Product Ruling PR 2007/50
Date of effect: 30 May 2007

What this 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 Primary Yield Lamb Project 2007 or simply as 'the Project'. Class of entities 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 Graziers. Graziers 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 38 of this Ruling on or before 31 May 2007. 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: Superannuation Industry (Supervision) Act 1993 5. This Product ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this product may contravene the provisions of SISA 1993. Qualifications 6. 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 38 to 89 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. 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:

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 Graziers. Graziers 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 38 of this Ruling on or before 31 May 2007. 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: | Superannuation Industry (Supervision) Act 1993: 5. This Product ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this product may contravene the provisions of SISA 1993. | Qualifications: 6. 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 38 to 89 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. 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: 9. This Product Ruling applies prospectively from 30 May 2007, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 30 May 2007 until 31 May 2007, 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 for the income years up to 30 June 2009. 10. However the Product Ruling only applies to the extent that: 11. 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)). 12. 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: 13. 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: 14. Although this Product Ruling deals with the laws enacted at the time it was issued, later amendments to the law may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to the extent of those amendments this Product Ruling will be superseded. 15. 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: 16. 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: 17. 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 Grazier) 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: 18. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grazier in the defined class of entities who enters into the scheme described at paragraphs 38 to 89 of this Ruling. 19. The Grazier's participation in the Project must constitute the carrying on of business of primary production. Provided the Project is carried out as described below, the Grazier's business of primary production will commence at the time of execution of their Management Agreement, Lease Agreement and Agistment Agreement, on or before 31 May 2007. | Minimum subscription: 20. A Grazier is not eligible to claim any tax deductions until the Grazier's application to enter the Project is accepted and the Project has commenced. Under the terms of the Information Memorandum, a Grazier's application will not be accepted and the Project will not proceed until applications in respect of 11,000 Stock in aggregate are achieved. | Division 328: 21. To be an 'STS taxpayer' a Grazier 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 Grazier participating in the Project, the recognition of income and the timing of tax deductions is different depending on whether the Grazier was an 'STS taxpayer' prior to 1 July 2005 and 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 . 22. For such Graziers, 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: 23. 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. | Sections 6-5 and 17-5: 24. That part of the gross sales proceeds from the Project attributable to the Grazier's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grazier under section 6-5. | Sections 70-35, 70-45 and 70-55: 25. A Grazier who is not an 'STS taxpayer' may, in some years, hold Progeny, wool or skin that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grazier must include the amount of that excess in assessable income. 26. Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grazier may claim the amount of that excess as an allowable deduction. 27. Under section 70-45, the Grazier can elect to value trading stock on hand at the end of the income year at cost, market selling value or replacement value. Where the Grazier elects to value the trading stock at the end of the income year at cost, 'cost' would include only those expenses incurred until the Progeny, wool or skin became trading stock of the Grazier. 28. Under section 70-55, where the Grazier holds trading stock, being Progeny, that the Grazier acquired by natural increase, the Grazier can elect to value the cost of that Progeny at the actual cost of each animal or the cost prescribed by the regulations for each animal in the applicable class of livestock. | Section 328-285: 29. A Grazier who is an 'STS taxpayer' may, in some years, hold Progeny, wool or skin that will constitute trading stock on hand. Where, for such a Grazier, for an income year, the difference between the value of all their trading stock at the start of an income year and a reasonable estimate of it at the end of the income year, is less than $5,000, they do not have to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)). 30. Alternatively, a Grazier who is an 'STS taxpayer' may instead choose to account for trading stock in an income year under the provisions of Division 70 (subsection 328-285(2)). | Section 8-1 and Division 27 of the ITAA 1997 and sections 82KZME and 82KZMF of the ITAA 1936: 31. A Grazier may claim tax deductions for the following fees and expenses on a per Stock basis, as set out in the Table below. Notes : | Interest: 32. The deductibility or otherwise of interest incurred by Graziers who finance their participation in the Project through a loan facility is outside the scope of this Ruling. Such Graziers may request a private ruling on the deductibility or otherwise of interest under such finance arrangements. | Division 35 - deferral of losses from non-commercial business activities: 33. A Grazier who is an individual accepted into the Project by 31 May 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. 34. Financial projections by Environinvest indicate that in each year of the Scheme the assessable income test in section 35-30 will be met. 35. Where a Grazier satisfies the assessable income test in an income year the Grazier will not be required to defer any loss attributable to their business activity, to a later year. Instead, this loss can be offset against other assessable income of the Grazier for the year in which the loss arises. 36. However, if a Grazier either fails to pass the assessable income test in the income year ended 30 June 2007 or later, or fails to pass one of the other tests in Division 35, they should seek a private ruling on how Division 35 will apply to their business activity for that income year. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 37. For a Grazier who commences participation in the Project and incurs expenditure as required by the Management, Lease and Agistment Agreements, the following provisions of the ITAA 1936 have application as indicated: 38. 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. 39. The documents highlighted are those that a Grazier 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 Grazier, or any associate of a Grazier, will be a party to, which are a part of the scheme. 40. This Ruling does not apply unless the Grazier accepts a personal offer made in accordance with subsection 1012E(5) of the Corporations Act and does not breach the ceilings set in subsections 1012E(6) and (7) of the Corporations Act. Each of these categories is explained in paragraphs 90 to 93 of this Ruling. 41. 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: 42. The main features of the Primary Yield Lamb Project 2007 are as follows: 43. The Project will involve the Grazier in carrying on a business of leasing, grazing sheep and for the production of lamb meat, wool and skin for sale. 44. A personal offer to participate in the scheme will be made through an Information Memorandum. A Grazier that participates in the Project will do so by acquiring an Interest in the Project which consists of a minimum of 300 Grazier Stock. 45. Applicants must complete and sign the Application Form and Power of Attorney contained in the Information Memorandum and make together with the Application Form a payment in full of the Initial Management Fee. 46. The Power of Attorney irrevocably appoints Environinvest to enter into, on behalf of the Grazier, a Lease Agreement, Agistment Agreement and Management Agreement and any other documents required to hold an interest in the Project. 47. Under the terms of the Information Memorandum, the Project will not proceed unless applications for at least 11,000 Stock are received and accepted. The Responsible Entity reserves the right to refuse any application to subscribe for an Interest in the Project. 48. This ruling only applies to Graziers who are accepted to participate in the Project and who have executed the Lease Agreement, the Agistment Agreement and the Management Agreement from the date of this ruling issued to 31 May 2007. 49. A Grazier will enter into a Lease Agreement with Environinvest. The Lease will comprise contractual rights in relation to the Grazier's Stock. Each Grazier will lease a minimum of 300 Stock on the terms and conditions of this agreement. 50. A Grazier will also be granted a licence under an Agistment Agreement to enter onto the Land for the purposes agisting the Grazier's Flock. 51. Under the Management Agreement each Grazier will engage Environinvest as manager of the Grazier's Business to carry out the services under the agreement during the term of the Project. | Constitution: 52. The Constitution establishes the Project and each Grazier irrevocably appoints the Responsible Entity as its agent, representative and attorney in relation to the Project, subject to the terms and conditions of the Constitution and the Project Documents, clause 3. 53. The Responsible Entity will hold bank accounts for the Project, where the Responsible Entity will deposit the Application Money and all money generated from each Grazier's Business and the Project on behalf of the participants, clause 4. 54. To be a Grazier and be issued an interest in the Project, clause 5 states that an Applicant must: 55. This Product Ruling will only apply to Graziers who have their application for an Interest in the Project accepted, project documents executed, issued an Interest and application Money transferred to the Responsible Entity on or before 31 May 2007. 56. Among the other things, the Constitution sets out details summarised as follows: | Lease Agreement: 57. Graziers participating in the scheme will enter into a Lease Agreement with Environinvest to lease a minimum of 300 Stock from the Commencement Date until 30 June in the seventh Subsequent Year, clause 2. 58. Under clause 3 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Lease Fee. Refer to paragraph 84 of this Ruling for details of the Lease Fee. 59. Environinvest warrants that the Grazier's Stock will be free from all abnormalities or genetic defects or deficiencies likely to have a detrimental effect on the Grazier's Stock or the Grazier's Progeny, clause 5. 60. Pursuant to clause 4 the Grazier covenants with Environinvest to ensure that: 61. The Grazier acknowledges that Environinvest may replace the Grazier's Stock with Stock from Reserve Ewes, provided it is in the best interests of the Grazier. Environinvest will update the Register by substituting the initial Sock Identifiers listed in the Register with the Sock Identifiers for the Reserve Ewes, clause 4.2(a). 62. In each Subsequent Year Environinvest, without prior notification to the Grazier, may require the Grazier to sell to Environinvest up to 60% of the Grazier's ewe Progeny that are born in that Subsequent year. The Grazier must sell that ewe Progeny to Environinvest at a price equal to the average price Environinvest obtains for the sale of Cast-for-age ewes, clause 4.2(b). 63. Environinvest warrants that by 20 June of the Application Year the Grazier's Stock will be pregnancy tested and that all the Grazier's Stock will be found to be pregnant. Prior to 20 June in each Subsequent Year, Environinvest will replace any of the Grazier's Stock which have died, are not pregnant or unsuitable for breeding, with sheep found to be pregnant, clause 5. | Agistment Agreement: 64. Environinvest will licence Land for the Project in Kojonup in the south west of Western Australia and Cunnamulla in southern Queensland. Specifically, the property in Kojonup is described as house block number 7083 and the property in Cunnamulla is described as 4490 RDP 11 KU14 & L3 KU18:Parish/Cotto Prop I.D. 3014077 in the Shire of Paroo. 65. From the Commencement Date until 30 June in the seventh Subsequent Year, the Grazier will be granted a licence to enter onto the Land for the purpose of agisting the Grazier's Flock (Stock and Progeny), clause 2.1. 66. Under clause 3 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Agistment Fee. Refer to paragraph 84 of this Ruling for details of the Agistment Fee. 67. The Grazier and Environinvest covenant that the Grazier's Flock will not exceed the carrying capacity of the Land, clauses 4.1(b) and 5(c). 68. Among other things, the Agistment Agreement sets out details summarised as follows: | Management Agreement: 69. Under clause 3 the Grazier appoints Environinvest to manage the Grazier's Business and to carry out the management services subject to the terms and conditions of the Agreement. The Agreement will commence on the Commencement Date and shall continue until its termination under clause 3. 70. Environinvest will commence the provision of the initial management services on or after the Commencement Date and will use all reasonable endeavours to complete the initial management services on or before 30 June 2007, clause 4.1. 71. The initial management services include, amongst other things: 72. Environinvest will provide management services of each Subsequent Year and shall continue to provide the ongoing management services until the termination of this Agreement, clause 4.2. 73. The ongoing management services provided to the Grazier in each Subsequent Year include, amongst other things: 74. Under clause 5 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Initial Management Fee, Management Fee, Performance Bonus Fee and Third Party Expenses. Refer to paragraph 84 of this Ruling for details of these fees. 75. Environinvest will on or prior to 31 May of each Subsequent Year prepare a report for the Grazier containing an estimate of the Grazier's Entitlement and the fees, costs and expenses likely to be payable by the Grazier in accordance with the Project Documents for that Subsequent Year, clause 9(b). 76. Environinvest will pay to the Grazier the Grazier's Entitlement, after the deduction by Environinvest of all fees and expenses for which the Grazier is liable for under this Agreement, the Lease Agreement, the Agistment Agreement and the Constitution, by the end of the Subsequent Year in which the Sale Proceeds are received, clause 6.3. | Third Party Agreements: 77. The Responsible Entity will enter into the following third party agreements. | Stock Lease Agreement: 78. The Responsible Entity will enter into this agreement to secure rights in respect of Stock in order to grant to the Grazier a lease under the Lease Agreement. The Farmer must ensure that the Stock are tested pregnant in lamb and must replace any Stock that do not test pregnant between 15 June 2007 and 20 June 2007 and prior to the Breeding Season each Financial Year. 79. Subject to the direction, supervision and consent of Environinvest, the Farmer will retire and sell any Stock that, in accordance with accepted livestock practices are unfit for breeding, provided always that the Farmer replaces the equivalent number of Stock at the start of each Breeding Season from the Reserve Ewes that test pregnant. 80. Under the terms of this agreement Environinvest, prior to each Breeding Season, must sell to the Farmer an equivalent number of female Progeny produced by the Grazier's Stock to replace any Stock that die or are sold during the immediately proceeding Breeding Season. The Progeny sold to the Farmer will become part of the Reserve Ewes. Environinvest shall not be required to sell more than 60% of the ewe Progeny produced by the Grazier's Stock. | Farmer Agistment Agreement: 81. The Responsible Entity will enter into this agreement to secure a non-exclusive licence to use the Land for the purposes of agisting the Flock. The Farmer covenants with the Responsible Entity: | Farmer Management Agreement and Operations Management Agreement: 82. The Responsible Entity will enter into these agreements to appoint the Farmer and Ausfarm as independent contractors to provide services on the terms and conditions set out in the relevant agreements. | Pooling of Produce and Grazier's Entitlement to Net Proceeds: 83. Clause 6 of the Management Agreement and clause 18 of the Constitution set out provisions relating to the Grazier's Entitlement to participate in the Sale Proceeds from the sale of Produce. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Fees: 84. Under the terms of the Management Agreement, Lease Agreement and Agistment Agreement, a Grazier will make payments as described below on a per Stock basis. 85. If the Grazier's Entitlement in that Subsequent year is insufficient to cover the fees due under the respective Project Agreements, the Grazier must pay the fees the Grazier is liable for under the Project Documents, in full by 30 June of the Subsequent Year to which the fees relate. | Finance: 86. A Grazier can fund their involvement in the Project themselves or borrow from an independent lender external to the Project. 87. A Grazier who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility of interest incurred under the finance arrangement. 88. Graziers cannot rely on any part of this Ruling if the Application Money is not paid in full on or before 31 May 2007 by the Grazier or, on the Grazier's behalf, by a lending institution. 89. This Ruling does not apply if the finance arrangement entered into by the Grazier includes or has any of the following features: Commissioner of Taxation 30 May 2007 | Corporations Act: 90. For this Ruling to apply, an offer for an interest in the Project must be an offer which qualifies as a small scale offering as defined in section 1012E of the Corporations Act. 91. Small scale offers do not require a product disclosure statement. 92. Under section 1012E of the Corporations Act, a Grazier may participate in the Project by accepting a 'personal offer' for an interest in the Project. Offers made under section 1012E cannot be accepted by more than 20 investors in any 12 month period and these investors, in aggregate, must not invest more than $2 million dollars (subsection 1012E(2)). 93. An offer will be a 'personal offer' where it can only be accepted by the person to whom it is made, and it is made to a person who is likely to be interested in the offer because of previous contact, or professional or other connection with the person making the offer, or because they have indicated that they are interested in offers of that kind (subsection 1012E(5) of the Corporations Act). | Is the Grazier carrying on a business?: 94. For the amounts set out in paragraph 31 of this Ruling to constitute allowable deductions the Grazier's sheep breeding activities as a participant in the Primary Yield Lamb Project 2007 must amount to the carrying on of a business of primary production. 95. Two Taxation Rulings are relevant in determining whether a Grazier will be carrying on of a business of primary production. 96. 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? 97. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Primary Yield Lamb Project 2007. As Taxation Ruling 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. 98. Having applied these principles to the arrangement set out above, a Grazier in the Primary Yield Lamb Project 2007 is accepted to be carrying on a business of leasing and grazing sheep and for the production of lamb meat, wool and skin for profit. | Division 328: 99. Subdivision 328-F sets out the eligibility requirements that a Grazier must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS. 100. Changes to the STS rules apply from 1 July 2005. The question of whether a Grazier 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 Grazier 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: 101. The Initial Management Fee, ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are 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 there is no capital component evident in the Initial Management Fee, Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee (see paragraphs 49 to 51 of TR 2000/8). 102. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 103 to 107 of this Ruling) a deduction for these amounts can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) | Sections 82KZL to 82KZMF: 103. 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 Stock or licensing 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. 104. 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: 105. Under the scheme to which this Product Ruling applies ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are incurred annually. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 106. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grazier in this Project prepays all or some of the expenditure payable under the Management, Lease and Agistment Agreements, or prepays interest under a loan agreement. 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. 107. As noted in the Ruling section above, Graziers who prepay fees or interest are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Sections 35-10 and 35-55: 108. A Grazier who is an individual accepted into the Project by 31 May 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. 109. Financial projections by the Responsible Entity indicate that in each year if the Project the assessable income test in section 35-30 will be met. The assessable income test requires that a Grazier derives at least $20,000 of assessable in an income year from their business of selling lambs, wool and skin for profit. For the purposes of the assessable income test in the income year in which the Grazier commences to carry on their Business the Grazier can use a reasonable estimate of what would have been the amount of their assessable income if they had carried on their Business throughout the whole of that financial year. 110. Where a Grazier satisfies the assessable income test in an income year the Grazier will not be required to defer any loss attributable to their business activity, to a later year. Instead, this loss can be offset against other assessable income of the Grazier for the year in which the loss arises. 111. However, if a Grazier either fails to pass the assessable income test in the income year ended 30 June 2007 or later, or fails to pass one of the other tests in Division 35, they should seek a private ruling on how Division 35 will apply to their business activity for that income year. | Section 82KL - recouped expenditure: 112. 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. | Part IVA - general tax avoidance provisions: 113. 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). 114. The Primary Yield Lamb Project 2007 will be a 'scheme'. A Grazier will obtain a 'tax benefit' from entering into the scheme, in the form of tax deductions for the amounts detailed at 31 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. 115. Graziers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the sale of Progeny, wool and skin. There are no facts that would suggest that Graziers have 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 participants will enter into the scheme for the dominant purpose of obtaining a tax benefit. 116. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 18. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grazier in the defined class of entities who enters into the scheme described at paragraphs 38 to 89 of this Ruling. 19. The Grazier's participation in the Project must constitute the carrying on of business of primary production. Provided the Project is carried out as described below, the Grazier's business of primary production will commence at the time of execution of their Management Agreement, Lease Agreement and Agistment Agreement, on or before 31 May 2007. | Minimum subscription: 20. A Grazier is not eligible to claim any tax deductions until the Grazier's application to enter the Project is accepted and the Project has commenced. Under the terms of the Information Memorandum, a Grazier's application will not be accepted and the Project will not proceed until applications in respect of 11,000 Stock in aggregate are achieved. | Division 328: 21. To be an 'STS taxpayer' a Grazier 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 Grazier participating in the Project, the recognition of income and the timing of tax deductions is different depending on whether the Grazier was an 'STS taxpayer' prior to 1 July 2005 and 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 . 22. For such Graziers, 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: 23. 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. | Sections 6-5 and 17-5: 24. That part of the gross sales proceeds from the Project attributable to the Grazier's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grazier under section 6-5. | Sections 70-35, 70-45 and 70-55: 25. A Grazier who is not an 'STS taxpayer' may, in some years, hold Progeny, wool or skin that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grazier must include the amount of that excess in assessable income. 26. Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grazier may claim the amount of that excess as an allowable deduction. 27. Under section 70-45, the Grazier can elect to value trading stock on hand at the end of the income year at cost, market selling value or replacement value. Where the Grazier elects to value the trading stock at the end of the income year at cost, 'cost' would include only those expenses incurred until the Progeny, wool or skin became trading stock of the Grazier. 28. Under section 70-55, where the Grazier holds trading stock, being Progeny, that the Grazier acquired by natural increase, the Grazier can elect to value the cost of that Progeny at the actual cost of each animal or the cost prescribed by the regulations for each animal in the applicable class of livestock. | Section 328-285: 29. A Grazier who is an 'STS taxpayer' may, in some years, hold Progeny, wool or skin that will constitute trading stock on hand. Where, for such a Grazier, for an income year, the difference between the value of all their trading stock at the start of an income year and a reasonable estimate of it at the end of the income year, is less than $5,000, they do not have to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)). 30. Alternatively, a Grazier who is an 'STS taxpayer' may instead choose to account for trading stock in an income year under the provisions of Division 70 (subsection 328-285(2)). | Section 8-1 and Division 27 of the ITAA 1997 and sections 82KZME and 82KZMF of the ITAA 1936: 31. A Grazier may claim tax deductions for the following fees and expenses on a per Stock basis, as set out in the Table below. Notes : | Interest: 32. The deductibility or otherwise of interest incurred by Graziers who finance their participation in the Project through a loan facility is outside the scope of this Ruling. Such Graziers may request a private ruling on the deductibility or otherwise of interest under such finance arrangements. | Division 35 - deferral of losses from non-commercial business activities: 33. A Grazier who is an individual accepted into the Project by 31 May 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. 34. Financial projections by Environinvest indicate that in each year of the Scheme the assessable income test in section 35-30 will be met. 35. Where a Grazier satisfies the assessable income test in an income year the Grazier will not be required to defer any loss attributable to their business activity, to a later year. Instead, this loss can be offset against other assessable income of the Grazier for the year in which the loss arises. 36. However, if a Grazier either fails to pass the assessable income test in the income year ended 30 June 2007 or later, or fails to pass one of the other tests in Division 35, they should seek a private ruling on how Division 35 will apply to their business activity for that income year. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 37. For a Grazier who commences participation in the Project and incurs expenditure as required by the Management, Lease and Agistment Agreements, the following provisions of the ITAA 1936 have application as indicated: 38. 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. 39. The documents highlighted are those that a Grazier 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 Grazier, or any associate of a Grazier, will be a party to, which are a part of the scheme. 40. This Ruling does not apply unless the Grazier accepts a personal offer made in accordance with subsection 1012E(5) of the Corporations Act and does not breach the ceilings set in subsections 1012E(6) and (7) of the Corporations Act. Each of these categories is explained in paragraphs 90 to 93 of this Ruling. 41. 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: 42. The main features of the Primary Yield Lamb Project 2007 are as follows: 43. The Project will involve the Grazier in carrying on a business of leasing, grazing sheep and for the production of lamb meat, wool and skin for sale. 44. A personal offer to participate in the scheme will be made through an Information Memorandum. A Grazier that participates in the Project will do so by acquiring an Interest in the Project which consists of a minimum of 300 Grazier Stock. 45. Applicants must complete and sign the Application Form and Power of Attorney contained in the Information Memorandum and make together with the Application Form a payment in full of the Initial Management Fee. 46. The Power of Attorney irrevocably appoints Environinvest to enter into, on behalf of the Grazier, a Lease Agreement, Agistment Agreement and Management Agreement and any other documents required to hold an interest in the Project. 47. Under the terms of the Information Memorandum, the Project will not proceed unless applications for at least 11,000 Stock are received and accepted. The Responsible Entity reserves the right to refuse any application to subscribe for an Interest in the Project. 48. This ruling only applies to Graziers who are accepted to participate in the Project and who have executed the Lease Agreement, the Agistment Agreement and the Management Agreement from the date of this ruling issued to 31 May 2007. 49. A Grazier will enter into a Lease Agreement with Environinvest. The Lease will comprise contractual rights in relation to the Grazier's Stock. Each Grazier will lease a minimum of 300 Stock on the terms and conditions of this agreement. 50. A Grazier will also be granted a licence under an Agistment Agreement to enter onto the Land for the purposes agisting the Grazier's Flock. 51. Under the Management Agreement each Grazier will engage Environinvest as manager of the Grazier's Business to carry out the services under the agreement during the term of the Project. | Constitution: 52. The Constitution establishes the Project and each Grazier irrevocably appoints the Responsible Entity as its agent, representative and attorney in relation to the Project, subject to the terms and conditions of the Constitution and the Project Documents, clause 3. 53. The Responsible Entity will hold bank accounts for the Project, where the Responsible Entity will deposit the Application Money and all money generated from each Grazier's Business and the Project on behalf of the participants, clause 4. 54. To be a Grazier and be issued an interest in the Project, clause 5 states that an Applicant must: 55. This Product Ruling will only apply to Graziers who have their application for an Interest in the Project accepted, project documents executed, issued an Interest and application Money transferred to the Responsible Entity on or before 31 May 2007. 56. Among the other things, the Constitution sets out details summarised as follows: | Lease Agreement: 57. Graziers participating in the scheme will enter into a Lease Agreement with Environinvest to lease a minimum of 300 Stock from the Commencement Date until 30 June in the seventh Subsequent Year, clause 2. 58. Under clause 3 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Lease Fee. Refer to paragraph 84 of this Ruling for details of the Lease Fee. 59. Environinvest warrants that the Grazier's Stock will be free from all abnormalities or genetic defects or deficiencies likely to have a detrimental effect on the Grazier's Stock or the Grazier's Progeny, clause 5. 60. Pursuant to clause 4 the Grazier covenants with Environinvest to ensure that: 61. The Grazier acknowledges that Environinvest may replace the Grazier's Stock with Stock from Reserve Ewes, provided it is in the best interests of the Grazier. Environinvest will update the Register by substituting the initial Sock Identifiers listed in the Register with the Sock Identifiers for the Reserve Ewes, clause 4.2(a). 62. In each Subsequent Year Environinvest, without prior notification to the Grazier, may require the Grazier to sell to Environinvest up to 60% of the Grazier's ewe Progeny that are born in that Subsequent year. The Grazier must sell that ewe Progeny to Environinvest at a price equal to the average price Environinvest obtains for the sale of Cast-for-age ewes, clause 4.2(b). 63. Environinvest warrants that by 20 June of the Application Year the Grazier's Stock will be pregnancy tested and that all the Grazier's Stock will be found to be pregnant. Prior to 20 June in each Subsequent Year, Environinvest will replace any of the Grazier's Stock which have died, are not pregnant or unsuitable for breeding, with sheep found to be pregnant, clause 5. | Agistment Agreement: 64. Environinvest will licence Land for the Project in Kojonup in the south west of Western Australia and Cunnamulla in southern Queensland. Specifically, the property in Kojonup is described as house block number 7083 and the property in Cunnamulla is described as 4490 RDP 11 KU14 & L3 KU18:Parish/Cotto Prop I.D. 3014077 in the Shire of Paroo. 65. From the Commencement Date until 30 June in the seventh Subsequent Year, the Grazier will be granted a licence to enter onto the Land for the purpose of agisting the Grazier's Flock (Stock and Progeny), clause 2.1. 66. Under clause 3 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Agistment Fee. Refer to paragraph 84 of this Ruling for details of the Agistment Fee. 67. The Grazier and Environinvest covenant that the Grazier's Flock will not exceed the carrying capacity of the Land, clauses 4.1(b) and 5(c). 68. Among other things, the Agistment Agreement sets out details summarised as follows: | Management Agreement: 69. Under clause 3 the Grazier appoints Environinvest to manage the Grazier's Business and to carry out the management services subject to the terms and conditions of the Agreement. The Agreement will commence on the Commencement Date and shall continue until its termination under clause 3. 70. Environinvest will commence the provision of the initial management services on or after the Commencement Date and will use all reasonable endeavours to complete the initial management services on or before 30 June 2007, clause 4.1. 71. The initial management services include, amongst other things: 72. Environinvest will provide management services of each Subsequent Year and shall continue to provide the ongoing management services until the termination of this Agreement, clause 4.2. 73. The ongoing management services provided to the Grazier in each Subsequent Year include, amongst other things: 74. Under clause 5 Environinvest is entitled to be paid, or reimbursed from the Grazier's Entitlement, the Initial Management Fee, Management Fee, Performance Bonus Fee and Third Party Expenses. Refer to paragraph 84 of this Ruling for details of these fees. 75. Environinvest will on or prior to 31 May of each Subsequent Year prepare a report for the Grazier containing an estimate of the Grazier's Entitlement and the fees, costs and expenses likely to be payable by the Grazier in accordance with the Project Documents for that Subsequent Year, clause 9(b). 76. Environinvest will pay to the Grazier the Grazier's Entitlement, after the deduction by Environinvest of all fees and expenses for which the Grazier is liable for under this Agreement, the Lease Agreement, the Agistment Agreement and the Constitution, by the end of the Subsequent Year in which the Sale Proceeds are received, clause 6.3. | Third Party Agreements: 77. The Responsible Entity will enter into the following third party agreements. | Stock Lease Agreement: 78. The Responsible Entity will enter into this agreement to secure rights in respect of Stock in order to grant to the Grazier a lease under the Lease Agreement. The Farmer must ensure that the Stock are tested pregnant in lamb and must replace any Stock that do not test pregnant between 15 June 2007 and 20 June 2007 and prior to the Breeding Season each Financial Year. 79. Subject to the direction, supervision and consent of Environinvest, the Farmer will retire and sell any Stock that, in accordance with accepted livestock practices are unfit for breeding, provided always that the Farmer replaces the equivalent number of Stock at the start of each Breeding Season from the Reserve Ewes that test pregnant. 80. Under the terms of this agreement Environinvest, prior to each Breeding Season, must sell to the Farmer an equivalent number of female Progeny produced by the Grazier's Stock to replace any Stock that die or are sold during the immediately proceeding Breeding Season. The Progeny sold to the Farmer will become part of the Reserve Ewes. Environinvest shall not be required to sell more than 60% of the ewe Progeny produced by the Grazier's Stock. | Farmer Agistment Agreement: 81. The Responsible Entity will enter into this agreement to secure a non-exclusive licence to use the Land for the purposes of agisting the Flock. The Farmer covenants with the Responsible Entity: | Farmer Management Agreement and Operations Management Agreement: 82. The Responsible Entity will enter into these agreements to appoint the Farmer and Ausfarm as independent contractors to provide services on the terms and conditions set out in the relevant agreements. | Pooling of Produce and Grazier's Entitlement to Net Proceeds: 83. Clause 6 of the Management Agreement and clause 18 of the Constitution set out provisions relating to the Grazier's Entitlement to participate in the Sale Proceeds from the sale of Produce. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Fees: 84. Under the terms of the Management Agreement, Lease Agreement and Agistment Agreement, a Grazier will make payments as described below on a per Stock basis. 85. If the Grazier's Entitlement in that Subsequent year is insufficient to cover the fees due under the respective Project Agreements, the Grazier must pay the fees the Grazier is liable for under the Project Documents, in full by 30 June of the Subsequent Year to which the fees relate. | Finance: 86. A Grazier can fund their involvement in the Project themselves or borrow from an independent lender external to the Project. 87. A Grazier who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility of interest incurred under the finance arrangement. 88. Graziers cannot rely on any part of this Ruling if the Application Money is not paid in full on or before 31 May 2007 by the Grazier or, on the Grazier's behalf, by a lending institution. 89. This Ruling does not apply if the finance arrangement entered into by the Grazier includes or has any of the following features: Commissioner of Taxation 30 May 2007 | Corporations Act: 90. For this Ruling to apply, an offer for an interest in the Project must be an offer which qualifies as a small scale offering as defined in section 1012E of the Corporations Act. 91. Small scale offers do not require a product disclosure statement. 92. Under section 1012E of the Corporations Act, a Grazier may participate in the Project by accepting a 'personal offer' for an interest in the Project. Offers made under section 1012E cannot be accepted by more than 20 investors in any 12 month period and these investors, in aggregate, must not invest more than $2 million dollars (subsection 1012E(2)). 93. An offer will be a 'personal offer' where it can only be accepted by the person to whom it is made, and it is made to a person who is likely to be interested in the offer because of previous contact, or professional or other connection with the person making the offer, or because they have indicated that they are interested in offers of that kind (subsection 1012E(5) of the Corporations Act). | Is the Grazier carrying on a business?: 94. For the amounts set out in paragraph 31 of this Ruling to constitute allowable deductions the Grazier's sheep breeding activities as a participant in the Primary Yield Lamb Project 2007 must amount to the carrying on of a business of primary production. 95. Two Taxation Rulings are relevant in determining whether a Grazier will be carrying on of a business of primary production. 96. 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? 97. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Primary Yield Lamb Project 2007. As Taxation Ruling 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. 98. Having applied these principles to the arrangement set out above, a Grazier in the Primary Yield Lamb Project 2007 is accepted to be carrying on a business of leasing and grazing sheep and for the production of lamb meat, wool and skin for profit. | Division 328: 99. Subdivision 328-F sets out the eligibility requirements that a Grazier must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS. 100. Changes to the STS rules apply from 1 July 2005. The question of whether a Grazier 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 Grazier 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: 101. The Initial Management Fee, ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are 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 there is no capital component evident in the Initial Management Fee, Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee (see paragraphs 49 to 51 of TR 2000/8). 102. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 103 to 107 of this Ruling) a deduction for these amounts can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) | Sections 82KZL to 82KZMF: 103. 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 Stock or licensing 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. 104. 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: 105. Under the scheme to which this Product Ruling applies ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are incurred annually. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 106. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grazier in this Project prepays all or some of the expenditure payable under the Management, Lease and Agistment Agreements, or prepays interest under a loan agreement. 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. 107. As noted in the Ruling section above, Graziers who prepay fees or interest are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Sections 35-10 and 35-55: 108. A Grazier who is an individual accepted into the Project by 31 May 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. 109. Financial projections by the Responsible Entity indicate that in each year if the Project the assessable income test in section 35-30 will be met. The assessable income test requires that a Grazier derives at least $20,000 of assessable in an income year from their business of selling lambs, wool and skin for profit. For the purposes of the assessable income test in the income year in which the Grazier commences to carry on their Business the Grazier can use a reasonable estimate of what would have been the amount of their assessable income if they had carried on their Business throughout the whole of that financial year. 110. Where a Grazier satisfies the assessable income test in an income year the Grazier will not be required to defer any loss attributable to their business activity, to a later year. Instead, this loss can be offset against other assessable income of the Grazier for the year in which the loss arises. 111. However, if a Grazier either fails to pass the assessable income test in the income year ended 30 June 2007 or later, or fails to pass one of the other tests in Division 35, they should seek a private ruling on how Division 35 will apply to their business activity for that income year. | Section 82KL - recouped expenditure: 112. 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. | Part IVA - general tax avoidance provisions: 113. 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). 114. The Primary Yield Lamb Project 2007 will be a 'scheme'. A Grazier will obtain a 'tax benefit' from entering into the scheme, in the form of tax deductions for the amounts detailed at 31 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. 115. Graziers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the sale of Progeny, wool and skin. There are no facts that would suggest that Graziers have 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 participants will enter into the scheme for the dominant purpose of obtaining a tax benefit. 116. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Corporations Act: 90. For this Ruling to apply, an offer for an interest in the Project must be an offer which qualifies as a small scale offering as defined in section 1012E of the Corporations Act. 91. Small scale offers do not require a product disclosure statement. 92. Under section 1012E of the Corporations Act, a Grazier may participate in the Project by accepting a 'personal offer' for an interest in the Project. Offers made under section 1012E cannot be accepted by more than 20 investors in any 12 month period and these investors, in aggregate, must not invest more than $2 million dollars (subsection 1012E(2)). 93. An offer will be a 'personal offer' where it can only be accepted by the person to whom it is made, and it is made to a person who is likely to be interested in the offer because of previous contact, or professional or other connection with the person making the offer, or because they have indicated that they are interested in offers of that kind (subsection 1012E(5) of the Corporations Act). | Is the Grazier carrying on a business?: 94. For the amounts set out in paragraph 31 of this Ruling to constitute allowable deductions the Grazier's sheep breeding activities as a participant in the Primary Yield Lamb Project 2007 must amount to the carrying on of a business of primary production. 95. Two Taxation Rulings are relevant in determining whether a Grazier will be carrying on of a business of primary production. 96. 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? 97. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Primary Yield Lamb Project 2007. As Taxation Ruling 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. 98. Having applied these principles to the arrangement set out above, a Grazier in the Primary Yield Lamb Project 2007 is accepted to be carrying on a business of leasing and grazing sheep and for the production of lamb meat, wool and skin for profit. | Division 328: 99. Subdivision 328-F sets out the eligibility requirements that a Grazier must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS. 100. Changes to the STS rules apply from 1 July 2005. The question of whether a Grazier 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 Grazier 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: 101. The Initial Management Fee, ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are 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 there is no capital component evident in the Initial Management Fee, Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee (see paragraphs 49 to 51 of TR 2000/8). 102. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 103 to 107 of this Ruling) a deduction for these amounts can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) | Sections 82KZL to 82KZMF: 103. 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 Stock or licensing 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. 104. 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: 105. Under the scheme to which this Product Ruling applies ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee are incurred annually. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 106. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grazier in this Project prepays all or some of the expenditure payable under the Management, Lease and Agistment Agreements, or prepays interest under a loan agreement. 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. 107. As noted in the Ruling section above, Graziers who prepay fees or interest are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project. | Sections 35-10 and 35-55: 108. A Grazier who is an individual accepted into the Project by 31 May 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. 109. Financial projections by the Responsible Entity indicate that in each year if the Project the assessable income test in section 35-30 will be met. The assessable income test requires that a Grazier derives at least $20,000 of assessable in an income year from their business of selling lambs, wool and skin for profit. For the purposes of the assessable income test in the income year in which the Grazier commences to carry on their Business the Grazier can use a reasonable estimate of what would have been the amount of their assessable income if they had carried on their Business throughout the whole of that financial year. 110. Where a Grazier satisfies the assessable income test in an income year the Grazier will not be required to defer any loss attributable to their business activity, to a later year. Instead, this loss can be offset against other assessable income of the Grazier for the year in which the loss arises. 111. However, if a Grazier either fails to pass the assessable income test in the income year ended 30 June 2007 or later, or fails to pass one of the other tests in Division 35, they should seek a private ruling on how Division 35 will apply to their business activity for that income year. | Section 82KL - recouped expenditure: 112. 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. | Part IVA - general tax avoidance provisions: 113. 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). 114. The Primary Yield Lamb Project 2007 will be a 'scheme'. A Grazier will obtain a 'tax benefit' from entering into the scheme, in the form of tax deductions for the amounts detailed at 31 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. 115. Graziers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the sale of Progeny, wool and skin. There are no facts that would suggest that Graziers have 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 participants will enter into the scheme for the dominant purpose of obtaining a tax benefit.


What this 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. | $91.30 See Notes (i) & (ii) | $31.90 plus indexation See Notes (i), (iii) & (iv) | $20.90 plus indexation See Notes (i), (iii) & (iv) | $5.40 plus indexation See Notes (i), (iii) & (iv) | $26.40 plus indexation See Notes (i), (iii) & (iv) | As incurred See Notes (i), (iii) & (iv) | Type of business each participant will be carrying on | Medium term commercial breeding and production of lambs, wool and skin and selling for profit. | 7 Subsequent Years after the Application Year | Number of ewes involved in the breeding program | Up to 14,000 ewes (Stock) | Minimum allocation per Grazier | The Simplified Tax System (STS) | 25% entrepreneurs tax offset | Deduction for Initial Management Fee, ongoing Management Fees, Third Party Expenses, Performance Bonus Fee, Lease Fee and Agistment Fee | Prepayment provisions and anti-avoidance provisions | The Simplified Tax System | Division 35 - deferral of losses from non-commercial business activities and the Commissioner's discretion | 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
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 1936 318 ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 17-5 ITAA 1997 Div 27 ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-30 ITAA 1997 35-55 ITAA 1997 Subdiv 61-J ITAA 1997 Div 70 ITAA 1997 70-35 ITAA 1997 70-45 ITAA 1997 70-55 ITAA 1997 Div 328 ITAA 1997 328-285 ITAA 1997 328-285(1) ITAA 1997 328-285(2) ITAA 1997 Subdiv 328-F ITAA 1997 Subdiv 328-G IT(TP)A 1997 328-120 IT(TP)A 1997 328-125 TAA 1953 TAA 1953 Sch 1 357-75(1) SISA 1993 Copyright Act 1968 Corporations Act 2001 Corporations Act 2001 1012E(2) Corporations Act 2001 1012E(5) Corporations Act 2001 1012E(6) Corporations Act 2001 1012E(7)
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 management fees non-commercial losses producing assessable income product rulings public rulings tax avoidance taxation administration trading stock