Product Ruling

PR 2024/15

AG Warehouse Pty Ltd - June Prepayment Discount Scheme

• Please note that the PDF version is the authorised version of this ruling.

What this Ruling is about

1. This Ruling sets out the income tax consequences for entities that participate as a customer in the AG Warehouse June Prepayment Discount Scheme (the Program) offered by AG Warehouse Pty Ltd (AG Warehouse).

2. All legislative references in this Ruling are to the Income Tax Assessment Act 1936, unless otherwise indicated. Terms which are defined in the AG Warehouse June Prepayment Discount Scheme application form (Application Form) referred to in paragraph 11 of this Ruling have been capitalised.

3. This Ruling does not address:

•

the tax consequences for a customer that is not a small business entity as defined in section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) or an entity covered by subsection 82KZM(1A)

•

the tax consequences upon application of the discount against a customer's purchases of the Eligible Products

•

the tax consequences of any financial accommodation obtained by a customer in order to fund the Prepayment Amount

•

the application of the prepaid expenditure provisions under Subdivision H of Division 3 of Part III, other than for section 82KZM

•

the circumstances under which a customer is entitled to a GST credit for goods and services tax paid under the Program

•

the tax consequences upon any assignment of a customer's rights under the Program to another party, and

•

whether this scheme constitutes a financial arrangement for the purposes of Division 230 of the ITAA 1997 (taxation of financial arrangements).

Who this Ruling applies to

4. This Ruling applies to you if you:

•

are accepted to participate in the scheme described in paragraphs 11 to 14 of this Ruling, as a customer, on or after 1 July 2024 and on or before 30 June 2027

•

use the Eligible Products purchased under the Program in carrying on a business for the purpose of gaining or producing assessable income, and

•

are a small business entity as defined in section 328-110 of the ITAA 1997 or an entity covered by subsection 82KZM(1A).

5. This Ruling does not apply to you if you:

•

are accepted to participate in the scheme before 1 July 2024 or after 30 June 2027

•

are not a small business entity as defined in section 328-110 of the ITAA 1997 or an entity covered by subsection 82KZM(1A)

•

participate in the scheme through offers made other than through the terms and conditions in the Application Form (or in terms and conditions materially similar to those in the Application Form) referred to in paragraph 11 of this Ruling

•

do not satisfy an assumption set out in paragraph 10 of this Ruling, or

•

are subject to Division 230 of the ITAA 1997 in respect of this scheme.

Requirements of the Superannuation Industry (Supervision) Act 1993

6. This Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993. We give no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Ruling as to whether investment in this scheme may contravene the provisions of the Superannuation Industry (Supervision) Act 1993.

Date of effect

7. This Ruling applies from 1 July 2024 to a customer specified in paragraph 4 of this Ruling that enters into the scheme from 1 July 2024 until 30 June 2027.

8. However, the Ruling only applies and may be relied on to the extent that there is no change in the scheme or in the customer's involvement in the scheme. If the scheme carried out is materially different from the scheme described at paragraphs 11 to 14 of this Ruling, this Ruling cannot be relied upon and may be withdrawn or modified.

Ruling

9. Subject to paragraph 3 of this Ruling and the assumptions in paragraph 10 of this Ruling:

(a)

The Prepayment Amount paid by a customer to AG Warehouse under the Program is deductible under section 8-1 of the ITAA 1997 in the income year it is paid.^[1]

(b)

Section 82KZM will not apply to deny a customer an immediate deduction of the Prepayment Amount incurred under the Program and allowable as a deduction under section 8-1 of the ITAA 1997.

(c)

The anti-avoidance provisions in Part IVA will not apply to deny the deductibility of the Prepayment Amount incurred under the Program by a customer.

Assumptions

10. This Ruling is made on the basis of the following necessary assumptions:

(a)

The customer is an Australian resident for tax purposes.

(b)

The customer is a small business entity as defined in section 328-110 of the ITAA 1997 or an entity covered by subsection 82KZM(1A).

(c)

The customer is carrying on a primary production business with a purpose of producing assessable income in excess of its deductible expenditure, and all Eligible Products purchased from AG Warehouse under the Program are used in carrying on that business.

(d)

The customer has not chosen to apply section 82KZMD to the expenditure incurred under the Program.

(e)

The Prepayment Amount is not 'excluded expenditure' as defined in subsection 82KZL(1).

(f)

To the extent the Eligible Products purchased by the customer from AG Warehouse are goods, they will not constitute trading stock and are not of a capital, private or domestic nature.

(g)

To the extent the Eligible Products purchased by the customer from AG Warehouse are services, they are not of a capital, private or domestic nature and will be performed by the Deadline.

(h)

The scheme will be executed in the manner described in the terms and conditions in the Application Form and in the Scheme section of this Ruling.

(i)

The terms and conditions in the application form offered by AG Warehouse in respect of the income years ending 30 June 2025, 2026 and 2027 will not be materially different to the terms and conditions in the Application Form referred to in paragraph 11 of this Ruling.

(j)

All dealings between the customer and AG Warehouse will be at arm's length.

Scheme

11. The scheme is identified and described in the following:

•

application for a product ruling as constituted by documents and information received on 28 June 2024, and

•

the Application Form, received on 28 June 2024.

Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under freedom of information legislation.

12. For the purposes of describing the scheme, there are no other agreements (whether formal or informal, and whether or not legally enforceable) which a customer, or any associate of a customer, will be a party to which are a part of the scheme.

Overview of scheme

13. The terms and conditions of the Program, as set out in the Application Form, constitute an agreement between a customer of AG Warehouse and AG Warehouse. The Program is open for acceptance prior to 30 June in the year of payment and is designed to assist customer cash-flow management by enabling them to align their payment for Eligible Products with seasonal farming periods, and benefit from potential discounts offered.

14. Pursuant to the terms and conditions of the Program:

(a)

The customer makes a payment to AG Warehouse referred to as the Prepayment Amount. The Prepayment Amount

(i)

must be a minimum of $10,000 plus goods and services tax

(ii)

must be paid in full on or before 26 June (the Closing Date)

(iii)

must be used by the customer to purchase Eligible Products from AG Warehouse within 12 months of the date the Prepayment Amount was paid (Deadline)

(iv)

must be used by the customer to purchase Eligible Products from AG Warehouse by 31 March of the year following payment in order for a Monthly Discount to be applied to the sale price of the Eligible Product^[2]

(v)

is not refundable to the customer in whole or in part, and

(vi)

will be forfeited in full by the customer if unused by the Deadline.

(b)

The Eligible Products purchased by the customer from AG Warehouse will

(i)

be as agreed between AG Warehouse and the customer, including but not limited to, crop protection products, forage conservation products, fencing products, fertiliser, animal health products, water products, seed and fertiliser spreading services

(ii)

not include bulk fuel, bulk feed, trading stock and items of a capital, private or domestic nature, and

(iii)

be subject to AG Warehouse's standard Terms of Sale.

(c)

AG Warehouse may use any Prepayment Amount made by the customer to settle any other amounts that are due, owing and payable by the customer to AG Warehouse under any other arrangement or contract that the customer has entered into with AG Warehouse.

Commissioner of Taxation
4 September 2024

Appendix - Explanation

Section 8-1 of the ITAA 1997 - deductibility of the Prepayment Amount

15. A loss or outgoing is deductible under section 8-1 of the ITAA 1997 if it is necessarily incurred in carrying on a business for the purpose of gaining or producing a taxpayer's assessable income. The expenditure must be part of the cost of trading operations and must not be of a capital, private or domestic nature.

16. An outgoing incurred by a business will be 'necessarily incurred' where, in the circumstances, it is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income (see Magna Alloys & Research Pty Ltd v. Commissioner of Taxation of the Commonwealth of Australia [1980] FCA 180).

17. Upon entry into the Program the Prepayment Amount is both immediately due and non-refundable such that the customer becomes definitively committed to, and incurs, the Prepayment Amount. As the Prepayment Amount is incurred for the purchase of Eligible Products to be used in the customer's primary production business, it constitutes expenditure which is clearly appropriate from the point of view of the pursuit of the business ends of the customer's business and is therefore necessarily incurred in the carrying on of that business.

18. The Prepayment Amount necessarily incurred by the customer to purchase Eligible Products in the course of carrying on its business is not of a capital, private or domestic nature. The deduction for the Prepayment Amount is allowable under section 8-1 of the ITAA 1997 in the income year the payment is made to AG Warehouse (that is, at the time it is necessarily incurred).

Section 82KZM - prepaid expenditure incurred by certain small and medium business entities and individuals incurring non-business expenditure

19. Subject to paragraph 20 of this Ruling, section 82KZM operates to spread over more than one income year a deduction which, apart from that section, would be allowable under section 8-1 of the ITAA 1997 for the year of income in which the prepaid expenditure (other than excluded expenditure as defined in subsection 82KZL(1)) is incurred under an agreement by a taxpayer that is either:

•

a small business entity, or an entity covered by subsection 82KZM(1A), for the year of income that has not chosen to apply section 82KZMD to the expenditure, or

•

an individual that has not incurred the expenditure in carrying on a business.

20. Section 82KZM applies if the eligible service period for the expenditure is longer than 12 months, or the eligible service period for the expenditure is 12 months or shorter but ends after the last day of the year of income after the one in which the expenditure was incurred.

21. In relation to the Prepayment Amount incurred by the customer under the Program, the eligible service period for the purpose of section 82KZM is the period to which the Prepayment Amount relates. That period is:

•

from the day the Prepayment Amount is paid, being the day on which the first of the things to be done under the Program in return for the Prepayment Amount (that is, the provision of Eligible Products by AG Warehouse) is required or permitted (as the case may be) to commence being done

•

until the Deadline (the date that is 12 months after the Prepayment Amount is paid), being the last day on which a thing to be done under the Program in return for the Prepayment Amount is required or permitted (as the case may be) to cease being done.

22. The eligible service period in relation to the deductible Prepayment Amount under the Program is 12 months or less. As it is not more than 12 months and does not end after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM will have no application to customers that (as assumed at paragraph 10 of this Ruling) are a small business entity (or an entity covered by subsection 82KZM(1A)) for the year of income and have not chosen to apply section 82KZMD to the expenditure.

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

References

ATO references:
NO 1-12TPSZRL

Business Line:  PW

Legislative References:
ITAA 1936 Pt III Div 3 Subdiv H
ITAA 1936 82KZL(1)
ITAA 1936 82KZM
ITAA 1936 82KZM(1A)
ITAA 1936 82KZMD
ITAA 1936 Part IVA
ITAA 1997 8-1
ITAA 1997 27-5
ITAA 1997 Div 230
ITAA 1997 328-110
SISA 1993

Case References:
Magna Alloys & Research Pty Ltd v. Commissioner of Taxation of the Commonwealth of Australia
[1980] FCA 180
80 ATC 4542
11 ATR 276
33 ALR 213
49 FLR 183