Product Ruling

PR 2001/121

Income tax: Paulownia Forestry Scheme

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FOI status:

may be releasedFOI number: I 1023460

What this Product Ruling is about
Date of effect
Withdrawal
Arrangement
Ruling
Explanations
Detailed contents list

Preamble

The number, subject heading, and the What this Product Ruling is about (including Tax law(s), Class of persons and Qualifications sections), Date of effect, Withdrawal, Arrangement and Ruling parts of this document are a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953. Product Ruling PR 1999/95 explains Product Rulings and Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

No guarantee of commercial success

The Australian Taxation Office (ATO) does not sanction or guarantee these products as investments. Further, we give no assurance that the products are commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based.

Potential investors must form their own view about the commercial and financial viability of the products. This will involve a consideration of important issues such as whether projected returns are realistic, the 'track record' of the management, the level of fees in comparison to similar products, how the investment fits an existing portfolio, etc. We recommend a financial (or other) adviser be consulted for such information.

This Product Ruling provides certainty for potential investors by confirming that the tax benefits set out below in the Ruling part of this document are available, provided that the arrangement is carried out in accordance with the information we have been given, and have described below in the Arrangement part of this document.

If the arrangements are not carried out as described below, investors lose the protection of this Product Ruling. Potential investors may wish to seek assurances from the promoter that the arrangements will be carried out as described in this Product Ruling.

Potential investors should be aware that the ATO will be undertaking review activities in future years to confirm the arrangements have been implemented as described below and to ensure that participants in the arrangements include in their income tax returns income derived in those future years.

Terms of use of this Product Ruling

This Product Ruling has been given on the basis that the person(s) who applied for the Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Ruling.

What this Product Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates. In this Ruling this arrangement is sometimes referred to as the Paulownia Forestry Scheme, or simply as 'the Project'.

Tax law(s)

2. The tax law(s) dealt with in this Ruling are:

Division 35 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Goods and Services Tax

3. In this Ruling all fees and expenditure referred to include Goods and Services Tax ('GST') where applicable. In order for an entity (referred to in this Ruling as a Grower to be entitled to claim input tax credits for the GST included in its expenditure, it must be registered, or required to be registered for GST and hold a valid tax invoice.

Business Tax Reform

4. The Government is currently evaluating further changes to the tax system in response to the Ralph Review of Business Taxation and continuing business tax reform is expected to be implemented over a number of years. Although this Ruling deals with the laws enacted at the time it was issued, future tax changes may affect the operation of those laws and, in particular, the tax deductions that are allowable. Where tax laws change, those changes will take precedence over the application of this Ruling and, to that extent, this Ruling will be superseded.

5. Taxpayers who are considering investing in the Project are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued.

Note to promoters and advisers

6. Product Rulings were introduced for the purpose of providing certainty about tax consequences for investors in projects such as this. In keeping with that intention, the Tax Office suggests that promoters and advisers ensure that potential investors are fully informed of any changes in tax laws that take place after the Ruling is issued. Such action should minimise suggestions that potential investors have been negligently or otherwise misled.

Class of persons

7. The class of persons to whom this Ruling applies is those who entered into the arrangement described below on or after 14 March 1996 and before 14 March 1997. They have a purpose of staying in the arrangement until it is completed (i.e., being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement as set out in the description of the arrangement. In this Ruling these persons are referred to as 'Growers'.

8. The class of persons to whom this Ruling applies does not include persons who have terminated or intend to terminate their involvement in the arrangement prior to its completion, or who otherwise do not intend to derive assessable income from the Project.

Qualifications

9. The Commissioner rules on the precise arrangement identified in the Ruling.

10. If the arrangement described in this Ruling is materially different from the arrangement that is actually carried out:

the Ruling has no binding effect on the Commissioner, as the arrangement entered into is not the arrangement ruled upon; and
the Ruling will be withdrawn or modified.

11. A Product Ruling may only be reproduced in its entirety. Extracts may not be reproduced. As each Product Ruling is copyright, apart from any use as permitted under the Copyright Act 1968, no Product Ruling may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra ACT 2601.

Date of effect

12. This Ruling applies prospectively from 29 June 2001, the date this Ruling is made. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

13. If a taxpayer has a more favourable private ruling (which is legally binding), the taxpayer can rely on the private ruling if the income year to which the private ruling relates has ended, or has commenced but not yet ended. However, if the arrangement covered by the private ruling has not begun to be carried out, and the income year to which it relates has not yet commenced, this Ruling applies to the taxpayer to the extent of the inconsistency only (see Taxation Determination TD 93/34).

Withdrawal

14. This Product Ruling is withdrawn and ceases to have effect after 30 June 2002. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who entered into the specified arrangement on or after 14 March 1996 and before 14 March 1997. This is subject to there being no material difference in the arrangement or in the persons' involvement in the arrangement.

Arrangement

15. The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

Prospectus issued by Queensland Paulownia Forests Limited, dated 13 March 1996;
Forestry Deed between Queensland Paulownia Forests Limited, Paulownia Holdings Pty Ltd, and Australian Rural Group Limited, dated 15 February 1996;
Plantation and Management Agreement between Queensland Paulownia Forests Limited, Australian Rural Group Limited and Growers dated 28 June 1996;
Farming Agreement between Queensland Paulownia Forests Limited, Australian Rural Group Limited and Growers dated 28 June 1996;
Loan Agreement between Queensland Paulownia Forests Limited and Growers dated 28 June 1996;
Letter from Queensland Paulownia Forests Limited to Grower dated 10 July 1996;
Letter from Australian Rural Group Limited to Queensland Paulownia Forests Limited dated 28 June 1996;
Letter from the Applicant's representative to Australian Taxation Office dated 19 February 1997, including copies of executed Power of Attorney from a Grower, 'costing submissions' and budgets' provided by Queensland Paulownia Forests Limited to Australian Securities Commission, Directors' Report for Queensland Paulownia Forests Limited for the period ended 30 June 1996 and Forestry Inspection Report dated 6 November 1996;
Letter from the Applicant's representative to Australian Taxation Office dated 20 March 1997, including copy of bank account statement for Australian Rural Group Limited issued on 28 June 1996, copy of Balance Sheet, Profit and Loss Statement and accompanying notes, for Queensland Paulownia Forests Limited for period ending 30 November 1996; and
Letter from Applicant to Australian Taxation Office dated 29 January 2001.

Note: Certain information received from the applicant has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information legislation.

16. The documents described in bold in paragraph 15 are the ones the Growers will enter into.

Note : In this Ruling 'Associate' has the meaning as defined in section 318 of the ITAA 1936.

17. All Australian Securities and Investments Commission (ASIC) requirements have been, and will be, complied with for the term of the agreements. The effect of the agreements may be summarised as follows.

Overview

18. This arrangement is called the Paulownia Forestry Scheme.

Location Kingaroy, Queensland
Type of business each participant is carrying on Commercial growing, and cultivation of Paulownia trees for the purpose of harvesting and selling timber.
Number of Woodlots on offer 500
Minimum number of Woodlots per application 1
Number of hectares available 200 hectares
Size of each Woodlot 0.4 hectares
Number of trees per Woodlot 100
Expected production 40 cubic metres of rough sawn timber or 55 cubic meters of timber in a round log form per Woodlot
Incentive fee Responsible Entity will be entitled to 1/3 of revenue of timber yield in excess of the Projected Yield
The term of the investment Until 30 June 2006.
Initial cost $9,100 per Woodlot
Initial cost per hectare $22,750
Ongoing costs Management and Licence Fees.

Forestry Deed

19. On 15 February 1996 a Forestry Deed, as required under the Corporations Law, was executed between Queensland Paulownia Forests Limited ('QPFL'), as Manager, Paulownia Holdings Pty Ltd ('PHL'), as Land Owner, and Australian Rural Group Limited ('ARGL'), as Trustee. The recitals to this deed included reference to the Manager's intent to establish an afforestation scheme, to be known as the Paulownia Forestry Scheme. Recital I. stated:

'The Manager and the Trustee will enter into Farming Agreements and Plantation and Maintenance Agreements with the Growers so the Growers can have access to the 0.4 hectare Woodlots on the Land for the establishment, growing, maintenance, harvesting and milling of Paulownia trees.'

20. Clause 3.2(a) of this deed required the Trustee to create two separate funds for each Project, being an Application Fund and a Proceeds Fund, the former being held by the Trustee for the Applicants and the latter being held 'upon the trusts constituted for each Project'. Clause 5.3 required the Manager to issue a Prospectus before inviting persons to enter into any Farming Agreement and Plantation and Maintenance Agreement pursuant to the deed. Clause 5.6 contemplated that the Manager could be a lender in relation to providing finance to any Applicant. Clauses 9 and 10 covered the release of the 'Application Money' by the Trustee to the Manager.

21. Clause 26 covered the transfer of a Farming Agreement and a Plantation and Maintenance Agreement. Specifically, clause 26.1 stated:

'A Grower is only entitled to assign the Farming Agreement and Plantation and Maintenance Agreement to which it is a party in the circumstances set out in this clause and the terms and conditions of the Farming Agreement and Plantation and Maintenance Agreement.'

22. Clause 28 of the Forestry Deed covered 'Management' of the Project, whilst clause 29 sets out the Manager's Covenants, being:

cl 29.1 Conduct Business Properly
cl 29.2 Exercise Powers and Perform Functions Diligently
cl 29.3 Public Notice with Trustee Approval
cl 29.4 Prepare Cheques and Notices
cl 29.5 Give Information to Trustee
cl 29.6 Manager to Provide Information to Trustee
cl 29.7 Summon Joint Meeting of Applicants and Growers
cl 29.8 Properly act as a securities lender
cl 29.9 Procure Auditor to conduct audit
cl 29.10 Comply with section 1071
cl 29.11 Performance of Covenants in Farming Agreement and
Plantation and Maintenance Agreement
cl 29.12 Expenditure Forecasts
cl 29.13 Actual Expenditure Reports
cl 29.14 Payment of Benefit on Retirement
cl 29.15 Approved Deed in Force
cl 29.16 Best Interests of Applicants and Growers
cl 29.17 Notice Convening Meeting
cl 29.18 Variation to Investment Policy
cl 29.19 Manager's Right to Vote
cl 29.20 Primary Production Purposes
cl 29.21 Taxation Benefits
cl 29.22 Long Term and Illiquid Investment.

23. Clause 34 of the Deed covered retirement of the Manager, both compulsory retirement, as required under the Corporations Law, and for non-performance or breach of its duties under the Plantation and Maintenance Agreement. No meeting or vote of Growers is called for to trigger such retirement.

24. Schedule 1.1 to the Deed contained various definitions. A Grower was defined as: 'a Person who has entered into a Farming Agreement and Plantation and Maintenance Agreement (which agreement has not been terminated) in respect of whom all Application Money has been fully paid and allocated pursuant to clause 10.' A Woodlot was defined as: 'means that specified part of the Project comprising 0.4 hectares identified individually as being allocated to a particular Grower or Growers.'

Prospectus

25. A Prospectus for QPFL, in respect of the Paulownia Forestry Scheme, was lodged with the Australian Securities Commission on 14 March 1996. The main features of the scheme were stated on page 5 of the Prospectus in the following terms:

'This Prospectus offers the opportunity to carry on the business of commercially growing Paulownia Trees in Queensland. The timber produced from the plantations will be sold either as rough sawn timber or in a log form.
Applicants enter into an agreement which gives them a licence over an area (called a woodlot) and contract with the Manager to establish and maintain the plantation until maturity. Unless the Grower wishes to collect his/her own Timber Produce, the Manager, as agent for the Grower, intends to sell the Timber Produce at the highest price available.
This offer relates to 500 woodlots each having an area of 0.4 Hectares (approximately one acre) at a cost of $9,100 each. The Manager has the right to accept over subscriptions.
Once an application is made and then accepted by the Manager the applicant becomes a Grower. The Grower will be bound by the terms of the Forestry Deed (summarised later in this section) and will enter into the farming agreement and plantation and maintenance agreement. The Grower enters the latter agreements by virtue of a power of attorney granted to the Manager who signs those agreements on behalf of Growers. The power of attorney also forms part of this Prospectus.
Growers are allocated a minimum of 100 trees or seedlings which are selected by the Manager. Initially, these seedlings will be cared for in a greenhouse and later transplanted into a woodlot on the land. At all times the trees will be separately identifiable as having been allocated to a particular Grower.
The Growers pay the application price of $9,100 to the Manager for the right to be allocated trees, a woodlot area, and the establishment, management and maintenance of the project for the first 13 months. The Growers then pay an annual fee of to the Manager of $100 for the use of the woodlot plus $340 for the ongoing maintenance of the trees by the Manager on behalf of the Grower.
The fees are payable under the terms of the farming agreement and the plantation and maintenance agreement which both expire:

-
at the completion of harvest and milling, which is expected to occur between 30 June and 31 December, 2004 or
-
on 30 June, 2006;

whichever is the later.
The Manager must pay all costs throughout the life of the project except harvest and/or milling and associated costs which are paid by the Growers. The payment of those costs are coordinated by the Manager.
Prior to 30 June 2004, Growers may elect to take their own produce from the trees in lieu of having them milled and marketed on their behalf by the Manager. If no such election is made the Manager will mill and market the timber on behalf of Growers. The Manager is entitled to a marketing fee not exceeding 5% of the proceeds of the sale of timber in that event.
The Growers have no other financial commitments other than those set out above. Growers, however, may wish to insure their trees against some form of disaster, for example, fire, flood or storm, as the Manager does not intend to take out such insurance. The Manager will, however, take out public liability insurance over all of the land used (which includes all Growers' woodlots).'

26. Pages 8-9 of the Prospectus described other features of the scheme as follows:

Sale of Produce- project expected to reach 'harvest maturity' after 8 years- Manager, Trustee and Consultant Forester to decide then whether or not to harvest
Projected Figures- timber produced from each woodlot projected to be 40 cubic metres of rough sawn timber or 55 cubic metres timber in rough log form
Incentive Fee- Manager entitled to 1/3 of revenue from in excess of projected revenue
Marketing- Manager entitled to 5% of net harvest proceeds as marketing fee. Trustee entitled to 0.4% of net harvest proceeds as remuneration
Land- PHL will lease the land it intends to purchase to the Trustee, which will sub-lease it to the Manager. A Grower's use of the land will be based on the terms of the Farming Agreement. Lease and sub-leases to have maximum terms of 10 years, i.e., to 30 June 2006. Land to be purchased by PHL will accommodate only 150 woodlots
Duties of Manager- Manager to plant seedlings on woodlots within 13 months of date of execution of leases and agreements. After this 13 month period until harvest Manager required to maintain trees in accordance with 'good silvicultural practice', to establish and maintain any access roads, keep leased area free from vermin, comply with relevant laws and arrange for marketing and harvest of produce. The Manager guarantees a minimum number of 100 trees per woodlot after 13 months of planting.

27. On page 11 of the Prospectus there is a table containing a forecast of net sale proceeds per woodlot in 2004. This forecast is based on a 1996 value per cubic metre, which is confirmed in the Independent Forester's report on page 20. On page 22 of the Prospectus the Independent Forester's report also stated:

'Yields
The management objective is to ensure that at least 55 to 60 cubic metres of logs or 40 cubic metres of rough sawn timber is produced from each acre [0.4 ha] of plantation. If this is not achieved the Manager may exercise his discretion to defer harvesting. This would be unlikely to go past year 9.
Costings
The Lease and Management Agreements are satisfactory and similar to others established in the Industry. The activities described in the Lease and Management Agreements are normal to plantation forestry operations. The price per Lease Area adequately covers costs associated with the satisfactory establishment and maintenance including Public Liability Insurance over the life of the project.'

Power of Attorney

28. The Growers executed a Power of Attorney granting QPFL the power to execute the Plantation and Maintenance and Farming Agreements on their behalf.

Plantation and Maintenance Agreement

29. Clause 4.1 of the Plantation and Maintenance Agreement between QPFL, ARGL and the Growers provided that it would commence on the execution date and end on 30 June 2006 or on the completion of 'Harvest and Milling', whichever was the earlier. It also provided that on termination the Growers would have 'no further interest in the Trees', and no right to any regrowth. Clause 5.1 set the remuneration of the Manager at $9,100 per woodlot for services to be provided in the first 13 months, payable on acceptance of the application for a woodlot, and $340 per woodlot per annum (indexed), payable on or before 30 June for each subsequent year. Under this clause the Growers also agreed to pay the Manager for the cost of any insurance premiums, the 'Incentive Fee', and any marketing fee payable, where the Manager sells the Forest Produce on behalf of the Growers.

30. Clause 6 set out the Duties of the Manager. Clause 6.1 stated:

'The Manager agrees to carry out the duties that relate to the acquisition and propagation of seeds and seedlings along with those duties which are usual or necessary for carrying on the business of plantation forestry on the woodlot in a manner according to sound silvicultural and environmental practices including but not limited to:

(a)
acquiring Trees on behalf of the Grower, which Trees will for the duration of this agreement be the property of the Grower and before being planted, will at all times be separately identifiable as having been acquired on behalf of the Grower in accordance with this agreement;
(b)
preparing the land with adequate drainage for the Trees;
(c)
establishing, tending and maintaining the Trees and Woodlot in a proper and skilful manner as and when appropriate, prepare, cultivate, spray herbicides and insecticides, and plant and fertilise seedling Trees;
(d)
carry out, or arrange to be carried out the Harvest and Milling of the Trees at the appropriate time, in a manner which maximises the yield for the Grower;
(e)
complying with the laws and regulations relating to the use and occupancy of the woodlots;
(f)
eradicating as far as reasonably possible any pests and competitive weeds which may affect the growth or yield of the Trees;
(g)
repairing damage to roads, tracks or fences on the woodlots or on neighbouring land resulting from the actions of the Manager or its contractors;
(h)
embarking on such operations as may be required to prevent or combat land degradation on the woodlots;
(i)
keeping accurate records of payments;
(j)
carrying out any obligations imposed on the Grower under the provisions of the Farming Agreement; and
(k)
carrying out any obligations of the Manager under the Forestry Deed.'

31. Clause 6.2 required that the Manager commence these duties on or before 30 June 1996.

32. Clause 16 set out the rights of a Grower to 'Forest Produce', which was defined as 'that produce from the Woodlot, ... available after Harvesting and Milling ...'. Specifically, clause 16.1 stated:

'The Grower must, at all times, have full right, title and interest in the Forest Produce.'

33. 'The services to be provided in the first thirteen months include:

ploughing the Growers' woodlots,
liming the Growers' woodlots,
fertilising of the Growers' woodlots,
maintenance of the seedlings prior to planting them on the
Growers' woodlots,
planting of seedlings on the Growers' woodlots,
irrigation of the Growers' woodlots,
maintenance of the seedlings on the Growers' woodlots,
pruning of the seedlings on the Growers' woodlots and
other duties as specified at clause 6.1 of the Plantation and Management Agreement.'

34. The services to be performed during the second to sixth years of the Project include pruning, cultivation of the land, weed control, provision of irrigation services, general management services as listed at Clause 6.1 of the Plantation and Management Agreement and provision of reports as required by Clause 18.2 of the Plantation and Management Agreement.

35. As the land was an established farm situated on the highway there was no clearing of land, weed control, erection of fences, or building of roads required. The seedlings to be planted on the Growers' woodlots were propagated in July and August 1996. Until they were planted on the Growers' woodlots they were maintained at a nursery.

36. Clause 21.3 provided for all parties to acknowledge that the Manager or Trustee may retire or be removed under the Forestry Deed.

37. Under Clause 13 a Grower can elect to take the timber harvested from their woodlot, subject to them paying on the day of collection harvesting and milling costs to the Manager. The Manager then is under no obligation to market and sell the timber on the 'Electing Grower's behalf: see clause 15.

38. Once the timber is sold the Manager must pay the 'Gross Proceeds' to the Trustee (Clause 14.2). From this the Trustee is required to deduct and pay to the Manager the harvest and milling costs, costs of sale, marketing fee payable under clause 5.1(b), and any outstanding fees due by a Grower to the Manager under this agreement or the Farming Agreement or the Forestry Deed (Clause 14.3). Any remaining money is 'the Net Proceeds' (Clause 14.3), from which is deducted the Trustee's fees. The amount remaining then is designated as 'Distributable Proceeds' 'and must be held by the Trustee on trust for the non-electing Growers in accordance with the terms of the Forestry Deed' (Clause 14.4).

39. Clause 14.5 states:

'The Manager must provide the Trustee with a report within 7 days of the receipt of Gross Proceeds. The report must state:

(a)
Gross Proceeds for all non-electing Growers;
(b)
the total volume of forest produce sold;
(c)
the Gross Proceeds for the Grower;
(d)
the total number of woodlots for all non-electing Growers producing forest produce included in the sale;
(e)
all Harvest and Milling costs, costs of sale and marketing fees for all non-electing Growers;
(f)
the calculation of Net Proceeds and the deduction of fees payable to the Trustee from that amount; and
(g)
a calculation in respect of each non-electing Grower showing the calculation of the Distributable Proceeds for each non-electing Grower.'

The 'non-electing Grower' would then be entitled to payment from the Trustee of the final amount due to them from the sale of timber from their woodlot.

Farming Agreement

40. A Farming Agreement between QPFL, ARGL and the Growers was dated 28 June 1996. The recitals to this agreement indicated that PHL had agreed to lease the land to ARGL, which as Trustee, was to 'hold the Land on behalf of Growers pursuant to a lease'. ARGL was to sub-lease the Land to QPFL. Clause 2.1 of this agreement stated:

'The Manager grants to the Grower and the Grower takes from the Manager a licence to use and occupy a Woodlot for the purpose only of establishment, growing, maintenance, harvesting, milling and sale of Paulownia trees for the term of this agreement and subject to the conditions, covenants and obligations set out in this agreement and the Plantation and Maintenance Agreement and the Forestry Deed.'

41. Clause 2.2 provided that the right granted under clause 2.1 was not one of exclusive occupation of the woodlot. Clause 3.1 governed the term of the right ('licence'), and provided that it commenced on the date that the agreement was executed by the last party to do so, and ended on 30 June 2006, or the date the harvesting and milling of the Trees was completed, whichever was the earliest. Upon termination a Grower was to have 'no further interest in the Woodlot' (Clause 3.1(b)).

42. Under clause 4.1 the agreement was to be subject to and conditional upon the Manager obtaining, within 12 months of the execution of the agreement, all local, State and Commonwealth Government approvals, licences or permits required for the establishment of the Trees. Clause 4.2 set out the consequences of failing to obtain government approval. These were that the agreement was deemed never to have been of any force or effect, and that the Manager was to immediately repay any money paid under the agreement to the Grower.

43. Clause 5.1 prescribed that the Farming Agreement was subject to and conditional upon the Grower entering into a Plantation and Maintenance Agreement with QPFL and ARGL, 'prior to or on the Commencement Date [as defined in cl.3.1]'. Clause 6.1 governed the licence fee payable and stated:

'The Grower must pay to the Manager an annual Licence Fee of $100.00 per Woodlot per annum (Indexed) commencing on June 30, 1997 and then payable on or before every June 30 after that until the end of this agreement.'

44. Clause 7 set out the Grower's obligations, which were generally consistent with use if the woodlot solely for the purpose of growing Paulownia trees. Clause 8 set out the Manager's obligations, which included boundary fencing, payment of rates, compliance with relevant laws and keeping dangerous substances away from the woodlot.

45. Under clause 9.1 the Grower could terminate the agreement if the Manager breached any of its obligations under the agreement, whilst a similar provision applied to the Manager re the Grower, under clause 9.2. Clause 10 covered assignments be either the Manager or the Grower. Clause 10.4 stated:

'Once the Grower has perfected a transfer, mortgage, assignment or disposal of its interest in this agreement in accordance with the Forestry Deed, then the Grower no longer remains liable under this agreement.'

46. Schedule 1 to the Farming Agreement executed on behalf of the Growers described the relevant woodlot as; 'Part of Lot 151 on Plan FY913 and Part of Lot 231 on Plan FY222 Parish Wooroolin County Fitzroy'.

Finance

47. Growers can fund their investment in the Project themselves, borrow from Queensland Paulownia Forests Limited (a lender associated with the Responsible Entity) or borrow from an independent lender.

48. This Ruling does not apply if a Grower enters into a finance agreement that includes or has any of the following features:

there are split loan features of a type referred to in Taxation Ruling TR 98/22;
there are indemnity arrangements or other collateral agreements in relation to the loan designed to limit the borrower's risk;
'additional benefits' are or will be granted to the borrowers for the purpose of section 82KL or the funding arrangements transform the Project into a 'scheme' to which Part IVA may apply;
the loan or rate of interest is non-arm's length;
repayments of the principal and payments of interest are linked to the derivation of income from the Project;
the funds borrowed, or any part of them, will not be available for the conduct of the Project but will be transferred (by any mechanism, directly or indirectly) back to the lender, or any associate of the lender; or
lenders do not have the capacity under the loan agreement, or a genuine intention, to take legal action against defaulting borrowers;
entities associated with the Project other than Queensland Paulownia Forests Limited, are involved or become involved, in the provision of finance to Growers for the Project.

Ruling

Division 35 - Deferral of losses from non-commercial business activities

Section 35-55 - Commissioner's discretion

49. For a Grower who is an individual and who entered the Project on or after 14 March 1996 and before 14 March 1997, the rule in section 35-10 may apply to the business activity comprised by their involvement in this Project. Under paragraph 35-55(1)(b) the Commissioner has decided for the income years ended 30 June 2001 to 30 June 2003 that the rule in section 35-10 does not apply to this business activity provided that the Project has been, and continues to be carried on in a manner that is not materially different to the arrangement described in this Ruling.

50. This exercise of the discretion in subsection 35-55(1) will not be required where, for any year in question:

A Grower's business activity satisfies one of the objective tests in sections 35-30, 35-35, 35-40 or 35-45; or
the 'Exception' in subsection 35-10(4) applies (see paragraph 55 in the Explanations part of this ruling, below).

51. Where, either the Grower's business activity satisfies one of the objective tests, the discretion in subsection 35-55(1) is exercised, or the Exception in subsection 35-10(4) applies, section 35-10 will not apply. This means that a Grower will not be required to defer any excess of deductions attributable to their business activity in excess of any assessable income from that activity, i.e., any 'loss' from that activity, to a later year. Instead, this 'loss' can be offset against other assessable income for the year in which it arises.

52. Growers are reminded of the important statement made on Page 1 of this Product Ruling. Therefore, Growers should not see the Commissioner's decision to exercise the discretion in paragraph 35-55(1)(b) as an indication that the Tax Office sanctions or guarantees the Project or the product to be a commercially viable investment. An assessment of the Project or the product from this perspective has not been made.

Explanations

Division 35 - Deferral of losses from non-commercial business activities

53. Under the rule in subsection 35-10(2) a deduction for a loss incurred by an individual (including an individual in a general law partnership) from certain business activities will not be allowable in an income year unless:

the 'Exception' in subsection 35-10(4) applies;
one of four objective tests in sections 35-30, 35-35, 35-40 or 35-45 is met; or
if one of the objective tests is not satisfied, the Commissioner exercises the discretion in section 35-55.

54. Generally, a loss in this context is, for the income year in question, the excess of an individual taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

55. Under the loss deferral rule in subsection 35-10(2) the relevant loss is not able to be taken into account in the calculation of taxable income in the year that loss arose. Instead, in a later year it may be offset against any income from the same or similar business activity, or, if one of the objective tests is passed, or the Commissioner's discretion exercised, against other income.'

56. For the purposes of applying the objective tests, subsection 35-10(3) allows taxpayers to group business activities 'of a similar kind'. Under subsection 35-10(4), there is an 'Exception' to the general rule in subsection 35-10(2) where the loss is from a primary production business and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain). As both subsections relate to the individual circumstances of Growers who participate in the Project they are beyond the scope of this Product Ruling and are not considered further.

57. In broad terms, the objective tests require:

(a)
at least $20,000 of assessable income in that year from the business activity (section 35-30);
(b)
the business activity results in a taxation profit in 3 of the past 5 income years (including the current year) (section 35-35);
(c)
at least $500,000 of real property is used on a continuing basis in carrying on the business activity in that year (section 35-40); or
(d)
at least $100,000 of certain other assets is used on a continuing basis in carrying on the business activity in that year (section 35-45).

58. A Grower who was accepted into the Project on or after 14 March 1996 and before 14 March 1997, and who has participated in the Project since then is carrying on a business activity that is subject to these provisions. Information provided with the application for this Product Ruling and additional information provided since, indicates that a Grower who acquired the minimum investment of one interest in the Project is unlikely to pass one of the objective tests until the income year ended 30 June 2004. Growers who acquired more than one interest in the Project may however, pass one of the tests in an earlier income year.

59. Therefore, prior to this time, unless the Commissioner exercises an arm of the discretion under paragraphs 35-55(1)(a) or (b), the rule in subsection 35-10(2) will apply to defer to a future income year any loss that arises from the Grower's participation in the Project.

60. The first arm of the discretion in paragraph 35-55(1)(a) relates to 'special circumstances' applicable to the business activity, and has no relevance for the purposes of this Product Ruling. However, for an individual Grower who acquired an interest(s) in the Project on or after 14 March 1996 and prior to 14 March 1997, the Commissioner has decided that it would be unreasonable not to exercise the second arm of the discretion in paragraph 35-55(1)(b) for the years ended 30 June 2001 to 30 June 2003.

61. The discretion in paragraph 35-55(1)(b) may be exercised by the Commissioner where:

(i)
the business activity has started to be carried on; and
(ii)
there is an objective expectation that the business activity of an individual taxpayer will either pass one of the objective tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

62. Information provided by the applicant states that the business activity comprised by a Grower's involvement in this Project has started to be carried on, and will continue to be carried on in a manner that is not materially different to that described in the Arrangement in this Product Ruling.

63. In deciding to exercise the discretion in paragraph 35-55(1)(b) the Commissioner has relied upon:

the report of the independent forester and additional expert or scientific evidence provided by the Responsible Entity with the application and subsequently, in further information requested by the Commissioner; and
independent, objective, and generally available information relating to the Paulownia industry.

Detailed contents list

64. Below is a detailed contents list for this Product Ruling:

  Paragraph
What this Product Ruling is about 1
Tax law(s)
Goods and Services Tax 3
Business Tax Reform 4
Note to promoters and advisers 6
Class of persons 7
Qualifications 9
Date of effect 12
Withdrawal 14
Arrangement 15
Overview 18
Forestry Deed 19
Prospectus 25
Power of Attorney 28
Plantation and Maintenance Agreement 29
Farming Agreement 40
Finance 47
Ruling 49
Division 35 - Deferral of losses from non-commercial business activities 49
Section 35-55 - Commissioner's discretion 49
Explanations 53
Division 35 - Deferral of losses from non-commercial business activities 53
Detailed contents list 64

Commissioner of Taxation
29 June 2001

Not previously issued in draft form

References

ATO references:
NO 2001/009710

ISSN: 1441-1172

Related Rulings/Determinations:

PR 1999/95
TR 92/1
TR 97/11
TR 97/16
TR 92/20
TR 98/22
TD 93/34

Subject References:
carrying on a business
commencement of a business
management fees
primary production
producing assessable income
product rulings
public rulings
schemes
tax avoidance
tax benefits

Legislative References:
ITAA 1997 Div 35
ITAA 1997 35-10
ITAA 1997 35-10(2)
ITAA 1997 35-10(3)
ITAA 1997 35-10(4)
ITAA 1997 35-30
ITAA 1997 35-35
ITAA 1997 35-40
ITAA 1997 35-45
ITAA 1997 35-55
ITAA 1997 35-55(1)
ITAA 1997 35-55(1)(a)
ITAA 1997 35-55(1)(b)
ITAA 1936 82KL
ITAA 1936 Pt IVA

PR 2001/121 history
  Date: Version: Change:
You are here 29 June 2001 Original ruling  
  1 July 2002 Consolidated ruling Partial Withdrawal
  21 May 2007 Withdrawn