations of the *forestry manager of the scheme;
Example: Product design and preparation of product disclosure statements.
(i) supervision and auditing of contracts, other than direct supervision of direct forestry activities (such as establishing trees for felling);
(j) legal fees relating to any matter mentioned in this subsection.
Exclusions - expenditure after harvest etc.
(4) Also, direct forestry expenditure under the scheme does not include amounts paid under the scheme to the extent that they relate to any of the following:
(a) transportation and handling of felled trees that happens after the earliest of the following:
(i) sale of the trees;
(ii) arrival of the trees at the mill door;
(iii) arrival of the trees at the port;
(iv) arrival of the trees at the place of processing (other than where processing happens in-field);
(b) processing;
(c) stockpiling (other than in-field stockpiling);
(d) marketing and sale of forestry produce.