Product Ruling

PR 2003/11

Income tax: Environinvest Eucalypt Project No. 6

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FOI status:

may be released

Preamble

No guarantee of commercial success

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

Potential participants must form their own view about the commercial and financial viability of the product. 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 this product fits an existing portfolio, etc. We recommend a financial (or other) adviser be consulted for such information.

This Product Ruling provides certainty for potential participants 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 arrangement is not carried out as described below, participants lose the protection of this Product Ruling. Potential participants may wish to seek assurances from the promoter that the arrangement will be carried out as described in this Product Ruling.

Potential participants should be aware that the ATO will be undertaking review activities to confirm the arrangement has been implemented as described below and to ensure that the participants in the arrangement 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 Environinvest Eucalypt Project No. 6 or simply as 'the Project'.

Tax law(s)

2. The tax laws dealt with in this Ruling are:

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Section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997');

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Section 8-1 (ITAA 1997);

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Section 17-5 (ITAA 1997);

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Section 25-25 (ITAA 1997);

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Division 27 (ITAA 1997);

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Division 35 (ITAA 1997);

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Division 328 (ITAA 1997);

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Section 82KL of the Income Tax Assessment Act 1936 ('ITAA 1936');

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Section 82KZL (ITAA 1936);

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Sections 82KZME - 82KZMF (ITAA 1936);

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Section 82KZMG (ITAA 1936); and

•

Part IVA (ITAA 1936).

Goods and Services Tax

3. All fees and expenditure referred to in this Ruling include the 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.

Changes in the Law

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, later amendments may impact on this Ruling. Any such changes will take precedence over the application of this Ruling and, to that extent, this Ruling will be superseded.

5. Taxpayers who are considering participating 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 participants in projects such as this. In keeping with that intention the Tax Office suggests that promoters and advisers ensure that potential participants are fully informed of any legislative changes after the Ruling is issued.

Class of persons

7. The class of persons to whom this Ruling applies is the persons more specifically identified in the Ruling part of this Product Ruling and who enter into the arrangement specified below on or after the date this Ruling is made. They will 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 intend to terminate their involvement in the arrangement prior to its completion, or who otherwise do not intend to derive assessable income from it. Growers who elect to market their own produce are also excluded from the class of persons to whom this Ruling applies.

Qualifications

9. The Commissioner rules on the precise arrangement identified in the Ruling. If the arrangement described in the Ruling is materially different from the arrangement that is actually carried out, the Ruling has no binding effect on the Commissioner. The Ruling will be withdrawn or modified.

10. 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:

Commonwealth Copyright Administration

Intellectual Property Branch

Department of Communications, Information Technology and the Arts

GPO Box 2154

Canberra ACT 2601

or by e-mail: commonwealth.copyright@dcita.gov.au.

Date of effect

11. This Ruling applies prospectively from 9 April 2003, 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).

12. 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 commenced 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

13. This Product Ruling is withdrawn and ceases to have effect after 30 June 2006. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the arrangement specified below. Thus, the Ruling continues to apply to those persons, even following its withdrawal, who entered into the specified arrangement prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

14. The arrangement that is the subject of this Ruling is specified below. This arrangement incorporates the following documents:

•

Application for a Product Ruling for the Environinvest Eucalypt Project No. 6, dated 26 November 2002 as constituted by documents provided on 19 December 2002, and additional correspondence (including e-mails) from the applicant or the applicant's representative to the Tax Office, dated 25 November 2002, 17 December 2002, 20 December 2002, 8 January 2003, 18 February 2003, 19 February 2003, 20 February 2003, 21 February 2003, 4 March 2003, 14 March 2003, 21 March 2003, 28 March 2003;

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Draft Product Disclosure Statement ('PDS') for the Environinvest Eucalypt Project No. 6;

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Environinvest Limited Loan application form;

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Environinvest Limited Sample Loan agreements relating to the Principal Only Loan, Interest Only Loan, and a Principal and Interest Loan;

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Constitution of Environinvest Ltd (the Responsible Entity);

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Constitution of the Environinvest Agricultural Fund;

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Sample Lease between Environinvest Ltd as (the Landlord), and the Grower;

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Sample Management Agreement between Environinvest Ltd as Manager, and the Grower; and

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Forester's Report dated 12 December 2002 supplied on 19 December 2002.

15. The documents highlighted are those that Growers may enter into. For the purposes of describing the arrangement to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the arrangement. The effect of these agreements is summarised as follows.

16. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of these agreements is summarised as follows.

Overview

17. The salient features of the Environinvest Eucalypt Project No. 6 are as follows:

18. The Project is registered as a Managed Investment Scheme under the Corporations Act. The Responsible Entity for the Project is Environinvest Ltd ('Environinvest').

19. The Project consists of an arrangement between Growers and Environinvest for the growing of Eucalyptus globulus (Tasmanian Bluegums) to produce timber for woodchipping. The Project will be established for between 8 years and 12 years. There is no minimum subscription for the Project. Growers will be provided with annual reports containing information about their Allotments and by arrangement, Growers can visit their Allotments (pages 2 & 3 of the PDS).

20. Environinvest holds, or will acquire sufficient suitable land for the purposes of the Project. 1,400 hectares of suitable land is currently owned, leased or being purchased for this and future Environinvest Projects. The criteria for suitable land are shown on pages 5 & 6 of the PDS. The land is, or will be located in Western Victoria, South West Victoria, 'Green Triangle' and South East South Australia. Environinvest may acquire additional land for the purpose of this Project.

Power of Attorney

21. To be accepted to participate in the Project, Growers must grant Environinvest an irrevocable power of attorney. This allows Environinvest to enter into and execute, complete and amend the Application Form, Lease, Management Agreement and (if applicable) Loan Agreement and carry out other management activities related to the Project.

22. Other than an Event of Default (as defined in the Lease and Management Agreement), the power of attorney does not authorise Environinvest to:

•

sell, transfer or dispose of any part or all of the Grower's interest in the Land;

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to re-finance any loans taken out by the Grower in respect of the Allotments or the Project Documents without the Grower's consent; or

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in any way increase the Grower's liability or impose any additional burden on the Grower without the Grower's consent.

Lease and Schedule

23. The Lease is granted by Environinvest (the Landlord) to Growers named and described in item 3 of the Schedule. Under the terms of the Lease, the Grower is granted a proprietary interest over an identifiable interest in an area of Land consisting of at least two Allotments, each of 0.5ha, for the purpose of carrying on a business of establishing, maintaining and harvesting Tasmanian Bluegums (the 'Trees').

24. The Lease sets out the purpose for which the Grower may use the land (clause 3), confirmation of the Grower's ownership of the Trees (clause 4), the Grower's covenants (clause 5), the Landlord's covenants (clause 6) and a process for dispute resolution (clause 11). Other than an Event of Default (clause 9) or Early Termination (clause 10), the Lease will be terminated automatically the day after the clear fell and removal of the Trees from the Allotments (clause 9).

25. The Schedule sets out the Grower's identifiable interest in the Land (Item 4), the details of the Land on which the Grower's Allotments are located (Item 5) and the Lease Rental (Item 6). The Lease Rental is discussed below under the heading 'Fees'. The Landlord will take all reasonable steps to collect the Lease Rental should it not be paid as and when required.

Management Agreement and Schedule

26. A Management Agreement is entered into between Environinvest ('the Manager') and each Grower named and described in item 3 of the Schedule. From the Commencement Date the Grower appoints the Manager to carry out, on Land that the Grower has leased from the Landlord, the Establishment Services, Planting Services and Maintenance Services and, as the Grower's agent, to carry out the Harvesting Services (clause 2). Each of the services referred to in this paragraph is defined in the Management Agreement.

27. Under subclause 3.1 the Manager will commence the Establishment Services as soon as is reasonably practical after the Commencement Date and use all reasonable endeavours to complete those Services:

•

within 12 months of the payment of the Establishment Fee; and

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by 30 June of the first Subsequent Year.

28. Under subclause 3.2 the Manager will commence the Planting Services as soon as is reasonably practicable after the conclusion of the Establishment Services and shall complete the Planting Services:

•

within 12 months of the payment of the Establishment Fee; and

•

by 30 June of the first Subsequent Year.

29. To assist the Grower to determine the tax deductions relating to the above mentioned services, the Manager will provide a Notice to the Grower stating the extent and value of the Establishment Services and Planting Services completed in the relevant year (subclause 3.3).

30. Where the Establishment Services and the Planting Services have been completed by or during the first Subsequent Year, the Manager will carry out the Maintenance Services in that year and each Subsequent Year thereafter. Otherwise the Maintenance Services will be completed in each Subsequent Year (subclause 3.4).

31. The Manager will provide the Harvesting Services in the Harvesting Year. Having regard to the growth of the Trees, market conditions and the Grower's wishes, the Manager has an absolute and unfettered discretion to determine the Harvest Year. The Manager estimates that the Harvest Year will be in the eighth to twelfth Subsequent Year (subclause 3.5).

32. The Management Fees are set out in clause 4 by reference to the Schedule. Further, the Schedule sets out the Establishment Fee (item 4), the Maintenance Fee (item 5), and the Harvesting Fee (item 6). These fees are discussed below under the heading 'Fees'. The Manager will take all reasonable means to collect the Establishment Fee, Maintenance Fee and Harvesting Fee should it not be paid as and when required.

33. Clause 5 sets out the Grower's Obligations under the Management Agreement and clause 6 sets out the Manager's Obligations. Under subclause 6.1 the Manager agrees to use all reasonable endeavours to carry out its duties and obligations:

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in accordance with established, modern, scientific and good management and husbandry methods and practices;

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with due skill, expertise, diligence and vigour;

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using good and sufficient materials and services; and

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so as to comply with all applicable laws, regulations, orders and rules including the Corporations Act.

34. Clause 7 provides for the establishment of one or more Grower's Accounts. Among other things, the Manager as the Grower's agent will use the Grower's Account(s) to hold the Sale Proceeds and other moneys pending distribution to the Growers.

35. Other matters dealt with by the Management Agreement include:

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insurance and proceeds of insurance (clause 8);

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financial hardship (clause 12);

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default and termination (clause 13);

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dispute resolution (clause 14); and

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certain miscellaneous matters (clause 15).

36. Further, subclause 13.5 provides that where an Event of Default occurs, the Management Agreement will be terminated automatically the day after the clear fell and removal of the Trees from the Allotments and subclause 15.7 sets out the circumstances under which either party may assign the Management Agreement.

37. The Schedule sets out the fees that the Grower is required to pay which includes, the Establishment Fee (item 4), the Maintenance Fee (item 5) and the Harvesting Fee (item 6). These items are discussed below under the heading 'Fees'.

Constitution of the Environinvest Agricultural Fund (the 'Fund')

38. The Constitution sets out how the Fund operates pursuant to the requirements of the Corporations Act 2001.

39. Among other things, the Constitution sets out in detail the following:

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the appointment of Environinvest as the Responsible Entity of the Project (clause 3);

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the opening of bank accounts for the purposes of an Application Fund to hold Application Moneys and the Proceeds Fund to hold money generated from the Project other than Application Moneys (clause 5);

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the division of the Project into Interests (with certain rights and obligations) and the holding of those Interests by Growers (clause 6), the consideration payable to acquire an Interest (clause 7), and the status, execution and cancellation of Project documents relating to an Interest (clause 8);

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the payment of Application Moneys by cheque, the placing of Application Moneys into the Application Fund, the duties of the Responsible Entity in relation to Application Moneys, and the transfer of Application Moneys from the Application Fund (clauses 10 and 11);

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the issuing of numbered Certificates (clause 12), the holding of Scheme Property on trust for the Growers (clause 13), and the maintenance of a register setting out the details of the Growers (clause 17);

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the payment of proceeds into the Proceeds Fund (clause 20), deductions that may be made from the Proceeds Fund (clause 21), and distributions to the Growers from the Proceeds Fund (clause 22); and

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a process for dealing with complaints (clause 23), the assignment of a Grower's Interest (clause 25), the retirement and removal of the Responsible Entity (clause 27) and winding up the project (clause 34).

Fees

40. Under the terms of the Management Agreement and the Lease (which are annexed to the Constitution), a Grower will pay the following fees per Allotment:

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an establishment fee of $2057 (payable once only upon Application);

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Lease Rental of $143 payable upon Application. Thereafter, for the terms of the Project, the amount payable in the preceding year (indexed in accordance with the All Group Consumer Price Index), is payable in arrears on 30 June of each Subsequent Year;

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an Annual Maintenance Fee of $49.50, payable in arrears on 30 June of the first Subsequent Year (where Maintenance Services are provided in that year) or, otherwise, in the Subsequent Year following the first Subsequent Year. Thereafter, for the term of the Project, the amount payable in the preceding year (indexed in accordance with the All Group Consumer Price Index), is payable in arrears on 30 June of each Subsequent Year;

•

for Growers who borrow from Environinvest, a loan establishment fee, if any, of no more than $100 in the Application Year for Growers using Environinvest Ltd as finance provider; and

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a Harvest Fee of 5.5% of the net Sale Proceeds is payable in the Harvest Year.

Finance

41. Growers can fund part of the Establishment Fee, Maintenance and Lease Rental by borrowing from Environinvest, acting in the capacity of finance provider, or by borrowing from a third party financier.

42. Environinvest will offer three finance options to Growers. Loans, other than those provided by Environinvest, that differ materially in its terms and conditions from those described below are outside the scope of this Product Ruling:

(i)

A Principal Only Loan with the following features:

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the Grower must provide Environinvest with a deposit of not less than 10% of the Application Fee (being the amount of $2,200 payable by a Grower as the fees for the first year);

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the principal is repayable in 12 equal monthly instalments, in arrears;

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the monthly instalments are payable on or before the end of each calendar month commencing in the first calendar month after the loan moneys are drawn down;

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a loan establishment fee of no more than $100 is payable; and

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at least, minimum security by mortgage over the Lease and the Trees.

(ii)

A Principal and Interest Loan with the following features:

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the Grower must provide Environinvest with a deposit of not less than 10% of the Application Fee (being the amount of $2,200 payable by a Grower as the fees for the first year);

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the term of the loan may be up to 10 years;

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from the Commencement Date the principal and interest is repayable in equal monthly instalments, in arrears;

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the rate of interest is fixed over the term of the loan;

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the fixed rate of interest per annum will not be more than 4% above the base rate per annum that is charged from time to time by the National Australia Bank Ltd or its successor on unsecured or overdraft accounts rate;

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the monthly instalments are payable on or before the end of each calendar month commencing in the first calendar month after the loan moneys are drawn down;

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a loan establishment fee of no more than $100 is payable; and

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at least a minimum security by mortgage over the Lease and the Trees.

(iii)

An Interest Only Loan with the following features:

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the Grower must provide Environinvest with a deposit of not less than 10% of the Application Fee (being the amount of $2,200 payable by a Grower as the fees for the first year);

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the term of the loan may be up to 10 years;

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from the Commencement Date the interest is repayable in 10 equal annual instalments, in arrears;

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the rate of interest is fixed over the term of the loan;

•

the fixed rate of interest per annum will not be more than 4% above the base rate per annum that is charged from time to time by the National Australia Bank Ltd or its successor on unsecured or overdraft accounts;

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interest is payable annually in advance in equal amounts, beginning on the Commencement Date;

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the principal is payable on the Final Repayment Date as set out in Item 10 of the Schedule;

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a loan establishment fee of no more than $100 is payable; and

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at least a minimum security by mortgage over the Lease and the Trees.

43. This Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features:

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there are split loan features of a type referred to in Taxation Ruling TR 98/22;

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there are indemnity arrangements or other collateral agreements in relation to the loan designed to limit the borrower's risk;

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'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;

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repayments of the principal and payments of interest are linked to the derivation of income from the Project;

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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;

•

lenders do not have the capacity under the loan agreement, or a genuine intention, to take legal action against defaulting borrowers; or

•

entities associated with the Project, other than Environinvest Ltd are involved or become involved in the provision of finance to Growers for the Project.

Ruling

Application of this Ruling

44. This Ruling applies only to Growers who are accepted to participate in the Project on or before 30 June 2004 and who have executed a Management Agreement and a Lease Agreement on or before that date. The Ruling will not apply to any Grower who is allocated less than two Allotments in the Project.

45. A Grower is not eligible to claim any tax deduction until the Grower's application to enter the Project is accepted and the Project has commenced. The Grower's participation in the Project must constitute the carrying on of a business of primary production.

The Simplified Tax System ('STS')

Division 328

46. For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different depending on whether the Grower is an 'STS taxpayer'. To be an 'STS taxpayer' a Grower:

•

must be eligible to be an 'STS taxpayer'; and

•

must have elected to be an 'STS taxpayer'.

Qualification

47. This Product Ruling assumes that a Grower who is an 'STS taxpayer' is so for the income year in which their participation in the Project commences. A Grower may become an 'STS taxpayer' at a later point in time. Also, a Grower who is an 'STS taxpayer' may choose to stop being an 'STS taxpayer', or may cease to be eligible to be an 'STS taxpayer', during the term of the Project. These are contingencies relating to the circumstances of individual Growers that cannot be accommodated in this Ruling. Such Growers can ask for a private ruling on how the taxation legislation applies to them.

Tax outcomes for Growers who are not 'STS taxpayers'

Assessable Income

Section 6-5

48. That part of the gross sales proceeds from the Project attributable to the Growers produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5.

49. The Grower recognises ordinary income from carrying on the business of afforestation at the time that income is derived.

Deductions for Establishment Fee, Maintenance Fee, Lease Rental, and Interest

Section 8-1

50. A Grower who is accepted to participate in the Project on or before 30 June 2003 and is not an 'STS taxpayer' may claim, on a per Allotment basis, tax deduction for the following properly incurred revenue expenses:

* Subject to CPI Increase

51. A Grower who is accepted to participate in the Project between on or after 1 July 2003 and on or before 30 June 2004 and is not an 'STS taxpayer' may claim, on a per Allotment basis, tax deductions for the following properly incurred revenue expenses:

* Subject to CPI increase

Notes:

(i)

If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (e.g. input tax credits): Division 27. See Example at paragraph 126;

(ii)

Expenditure for 'seasonally dependent agronomic activities' is deductible in the income year in which it is incurred. 'Seasonally dependent agronomic activities' are explained below at paragraphs 88 to 92;

(iii)

Where a Grower who is not an 'STS taxpayer', pays the Maintenance Fee and the Lease Rental in the relevant income years shown in the Management Agreement and the Lease, those fees are deductible in full in the year that they are incurred. However, if a Grower chooses to prepay fees for the doing of a thing (e.g. the provision of maintenance services or the leasing of land) that will not be wholly done in the income year the fees are incurred, the prepayment rules of the ITAA 1936 may apply to apportion those fees (see paragraphs 80 to 87). In such cases, the tax deduction for the prepaid fee must be determined using the formula shown in paragraph 86 unless the expenditure is 'excluded expenditure'. 'Excluded expenditure' is an 'exception' to the prepayment rules and is deductible in full in the year in which it is incurred. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000;

(iv)

Growers who enter into an Interest Only Loan with Environinvest incur interest annually in advance, beginning from the Commencement date. Such interest is NOT deductible in full in the year in which it is incurred, unless the amount of the interest is 'excluded expenditure' (see Note (iii) above). Where the amount of interest is not 'excluded expenditure' the deduction for the interest paid in advance each year must be determined using the formula in subsection 82KZMF(1) (see paragraph 86). Environinvest will inform Growers of the Commencement Date to allow Growers to determine the number of days in the 'eligible service period' in the first expenditure year (i.e. the Application Year). This figure is necessary to calculate the deduction allowable for the interest incurred;

(v)

Growers who enter into a Principal and Interest Loan with Environinvest incur interest monthly, in arrears. Such interest is deductible when incurred;

(vi)

The deductibility or otherwise of interest arising from loan agreements entered into with financiers other than Environinvest is outside the scope of this Ruling. However, all Growers, including those who finance their participation in the Project other than with Environinvest, should read the discussion of the prepayment rules in paragraphs 80 to 87 (below) as those rules may be applicable if interest is prepaid. Subject to the 'excluded expenditure' exception, the prepayment rules apply whether the prepayment is required under the relevant loan agreement or is at the Grower's choice; and

(vii)

Borrowing expenses are deductible under section 25-25 where the borrowed moneys are used or are to be used during that income year for income producing purposes. Borrowing expenses of $100 or less are deductible in the year in which they are incurred (subsection 25-25(6)).

Tax outcomes for Growers who are 'STS taxpayers'

Assessable Income

Section 6-5 and section 328-105

52. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5.

53. The Grower recognises ordinary income from carrying on the business of afforestation at the time the income is received (paragraph 328-105(1)(a)).

Deductions for the Establishment Fee, Maintenance Fee, Lease Rental, and Interest

Section 8-1 and section 328-105

54. A Grower who is accepted to participate in the Project on or before 30 June 2003 may claim, on a per Allotment basis, tax deductions for the following properly incurred and paid revenue expenses. If an amount of expenditure is not fully paid in the year shown in the table below, it is only deductible to the extent that it is paid:

* Subject to CPI increase

55. A Grower who is accepted to participate in the Project between on or after 1 July 2003 and on or before 30 June 2004 may claim, on a per Allotment basis, tax deductions for the following properly incurred and paid revenue expenses. If an amount of expenditure is not fully paid in the year shown in the table below, it is only deductible to the extent that it is paid.

* Subject to CPI increase

Notes:

(viii)

If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (e.g. input tax credits). See Example at paragraph 126;

(ix)

If, for any reason, an amount shown in the Table above is not fully paid in the year in which it is incurred by a Grower who is an 'STS taxpayer' then the amount is only deductible to the extent to which it has been paid, or has been paid for the Grower. Any amount or part of an amount shown in the Table above which is not paid in the year in which it is incurred will be deductible in the year in which it is actually paid;

(x)

Expenditure for 'seasonally dependent agronomic activities' is deductible in the income year in which it is incurred. 'Seasonally dependent agronomic activities' are explained below at paragraphs 88 to 92;

(xi)

Where a Grower who is an 'STS taxpayer', pays the Maintenance Fees and the Lease Rental in the relevant income years shown in the Management Agreement and the Lease, those fees are deductible in full in the year that they are paid. However, if a Grower chooses to prepay fees for the doing of a thing (e.g., the provision of maintenance services or the leasing of land) that will not be wholly done in the income year the fees are incurred, the prepayment rules of the ITAA may apply to apportion those fees (see paragraphs 80 to 87). In such cases, the tax deduction for the prepaid fee must be determined using the formula shown in paragraph 86, unless the expenditure is 'excluded expenditure'. 'Excluded expenditure' is an 'exception' to the prepayment rules, and is deductible in full in the year in which it is incurred. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000;

(xii)

Growers who enter into an Interest Only Loan with Environinvest incur interest annually in advance, beginning from the Commencement date. Such interest is NOT deductible in full in the year in which it is incurred and paid, unless the amount of the interest is 'excluded expenditure' (see Note (ix) above). Where the amount of interest is not 'excluded expenditure' the deduction for the interest paid in advance each year must be determined using the formula in subsection 82KZMF(1) (see paragraph 86). Environinvest will inform Growers of the Commencement Date to allow Growers to determine the number of days in the 'eligible service period' in the first expenditure year (i.e. the Application Year). This figure is necessary to calculate the deduction allowable for the interest incurred;

(xiii)

Growers who enter into a Principal and Interest Loan with Environinvest incur interest monthly, in arrears. For STS taxpayers such interest is deductible when incurred and paid;

(xiv)

The deductibility or otherwise of interest arising from loan agreements entered into with financiers other than Environinvest is outside the scope of this Ruling. However, all Growers, including those who finance their participation in the Project other than with Environinvest, should read the discussion of the prepayment rules in paragraphs 80 to 87 (below) as those rules may be applicable if interest is prepaid. Subject to the 'excluded expenditure' exception, the prepayment rules apply whether the prepayment is required under the relevant loan agreement or is at the Grower's choice; and

(xv)

Borrowing expenses are deductible under section 25-25 where the borrowed moneys are used or are to be used during that income year for income producing purposes. Borrowing expenses of $100 or less are deductible in the year in which they are incurred (subsection 25-25(6)).

Tax outcomes that apply to all Growers

Deferral of losses from non-commercial business activities

Division 35

56. For a Grower who is an individual and who enters the Project during the income year ended 30 June 2003 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 will decide for the income years ending 30 June 2003 to 30 June 2014 that the rule in section 35-10 does not apply to this activity provided that the Project is carried out in the manner described in this Ruling.

57. For a Grower who is an individual and who enters the Project on or after 1 July 2003 and on or before the 30 June 2004 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 will decide for the income years ending 30 June 2004 to 30 June 2015 that the rule in section 35-10 does not apply to this activity provided that the Project is carried out in the manner described in this Ruling.

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

•

the 'exception' in subsection 35-10(4) applies (see paragraph 113 in the Explanations part of this ruling, below);

•

a Grower's business activity satisfies one of the tests in sections 35-30, 35-35, 35-40 or 35-45; or

•

a Grower's business activity produces assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)).

59. Where, the 'exception' in subsection 35-10(4) applies, the Grower's business activity satisfies one of the tests, or the discretion in subsection 35-55(1) is exercised, 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.

60. 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 commercially viable. An assessment of the Project or the product from this perspective has not been made.

Section 82KL and Part IVA

61. For a Grower who participates in the Project and incurs expenditure as required by the Management Agreement and the Lease the following provisions of the ITAA 1936 have application as indicated:

•

section 82KL does not apply to deny the deductions otherwise allowable; and

•

the relevant provisions in Part IVA will not be applied to cancel a tax benefit obtained under a tax law dealt with in this Ruling.

Explanations

Is the Grower carrying on a business?

62. For the amounts set out in the Tables above to constitute allowable deductions the Grower's afforestation activities as a participant in the Project must amount to the carrying on of a business of primary production.

63. Where there is a business, or a future business, the gross proceeds from the sale of the wood produce will constitute gross assessable income in their own right. The generation of 'business income' from such a business, or future business, provides the backdrop against which to judge whether the outgoings in question have the requisite connection with the operations that more directly gain or produce this income.

64. For schemes such as that of the Environinvest Eucalypt Project No. 6, Taxation Ruling TR 2000/8 sets out in paragraph 89 the circumstances in which the Grower's activities can constitute the carrying on of a business. As Taxation Ruling TR 2000/8 sets out, these circumstances have been established in court decisions such as FCT v Lau 84 ATC 4929.

65. Generally, a Grower will be carrying on a business of afforestation, and hence primary production, if:

•

the Grower has an identifiable interest (by lease or by licence) in the land on which the Grower's Trees are established;

•

the Grower has a right to harvest and sell the wood produce from those trees;

•

the afforestation activities are carried out on the Grower's behalf;

•

the afforestation activities of the Grower are typical of those associated with an afforestation business; and

•

the weight and influence of general indicators point to the carrying on of a business.

66. In this Project, each Grower enters into a Management Agreement and a Lease Agreement.

67. Under the Lease each individual Grower will have rights over a specific and identifiable area of, at least, one hectare of land. The Lease provides the Grower with an ongoing interest in the specific trees on the leased area for the term of the Project. Under the lease the Grower must use the land in question for the purpose of carrying out afforestation activities, and for no other purpose. The lease allows the Manager come onto to the land to carry out its obligations under the Management Agreement.

68. Under the Management Agreement the Manager is engaged by the Grower to establish and maintain a woodlot on the Grower's identifiable area of land during the term of the Project. The Manager has provided evidence that it holds the appropriate professional skills and credentials to provide the management services to establish and maintain the woodlot on the Grower's behalf.

69. The Manager is also engaged to harvest and sell, on the Grower's behalf, the wood produce grown on the Grower's woodlot.

70. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11. Positive findings can be made from the Project's description for all the indicators.

71. The activities that will be regularly carried out during the term of the Project demonstrate a significant commercial purpose. Based on reasonable projections, a Grower in the Project will derive assessable income from the sale of the wood produce that will return a before-tax profit, i.e. a profit in cash terms that does not depend in its calculation on the fees in question being allowed as a deduction.

72. The pooling of wood produce from trees grown on the Grower's woodlot with the wood produce of other Grower is consistent with general afforestation practices. Each Grower's proportionate share of the sale proceeds of the pooled wood products will reflect the proportion of the trees contributed from their woodlot.

73. The Manager's services are also consistent with general silvicultural practices. They are of the type ordinarily found in afforestation ventures that would commonly be said to be businesses. While the size of a woodlot is relatively small, it is of a size and scale to allow it to be commercially viable (see Taxation Ruling IT 360).

74. The Grower's degree of control over the Manager as evidenced by the Management Agreement, and supplemented by the Corporations Act, is sufficient. During the term of the Project, the Manager will provide the Grower with regular progress reports on the Grower's woodlot and the activities carried out on the Grower's behalf. Growers are able to terminate arrangements with the Manager in certain instances, such as cases of default or neglect.

75. The afforestation activities, and hence the fees associated with their procurement, are consistent with an intention to commence regular activities that have an 'air of permanence' about them. For the purposes of this Ruling, the Grower's afforestation activities in the Project will constitute the carrying on of a business.

The Simplified Tax System

Division 328

76. Subdivision 328-F sets out the eligibility requirements that a Grower must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS.

77. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling. Therefore, any Grower who relies on those parts of this Ruling that refer to the STS will be assumed to have correctly determined whether or not they are eligible to be an 'STS taxpayer'.

Deductibility of Management Fees and Lease Fees

Section 8-1

78. Consideration of whether the initial management fees and lease fees are deductible under section 8-1 begins with the first limb of the section. This view proceeds on the following basis:

•

the outgoing in question must have a sufficient connection with the operations or activities that directly gain or produce the taxpayer's assessable income;

•

the outgoings are not deductible under the second limb if they are incurred when the business has not commenced; and

•

where all that happens in a year of income is that a taxpayer is contractually committed to a venture that may not turn out to be a business, there can be doubt about whether the relevant business has commenced, and hence, whether the second limb applies. However, that does not preclude the application of the first limb in determining whether the outgoing in question has a sufficient connection with activities to produce assessable income.

79. The Management Fees and Lease Fees associated with the afforestation activities will relate to the gaining of income from the Grower's business of afforestation (see above), and hence have a sufficient connection to the operations by which income (from the harvesting and sale of wood produce) is to be gained from this business. They will thus be deductible under the first limb of section 8-1. Further, no 'non-income producing' purpose in incurring the fee is identifiable from the arrangement. The fee appears to be reasonable. There is no capital component of the Management Fee. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply.

Prepayment provisions

Sections 82KZL to 82KZMG

80. The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement (eg. the performance of management services or the leasing of land) that will not be wholly done within the same year of income as the year in which the expenditure is incurred. If expenditure is incurred to cover the provision of services to be provided within the same year, then it is not expenditure to which the prepayment rules apply.

81. For this Project, only section 82KZL (an interpretive provision) and sections 82KZME, 82KZMF and 82KZMG are relevant. Subject to section 82KZMG, if the requirements of sections 82KZME and 82KZMF are met, taxpayers determine deductions for prepaid expenditure under section 82KZMF using the formula in subsection 82KZMF(1). These provisions also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF.

Sections 82KZME and 82KZMF

82. Other than expenditure deductible under section 82KZMG, if the requirements of subsections 82KZME(2) and (3) are met, the formula in subsection 82KZMF(1) (see below) will apply to apportion expenditure that is otherwise deductible under section 8-1 of the ITAA 1997. The requirements of subsection 82KZME(2) will be met if expenditure is incurred by a taxpayer in return for the doing of a thing that is not to be wholly done within the year the expenditure is made. The year in which such expenditure is incurred is called the 'expenditure year' (subsection 82KZME(1)).

83. The requirements of subsection 82KZME(3) will be met where the agreement (or arrangement) has the following characteristics:

•

the taxpayer's allowable deductions under the agreement for the 'expenditure year' exceed any assessable income attributable to the agreement for that year; and

•

the taxpayer does not have effective day to day control over the operation of the agreement. That is, the significant aspects of the arrangement are managed by someone other than the taxpayer; and

•

either:

(a)

there is more than one participant in the agreement in the same capacity as the taxpayer; or

(b)

the person who promotes, arranges or manages the agreement (or an associate of that person) promotes similar agreements for other taxpayers.

84. For the purpose of these provisions, the agreement includes all activities that relate to the agreement (subsection 82KZME(4)). This has particular relevance for a Grower in this Project who, in order to participate in the Project may borrow funds from a financier other than Environinvest. Although undertaken with an unrelated party, that financing would be an element of the arrangement. The funds borrowed and the interest deduction are directly related to the activities under the arrangement. If a Grower prepays interest under such financing arrangements, the deductions allowable will be subject to apportionment under section 82KZMF.

85. There are a number of exceptions to these rules, but for Growers participating in this Project, only the 'excluded expenditure' exception in subsection 82KZME(7) is relevant. 'Excluded expenditure' is defined in subsection 82KZL(1). However, for the purposes of Growers in this Project, 'excluded expenditure' is prepaid expenditure incurred under the arrangement that is less than $1,000. Such expenditure is immediately deductible.

86. Where the requirements of section 82KZME are met, section 82KZMF applies to apportion relevant prepaid expenditure. Section 82KZMF uses the formula below, to apportion prepaid expenditure and allow a deduction over the period that the benefits are provided.

Expenditure * (Number of days of eligible service period in the year of income / Total number of days of eligible service period)


87. In the formula 'eligible service period' (defined in subsection 82KZL(1)) means, the period during which the thing under the agreement is to be done. The eligible service period begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years.

Section 82KZMG

88. Under subsection 82KZMG(1), expenditure is excluded from the prepayment rules that would otherwise apply, to the extent that the prepaid amount satisfies the requirements of subsections 82KZMG(2) to (4).

89. Subsection 82KZMG(2) requires that the expenditure is:

•

incurred on or after 2 October 2001 and on or before 30 June 2006;

•

the eligible service period must be 12 months or shorter and must end on or before the last day of the year of income after the expenditure year; and

•

for the doing of a thing under the agreement that is not to be wholly done within the expenditure year.

90. To satisfy subsection 82KZMG(3) the agreement must satisfy the following requirements:

•

it must be an agreement for planting and tending trees for felling;

•

be an agreement where the taxpayer does not have day to day control over the operations arising out of the agreement. (A right to be consulted or to give directions does not equate to day to day control for the purposes of this requirement); and

•

either:

(i)

there is more than one participant in the agreement in the same capacity as the taxpayer; or

(ii)

the manager manages, arranges or promotes the agreement, or an associate of the manager, manages, arranges or promotes similar agreements.

91. Under subsection 82KZMG(4) the expenditure incurred by the taxpayer must be paid for 'seasonally dependent agronomic activities' undertaken by the manager during the 'establishment period' for the relevant planting of trees for felling.

92. Subsection 82KZMG(5) defines the 'establishment period' to commence at the time that the first 'seasonally dependent agronomic activity' is performed in relation to a specific planting of trees and to conclude with the planting of trees. Where it is necessary to apply a fertiliser or herbicide to the trees at the same time as planting then those activities fall within the establishment period. Planting of trees refers to the main planting of the particular plantation and expressly excludes specific planting to replace existing seedlings that have not survived.

Application of the prepayment provisions to this Project

93. Under the Management Agreement, per Allotment, a Grower incurs an Establishment Fee of $2,057 in the Application Year for 'seasonally dependent agronomic activities'.

94. The 'seasonally dependent agronomic activities' that will be carried out by Environinvest on the Grower's behalf during the 'establishment period' are ploughing, ripping and other subsurface works, soil improvement, fertilising and acquisition, weed control, supply and planting of the Grower's trees. During the term of the Project, the Trees will be tended by Environinvest for the Growers and are specifically grown for felling in the Harvest Year.

95. As the requirements of section 82KZMG have been met a Grower who is not an 'STS taxpayer' can, therefore, claim an immediate deduction for the Establishment Fee in the income year in which the fee is incurred. A Grower who is an 'STS taxpayer' can claim an immediate deduction for each of the relevant fees in the income year in which the fee is paid.

96. The Management Agreement also requires that a Grower incur a Maintenance Fee of $49.50 (year 2) per Allotment per year from either, the first Subsequent Year or, the Subsequent Year after the first Subsequent Year (thereafter indexed by the All Group Consumer Price Index). The Maintenance Fee is for the performance of the Maintenance Services during the term of the Project. Under the Lease a Grower incurs annual Lease Rental of $143 (year 2) per Allotment to lease land during the term of the Project (thereafter indexed by the All Group Consumer Price Index).

97. The Maintenance Fee incurred under the Management Agreement during these years and the Lease Rentals incurred under the Lease are not prepaid. These fees are charged for providing maintenance services and for the lease of the land to a Grower until 30 June of the year in which the fees are incurred.

98. On this basis, the basic precondition in subsection 82KZME(2) is not satisfied and, in these circumstances, section 82KZMF will have no application to the Maintenance Fees and the Lease Rental.

99. A Grower who is an 'STS taxpayer' can claim an immediate deduction for each of the relevant fees in the income year in which the fee is paid. A Grower who is not an 'STS taxpayer' can, therefore, claim an immediate deduction for the Maintenance Fee and the Lease Rental in the income year in which the fee is incurred.

Growers who choose to pay fees for a period in excess of that required by the Project's agreements

100. Although not required under the Management Agreement, the Lease, or the Principal and Interest Loan Agreement (see below), a Grower participating in the Project may choose to prepay fees/interest for a period beyond the 'expenditure year'. Where this occurs, contrary to the conclusion reached in paragraph 95 above, section 82KZMF will apply to apportion the expenditure and allow a deduction over the period in which the prepaid benefits are provided.

101. For these Growers, the amount and timing of deductions for any relevant prepaid Maintenance Fees, prepaid Lease Rentals, or prepaid interest will depend upon when the respective amounts are incurred and what the 'eligible service period' is in relation to these amounts.

102. However, as noted above, prepaid amounts of less than $1,000 incurred in an expenditure year will be 'excluded expenditure' and will be not subject to apportionment under section 82KZMF.

Interest deductibility

Section 8-1

(i) Growers who use Environinvest as the finance provider

103. Some Growers may finance their participation in the Project through a loan facility with Environinvest. Whether the resulting interest costs are deductible under section 8-1 depends on the same reasoning as that applied to the deductibility of lease and management fees.

104. The interest incurred will be in respect of a loan to finance the Grower's business operations - the cultivation and growing the Trees and the lease of the land on which the Trees will have been planted - that will continue to be directly connected with the gaining of 'business income' from the Project. Such interest will, therefore, have a sufficient connection with the gaining of assessable income to be deductible under section 8-1.

105. As with the Establishment Fee, the Maintenance Fees and the Lease Rentals, in the absence of any application of the prepayment provisions (see paragraphs 80 to 87), the timing of deductions for interest incurred under the Principal and Interest Loan will again depend upon whether a Grower is an 'STS taxpayer' or is not an 'STS taxpayer'.

106. If the Grower is not an 'STS taxpayer', interest is deductible in the year in which it is incurred. If the Grower is an 'STS taxpayer' interest is not deductible until it has been both incurred and paid, or is paid for the Grower. If interest that is properly incurred in an income year remains unpaid at the end of that income year, the unpaid amount is deductible in the income year in which it is actually paid, or is paid for the Grower.

107. However, Growers who enter into an Interest Only Loan pay interest annually in advance. Subject to the 'excluded expenditure' exception (see above), deductions for these Growers will be determined using the formula shown in paragraph 86. However, as stated above, for Growers who are 'STS taxpayers', the deduction calculated using this formula is only deductible to the extent to which it is paid.

(ii) Growers who DO NOT use Environinvest as the finance provider

108. The deductibility of interest incurred by Growers who finance their participation in the Project through a loan facility with a bank or financier other than Environinvest is outside the scope of this Ruling. Product Rulings only deal with arrangements where all details and documentation have been provided to, and examined by the Tax Office.

109. While the terms of any finance agreement entered into between relevant Growers and such financiers are subject to commercial negotiation, those agreements may require interest to be prepaid. Alternatively, a Grower may choose to prepay such interest. Unless such prepaid interest is 'excluded expenditure' any tax deduction that is allowable will be subject to the prepayment provisions of the ITAA 1936 (see paragraphs 80 to 87).

Deferral of losses from non-commercial business activities

Division 35

110. Division 35 applies to losses from certain business activities for the income year ended 30 June 2001 and subsequent years. Under the rule in subsection 35-10(2) a deduction for a loss made by an individual (including an individual in a general law partnership) from certain business activities will not be taken into account in an income year unless:

•

the exception in subsection 35-10(4) applies;

•

one of four tests in sections 35-30, 35-35, 35-40 or 35-45 is met; or

•

if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55.

111. 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.

112. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2), can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

113. For the purposes of applying Division 35, 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 activity 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.

114. In broad terms, the 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, or an interest in real property, (excluding any private dwelling) 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 (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45).

115. A Grower who is accepted to participate in the Project will be carrying on a business activity that is subject to these provisions. Information provided with the application for this Product Ruling indicates that a Grower who acquires the minimum allocation of two Allotments in the Project is unlikely to have their activity pass one of the tests. Growers who acquire more than one interest in the Project may however, find that their activity meets one of the tests.

116. 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.

117. 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, the second arm of the discretion in paragraph 35-55(1)(b) may be exercised by the Commissioner where the business activity has started to be carried on and for that, or those income years;

•

because of its nature, the business activity has not satisfied, or will not satisfy one of the tests set out in Division 35; and

•

there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

118. Information provided with this Product Ruling indicates that a Grower who acquires a minimum investment of two Allotments in the Project is expected to be carrying on a business activity that will produce a taxation profit, in the income year ended 30 June 2014 (for Growers accepted on or before 30 June 2003) or the income year ended 30 June 2015 (for Growers accepted on or after 1 July 2003 and on or before 30 June 2004).

119. The Commissioner will decide for such a Grower that it would be reasonable to exercise the second arm of the discretion for all income years up to, and including the income year ended 30 June 2014 (for Growers accepted on or before 30 June 2003) or the income year ended 30 June 2015 (for Growers accepted on or after 1 July 2003 and on or before 30 June 2004).

120. This Product Ruling is issued on a prospective basis (i.e. before an individual Grower's business activity starts to be carried on). The Project, however, may fail to be carried on during the income years specified above (see paragraph 86 or 87), in the manner described in the Arrangement (see paragraphs 14 to 43). If so, this Ruling, and specifically the decision in relation to paragraph 35-55(1)(b), that it would be unreasonable that the loss deferral rule in subsection 35-10(2) not apply, may be affected, because the Ruling no longer applies (see paragraph 9). Growers may need to apply for private rulings on how paragraph 35-55(1)(b) will apply in such changed circumstances.

121. In deciding that the second arm of the discretion in paragraph 35-55(1)(b) will be exercised on this conditional basis, the Commissioner has relied upon:

•

the report of the independent forester;

•

site visits to earlier Environinvest afforestation projects;

•

independent, objective, and generally available information relating to the industry which substantially supports cash flow projections and other claims, including prices and costs, in the Product Ruling application submitted by the Responsible Entity. In particular, the Australian Forest Products March Quarter 2001 Statistics, Forest plantations on cleared agricultural land in Australia (ABARE Research Report 99.11), Global outlook for plantations (ABARE Research Report 99.9).

Losses and Outgoings incurred under Certain Tax Avoidance Schemes

Section 82KL - recouped expenditure

122. The operation of section 82KL depends, among other things, on the identification of a certain quantum of 'additional benefits(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1.

Part IVA - general tax avoidance provisions

123. For Part IVA to apply there must be a 'scheme' (section 177A), a 'tax benefit' (section 177C) and a dominant purpose of entering into the scheme to obtain a tax benefit (section 177D).

124. The Environinvest Eucalypt Project No 6 will be a 'scheme'. A Grower will obtain a 'tax benefit' from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraphs 50, 51, 54 and 55 that would not have been obtained but for the scheme. However, it is not possible to conclude the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit.

125. Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the wood produce. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There are no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing at arm's length or, if any parties are not dealing at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under paragraph 177D(b) it cannot be concluded, on the information available, that participants will enter into the scheme for the dominant purpose of obtaining a tax benefit.

Example

Example - Entitlement to GST input tax credits

126. Susan, who is a sole trader and registered for GST, contracts with a manager to manage her viticulture business. Her manager is registered for GST and charges her a management fee payable every six months in advance. On 1 December 2002, Susan receives a valid tax invoice from her manager requesting payment of a management fee in advance, and also requesting payment for an improvement in the connection of electricity for her vineyard that she contracted him to carry out. The tax invoice includes the following details:

Susan pays the invoice by the due date and calculates her input tax credit on the management fee (to be claimed through her Business Activity Statement) as:

(1 / 11) * $4,400 = $400.


Hence her outgoing for the management fee is effectively $4,400 less $400, or $4,000.

Similarly, Susan calculates her input tax credit on the connection of electricity as:

(1 / 11) * $2,200 = $200.


Hence her outgoing for the power upgrade is effectively $2,200 less $200, or $2,000.

In preparing her income tax return for the year ended 30 June 2003, Susan is aware that the management fee is deductible in the year incurred. She calculates her management fee deduction as $4,000 (not $4,400).

Susan is aware that the electricity upgrade is deductible 10% per year over a 10 year period. She calculates her deduction for the power upgrade as $200 (one tenth of $2,000 only, not one tenth of $2,200).

Detailed contents list

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

Commissioner of Taxation
9 April 2003

Not previously released in draft form.

References

ATO references:
NO 2003/003510

Related Rulings/Determinations:

TR 92/1
TR 92/20
TR 97/11
TR 97/16
TR 98/22
PR 1999/95
TR 2000/8
TD 93/34
IT 360

Subject References:
advance deductions and expenses for certain forestry expenditure
carrying on a business
commencement of business
fee expenses
forestry agreement
interest expenses
management fees
producing assessable income
product rulings
public rulings
seasonally dependent agronomic activity
taxation administration
tax avoidance
tax benefits under tax avoidance schemes
tax shelters
tax shelters project

Legislative References:
ITAA 1936 82KL
ITAA 1936 82KZL
ITAA 1936 82KZL(1)
ITAA 1936 82KZME
ITAA 1936 82KZME(1)
ITAA 1936 82KZME(2)
ITAA 1936 82KZME(3)
ITAA 1936 82KZME(4)
ITAA 1936 82KZME(7)
ITAA 1936 82KZMF
ITAA 1936 82KZMF(1)
ITAA 1936 82KZMG
ITAA 1936 82KZMG(1)
ITAA 1936 82KZMG(2)
ITAA 1936 82KZMG(3)
ITAA 1936 82KZMG(4)
ITAA 1936 82KZMG(5)
ITAA 1936 Pt IVA
ITAA 1936 Div 3 Pt III
ITAA 1936 177A
ITAA 1936 177C
ITAA 1936 177D
ITAA 1936 177D(b)
ITAA 1997 6-5
ITAA 1997 8-1
ITAA 1997 17-5
ITAA 1997 25-25
ITAA 1997 25-25(6)
ITAA 1997 Div 27
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 1997 Div 328
ITAA 1997 328-105
ITAA 1997 328-105(1)(a)
ITAA 1997 Subdiv 328-F
ITAA 1997 Subdiv 328-G
TAA 1953 Pt IVAAA
Copyright Act 1968
Corporations Act 2001

Case References:
FCT v. Lau
84 ATC 4929
(1984) 16 ATR 55