Private ruling: The Project
Published: July 2012
Ruling period: 1 July 2012 to 30 June 2043
Date scheme commenced: 30 June 2012

Ruling: Q1: Is the Commissioner satisfied on 30 June in the relevant year it was reasonable to expect that the 70% direct forestry expenditure rule under section 394-35 of the Income Tax Assessment Act 1997 (ITAA 1997) was met for the Project? | A1: Yes | Q2: Can you claim a deduction for the establishment services fee paid before 30 June in the relevant year under section 394-10 of the ITAA 1997? | A2: Yes | Q3: Can you claim a deduction under section 394-10 of the ITAA 1997 for council rates and other applicable statutory charges which are determined annually and paid out of the sinking fund? | A3: Yes

Relevant facts and circumstances: You paid the relevant Project Establishment amount and Fund amount before 30 June in the relevant year. You signed and executed the Project documents before 30 June in the relevant year. You are a wholesale client for the purpose of the Corporations Act 2001 You did not utilise any internal finance provided by the Manager.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-5 | Income Tax Assessment Act 1997 Section 8-10 | Income Tax Assessment Act 1997 Section 12-5 | Income Tax Assessment Act 1997 Division 394 | Income Tax Assessment Act 1997 Section 394-10 | Income Tax Assessment Act 1997 Subsection 394-10(1) | Income Tax Assessment Act 1997 Paragraph 394-10(1)(c) | Income Tax Assessment Act 1997 Paragraph 394-10(1)(d) | Income Tax Assessment Act 1997 Paragraph 394-10(1)(e) | Income Tax Assessment Act 1997 Paragraph 394-10(1)(f) | Income Tax Assessment Act 1997 Subsection 394-10(2) | Income Tax Assessment Act 1997 Subsection 394-10(4) | Income Tax Assessment Act 1997 Subsection 394-10(5) | Income Tax Assessment Act 1997 Subsection 394-10(5)(A) | Income Tax Assessment Act 1997 Subsection 394-10(6) | Income Tax Assessment Act 1997 Section 394-20 | Income Tax Assessment Act 1997 Section 394-25 | Income Tax Assessment Act 1997 Subsection 394-35(2) | Income Tax Assessment Act 1997 Subsection 394-35(3) | Income Tax Assessment Act 1997 Subsection 394-35(4) | Income Tax Assessment Act 1997 Subsection 394-35(5) | Income Tax Assessment Act 1997 Subsection 394-35(6) | Income Tax Assessment Act 1997 Subsection 394-35(7) | Income Tax Assessment Act 1997 Subsection 394-35(8) | Income Tax Assessment Act 1936 Section 170 | Taxation Administration Act 1953 | Taxation Administration Act 1953 Schedule 1 Section 394-10 | Corporations Act 2001

Reasons for decision: Detailed Reasoning - Detailed reasoning: The threshold test for a participant in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June of the relevant year, the amount of 'direct forestry expenditure' under the scheme will be no less than 70% of the amount of payments under the scheme. The amount of all 'direct forestry expenditure' is the amount of the net present value of all 'direct forestry expenditure' that the Manager, as 'forestry manager' of the Project, has paid or will pay under the scheme (subsection 394-35(2)). The 'amount of payments under the scheme' is the amount of the net present value of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)). Both of the above amounts are determined as at 30 June 2012 in the relevant year, taking into account: · the timing requirements in subsections 394-35(4) and (5); · any amounts that can reasonably be expected to be recouped (subsection 394-35(6)); · the discount rate in subsection 394-35(7); and · the market value rule in subsection 394-35(8). The Australian Taxation Office (ATO) may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'. Applying all of these requirements to the information provided by the Manager of the Project the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June in the relevant year. | Detailed Reasoning - Question 2 and Question 3: Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5 and includes payments under a 'forestry managed investment scheme' that meet the requirements of Subsection 394-10(1). | Detailed Reasoning - The '70% DFE rule': Paragraph 394-10(1)(c) states that the scheme must satisfy the '70% DFE rule' on 30 June in the income year in which a participant pays an amount under the scheme. As determined in Question 1 above, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June in the relevant income year. | Detailed Reasoning - The other elements for deductibility under subsection 394-10(1): The requirement of paragraph 394-10(1)(d) that participants in the Project not have day to day control over the operation of the Project is clear from the Project Agreements as are the alternative elements of paragraph (e) relating to the number of participants in the scheme and the Manager's role in other managed investment schemes. The final requirement for deductibility requires all the Project trees to be established within 18 months of 30 June of the relevant year (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting timeline provided by the Manager indicates that all the trees required to be established under the scheme will be planted on the Project land by 31 December of the following year. Accordingly, subject to the qualifications set out below, amounts paid by participants to the Manager in relation to his 'forestry interests' satisfy all requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)). Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). Where a participant does not fully pay an amount, or the amount is not fully paid on their behalf in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year. | Detailed Reasoning - Loss of deductions previously allowed under subsection 394-10(1): Two situations may lead to a loss of deductions previously allowed to participants. The first of these situations will occur if the Manager fails to establish the trees on the Project land within 18 months. Where this occurs the Manager is required to notify the Commissioner within three months of the end of the 18 month period (section 394-10 of Schedule 1 to the Tax Administration Act 1953 ). The second situation where a participant may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within four years from 30 June of the income year they paid an amount under the scheme, for example, the Application Price (see subsection 394-10(5)). For the purposes of this provision, the Commissioner is able to amend the assessment of a participant within two years of the relevant 'CGT event' happening. The Commissioner's power to amend in these circumstances applies despite section 170 of the Income Tax Assessment Act 1936 (subsection 394-10(6) of the ITAA 1997). Where a 'CGT event' happens to the 'forestry interest' of a participant within four years, the market value of the forestry interest at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event' is still included in the assessable income of the participant by section 394-25. The amount must be included in assessable income even where an amendment has disallowed or may disallow the deductions previously allowed under section 394-10. However, subsection 394-10(5) will have no application where the 'CGT event' happens because of circumstances outside the participant's control and the participant could not reasonably have foreseen the 'CGT event' happening when they acquired the 'forestry interest' (subsection 394-10(5A)). Under the terms of the Agreement, the Project establishment amount and Fund amount is payable when the Application Form is lodged. Additional Fund amounts will be called upon by the manager to cover the cost of annual insurance premiums, council rates and other applicable charges to cover any shortfall in the Fund. Therefore, ensuring all of the above requirements are met you can claim deductions for the Project Establishment amount that is paid to the manager (sections 8-5 and 394-10).

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