Product Ruling PR 2006/155
Date of effect: 6 December 2006


Class of entities or scheme: 2. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. 3. The class of entities who can rely on those tax benefits are referred to as Growers. Growers will be those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and who have executed the relevant Project Agreements set out in paragraph 28 of this Ruling on or after 1 July 2007 and on or before 15 June 2008. They must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. 4. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: | Qualifications: 5. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 28 to 87 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 8. This Product Ruling applies prospectively from 6 December 2006, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 1 July 2007 until 15 June 2008, being the closing date for entry into the scheme. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities up to 30 June 2010. This Product Ruling will continue to apply to those entities even after its period of application for schemes entered into during the period of application. 9. However the Product Ruling only applies to the extent that: 10. If this Product Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)). 11. If this Product Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met: 12. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA). | Changes in the Law: 13. Although this Product Ruling deals with the laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to the extent this Product Ruling will have no effect. 14. Entities who are considering participating in the scheme 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: 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Tax Office suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling is issued. | Goods and Services Tax: 16. All fees and expenditure referred to in this Product 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. | Application of this Ruling: 17. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 28 to 87 of this Ruling. 18. The Grower's participation in the Project must constitute the carrying on of a business of primary production. Provided the Project is carried out as described below, the Grower's business of primary production will commence at the time or execution of their Sub-lease Deed and Grovelot Management Agreement. 19. A Grower is not eligible to claim any tax deductions until the Grower's application to enter the Project is accepted and the Project has commenced. | Division 328: 20. To be an 'STS taxpayer' a Grower must be eligible to be an 'STS taxpayer' and must have elected to be an 'STS taxpayer' (Division 328 of the ITAA 1997). For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different under the STS where a Grower who was an 'STS taxpayer' prior to 1 July 2005 continues to use the cash accounting method (called the 'STS accounting method') - see sections 328-120 and 328-125 of the Income Tax (Transitional Provisions) Act 1997 . 21. For such a Grower, a reference in this Ruling to an amount being deductible when incurred will mean that amount is deductible when paid and a reference to an amount being included in assessable income when 'derived' will mean that amount is included in assessable income when received. | Subdivision 61-J: 22. For the first income year starting on or after 1 July 2005, Subdivision 61-J provides for a tax offset of up to 25% of income tax liability related to the business income of a business in the STS with annual group turnover of less than $75,000. Entitlement to the offset varies depending on the type of entity and is therefore outside the scope of this Ruling. | Section 6-5: 23. 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. | Section 8-1, section 25-25, Division 27 and section 40-515 of the ITAA 1997 and sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936: 24. A Grower may claim tax deductions for the following fees and expenses on a per Grovelot basis, as set out in the Table below. | Notes: 25. A Joint Venture Grower who is in Joint Venture with another entity may claim deductions, on a per Grovelot basis, for the following expenditure set out in the Table and Notes in paragraph 24 of this Ruling: First Joint Venturer Second Joint Venturer | Section 35-55 - exercise of Commissioner's discretion: 26. A Grower who is an individual accepted into the Project by 15 June 2008 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for a Grower for the income years ending 30 June 2008 to 30 June 2013 . This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise. | Sections 82KZME, 82KZMF, 82KL and Part IVA: 27. For a Grower who commences participation in the Project and incurs expenditure as required by the Grovelot Management Agreement and the Sub-lease Deed, the following provisions of the ITAA 1936 have application as indicated: 28. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 29. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme 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 scheme. The effect of these agreements is summarised as follows. 30. 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: 31. The main features for the 2007 Timbercorp Olive Project are as follows: 32. The Project will be registered as a managed investment scheme under the Corporations Act 2001 . TSL is the holder of an Australian Financial Services Licence Number 235653 and will be the Responsible Entity for the Project. 33. The Project will involve cultivating and maintaining Olive Trees for the purpose of harvesting Olives for processing into Olive Oil for sale. 34. An offer to participate in the Project will be made through the 2007 Timbercorp Olive Project Product Disclosure Statement (PDS). The offer under the PDS is for 1,000 hectares in the Project which corresponds to 4,000 Grovelots. Applicants will be invited to subscribe for at least two Grovelots comprising of 0.25 hectares per Grovelot. There is no minimum amount that must be raised under the PDS and TSL will not be accepting oversubscriptions. 35. To participate in the Project Applicants must complete the Application and Power of Attorney Form Booklet attached to the PDS and lodge the completed Booklet together with the relevant Application Money on or before 15 June 2008. The Custodian will be appointed under the Custody Agreement to protect the interests of a Grower in their dealings with the Responsible Entity, Timbercorp Securities Limited (TSL). 36. Under the Power of Attorney, TSL will execute the Grower Agreements on behalf of Applicants who are accepted to participate in the Project as Growers. TSL will also allocate Grovelots to the Grower and place the Grower's details in a Register. 37. A Grower accepted on or after 1 July 2007 and on or before 15 June 2008 will commence participation as a Post 30 June Grower. This Ruling only applies in respect of Post 30 June Growers who are accepted into the Project. Note that a separate Product Ruling PR 2006/154 has issued for Growers accepted into the Project on or before 15 June 2007 . 38. The land on which a Grower will be growing and cultivating Olive Trees for the production of Crop or Produce consists of two properties (the Project Land) known as Anderson TOP 7 and Suttons, located near Boundary Bend in North West Victoria. TSL will enter into Head Leases with B.B. Olives Pty Ltd, (the Land Owner), in respect of the Project Land and Water Licences owned or acquired by the Land Owner. 39. TSL will grant each Grower a sub-lease to use and occupy two or more identifiable Grovelots for the Term of the Project. However, TSL reserves the right to accept applications for less than two Grovelots. 40. A Grower will also enter into a Grovelot Management Agreement with TSL to engage TSL to cultivate and maintain the Olive Trees on the Grower's Grovelots, and be responsible for harvesting the Olive Trees, procuring the processing of the Grower's Crop into Product, and selling the Grower's Product. 41. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, the Grovelot Management Agreement, and the Sub-lease Deed provide that two entities may participate in the Project as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 42. The Constitution establishes the Project and operates as a deed binding all of the Growers and TSL, as Responsible Entity (clause 8.6). The Constitution sets out the terms and conditions under which the Responsible Entity agrees to act and thereby manage the Project. 43. The Responsible Entity must hold the Application Money as a bare trustee for the Applicant. The Application Money paid by any Applicant must be accounted for by the Responsible Entity in a special trust account and such amounts must be placed in one or more bank accounts solely for the purpose of depositing the Application Money for this Project (clause 4). Once the Responsible Entity is satisfied that all documents have been executed and the required finance has been approved for an Applicant, the Application Money is released and applied against the fees payable by the Applicant (clause 9.3). 44. Among other things, the Constitution also sets out provisions relating to: 45. Clause 6.4 of the Constitution provides that, in certain circumstances, Application Moneys may be paid by instalments. TSL have stated that clause 6.4 will not be invoked. However, for the sake of certainty, this Product Ruling will not apply to any Applicant who enters into an arrangement with TSL to pay their Application Moneys by instalments. | Joint Venture: 46. The Constitution also provides for two entities to participate in the Project as Joint Venturers in an unincorporated joint venture (clause 29). Each of the Joint Venturers will be entitled to a Prescribed Proportion of the Joint Venture Assets and any losses realised will be as tenants in common in their Prescribed Proportions. The First Joint Venturer has a 54% Prescribed Proportion and the Second Joint Venturer has a 46% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. 47. A default on the part of one Joint Venturer will constitute a default of both Joint Venturers that comprise the Participant Grower in respect of the Joint Venturer Grovelots. However, the Responsible Entity acknowledges that a Joint Venturer is not liable for any amount or liability exceeding the Joint Venturer's respective Prescribed Portion by reason of any joint liability incurred or joint loss sustained in connection with any contract or arrangement entered into by the Joint Venturer (clause 18.3A). 48. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 49. As required by the Corporations Act 2001 , the Responsible Entity has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that TSL, as the Responsible Entity, manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of the Growers are protected. | Head Leases: 50. The Project will be conducted on 2 properties (Project Land) in north-west Victoria, one known as Anderson TOP 7 (designated as Grove 700) and the other known as Suttons (designated as Grove 300). 51. The Project Land and Water Licences for the Project are owned or will be owned by the Land Owner. The properties will be leased by the Land Owner to TSL (the Lessee) under two Head Leases. Each Head Lease sets out the terms and conditions under which the Land Owner will lease the Project Land to TSL to use and exploit during the Term of the Project. 52. TSL must only use the Project Land in accordance with the Constitution, the Grovelot Management Agreement and the Sub-lease Deed (clause 5.1). The Land Owner consents and authorises TSL to enter into Sub-lease Deed with the Growers (clause 9.2). | Sub-lease Deed: 53. The Grower will enter into a Sub-lease Deed with TSL and the Land Owner, effective from the Commencement Date, to use and occupy their Grovelots for growing and cultivating the Olive Trees for the production of Crop or Product for commercial gain. The Sub-lease Deed will have a Term of approximately 23 years, but may be extended by TSL for a further 2 years on the same terms and conditions if certain threshold conditions are not met over the period from the Commencement Date until 29 June 2029 and TSL is reasonably satisfied that it is in the best interests of the Grower to extend the Term (clauses 4.1 and 4.2). 54. A Grovelot is a stapled lot consisting of separately identifiable parts of the Grove located on two separate properties. The Grower's interest in the Project includes their interests in, and rights in relation to, each stapled and separately identifiable area in the Project Land. Each Grovelot is approximately 0.25 hectares and consists of approximately 0.175 hectares of the Grove 700 Project Land and approximately 0.075 hectares of the Grove 300 Project Land. Each Grower's Grovelot also includes their interest in and rights over the Olive Trees, the Capital Works and the Water Licences attributed to the Project. 55. The Land Owner warrants to the Grower that Grove 700 has been established and that the necessary infrastructure and other capital works have been or will be constructed and carried out by 15 December 2006. 56. The Land Owner also agrees with the Grower that it must, at its own cost, establish or procure the establishment of Grove 300 and construct necessary infrastructure and carry out the necessary capital works, including the irrigation infrastructure by 15 December 2007 (clause 2.2). 57. In accordance with the provisions of the Grovelot Management Agreement, the Land Owner must also fully exploit its Water Licences to enable water to be supplied to the Grovelots by TSL for the benefit of all the Growers during the Term of the Project (clause 3.2). 58. The Grower acknowledges that the Capital Works, Olive Trees and the Water Licences on and attaching to the Grower's Grovelot(s) will at all times remain the property of B.B. Olives Pty Ltd (clause 2.3). 59. The Sub-lease Deed also set out provisions relating to: | Grovelot Management Agreement: 60. Each Grower separately engages TSL as an independent contractor for the Term of the Project to manage their Grovelots, conduct the Project Operations on their behalf and perform the Grove Services in accordance with the Management Plan and Best Horticultural Practices (clauses 5 and 6). 61. Commencing on the later of 1 July 2007 and completion of the planting of the Olive Trees on the Grower's Grovelots, and during each subsequent year of the Project, TSL will provide Grovelot Services, (clause 5.2A), test the maturity of the Olives and where they are ready for harvesting, harvest the mature Olives, (clause 6) and deliver the harvested Olives to delivery point(s) for processing into Product and sale (clause 7). 62. TSL will procure the processing of the Grower's Participating Interest in the Crop and will enter into a Project Document as agent and attorney for the Grower. TSL will market and sell the Grower's Participating Interest in the Product using its reasonable endeavours to seek to maximise returns (clauses 7.1 and 7.2). 63. The Grower agrees that the Crop or Product and the proceeds of sale of the Crop or Produce will be divided pro rata according to the Participating Interest of each of the Growers in the Project in the Crop or Produce (clause 7.3(a)). 64. TSL will be responsible for obtaining and keeping policies of insurance on behalf of the Growers in the Project with a reputable insurer against damage to the Grove, provided that the cost of any such insurance is economically justified. Insurance over the Grove does not include crop insurance unless specifically agreed between TSL and the Grower from year to year (clause 12). 65. Among other things, the Agreement also sets out details of the following: | Capital Works Agreement: 66. The Land Owner engages BBEM as an independent contractor to provide Development Services, to establish the Land having regard to the Establishment Plan, and Best Horticultural Practice. The Development Services include the preparation of the Land, the installation of irrigation facilities, advising the Land Owner on the purchase of Water Licences adequate to meet the requirements of the Grove, erect single wire trellis guards and tree ties and planting of the Olive Trees at an average density of approximately 398 trees per hectare across the whole of the Growers Grovelots (clauses 4.1 and 4.2). 67. The Development Services referred to in clauses 4.1(a) to (f) and 4.2(a) to (c) will have been performed by BBEM by 15 December 2006 in relation to Grove 700. BBEM will also have performed the Development Services referred to in clauses 4.1(a) to (f) and 4.2(a) to (c) in relation to Grove 300 by 15 December 2007. This means that, depending upon when a Post 30 June 2007 Grower is accepted by TSL to participate in the Project, part or all of the Grower's Olive Trees will be already planted. 68. BBEM will replace and replant, at its cost, any Olive Tree that fails within 6 months where the failure is caused by BBEM (clause 4.2(d)). | Management Agreement: 69. TSL engages OML as an independent contractor to manage and administer the Project, manage, direct and conduct the Project Operations on behalf of the Growers and perform the Grove Services. | Olive Grove Management Agreement: 70. OML engages BBEM as an independent contractor to provide Grove Management Services (clause 4), Harvesting Services (clause 5), Olive Oil Processing Services (clause 6) and Technical Services (clause 7). BBEM must carry out the provision of these services in accordance with the Management Plan. | Distribution Agreement: 71. OML engages BBM as distributor to purchase the entire Product produced from the Project. The Agreement provides for BBM to sell the produce on a back-to-back basis, that is, BBM will source and enter agreements with purchasers for the sale of the Product and will complete its obligations under its agreements by purchasing the Product produced by the Project. | Pooling of Crops and Grower's entitlement to Net Proceeds: 72. Both the Constitution (clause 13) and the Grovelot Management Agreement (clauses 7.3 and 14.1) set out provisions relating to the Grower's entitlement to Proceeds. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Fees: 73. Under the terms of the Grovelot Management Agreement and the Sub-lease Deed, a Grower will make payments as described below on a per Grovelot basis. These are as follows: Fees payable under the Grovelot Management Agreement Fees payable under the Sub-lease Deed 74. As noted above, from the 2010 Financial Year the annual fee payable by a Grower will consist of an amount for the estimated costs of operating the Grovelot. The estimated costs of operating the Grovelot for a Financial Year will include an adjustment for the difference between the actual costs and the estimated costs of managing the Grovelot during the preceding Financial Year (clause 11.3(b)). 75. The PDS provides that the ultimate cost to the Grower will depend on the fees the Grower negotiates with TSL or a financial planner. This Product Ruling does not apply to any Grower who does not pay the fees set out in paragraph 73 of this Ruling. Growers who negotiate fees that are different to those set out in paragraph 73 may request a private ruling on the tax consequences of their participation in the Project. Fees payable under the Constitution by Growers as Joint Venturers 76. The fees payable per Grovelot by a Grower who is in Joint Venture with another entity are stipulated in clause 29.5 of the Constitution. Under this clause, the fees for which a Joint Venture Grower will be solely responsible are expressed as percentages of the fees outlined in paragraph 73 of this Ruling. 77. The First Joint Venturer will be solely responsible for paying the following fees and other amounts: 78. The Second Joint Venturer will be solely responsible for paying the following fees and other amounts: | Finance: 79. A Grower who does not pay the Application Monies in full upon application can fund their involvement in the Project by borrowing from Timbercorp Finance Pty Ltd (the Financier), a lender associated with TSL or from an independent lender external to the Project. 80. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with the Financier that materially differs from that set out in the documentation provided to the Tax Office with the application for this Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project other than the Financier may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling. 81. Growers cannot rely on any part of this Ruling if the Application Monies are not paid in full on or before 15 June 2008 by the Grower or, on the Grower's behalf, by a lending institution. Where an application is accepted subject to finance approval by any lending institution other than the Financier, Growers cannot rely on this Ruling if written evidence of that approval has not been given to the Responsible Entity by the lending institution on or before 15 June 2008. | Finance offered by Timbercorp Finance Pty Ltd: 82. Subject to the terms and conditions of the Loan Application Form and Loan Explanation and Loan Terms a Grower can finance the cost of their Application Monies by borrowing that amount from the Financier. 83. Subject to the Financier accepting the Grower's application, the Grower will be bound by the terms and conditions of the Loan Application Form and Loan Explanation and Loan Terms. 84. The Financier will offer Loan Terms on a commercial basis and approve Loan Amounts up to 90% of the Application Money, as well as 90% of the management fee and rent payable by the Grower in the Financial Year ending 30 June 2009. A Grower is required to complete a separate Loan Application Form for each year in which they wish to borrow from the Financier. The Financier will provide a Grower with the loan(s) on a full recourse basis and will pursue legal action against any defaulting borrowers. Details of the loans that will be offered to a Grower by the Financier are set out in the Loan Application Form and Loan Explanation and Loan Terms. 85. Common features contained in the Loan Terms are: 86. The terms specific to the Loan Terms offered by the Financier are summarised below. Rates shown are indicative. 87. This Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features: Commissioner of Taxation 6 December 2006 | Is the Grower carrying on a business?: 88. For the amounts set out in paragraphs 24 and 25 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the 2007 Timbercorp Olive Project must amount to the carrying on of a business of primary production. 89. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 90. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 91. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the 2007 Timbercorp Olive Project. As TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. Having applied these principles to the arrangement set out above, a Grower in the 2007 Timbercorp Olive Project is accepted to be carrying on a business of growing and harvesting Olives for processing into Olive Oil for sale. | Division 328: 92. 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. 93. Changes to the STS rules apply from 1 July 2005. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling (but refer to Taxation Ruling TR 2002/6 and Taxation Ruling TR 2002/11). 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'. | Section 8-1: 94. Other than part of the rent in the initial year, the management fee and rent is deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and, other than part of the rent in the initial year, there is no capital component evident in the management fee (see paragraphs 49 to 51 of TR 2000/8). 95. Subject to paragraphs 96 and 97 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 96. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticultural operation which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that depending upon when they are accepted to participate in the Project, a portion of the initial rent payable by a Grower will be capital expenditure. Therefore, the amount allowed as a deduction for rent under section 8-1 will be allowed as follows. 97. If a Grower enters the Project on or before 31 July 2007 the rent of $500 payable on application for the period from the Commencement Date to 30 June 2008 will be deductible in full. However, Growers accepted to participate in the Project on or after 1 August 2007 and on or before 15 June 2008, will not be entitled to the full deduction. The deduction will be calculated on a pro-rata monthly basis of $41.67 for each month or part month that the Grower is granted the sub-leases to use the Grovelots from TSL. 98. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 101 to 105 of this Ruling) a deduction for the management fees and rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 99. Some Growers may finance their participation in the Project through a Loan Agreement with Timbercorp Finance Pty Ltd. Applying the same principles as that used for the management fee and rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 100. Other than where the prepayment provisions apply (see paragraphs 101 to 105 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 101. 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 (for example, 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. 102. For this Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). Application of the prepayment provisions to this Project 103. Under the Scheme to which this Product Ruling applies management fees and rent are incurred annually and interest payable to Timbercorp Finance Pty Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 104. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays all or some of the expenditure payable under the Grovelot Management Agreement and/or the Sub-lease Deed, or prepays interest under a loan agreement (including loan agreements with lenders other than Timbercorp Finance Pty Ltd). Where such a prepayment is made these prepayment provisions will also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 105. As noted in the Ruling section above, a Grower who prepays fees or interest is not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Division 40: 106. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Olive Trees is of a capital nature. This expenditure falls for consideration under Division 40. | Section 35-55 - exercise of Commissioner's discretion: 107. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years 30 June 2008 to 30 June 2013 the Commissioner has applied the principles set out in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses. Accordingly, based on the evidence supplied, the Commissioner has determined that for those income years ended 30 June 2008 up to and including 30 June 2013: 108. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 109. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 110. The operation of section 82KL of the ITAA 1936 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 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 111. For Part IVA of the ITAA 1936 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). 112. The 2007 Timbercorp Olive Project 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 24 and 25 of this Ruling 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. 113. Grower to whom this Ruling applies intends to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Crop or Product. There are no facts that would suggest that a Grower has the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There is 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) of the ITAA 1936 it cannot be concluded, on the information available, that Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit. 114. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 17. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 28 to 87 of this Ruling. 18. The Grower's participation in the Project must constitute the carrying on of a business of primary production. Provided the Project is carried out as described below, the Grower's business of primary production will commence at the time or execution of their Sub-lease Deed and Grovelot Management Agreement. 19. A Grower is not eligible to claim any tax deductions until the Grower's application to enter the Project is accepted and the Project has commenced. | Division 328: 20. To be an 'STS taxpayer' a Grower must be eligible to be an 'STS taxpayer' and must have elected to be an 'STS taxpayer' (Division 328 of the ITAA 1997). For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different under the STS where a Grower who was an 'STS taxpayer' prior to 1 July 2005 continues to use the cash accounting method (called the 'STS accounting method') - see sections 328-120 and 328-125 of the Income Tax (Transitional Provisions) Act 1997 . 21. For such a Grower, a reference in this Ruling to an amount being deductible when incurred will mean that amount is deductible when paid and a reference to an amount being included in assessable income when 'derived' will mean that amount is included in assessable income when received. | Subdivision 61-J: 22. For the first income year starting on or after 1 July 2005, Subdivision 61-J provides for a tax offset of up to 25% of income tax liability related to the business income of a business in the STS with annual group turnover of less than $75,000. Entitlement to the offset varies depending on the type of entity and is therefore outside the scope of this Ruling. | Section 6-5: 23. 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. | Section 8-1, section 25-25, Division 27 and section 40-515 of the ITAA 1997 and sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936: 24. A Grower may claim tax deductions for the following fees and expenses on a per Grovelot basis, as set out in the Table below. | Notes: 25. A Joint Venture Grower who is in Joint Venture with another entity may claim deductions, on a per Grovelot basis, for the following expenditure set out in the Table and Notes in paragraph 24 of this Ruling: First Joint Venturer Second Joint Venturer | Section 35-55 - exercise of Commissioner's discretion: 26. A Grower who is an individual accepted into the Project by 15 June 2008 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for a Grower for the income years ending 30 June 2008 to 30 June 2013 . This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise. | Sections 82KZME, 82KZMF, 82KL and Part IVA: 27. For a Grower who commences participation in the Project and incurs expenditure as required by the Grovelot Management Agreement and the Sub-lease Deed, the following provisions of the ITAA 1936 have application as indicated: 28. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 29. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme 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 scheme. The effect of these agreements is summarised as follows. 30. 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: 31. The main features for the 2007 Timbercorp Olive Project are as follows: 32. The Project will be registered as a managed investment scheme under the Corporations Act 2001 . TSL is the holder of an Australian Financial Services Licence Number 235653 and will be the Responsible Entity for the Project. 33. The Project will involve cultivating and maintaining Olive Trees for the purpose of harvesting Olives for processing into Olive Oil for sale. 34. An offer to participate in the Project will be made through the 2007 Timbercorp Olive Project Product Disclosure Statement (PDS). The offer under the PDS is for 1,000 hectares in the Project which corresponds to 4,000 Grovelots. Applicants will be invited to subscribe for at least two Grovelots comprising of 0.25 hectares per Grovelot. There is no minimum amount that must be raised under the PDS and TSL will not be accepting oversubscriptions. 35. To participate in the Project Applicants must complete the Application and Power of Attorney Form Booklet attached to the PDS and lodge the completed Booklet together with the relevant Application Money on or before 15 June 2008. The Custodian will be appointed under the Custody Agreement to protect the interests of a Grower in their dealings with the Responsible Entity, Timbercorp Securities Limited (TSL). 36. Under the Power of Attorney, TSL will execute the Grower Agreements on behalf of Applicants who are accepted to participate in the Project as Growers. TSL will also allocate Grovelots to the Grower and place the Grower's details in a Register. 37. A Grower accepted on or after 1 July 2007 and on or before 15 June 2008 will commence participation as a Post 30 June Grower. This Ruling only applies in respect of Post 30 June Growers who are accepted into the Project. Note that a separate Product Ruling PR 2006/154 has issued for Growers accepted into the Project on or before 15 June 2007 . 38. The land on which a Grower will be growing and cultivating Olive Trees for the production of Crop or Produce consists of two properties (the Project Land) known as Anderson TOP 7 and Suttons, located near Boundary Bend in North West Victoria. TSL will enter into Head Leases with B.B. Olives Pty Ltd, (the Land Owner), in respect of the Project Land and Water Licences owned or acquired by the Land Owner. 39. TSL will grant each Grower a sub-lease to use and occupy two or more identifiable Grovelots for the Term of the Project. However, TSL reserves the right to accept applications for less than two Grovelots. 40. A Grower will also enter into a Grovelot Management Agreement with TSL to engage TSL to cultivate and maintain the Olive Trees on the Grower's Grovelots, and be responsible for harvesting the Olive Trees, procuring the processing of the Grower's Crop into Product, and selling the Grower's Product. 41. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, the Grovelot Management Agreement, and the Sub-lease Deed provide that two entities may participate in the Project as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 42. The Constitution establishes the Project and operates as a deed binding all of the Growers and TSL, as Responsible Entity (clause 8.6). The Constitution sets out the terms and conditions under which the Responsible Entity agrees to act and thereby manage the Project. 43. The Responsible Entity must hold the Application Money as a bare trustee for the Applicant. The Application Money paid by any Applicant must be accounted for by the Responsible Entity in a special trust account and such amounts must be placed in one or more bank accounts solely for the purpose of depositing the Application Money for this Project (clause 4). Once the Responsible Entity is satisfied that all documents have been executed and the required finance has been approved for an Applicant, the Application Money is released and applied against the fees payable by the Applicant (clause 9.3). 44. Among other things, the Constitution also sets out provisions relating to: 45. Clause 6.4 of the Constitution provides that, in certain circumstances, Application Moneys may be paid by instalments. TSL have stated that clause 6.4 will not be invoked. However, for the sake of certainty, this Product Ruling will not apply to any Applicant who enters into an arrangement with TSL to pay their Application Moneys by instalments. | Joint Venture: 46. The Constitution also provides for two entities to participate in the Project as Joint Venturers in an unincorporated joint venture (clause 29). Each of the Joint Venturers will be entitled to a Prescribed Proportion of the Joint Venture Assets and any losses realised will be as tenants in common in their Prescribed Proportions. The First Joint Venturer has a 54% Prescribed Proportion and the Second Joint Venturer has a 46% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. 47. A default on the part of one Joint Venturer will constitute a default of both Joint Venturers that comprise the Participant Grower in respect of the Joint Venturer Grovelots. However, the Responsible Entity acknowledges that a Joint Venturer is not liable for any amount or liability exceeding the Joint Venturer's respective Prescribed Portion by reason of any joint liability incurred or joint loss sustained in connection with any contract or arrangement entered into by the Joint Venturer (clause 18.3A). 48. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 49. As required by the Corporations Act 2001 , the Responsible Entity has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that TSL, as the Responsible Entity, manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of the Growers are protected. | Head Leases: 50. The Project will be conducted on 2 properties (Project Land) in north-west Victoria, one known as Anderson TOP 7 (designated as Grove 700) and the other known as Suttons (designated as Grove 300). 51. The Project Land and Water Licences for the Project are owned or will be owned by the Land Owner. The properties will be leased by the Land Owner to TSL (the Lessee) under two Head Leases. Each Head Lease sets out the terms and conditions under which the Land Owner will lease the Project Land to TSL to use and exploit during the Term of the Project. 52. TSL must only use the Project Land in accordance with the Constitution, the Grovelot Management Agreement and the Sub-lease Deed (clause 5.1). The Land Owner consents and authorises TSL to enter into Sub-lease Deed with the Growers (clause 9.2). | Sub-lease Deed: 53. The Grower will enter into a Sub-lease Deed with TSL and the Land Owner, effective from the Commencement Date, to use and occupy their Grovelots for growing and cultivating the Olive Trees for the production of Crop or Product for commercial gain. The Sub-lease Deed will have a Term of approximately 23 years, but may be extended by TSL for a further 2 years on the same terms and conditions if certain threshold conditions are not met over the period from the Commencement Date until 29 June 2029 and TSL is reasonably satisfied that it is in the best interests of the Grower to extend the Term (clauses 4.1 and 4.2). 54. A Grovelot is a stapled lot consisting of separately identifiable parts of the Grove located on two separate properties. The Grower's interest in the Project includes their interests in, and rights in relation to, each stapled and separately identifiable area in the Project Land. Each Grovelot is approximately 0.25 hectares and consists of approximately 0.175 hectares of the Grove 700 Project Land and approximately 0.075 hectares of the Grove 300 Project Land. Each Grower's Grovelot also includes their interest in and rights over the Olive Trees, the Capital Works and the Water Licences attributed to the Project. 55. The Land Owner warrants to the Grower that Grove 700 has been established and that the necessary infrastructure and other capital works have been or will be constructed and carried out by 15 December 2006. 56. The Land Owner also agrees with the Grower that it must, at its own cost, establish or procure the establishment of Grove 300 and construct necessary infrastructure and carry out the necessary capital works, including the irrigation infrastructure by 15 December 2007 (clause 2.2). 57. In accordance with the provisions of the Grovelot Management Agreement, the Land Owner must also fully exploit its Water Licences to enable water to be supplied to the Grovelots by TSL for the benefit of all the Growers during the Term of the Project (clause 3.2). 58. The Grower acknowledges that the Capital Works, Olive Trees and the Water Licences on and attaching to the Grower's Grovelot(s) will at all times remain the property of B.B. Olives Pty Ltd (clause 2.3). 59. The Sub-lease Deed also set out provisions relating to: | Grovelot Management Agreement: 60. Each Grower separately engages TSL as an independent contractor for the Term of the Project to manage their Grovelots, conduct the Project Operations on their behalf and perform the Grove Services in accordance with the Management Plan and Best Horticultural Practices (clauses 5 and 6). 61. Commencing on the later of 1 July 2007 and completion of the planting of the Olive Trees on the Grower's Grovelots, and during each subsequent year of the Project, TSL will provide Grovelot Services, (clause 5.2A), test the maturity of the Olives and where they are ready for harvesting, harvest the mature Olives, (clause 6) and deliver the harvested Olives to delivery point(s) for processing into Product and sale (clause 7). 62. TSL will procure the processing of the Grower's Participating Interest in the Crop and will enter into a Project Document as agent and attorney for the Grower. TSL will market and sell the Grower's Participating Interest in the Product using its reasonable endeavours to seek to maximise returns (clauses 7.1 and 7.2). 63. The Grower agrees that the Crop or Product and the proceeds of sale of the Crop or Produce will be divided pro rata according to the Participating Interest of each of the Growers in the Project in the Crop or Produce (clause 7.3(a)). 64. TSL will be responsible for obtaining and keeping policies of insurance on behalf of the Growers in the Project with a reputable insurer against damage to the Grove, provided that the cost of any such insurance is economically justified. Insurance over the Grove does not include crop insurance unless specifically agreed between TSL and the Grower from year to year (clause 12). 65. Among other things, the Agreement also sets out details of the following: | Capital Works Agreement: 66. The Land Owner engages BBEM as an independent contractor to provide Development Services, to establish the Land having regard to the Establishment Plan, and Best Horticultural Practice. The Development Services include the preparation of the Land, the installation of irrigation facilities, advising the Land Owner on the purchase of Water Licences adequate to meet the requirements of the Grove, erect single wire trellis guards and tree ties and planting of the Olive Trees at an average density of approximately 398 trees per hectare across the whole of the Growers Grovelots (clauses 4.1 and 4.2). 67. The Development Services referred to in clauses 4.1(a) to (f) and 4.2(a) to (c) will have been performed by BBEM by 15 December 2006 in relation to Grove 700. BBEM will also have performed the Development Services referred to in clauses 4.1(a) to (f) and 4.2(a) to (c) in relation to Grove 300 by 15 December 2007. This means that, depending upon when a Post 30 June 2007 Grower is accepted by TSL to participate in the Project, part or all of the Grower's Olive Trees will be already planted. 68. BBEM will replace and replant, at its cost, any Olive Tree that fails within 6 months where the failure is caused by BBEM (clause 4.2(d)). | Management Agreement: 69. TSL engages OML as an independent contractor to manage and administer the Project, manage, direct and conduct the Project Operations on behalf of the Growers and perform the Grove Services. | Olive Grove Management Agreement: 70. OML engages BBEM as an independent contractor to provide Grove Management Services (clause 4), Harvesting Services (clause 5), Olive Oil Processing Services (clause 6) and Technical Services (clause 7). BBEM must carry out the provision of these services in accordance with the Management Plan. | Distribution Agreement: 71. OML engages BBM as distributor to purchase the entire Product produced from the Project. The Agreement provides for BBM to sell the produce on a back-to-back basis, that is, BBM will source and enter agreements with purchasers for the sale of the Product and will complete its obligations under its agreements by purchasing the Product produced by the Project. | Pooling of Crops and Grower's entitlement to Net Proceeds: 72. Both the Constitution (clause 13) and the Grovelot Management Agreement (clauses 7.3 and 14.1) set out provisions relating to the Grower's entitlement to Proceeds. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Fees: 73. Under the terms of the Grovelot Management Agreement and the Sub-lease Deed, a Grower will make payments as described below on a per Grovelot basis. These are as follows: Fees payable under the Grovelot Management Agreement Fees payable under the Sub-lease Deed 74. As noted above, from the 2010 Financial Year the annual fee payable by a Grower will consist of an amount for the estimated costs of operating the Grovelot. The estimated costs of operating the Grovelot for a Financial Year will include an adjustment for the difference between the actual costs and the estimated costs of managing the Grovelot during the preceding Financial Year (clause 11.3(b)). 75. The PDS provides that the ultimate cost to the Grower will depend on the fees the Grower negotiates with TSL or a financial planner. This Product Ruling does not apply to any Grower who does not pay the fees set out in paragraph 73 of this Ruling. Growers who negotiate fees that are different to those set out in paragraph 73 may request a private ruling on the tax consequences of their participation in the Project. Fees payable under the Constitution by Growers as Joint Venturers 76. The fees payable per Grovelot by a Grower who is in Joint Venture with another entity are stipulated in clause 29.5 of the Constitution. Under this clause, the fees for which a Joint Venture Grower will be solely responsible are expressed as percentages of the fees outlined in paragraph 73 of this Ruling. 77. The First Joint Venturer will be solely responsible for paying the following fees and other amounts: 78. The Second Joint Venturer will be solely responsible for paying the following fees and other amounts: | Finance: 79. A Grower who does not pay the Application Monies in full upon application can fund their involvement in the Project by borrowing from Timbercorp Finance Pty Ltd (the Financier), a lender associated with TSL or from an independent lender external to the Project. 80. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with the Financier that materially differs from that set out in the documentation provided to the Tax Office with the application for this Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project other than the Financier may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling. 81. Growers cannot rely on any part of this Ruling if the Application Monies are not paid in full on or before 15 June 2008 by the Grower or, on the Grower's behalf, by a lending institution. Where an application is accepted subject to finance approval by any lending institution other than the Financier, Growers cannot rely on this Ruling if written evidence of that approval has not been given to the Responsible Entity by the lending institution on or before 15 June 2008. | Finance offered by Timbercorp Finance Pty Ltd: 82. Subject to the terms and conditions of the Loan Application Form and Loan Explanation and Loan Terms a Grower can finance the cost of their Application Monies by borrowing that amount from the Financier. 83. Subject to the Financier accepting the Grower's application, the Grower will be bound by the terms and conditions of the Loan Application Form and Loan Explanation and Loan Terms. 84. The Financier will offer Loan Terms on a commercial basis and approve Loan Amounts up to 90% of the Application Money, as well as 90% of the management fee and rent payable by the Grower in the Financial Year ending 30 June 2009. A Grower is required to complete a separate Loan Application Form for each year in which they wish to borrow from the Financier. The Financier will provide a Grower with the loan(s) on a full recourse basis and will pursue legal action against any defaulting borrowers. Details of the loans that will be offered to a Grower by the Financier are set out in the Loan Application Form and Loan Explanation and Loan Terms. 85. Common features contained in the Loan Terms are: 86. The terms specific to the Loan Terms offered by the Financier are summarised below. Rates shown are indicative. 87. This Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features: Commissioner of Taxation 6 December 2006 | Is the Grower carrying on a business?: 88. For the amounts set out in paragraphs 24 and 25 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the 2007 Timbercorp Olive Project must amount to the carrying on of a business of primary production. 89. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 90. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 91. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the 2007 Timbercorp Olive Project. As TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. Having applied these principles to the arrangement set out above, a Grower in the 2007 Timbercorp Olive Project is accepted to be carrying on a business of growing and harvesting Olives for processing into Olive Oil for sale. | Division 328: 92. 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. 93. Changes to the STS rules apply from 1 July 2005. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling (but refer to Taxation Ruling TR 2002/6 and Taxation Ruling TR 2002/11). 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'. | Section 8-1: 94. Other than part of the rent in the initial year, the management fee and rent is deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and, other than part of the rent in the initial year, there is no capital component evident in the management fee (see paragraphs 49 to 51 of TR 2000/8). 95. Subject to paragraphs 96 and 97 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 96. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticultural operation which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that depending upon when they are accepted to participate in the Project, a portion of the initial rent payable by a Grower will be capital expenditure. Therefore, the amount allowed as a deduction for rent under section 8-1 will be allowed as follows. 97. If a Grower enters the Project on or before 31 July 2007 the rent of $500 payable on application for the period from the Commencement Date to 30 June 2008 will be deductible in full. However, Growers accepted to participate in the Project on or after 1 August 2007 and on or before 15 June 2008, will not be entitled to the full deduction. The deduction will be calculated on a pro-rata monthly basis of $41.67 for each month or part month that the Grower is granted the sub-leases to use the Grovelots from TSL. 98. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 101 to 105 of this Ruling) a deduction for the management fees and rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 99. Some Growers may finance their participation in the Project through a Loan Agreement with Timbercorp Finance Pty Ltd. Applying the same principles as that used for the management fee and rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 100. Other than where the prepayment provisions apply (see paragraphs 101 to 105 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 101. 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 (for example, 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. 102. For this Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). Application of the prepayment provisions to this Project 103. Under the Scheme to which this Product Ruling applies management fees and rent are incurred annually and interest payable to Timbercorp Finance Pty Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 104. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays all or some of the expenditure payable under the Grovelot Management Agreement and/or the Sub-lease Deed, or prepays interest under a loan agreement (including loan agreements with lenders other than Timbercorp Finance Pty Ltd). Where such a prepayment is made these prepayment provisions will also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 105. As noted in the Ruling section above, a Grower who prepays fees or interest is not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Division 40: 106. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Olive Trees is of a capital nature. This expenditure falls for consideration under Division 40. | Section 35-55 - exercise of Commissioner's discretion: 107. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years 30 June 2008 to 30 June 2013 the Commissioner has applied the principles set out in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses. Accordingly, based on the evidence supplied, the Commissioner has determined that for those income years ended 30 June 2008 up to and including 30 June 2013: 108. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 109. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 110. The operation of section 82KL of the ITAA 1936 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 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 111. For Part IVA of the ITAA 1936 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). 112. The 2007 Timbercorp Olive Project 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 24 and 25 of this Ruling 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. 113. Grower to whom this Ruling applies intends to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Crop or Product. There are no facts that would suggest that a Grower has the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There is 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) of the ITAA 1936 it cannot be concluded, on the information available, that Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit. 114. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Is the Grower carrying on a business?: 88. For the amounts set out in paragraphs 24 and 25 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the 2007 Timbercorp Olive Project must amount to the carrying on of a business of primary production. 89. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 90. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 91. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the 2007 Timbercorp Olive Project. As TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. Having applied these principles to the arrangement set out above, a Grower in the 2007 Timbercorp Olive Project is accepted to be carrying on a business of growing and harvesting Olives for processing into Olive Oil for sale. | Division 328: 92. 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. 93. Changes to the STS rules apply from 1 July 2005. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling (but refer to Taxation Ruling TR 2002/6 and Taxation Ruling TR 2002/11). 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'. | Section 8-1: 94. Other than part of the rent in the initial year, the management fee and rent is deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and, other than part of the rent in the initial year, there is no capital component evident in the management fee (see paragraphs 49 to 51 of TR 2000/8). 95. Subject to paragraphs 96 and 97 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 96. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticultural operation which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that depending upon when they are accepted to participate in the Project, a portion of the initial rent payable by a Grower will be capital expenditure. Therefore, the amount allowed as a deduction for rent under section 8-1 will be allowed as follows. 97. If a Grower enters the Project on or before 31 July 2007 the rent of $500 payable on application for the period from the Commencement Date to 30 June 2008 will be deductible in full. However, Growers accepted to participate in the Project on or after 1 August 2007 and on or before 15 June 2008, will not be entitled to the full deduction. The deduction will be calculated on a pro-rata monthly basis of $41.67 for each month or part month that the Grower is granted the sub-leases to use the Grovelots from TSL. 98. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 101 to 105 of this Ruling) a deduction for the management fees and rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 99. Some Growers may finance their participation in the Project through a Loan Agreement with Timbercorp Finance Pty Ltd. Applying the same principles as that used for the management fee and rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 100. Other than where the prepayment provisions apply (see paragraphs 101 to 105 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 101. 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 (for example, 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. 102. For this Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). Application of the prepayment provisions to this Project 103. Under the Scheme to which this Product Ruling applies management fees and rent are incurred annually and interest payable to Timbercorp Finance Pty Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 104. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays all or some of the expenditure payable under the Grovelot Management Agreement and/or the Sub-lease Deed, or prepays interest under a loan agreement (including loan agreements with lenders other than Timbercorp Finance Pty Ltd). Where such a prepayment is made these prepayment provisions will also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 105. As noted in the Ruling section above, a Grower who prepays fees or interest is not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Division 40: 106. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Olive Trees is of a capital nature. This expenditure falls for consideration under Division 40. | Section 35-55 - exercise of Commissioner's discretion: 107. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years 30 June 2008 to 30 June 2013 the Commissioner has applied the principles set out in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses. Accordingly, based on the evidence supplied, the Commissioner has determined that for those income years ended 30 June 2008 up to and including 30 June 2013: 108. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 109. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 110. The operation of section 82KL of the ITAA 1936 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 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 111. For Part IVA of the ITAA 1936 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). 112. The 2007 Timbercorp Olive Project 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 24 and 25 of this Ruling 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. 113. Grower to whom this Ruling applies intends to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Crop or Product. There are no facts that would suggest that a Grower has the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There is 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) of the ITAA 1936 it cannot be concluded, on the information available, that Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit.


What this Product Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a taxation provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | No guarantee of commercial success: The Tax Office 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 and how the product fits an existing portfolio. 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 in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. | If the scheme is not carried out as described, participants lose the protection of this Product Ruling. Potential participants may wish to seek assurances from the promoter that the scheme will be carried out as described in this Product Ruling. | Potential participants should be aware that the Tax Office will be undertaking review activities to confirm the scheme has been implemented as described below and to ensure that the participants in the scheme include in their income tax returns income derived in those future years. | What this Product Ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. In this Product Ruling this scheme is referred to as the '2007 Timbercorp Olive Project' or simply as 'the Project'. | $6,900 See Notes (i), (ii) & (iii) | $1,200 and other amounts incurred See Notes (i), (ii), (iii) & (iv) | Operating costs and other amounts incurred See Notes (i), (ii), (iii) & (iv) | Must be calculated - See Notes (i), (ii), (iii) & (v) | $500 See Notes (i), (ii) & (iii) | $600 See Notes (i), (ii) & (iii) | Marketing and Sales costs | As incurred See Note (vi) | Interest on loans with the Financier | As incurred See Notes (iii) & (vii) | Loan Application Fee for loans with the Financier | Must be calculated - See Note (viii) | Establishment of Olive Trees | Type of business to be carried on by each Participant Grower | Commercial growing and cultivation of Olive Trees for the purpose of harvesting Olives for processing into Olive Oil and selling the Olive Oil. | Number of hectares offered for cultivation | 0.25 hectares, of which approximately 70% will be located on Grove 700 and approximately 30% will be located on Grove 300. | 2 Grovelots (TSL may allocate 1 Grovelot at its absolute discretion.) | Number of trees per hectare | 23 years with provision for extension by 2 years if certain cashflow benchmarks are not achieved. | Initial cost per Grovelot | $7,400 (comprising a management fee of $6,900 and rent of $500) | The Simplified Tax System (STS) | 25% entrepreneurs' tax offset | Deductions for management fees, rent, interest, borrowing costs and capital expenditure | Division 35 - deferral of losses from non-commercial business activities | Prepayment provisions and anti-avoidance provisions | Sections 82KZME, 82KZMF and 82KL and Part IVA | The Simplified Tax System | Deductibility of management fees, rent and interest on loans with Timbercorp Finance Pty Ltd | Expenditure of a capital nature | Appendix 2 - Detailed contents list


Related rulings: TR 97/7 TR 97/11 TR 98/22 TR 2000/8 TR 2001/14 TR 2002/6 TR 2002/11 PR 2006/154
Legislative references: ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMB ITAA 1936 82KZMC ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZMF ITAA 1936 Pt IVA 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 Div 27 ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-10(2) ITAA 1997 35-55 ITAA 1997 35-55(1)(b) ITAA 1997 Div 40 ITAA 1997 40-515 ITAA 1997 40-515(1)(b) ITAA 1997 40-520(2) ITAA 1997 40-525(2) ITAA 1997 40-530 ITAA 1997 40-545 ITAA 1997 Subdiv 61-J ITAA 1997 Div 328 ITAA 1997 Subdiv 328-F ITAA 1997 Subdiv 328-G TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968 Corporations Act 2001 IT(TP)A 1997 328-120 IT(TP)A 1997 328-125
Case references: Commissioner of Taxation v. Lau (1984) 6 FCR 202 84 ATC 4929 (1984) 16 ATR 55
Subject references: carrying on a business commencement of business fee expenses interest expenses management fees non-commercial losses producing assessable income product rulings public rulings tax avoidance tax benefits under tax avoidance schemes tax shelters tax shelters project taxation administration