Product Ruling PR 2009/57
Date of effect: 4 November 2009

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 Gunns Plantations Walnut Project No. 3 or simply as 'the Project'. 2. All legislative references in this Product 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 class of entities who can rely on those tax benefits are referred to as Growers. Growers will be those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and who have executed the relevant Project Agreements set out in paragraph 28 of this Ruling on or before 15 June 2010. They will stay in the scheme until its completion and derive assessable income from this involvement. 5. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include: Superannuation Industry (Supervision) Act 1993 6. 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 7. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 28 to 84 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 9. 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: 3. This part of the Product Ruling specifies which entities: set out in the Ruling section of this Product Ruling. 4. The class of entities who can rely on those tax benefits are referred to as Growers. Growers will be those entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and who have executed the relevant Project Agreements set out in paragraph 28 of this Ruling on or before 15 June 2010. They will stay in the scheme until its completion and derive assessable income from this involvement. 5. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include: | Superannuation Industry (Supervision) Act 1993: 6. 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: 7. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 28 to 84 of this Ruling. 8. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 9. 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: 10. This Product Ruling applies prospectively from 4 November 2009, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 4 November 2009 until 15 June 2010, 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 2012. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 11. However this 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: 12. 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. 13. 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: 14. 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: 15. 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 any creditable acquisition it makes, it must be registered or required to be registered for GST and hold a valid tax invoice. | Application of this Ruling: 16. 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 below at paragraphs 28 to 84 of this Ruling. 17. The Grower's participation in the Project must constitute the carrying on of a business of primary production. Provided the Project is carried out as described below, the Grower's business of primary production will commence at the time of execution of their Management Agreement and Orchard Right Agreement on or before 15 June 2010. | Small business concessions: 18. From the 2007-08 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'). 19. 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 Product Ruling. | Section 6-5: 20. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5. | Sections 8-1, 25-25 and 40-880 and Division 27: 21. A Grower may claim tax deductions for the following fees and expenses on a per Walnut Lot basis, as set out in the table below. | Division 40: 22. A Grower will be entitled to tax deductions relating to the cost of establishing the Walnut Trees under Subdivision 40-F and the cost of a landcare operation under Subdivision 40-G on a per Walnut Lot basis, as set out in the table below. | Joint Venturers: 23. A Joint Venturer may claim deductions under section 8-1, 25-25, 40-515, 40-630 and 40-880 on a per Walnut Lot basis, for the following expenditure: 24. 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. | Section 35-55 - exercise of Commissioner's discretion: 25. Growers who will stay in the Project until its completion will be considered to be carrying on a business of primary production. Such Growers who are individuals and accepted into the Project by 15 June 2010 may make losses from the Project that may be affected by the loss deferral rule in section 35-10 in Division 35. 26. The discretion in paragraph 35-55(1)(b) will be exercised for such Growers to whom the loss deferral rule would otherwise apply as follows: Exercise of the discretion in this case however is also conditional on the Project being carried out in the manner described in paragraphs 28 to 84 of this Ruling. The discretion allows the Growers referred to in paragraph 26 of this Ruling to offset losses against their other assessable income in the year the loss is incurred. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 27. 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: 28. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 29. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows. 30. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 31. The main features of the Gunns Plantations Walnut Project No. 3 are as follows: 32. The Project will be a registered managed investment scheme under the Corporations Act 2001 . GPL has been issued with an Australian Financial Services Licence (Number 238701) and will be the Responsible Entity for the Project. 33. An offer to participate in the Project will be made through the PDS. The offer under the PDS is for approximately 717.8 hectares, which corresponds to approximately 3,589 Walnut Lots in the Project, although GPL reserves the right to accept oversubscriptions. An entity that participates in the Project as a Grower will do so by acquiring an interest in the Project which will consist of a minimum of 1 Walnut Lot. There is no minimum amount that must be raised under the PDS. 34. To participate in the Project, Applicants execute the Application and Power of Attorney Form contained in the PDS and lodge the executed form together with the Application Fee. Applications to participate in the Project must be made during the offer period which is: 35. For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute the Orchard Right Agreement and the Management Agreement on or after the date of this Ruling and on or before 15 June 2010 will commence participation as a Late Grower. This Ruling only applies to Late Growers (also referred to throughout this Ruling as Growers). Any Growers accepted into the Project between 16 June 2009 and the date of this Product Ruling are not covered by this Ruling and may apply for a private ruling regarding their participation in the Project. Note that a separate Product Ruling PR 2009/33 has issued for Growers who were accepted into the Project on or before 15 June 2009. 36. The Power of Attorney irrevocably appoints GPL to enter into, on behalf of the Grower, an Orchard Right Agreement and Management Agreement. The Orchard Rights granted to the Grower under the Orchard Right Agreement will comprise contractual rights in relation to each Walnut Lot of approximately 0.2 hectares in size. 37. Each Walnut Lot will have approximately 62 Walnut Trees on it. Approximately 0.19 hectares (or 95%) of each Walnut Lot will be Existing Orchard (trees planted prior to 1 January 2009) and 0.01 hectares (or 5%) will be New Orchard (trees planted after 1 January 2009). 38. Pursuant to the Management Agreement, Growers will engage GPL to perform the Services in respect of the Grower's Walnut Lot and act as sole agent to market, enter into negotiations and sell the Harvested Walnuts on the Grower's behalf. 39. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, Management Agreement, and Orchard Right Agreement provide that two entities may participate in the Project as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 40. The Constitution establishes the Project and operates as a deed binding all Growers and GPL. The Constitution sets out the general functions, powers and duties under which GPL 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. 41. 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. 42. Application Moneys are vested in and held by GPL on trust for the Growers in a bank account dedicated to the Growers (clauses 3.2, 3.4(c) and 6.1). 43. Before authorising or instructing the Custodian to release the Application Money in accordance with clause 9, the Responsible Entity must be satisfied, among other things, that: 44. The Responsible Entity is entitled to receive the fees provided for in the Orchard Right Agreement and Management Agreement (clause 12). 45. Among other things the Constitution sets out in detail the following: | Joint Venture: 46. The Constitution also provides for two entities to enter the Project 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 and the Second Joint Venturer each has a 50% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 47. 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 Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Leases: 48. The Tabbita Lane and Leeton Properties (the 'Project Land') are owned by Gunns and are, or will be, leased by Gunns to GPL under a Lease for the purposes of the Project. The Tabbita Lane Property and four of the six titles at the Leeton Property are subject to existing Leases between Gunns, as lessor, and GPL, as lessee. A further Lease over the remaining titles at the Leeton Property will be executed if required. 49. The Leases set out the terms and conditions under which Gunns will lease the Project Land to GPL for the Term together with: 50. Gunns undertakes to: | Orchard Right Agreement: 51. Each Grower will enter into an Orchard Right Agreement in respect of their Walnut Lot(s) with GPL. A Walnut Lot is a parcel or parcels of land of approximately 0.2 hectares in total, made up of 0.19 hectares of Existing Orchard and 0.01 hectares of New Orchard. 52. Under clause 3, GPL grants to the Grower and the Grower takes from GPL an Orchard Right over the Walnut Lot(s) for the Term for the purpose of carrying out the Permitted Activities, including: 53. The Orchard Right will have a Term commencing on 15 June 2010 and ending upon termination of the Management Agreement. 54. The Orchard Right Agreement also sets out provisions relating to: | Management Agreement: 55. Each Grower will engage GPL as Manager for the Term of the Project to perform the Initial Services, Maintenance Services and the Harvest and Processing Services subject to the terms and conditions of the Management Agreement. GPL may delegate the responsibility to perform these Services. 56. The Management Agreement will commence on 15 June 2010 and terminate on the earlier of: The Term may be extended by a period of two years at GPL's discretion if at 30 June 2035 the Project does not reach an IRR of 9.5% and GPL is reasonably satisfied that it is in the best interests of the Growers to do so (clause 2). 57. The Initial Services, listed in clause 4, are the services which GPL must complete in relation to each Walnut Lot from 15 June 2010 to 30 June 2010. 58. GPL must do all things necessary to rear the Trees and maintain the Walnut Lots by performing the Maintenance Services listed in clause 5 in a proper and efficient manner and in accordance with good horticultural practice. 59. GPL must do all things necessary to perform the Harvest and Processing Services listed in clause 6 in a proper and efficient manner and in accordance with good horticultural practice. 60. The Grower irrevocably and unconditionally appoints GPL as sole agent to market, enter into negotiations and sell the Walnuts on the Grower's behalf on substantially similar terms and conditions to those set out in the Walnut Sale Agreement (clause 10.1). 61. GPL must distribute and pay or procure that the Custodian distribute and pay to the Grower the Grower's Net Proceeds Entitlement (clause 18.3). 62. The Management Agreement also sets out provisions relating to: | Pooling of Walnuts and Grower's entitlement to proceeds: 63. The Constitution and Management Agreement set out provisions relating to the Grower's entitlement to the Net Proceeds Entitlement. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Initial Services Sub-contracting Agreement and Maintenance and Harvest Services Sub-contracting Agreement: 64. GPL engages Gunns as its sub-contractor, to perform the Initial Services under an Initial Services Sub-contracting Agreement, and the Maintenance Services and Harvest and Processing services under the Maintenance and Harvest Services Sub-contracting Agreement, in accordance with the terms and conditions set out in these Agreements. | Webster Sub-contracting Agreement: 65. Gunns, as GPL's sub-contractor, engages Webster as its sub-contractor to perform the Subcontracted Services. The Subcontracted Services are the Establishment Services (clause 6), the Initial Services (Webster) (clause 7), the Maintenance Services (Webster) (clause 8) and the Harvest and Processing Services (clause 9.3). | Walnut Sale Agreement and Deed Poll: 66. The Deed poll records Webster's commitment to enter into an agreement to purchase the 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 Walnuts harvested under the Project annually. 67. GPL, as agent for each Grower will agree to sell, and the Purchaser will agree to buy, the Processed Walnuts on the terms and conditions set out in the Walnut Sale Agreement. | Application Fee: 68. The Grower must pay an Application Fee of $6,424 per Walnut Lot on application, applied towards the following: | Ongoing Fees: 69. Ongoing Fees means the Orchard Right Fees payable by the Grower under the Orchard Right Agreement and the Operating Fees and Water Fees payable by the Grower under the Management Agreement from and including the year ending 30 June 2011. On a per Walnut Lot basis, these are: 70. Varied by Indexation means where a fee is to be varied by indexation, the new fee will be the current fee: 71. Where GPL procures insurance for the Grower against destruction or damage of the Grower's Walnuts, the Grower will pay to GPL the relevant insurance premium together with an administration charge of 11% of the amount of the premium within 14 days of the date of the invoice. | 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 and 69 of this Ruling. These percentages are as follows: | Terms Arrangement: 73. Via the execution of a terms application and Direct Debit Authority, Applicants may apply to GPL to pay the Application Fee of $6,424 per Walnut Lot under a Terms Arrangement. 74. A deposit of 10% of the Application Fee is payable on application. The unpaid balance (plus the Terms Establishment Fee of $150 plus 0.4% of the deferred amount) is payable by 11 equal consecutive monthly instalments as set out in Schedule 4 of the Terms Arrangement, with the first instalment to be made on the last business day of the month following the month in which the Grower's application is accepted and thereafter on the last business day of each successive month until fully paid. 75. The Grower will convey absolutely its rights, entitlements and interests in the Project to GPL as security for the unpaid amount of the Application Fee and, upon repayment of the outstanding monies in full, may require that they be reconveyed. 76. There will be no interest levied to the Grower, unless instalments are not paid on time in which case interest at a rate of 6% above the 5 year swap reference rate of the ANZ Bank (or Gunns' banker at the time) will be levied. | Finance: 77. A Grower who does not pay the Application Fee upon application from their own financial resources or under a Terms Arrangement with GPL can borrow from Gunns Finance (a lender associated with GPL) or borrow from an independent lender external to the Project. 78. Growers cannot rely on any part of this Ruling if the Application Fee, other than an Application Fee payable subject to a Terms Arrangement with GPL, is not paid in full on or before 15 June 2010 by the Grower or on the Grower's behalf by a lending institution. Where an application is accepted subject to finance approval by any lending institution, Growers cannot rely on this Ruling if written evidence of that approval has not been given to GPL by the lending institution on or before 15 June 2010. The lending institution must provide the full amount of the loan monies to GPL no later than 30 June 2010. 79. 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 Gunns Finance that materially differs from those set out in the documentation provided to the Tax Office with the application for this Product Ruling and summarised below. 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 that are not covered by this Product Ruling. | Finance of the Application Fee by Gunns Finance: 80. Subject to Gunns Finance accepting the Grower's application for finance of the Application Fee, the Grower will be bound by the terms and conditions of the Loan Contract set out in the PDS. Gunns Finance will provide the Grower with the loan on a full recourse basis and will pursue legal action against any defaulting borrowers. 81. The key features of the Loan Contract are: | Fee Facility by Gunns Finance for Ongoing Fees: 82. Under a Fee Facility Deed, Gunns Finance will also offer finance for 90% of the Ongoing Fees payable by the Grower in the years ending 30 June 2011 to 30 June 2014 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. 83. The key features of the Fee Facility are: | Other qualifications relating to finance: 84. 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 4 November 2009 | Is the Grower carrying on a business?: 85. For the amounts set out in paragraphs 21 to 23 of this Ruling to constitute allowable deductions the Grower's walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 3 must amount to the carrying on of a business of primary production. 86. 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? 87. 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). 88. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 3 and 4 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving growing and harvesting Walnuts for sale. | Section 8-1: 89. The Initial Services Fee (excluding the expenditure of $288.20 on a landcare operation), Orchard Right Fees, Operating Fees and Water Fees are deductible under section 8-1. A 'non-income producing' purpose is not identifiable in the arrangement and there is no capital component evident in these fees. 90. With the exception of the capital expenditure on a landcare operation, the tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 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). 91. Some Growers may finance their participation in the Project through a Loan Contract with Gunns Finance. Applying the same principles as that used for the Initial Services Fee, Orchard Right Fees, Operating Fees and Water Fees, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 92. 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. | Section 40-880: 93. Growers who elect to pay the Application Fee under the Terms Arrangement must pay a Terms Establishment Fee of $150 plus 0.4% of the deferred amount. This expenditure does not constitute a borrowing expense and is therefore not deductible under section 25-25. As it is capital in nature it is also not deductible under section 8-1. 94. However, section 40-880 will allow the Terms Establishment Fee to be deducted on a straight line basis over five income years. Section 40-880 applies to capital expenditure that is incurred in relation to a business and which is not taken into account elsewhere or denied deductibility under another provision of income tax law. | Sections 82KZL to 82KZMF: 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 Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). | Application of the prepayment provisions to this Project: 97. Under the scheme to which this Product Ruling applies, fees payable to GPL under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance is incurred monthly in arrears. 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 Project prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under the Loan Contract or Fee Facility Deed (including loan agreements with lenders other than Gunns Finance). 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 Project. | Division 40: 100. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Trees and the Native Vegetation Management (a landcare operation) is of a capital nature. This expenditure falls for consideration under Division 40. 101. The tax treatment of capital expenditure has been dealt with in paragraph 22 of this Ruling in the table and accompanying notes. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 102. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 26 of this Ruling, based on the evidence supplied, the Commissioner has determined that for those income years: 103. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 104. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) for Growers who will stay in the Project until its completion is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 105. 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: 106. 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). 107. The Gunns Plantations Walnut Project No. 3 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 21 to 23 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. 108. 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. 109. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 16. 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 below at paragraphs 28 to 84 of this Ruling. 17. The Grower's participation in the Project must constitute the carrying on of a business of primary production. Provided the Project is carried out as described below, the Grower's business of primary production will commence at the time of execution of their Management Agreement and Orchard Right Agreement on or before 15 June 2010. | Small business concessions: 18. From the 2007-08 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'). 19. 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 Product Ruling. | Section 6-5: 20. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5. | Sections 8-1, 25-25 and 40-880 and Division 27: 21. A Grower may claim tax deductions for the following fees and expenses on a per Walnut Lot basis, as set out in the table below. | Division 40: 22. A Grower will be entitled to tax deductions relating to the cost of establishing the Walnut Trees under Subdivision 40-F and the cost of a landcare operation under Subdivision 40-G on a per Walnut Lot basis, as set out in the table below. | Joint Venturers: 23. A Joint Venturer may claim deductions under section 8-1, 25-25, 40-515, 40-630 and 40-880 on a per Walnut Lot basis, for the following expenditure: 24. 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. | Section 35-55 - exercise of Commissioner's discretion: 25. Growers who will stay in the Project until its completion will be considered to be carrying on a business of primary production. Such Growers who are individuals and accepted into the Project by 15 June 2010 may make losses from the Project that may be affected by the loss deferral rule in section 35-10 in Division 35. 26. The discretion in paragraph 35-55(1)(b) will be exercised for such Growers to whom the loss deferral rule would otherwise apply as follows: Exercise of the discretion in this case however is also conditional on the Project being carried out in the manner described in paragraphs 28 to 84 of this Ruling. The discretion allows the Growers referred to in paragraph 26 of this Ruling to offset losses against their other assessable income in the year the loss is incurred. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 27. 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: 28. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 29. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows. 30. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. | Overview: 31. The main features of the Gunns Plantations Walnut Project No. 3 are as follows: 32. The Project will be a registered managed investment scheme under the Corporations Act 2001 . GPL has been issued with an Australian Financial Services Licence (Number 238701) and will be the Responsible Entity for the Project. 33. An offer to participate in the Project will be made through the PDS. The offer under the PDS is for approximately 717.8 hectares, which corresponds to approximately 3,589 Walnut Lots in the Project, although GPL reserves the right to accept oversubscriptions. An entity that participates in the Project as a Grower will do so by acquiring an interest in the Project which will consist of a minimum of 1 Walnut Lot. There is no minimum amount that must be raised under the PDS. 34. To participate in the Project, Applicants execute the Application and Power of Attorney Form contained in the PDS and lodge the executed form together with the Application Fee. Applications to participate in the Project must be made during the offer period which is: 35. For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute the Orchard Right Agreement and the Management Agreement on or after the date of this Ruling and on or before 15 June 2010 will commence participation as a Late Grower. This Ruling only applies to Late Growers (also referred to throughout this Ruling as Growers). Any Growers accepted into the Project between 16 June 2009 and the date of this Product Ruling are not covered by this Ruling and may apply for a private ruling regarding their participation in the Project. Note that a separate Product Ruling PR 2009/33 has issued for Growers who were accepted into the Project on or before 15 June 2009. 36. The Power of Attorney irrevocably appoints GPL to enter into, on behalf of the Grower, an Orchard Right Agreement and Management Agreement. The Orchard Rights granted to the Grower under the Orchard Right Agreement will comprise contractual rights in relation to each Walnut Lot of approximately 0.2 hectares in size. 37. Each Walnut Lot will have approximately 62 Walnut Trees on it. Approximately 0.19 hectares (or 95%) of each Walnut Lot will be Existing Orchard (trees planted prior to 1 January 2009) and 0.01 hectares (or 5%) will be New Orchard (trees planted after 1 January 2009). 38. Pursuant to the Management Agreement, Growers will engage GPL to perform the Services in respect of the Grower's Walnut Lot and act as sole agent to market, enter into negotiations and sell the Harvested Walnuts on the Grower's behalf. 39. As an alternative to participation by a Grower as a single entity, the terms of the Constitution, Management Agreement, and Orchard Right Agreement provide that two entities may participate in the Project as Joint Venture Growers on the terms specified in the Constitution. | Constitution: 40. The Constitution establishes the Project and operates as a deed binding all Growers and GPL. The Constitution sets out the general functions, powers and duties under which GPL 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. 41. 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. 42. Application Moneys are vested in and held by GPL on trust for the Growers in a bank account dedicated to the Growers (clauses 3.2, 3.4(c) and 6.1). 43. Before authorising or instructing the Custodian to release the Application Money in accordance with clause 9, the Responsible Entity must be satisfied, among other things, that: 44. The Responsible Entity is entitled to receive the fees provided for in the Orchard Right Agreement and Management Agreement (clause 12). 45. Among other things the Constitution sets out in detail the following: | Joint Venture: 46. The Constitution also provides for two entities to enter the Project 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 and the Second Joint Venturer each has a 50% Prescribed Proportion. This Ruling will not apply to Joint Venturers comprised of more than two entities. | Compliance Plan: 47. 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 Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Leases: 48. The Tabbita Lane and Leeton Properties (the 'Project Land') are owned by Gunns and are, or will be, leased by Gunns to GPL under a Lease for the purposes of the Project. The Tabbita Lane Property and four of the six titles at the Leeton Property are subject to existing Leases between Gunns, as lessor, and GPL, as lessee. A further Lease over the remaining titles at the Leeton Property will be executed if required. 49. The Leases set out the terms and conditions under which Gunns will lease the Project Land to GPL for the Term together with: 50. Gunns undertakes to: | Orchard Right Agreement: 51. Each Grower will enter into an Orchard Right Agreement in respect of their Walnut Lot(s) with GPL. A Walnut Lot is a parcel or parcels of land of approximately 0.2 hectares in total, made up of 0.19 hectares of Existing Orchard and 0.01 hectares of New Orchard. 52. Under clause 3, GPL grants to the Grower and the Grower takes from GPL an Orchard Right over the Walnut Lot(s) for the Term for the purpose of carrying out the Permitted Activities, including: 53. The Orchard Right will have a Term commencing on 15 June 2010 and ending upon termination of the Management Agreement. 54. The Orchard Right Agreement also sets out provisions relating to: | Management Agreement: 55. Each Grower will engage GPL as Manager for the Term of the Project to perform the Initial Services, Maintenance Services and the Harvest and Processing Services subject to the terms and conditions of the Management Agreement. GPL may delegate the responsibility to perform these Services. 56. The Management Agreement will commence on 15 June 2010 and terminate on the earlier of: The Term may be extended by a period of two years at GPL's discretion if at 30 June 2035 the Project does not reach an IRR of 9.5% and GPL is reasonably satisfied that it is in the best interests of the Growers to do so (clause 2). 57. The Initial Services, listed in clause 4, are the services which GPL must complete in relation to each Walnut Lot from 15 June 2010 to 30 June 2010. 58. GPL must do all things necessary to rear the Trees and maintain the Walnut Lots by performing the Maintenance Services listed in clause 5 in a proper and efficient manner and in accordance with good horticultural practice. 59. GPL must do all things necessary to perform the Harvest and Processing Services listed in clause 6 in a proper and efficient manner and in accordance with good horticultural practice. 60. The Grower irrevocably and unconditionally appoints GPL as sole agent to market, enter into negotiations and sell the Walnuts on the Grower's behalf on substantially similar terms and conditions to those set out in the Walnut Sale Agreement (clause 10.1). 61. GPL must distribute and pay or procure that the Custodian distribute and pay to the Grower the Grower's Net Proceeds Entitlement (clause 18.3). 62. The Management Agreement also sets out provisions relating to: | Pooling of Walnuts and Grower's entitlement to proceeds: 63. The Constitution and Management Agreement set out provisions relating to the Grower's entitlement to the Net Proceeds Entitlement. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Initial Services Sub-contracting Agreement and Maintenance and Harvest Services Sub-contracting Agreement: 64. GPL engages Gunns as its sub-contractor, to perform the Initial Services under an Initial Services Sub-contracting Agreement, and the Maintenance Services and Harvest and Processing services under the Maintenance and Harvest Services Sub-contracting Agreement, in accordance with the terms and conditions set out in these Agreements. | Webster Sub-contracting Agreement: 65. Gunns, as GPL's sub-contractor, engages Webster as its sub-contractor to perform the Subcontracted Services. The Subcontracted Services are the Establishment Services (clause 6), the Initial Services (Webster) (clause 7), the Maintenance Services (Webster) (clause 8) and the Harvest and Processing Services (clause 9.3). | Walnut Sale Agreement and Deed Poll: 66. The Deed poll records Webster's commitment to enter into an agreement to purchase the 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 Walnuts harvested under the Project annually. 67. GPL, as agent for each Grower will agree to sell, and the Purchaser will agree to buy, the Processed Walnuts on the terms and conditions set out in the Walnut Sale Agreement. | Application Fee: 68. The Grower must pay an Application Fee of $6,424 per Walnut Lot on application, applied towards the following: | Ongoing Fees: 69. Ongoing Fees means the Orchard Right Fees payable by the Grower under the Orchard Right Agreement and the Operating Fees and Water Fees payable by the Grower under the Management Agreement from and including the year ending 30 June 2011. On a per Walnut Lot basis, these are: 70. Varied by Indexation means where a fee is to be varied by indexation, the new fee will be the current fee: 71. Where GPL procures insurance for the Grower against destruction or damage of the Grower's Walnuts, the Grower will pay to GPL the relevant insurance premium together with an administration charge of 11% of the amount of the premium within 14 days of the date of the invoice. | 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 and 69 of this Ruling. These percentages are as follows: | Terms Arrangement: 73. Via the execution of a terms application and Direct Debit Authority, Applicants may apply to GPL to pay the Application Fee of $6,424 per Walnut Lot under a Terms Arrangement. 74. A deposit of 10% of the Application Fee is payable on application. The unpaid balance (plus the Terms Establishment Fee of $150 plus 0.4% of the deferred amount) is payable by 11 equal consecutive monthly instalments as set out in Schedule 4 of the Terms Arrangement, with the first instalment to be made on the last business day of the month following the month in which the Grower's application is accepted and thereafter on the last business day of each successive month until fully paid. 75. The Grower will convey absolutely its rights, entitlements and interests in the Project to GPL as security for the unpaid amount of the Application Fee and, upon repayment of the outstanding monies in full, may require that they be reconveyed. 76. There will be no interest levied to the Grower, unless instalments are not paid on time in which case interest at a rate of 6% above the 5 year swap reference rate of the ANZ Bank (or Gunns' banker at the time) will be levied. | Finance: 77. A Grower who does not pay the Application Fee upon application from their own financial resources or under a Terms Arrangement with GPL can borrow from Gunns Finance (a lender associated with GPL) or borrow from an independent lender external to the Project. 78. Growers cannot rely on any part of this Ruling if the Application Fee, other than an Application Fee payable subject to a Terms Arrangement with GPL, is not paid in full on or before 15 June 2010 by the Grower or on the Grower's behalf by a lending institution. Where an application is accepted subject to finance approval by any lending institution, Growers cannot rely on this Ruling if written evidence of that approval has not been given to GPL by the lending institution on or before 15 June 2010. The lending institution must provide the full amount of the loan monies to GPL no later than 30 June 2010. 79. 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 Gunns Finance that materially differs from those set out in the documentation provided to the Tax Office with the application for this Product Ruling and summarised below. 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 that are not covered by this Product Ruling. | Finance of the Application Fee by Gunns Finance: 80. Subject to Gunns Finance accepting the Grower's application for finance of the Application Fee, the Grower will be bound by the terms and conditions of the Loan Contract set out in the PDS. Gunns Finance will provide the Grower with the loan on a full recourse basis and will pursue legal action against any defaulting borrowers. 81. The key features of the Loan Contract are: | Fee Facility by Gunns Finance for Ongoing Fees: 82. Under a Fee Facility Deed, Gunns Finance will also offer finance for 90% of the Ongoing Fees payable by the Grower in the years ending 30 June 2011 to 30 June 2014 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. 83. The key features of the Fee Facility are: | Other qualifications relating to finance: 84. 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 4 November 2009 | Is the Grower carrying on a business?: 85. For the amounts set out in paragraphs 21 to 23 of this Ruling to constitute allowable deductions the Grower's walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 3 must amount to the carrying on of a business of primary production. 86. 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? 87. 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). 88. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 3 and 4 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving growing and harvesting Walnuts for sale. | Section 8-1: 89. The Initial Services Fee (excluding the expenditure of $288.20 on a landcare operation), Orchard Right Fees, Operating Fees and Water Fees are deductible under section 8-1. A 'non-income producing' purpose is not identifiable in the arrangement and there is no capital component evident in these fees. 90. With the exception of the capital expenditure on a landcare operation, the tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 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). 91. Some Growers may finance their participation in the Project through a Loan Contract with Gunns Finance. Applying the same principles as that used for the Initial Services Fee, Orchard Right Fees, Operating Fees and Water Fees, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 92. 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. | Section 40-880: 93. Growers who elect to pay the Application Fee under the Terms Arrangement must pay a Terms Establishment Fee of $150 plus 0.4% of the deferred amount. This expenditure does not constitute a borrowing expense and is therefore not deductible under section 25-25. As it is capital in nature it is also not deductible under section 8-1. 94. However, section 40-880 will allow the Terms Establishment Fee to be deducted on a straight line basis over five income years. Section 40-880 applies to capital expenditure that is incurred in relation to a business and which is not taken into account elsewhere or denied deductibility under another provision of income tax law. | Sections 82KZL to 82KZMF: 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 Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). | Application of the prepayment provisions to this Project: 97. Under the scheme to which this Product Ruling applies, fees payable to GPL under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance is incurred monthly in arrears. 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 Project prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under the Loan Contract or Fee Facility Deed (including loan agreements with lenders other than Gunns Finance). 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 Project. | Division 40: 100. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Trees and the Native Vegetation Management (a landcare operation) is of a capital nature. This expenditure falls for consideration under Division 40. 101. The tax treatment of capital expenditure has been dealt with in paragraph 22 of this Ruling in the table and accompanying notes. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 102. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 26 of this Ruling, based on the evidence supplied, the Commissioner has determined that for those income years: 103. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 104. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) for Growers who will stay in the Project until its completion is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 105. 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: 106. 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). 107. The Gunns Plantations Walnut Project No. 3 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 21 to 23 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. 108. 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. 109. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Is the Grower carrying on a business?: 85. For the amounts set out in paragraphs 21 to 23 of this Ruling to constitute allowable deductions the Grower's walnut cultivation activities as a participant in the Gunns Plantations Walnut Project No. 3 must amount to the carrying on of a business of primary production. 86. 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? 87. 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). 88. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 3 and 4 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving growing and harvesting Walnuts for sale. | Section 8-1: 89. The Initial Services Fee (excluding the expenditure of $288.20 on a landcare operation), Orchard Right Fees, Operating Fees and Water Fees are deductible under section 8-1. A 'non-income producing' purpose is not identifiable in the arrangement and there is no capital component evident in these fees. 90. With the exception of the capital expenditure on a landcare operation, the tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 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). 91. Some Growers may finance their participation in the Project through a Loan Contract with Gunns Finance. Applying the same principles as that used for the Initial Services Fee, Orchard Right Fees, Operating Fees and Water Fees, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 92. 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. | Section 40-880: 93. Growers who elect to pay the Application Fee under the Terms Arrangement must pay a Terms Establishment Fee of $150 plus 0.4% of the deferred amount. This expenditure does not constitute a borrowing expense and is therefore not deductible under section 25-25. As it is capital in nature it is also not deductible under section 8-1. 94. However, section 40-880 will allow the Terms Establishment Fee to be deducted on a straight line basis over five income years. Section 40-880 applies to capital expenditure that is incurred in relation to a business and which is not taken into account elsewhere or denied deductibility under another provision of income tax law. | Sections 82KZL to 82KZMF: 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 Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions). | Application of the prepayment provisions to this Project: 97. Under the scheme to which this Product Ruling applies, fees payable to GPL under the Management Agreement and the Orchard Right Agreement are incurred annually and the interest payable to Gunns Finance is incurred monthly in arrears. 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 Project prepays all or some of the expenditure payable under the Management Agreement and the Orchard Right Agreement, or prepays interest under the Loan Contract or Fee Facility Deed (including loan agreements with lenders other than Gunns Finance). 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 Project. | Division 40: 100. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the Trees and the Native Vegetation Management (a landcare operation) is of a capital nature. This expenditure falls for consideration under Division 40. 101. The tax treatment of capital expenditure has been dealt with in paragraph 22 of this Ruling in the table and accompanying notes. | Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion: 102. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years referred to in paragraph 26 of this Ruling, based on the evidence supplied, the Commissioner has determined that for those income years: 103. A Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income. 104. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) for Growers who will stay in the Project until its completion is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 105. 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: 106. 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). 107. The Gunns Plantations Walnut Project No. 3 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 21 to 23 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. 108. 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 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. | $6,126.63 See Notes (i) & (ii) | $1,133 (Varied by Indexation), plus 23.1% of the Gross Proceeds Entitlement See Notes (i), (iii) & (iv) | Preceding fixed component of annual Operating Fee (Varied by Indexation), plus 23.1% of the Gross Proceeds Entitlement See Notes (i), (iii) & (iv) | $517 (Varied by Indexation), plus 2% of the fee so varied See Notes (i), (iii) & (iv) | Preceding annual Water Fee (Varied by Indexation), plus 2% of the fee so varied See Notes (i), (iii) & (iv) | $9.17 See Notes (i) & (iii) | $220 (Varied by Indexation) See Notes (i), (iii) & (iv) | Preceding annual Orchard Right Fee (Varied by Indexation) See Notes (i), (iii) & (iv) | Interest on loans with Gunns Finance | As incurred See Notes (iv) & (v) | Must be calculated See Note (vi) | Must be calculated See Note (vii) | Must be calculated See Note (viii) | Goolgowi and Leeton in the Riverina District of New South Wales | Type of business to be carried on by each Grower | Commercial growing and cultivation of Walnut Trees for the purpose of harvesting Walnuts for sale | 25 years, may be extended by a period of 2 years at GPL's discretion | Number of hectares offered for cultivation | Approximately 717.8 (approximately 3,589 Walnut Lots) | Number of Trees per hectare | Minimum allocation per Grower | Initial cost per Walnut Lot | Ongoing costs per Walnut Lot | Deduction for Initial Services Fee, Operating Fees, Water Fees, Orchard Right Fees, interest, Loan Establishment Fee and Terms Establishment Fee | Deductions for capital expenditure | Division 35 - deferral of losses from non-commercial business activities | Prepayment provisions and anti-avoidance provisions | Deductibility of the Initial Services Fee, Operating Fees, Water Fees, Orchard Right Fees and interest on loans with Gunns Finance | Administration Fee payable under a Terms Arrangement | Expenditure of a capital nature | Appendix 2 - Detailed contents list


Related rulings: TR 97/7 TR 97/11 TR 98/22 PR 2009/33
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 177A ITAA 1936 177C ITAA 1936 177D ITAA 1936 177D(b) ITAA 1936 318 ITAA 1997 ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 17-5 ITAA 1997 25-25 ITAA 1997 Div 27 ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-10(2) ITAA 1997 35-55 ITAA 1997 35-55(1)(b) ITAA 1997 Div 40 ITAA 1997 Subdiv 40-F ITAA 1997 Subdiv 40-G ITAA 1997 40-515 ITAA 1997 40-515(1)(b) ITAA 1997 40-520(2) ITAA 1997 40-525(2) ITAA 1997 40-530 ITAA 1997 40-545 ITAA 1997 40-630 ITAA 1997 40-635 ITAA 1997 40-880 TAA 1953 Copyright Act 1968 Corporations Act 2001 SISA 1993
Case references: Hance v. FC of T; Hannebery v. FC of T [2008] FCAFC 196 2008 ATC 20-085
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