Class Ruling CR 2008/27
Date of effect: 1 July 2006

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant provision(s) 2. The relevant provisions dealt with in this Ruling are: All legislative references in the Ruling are to the ITAA 1997 unless otherwise indicated. Class of entities 3. The class of entities to which this Ruling applies is all growers who, after 1 July 2006, enter into an agreement with Seed Technology & Marketing Pty Limited (Seedmark) for the sale of produced seed by delivery into a seed pool operated by Seedmark. Qualifications 4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 22 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 3. The class of entities to which this Ruling applies is all growers who, after 1 July 2006, enter into an agreement with Seed Technology & Marketing Pty Limited (Seedmark) for the sale of produced seed by delivery into a seed pool operated by Seedmark. | Qualifications: 4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 22 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. 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: 8. This Ruling applies from 1 July 2006 to 30 June 2007. However, the Ruling continues to apply after 30 June 2007 to all entities within the specified class who entered into the specified scheme during the term of the Ruling. 9. The Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling. Furthermore, the Ruling only applies to the extent that: 10. If this 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)). 11. If this Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Ruling is made, the following two conditions are met: 12. 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). 13. The following description of the scheme is based on information provided by the applicant. The following documents, or relevant parts of them form part of and are to be read with the description: Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information legislation. 14. Seedmark is an Australian seed company headquartered in Adelaide. The company produces proprietary and common seed varieties and markets them in Australia and internationally. Their services include: 15. Seedmark provide a range of services to growers to help in seed production. They also offer a range of marketing alternatives, including pool marketing. They operate separate pools for each variety of produced seed species. Each pool has its own payment schedule, which allows for a Harvest Advance and a number of progress payments before the final payment is declared. [1] 16. This ruling only applies to arrangements that are the subject of Seedmark's standard Purchase Contract and terms and conditions for seed pools created and operated by Seedmark in the 2007 tax year. 17. The standard Seedmark Purchase Contract details the product (including the species, variety and receival standards), the term of the agreement and, at Item 5, the product and price agreement. Where the contract type is specified as 'pool', the contract price is stated to be 'per Seedmark's final pool return' and the payment terms are 'in accordance with Seedmark's pool payment schedule'. 18. Under clause 1 of the standard terms and conditions, on entering a Seedmark pool contract, the grower is granted the right to produce seed of the variety specified at Item 3 of the contract (the 'produced seed') in accordance with the contract on condition that the grower sells all the produced seed to Seedmark. 19. The terms and conditions further provide that: 20. Seedmark makes estimates from time to time of the likely pool return as a guide to growers. The estimated pool returns are subject to change and therefore future returns are unable to be quantified in absolute terms until the declarations are made. Declared distributions are made in accordance with the contract terms specified at Item 5 of the purchase contract. 21. As referred to in paragraph 15, each pool has its own payment schedule specifying the timing of the Harvest Advance payment and progress payments. The pool payment schedule is at the discretion of Seedmark and applies specifically and exclusively to each pool. Pool payments for all growers will be net of any selling costs and expenses incurred by the pool which may include a pool management fee as determined at the discretion of Seedmark. 22. For each pool, the initial payment is a Harvest Advance. This is not a distribution of sale proceeds - it is a loan from Seedmark to the grower. When the progress payments are declared, the amounts are first applied against the outstanding loan before being paid to the grower. The pool payment system is designed to avoid the possibility that the Harvest Advance and progress payments will exceed the final sales return. | Sales of produced seed into the pool: 23. For growers returning their income on a cash basis, the pool distributions are included in assessable income under section 6-5 in the income year in which the grower receives the payments. 24. For growers returning their income on an earnings or accruals basis, the pool distributions made by Seedmark are included in assessable income under section 6-5 in the income year in which Seedmark declares each distribution. | Harvest Advance: 25. The Harvest Advance payment paid to growers under the terms of the Seedmark agreement is a loan and not income. | Amounts received: 26. Under subsection 6-5(4) the grower is treated as having received distribution amounts when the amounts are applied or dealt with in any way on the grower's behalf or as the grower directs. This includes when amounts are applied in full or partial satisfaction of the Harvest Advance loan owing to Seedmark. | Trading stock: 27. At the time Seedmark accepts delivery of the grower's produced seed, makes a payment in advance of delivery or the grower is in breach of the contract, the grower has sold and Seedmark has purchased the produced seed. The produced seed ceases to be trading stock of the grower for the purposes of Division 70 at that time. | Application of Part IVA: 28. Having regard to the facts of the arrangement, Part IVA of the ITAA 1936 does not apply. Commissioner of Taxation 9 April 2008 | Sales of produced seed into the pool: 29. The Standard Seedmark Purchase Contracts and Standard terms and conditions provides for the sale of the grower's produced seed, which is the grower's trading stock, when title to the produced seed passes to Seedmark. Title to the produced seed passes to Seedmark at the following times: 30. Sales revenue is ordinary income and is included in assessable income under section 6-5 in the income year in which the ordinary income is derived. 31. For taxpayers who use the cash method of accounting to determine their assessable income, income is derived when it is received, either actually, or constructively under subsection 6-5(4). [2] Accordingly, growers returning income on a cash basis include distributions in their assessable income under section 6-5 in the year in which the grower receives the payments. 32. For taxpayers who use the earnings or accruals method of accounting to determine their assessable income, income is derived when it is earned. The point of derivation occurs when a recoverable debt is created. [3] 33. At the time growers sell their produced seed they have a right to receive payment of their share of the pool proceeds, but that right is not presently existing as the payment is neither quantified nor quantifiable. Seedmark quantifies the amount payable to growers by determining and declaring pool distributions. 34. The amount of the distribution is a presently existing recoverable debt for payment of that part of the pool return. The determination and declaration of the amount by Seedmark is the point at which this debt becomes presently existing, unconditional and not subject to any contingency. 35. Accordingly, growers returning their income on an earnings or accruals basis include distributions made by Seedmark in their assessable income under section 6-5 in the year of income in which Seedmark declares each distribution. | Harvest Advance: 36. Growers selling produced seed into a Seedmark pool receive a Harvest Advance payment. Under the terms of the Seedmark agreement, this payment is a loan that is repaid in full out of the progress payments or final distribution when the seed pool is declared. It is not income. | Amounts received: 37. Subsection 6-5(4) treats an amount as assessable income of a taxpayer if the amount has been applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. 38. This means that amounts applied or dealt with by Seedmark in any way on the grower's behalf or as the grower directs, including declared distributions that are applied in full or partial satisfaction of the Harvest Advance loan owing to Seedmark, are treated under subsection 6-5(4) as having been received by the grower at the time the amount is so applied or dealt with. | Trading stock: 39. Under the various Sale of Goods Acts which operate in each State or Territory of Australia, a contract for the sale of goods is made when the seller agrees to transfer the property in the goods to the buyer for the sale price. Where, under a contract, property in goods is transferred from the seller to the buyer the contract is a sale. [4] 40. Under the contract, the grower agrees to sell all produced seed to Seedmark. The contract further specifies that title to the produced seed passes to Seedmark: 41. When accepted into the pool by Seedmark, the produced seed delivered by the grower is mixed with that of other growers. Accordingly, the grower has lost dispositive power over the produced seed as the produced seed of that particular grower is no longer identifiable. In these circumstances title in the produced seed has passed to Seedmark and the grower has disposed of the produced seed. [5] Consequently, the produced seed ceases to be trading stock of the grower for the purposes of Division 70 at the time Seedmark accepts delivery of the grower's produced seed. 42. In circumstances where Seedmark makes a payment in advance of delivery or the grower is in breach of the contract the produced seed ceases to be trading stock of the grower for the purposes of Division 70 at the time of the advance payment or the breach. | Application of Part IVA: 43. Having regard to the commercial character of the arrangement, Part IVA of the ITAA 1936 does not apply. 44. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: Sales of produced seed into the pool: 23. For growers returning their income on a cash basis, the pool distributions are included in assessable income under section 6-5 in the income year in which the grower receives the payments. 24. For growers returning their income on an earnings or accruals basis, the pool distributions made by Seedmark are included in assessable income under section 6-5 in the income year in which Seedmark declares each distribution. | Harvest Advance: 25. The Harvest Advance payment paid to growers under the terms of the Seedmark agreement is a loan and not income. | Amounts received: 26. Under subsection 6-5(4) the grower is treated as having received distribution amounts when the amounts are applied or dealt with in any way on the grower's behalf or as the grower directs. This includes when amounts are applied in full or partial satisfaction of the Harvest Advance loan owing to Seedmark. | Trading stock: 27. At the time Seedmark accepts delivery of the grower's produced seed, makes a payment in advance of delivery or the grower is in breach of the contract, the grower has sold and Seedmark has purchased the produced seed. The produced seed ceases to be trading stock of the grower for the purposes of Division 70 at that time. | Application of Part IVA: 28. Having regard to the facts of the arrangement, Part IVA of the ITAA 1936 does not apply. Commissioner of Taxation 9 April 2008


Appendix: Sales of produced seed into the pool: 29. The Standard Seedmark Purchase Contracts and Standard terms and conditions provides for the sale of the grower's produced seed, which is the grower's trading stock, when title to the produced seed passes to Seedmark. Title to the produced seed passes to Seedmark at the following times: 30. Sales revenue is ordinary income and is included in assessable income under section 6-5 in the income year in which the ordinary income is derived. 31. For taxpayers who use the cash method of accounting to determine their assessable income, income is derived when it is received, either actually, or constructively under subsection 6-5(4). [2] Accordingly, growers returning income on a cash basis include distributions in their assessable income under section 6-5 in the year in which the grower receives the payments. 32. For taxpayers who use the earnings or accruals method of accounting to determine their assessable income, income is derived when it is earned. The point of derivation occurs when a recoverable debt is created. [3] 33. At the time growers sell their produced seed they have a right to receive payment of their share of the pool proceeds, but that right is not presently existing as the payment is neither quantified nor quantifiable. Seedmark quantifies the amount payable to growers by determining and declaring pool distributions. 34. The amount of the distribution is a presently existing recoverable debt for payment of that part of the pool return. The determination and declaration of the amount by Seedmark is the point at which this debt becomes presently existing, unconditional and not subject to any contingency. 35. Accordingly, growers returning their income on an earnings or accruals basis include distributions made by Seedmark in their assessable income under section 6-5 in the year of income in which Seedmark declares each distribution. | Harvest Advance: 36. Growers selling produced seed into a Seedmark pool receive a Harvest Advance payment. Under the terms of the Seedmark agreement, this payment is a loan that is repaid in full out of the progress payments or final distribution when the seed pool is declared. It is not income. | Amounts received: 37. Subsection 6-5(4) treats an amount as assessable income of a taxpayer if the amount has been applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. 38. This means that amounts applied or dealt with by Seedmark in any way on the grower's behalf or as the grower directs, including declared distributions that are applied in full or partial satisfaction of the Harvest Advance loan owing to Seedmark, are treated under subsection 6-5(4) as having been received by the grower at the time the amount is so applied or dealt with. | Trading stock: 39. Under the various Sale of Goods Acts which operate in each State or Territory of Australia, a contract for the sale of goods is made when the seller agrees to transfer the property in the goods to the buyer for the sale price. Where, under a contract, property in goods is transferred from the seller to the buyer the contract is a sale. [4] 40. Under the contract, the grower agrees to sell all produced seed to Seedmark. The contract further specifies that title to the produced seed passes to Seedmark: 41. When accepted into the pool by Seedmark, the produced seed delivered by the grower is mixed with that of other growers. Accordingly, the grower has lost dispositive power over the produced seed as the produced seed of that particular grower is no longer identifiable. In these circumstances title in the produced seed has passed to Seedmark and the grower has disposed of the produced seed. [5] Consequently, the produced seed ceases to be trading stock of the grower for the purposes of Division 70 at the time Seedmark accepts delivery of the grower's produced seed. 42. In circumstances where Seedmark makes a payment in advance of delivery or the grower is in breach of the contract the produced seed ceases to be trading stock of the grower for the purposes of Division 70 at the time of the advance payment or the breach. | Application of Part IVA: 43. Having regard to the commercial character of the arrangement, Part IVA of the ITAA 1936 does not apply.


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. | Appendix 2 - Detailed contents list


Related rulings: TR 98/1 TR 2001/1
Legislative references: ITAA 1936 Pt IVA ITAA 1997 6-5 ITAA 1997 6-5(4) ITAA 1997 Div 70 TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968
Case references: Farnsworth v. FC of T (1949) 78 CLR 504 (1949) 9 ATD 33
Subject references: crops as trading stock derivation of income primary production income