Product Ruling PR 2007/41
Date of effect: 2 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 'Gunns Plantations Walnut Project No. 2' or simply as 'the Scheme'. 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 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 Scheme Agreements set out in paragraph 34 of this Ruling on or before 15 June 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 34 to 83 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 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 Scheme Agreements set out in paragraph 34 of this Ruling on or before 15 June 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 34 to 83 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 2 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 2 May 2007 until 15 June 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 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: 18. 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 34 to 83 of this Ruling. 19. The Grower's participation in the Scheme must constitute the carrying on of business of primary production. Provided the Scheme is carried out as described below, the Grower's business of primary production will commence at the time of execution of their Management Agreement and an Orchard Right Agreement, on or before 15 June 2007. | 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 Scheme, the recognition of income and the timing of tax deductions is different depending on whether the Grower 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 . 21. For such Growers, 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. | Sections 6-5 and 17-5: 23. That part of the gross sales proceeds from the Scheme 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 and Division 27 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 expenditure set out in the Table below on a per Walnut Lot basis. | Joint Venturers: 25. If a Joint Venturer is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (for example, input tax credits): Division 27. 26. A Joint Venturer may claim deductions under section 8-1, 25-25 and 40-630 for the expenditures, set out in the table and Notes of paragraph 24 and paragraph 31 of this Ruling, as follows: 27. Each Joint Venturer can also claim deductions for 50% share of the horticultural plant write-off as explained in paragraphs 28 to 30 of this Ruling. | Division 40: 28. A Grower will be entitled to tax deductions relating to the cost of establishing the Walnut Trees under Subdivision 40-F and in relation to a 'landcare operation' under Subdivision 40-G. If the Grower is registered or required to be registered for GST, amounts of outgoings would need to be adjusted as relevant for GST (for example input tax credits): Division 27. 29. A Walnut Tree is considered to be a 'horticultural plant' as defined in subsection 40-520(2). A Grower holds an Orchard Right to cultivate the Walnut Trees on a designated area of land called a Walnut Lot for the growing of Walnuts for commercial gain. As a Grower holds an Orchard Right over the land, one of the conditions in subsection 40-525(2) is met and a deduction for 'horticultural plants' is available under paragraph 40-515(1)(b) for their decline in value. 30. The deduction is determined using the formula in section 40-545. Walnut Trees have an 'effective life' of 25 years and for the purposes of section 40-545, the result is a straight-line write-off at a rate of 13%. The deduction is allowable when the Walnut Trees enter their first commercial season (section 40-530, item 2). GPL will advise Growers about the amount of tax deduction that they are entitled to each year in relation to the establishment of Walnut Trees. 31. The capital expenditure of $288.20 incurred in respect of native vegetation management is considered a 'landcare operation' (as defined in section 40-635) and is fully deductible in the year it is incurred under Subdivision 40-G, section 40-630. | Section 35-55 - exercise of Commissioner's discretion: 32. A Grower, who is an individual accepted into the Project by 15 June 2007 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 individual Growers as follows: 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 and 82KL and Part IVA: 33. For a Grower who commences participation in the Project and incurs expenditure as required by the Orchard Right Agreement and Management Agreement, the following provisions of the ITAA 1936 have application as indicated: 34. 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. 35. 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. 36. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 37. The main features of the Gunns Plantations Walnut Project No. 2 are as follows: 38. The Scheme will be a registered as a managed investment scheme under the Corporations Act 2001 . Applications to participate in the Scheme must be made during the offer period which is: 39. For the purposes of this Ruling, Growers whose applications are accepted on or before 15 June 2007 will become 'Early Growers'. This Ruling only applies to 'Early Growers'. In this Ruling 'Early Growers' are referred to as 'Growers'. Note that a separate Product Ruling will issue for 'Late Growers' who are accepted into the Scheme from 1 July 2007 to 13 June 2008. 40. An offer to participate in the Scheme will be made through a Product Disclosure Statement (PDS) for 6,000 Walnut Lots which comprises of 1,200 hectares of land. The offer to participate in the Scheme must be made through an 'Application and Power of Attorney Form' in the PDS. 41. Growers will enter into an Orchard Right Agreement with GPL. The Orchard Right will comprise contractual rights in relation to a parcel of land of 0.2 hectares called a Walnut Lot. 42. Each Walnut Lot will have approximately 62 Walnut Trees on it. Approximately 0.07 hectares of each Walnut Lot will be Existing Orchard (established prior to 1 January 2007) and 0.13 hectares will be New Orchard (established by 31 October 2007). 43. Growers will also enter into a Management Agreement to contract with GPL to undertake Initial Services, Maintenance Services and Harvest and Processing Services. 44. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, the Management Agreement, and the Orchard Right Agreement provide that two entities may participate in the Scheme as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 45. The Constitution for the Scheme sets out the general functions, powers and duties under which the Responsible Entity agrees to act for the Growers and to manage the Scheme. The Orchard Right Agreement and the Management Agreement are Schedules to the Constitution. These Agreements will be executed on behalf of each Grower who has signed the 'Application and Power of Attorney Form' attached to the PDS and who is accepted into the Scheme. After acceptance and execution of the Agreements, Growers are bound by the Constitution by virtue of their participation in the Scheme. 46. On acceptance of an application, the Responsible Entity will allocate the Walnut Lot(s) to the Grower and prepare the Orchard Right Agreement and Management Agreement in accordance with clause 7. 47. Before authorising or instructing the Custodian to release the Application Money, the Responsible Entity in accordance with clause 8 must be satisfied, among other things, that: 48. The Responsible Entity is entitled to receive fees in accordance with clause 12 and may instruct the Custodian to invest all or part of the 'Proceeds Portion' and 'Application Portion' in accordance with clause 13. 49. Among other things the Constitution sets out in detail the following: | Joint Venture: 50. The Constitution also provides for two entities to enter the Scheme as Joint Venturers in an unincorporated joint venture (clause 5). Each of the Joint Venturers will be entitled to their Prescribed Proportion of the Joint Venture and any losses realised will be as tenants in common in their Prescribed Proportions. The First Joint Venturer has a 50% Prescribed Proportion and the Second Joint Venturer has a 50% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 51. As required by the Corporations Act 2001, GPL has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that GPL manages the Scheme in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Lease Agreement: 52. Under this Agreement Gunns as Landowner will lease the Scheme land to GPL. Gunns undertakes to carry out all Establishment Works including the installation of Orchard Infrastructure before 15 June 2007 (clause 9). The Orchard Infrastructure includes irrigation systems comprising of pumps, filters, main lines, sumps, dams, channels and drainage systems. Gunns also undertakes to plant the Walnut Trees on or before 31 October 2007. | Orchard Right Agreement: 53. Growers will enter into the Orchard Right Agreement in respect of a Walnut Lot(s) with GPL for the 'Term' of the Scheme. 54. Under clause 3, GPL will grant to a Grower an Orchard Right over the Walnut Lot(s) which includes the following: 55. The Agreement also sets out: | Management Agreement: 56. The Grower engages GPL as Manager to cultivate the Grower's Walnut Lot(s) and to carry out the Maintenance Services (clause 5) subject to the terms and conditions of this Agreement for the term of the agreement. 57. The term of the agreement may be extended by a period of 2 years at the Manager's discretion if the scheme does not reach an IRR of 9.5% (clause 2). 58. GPL will manage and cultivate the Walnut Lot(s) on behalf of the Grower in accordance with good horticultural practice (clauses 5 and 6). 59. GPL can delegate its obligations under this Agreement but delegation of the obligations does not release GPL from liability under this agreement (clause 26). 60. GPL must complete all of the Initial Services in relation to the Grower's Walnut Lot(s) before 30 June 2007 (clause 4), in return for the Initial Service Fee (clause 9.1). 61. The Agreement also stipulates the services to be provided after 30 June 2007 and each subsequent year. GPL will perform the Maintenance Services in a proper and efficient manner (clause 5), in return for the Operating Fee (clause 9.3). 62. GPL must cause its obligations in relation to harvesting and processing of Walnuts to be carried out in a proper and efficient manner and in accordance with good horticultural practice (clause 6). 63. The Grower appoints GPL to sell Walnuts Harvested from the Grower's Trees (clause 10). | Pooling of amounts and distribution of proceeds: 64. The Constitution and the Management Agreement set out provisions relating to the pooling of amounts held by Gunns on behalf of Growers. This Product Ruling only applies where the following principles apply to the pooling and distribution schemes: | Initial Services Sub-contracting Agreement and Maintenance and Harvest Services Sub-contracting Agreement: 65. GPL engages Gunns as its sub-contractor, to perform Initial Services under Initial Services Sub-contracting Agreement, and Maintenance and Harvest Services under the Maintenance and Harvest Services Sub-contracting Agreement, in accordance with the terms and conditions set out in these Agreements. This is in accordance with clause 26 of the Management Agreement under which GPL can delegate its obligations under that Agreement. | Walnut Sale Agreement and Deed Poll: 66. GPL, as agent for each Grower will enter into a Walnut Sale Agreement for the sale of Grower's Walnuts. The Deed poll records Webster's commitment to enter into an agreement to purchase Walnuts on terms no less favourable than those in the Walnut Sale Agreement which among other conditions requires Webster to acquire at least 75% of the Walnut harvest. | Scheme Fees: 67. Varied by Indexation means where a fee is to be varied by indexation, the new fee will be the current fee: | Application Fee: 68. The Grower must pay an Application Fee of $6,424 per Walnut Lot payable on Application which will be applied towards the following: | Ongoing Fees: 69. Ongoing Fees mean the fees payable under the Orchard Right Agreement and the Management Agreement from and including the year ending 30 June 2008. These are described under paragraphs 70 and 71 of this Ruling. | Orchard Right Agreement Fees: 70. For the year ending 30 June 2008, the Orchard Right Fee of $220 is payable by a Grower on 1 June 2008. Thereafter, the annual Orchard Right Fee will be the Orchard Right Fee on the immediately preceding 1 June, varied by indexation, and payable on 1 June of each subsequent year. | Management Agreement Fees: 71. Operating Fee payments payable by a Grower on a per Walnut Lot basis are as follows: In addition from the year ending 30 June 2010: | Joint Venture - Fees: 72. The fees to which a Joint Venture Grower will be solely responsible for are stipulated in clause 5 of the Constitution and are expressed as percentages of the fees outlined in paragraphs 68 to 71 of this Ruling. These percentages are as follows: | Finance: 73. Each Grower can fund their involvement in the Scheme as follows: 74. Growers cannot rely on this Product Ruling if they enter into a finance package with Gunns Finance or Allco Managed Investments that materially differs from those provided to the Tax Office by GPL with the application for this Product Ruling. These finance packages are summarised below. | Terms Agreement: 75. If GPL accepts that the Application Fee of $6,424 can be paid under a Terms Arrangement the Grower must complete a terms application and Direct Debit Authority. The Grower will be required to pay their application fee as follows: | Finance by Gunns Finance: 76. The loans offered by Gunns Finance are Principal and Interest loans with terms of 3, 5, 10 or 15 years. The key features of the finance package are: 77. The deposit required to fund the loan may be varied, at the absolute discretion of Gunns Finance, between 0 to 20% of the Application Fee. 78. The Borrower agrees to repay the Loan, and pay interest and all Outstanding Monies by paying by direct debit the Repayment Amount, to Gunns Finance, on the Repayment Date of each month during the term as detailed in the Loan Schedule, and all other Outstanding Monies on the Final Repayment Date. 79. In the event of an early repayment of some or all of the Outstanding Balance, a break fee of $400 will become immediately due and payable. | Finance by Allco Managed Investments: 80. Allco Managed Investments offers 3 types of loans. The first type is a loan with monthly principal and interest repayments and may be for 3, 5, 10 or 15 years. The second type of loan involves a two year interest only period followed by monthly principal and interest repayments and may be for 5, 7 or 10 years duration in total. The third type of loan is for a three year interest only period followed by monthly principal and interest repayments and may be for 6, 10 or 15 years duration in total. Common features contained in each of these loans are: 81. A Grower cannot rely on any part of this Product Ruling if the Application Fee, other than an application fee payable subject to a finance arrangement or a Terms Agreement, is not paid in full by 15 June 2007. Where an application is accepted by GPL, subject to finance approval by any lending institution, a Grower cannot rely on this Ruling if written evidence of that approval has not been given to GPL by 15 June 2007. | Fee Facility by Gunns Finance: 82. Gunns Finance will also offer finance for 90 percent of the Ongoing Fees payable by the Grower in the financial years ending 30 June 2008 to 30 June 2011 inclusive. Gunns Finance will provide the Grower with the loan(s) on a full recourse basis and will pursue legal action against any defaulting borrowers. Details of the finance that will be offered to a Grower to fund the Ongoing Fees in those years by Gunns Finance are set out in the Fee Facility Deed. The key features of the Fee Facility Deed are: 83. 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 2 May 2007 | Is the Grower carrying on a business?: 84. For the amounts set out in paragraphs 24 to 31 of this Ruling to constitute allowable deductions the Grower's Walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 2 must amount to the carrying on of a business of primary production. 85. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 86. 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? 87. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Gunns Plantations Walnut Project No. 2. 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. 88. Having applied these principles to the arrangement set out above, a Grower in the Gunns Plantations Walnut Project No. 2 is accepted to be carrying on a business of growing and harvesting walnuts for sale. | Division 328: 89. 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. 90. 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: 91. The Initial Services Fee (excluding the expenditure of $288.20 on 'land care') and Orchard Right 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 Services Fee and Orchard Right Fee (see paragraphs 49 to 51 of TR 2000/8). 92. The tests of deductibility under the first limb of section 8-1 are met with the exception of the capital expenditure of $288.20 on land care. Provided that the prepayment provisions do not apply (see paragraphs 97 to 99 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.) 93. Some Growers may finance their participation in the Scheme through a Loan Agreement with Gunns Finance or Allco Managed Investments. Applying the same principles as that used for the Initial Services Fee and Orchard Right Fee, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 94. Other than where the prepayment provisions apply (see paragraphs 97 to 99 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZME, 82KZMF and 82KZL: 95. 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. 96. For this Scheme, 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 Scheme: 97. Under the scheme to which this Product Ruling applies Project fees under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance or Allco Managed Investments is incurred monthly. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 98. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Scheme prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under a loan agreement (including loan agreements with lenders other than Gunns Finance or Allco Managed Investments). 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. 99. As noted in the Ruling section above, Growers 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 Scheme. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 100. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 32 of this Ruling, the Commissioner has determined that based on the evidence supplied for those income years: 101. A Grower who would otherwise be required to defer a loss arising from their participation in the Scheme under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 102. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Scheme being carried on in the manner described in this Ruling during the income years specified. If the Scheme 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: 103. 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 of the ITAA 1936. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 104. 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). 105. The Gunns Plantations Walnut Project No. 2 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 to 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. 106. Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Walnuts. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There 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. 107. 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 Grower in the defined class of entities who enters into the scheme described at paragraphs 34 to 83 of this Ruling. 19. The Grower's participation in the Scheme must constitute the carrying on of business of primary production. Provided the Scheme is carried out as described below, the Grower's business of primary production will commence at the time of execution of their Management Agreement and an Orchard Right Agreement, on or before 15 June 2007. | 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 Scheme, the recognition of income and the timing of tax deductions is different depending on whether the Grower 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 . 21. For such Growers, 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. | Sections 6-5 and 17-5: 23. That part of the gross sales proceeds from the Scheme 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 and Division 27 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 expenditure set out in the Table below on a per Walnut Lot basis. | Joint Venturers: 25. If a Joint Venturer is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (for example, input tax credits): Division 27. 26. A Joint Venturer may claim deductions under section 8-1, 25-25 and 40-630 for the expenditures, set out in the table and Notes of paragraph 24 and paragraph 31 of this Ruling, as follows: 27. Each Joint Venturer can also claim deductions for 50% share of the horticultural plant write-off as explained in paragraphs 28 to 30 of this Ruling. | Division 40: 28. A Grower will be entitled to tax deductions relating to the cost of establishing the Walnut Trees under Subdivision 40-F and in relation to a 'landcare operation' under Subdivision 40-G. If the Grower is registered or required to be registered for GST, amounts of outgoings would need to be adjusted as relevant for GST (for example input tax credits): Division 27. 29. A Walnut Tree is considered to be a 'horticultural plant' as defined in subsection 40-520(2). A Grower holds an Orchard Right to cultivate the Walnut Trees on a designated area of land called a Walnut Lot for the growing of Walnuts for commercial gain. As a Grower holds an Orchard Right over the land, one of the conditions in subsection 40-525(2) is met and a deduction for 'horticultural plants' is available under paragraph 40-515(1)(b) for their decline in value. 30. The deduction is determined using the formula in section 40-545. Walnut Trees have an 'effective life' of 25 years and for the purposes of section 40-545, the result is a straight-line write-off at a rate of 13%. The deduction is allowable when the Walnut Trees enter their first commercial season (section 40-530, item 2). GPL will advise Growers about the amount of tax deduction that they are entitled to each year in relation to the establishment of Walnut Trees. 31. The capital expenditure of $288.20 incurred in respect of native vegetation management is considered a 'landcare operation' (as defined in section 40-635) and is fully deductible in the year it is incurred under Subdivision 40-G, section 40-630. | Section 35-55 - exercise of Commissioner's discretion: 32. A Grower, who is an individual accepted into the Project by 15 June 2007 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 individual Growers as follows: 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 and 82KL and Part IVA: 33. For a Grower who commences participation in the Project and incurs expenditure as required by the Orchard Right Agreement and Management Agreement, the following provisions of the ITAA 1936 have application as indicated: 34. 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. 35. 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. 36. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 37. The main features of the Gunns Plantations Walnut Project No. 2 are as follows: 38. The Scheme will be a registered as a managed investment scheme under the Corporations Act 2001 . Applications to participate in the Scheme must be made during the offer period which is: 39. For the purposes of this Ruling, Growers whose applications are accepted on or before 15 June 2007 will become 'Early Growers'. This Ruling only applies to 'Early Growers'. In this Ruling 'Early Growers' are referred to as 'Growers'. Note that a separate Product Ruling will issue for 'Late Growers' who are accepted into the Scheme from 1 July 2007 to 13 June 2008. 40. An offer to participate in the Scheme will be made through a Product Disclosure Statement (PDS) for 6,000 Walnut Lots which comprises of 1,200 hectares of land. The offer to participate in the Scheme must be made through an 'Application and Power of Attorney Form' in the PDS. 41. Growers will enter into an Orchard Right Agreement with GPL. The Orchard Right will comprise contractual rights in relation to a parcel of land of 0.2 hectares called a Walnut Lot. 42. Each Walnut Lot will have approximately 62 Walnut Trees on it. Approximately 0.07 hectares of each Walnut Lot will be Existing Orchard (established prior to 1 January 2007) and 0.13 hectares will be New Orchard (established by 31 October 2007). 43. Growers will also enter into a Management Agreement to contract with GPL to undertake Initial Services, Maintenance Services and Harvest and Processing Services. 44. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, the Management Agreement, and the Orchard Right Agreement provide that two entities may participate in the Scheme as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 45. The Constitution for the Scheme sets out the general functions, powers and duties under which the Responsible Entity agrees to act for the Growers and to manage the Scheme. The Orchard Right Agreement and the Management Agreement are Schedules to the Constitution. These Agreements will be executed on behalf of each Grower who has signed the 'Application and Power of Attorney Form' attached to the PDS and who is accepted into the Scheme. After acceptance and execution of the Agreements, Growers are bound by the Constitution by virtue of their participation in the Scheme. 46. On acceptance of an application, the Responsible Entity will allocate the Walnut Lot(s) to the Grower and prepare the Orchard Right Agreement and Management Agreement in accordance with clause 7. 47. Before authorising or instructing the Custodian to release the Application Money, the Responsible Entity in accordance with clause 8 must be satisfied, among other things, that: 48. The Responsible Entity is entitled to receive fees in accordance with clause 12 and may instruct the Custodian to invest all or part of the 'Proceeds Portion' and 'Application Portion' in accordance with clause 13. 49. Among other things the Constitution sets out in detail the following: | Joint Venture: 50. The Constitution also provides for two entities to enter the Scheme as Joint Venturers in an unincorporated joint venture (clause 5). Each of the Joint Venturers will be entitled to their Prescribed Proportion of the Joint Venture and any losses realised will be as tenants in common in their Prescribed Proportions. The First Joint Venturer has a 50% Prescribed Proportion and the Second Joint Venturer has a 50% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 51. As required by the Corporations Act 2001, GPL has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that GPL manages the Scheme in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Lease Agreement: 52. Under this Agreement Gunns as Landowner will lease the Scheme land to GPL. Gunns undertakes to carry out all Establishment Works including the installation of Orchard Infrastructure before 15 June 2007 (clause 9). The Orchard Infrastructure includes irrigation systems comprising of pumps, filters, main lines, sumps, dams, channels and drainage systems. Gunns also undertakes to plant the Walnut Trees on or before 31 October 2007. | Orchard Right Agreement: 53. Growers will enter into the Orchard Right Agreement in respect of a Walnut Lot(s) with GPL for the 'Term' of the Scheme. 54. Under clause 3, GPL will grant to a Grower an Orchard Right over the Walnut Lot(s) which includes the following: 55. The Agreement also sets out: | Management Agreement: 56. The Grower engages GPL as Manager to cultivate the Grower's Walnut Lot(s) and to carry out the Maintenance Services (clause 5) subject to the terms and conditions of this Agreement for the term of the agreement. 57. The term of the agreement may be extended by a period of 2 years at the Manager's discretion if the scheme does not reach an IRR of 9.5% (clause 2). 58. GPL will manage and cultivate the Walnut Lot(s) on behalf of the Grower in accordance with good horticultural practice (clauses 5 and 6). 59. GPL can delegate its obligations under this Agreement but delegation of the obligations does not release GPL from liability under this agreement (clause 26). 60. GPL must complete all of the Initial Services in relation to the Grower's Walnut Lot(s) before 30 June 2007 (clause 4), in return for the Initial Service Fee (clause 9.1). 61. The Agreement also stipulates the services to be provided after 30 June 2007 and each subsequent year. GPL will perform the Maintenance Services in a proper and efficient manner (clause 5), in return for the Operating Fee (clause 9.3). 62. GPL must cause its obligations in relation to harvesting and processing of Walnuts to be carried out in a proper and efficient manner and in accordance with good horticultural practice (clause 6). 63. The Grower appoints GPL to sell Walnuts Harvested from the Grower's Trees (clause 10). | Pooling of amounts and distribution of proceeds: 64. The Constitution and the Management Agreement set out provisions relating to the pooling of amounts held by Gunns on behalf of Growers. This Product Ruling only applies where the following principles apply to the pooling and distribution schemes: | Initial Services Sub-contracting Agreement and Maintenance and Harvest Services Sub-contracting Agreement: 65. GPL engages Gunns as its sub-contractor, to perform Initial Services under Initial Services Sub-contracting Agreement, and Maintenance and Harvest Services under the Maintenance and Harvest Services Sub-contracting Agreement, in accordance with the terms and conditions set out in these Agreements. This is in accordance with clause 26 of the Management Agreement under which GPL can delegate its obligations under that Agreement. | Walnut Sale Agreement and Deed Poll: 66. GPL, as agent for each Grower will enter into a Walnut Sale Agreement for the sale of Grower's Walnuts. The Deed poll records Webster's commitment to enter into an agreement to purchase Walnuts on terms no less favourable than those in the Walnut Sale Agreement which among other conditions requires Webster to acquire at least 75% of the Walnut harvest. | Scheme Fees: 67. Varied by Indexation means where a fee is to be varied by indexation, the new fee will be the current fee: | Application Fee: 68. The Grower must pay an Application Fee of $6,424 per Walnut Lot payable on Application which will be applied towards the following: | Ongoing Fees: 69. Ongoing Fees mean the fees payable under the Orchard Right Agreement and the Management Agreement from and including the year ending 30 June 2008. These are described under paragraphs 70 and 71 of this Ruling. | Orchard Right Agreement Fees: 70. For the year ending 30 June 2008, the Orchard Right Fee of $220 is payable by a Grower on 1 June 2008. Thereafter, the annual Orchard Right Fee will be the Orchard Right Fee on the immediately preceding 1 June, varied by indexation, and payable on 1 June of each subsequent year. | Management Agreement Fees: 71. Operating Fee payments payable by a Grower on a per Walnut Lot basis are as follows: In addition from the year ending 30 June 2010: | Joint Venture - Fees: 72. The fees to which a Joint Venture Grower will be solely responsible for are stipulated in clause 5 of the Constitution and are expressed as percentages of the fees outlined in paragraphs 68 to 71 of this Ruling. These percentages are as follows: | Finance: 73. Each Grower can fund their involvement in the Scheme as follows: 74. Growers cannot rely on this Product Ruling if they enter into a finance package with Gunns Finance or Allco Managed Investments that materially differs from those provided to the Tax Office by GPL with the application for this Product Ruling. These finance packages are summarised below. | Terms Agreement: 75. If GPL accepts that the Application Fee of $6,424 can be paid under a Terms Arrangement the Grower must complete a terms application and Direct Debit Authority. The Grower will be required to pay their application fee as follows: | Finance by Gunns Finance: 76. The loans offered by Gunns Finance are Principal and Interest loans with terms of 3, 5, 10 or 15 years. The key features of the finance package are: 77. The deposit required to fund the loan may be varied, at the absolute discretion of Gunns Finance, between 0 to 20% of the Application Fee. 78. The Borrower agrees to repay the Loan, and pay interest and all Outstanding Monies by paying by direct debit the Repayment Amount, to Gunns Finance, on the Repayment Date of each month during the term as detailed in the Loan Schedule, and all other Outstanding Monies on the Final Repayment Date. 79. In the event of an early repayment of some or all of the Outstanding Balance, a break fee of $400 will become immediately due and payable. | Finance by Allco Managed Investments: 80. Allco Managed Investments offers 3 types of loans. The first type is a loan with monthly principal and interest repayments and may be for 3, 5, 10 or 15 years. The second type of loan involves a two year interest only period followed by monthly principal and interest repayments and may be for 5, 7 or 10 years duration in total. The third type of loan is for a three year interest only period followed by monthly principal and interest repayments and may be for 6, 10 or 15 years duration in total. Common features contained in each of these loans are: 81. A Grower cannot rely on any part of this Product Ruling if the Application Fee, other than an application fee payable subject to a finance arrangement or a Terms Agreement, is not paid in full by 15 June 2007. Where an application is accepted by GPL, subject to finance approval by any lending institution, a Grower cannot rely on this Ruling if written evidence of that approval has not been given to GPL by 15 June 2007. | Fee Facility by Gunns Finance: 82. Gunns Finance will also offer finance for 90 percent of the Ongoing Fees payable by the Grower in the financial years ending 30 June 2008 to 30 June 2011 inclusive. Gunns Finance will provide the Grower with the loan(s) on a full recourse basis and will pursue legal action against any defaulting borrowers. Details of the finance that will be offered to a Grower to fund the Ongoing Fees in those years by Gunns Finance are set out in the Fee Facility Deed. The key features of the Fee Facility Deed are: 83. 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 2 May 2007 | Is the Grower carrying on a business?: 84. For the amounts set out in paragraphs 24 to 31 of this Ruling to constitute allowable deductions the Grower's Walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 2 must amount to the carrying on of a business of primary production. 85. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 86. 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? 87. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Gunns Plantations Walnut Project No. 2. 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. 88. Having applied these principles to the arrangement set out above, a Grower in the Gunns Plantations Walnut Project No. 2 is accepted to be carrying on a business of growing and harvesting walnuts for sale. | Division 328: 89. 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. 90. 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: 91. The Initial Services Fee (excluding the expenditure of $288.20 on 'land care') and Orchard Right 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 Services Fee and Orchard Right Fee (see paragraphs 49 to 51 of TR 2000/8). 92. The tests of deductibility under the first limb of section 8-1 are met with the exception of the capital expenditure of $288.20 on land care. Provided that the prepayment provisions do not apply (see paragraphs 97 to 99 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.) 93. Some Growers may finance their participation in the Scheme through a Loan Agreement with Gunns Finance or Allco Managed Investments. Applying the same principles as that used for the Initial Services Fee and Orchard Right Fee, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 94. Other than where the prepayment provisions apply (see paragraphs 97 to 99 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZME, 82KZMF and 82KZL: 95. 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. 96. For this Scheme, 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 Scheme: 97. Under the scheme to which this Product Ruling applies Project fees under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance or Allco Managed Investments is incurred monthly. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 98. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Scheme prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under a loan agreement (including loan agreements with lenders other than Gunns Finance or Allco Managed Investments). 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. 99. As noted in the Ruling section above, Growers 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 Scheme. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 100. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 32 of this Ruling, the Commissioner has determined that based on the evidence supplied for those income years: 101. A Grower who would otherwise be required to defer a loss arising from their participation in the Scheme under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 102. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Scheme being carried on in the manner described in this Ruling during the income years specified. If the Scheme 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: 103. 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 of the ITAA 1936. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 104. 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). 105. The Gunns Plantations Walnut Project No. 2 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 to 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. 106. Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Walnuts. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There 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. 107. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Is the Grower carrying on a business?: 84. For the amounts set out in paragraphs 24 to 31 of this Ruling to constitute allowable deductions the Grower's Walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 2 must amount to the carrying on of a business of primary production. 85. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 86. 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? 87. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Gunns Plantations Walnut Project No. 2. 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. 88. Having applied these principles to the arrangement set out above, a Grower in the Gunns Plantations Walnut Project No. 2 is accepted to be carrying on a business of growing and harvesting walnuts for sale. | Division 328: 89. 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. 90. 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: 91. The Initial Services Fee (excluding the expenditure of $288.20 on 'land care') and Orchard Right 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 Services Fee and Orchard Right Fee (see paragraphs 49 to 51 of TR 2000/8). 92. The tests of deductibility under the first limb of section 8-1 are met with the exception of the capital expenditure of $288.20 on land care. Provided that the prepayment provisions do not apply (see paragraphs 97 to 99 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.) 93. Some Growers may finance their participation in the Scheme through a Loan Agreement with Gunns Finance or Allco Managed Investments. Applying the same principles as that used for the Initial Services Fee and Orchard Right Fee, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 94. Other than where the prepayment provisions apply (see paragraphs 97 to 99 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZME, 82KZMF and 82KZL: 95. 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. 96. For this Scheme, 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 Scheme: 97. Under the scheme to which this Product Ruling applies Project fees under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance or Allco Managed Investments is incurred monthly. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme. 98. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Scheme prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under a loan agreement (including loan agreements with lenders other than Gunns Finance or Allco Managed Investments). 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. 99. As noted in the Ruling section above, Growers 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 Scheme. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 100. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 32 of this Ruling, the Commissioner has determined that based on the evidence supplied for those income years: 101. A Grower who would otherwise be required to defer a loss arising from their participation in the Scheme under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 102. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Scheme being carried on in the manner described in this Ruling during the income years specified. If the Scheme 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: 103. 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 of the ITAA 1936. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 104. 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). 105. The Gunns Plantations Walnut Project No. 2 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 to 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. 106. Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the Walnuts. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There 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. | $6,117.47 See Notes (i) & (ii) | $990 See Notes (i), (iii) & (iv) | $990 (Varied by Indexation) See Notes (i), (iii) & (iv) | $18.33 See Notes (i) & (iii) | $220 See Notes (i), (iii) & (iv) | $220 (Varied by Indexation) See Notes (i), (iii) & (iv) | Amount incurred See Notes (iv) & (v) | Must be calculated See Note (vi) | Goolgowi and Leeton in the Riverina District of New South Wales | Type of business to be carried on by each participant | Commercial growing and cultivation of Walnut trees for the purpose of harvesting Walnuts for sale | Number of hectares offered for cultivation | Number of trees per hectare | 25 years, may be extended by a period of 2 years at the Manager's discretion | Ongoing costs per Walnut Lot | Orchard Right Fee and Operating Fee Deferred management fees for years 1 and 2 | The Simplified Tax System (STS) | 25% entrepreneurs tax offset | Deductions for Initial Services Fee, Operating Fee, Orchard Right Fee, Loan Establishment Fee and Interest | Deductions for capital expenditure | Division 35 - deferral of losses from non-commercial business activities | Prepayment provisions and anti-avoidance provisions | The Simplified Tax System | Deductibility of Initial Services Fee, Orchard Right Fee and interest on loans with Gunns Finance and Allco Managed Investments | Appendix 2 - Detailed contents list


Related rulings: TR 97/7 TR 97/11 TR 98/22 TR 2000/8 TR 2002/6 TR 2002/11
Legislative references: ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL 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 25-25(1) 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 Subdiv 40-F ITAA 1997 Subdiv 40-G ITAA 1997 40-515 ITAA 1997 40-520(2) ITAA 1997 40-525(2) ITAA 1997 40-530 ITAA 1997 40-545 ITAA 1997 40-630 ITAA 1997 40-635 ITAA 1997 Subdiv 61-J ITAA 1997 Div 328 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) Copyright Act 1968 Corporations Act 2001 SISA 1993
Case references: Commissioner of Taxation v. Lau (1984) 6 FCR 202 84 ATC 4929 (1984) 16 ATR 55
Subject references: advance deductions and expenses for certain forestry expenses carrying on a business commencement of a business fee expenses forestry agreement interest expenses management fees non-commercial losses producing assessable income product rulings public rulings seasonally dependent agronomic activities tax avoidance tax benefits under tax avoidance schemes tax shelters tax shelters project taxation administration