Product Ruling PR 2011/14
Date of effect: 30 June 2011

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. In this Product Ruling this scheme is referred to as the Choice Forestry Project 2011 or simply as 'the Project'. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Product Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Product Ruling, terms defined in the Project agreements have been capitalised. Class of entities 3. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 45 of this Ruling on or before 30 June 2011 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on this Product Ruling does not include: Qualifications 8. 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 45 to 95 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. 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: Superannuation Industry (Supervision) Act 1993 11. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme 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 scheme may contravene the provisions of SISA.

Class of entities or scheme: 3. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 45 of this Ruling on or before 30 June 2011 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on this Product Ruling does not include: | Qualifications: 8. 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 45 to 95 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. 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: | Superannuation Industry (Supervision) Act 1993: 11. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme 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 scheme may contravene the provisions of SISA. 12. This Product Ruling applies prospectively from date of publication, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from date of publication until 30 June 2011 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 all income years up to the income year in which the scheme is terminated in accordance with the Project Agreements. 13. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 14. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 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 Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. | Goods and Services Tax: 17. All amounts and percentages referred to in this Product Ruling exclude the Goods and Services Tax (GST), unless otherwise specified. The transactions in respect of this scheme may, where appropriate, have GST implications. Those GST implications are outside the scope of this Product Ruling. | Structure of the Project: 18. The Choice Forestry Project 2011 is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is establishing and tending of Eucalyptus globulus (Tasmanian Blue Gum) trees for felling in Australia. 19. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for an 'initial participant' [1] in the defined class of entities (see paragraphs 3 to 7 of this Ruling) who is accepted to participate in the 'forestry managed investment scheme' described at paragraphs 45 to 95 of this Ruling between Date of publication and on or before 30 June 2011 inclusive. 20. An entity that takes part in the Project as a 'subsequent participant' [2] is not covered by this Product Ruling but may request a private ruling on their participation in the Project. A 'subsequent participant' is an entity that does not meet the definition of 'initial participant' in subsection 394-15(5). | Carrying on a business: 21. Although not relevant for the purposes of Division 394, a Grower (as described in paragraphs 4 to 6 of this Ruling) who will stay in the Project until it is completed will be considered to be carrying on a business of primary production. Such Growers who are individuals will be subject to the operation of Division 35 of the ITAA 1997 (see paragraphs 40 to 43 of this Ruling). Concessions for 'small business entities' [3] 22. From the 2007-2008 income year, a range of concessions previously available under the simplified tax system (STS), will be available to an entity if it carries on a business and satisfies the $2 million aggregated turnover test (a 'small business entity'). 23. A 'small business entity' can choose the concessions that best suit its needs. Eligibility for some small business concessions is also dependent on satisfying some additional conditions. Because of these choices and the eligibility conditions the application of the small business concessions to Growers who qualify as a 'small business entity' is not able to be dealt with in this Ruling. | Section 394-35 and subsection 394-10(4): 24. The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by WA Blue Gum Limited (WABG). On the basis of that information the Commissioner has decided that on 30 June 2011 it will be reasonable to expect that the '70% DFE rule' [4] will be satisfied. The Australian Taxation Office (ATO) may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'. 25. The Ruling will only apply if WABG establishes all of the Trees that were intended to be established under the Project within 18 months of the end of the income year in which the first 'participant' in the Project is accepted. [5] For this Project the Trees must be established no later than 31 December 2012. 26. In the context of this Project the Trees will be established when they are planted on the Land acquired for the purposes of the Project at the average rate of 1,000 trees per hectare. WABG is required by section 394-10 of Schedule 1 of the Tax Administration Act 1953 (TAA) to notify the ATO if the Trees are not established by 31 December 2012. | Sections 8-5, 394-10, 394-20 and Division 27: 27. A Grower in the Project can claim deductions for the amounts shown in the Table below that are paid to WABG (sections 8-5 and 394-10). 28. The deductibility of these amounts remains subject to a requirement that a CGT event [6] does not happen in relation to the Grower's 'forestry interest' within 4 years of the Grower first paying an amount under the scheme (see paragraphs 32 to 34 of this Ruling). 29. The amount is deductible in the income year in which it is paid, or is paid on behalf of the Grower (subsection 394-10(2) and section 394-20). This requires cash to flow from the Grower, or from another entity on the Grower's behalf, to WABG's bank account in the year in which the deduction is claimed. Any form of payment that does not involve the movement of cash into WABG's bank account will not qualify for a deduction under subsection 394-10(2). 30. Where a Grower does not fully pay an amount, or it is not fully paid on their behalf in an income year, it is deductible only to the extent to which it has been paid. Any unpaid amount is then deductible in the year or years in which it is actually paid. 31. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). | Subsections 394-10(5) and 394-10(6): 32. Deductions for the establishment fees, tending fees, rent and unforseen expenses that have been allowed as deductions under 394-10 in the first four years are not allowable where a 'CGT event' happens in relation to the 'forestry interest' of a Grower before 1 July 2015 (subsection 394-10(5)). 33. Where deductions for these amounts have already been claimed by a Grower the Commissioner may amend their assessment at any time within two years of the 'CGT event' happening (subsection 394-10(6)). The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936. 34. Growers whose deductions are disallowed because of subsection 394-10(5) are still required to include in assessable income the market value of the 'forestry interest' at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event'. | Section 8-1: 35. A Grower may claim tax deductions for the following fees and expenses as set out in the following table. | Sections 6-10, 17-5, and 394-25: 36. Where a 'CGT event' happens to a 'forestry interest' held by a Grower in this Project the market value of the 'forestry interest', or the decrease in the market value of the 'forestry interest', is included in the assessable income of the Grower (sections 6-10 and 394-25), less any GST payable on those proceeds (section 17-5). 37. The relevant amount is included in the Grower's assessable income in the income year in which the 'CGT event' happens (subsection 394-25(2)). 38. 'CGT events' for these purposes include those relating to: | Section 6-5: 39. An amount received by a Grower in respect of carbon and/or other environmental credits under this Project are not received as a result of a 'CGT event' and is not otherwise assessable under Division 394. The amount(s) are a distribution of ordinary income that arises as an outcome of a Grower holding a 'forestry interest' in the Project. Growers include amounts received in their assessable income in the income year in which the amounts are derived (section 6-5). | Section 35-55 - annual exercise of Commissioner's discretion during the period beginning with the income year ended 30 June 2011 and concluding with the income year ended 30 June 2021: 40. For each of the 2010-11 to 2020-21 income years the Commissioner will exercise the discretion in subsection 35-55(1) once the following conditions are satisfied for the year concerned: 41. If these conditions are met for a given year, the Commissioner will exercise the discretion for that year under: 42. If the Commissioner determines that the discretion will not be exercised for a particular year or years the Grower will be informed of that decision and the reasons. In any year where the discretion is not exercised losses incurred by a Grower will be subject to the loss deferral rule in section 35-10 and the Grower will not be able to offset the losses from the Project against other assessable income. 43. The issue of this Product Ruling of itself does not constitute the exercise of the Commissioner's discretion in sub-section 35-55(1) for any income year. | Sections 82KZM, 82KZME, 82KZMF and 82KL and Part IVA: 44. Where a Grower is accepted to participate in the Project set out at paragraphs 45 to 95 of this Ruling, the following provisions of the ITAA 1936 have application as indicated: 45. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: 46. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. 47. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows. | Overview: 48. The main features of the Choice Forestry Project 2011 are as follows: 49. The Project is a registered managed investment scheme under the Corporations Act 2001 . WABG has been issued with an Australian Financial Service Licence 246264 and will be the Responsible Entity for the Project. 50. An offer to participate in the Project will be made through a Combined Product Disclosure Statement and Financial Services Guide (PDS). The offer under the PDS is for 200 hectares, which corresponds to 200 'forestry interests' in the project. 51. An entity that participates in the Project as a Grower will do so by acquiring a 'forestry interest' in the Project on or before 30 June 2011. 52. To participate in the Project Applicants must complete the Application Form and Power of Attorney Form attached to the PDS and, if applying for finance, complete the Application for Finance Form and pay the initial contribution amount by 30 June 2011. 53. By signing the Application Form, the Applicant has agreed to be bound by the terms of the Constitution. 54. For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute either the Agreement to Sub-lease or the Sub-lease and the Project Management Contract on or before 30 June 2011, will become Growers in the Project. 55. WABG will identify sufficient land to be used for the Project. A Grower will Sub-lease from WABG an area of land called a Leased Area. The Plantable Area in this Project will be established close to existing plantations that the WABG Group has established in the south west region in Western Australia. Land utilised by the Project must meet the requirements set out in the Independent Forester's Report. 56. Each Grower will have a beneficial interest in their Plantable Area, the Trees which are planted on their Plantable Area, the produce derived from those Trees, and the returns from the sale of the timber grown on the Plantable Area. 57. Growers are responsible for insurance to cover the standing timber on their Plantable Area against loss or damage by fire and other risks. WABG will use its best endeavours to arrange plantation insurance cover annually for a Grower's Interest in the Project. | Constitution: 58. The Constitution establishes and governs the Project and operates as a deed binding all Growers and WAGB. It sets out the terms and conditions under which WAGB agrees to act as Responsible Entity and thereby manage the Project. Upon acceptance into the Project, Growers are bound by the Constitution by virtue of their participation in the Project. 59. All moneys received from applications shall be held by the Responsible Entity in the Application Fund, for the purpose of depositing all money received from applicants and accrued interest and all income and other earnings from the Project including Harvest Income on trust for the Growers (clause 6). 60. If the Application Money remains in the Application Fund for 12 months after it was received by the Responsible Entity then the Application Money must be refunded to the Applicant unless the Applicant directs the Responsible Entity in writing to hold the money for a further period (clause 6.5(b). 61. Once WABG has accepted the application and all of the Project Agreements have been executed, the Application Money may be released against the establishment fee due to WABG. 62. The Constitution also sets out among other things, the following provisions relating to: | Compliance Plan: 63. As required by the Corporations Act, the Responsible Entity has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that the Responsible Entity manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Project Management Contract 2011: 64. Growers engage WABG, as the Project Manager, for the term of the Project to carry out such services as are required to Establish and tend the Plantation for felling in accordance with the Plantation and Tending Plan and sound silvicultural and environmental practices. 65. The Project Management Contract will commence upon its execution and terminate when the whole of the Plantation has been Harvested (clause 5). 66. Commencing on the date that a Sub-Lease is entered into by the Grower, WABG will perform or cause to be performed all the Plantation Services listed in clause 4.2 in relation to the Land and the Plantation. The Plantation Services include the Establishment of the Plantation within the Establishment Period, ending no later than 31 December 2012. 67. The Establishment of the Plantation requires the planting of the seedlings at an average stocking rate of approximately 1,000 Trees per hectare. 68. The Harvesting of the Plantation shall be conducted in accordance with the terms of the Wood Purchase Agreement (clause 11). 69. At the cost of the Grower, WABG will keep current policies of fire insurance on behalf of the Grower with a reputable insurer, provided that such insurance is reasonably available (clause 4.3). 70. The Project Management Contract also sets out provisions relating to: | Plantation Services Agreement: 71. The Project Manager will engage the Contractor as an independent contractor to carry out the Plantation Services required to Establish and tend the Plantation on the Land during the Term in accordance with the Plantation Development and Tending Plan and sound silvicultural and environmental practices for the purposes of felling and Harvesting the Plantation | Head Leases: 72. WAGB will secure land (the Project Land) by entering into a lease or sub lease with various farmers and/or WA Chip & Pulp and/or WACAP Treefarms Pty Ltd to secure plantation land for the Project before 30 September 2012. 73. The head leases set out the terms and conditions under which the Lessor or Sub-Lessor will lease or sublease the Project Land to WAGB for the purpose of growing, tending and harvesting plantation of trees planted on the Sub-Leased Area. 74. The Lessor or the Sub-Lessor acknowledges that plantation of trees planted on the Sub-Leased Area and any rights, benefits and credits derived from such trees are the property of WAGB. The head leases will be current for the term of the Project. Where a head lease does not exist Growers will enter into an agreement to sublease until a head lease is executed. | Sub-lease Choice Forestry Project 2011: 75. Either at the time their application is accepted or when sufficient suitable land is available prior to 30 September 2012, Growers will enter into a Sub-lease with WABG, as the Landholder, to use the Leased Area for the purpose of Establishing, tending and Harvesting a plantation of eucalyptus trees for commercial wood production. The Leased Area is set out in Part 1 of the Schedule. 76. WABG will make application for approvals required so that it is entitled to grant this Sub-lease to the Grower and that all relevant consents have been obtained (clauses 3 and 4). 77. WABG and the Grower acknowledge that the Plantation and the carbon, environmental or any other credits derived from the Plantation are and shall remain the property of the Grower until the end of the Term and the Grower shall be entitled to Harvest the Plantation and to retain all income from the sale of the Wood (clause 9.17). 78. If there is damage to or reduction in the viability of the Plantation, the Grower is required to reduce the Plantable Area by the area which has been damaged or is no longer viable or, where the whole of the Plantation is damaged or no longer commercially viable, to terminate the Sub-lease. The area which has been destroyed or is no longer viable will be deemed surrendered back to WABG and reinstate the land and reseed it to pasture, if directed by the Landholder (clause 10). 79. The Sub-lease (Part 3 of the schedule) operates on and from its commencement date until completion of Harvesting. The Grower may extend the Term by giving written notice to WABG (clause 5). 80. The Sub-lease also sets out provisions relating to: | Agreement to Sub-lease 2011: 81. Where there is no Project Land available for a Grower on or before 30 June 2011, the Grower will be required to enter into an Agreement to Sub-lease with WABG. 82. Pursuant to the terms of the Agreement to Sub-lease the parties undertake to enter into a Sub-lease of the Land on or before the Starting Date, being a date no later than 30 September 2012, which will allow all the Establishment services referred to in the Project Management Contract to be completed within the Establishment Period. The parties are bound by all the provisions of the Sub-lease from the Starting Date. | Wood Purchase Agreement: 83. Growers authorise WABG, as the Project Manager, to sell the Wood under the Wood Purchase Agreement on their behalf. WABG agrees to sell and the Purchaser agrees to purchase for the Purchase Price all Wood grown on the Land, Harvested and Delivered in accordance with the Harvest Plan and on terms and conditions set out in the Wood Purchase Agreement. 84. The Purchaser may Harvest, Deliver and purchase the Wood, for a price offered as being fair and reasonable at the relevant time. WABG may seek alternative prices for Harvest and Delivery and an alternative Purchase Price for the Wood. Where such alternatives are obtained the Purchaser retains the right to match the price offered by the other party. | Pooling of Wood and Grower's entitlement to a distribution: 85. The Constitution (clause 7) sets out provisions relating to the pooling of amounts from the sale of the Growers timber and the distribution of Proceeds Funds from that sale. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Schemes Property Custody Agreement: 86. WABG, as Responsible Entity, has engaged Sandhurst Trustees Limited to act as the Custodian of the Property. The Property includes all Application Money and Harvest Income until disbursed or distributed in accordance with the Constitution and Project Agreements, but does not include property legally vested in a Grower. | Fees: 87. The Project fees are set out under the terms of the Project Management Contract and the Sub-lease, a Grower will make payments as described below on a per hectare basis. 88. A merchant fee for the use of a credit or similar card to pay the fees under the Project will also be incurred. | Finance: 89. To finance all or part of the cost of their 'forestry interest' a Grower can enter into a Loan Agreement with Albany Financial Pty Ltd (a lender associated with WABG) or, alternatively, borrow from an independent lender external to the Project. 90. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with Albany Financial Pty Ltd that materially differs from that set out in the documentation provided with the application for this Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling. 91. A Grower cannot rely on any part of this Ruling if the Application Monies are not paid in full on or before 30 June 2011 by the Grower or, on the Grower's behalf, by a lending institution. | Finance offered by Albany Financial Pty Ltd: 92. Subject to Albany Financial Pty Ltd accepting the Grower's application to finance the Application Money, the Grower will be bound by the terms and conditions of the Loan Agreement. Albany Financial Pty Ltd will provide the Grower with the loan on a full recourse basis and will pursue recovery action against any defaulting borrowers. 93. The key features of the Loan Agreement are: 94. As security for the payment of any outstanding monies under the Loan Agreement, the Grower will assign to Albany Financial Pty Ltd its right, title and interest in and under the Project Management Contract, the Sub-lease, the Wood Purchase Agreement, all money payable to the Grower under the Wood Purchase Agreement or under any policies of insurance. The assignment shall be void upon the repayment of all outstanding monies under the Loan Agreement. | Other qualifications relating to finance: 95. 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 8 June 2011 | Structure of the Project: 96. In return for payment of the Establishment Fee and Ongoing Management Costs under the Project Management Contact and Sub-lease during the term of the Project, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)). 97. Under the Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the harvest of the trees grown on the Project Land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants' [7] in the Project. | Is the Grower carrying on a business?: 98. The general indicators used by the Courts in determining whether an entity is carrying on a business are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 99. More recently, and in relation to a managed investment scheme similar to that which is the subject of this Ruling, the Full Federal Court in Hance v. FC of T ; Hannebery v. FC of T [2008] FCAFC 196; 2008 ATC 20-085 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90). 100. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 4 to 6 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving afforestation activities. | Sections 8-5, 12-5, 394-10 and 394-20: 101. Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5 and includes payments under a 'forestry managed investment scheme' that meet the requirements of subsection 394-10(1). | Paragraph 394-10(1)(c) and section 394-35: 102. The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June 2011, the amount of 'direct forestry expenditure' [8] under the scheme will be no less than 70% of the amount of payments under the scheme. [9] 103. The amount of all 'direct forestry expenditure' is the amount of the net present value of all 'direct forestry expenditure' that WABG, as 'forestry manager' [10] of the Project, has paid or will pay under the scheme (subsection 394-35(2)). 104. The 'amount of payments under the scheme' is the amount of the net present value of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)). 105. Both of the above amounts are determined as at 30 June 2011 taking into account: 106. Applying all of these requirements to the information provided by WABG, as the Responsible Entity of the Project, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2011. | The other elements for deductibility under subsection 394-10(1): 107. The requirement of paragraph 394-10(1)(d) that Growers in the Project not have day to day control over the operation of the Project is clear from the Project Agreements as are the alternative elements of paragraph (e) relating to the number of Growers in the scheme and WABG's role in other Managed Investment Schemes. 108. The final requirement for deductibility requires all the Project trees to be established within 18 months of 30 June 2011 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting timeline provided with the application for this Ruling by WAGB indicates that all the trees required to be established under the scheme will be planted on the Project land by 31 December 2012. 109. Accordingly, subject to the qualifications set out below, amounts paid by Growers to WAGB in relation their 'forestry interests' satisfy all requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)). 110. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). 111. Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year. | Loss of deductions previously allowed under subsection 394-10(1): 112. Two situations may lead to a loss of deductions previously allowed to Growers under subsection 394-10(1). 113. The first of these situations will occur if WAGB fails to establish the trees on the Project land within 18 months. Where this occurs WAGB is required to notify the Commissioner within 3 months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA). 114. The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within 4 years from 30 June of the income year they paid an amount under the scheme, for example, the establishment fee (see subsection 394-10(5)). 115. For the purposes of this provision, the Commissioner is able to amend the assessment of a Grower within 2 years of the relevant 'CGT event' happening. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6)). 116. Where a 'CGT event' happens to the 'forestry interest' of a Grower within 4 years, the market value of the forestry interest at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event' is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed or may disallow the deductions previously allowed under section 394-10. | Section 8-1: 117. Where a Grower borrows money to fund their investment in the Project the deductibility of the interest incurred on the loan monies falls for consideration under the general deduction provisions of section 8-1. If the interest incurred by the Grower is deductible under the first positive limb in subsection 8-1(1) there is no requirement to consider whether it is also deductible under the second positive limb of that provision. Court decisions show that the same basic test applies to both limbs (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431, at CLR 56; ATD 435). 118. Under the first positive limb of subsection 8-1(1) the interest incurred by a Grower will be deductible if it is incurred in gaining or producing a Grower's assessable income and is not excluded by one of the negative limbs in subsection 8-1(2). 119. Growers in the Project use the borrowed funds to acquire a 'forestry interest' in a 'forestry managed investment scheme'. The holding of that 'forestry interest' will produce assessable income for a Grower in the form of the proceeds of a full or part disposal of the 'forestry interest' or, as a proportionate share of the harvest proceeds. The tests of deductibility of interest under the first limb of subsection 8-1(1) are, therefore, met unless one of the exclusions in subsection 8-1(2) apply. 120. For the purposes of this Project, only the capital exclusion in paragraph 8-1(2)(a) is relevant. The use of borrowed funds to purchase a capital asset, such as a 'forestry interest', does not mean that the interest outgoings are on capital account (see Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, at CLR 470; ATC 4249; ATR 148). 121. Therefore, the capital exclusion in subsection 8-1(2) does not apply to the interest and, subject only to the potential application of the prepayment provisions, a deduction for the interest can be claimed in the year in which it is incurred. (Note: the meaning of 'incurred' is explained in Taxation Ruling TR 97/7.) | Sections 82KZL to 82KZMF: 122. 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 that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and section 82KZMF of the ITAA 1936. 123. However, subsection 394-10(7) specifically provides that sections 82KZMD and section 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10. 124. Accordingly, under the scheme to which this Product Ruling applies, only deductions for interest payable under a loan with Albany Financial Pty Ltd will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Ruling applies (see paragraphs 89 to 95 of this Ruling) do not require any prepayment of interest over the term of the loan. Accordingly, the prepayment provisions have no application to Growers who enter into those loans. 125. If a Grower chooses to prepay interest on these loans that Grower may request a private ruling on how the prepayment provisions will affect the timing of their interest deduction. | Sections 6-10, 10-5, and 394-25: 126. Section 6-10 includes in assessable income amounts that are not ordinary income. These amounts, called statutory income, are listed in the table in section 10-5 and include amounts that are included in the assessable income of 'initial participants' of a 'forestry managed investment scheme' by subsection 394-25(2). | Subsection 394-25(2): 127. Where a 'CGT event' (other than for a 'CGT event' in respect of a thinning) [11] happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if: | Market value rule applies to' CGT events': 128. If, as a result of the 'CGT event' the Grower either: then the market value of the 'forestry interest' at the time of the event, or the reduction of the market value of the 'forestry interest' as a result of the event, is included in the assessable income of the Grower in the income year in which the 'CGT event' happens (subsection 394-25(2)). A market value rule applies rather than the amount of money actually received from the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same. 129. The market value amount included in the assessable income of a Grower is the value of the 'forestry interest' just before the 'CGT event', or where the Grower continues to hold their interest after the event, the amount by which the market value of the 'forestry interest' is reduced as a result of the 'CGT event' (subsection 394-25(2)). 130. Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell harvest of the trees grown under the Project. | Section 6-5: 131. Carbon and/or other environmental credit amounts received by a Grower in this Project do not arise as a result of t 'CGT event' and are not otherwise assessable under Division 394. The receipts of such an amount are a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. It is an item of the ordinary income and the assessable under section 6-5 in the year in which it is derived. | Section 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 132. Based on information provided with the application for this Product Ruling, a Grower accepted into the Project in the income year ended 30 June 2011 who carries on a business of afforestation individually (alone or in partnership) is expected to incur losses from their participation in the Project which will be subject to Division 35. [12] These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year. 133. The exceptions to the loss deferral rule depend upon the circumstances of individual Growers and are outside the scope of this Ruling. 134. The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion. 135. Where a Grower with income for non-commercial losses (NCL) purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: 136. Where a Grower with income for NCL purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: 137. A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: 138. In each individual year where the Commissioner's discretion is exercised a Grower within either paragraph 135 or paragraph 136 of this Ruling who would otherwise be required to defer a loss arising from their participation in the Project under section 35-10 until a later income year is able to offset that loss against their other assessable income. | Section 82KL - recouped expenditure: 139. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(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. | Part IVA - general tax avoidance provisions: 140. 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). 141. The Project will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraphs 31 and 35 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. 142. Growers to whom this Ruling applies will derive assessable income from holding or disposing of their 'forestry interest' in the Project. 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 Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit. 143. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 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. In this Product Ruling this scheme is referred to as the Choice Forestry Project 2011 or simply as 'the Project'. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Product Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Product Ruling, terms defined in the Project agreements have been capitalised. | Class of entities: 3. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 45 of this Ruling on or before 30 June 2011 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on this Product Ruling does not include: | Qualifications: 8. 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 45 to 95 of this Ruling. 9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 10. 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: | Superannuation Industry (Supervision) Act 1993: 11. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme 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 scheme may contravene the provisions of SISA.


Appendix: Structure of the Project: 96. In return for payment of the Establishment Fee and Ongoing Management Costs under the Project Management Contact and Sub-lease during the term of the Project, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)). 97. Under the Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the harvest of the trees grown on the Project Land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants' [7] in the Project. | Is the Grower carrying on a business?: 98. The general indicators used by the Courts in determining whether an entity is carrying on a business are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 99. More recently, and in relation to a managed investment scheme similar to that which is the subject of this Ruling, the Full Federal Court in Hance v. FC of T ; Hannebery v. FC of T [2008] FCAFC 196; 2008 ATC 20-085 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90). 100. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 4 to 6 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving afforestation activities. | Sections 8-5, 12-5, 394-10 and 394-20: 101. Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5 and includes payments under a 'forestry managed investment scheme' that meet the requirements of subsection 394-10(1). | Paragraph 394-10(1)(c) and section 394-35: 102. The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June 2011, the amount of 'direct forestry expenditure' [8] under the scheme will be no less than 70% of the amount of payments under the scheme. [9] 103. The amount of all 'direct forestry expenditure' is the amount of the net present value of all 'direct forestry expenditure' that WABG, as 'forestry manager' [10] of the Project, has paid or will pay under the scheme (subsection 394-35(2)). 104. The 'amount of payments under the scheme' is the amount of the net present value of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)). 105. Both of the above amounts are determined as at 30 June 2011 taking into account: 106. Applying all of these requirements to the information provided by WABG, as the Responsible Entity of the Project, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2011. | The other elements for deductibility under subsection 394-10(1): 107. The requirement of paragraph 394-10(1)(d) that Growers in the Project not have day to day control over the operation of the Project is clear from the Project Agreements as are the alternative elements of paragraph (e) relating to the number of Growers in the scheme and WABG's role in other Managed Investment Schemes. 108. The final requirement for deductibility requires all the Project trees to be established within 18 months of 30 June 2011 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting timeline provided with the application for this Ruling by WAGB indicates that all the trees required to be established under the scheme will be planted on the Project land by 31 December 2012. 109. Accordingly, subject to the qualifications set out below, amounts paid by Growers to WAGB in relation their 'forestry interests' satisfy all requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)). 110. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). 111. Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year. | Loss of deductions previously allowed under subsection 394-10(1): 112. Two situations may lead to a loss of deductions previously allowed to Growers under subsection 394-10(1). 113. The first of these situations will occur if WAGB fails to establish the trees on the Project land within 18 months. Where this occurs WAGB is required to notify the Commissioner within 3 months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA). 114. The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within 4 years from 30 June of the income year they paid an amount under the scheme, for example, the establishment fee (see subsection 394-10(5)). 115. For the purposes of this provision, the Commissioner is able to amend the assessment of a Grower within 2 years of the relevant 'CGT event' happening. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6)). 116. Where a 'CGT event' happens to the 'forestry interest' of a Grower within 4 years, the market value of the forestry interest at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event' is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed or may disallow the deductions previously allowed under section 394-10. | Section 8-1: 117. Where a Grower borrows money to fund their investment in the Project the deductibility of the interest incurred on the loan monies falls for consideration under the general deduction provisions of section 8-1. If the interest incurred by the Grower is deductible under the first positive limb in subsection 8-1(1) there is no requirement to consider whether it is also deductible under the second positive limb of that provision. Court decisions show that the same basic test applies to both limbs (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431, at CLR 56; ATD 435). 118. Under the first positive limb of subsection 8-1(1) the interest incurred by a Grower will be deductible if it is incurred in gaining or producing a Grower's assessable income and is not excluded by one of the negative limbs in subsection 8-1(2). 119. Growers in the Project use the borrowed funds to acquire a 'forestry interest' in a 'forestry managed investment scheme'. The holding of that 'forestry interest' will produce assessable income for a Grower in the form of the proceeds of a full or part disposal of the 'forestry interest' or, as a proportionate share of the harvest proceeds. The tests of deductibility of interest under the first limb of subsection 8-1(1) are, therefore, met unless one of the exclusions in subsection 8-1(2) apply. 120. For the purposes of this Project, only the capital exclusion in paragraph 8-1(2)(a) is relevant. The use of borrowed funds to purchase a capital asset, such as a 'forestry interest', does not mean that the interest outgoings are on capital account (see Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, at CLR 470; ATC 4249; ATR 148). 121. Therefore, the capital exclusion in subsection 8-1(2) does not apply to the interest and, subject only to the potential application of the prepayment provisions, a deduction for the interest can be claimed in the year in which it is incurred. (Note: the meaning of 'incurred' is explained in Taxation Ruling TR 97/7.) | Sections 82KZL to 82KZMF: 122. 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 that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and section 82KZMF of the ITAA 1936. 123. However, subsection 394-10(7) specifically provides that sections 82KZMD and section 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10. 124. Accordingly, under the scheme to which this Product Ruling applies, only deductions for interest payable under a loan with Albany Financial Pty Ltd will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Ruling applies (see paragraphs 89 to 95 of this Ruling) do not require any prepayment of interest over the term of the loan. Accordingly, the prepayment provisions have no application to Growers who enter into those loans. 125. If a Grower chooses to prepay interest on these loans that Grower may request a private ruling on how the prepayment provisions will affect the timing of their interest deduction. | Sections 6-10, 10-5, and 394-25: 126. Section 6-10 includes in assessable income amounts that are not ordinary income. These amounts, called statutory income, are listed in the table in section 10-5 and include amounts that are included in the assessable income of 'initial participants' of a 'forestry managed investment scheme' by subsection 394-25(2). | Subsection 394-25(2): 127. Where a 'CGT event' (other than for a 'CGT event' in respect of a thinning) [11] happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if: | Market value rule applies to' CGT events': 128. If, as a result of the 'CGT event' the Grower either: then the market value of the 'forestry interest' at the time of the event, or the reduction of the market value of the 'forestry interest' as a result of the event, is included in the assessable income of the Grower in the income year in which the 'CGT event' happens (subsection 394-25(2)). A market value rule applies rather than the amount of money actually received from the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same. 129. The market value amount included in the assessable income of a Grower is the value of the 'forestry interest' just before the 'CGT event', or where the Grower continues to hold their interest after the event, the amount by which the market value of the 'forestry interest' is reduced as a result of the 'CGT event' (subsection 394-25(2)). 130. Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell harvest of the trees grown under the Project. | Section 6-5: 131. Carbon and/or other environmental credit amounts received by a Grower in this Project do not arise as a result of t 'CGT event' and are not otherwise assessable under Division 394. The receipts of such an amount are a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. It is an item of the ordinary income and the assessable under section 6-5 in the year in which it is derived. | Section 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 132. Based on information provided with the application for this Product Ruling, a Grower accepted into the Project in the income year ended 30 June 2011 who carries on a business of afforestation individually (alone or in partnership) is expected to incur losses from their participation in the Project which will be subject to Division 35. [12] These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year. 133. The exceptions to the loss deferral rule depend upon the circumstances of individual Growers and are outside the scope of this Ruling. 134. The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion. 135. Where a Grower with income for non-commercial losses (NCL) purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: 136. Where a Grower with income for NCL purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: 137. A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: 138. In each individual year where the Commissioner's discretion is exercised a Grower within either paragraph 135 or paragraph 136 of this Ruling who would otherwise be required to defer a loss arising from their participation in the Project under section 35-10 until a later income year is able to offset that loss against their other assessable income. | Section 82KL - recouped expenditure: 139. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(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. | Part IVA - general tax avoidance provisions: 140. 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). 141. The Project will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraphs 31 and 35 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. 142. Growers to whom this Ruling applies will derive assessable income from holding or disposing of their 'forestry interest' in the Project. 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 Growers 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 relevant 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, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is 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. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends 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. | Deductible in income year ended | Establishment fee (including part rent prepayment) | $9090.91 per interest $18,181.82 for a minimum of 2 interests | 30 June 2011 See Note (i) | Annual Tending and Rent fees | Tending fee $215 per hectare per annum to manage the plantation, indexed annually Tending fee is $430 for a minimum of 2 interests Rent $170 per hectare per annum, indexed annually. Rent is $340 for a minimum of 2 interests | Any year in which this amount is paid. See Note (i) and (ii) Any year in which this amount is paid. See Note (i) and (iii) | Harvesting, delivery and supervision expenses | The year(s) in which such expenses are paid See Note (i) | 15% of the amount by which the net proceeds from the sale of timber exceeds $16,000 per hectare indexed from 30 June 2011. | Any year in which this amount is paid. See Note (i) | Interest payable to Albany Financial Pty Ltd | 30 June of the year in which the interest is incurred See Note (iv) | Credit card merchant fees incurred by a Grower | 30 June of the year in which the fee is incurred See Note (v) | 30 June of the year in which the fee is incurred See Note (vi) | South West of Western Australia between Bunbury and Albany | Species of trees to be planted | Approximately 10 years from 30 June 2011. | Date all Trees must be planted on scheme Land | Number of Trees per hectare | Number of hectares offered for establishment | Approximately 200 hectares | Size of each 'forestry interest' (Woodlot) | Minimum allocation of 'forestry interests' per Investor | Ongoing fees - payable from 2011 2012 income year | Incentive fee: 15% of the amount by which the net proceeds from the sale of timber exceeds $16000 per hectare, indexed from 30 June 2011. Insurance fee: Annual premium rate of approximately 0.7% of the insured value. Harvest fee: the cost incurred by the Project Manager. Unforseen expenses incurred by the Project manager in relation to fertiliser and/or insect issues. Transfer of interest fee: $330. | Fees payable under the Project Management Contract ( Schedule 2 ) | Fees payable under the Sub - lease ( Part 2 of the Schedule ) | The question of whether an outgoing [is] ... incurred in gaining or producing the assessable income is a question of characterisation' ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613, at CLR 17; ATC 4957; ATR 621). | To the extent that ... outgoings of interest ... can properly be characterised as of a kind referred to in the first limb of [section 8-1] they must draw their character from the use of the borrowed funds ( Fletcher , at CLR 19; ATC 4958; ATR 623). | [T]he characterisation of interest will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are put' ( Federal Commissioner of Taxation v. Roberts (1992) 37 FCR 246; 92 ATC 4380; (1992) 23 ATR 494, at FCR 257; ATC 4388; ATR 504). | Interest [is a] periodic payment for the use, but not the permanent acquisition of a capital item. Therefore, a consideration of the often-cited three matters identified by Dixon J in Sun Newspapers Ltd v FC of T ... assigns interest ... to revenue ( Australian National Hotels Ltd v. Federal Commissioner of Taxation (1988); 19 FCR 234; 88 ATC 4627; (1988) 19 ATR 1575, at FCR 241; ATC 4633-4634; ATR 1582). | The '70% DFE rule' and the establishment of the Trees | CGT event' within 4 years for Growers who are 'initial participants' | Subsections 394-10(5) Subsections 394-10(6 ) | Interest on loans to finance the 'forestry interest', merchant credit card fees and insurance costs of a Grower | Assessable income, 'CGT events' and the 'forestry interests' of Growers who are initial participants | Amounts received for Carbon and other environmental credits | Division 35 - deferral of losses from non-commercial business activities | Prepayment provisions and anti-avoidance provisions | Sections 82KZM, 82KZME, 82KZMF, 82KL and Part IVA | Interest on loans to finance the 'forestry interest' of a Grower | Amounts received by Growers for carbon and other environmental credits | Sections 35-10 and 35-55 - 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 2007/6
Legislative references: ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL ITAA 1936 82KZLA 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 170 ITAA 1936 177A ITAA 1936 177C ITAA 1936 177D ITAA 1936 177D(b) ITAA 1936 318 ITAA 1997 ITAA 1997 6-5 ITAA 1997 6-10 ITAA 1997 8-1 ITAA 1997 8-1(1) ITAA 1997 8-1(1)(a) ITAA 1997 8-1(2) ITAA 1997 8-1(2)(a) ITAA 1997 8-5 ITAA 1997 10-5 ITAA 1997 12-5 ITAA 1997 25-25 ITAA 1997 25-25(1) ITAA 1997 25-25(4) ITAA 1997 Subdiv 27-A ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-10(2) ITAA 1997 35-10(2C) ITAA 1997 35-10(2E) ITAA 1997 35-55 ITAA 1997 35-55(1) ITAA 1997 35-55(1)(b) ITAA 1997 35-55(1)(c) ITAA 1997 Div 394 ITAA 1997 394-10 ITAA 1997 394-10(1) ITAA 1997 394-10(1)(c) ITAA 1997 394-10(1)(d) ITAA 1997 394-10(1)(e) ITAA 1997 394-10(1)(f) ITAA 1997 394-10(2) ITAA 1997 394-10(4) ITAA 1997 394-10(5) ITAA 1997 394-10(6) ITAA 1997 394-10(7) ITAA 1997 394-15(1) ITAA 1997 394-15(2) ITAA 1997 394-15(4) ITAA 1997 394-15(5) ITAA 1997 394-20 ITAA 1997 394-25 ITAA 1997 394-25(1)(c) ITAA 1997 394-25(2) ITAA 1997 394-25(3) ITAA 1997 394-30 ITAA 1997 394-35 ITAA 1997 394-35(1) ITAA 1997 394-35(2) ITAA 1997 394-35(3) ITAA 1997 394-35(4) ITAA 1997 394-35(5) ITAA 1997 394-35(6) ITAA 1997 394-35(7) ITAA 1997 394-35(8) ITAA 1997 394-40 ITAA 1997 394-45 ITAA 1997 995-1 TAA 1953 TAA 1953 Sch 1 357-75(1) TAA 1953 Sch 1 394-10 SISA 1993 Copyright Act 1968 Corporations Act 2001
Case references: Australian National Hotels Ltd v. Federal Commissioner of Taxation (1988) 19 FCR 234 88 ATC 4627 (1988) 19 ATR 1575
Subject references: 4 year holding period 70 per cent DFE rule carrying on a business DFE direct forestry expenditure forestry interest forestry MIS interest expenses managed investment schemes market value substitution rule payments under the scheme producing assessable income product rulings reasonable expectation tax avoidance taxation administration
Other references: Hannebery and Hance (NSD 492 493 of 2008)