Product Ruling PR 2008/48
Date of effect: 21 May 2008

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 Rewards Group Berry Project 2008 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 39 of this Ruling on or before 31 May 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 39 to 78 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 39 of this Ruling on or before 31 May 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 39 to 78 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 21 May 2008, the date this Product Ruling is made. It therefore applies to the specified class of entities that enter into the scheme from 21 May 2008 until 31 May 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 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 the extent of those amendments this Product Ruling will be superseded. 15. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued. | Note to promoters and advisers: 16. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Tax Office suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling is issued. | Goods and Services Tax: 17. All fees and expenditure referred to in this Product Ruling include the Goods and Services Tax (GST) where applicable. In order for an entity (referred to in this Ruling as a Grower) to be entitled to claim input tax credits for the GST included in its expenditure, it must be registered or required to be registered for GST and hold a valid tax invoice. | Application of this Ruling: 18. This Ruling applies only to Growers who: 19. The Grower's participation in the Project must constitute the carrying on of a business of primary production. 20. A Grower is not eligible to claim any tax deductions until the Grower's application to enter the Project is accepted and the Project has commenced. | Small business concessions: 21. 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'). 22. 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, unless otherwise stated, 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: 23. 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. 24. The Grower recognises ordinary income from carrying on the business of cultivation of Strawberry and Blueberry Plants at the time that income is derived. | Section 328-285: 25. A Grower who is a 'small business entity' may, in some years, hold Fruit 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)). 26. 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). 27. The Responsible Entity will advise the Grower of the value of trading stock on hand at the end of the year. | Section 70-35: 28. A Grower who is not a 'small business entity' may, in some years, hold Fruit 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. 29. 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. 30. The Responsible Entity will advise the Grower of the value of trading stock on hand at the end of the year. Deductions for the Management Services (Fixed Component) Fees, Rent, Prepaid fee for Ongoing Services, Harvest costs and cost of sales, Management Services (Harvest Component) Fees, Plant insurance costs, Credit Card Merchant Fee, Interest and borrowing expenses | Sections 8-1 and 25-25 of the ITAA 1997 and sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936: 31. A Grower may claim tax deductions for the following fees and expenses on a per Grove basis, as set out in the Table below. | Notes: Joint Venture Growers 32. A Joint Venture Grower may claim the following deductions per Grove as described in the above Table and accompanying notes: | Interest: 33. The deductibility or otherwise of interest incurred by Growers who finance their participation in the Project through a loan facility with an independent lender external to the Project is outside the scope of this Ruling. Such Growers may request a private ruling on the deductibility or otherwise of interest under finance arrangements not covered by this Product Ruling. | Subdivisions 40-F, 40-G and 40-I: 34. Growers will also be entitled to tax deductions for the Planting Services Fee, Landcare Services Fee and the Application Fee for the 12 Month Terms Option. The deductions are shown (on a per Grove basis) in the following Table and accompanying notes: | Notes: Joint Venture Growers 35. The First Joint Venturer is entitled to claim the deduction for: 36. The Second Joint Venturer is entitled to claim the deduction for the capital expenditure for the establishment of horticultural plant (being the Planting Services Fees) for Planting Services to be completed for the period 1 July 2008 to 30 June 2009, as listed in the Table and note (viii) to paragraph 34 of this Ruling. | Section 35-55 - exercise of Commissioner's discretion: 37. A Grower who is an individual accepted into the Project in the period from the date of this Ruling to on or before 31 May 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 2009 . 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 82KL and Part IVA: 38. For a Grower who participates in the Project and incurs expenditure as required by the Sub-Lease and the Management Agreement the following provisions of the ITAA 1936 have application as indicated: 39. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information received from the applicant has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information legislation. 40. The documents highlighted (in bold) are those that the Growers may enter into. There are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or an associate of the Grower will be a party to that are part of the scheme to which this Ruling applies. 41. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of the agreements may be summarised as follows. | Overview: 42. This scheme is called the Rewards Group Berry Project 2008. 43. The Project is registered as a Managed Investment Scheme under the Corporations Act 2001 , ARSN 128 368 141. Rewards Projects Limited has been issued with Financial Services Licence Number 224000 and will be the Responsible Entity for the Project. 44. The Project involves the cultivation of Strawberry and Blueberry Plants and the harvest and sale of the Fruit derived from the Strawberry and Blueberry Plants. The Strawberry Plants will include Driscoll varieties (which are obtained under licence from the Owner of the Plants) and public varieties. 45. The Project will be conducted on land located in Queensland and Victoria. The Queensland properties are located near Caboolture which is situated 40 kilometres north of Brisbane in the Caboolture Shire. The properties are comprised of two separate titles described as Lot 102 on Crown Plan C311307 and Lot 271 on Crown Plan CG932. Water for irrigation of the Strawberry Plants will be supplied from dams established on the properties. The Victorian properties are located near Woori Yallock which is situated 40 km north east of Melbourne. The properties are comprised of the titles described as CT Volume 9146 Folio 938, CT Volume 10203 Folio 154 and CT Volume 10203 Folio 155. Water for irrigation of the Strawberry Plants and Blueberry Plants will be supplied from dams and bores established on the properties. 46. A Grower who participates in the Project will do so by acquiring an interest in the Project which will consist of a minimum of one Grove of 0.05 hectares in size. The Groves will be planted at the rate of approximately 50,000 Strawberry Plants per hectare in the Caboolture Plantation and 45,000 Strawberry Plants and 2,000 Blueberry Plants per hectare in the Yarra Valley Plantation. Rewards Projects Limited reserves the right to accept oversubscriptions where sufficient land is able to be sourced. Each Grove will consist of: 47. An offer to participate in the Project will be made through a Product Disclosure Statement (PDS). The offer made under the PDS is for 148 hectares which corresponds to 2,960 Groves in the Project, 2,097 of which were allocated to 'Early Growers' during the period from 5 December 2007 to on or before 29 February 2008 in line with Product Ruling PR 2007/96. The minimum subscription of 150 Groves was reached under PR 2007/96. The term of the Project is a minimum of 18 years. 48. Applicants execute a Power of Attorney contained in the PDS. The Power of Attorney irrevocably appoints the Responsible Entity to enter into, on behalf of the Grower, a Sub-Lease, a Management Agreement, a Grower Sub-Licence Agreement and any other agreements required to hold an interest in the Project. 49. For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute a Sub-Lease and a Management Agreement during the period from 21 May 2008 to on or before 31 May 2008 will become 'Late Growers'. This Ruling only applies to ' Late Growers'. 50. Product Ruling PR 2007/96 applies to 'Early Growers', whose applications were accepted during the period from 5 December 2007 to on or before 29 February 2008. | Constitution: 51. The Constitution for the Project sets out the terms and conditions under which the Responsible Entity agrees to act for the Growers in the Project. Growers are bound by the Constitution by virtue of their participation in the Project. The Responsible Entity will maintain a register of all Growers that are accepted to participate in the Project. 52. Under the terms of the Constitution, the Responsible Entity must deposit all application moneys received from Growers into a trust account established for this purpose. This account is referred to as a Subscription Fund. The application moneys will be released from this fund when the Responsible Entity is satisfied that certain specified criteria in the Constitution have been met (clauses 3.3 and 3.8 of the Constitution). 53. The proceeds from the sale of the Fruit will be paid into a Proceeds Fund established by the Responsible Entity. Following the end of each Harvest Period, the Responsible Entity will deduct the Grower's share of Harvest costs and costs of sale and any other outstanding Project Fees and amounts owing by the Grower before distributing the balance to the Grower (clause 11 of the Constitution). 54. In the event that a Grower's Grove(s) is destroyed or partially destroyed, the Grower's proceeds of the sale from the Fruit will be reduced in accordance with clause 18 of the Constitution. 55. The Responsible Entity will arrange insurance for the Grower's Plants on receiving notification each year from the Grower (clause 19). 56. Under clause 21, the Responsible Entity may accept applications from two Joint Venturers that wish to conduct an unincorporated joint venture to participate in the Project. Under the joint venture, the First Joint Venturer is entitled to a 20% share of the proceeds of selling the Fruit and the Second Joint Venturer is entitled to a 80% share of the proceeds of selling the Fruit. | Compliance Plan: 57. As required by the Corporations Act 2001 , a Compliance Plan has been prepared for the Project. Its purpose is to ensure that the Responsible Entity manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Grower Licence Agreement and Grower Sub-Licence Agreement: 58. Under the Grower Licence Agreement between the Owner of the Driscoll Plants and the Responsible Entity, the Owner grants the Responsible Entity the right to use the Driscoll Plants to produce and harvest Fruit. Title to the Fruit vests in the Responsible Entity at the time it is harvested from the Driscoll Plants. 59. Under the Grower Sub-Licence Agreement between the Responsible Entity and the Grower, the Responsible Entity sub-licences to the Grower the right to use the Driscoll Plants to produce and harvest Fruit. Title to the Fruit from the Driscoll Plants vests in the Grower at the time it is harvested from the Plants. | Lease and Sub-Lease: 60. Under the Head Lease for the Land located in Queensland, the Responsible Entity will lease the Project Land from the owner of the land for a period of 18 years. The Land is located in Wamuran in the Shire of Caboolture in Queensland. The properties are comprised of two separate titles totalling 70.74 hectares. The Responsible Entity as Sub-Lessor, sub-leases the 0.01 hectare portions of this Land (Strawberry Plantation) to the Growers by entering into Sub-Lease agreements. 61. Under the Head Lease for the Land located in Victoria, the Responsible Entity will lease the Project Land from the owner of the land for a period of 20 years. The Land is located near Woori Yarrock in Victoria. The properties are comprised of three separate titles totalling 137 hectares. The Responsible Entity as Sub-Lessor, sub-leases the 0.04 hectare portions of this Land (Strawberry and Blueberry 'Plantations') to the Growers by entering into Sub-Lease agreements. 62. Under the terms of the Sub-Lease, the Sub-Lessor will give the Grower quiet possession of the Groves and pay all rates, taxes and other charges in respect of the land. The Sub-Lessor has installed (or procured the owner or the Land to install) suitable irrigation systems on the Queensland Strawberry Plantation and the New Block of the Victorian Strawberry Plantation on or before 31 March 2008 (clause 5 of the Sub-Lease). The Sub-Lessor will install (or procured the owner or the Land to install) suitable irrigation systems on the Fallow Block of the Victorian Strawberry Plantation on or before 31 March 2009. 63. Growers are entitled to the Fruit derived from the Plants on their Groves (clause 2.2 of the Sub-Lease and clause 1.2 of the Grower Sub-Licence Agreement). However, the Grower is not entitled to the Strawberry Fruit derived from the Established Block located on the Victorian Strawberry Plantation from the Sub-Lease Commencement Date until the end of the 2008 Victorian Harvest Season. The Fruit on the Established Block, from the 2008 Victorian Harvest Season, will be harvested by the owner of the Land. 64. As consideration for granting of the Sub-Lease, the Grower shall pay Rent to the Sub-Lessor for the term of the Sub-Lease as set out in the Schedule to the Sub-Lease. | Management Agreement: 65. Under the Management Agreement, the Grower engages the Responsible Entity as an independent contractor and farm manager to carry out or cause to be carried out, the Management Services in accordance with sound agricultural and environmental practices adopted within the agricultural industry and in accordance with the Management Plan. The Responsible Entity will enter into the Operations Agreement to appoint Rewards Management Pty Ltd (the 'Manager') to carry out its obligations to the Grower under the Management Agreement. The Management Services are comprised of the Initial Services (including Landcare Services) and the Ongoing Services. 66. The Initial Services will be undertaken and completed during the Initial Period which is the period from the date of the Management Agreement to 30 June 2008. These services are listed in Annexure B of the Management Agreement. 67. The Ongoing Services that will be provided from the end of the Initial Period and throughout the balance of the Term on an annual basis are listed in Annexure C of the Management Agreement. | Harvesting and sale: 68. A Grower will appoint the Responsible Entity to arrange for each Harvest to take place as and when deemed appropriate with the aim of producing the best overall result for the Grower (clause 6 of Management Agreement). The Grower will appoint the Responsible Entity to negotiate the sale of the harvested Fruit and the Responsible Entity will use its best endeavours to negotiate the sale of Fruit for the highest price practicable (clause 7 of the Management Agreement). 69. The Responsible Entity will appoint a Fruit Agent to negotiate the sale of the Fruit from each Harvest of the same Plantation. Public and Driscoll varieties will be pooled separately. A Grower's share of the proceeds from sale of the Fruit is based on the number of Groves held by the Grower, excluding any Groves held by the Grower that fail to produce Fruit. | Fees: 70. The Initial Fee payable to the Responsible Entity on application is $6,400 per Grove. This fee consists of: 71. The ongoing fees per Grove are: Annual Management Services (Fixed Component) Fees: Planting Services Fee for the preparation of land for planting, supply of suitable plants and planting of the plants during the relevant Victorian Planting Season, being the period from March to May: Annual Management Services (Harvest Component) Fees: Annual Rent per Grove of: Other Fees per Grove: | Finance: 72. Growers can fund their investment in the Project in one of the following ways: Note: loans from an independent lender are outside the scope of this Ruling. 73. A Grower choosing to pay the Initial Fee of $6,400 per Grove by entering into a Terms Option or loan arrangement with the Responsible Entity or a loan arrangement with the Nominated Financier, must complete the Finance Application which includes a Direct Debit Service Agreement and a Finance Agreement. The Agreements will be executed by the Responsible Entity. All arrangements will be on a full recourse basis and recovery action will be taken in respect of any default. 74. An Application Fee of 1% of the Finance Application Amount, subject to a minimum of $100 and a maximum of $500 is payable to the Provider on the First Instalment Date which is 30 June 2008. Except for the Terms Option, the Interest Rate is fixed at 10.95% per annum. 75. The Finance Application Amount is repayable under the following payment options: 76. The instalments are paid monthly in arrears commencing on the last business day of June following the acceptance of the Grower's application (30 June 2008). Interest will accrue on the Principal Sum on and from the Acceptance Date. 77. The payment of the Instalment Amounts under the above arrangements are secured by a first ranking mortgage or charge over the Grower's right, title and interest in the Project. 78. This Ruling does not apply if any finance arrangements entered into by the Grower includes or has any of the following features: Commissioner of Taxation 21 May 2008 | Is the Grower carrying on a business?: 79. For the amounts set out in paragraphs 31 and 34 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the Rewards Group Berry Project 2008 must amount to the carrying on of a business of primary production. 80. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 81. 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? 82. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Rewards Group Berry Project 2008. 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. 83. Having applied these principles to the arrangement set out above, a Grower in the Rewards Group Berry Project 2008 is accepted to be carrying on a business of growing and harvesting Strawberries and Blueberries for sale. Deductibility of Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees | Section 8-1: 84. Other than the prepaid fee for Ongoing Services payable on acceptance of the Growers Application, the Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and there is no capital component evident in the prepaid fee for Ongoing Services, Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees (see paragraphs 49 to 51 of TR 2000/8). 85. 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 88 to 100 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.) 86. Some Growers may finance their participation in the Project through a Finance Agreement with the Responsible Entity or the Nominated Financier. Applying the same principles as that used for the management fee and the Rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 87. Other than where the prepayment provisions apply (see paragraphs 88 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 88. 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. 89. For this Project, only section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 are relevant. Where the requirements of sections 82KZME and 82KZMF are met, taxpayers determine deductions for prepaid expenditure under section 82KZMF using the formula in subsection 82KZMF(1) of the ITAA 1936. | Sections 82KZME and 82KZMF: 90. Where the requirements of subsections 82KZME(2) and (3) of the ITAA 1936 are met, the formula in subsection 82KZMF(1) of the ITAA 1936 (see paragraph 94 of this Ruling) will apply to apportion expenditure that is otherwise deductible under section 8-1 of the ITAA 1997. The requirements of subsection 82KZME(2) of the ITAA 1936 will be met if expenditure is incurred by a taxpayer in return for the doing of a thing that is not to be wholly done within the year the expenditure is made. The year in which such expenditure is incurred is called the 'expenditure year' (subsection 82KZME(1) of the ITAA 1936). 91. The requirements of subsection 82KZME(3) of the ITAA 1936 will be met where the agreement (or scheme) has the following characteristics: 92. For the purpose of these provisions, the agreement includes all activities that relate to the agreement (subsection 82KZME(4) of the ITAA 1936). This has particular relevance for a Grower in this Project who, in order to participate in the Project may borrow funds from a financier other than the Responsible Entity or the Nominated Financier. Although undertaken with an unrelated party, that financing would be an element of the arrangement. The funds borrowed and the interest deduction are directly related to the activities under the arrangement. If a Grower prepays interest under such financing arrangements, the deductions allowable will be subject to apportionment under section 82KZMF of the ITAA 1936. 93. There are a number of exceptions to these rules, but for a Grower participating in this Project, only the 'excluded expenditure' exception in subsection 82KZME(7) of the ITAA 1936 is relevant. 'Excluded expenditure' is defined in subsection 82KZL(1) of the ITAA 1936. However, for the purposes of a Grower in this Project, 'excluded expenditure' is prepaid expenditure incurred under the scheme that is less than $1,000. Such expenditure is immediately deductible. 94. Where the requirements of section 82KZME of the ITAA 1936 are met, section 82KZMF of the ITAA 1936 applies to apportion relevant prepaid expenditure. Section 82KZMF uses the formula below, to apportion prepaid expenditure and allow a deduction over the period that the benefits are provided: 95. In the formula 'eligible service period' (defined in subsection 82KZL(1) of the ITAA 1936) means, the period during which the thing under the agreement is to be done. The 'eligible service period' begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years. Application of the prepayment provisions to this Project 96. The expenditure incurred by a Grower in the Project for the prepaid fee for Ongoing Services payable on acceptance of the Growers Application meets the requirements of subsections 82KZME(1) and (2) of the ITAA 1936 and is incurred under an 'agreement' as described in subsection 82KZME(3) of the ITAA 1936. Therefore, unless one of the exceptions to section 82KZME of the ITAA 1936 applies, the amount and timing of tax deductions for those fees are determined under section 82KZMF of the ITAA 1936. 97. The prepaid fee for Ongoing Services incurred by each Grower does not fall within any of the five exceptions to section 82KZME of the ITAA 1936. Therefore, the deduction for each year is determined using the formula in subsection 82KZMF(1) of the ITAA 1936. Section 82KZMF of the ITAA 1936 apportions the deduction for the prepaid fee for Ongoing Services over the period that the services for which the prepayment is made are provided. 98. The Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are incurred annually and the interest payable to the Responsible Entity or the Nominated Financier is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to these fees. 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 Management Agreement and/or the Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than the Responsible Entity or the Nominated Financier). 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 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 and Division 328: 101. Any part of the expenditure if 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, the Landcare Services Fee, Planting Services Fees for the establishment of Strawberry Plants on the New Block of the Victorian Strawberry Plantation and the Application Fee for the Terms Option are of a capital nature. This expenditure falls for consideration under Division 40 or Division 328. 102. The application and extent to which a Grower claims deductions under Division 40 and Division 328 depends on whether or not the Grower is a 'small business entity'. 103. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 34 of this Ruling, the Table and accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 104. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years ended 30 June 2008 to 30 June 2009, the Commissioner has determined that for those income years: 105. 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. 106. 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: 107. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 108. 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). 109. The Rewards Group Berry Project 2008 will be a scheme commencing with the issue of the Product Disclosure Statement. A Grower will obtain a tax benefit from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraphs 31 to 36 of this Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude that the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit. 110. 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 their Fruit. 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 are no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing with each other at arm's length, or, if any parties are not 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. 111. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 18. This Ruling applies only to Growers who: 19. The Grower's participation in the Project must constitute the carrying on of a business of primary production. 20. A Grower is not eligible to claim any tax deductions until the Grower's application to enter the Project is accepted and the Project has commenced. | Small business concessions: 21. 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'). 22. 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, unless otherwise stated, 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: 23. 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. 24. The Grower recognises ordinary income from carrying on the business of cultivation of Strawberry and Blueberry Plants at the time that income is derived. | Section 328-285: 25. A Grower who is a 'small business entity' may, in some years, hold Fruit 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)). 26. 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). 27. The Responsible Entity will advise the Grower of the value of trading stock on hand at the end of the year. | Section 70-35: 28. A Grower who is not a 'small business entity' may, in some years, hold Fruit 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. 29. 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. 30. The Responsible Entity will advise the Grower of the value of trading stock on hand at the end of the year. Deductions for the Management Services (Fixed Component) Fees, Rent, Prepaid fee for Ongoing Services, Harvest costs and cost of sales, Management Services (Harvest Component) Fees, Plant insurance costs, Credit Card Merchant Fee, Interest and borrowing expenses | Sections 8-1 and 25-25 of the ITAA 1997 and sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936: 31. A Grower may claim tax deductions for the following fees and expenses on a per Grove basis, as set out in the Table below. | Notes: Joint Venture Growers 32. A Joint Venture Grower may claim the following deductions per Grove as described in the above Table and accompanying notes: | Interest: 33. The deductibility or otherwise of interest incurred by Growers who finance their participation in the Project through a loan facility with an independent lender external to the Project is outside the scope of this Ruling. Such Growers may request a private ruling on the deductibility or otherwise of interest under finance arrangements not covered by this Product Ruling. | Subdivisions 40-F, 40-G and 40-I: 34. Growers will also be entitled to tax deductions for the Planting Services Fee, Landcare Services Fee and the Application Fee for the 12 Month Terms Option. The deductions are shown (on a per Grove basis) in the following Table and accompanying notes: | Notes: Joint Venture Growers 35. The First Joint Venturer is entitled to claim the deduction for: 36. The Second Joint Venturer is entitled to claim the deduction for the capital expenditure for the establishment of horticultural plant (being the Planting Services Fees) for Planting Services to be completed for the period 1 July 2008 to 30 June 2009, as listed in the Table and note (viii) to paragraph 34 of this Ruling. | Section 35-55 - exercise of Commissioner's discretion: 37. A Grower who is an individual accepted into the Project in the period from the date of this Ruling to on or before 31 May 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 2009 . 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 82KL and Part IVA: 38. For a Grower who participates in the Project and incurs expenditure as required by the Sub-Lease and the Management Agreement the following provisions of the ITAA 1936 have application as indicated: 39. The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: Note: certain information received from the applicant has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information legislation. 40. The documents highlighted (in bold) are those that the Growers may enter into. There are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or an associate of the Grower will be a party to that are part of the scheme to which this Ruling applies. 41. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of the agreements may be summarised as follows. | Overview: 42. This scheme is called the Rewards Group Berry Project 2008. 43. The Project is registered as a Managed Investment Scheme under the Corporations Act 2001 , ARSN 128 368 141. Rewards Projects Limited has been issued with Financial Services Licence Number 224000 and will be the Responsible Entity for the Project. 44. The Project involves the cultivation of Strawberry and Blueberry Plants and the harvest and sale of the Fruit derived from the Strawberry and Blueberry Plants. The Strawberry Plants will include Driscoll varieties (which are obtained under licence from the Owner of the Plants) and public varieties. 45. The Project will be conducted on land located in Queensland and Victoria. The Queensland properties are located near Caboolture which is situated 40 kilometres north of Brisbane in the Caboolture Shire. The properties are comprised of two separate titles described as Lot 102 on Crown Plan C311307 and Lot 271 on Crown Plan CG932. Water for irrigation of the Strawberry Plants will be supplied from dams established on the properties. The Victorian properties are located near Woori Yallock which is situated 40 km north east of Melbourne. The properties are comprised of the titles described as CT Volume 9146 Folio 938, CT Volume 10203 Folio 154 and CT Volume 10203 Folio 155. Water for irrigation of the Strawberry Plants and Blueberry Plants will be supplied from dams and bores established on the properties. 46. A Grower who participates in the Project will do so by acquiring an interest in the Project which will consist of a minimum of one Grove of 0.05 hectares in size. The Groves will be planted at the rate of approximately 50,000 Strawberry Plants per hectare in the Caboolture Plantation and 45,000 Strawberry Plants and 2,000 Blueberry Plants per hectare in the Yarra Valley Plantation. Rewards Projects Limited reserves the right to accept oversubscriptions where sufficient land is able to be sourced. Each Grove will consist of: 47. An offer to participate in the Project will be made through a Product Disclosure Statement (PDS). The offer made under the PDS is for 148 hectares which corresponds to 2,960 Groves in the Project, 2,097 of which were allocated to 'Early Growers' during the period from 5 December 2007 to on or before 29 February 2008 in line with Product Ruling PR 2007/96. The minimum subscription of 150 Groves was reached under PR 2007/96. The term of the Project is a minimum of 18 years. 48. Applicants execute a Power of Attorney contained in the PDS. The Power of Attorney irrevocably appoints the Responsible Entity to enter into, on behalf of the Grower, a Sub-Lease, a Management Agreement, a Grower Sub-Licence Agreement and any other agreements required to hold an interest in the Project. 49. For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute a Sub-Lease and a Management Agreement during the period from 21 May 2008 to on or before 31 May 2008 will become 'Late Growers'. This Ruling only applies to ' Late Growers'. 50. Product Ruling PR 2007/96 applies to 'Early Growers', whose applications were accepted during the period from 5 December 2007 to on or before 29 February 2008. | Constitution: 51. The Constitution for the Project sets out the terms and conditions under which the Responsible Entity agrees to act for the Growers in the Project. Growers are bound by the Constitution by virtue of their participation in the Project. The Responsible Entity will maintain a register of all Growers that are accepted to participate in the Project. 52. Under the terms of the Constitution, the Responsible Entity must deposit all application moneys received from Growers into a trust account established for this purpose. This account is referred to as a Subscription Fund. The application moneys will be released from this fund when the Responsible Entity is satisfied that certain specified criteria in the Constitution have been met (clauses 3.3 and 3.8 of the Constitution). 53. The proceeds from the sale of the Fruit will be paid into a Proceeds Fund established by the Responsible Entity. Following the end of each Harvest Period, the Responsible Entity will deduct the Grower's share of Harvest costs and costs of sale and any other outstanding Project Fees and amounts owing by the Grower before distributing the balance to the Grower (clause 11 of the Constitution). 54. In the event that a Grower's Grove(s) is destroyed or partially destroyed, the Grower's proceeds of the sale from the Fruit will be reduced in accordance with clause 18 of the Constitution. 55. The Responsible Entity will arrange insurance for the Grower's Plants on receiving notification each year from the Grower (clause 19). 56. Under clause 21, the Responsible Entity may accept applications from two Joint Venturers that wish to conduct an unincorporated joint venture to participate in the Project. Under the joint venture, the First Joint Venturer is entitled to a 20% share of the proceeds of selling the Fruit and the Second Joint Venturer is entitled to a 80% share of the proceeds of selling the Fruit. | Compliance Plan: 57. As required by the Corporations Act 2001 , a Compliance Plan has been prepared for the Project. Its purpose is to ensure that the Responsible Entity manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected. | Grower Licence Agreement and Grower Sub-Licence Agreement: 58. Under the Grower Licence Agreement between the Owner of the Driscoll Plants and the Responsible Entity, the Owner grants the Responsible Entity the right to use the Driscoll Plants to produce and harvest Fruit. Title to the Fruit vests in the Responsible Entity at the time it is harvested from the Driscoll Plants. 59. Under the Grower Sub-Licence Agreement between the Responsible Entity and the Grower, the Responsible Entity sub-licences to the Grower the right to use the Driscoll Plants to produce and harvest Fruit. Title to the Fruit from the Driscoll Plants vests in the Grower at the time it is harvested from the Plants. | Lease and Sub-Lease: 60. Under the Head Lease for the Land located in Queensland, the Responsible Entity will lease the Project Land from the owner of the land for a period of 18 years. The Land is located in Wamuran in the Shire of Caboolture in Queensland. The properties are comprised of two separate titles totalling 70.74 hectares. The Responsible Entity as Sub-Lessor, sub-leases the 0.01 hectare portions of this Land (Strawberry Plantation) to the Growers by entering into Sub-Lease agreements. 61. Under the Head Lease for the Land located in Victoria, the Responsible Entity will lease the Project Land from the owner of the land for a period of 20 years. The Land is located near Woori Yarrock in Victoria. The properties are comprised of three separate titles totalling 137 hectares. The Responsible Entity as Sub-Lessor, sub-leases the 0.04 hectare portions of this Land (Strawberry and Blueberry 'Plantations') to the Growers by entering into Sub-Lease agreements. 62. Under the terms of the Sub-Lease, the Sub-Lessor will give the Grower quiet possession of the Groves and pay all rates, taxes and other charges in respect of the land. The Sub-Lessor has installed (or procured the owner or the Land to install) suitable irrigation systems on the Queensland Strawberry Plantation and the New Block of the Victorian Strawberry Plantation on or before 31 March 2008 (clause 5 of the Sub-Lease). The Sub-Lessor will install (or procured the owner or the Land to install) suitable irrigation systems on the Fallow Block of the Victorian Strawberry Plantation on or before 31 March 2009. 63. Growers are entitled to the Fruit derived from the Plants on their Groves (clause 2.2 of the Sub-Lease and clause 1.2 of the Grower Sub-Licence Agreement). However, the Grower is not entitled to the Strawberry Fruit derived from the Established Block located on the Victorian Strawberry Plantation from the Sub-Lease Commencement Date until the end of the 2008 Victorian Harvest Season. The Fruit on the Established Block, from the 2008 Victorian Harvest Season, will be harvested by the owner of the Land. 64. As consideration for granting of the Sub-Lease, the Grower shall pay Rent to the Sub-Lessor for the term of the Sub-Lease as set out in the Schedule to the Sub-Lease. | Management Agreement: 65. Under the Management Agreement, the Grower engages the Responsible Entity as an independent contractor and farm manager to carry out or cause to be carried out, the Management Services in accordance with sound agricultural and environmental practices adopted within the agricultural industry and in accordance with the Management Plan. The Responsible Entity will enter into the Operations Agreement to appoint Rewards Management Pty Ltd (the 'Manager') to carry out its obligations to the Grower under the Management Agreement. The Management Services are comprised of the Initial Services (including Landcare Services) and the Ongoing Services. 66. The Initial Services will be undertaken and completed during the Initial Period which is the period from the date of the Management Agreement to 30 June 2008. These services are listed in Annexure B of the Management Agreement. 67. The Ongoing Services that will be provided from the end of the Initial Period and throughout the balance of the Term on an annual basis are listed in Annexure C of the Management Agreement. | Harvesting and sale: 68. A Grower will appoint the Responsible Entity to arrange for each Harvest to take place as and when deemed appropriate with the aim of producing the best overall result for the Grower (clause 6 of Management Agreement). The Grower will appoint the Responsible Entity to negotiate the sale of the harvested Fruit and the Responsible Entity will use its best endeavours to negotiate the sale of Fruit for the highest price practicable (clause 7 of the Management Agreement). 69. The Responsible Entity will appoint a Fruit Agent to negotiate the sale of the Fruit from each Harvest of the same Plantation. Public and Driscoll varieties will be pooled separately. A Grower's share of the proceeds from sale of the Fruit is based on the number of Groves held by the Grower, excluding any Groves held by the Grower that fail to produce Fruit. | Fees: 70. The Initial Fee payable to the Responsible Entity on application is $6,400 per Grove. This fee consists of: 71. The ongoing fees per Grove are: Annual Management Services (Fixed Component) Fees: Planting Services Fee for the preparation of land for planting, supply of suitable plants and planting of the plants during the relevant Victorian Planting Season, being the period from March to May: Annual Management Services (Harvest Component) Fees: Annual Rent per Grove of: Other Fees per Grove: | Finance: 72. Growers can fund their investment in the Project in one of the following ways: Note: loans from an independent lender are outside the scope of this Ruling. 73. A Grower choosing to pay the Initial Fee of $6,400 per Grove by entering into a Terms Option or loan arrangement with the Responsible Entity or a loan arrangement with the Nominated Financier, must complete the Finance Application which includes a Direct Debit Service Agreement and a Finance Agreement. The Agreements will be executed by the Responsible Entity. All arrangements will be on a full recourse basis and recovery action will be taken in respect of any default. 74. An Application Fee of 1% of the Finance Application Amount, subject to a minimum of $100 and a maximum of $500 is payable to the Provider on the First Instalment Date which is 30 June 2008. Except for the Terms Option, the Interest Rate is fixed at 10.95% per annum. 75. The Finance Application Amount is repayable under the following payment options: 76. The instalments are paid monthly in arrears commencing on the last business day of June following the acceptance of the Grower's application (30 June 2008). Interest will accrue on the Principal Sum on and from the Acceptance Date. 77. The payment of the Instalment Amounts under the above arrangements are secured by a first ranking mortgage or charge over the Grower's right, title and interest in the Project. 78. This Ruling does not apply if any finance arrangements entered into by the Grower includes or has any of the following features: Commissioner of Taxation 21 May 2008 | Is the Grower carrying on a business?: 79. For the amounts set out in paragraphs 31 and 34 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the Rewards Group Berry Project 2008 must amount to the carrying on of a business of primary production. 80. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 81. 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? 82. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Rewards Group Berry Project 2008. 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. 83. Having applied these principles to the arrangement set out above, a Grower in the Rewards Group Berry Project 2008 is accepted to be carrying on a business of growing and harvesting Strawberries and Blueberries for sale. Deductibility of Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees | Section 8-1: 84. Other than the prepaid fee for Ongoing Services payable on acceptance of the Growers Application, the Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and there is no capital component evident in the prepaid fee for Ongoing Services, Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees (see paragraphs 49 to 51 of TR 2000/8). 85. 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 88 to 100 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.) 86. Some Growers may finance their participation in the Project through a Finance Agreement with the Responsible Entity or the Nominated Financier. Applying the same principles as that used for the management fee and the Rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 87. Other than where the prepayment provisions apply (see paragraphs 88 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 88. 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. 89. For this Project, only section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 are relevant. Where the requirements of sections 82KZME and 82KZMF are met, taxpayers determine deductions for prepaid expenditure under section 82KZMF using the formula in subsection 82KZMF(1) of the ITAA 1936. | Sections 82KZME and 82KZMF: 90. Where the requirements of subsections 82KZME(2) and (3) of the ITAA 1936 are met, the formula in subsection 82KZMF(1) of the ITAA 1936 (see paragraph 94 of this Ruling) will apply to apportion expenditure that is otherwise deductible under section 8-1 of the ITAA 1997. The requirements of subsection 82KZME(2) of the ITAA 1936 will be met if expenditure is incurred by a taxpayer in return for the doing of a thing that is not to be wholly done within the year the expenditure is made. The year in which such expenditure is incurred is called the 'expenditure year' (subsection 82KZME(1) of the ITAA 1936). 91. The requirements of subsection 82KZME(3) of the ITAA 1936 will be met where the agreement (or scheme) has the following characteristics: 92. For the purpose of these provisions, the agreement includes all activities that relate to the agreement (subsection 82KZME(4) of the ITAA 1936). This has particular relevance for a Grower in this Project who, in order to participate in the Project may borrow funds from a financier other than the Responsible Entity or the Nominated Financier. Although undertaken with an unrelated party, that financing would be an element of the arrangement. The funds borrowed and the interest deduction are directly related to the activities under the arrangement. If a Grower prepays interest under such financing arrangements, the deductions allowable will be subject to apportionment under section 82KZMF of the ITAA 1936. 93. There are a number of exceptions to these rules, but for a Grower participating in this Project, only the 'excluded expenditure' exception in subsection 82KZME(7) of the ITAA 1936 is relevant. 'Excluded expenditure' is defined in subsection 82KZL(1) of the ITAA 1936. However, for the purposes of a Grower in this Project, 'excluded expenditure' is prepaid expenditure incurred under the scheme that is less than $1,000. Such expenditure is immediately deductible. 94. Where the requirements of section 82KZME of the ITAA 1936 are met, section 82KZMF of the ITAA 1936 applies to apportion relevant prepaid expenditure. Section 82KZMF uses the formula below, to apportion prepaid expenditure and allow a deduction over the period that the benefits are provided: 95. In the formula 'eligible service period' (defined in subsection 82KZL(1) of the ITAA 1936) means, the period during which the thing under the agreement is to be done. The 'eligible service period' begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years. Application of the prepayment provisions to this Project 96. The expenditure incurred by a Grower in the Project for the prepaid fee for Ongoing Services payable on acceptance of the Growers Application meets the requirements of subsections 82KZME(1) and (2) of the ITAA 1936 and is incurred under an 'agreement' as described in subsection 82KZME(3) of the ITAA 1936. Therefore, unless one of the exceptions to section 82KZME of the ITAA 1936 applies, the amount and timing of tax deductions for those fees are determined under section 82KZMF of the ITAA 1936. 97. The prepaid fee for Ongoing Services incurred by each Grower does not fall within any of the five exceptions to section 82KZME of the ITAA 1936. Therefore, the deduction for each year is determined using the formula in subsection 82KZMF(1) of the ITAA 1936. Section 82KZMF of the ITAA 1936 apportions the deduction for the prepaid fee for Ongoing Services over the period that the services for which the prepayment is made are provided. 98. The Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are incurred annually and the interest payable to the Responsible Entity or the Nominated Financier is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to these fees. 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 Management Agreement and/or the Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than the Responsible Entity or the Nominated Financier). 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 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 and Division 328: 101. Any part of the expenditure if 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, the Landcare Services Fee, Planting Services Fees for the establishment of Strawberry Plants on the New Block of the Victorian Strawberry Plantation and the Application Fee for the Terms Option are of a capital nature. This expenditure falls for consideration under Division 40 or Division 328. 102. The application and extent to which a Grower claims deductions under Division 40 and Division 328 depends on whether or not the Grower is a 'small business entity'. 103. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 34 of this Ruling, the Table and accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 104. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years ended 30 June 2008 to 30 June 2009, the Commissioner has determined that for those income years: 105. 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. 106. 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: 107. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 108. 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). 109. The Rewards Group Berry Project 2008 will be a scheme commencing with the issue of the Product Disclosure Statement. A Grower will obtain a tax benefit from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraphs 31 to 36 of this Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude that the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit. 110. 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 their Fruit. 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 are no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing with each other at arm's length, or, if any parties are not 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. 111. The following is a detailed contents list for this Ruling: Not previously issued as a draft


Appendix: Is the Grower carrying on a business?: 79. For the amounts set out in paragraphs 31 and 34 of this Ruling to constitute allowable deductions the Grower's horticultural activities as a participant in the Rewards Group Berry Project 2008 must amount to the carrying on of a business of primary production. 80. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production. 81. 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? 82. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Rewards Group Berry Project 2008. 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. 83. Having applied these principles to the arrangement set out above, a Grower in the Rewards Group Berry Project 2008 is accepted to be carrying on a business of growing and harvesting Strawberries and Blueberries for sale. Deductibility of Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees | Section 8-1: 84. Other than the prepaid fee for Ongoing Services payable on acceptance of the Growers Application, the Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and there is no capital component evident in the prepaid fee for Ongoing Services, Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees (see paragraphs 49 to 51 of TR 2000/8). 85. 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 88 to 100 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.) 86. Some Growers may finance their participation in the Project through a Finance Agreement with the Responsible Entity or the Nominated Financier. Applying the same principles as that used for the management fee and the Rent, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1. 87. Other than where the prepayment provisions apply (see paragraphs 88 to 100 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred. | Sections 82KZL to 82KZMF: 88. 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. 89. For this Project, only section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 are relevant. Where the requirements of sections 82KZME and 82KZMF are met, taxpayers determine deductions for prepaid expenditure under section 82KZMF using the formula in subsection 82KZMF(1) of the ITAA 1936. | Sections 82KZME and 82KZMF: 90. Where the requirements of subsections 82KZME(2) and (3) of the ITAA 1936 are met, the formula in subsection 82KZMF(1) of the ITAA 1936 (see paragraph 94 of this Ruling) will apply to apportion expenditure that is otherwise deductible under section 8-1 of the ITAA 1997. The requirements of subsection 82KZME(2) of the ITAA 1936 will be met if expenditure is incurred by a taxpayer in return for the doing of a thing that is not to be wholly done within the year the expenditure is made. The year in which such expenditure is incurred is called the 'expenditure year' (subsection 82KZME(1) of the ITAA 1936). 91. The requirements of subsection 82KZME(3) of the ITAA 1936 will be met where the agreement (or scheme) has the following characteristics: 92. For the purpose of these provisions, the agreement includes all activities that relate to the agreement (subsection 82KZME(4) of the ITAA 1936). This has particular relevance for a Grower in this Project who, in order to participate in the Project may borrow funds from a financier other than the Responsible Entity or the Nominated Financier. Although undertaken with an unrelated party, that financing would be an element of the arrangement. The funds borrowed and the interest deduction are directly related to the activities under the arrangement. If a Grower prepays interest under such financing arrangements, the deductions allowable will be subject to apportionment under section 82KZMF of the ITAA 1936. 93. There are a number of exceptions to these rules, but for a Grower participating in this Project, only the 'excluded expenditure' exception in subsection 82KZME(7) of the ITAA 1936 is relevant. 'Excluded expenditure' is defined in subsection 82KZL(1) of the ITAA 1936. However, for the purposes of a Grower in this Project, 'excluded expenditure' is prepaid expenditure incurred under the scheme that is less than $1,000. Such expenditure is immediately deductible. 94. Where the requirements of section 82KZME of the ITAA 1936 are met, section 82KZMF of the ITAA 1936 applies to apportion relevant prepaid expenditure. Section 82KZMF uses the formula below, to apportion prepaid expenditure and allow a deduction over the period that the benefits are provided: 95. In the formula 'eligible service period' (defined in subsection 82KZL(1) of the ITAA 1936) means, the period during which the thing under the agreement is to be done. The 'eligible service period' begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years. Application of the prepayment provisions to this Project 96. The expenditure incurred by a Grower in the Project for the prepaid fee for Ongoing Services payable on acceptance of the Growers Application meets the requirements of subsections 82KZME(1) and (2) of the ITAA 1936 and is incurred under an 'agreement' as described in subsection 82KZME(3) of the ITAA 1936. Therefore, unless one of the exceptions to section 82KZME of the ITAA 1936 applies, the amount and timing of tax deductions for those fees are determined under section 82KZMF of the ITAA 1936. 97. The prepaid fee for Ongoing Services incurred by each Grower does not fall within any of the five exceptions to section 82KZME of the ITAA 1936. Therefore, the deduction for each year is determined using the formula in subsection 82KZMF(1) of the ITAA 1936. Section 82KZMF of the ITAA 1936 apportions the deduction for the prepaid fee for Ongoing Services over the period that the services for which the prepayment is made are provided. 98. The Management Services (Fixed Component) Fees, Rent, Harvest costs, cost of sale, Management Services (Harvest Component) Fees, optional Plant insurance costs and credit card merchant fees are incurred annually and the interest payable to the Responsible Entity or the Nominated Financier is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to these fees. 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 Management Agreement and/or the Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than the Responsible Entity or the Nominated Financier). 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 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 and Division 328: 101. Any part of the expenditure if 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, the Landcare Services Fee, Planting Services Fees for the establishment of Strawberry Plants on the New Block of the Victorian Strawberry Plantation and the Application Fee for the Terms Option are of a capital nature. This expenditure falls for consideration under Division 40 or Division 328. 102. The application and extent to which a Grower claims deductions under Division 40 and Division 328 depends on whether or not the Grower is a 'small business entity'. 103. The tax treatment of capital expenditure has been dealt with in a representative way in paragraph 34 of this Ruling, the Table and accompanying notes. | Section 35-55 - exercise of Commissioner's discretion: 104. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years ended 30 June 2008 to 30 June 2009, the Commissioner has determined that for those income years: 105. 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. 106. 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: 107. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997. | Part IVA - general tax avoidance provisions: 108. 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). 109. The Rewards Group Berry Project 2008 will be a scheme commencing with the issue of the Product Disclosure Statement. A Grower will obtain a tax benefit from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraphs 31 to 36 of this Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude that the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit. 110. 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 their Fruit. 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 are no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing with each other at arm's length, or, if any parties are not 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. | Management Services (Fixed Component) Fee - Initial Services | $3,505.21 See Notes (i) and (ii) | $666.66 See Notes (i) and (iii) | Management Services (Fixed Component) Fees - Ongoing Services | $2,427.58 See Notes (i), (ii) and (vi) | $2,178.93 See Notes (i), (ii) and (vi) | Amount incurred See Notes (i), (ii) and (vi) | $36.79 See Notes (i), (ii) and (vi) | $441.46 See Notes (i), (ii) and (vi) | As incurred See Notes (i) and (iv) | As incurred See Notes (v) and (vi) | Must be calculated See Note (vii) | Planting Services Fees (Victorian Strawberry Plantation - New Block) | $308 See Notes (i) and (viii) | $316.62 See Notes (i) and (viii) | $550 See Notes (i) & (ix) | Application Fee (12 Month Terms Option) | Must be calculated See Note (x) | Near Wamuran in the Shire of Caboolture, South East Queensland, 40 km north of Brisbane Near Woori Yallock in the Yarra Valley, Victoria, 40 km north east of Melbourne | Type of business each participant will be carrying on | Commercial growing and cultivation of Strawberry Plants and Blueberry Plants | Number of hectares offered for cultivation | Up to 25 hectares for Late Growers | Minimum allocation per Grower | Number of days of eligible service period in the year of income Total number of days of eligible service period | Treatment of trading stock | Sections 8-1 and 25-25 and sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936 | Deductions for capital expenditure | Division 35 - deferral of losses from non-commercial business activities | Anti-avoidance provisions | 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 2007/96
Legislative references: ITAA 1936 82KL ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KZL ITAA 1936 82KZL(1) ITAA 1936 82KZLA ITAA 1936 82KZM ITAA 1936 82KZMA ITAA 1936 82KZMB ITAA 1936 82KZMC ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZME(1) ITAA 1936 82KZME(2) ITAA 1936 82KZME(3) ITAA 1936 82KZME(4) ITAA 1936 82KZME(7) ITAA 1936 82KZMF ITAA 1936 82KZMF(1) 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 Subdiv 40-F 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 Subdiv 40-G ITAA 1997 40-630 ITAA 1997 40-635 ITAA 1997 Subdiv 40-I ITAA 1997 40-880 ITAA 1997 Div 70 ITAA 1997 Subdiv 70-C ITAA 1997 70-35 ITAA 1997 Div 328 ITAA 1997 328-285 ITAA 1997 328-285(1) SISA 1993 TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968 Corporations Act 2001
Case references: Commissioner of Taxation v. Lau (1984) 6 FCR 202 84 ATC 4929 (1984) 16 ATR 55
Subject references: borrowing expenses carrying on a business commencement of business fee expenses interest expenses management fees non-commercial losses producing assessable income product rulings public rulings tax avoidance tax benefits under tax avoidance schemes taxation administration