Product Ruling PR 2007/90
Date of effect: 31 October 2007

What this ruling is about: 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. In this Product Ruling this scheme is referred to as the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) or simply as 'the Project'. Class of entities 2. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Growers. 3. The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and which execute relevant Project Agreements mentioned in paragraph 33 of this Ruling on or before 15 March 2008. They must have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. 4. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: Superannuation Industry (Supervision) Act 1993 5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product ruling as to whether investment in this product may contravene the provisions of SISA 1993. Qualifications 6. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 33 to 81 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 2. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Growers. 3. The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after the date this Product Ruling is made and which execute relevant Project Agreements mentioned in paragraph 33 of this Ruling on or before 15 March 2008. They must have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement. 4. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: | Superannuation Industry (Supervision) Act 1993: 5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product ruling as to whether investment in this product may contravene the provisions of SISA 1993. | Qualifications: 6. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 33 to 81 of this Ruling. 7. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 8. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 9. This Product Ruling applies prospectively from 31 October 2007 the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 31 October 2007 until 15 March 2008, being the closing date for entry into the scheme. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2010. 10. However the Product Ruling only applies to the extent that: 11. If this Product Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)). 12. If this Product Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met: 13. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA). | Changes in the law: 14. Although this Product Ruling deals with the laws enacted at the time it was issued, later amendments 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 Tax Office suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling is issued. | Goods and Services Tax: 17. All fees and expenditure referred to in this Product Ruling include the Goods and Services Tax (GST) where applicable. In order for an entity (referred to in this Ruling as a Grower) to be entitled to claim input tax credits for the GST included in its expenditure, it must be registered or required to be registered for GST and hold a valid tax invoice. | Application of this Ruling: 18. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 33 to 81 of this Ruling. 19. 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 the Grower is granted a lease under the Lease and Sub-lease for 2007 Growers (Lease and Sub-lease) and at the time of execution of their Project Operations Agreement for 2007 Growers (Project Operations Agreement). | Concessions for 'small business entities': 20. 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'). 21. 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. Accordingly, 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. | Sections 6-5 and 17-5: 22. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5. | Section 8-1: 23. A Grower who is accepted to participate in the Project on or before 15 March 2008 may claim tax deductions, on a per Trufferie basis, for the following expenditure set out in the Table below. | Division 40: 24. A Grower will also be entitled to tax deductions for the application fee payable under the Terms Agreement and for the establishment of the truffles. All deductions shown in the following Table are determined under Division 40, on a per Trufferie basis. The deduction is allowable when the truffles, harvested from the Oak and Hazelnut trees, enter their first commercial season (section 40-530, item 2). The Responsible Entity will inform Growers of when the truffles enter their first commercial season and the amount that may be claimed as a tax deduction. | Part 3-1: 25. The shares in Truffle Properties Limited are CGT assets (section 108-5) and the amounts paid by a shareholder to acquire the shares are an outgoing of capital and not allowable as a deduction. 26. The amounts paid for each share will represent the first element of the cost base of the share (subsection 110-25(2)). Any disposal of the shares by a shareholder will be a CGT event and may give rise to a capital gain or loss. | Section 328-285: 27. A Grower who is a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, for such a Grower, for an income year, the difference between the value of all their trading stock at the start and a reasonable estimate of it at the end, is less than $5,000, they can choose not to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)). 28. Where the small business entity chooses to account for changes in the value of their trading stock for an income year, they will have to do a stocktake and account for the change in the value of all their trading stock (Subdivision 70-C). | Section 70-35: 29. A Grower who is not a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grower must include the amount of that excess in assessable income. 30. Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grower may claim the amount of that excess as an allowable deduction. | Section 35-55 - exercise of Commissioner's discretion: 31. A Grower who is an individual accepted into the Project by 15 March 2008 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for these Growers for the income years ended 30 June 2008 to 30 June 2013. This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 32. For a Grower who commences participation in the Project and incurs expenditure as required by the Project Operations Agreement and the Lease and Sub-lease, the following provisions of the ITAA 1936 have application as indicated: 33. The scheme that is the subject of this Ruling is identified and described in 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. 34. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. 35. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows. | Overview: 36. Following is a summary of the scheme: 37. The Project is registered as a managed investment scheme under the Corporations Act 2001. Watershed Premium Wines Ltd has been issued with Australian Financial Service Licence No 296166 and will be the Responsible Entity for the Project. 38. The Project involves the commercial growing, cultivation and harvesting of truffles and hazelnuts. 39. An offer to participate in the Project will be made through a combined PDS/Prospectus. The offer under the PDS/Prospectus is for approximately 60 hectares which corresponds to 300 Trufferies, 53 of which were allocated to Growers on or before 15 June 2007 in line with Product Ruling PR 2007/22. There is no minimum subscription for this Project as it is an extension of the 'Oak Valley Truffle Project'. PR 2006/21 and PR 2006/122 apply to Growers who were accepted to participate in the 'Oak Valley Truffle Project' during the period 22 March 2006 to on or before 15 March 2007. The minimum subscription of 50 Trufferies was reached under PR 2006/21. 40. The offer under the PDS/Prospectus is a stapled interest. A Grower that participates in the Project will do so by acquiring an interest in the Project which will consist of a minimum of one Trufferie. For each Trufferie applied for, an Applicant must also apply for 3,508 ordinary shares in the Land Owner, Truffle Properties Limited. The shares can be held by any entity and can be held in a different name from the Trufferie owner. Once the Responsible Entity has allotted a Trufferie to a Grower, the offer is no longer stapled and the shares can be transferred separately to the interest in the Trufferie. This Ruling does not address the tax consequences of disposing of shares in Truffle Properties Limited. 41. Applicants execute a Power of Attorney contained in the PDS/Prospectus. The Power of Attorney irrevocably appoints Watershed Premium Wines Ltd to enter into, on behalf of the Grower, a Lease and Sub-lease, a Project Operations Agreement, the application for shares in Truffle Properties Limited and any other documents required to hold an interest in the Project. 42. Watershed Premium Wines Ltd will allocate established Trufferies to Applicants who are accepted as Growers in the Project. Truffle Properties Limited (the Land Owner) will plant approximately 50 Oak and 50 Hazelnut trees which have been inoculated with black truffle fungus on each Trufferie. 43. This Ruling only applies to Applicants who are accepted to participate in the Project and who are granted a lease under the Lease and Sub-lease and who execute the Project Operations Agreement after the date of this Ruling and on or before 15 March 2008. Product Ruling PR 2007/22 applies to Growers who were accepted to participate in the Project during the period 21 March 2007 to on or before 15 June 2007. 44. The Project will be conducted on land located approximately 10 kilometres south-west of Manjimup, Western Australia on the corner of Seven Day Road and Appadene Road. 45. The Project land is owned by Truffle Properties Limited and will be leased to the Grower. Specifically, the property is described as Lot 102 on Deposited Plan 47397 being the whole of the land comprised in Certificate of Title Volume 2616 Folio 415 and Lot 11 on Diagram 92046 being the whole of the land comprised in Certificate of Title Volume 2156 Folio 98. | Constitution: 46. The Constitution establishes the Project and operates as a deed binding on all Growers and Watershed Premium Wines Ltd. The Constitution sets out the terms and conditions under which Watershed Premium Wines Ltd 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. 47. In order to acquire an interest in the Project, the Grower must make an application for a Trufferie in accordance with the PDS/Prospectus. Among other things, the application must be completed in a form approved by the Responsible Entity, signed by or on behalf of the Applicant and accompanied by the payment of the Application Money in a form acceptable to the Responsible Entity. 48. Watershed Premium Wines Ltd holds the Application Money on bare trust and will deposit all Application Moneys received from applicants in a Trust Account (clause 6). 49. Once Watershed Premium Wines Ltd has accepted the application and all of the Project Documents have been executed and remain in force, the Application Money may be applied against the fees due to Watershed Premium Wines Ltd (clause 3.6). 50. Under the Constitution, the Responsible Entity will keep a register of Growers. The Constitution also sets out provisions relating to: | Compliance Plan: 51. As required by the Corporations Act, a Compliance Plan has been prepared for the Project. Its purpose is to ensure that Watershed Premium Wines Ltd manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Lease and Sub-lease for 2007 Growers: 52. Growers are granted an interest in the Trufferie in the form of a lease to use their Trufferie for the purpose of conducting their truffle and hazelnut business upon the terms and conditions as set out in the Agreement. 53. The Lease and Sub-lease sets out the rights and obligations of the parties to the Agreement. Under the terms of the Lease and Sub-lease each Grower will lease a minimum of 1 Trufferie of 0.2 hectares. The Lease and Sub-lease shall operate from the date the Trufferie is allotted to the Grower and will continue until the Project is terminated on 30 June 2027 (Part 4 of the Schedule). 54. Clause 4 provides that the improvements on the Land, including the irrigation, are the property of the Land Owner. The Land Owner grants the Grower the non-exclusive right to use: 55. The Land Owner acknowledges that subject to any provisions of the Lease and Sub-lease the Grower's truffles and hazelnuts will remain the property of the Grower during the Term of the Lease and Sub-lease (clause 2.4). 56. The Grower's obligations are set out in detail in clause 5 under which the Grower agrees to use the Trufferie for the purpose of cultivating, maintaining and harvesting the truffles and hazelnuts in accordance with sound silvicultural practices. | Project Operations Agreement: 57. Under the Project Operations Agreement the Grower appoints the Responsible Entity to manage the Trufferie and to carry out management services subject to the terms and conditions of the Agreement. The Agreement will commence on the date the Responsible Entity accepts the Grower's application under the PDS/Prospectus and shall continue until its termination under clause 15. 58. The following Initial Services will be provided during the Initial Period, being from the Commencement Date to 31 March 2008: 59. As part of the Initial Services the Responsible Entity will apply lime, herbicide and fertiliser to the Trufferie between 16 March 2008 and 31 March 2008. 60. The Responsible Entity will commence the provision of the Ongoing Services from 1 April 2008 until the expiry of the Lease. 61. The Ongoing Services include: 62. The Responsible Entity will send a report to the Grower no later than 31 July 2008 and by 31 July of each succeeding year summarising details of all hazelnuts and truffles harvested in the preceding financial year and any other comments that may reasonably affect the Project. | Marketing and Management Agreement: 63. Watershed Premium Wines Ltd will enter into a Marketing and Management Agreement with Truffle Projects Pty Ltd. Under this Agreement Watershed Premium Wines Ltd engages Truffle Projects Pty Ltd (the Manager) as an independent contractor to carry out its duties and obligations under the Project Operations Agreement for the Term of the Project (clause 2). The Manager may delegate its responsibilities under this Agreement. | Pooling of truffles and hazelnuts and Grower's entitlement to Net Proceeds: 64. The Project Operations Agreement sets out the provisions relating to the Grower's entitlement to harvest proceeds. This Product ruling only applies where the following principles apply to the pooling and distribution arrangements: 65. The proceeds from the sale of the Grower's truffles and hazelnuts will be paid into a Trust Account held by the Bare Trustee (clause 4 of the Constitution). A Grower's Prescribed Proportion of the proceeds will be distributed to the Grower after deducting the fees and costs referred to in clause 12 of the Constitution. If the aggregate sum to be distributed is less than $1,000, then at the discretion of the Responsible Entity, the distribution to Growers may be postponed. The term 'Prescribed Proportion' is defined in the Constitution. | Fees: 66. Under the terms of the Project Operations Agreement, and the Lease and Sub-lease a Grower will make payments as described below on a per Trufferie basis. | Project Operations Agreement: 67. The following Fees are payable under the Project Operations Agreement: | Lease and Sub-lease: 68. Rent of $652.30 for the Initial Period is payable on application (see paragraphs 71 and 72 of this Ruling for payment options); 69. In Year 1 (1 April 2008 to 30 June 2008) Rent of $652.30 (indexed) is payable on 1 June 2008. In each succeeding Financial Year Rent of $652.30 (indexed) is payable on 1 June for the Term of the Project. 70. Rent will be reviewed on 1 June 2008 and thereafter on 1 June of each year for the Term of the Project. A Grower is required to pay an amount of Rent equal to the amount paid in the previous Financial Year indexed by CPI or 3%, whichever is the greater. | Application Money: 71. Application Money of $16,468.30 per Trufferie is payable on application. The Application Money consists of: 72. Upon signing the Application Form, the Grower acknowledges that the full amount of the application money is immediately due and payable. However, under the PDS/Prospectus, the Responsible Entity is offering a Terms Agreement for payment of the Application Money (see paragraphs 76 to 80 of this Ruling). | Finance: 73. A Grower who does not pay the Application Money in full upon application may enter into a Terms Agreement with Watershed Premium Wines Ltd or borrow from an independent lender external to the Project. 74. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if the Grower enters into a finance arrangement with Watershed Premium Wines Ltd that materially differs from that set out in the documentation provided to the Tax Office with the application for the 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 under finance arrangements not covered by this Product Ruling. 75. Other than where a Terms Agreement is in place Growers cannot rely on any part of this Ruling if the Application Money is not paid in full on or before 15 March 2008 by the Grower or, on the Grower's behalf, by a lending institution. | Terms Agreement: 76. If a Grower chooses to pay the Application Money under the Terms Agreement, they must complete a Terms Application Form and Direct Debit Request. Growers must pay a non-refundable application fee of $50 per Trufferie applied for. 77. Under the Terms Agreement a deposit of $7,925.30 is payable on application with the balance payable by 12 equal monthly instalments of $762 (including interest at 11.5% per annum daily reducing). The deposit will be applied as follows: 78. The first monthly payment is due one month from the date of Allotment. The full amount of the Application Money must be paid no later than 12 months from the date the Grower is accepted to participate in the Project. 79. If a Grower does not pay the required instalments under the Terms Agreement, the balance of principal, interest and any additional costs payable under the Agreement becomes immediately due and payable to the Responsible Entity. In addition, the Responsible Entity may take legal action to recover the balance of principal and interest and any costs payable under this Agreement or any other legal action relating to this Agreement, take possession of the Grower's Trufferie and do anything an owner of the secured property is entitled to do (clause 9.2 of the Terms Agreement). 80. Watershed Premium Wines Ltd may charge the Grower interest on overdue amounts (clause 2.6). 81. 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 31 October 2007 | Is the Grower carrying on a business?: 82. For the amounts set out in paragraphs 23 and 24 of this Ruling to constitute allowable deductions, the Grower's horticulture activities as a participant in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) must amount to the carrying on of a business of primary production. 83. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on a business of primary production. 84. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 85. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers). As Taxation Ruling TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. 86. Having applied these principles to the arrangement set out above, a Grower in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) is accepted to be carrying on a business of growing and harvesting truffles and hazelnuts for sale. | Deductibility of Management Fees, Rent and interest payable under the Terms Agreement: 87. Other than part of the Rent payable in the year ended 30 June 2008, the Management Fees and Rent are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of Taxation Ruling TR 2000/8) is not identifiable in the arrangement and, other than part of the Rent in the Initial Period, there is no capital component evident in the Management Fees and interest (see paragraphs 49 to 51 of TR 2000/8). 88. Subject to paragraphs 89 and 90 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 89. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticulture business which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that a portion of the Rent payable by a Grower will be capital expenditure. 90. A Grower who enters the Project on or before 15 March 2008 pays Rent of $1,304.60 in the year ended 30 June 2008 which is equivalent to the amount of Rent payable for two full income years. As the Grower does not lease the land for the full income year and there is no reduction in the Rent for the period to 30 June 2008 to reflect the actual period of the lease, it is considered that part of the Rent is a premium paid by the Grower for the grant of the lease and is capital in nature. Therefore, under section 8-1 Growers will be entitled to a partial deduction of $54.35 calculated on a pro-rata monthly basis for each month or part month that the Grower is granted the lease to use the Trufferie from Truffle Properties Limited. 91. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 96 to 100 of this Ruling) a deduction for the Management Fees and Rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 92. Some Growers may finance their participation in the Project through a Terms Agreement with Watershed Premium Wines Ltd. Applying the same principles as that used for the Management Fees and Rent, interest incurred under the Terms Agreement has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 93. Other than where the prepayment provisions apply (see paragraphs 96 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Section 40-880: 94. Growers who elect to pay their Grower's contribution under the Terms Agreement must pay an application fee of $50 per Trufferie. 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. 95. However, section 40-880 will allow the application fee to be deducted in equal proportions over five income years starting in the year in which the Grower incurred the amount (subsection 40-880(2)). 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: 96. 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. 97. 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: 98. Under the Scheme to which this Product Ruling applies the Management Fees and Rent are incurred annually and the interest payable to Watershed Premium Wines Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 99. 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 Project Operations Agreement and/or Lease and Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than Watershed Premium Wines Ltd in relation to the Terms Agreement). Where such a prepayment is made these prepayment provisions will also apply to small business entities because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 100. As noted in the Ruling section above, Growers who prepay fees or interest referred to in paragraph 23 of this Ruling 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: 101. 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 truffles and the application fee payable under the Terms Agreement (where applicable) are of a capital nature. This expenditure falls for consideration under Division 40. 102. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 24 in the Table accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 103. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income year ending 30 June 2008 to 30 June 2013, the Commissioner has determined that for those income years: 104. 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. 105. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 106. 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: 107. 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). 108. The Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) 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 23 and 24 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. 109. 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 truffles and hazelnuts. 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. 110. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 18. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 33 to 81 of this Ruling. 19. 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 the Grower is granted a lease under the Lease and Sub-lease for 2007 Growers (Lease and Sub-lease) and at the time of execution of their Project Operations Agreement for 2007 Growers (Project Operations Agreement). | Concessions for 'small business entities': 20. 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'). 21. 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. Accordingly, 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. | Sections 6-5 and 17-5: 22. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5. | Section 8-1: 23. A Grower who is accepted to participate in the Project on or before 15 March 2008 may claim tax deductions, on a per Trufferie basis, for the following expenditure set out in the Table below. | Division 40: 24. A Grower will also be entitled to tax deductions for the application fee payable under the Terms Agreement and for the establishment of the truffles. All deductions shown in the following Table are determined under Division 40, on a per Trufferie basis. The deduction is allowable when the truffles, harvested from the Oak and Hazelnut trees, enter their first commercial season (section 40-530, item 2). The Responsible Entity will inform Growers of when the truffles enter their first commercial season and the amount that may be claimed as a tax deduction. | Part 3-1: 25. The shares in Truffle Properties Limited are CGT assets (section 108-5) and the amounts paid by a shareholder to acquire the shares are an outgoing of capital and not allowable as a deduction. 26. The amounts paid for each share will represent the first element of the cost base of the share (subsection 110-25(2)). Any disposal of the shares by a shareholder will be a CGT event and may give rise to a capital gain or loss. | Section 328-285: 27. A Grower who is a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, for such a Grower, for an income year, the difference between the value of all their trading stock at the start and a reasonable estimate of it at the end, is less than $5,000, they can choose not to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)). 28. Where the small business entity chooses to account for changes in the value of their trading stock for an income year, they will have to do a stocktake and account for the change in the value of all their trading stock (Subdivision 70-C). | Section 70-35: 29. A Grower who is not a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grower must include the amount of that excess in assessable income. 30. Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grower may claim the amount of that excess as an allowable deduction. | Section 35-55 - exercise of Commissioner's discretion: 31. A Grower who is an individual accepted into the Project by 15 March 2008 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for these Growers for the income years ended 30 June 2008 to 30 June 2013. This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise. | Sections 82KZME, 82KZMF and 82KL and Part IVA: 32. For a Grower who commences participation in the Project and incurs expenditure as required by the Project Operations Agreement and the Lease and Sub-lease, the following provisions of the ITAA 1936 have application as indicated: 33. The scheme that is the subject of this Ruling is identified and described in 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. 34. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. 35. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows. | Overview: 36. Following is a summary of the scheme: 37. The Project is registered as a managed investment scheme under the Corporations Act 2001. Watershed Premium Wines Ltd has been issued with Australian Financial Service Licence No 296166 and will be the Responsible Entity for the Project. 38. The Project involves the commercial growing, cultivation and harvesting of truffles and hazelnuts. 39. An offer to participate in the Project will be made through a combined PDS/Prospectus. The offer under the PDS/Prospectus is for approximately 60 hectares which corresponds to 300 Trufferies, 53 of which were allocated to Growers on or before 15 June 2007 in line with Product Ruling PR 2007/22. There is no minimum subscription for this Project as it is an extension of the 'Oak Valley Truffle Project'. PR 2006/21 and PR 2006/122 apply to Growers who were accepted to participate in the 'Oak Valley Truffle Project' during the period 22 March 2006 to on or before 15 March 2007. The minimum subscription of 50 Trufferies was reached under PR 2006/21. 40. The offer under the PDS/Prospectus is a stapled interest. A Grower that participates in the Project will do so by acquiring an interest in the Project which will consist of a minimum of one Trufferie. For each Trufferie applied for, an Applicant must also apply for 3,508 ordinary shares in the Land Owner, Truffle Properties Limited. The shares can be held by any entity and can be held in a different name from the Trufferie owner. Once the Responsible Entity has allotted a Trufferie to a Grower, the offer is no longer stapled and the shares can be transferred separately to the interest in the Trufferie. This Ruling does not address the tax consequences of disposing of shares in Truffle Properties Limited. 41. Applicants execute a Power of Attorney contained in the PDS/Prospectus. The Power of Attorney irrevocably appoints Watershed Premium Wines Ltd to enter into, on behalf of the Grower, a Lease and Sub-lease, a Project Operations Agreement, the application for shares in Truffle Properties Limited and any other documents required to hold an interest in the Project. 42. Watershed Premium Wines Ltd will allocate established Trufferies to Applicants who are accepted as Growers in the Project. Truffle Properties Limited (the Land Owner) will plant approximately 50 Oak and 50 Hazelnut trees which have been inoculated with black truffle fungus on each Trufferie. 43. This Ruling only applies to Applicants who are accepted to participate in the Project and who are granted a lease under the Lease and Sub-lease and who execute the Project Operations Agreement after the date of this Ruling and on or before 15 March 2008. Product Ruling PR 2007/22 applies to Growers who were accepted to participate in the Project during the period 21 March 2007 to on or before 15 June 2007. 44. The Project will be conducted on land located approximately 10 kilometres south-west of Manjimup, Western Australia on the corner of Seven Day Road and Appadene Road. 45. The Project land is owned by Truffle Properties Limited and will be leased to the Grower. Specifically, the property is described as Lot 102 on Deposited Plan 47397 being the whole of the land comprised in Certificate of Title Volume 2616 Folio 415 and Lot 11 on Diagram 92046 being the whole of the land comprised in Certificate of Title Volume 2156 Folio 98. | Constitution: 46. The Constitution establishes the Project and operates as a deed binding on all Growers and Watershed Premium Wines Ltd. The Constitution sets out the terms and conditions under which Watershed Premium Wines Ltd 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. 47. In order to acquire an interest in the Project, the Grower must make an application for a Trufferie in accordance with the PDS/Prospectus. Among other things, the application must be completed in a form approved by the Responsible Entity, signed by or on behalf of the Applicant and accompanied by the payment of the Application Money in a form acceptable to the Responsible Entity. 48. Watershed Premium Wines Ltd holds the Application Money on bare trust and will deposit all Application Moneys received from applicants in a Trust Account (clause 6). 49. Once Watershed Premium Wines Ltd has accepted the application and all of the Project Documents have been executed and remain in force, the Application Money may be applied against the fees due to Watershed Premium Wines Ltd (clause 3.6). 50. Under the Constitution, the Responsible Entity will keep a register of Growers. The Constitution also sets out provisions relating to: | Compliance Plan: 51. As required by the Corporations Act, a Compliance Plan has been prepared for the Project. Its purpose is to ensure that Watershed Premium Wines Ltd manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Lease and Sub-lease for 2007 Growers: 52. Growers are granted an interest in the Trufferie in the form of a lease to use their Trufferie for the purpose of conducting their truffle and hazelnut business upon the terms and conditions as set out in the Agreement. 53. The Lease and Sub-lease sets out the rights and obligations of the parties to the Agreement. Under the terms of the Lease and Sub-lease each Grower will lease a minimum of 1 Trufferie of 0.2 hectares. The Lease and Sub-lease shall operate from the date the Trufferie is allotted to the Grower and will continue until the Project is terminated on 30 June 2027 (Part 4 of the Schedule). 54. Clause 4 provides that the improvements on the Land, including the irrigation, are the property of the Land Owner. The Land Owner grants the Grower the non-exclusive right to use: 55. The Land Owner acknowledges that subject to any provisions of the Lease and Sub-lease the Grower's truffles and hazelnuts will remain the property of the Grower during the Term of the Lease and Sub-lease (clause 2.4). 56. The Grower's obligations are set out in detail in clause 5 under which the Grower agrees to use the Trufferie for the purpose of cultivating, maintaining and harvesting the truffles and hazelnuts in accordance with sound silvicultural practices. | Project Operations Agreement: 57. Under the Project Operations Agreement the Grower appoints the Responsible Entity to manage the Trufferie and to carry out management services subject to the terms and conditions of the Agreement. The Agreement will commence on the date the Responsible Entity accepts the Grower's application under the PDS/Prospectus and shall continue until its termination under clause 15. 58. The following Initial Services will be provided during the Initial Period, being from the Commencement Date to 31 March 2008: 59. As part of the Initial Services the Responsible Entity will apply lime, herbicide and fertiliser to the Trufferie between 16 March 2008 and 31 March 2008. 60. The Responsible Entity will commence the provision of the Ongoing Services from 1 April 2008 until the expiry of the Lease. 61. The Ongoing Services include: 62. The Responsible Entity will send a report to the Grower no later than 31 July 2008 and by 31 July of each succeeding year summarising details of all hazelnuts and truffles harvested in the preceding financial year and any other comments that may reasonably affect the Project. | Marketing and Management Agreement: 63. Watershed Premium Wines Ltd will enter into a Marketing and Management Agreement with Truffle Projects Pty Ltd. Under this Agreement Watershed Premium Wines Ltd engages Truffle Projects Pty Ltd (the Manager) as an independent contractor to carry out its duties and obligations under the Project Operations Agreement for the Term of the Project (clause 2). The Manager may delegate its responsibilities under this Agreement. | Pooling of truffles and hazelnuts and Grower's entitlement to Net Proceeds: 64. The Project Operations Agreement sets out the provisions relating to the Grower's entitlement to harvest proceeds. This Product ruling only applies where the following principles apply to the pooling and distribution arrangements: 65. The proceeds from the sale of the Grower's truffles and hazelnuts will be paid into a Trust Account held by the Bare Trustee (clause 4 of the Constitution). A Grower's Prescribed Proportion of the proceeds will be distributed to the Grower after deducting the fees and costs referred to in clause 12 of the Constitution. If the aggregate sum to be distributed is less than $1,000, then at the discretion of the Responsible Entity, the distribution to Growers may be postponed. The term 'Prescribed Proportion' is defined in the Constitution. | Fees: 66. Under the terms of the Project Operations Agreement, and the Lease and Sub-lease a Grower will make payments as described below on a per Trufferie basis. | Project Operations Agreement: 67. The following Fees are payable under the Project Operations Agreement: | Lease and Sub-lease: 68. Rent of $652.30 for the Initial Period is payable on application (see paragraphs 71 and 72 of this Ruling for payment options); 69. In Year 1 (1 April 2008 to 30 June 2008) Rent of $652.30 (indexed) is payable on 1 June 2008. In each succeeding Financial Year Rent of $652.30 (indexed) is payable on 1 June for the Term of the Project. 70. Rent will be reviewed on 1 June 2008 and thereafter on 1 June of each year for the Term of the Project. A Grower is required to pay an amount of Rent equal to the amount paid in the previous Financial Year indexed by CPI or 3%, whichever is the greater. | Application Money: 71. Application Money of $16,468.30 per Trufferie is payable on application. The Application Money consists of: 72. Upon signing the Application Form, the Grower acknowledges that the full amount of the application money is immediately due and payable. However, under the PDS/Prospectus, the Responsible Entity is offering a Terms Agreement for payment of the Application Money (see paragraphs 76 to 80 of this Ruling). | Finance: 73. A Grower who does not pay the Application Money in full upon application may enter into a Terms Agreement with Watershed Premium Wines Ltd or borrow from an independent lender external to the Project. 74. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if the Grower enters into a finance arrangement with Watershed Premium Wines Ltd that materially differs from that set out in the documentation provided to the Tax Office with the application for the 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 under finance arrangements not covered by this Product Ruling. 75. Other than where a Terms Agreement is in place Growers cannot rely on any part of this Ruling if the Application Money is not paid in full on or before 15 March 2008 by the Grower or, on the Grower's behalf, by a lending institution. | Terms Agreement: 76. If a Grower chooses to pay the Application Money under the Terms Agreement, they must complete a Terms Application Form and Direct Debit Request. Growers must pay a non-refundable application fee of $50 per Trufferie applied for. 77. Under the Terms Agreement a deposit of $7,925.30 is payable on application with the balance payable by 12 equal monthly instalments of $762 (including interest at 11.5% per annum daily reducing). The deposit will be applied as follows: 78. The first monthly payment is due one month from the date of Allotment. The full amount of the Application Money must be paid no later than 12 months from the date the Grower is accepted to participate in the Project. 79. If a Grower does not pay the required instalments under the Terms Agreement, the balance of principal, interest and any additional costs payable under the Agreement becomes immediately due and payable to the Responsible Entity. In addition, the Responsible Entity may take legal action to recover the balance of principal and interest and any costs payable under this Agreement or any other legal action relating to this Agreement, take possession of the Grower's Trufferie and do anything an owner of the secured property is entitled to do (clause 9.2 of the Terms Agreement). 80. Watershed Premium Wines Ltd may charge the Grower interest on overdue amounts (clause 2.6). 81. 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 31 October 2007 | Is the Grower carrying on a business?: 82. For the amounts set out in paragraphs 23 and 24 of this Ruling to constitute allowable deductions, the Grower's horticulture activities as a participant in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) must amount to the carrying on of a business of primary production. 83. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on a business of primary production. 84. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 85. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers). As Taxation Ruling TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. 86. Having applied these principles to the arrangement set out above, a Grower in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) is accepted to be carrying on a business of growing and harvesting truffles and hazelnuts for sale. | Deductibility of Management Fees, Rent and interest payable under the Terms Agreement: 87. Other than part of the Rent payable in the year ended 30 June 2008, the Management Fees and Rent are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of Taxation Ruling TR 2000/8) is not identifiable in the arrangement and, other than part of the Rent in the Initial Period, there is no capital component evident in the Management Fees and interest (see paragraphs 49 to 51 of TR 2000/8). 88. Subject to paragraphs 89 and 90 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 89. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticulture business which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that a portion of the Rent payable by a Grower will be capital expenditure. 90. A Grower who enters the Project on or before 15 March 2008 pays Rent of $1,304.60 in the year ended 30 June 2008 which is equivalent to the amount of Rent payable for two full income years. As the Grower does not lease the land for the full income year and there is no reduction in the Rent for the period to 30 June 2008 to reflect the actual period of the lease, it is considered that part of the Rent is a premium paid by the Grower for the grant of the lease and is capital in nature. Therefore, under section 8-1 Growers will be entitled to a partial deduction of $54.35 calculated on a pro-rata monthly basis for each month or part month that the Grower is granted the lease to use the Trufferie from Truffle Properties Limited. 91. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 96 to 100 of this Ruling) a deduction for the Management Fees and Rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 92. Some Growers may finance their participation in the Project through a Terms Agreement with Watershed Premium Wines Ltd. Applying the same principles as that used for the Management Fees and Rent, interest incurred under the Terms Agreement has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 93. Other than where the prepayment provisions apply (see paragraphs 96 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Section 40-880: 94. Growers who elect to pay their Grower's contribution under the Terms Agreement must pay an application fee of $50 per Trufferie. 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. 95. However, section 40-880 will allow the application fee to be deducted in equal proportions over five income years starting in the year in which the Grower incurred the amount (subsection 40-880(2)). 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: 96. 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. 97. 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: 98. Under the Scheme to which this Product Ruling applies the Management Fees and Rent are incurred annually and the interest payable to Watershed Premium Wines Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 99. 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 Project Operations Agreement and/or Lease and Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than Watershed Premium Wines Ltd in relation to the Terms Agreement). Where such a prepayment is made these prepayment provisions will also apply to small business entities because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 100. As noted in the Ruling section above, Growers who prepay fees or interest referred to in paragraph 23 of this Ruling 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: 101. 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 truffles and the application fee payable under the Terms Agreement (where applicable) are of a capital nature. This expenditure falls for consideration under Division 40. 102. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 24 in the Table accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 103. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income year ending 30 June 2008 to 30 June 2013, the Commissioner has determined that for those income years: 104. 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. 105. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 106. 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: 107. 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). 108. The Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) 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 23 and 24 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. 109. 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 truffles and hazelnuts. 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. 110. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Is the Grower carrying on a business?: 82. For the amounts set out in paragraphs 23 and 24 of this Ruling to constitute allowable deductions, the Grower's horticulture activities as a participant in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) must amount to the carrying on of a business of primary production. 83. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on a business of primary production. 84. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 85. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers). As Taxation Ruling TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55. 86. Having applied these principles to the arrangement set out above, a Grower in the Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) is accepted to be carrying on a business of growing and harvesting truffles and hazelnuts for sale. | Deductibility of Management Fees, Rent and interest payable under the Terms Agreement: 87. Other than part of the Rent payable in the year ended 30 June 2008, the Management Fees and Rent are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of Taxation Ruling TR 2000/8) is not identifiable in the arrangement and, other than part of the Rent in the Initial Period, there is no capital component evident in the Management Fees and interest (see paragraphs 49 to 51 of TR 2000/8). 88. Subject to paragraphs 89 and 90 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply. 89. One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticulture business which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that a portion of the Rent payable by a Grower will be capital expenditure. 90. A Grower who enters the Project on or before 15 March 2008 pays Rent of $1,304.60 in the year ended 30 June 2008 which is equivalent to the amount of Rent payable for two full income years. As the Grower does not lease the land for the full income year and there is no reduction in the Rent for the period to 30 June 2008 to reflect the actual period of the lease, it is considered that part of the Rent is a premium paid by the Grower for the grant of the lease and is capital in nature. Therefore, under section 8-1 Growers will be entitled to a partial deduction of $54.35 calculated on a pro-rata monthly basis for each month or part month that the Grower is granted the lease to use the Trufferie from Truffle Properties Limited. 91. Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 96 to 100 of this Ruling) a deduction for the Management Fees and Rent can be claimed in the year in which they are incurred. (Note: the meaning of incurred is explained in Taxation Ruling TR 97/7.) 92. Some Growers may finance their participation in the Project through a Terms Agreement with Watershed Premium Wines Ltd. Applying the same principles as that used for the Management Fees and Rent, interest incurred under the Terms Agreement has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 93. Other than where the prepayment provisions apply (see paragraphs 96 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Section 40-880: 94. Growers who elect to pay their Grower's contribution under the Terms Agreement must pay an application fee of $50 per Trufferie. 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. 95. However, section 40-880 will allow the application fee to be deducted in equal proportions over five income years starting in the year in which the Grower incurred the amount (subsection 40-880(2)). 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: 96. 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. 97. 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: 98. Under the Scheme to which this Product Ruling applies the Management Fees and Rent are incurred annually and the interest payable to Watershed Premium Wines Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme. 99. 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 Project Operations Agreement and/or Lease and Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than Watershed Premium Wines Ltd in relation to the Terms Agreement). Where such a prepayment is made these prepayment provisions will also apply to small business entities because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF. 100. As noted in the Ruling section above, Growers who prepay fees or interest referred to in paragraph 23 of this Ruling 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: 101. 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 truffles and the application fee payable under the Terms Agreement (where applicable) are of a capital nature. This expenditure falls for consideration under Division 40. 102. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 24 in the Table accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 103. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income year ending 30 June 2008 to 30 June 2013, the Commissioner has determined that for those income years: 104. 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. 105. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances. | Section 82KL - recouped expenditure: 106. 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: 107. 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). 108. The Oak Valley Truffle Project 2007 (post 30 June 2007 Growers) 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 23 and 24 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. 109. 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 truffles and hazelnuts. 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, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | No guarantee of commercial success: The Tax Office does not sanction or guarantee this product. Further, we give no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based. | Potential participants must form their own view about the commercial and financial viability of the product. We recommend a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | $11,440 See Notes (i), (ii) & (iv) | $4,180 See Notes (i), (ii) & (iv) | $2,640 See Notes (i), (ii) & (iv) | See Notes (i), (ii), (iii) & (iv) | $652.30 (indexed) See Notes (i), (ii) & (iv) | Interest payable under the Terms Agreement (Watershed Premium Wines Ltd) | As incurred See Notes (ii), (iv) & (v) | Application fee - Terms Agreement (Watershed Premium Wines Ltd) | $10 See Notes (i) and (vi) | 10 kms south-west of Manjimup, Western Australia | Commercial growing and cultivation of Oak and Hazelnut trees for the purpose of harvesting truffles and hazelnuts for sale | Number of hectares offered for cultivation | Up to a maximum of 47.2 hectares | Number of trees per interest | Initial cost per interest | $16,468.30 comprising Management Fees of $8,800, Rent of $652.30 and $7,016 for 3,508 ordinary shares in Truffle Properties Limited | Annual Management Fees and Rent, Harvest Fees and insurance costs | Deductions for Management Fees, Rent and interest | Deductions for capital expenditure | Treatment of trading stock | Division 35 - deferral of losses from non-commercial business activities | Prepayment provisions and anti-avoidance provisions | Terms Agreement application fee | Expenditure of a capital nature | Appendix 2 - Detailed contents list


Related rulings: TR 97/7 TR 97/11 TR 98/22 TR 2000/8 PR 2006/21 PR 2006/122 PR2007/22
Legislative references: ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMB ITAA 1936 82KZMC ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZMF ITAA 1936 Pt IVA ITAA 1936 177A ITAA 1936 177C ITAA 1936 177D ITAA 1936 177D(b) ITAA 1997 6-5 ITAA 1997 8-1 ITAA 1997 17-5 ITAA 1997 25-25 ITAA 1997 Div 27 ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-10(2) ITAA 1997 35-55 ITAA 1997 35-55(1)(b) ITAA 1997 Div 40 ITAA 1997 40-30 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 40-880 ITAA 1997 40-880(2) ITAA 1997 Div 70 ITAA 1997 Subdiv 70-C ITAA 1997 70-35 ITAA 1997 Pt 3-1 ITAA 1997 108-5 ITAA 1997 110-25(2) ITAA 1997 328-285 ITAA 1997 328-285(1) Corporations Act 2001 SISA 1993 TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968
Case references: Commissioner of Taxation v. Lau (1984) 6 FCR 202 84 ATC 4929 (1984) 16 ATR 55
Subject references: carrying on a business commencement of business fee expenses horticulture management fees expenses non-commercial losses primary production primary production expenses primary production income producing assessable income product rulings public rulings schemes and shams tax administration tax avoidance tax benefits under tax avoidance schemes tax shelters tax shelters project