Product Ruling PR 2017/4
Date of effect: 3 May 2017

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 Product Ruling relates. In this Product Ruling this scheme is referred to as the W.A. Blue Gum Project 2017 Project or simply as 'the Project'. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Product Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Product Ruling, terms defined in the Project agreements have been capitalised. Class of entities 3. This part of the Product Ruling specifies which entities are subject to the taxation obligations and can rely on the taxation benefits set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 49 of this Product Ruling on or before 30 June 2017 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include: 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. Qualifications 9. 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 49 to 97 of this Product Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

Class of entities or scheme: 3. This part of the Product Ruling specifies which entities are subject to the taxation obligations and can rely on the taxation benefits set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 49 of this Product Ruling on or before 30 June 2017 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include: 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 9. 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 49 to 97 of this Product Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then: 11. This Product Ruling applies prospectively from 3 May 2017, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 3 May 2017 until 30 June 2017 being the closing date for entry into the scheme. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2027 being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application. 12. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme. | Changes in the law: 13. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect. 14. 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: 15. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention, the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued. | Goods and Services Tax: 16. All amounts and percentages referred to in this Product Ruling exclude the Goods and Services Tax (GST) unless otherwise specified. The transactions in respect of this scheme may, where appropriate, have GST implications. Those GST implications are outside the scope of this Product Ruling. 17. In order for an entity (referred to in this Product 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. | Structure of the Project: 18. The W.A. Blue Gum Project 2017 is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is the Establishment (by way of planting and/or Coppicing) and tending of Eucalyptus globulus (Tasmanian Blue Gum) trees for felling in Australia. 19. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for an 'initial participant' [1] in the defined class of entities (see paragraphs 3 to 7 of this Product Ruling) who is accepted to participate in the 'forestry managed investment scheme' described below at paragraphs 49 to 97 of this Product Ruling on or after the date of issue and on or before 30 June 2017. 20. An entity that takes part in the Project as a 'subsequent participant' [2] is not covered by this Product Ruling but may request a private ruling on their participation in the Project. A 'subsequent participant' is an entity that does not meet the definition of 'initial participant' in subsection 394-15(5). | Carrying on an enterprise: 21. Although not relevant for the purposes of Division 394, Growers who enter into the arrangement described in this Product Ruling will be carrying on an enterprise for the purposes of subsection 9-20(1) of the A New Tax (Goods and Services Tax) Act 1999 (GST Act), subject to the exclusions listed in subsection 9-20(2) of the GST Act. | Carrying on a business: 22. Although not relevant for the purposes of Division 394, a Grower (as described in paragraphs 3 to 7 of this Product Ruling) who will stay in the Project until it is completed will be considered to be carrying on a business of primary production. Such Growers (whether carrying on that business alone or in partnership) are individuals, will be subject to the operation of Division 35 (see paragraphs 44 to 47 and 142 to 148 of this Product Ruling). Concessions for 'small business entities' [3] 23. 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'). 24. A 'small business entity' can choose the concessions that best suit its needs. Eligibility for some small business concessions is also dependent on satisfying some additional conditions. Because of these choices and the eligibility conditions, the application of the small business concessions to Growers who qualify as a 'small business entity' is not able to be dealt with in this Product Ruling, other than as specified. | The '70% DFE rule' and the establishment of the trees - section 394-35 and subsection 394-10(4): 25. The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by W.A. Blue Gum Limited. On the basis of that information, the Commissioner has decided that on 30 June 2017 it will be reasonable to expect that the '70% DFE rule' [4] will be satisfied. The Australian Taxation Office (ATO) may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'. 26. This Product Ruling will only apply if W.A. Blue Gum Limited Establishes all of the trees that were intended to be Established under the Project within 18 months of the end of the income year in which an amount is first paid under the Project by a 'participant' in the Project. [5] For this Project, the trees must be Established by 31 December 2018. 27. In the context of this Project, the trees will be Established when they are planted and/or Coppiced on the Land acquired for the purposes of the Project at the average rate of 900 trees per hectare. W.A. Blue Gum Limited is required by section 394-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to notify the Commissioner if all of the trees are not Established by 31 December 2018. | Sections 8-5, 394-10, 394-20 and paragraph 394-40(d): 28. A Grower in the Project can claim deductions for the amounts shown in the Table below that are paid to W.A. Blue Gum Limited as the Responsible Entity for the Project (sections 8-5 and 394-10). ($20,000 for the minimum of five forestry interests) See Note (i) ($550 for the minimum of five forestry interests) See Note (i) and (ii) ($2,000 for the minimum of five forestry interests) See Notes (i) and (iii) See Note (i) *inclusive of GST **inclusive of GST and indexed annually See Note (iv) See note (i) Notes: 29. The deductibility of these amounts remains subject to a requirement that: 30. The amount is deductible in the income year in which it is paid, or is paid on behalf of the Grower (subsection 394-10(2) and section 394-20). This requires cash to flow from the Grower, or from another entity on the Grower's behalf, to W.A. Blue Gum Limited's bank account in the year in which the deduction is claimed. Any form of payment that does not involve the movement of cash into W.A. Blue Gum Limited's bank account will not qualify for a deduction under subsection 394-10(2). 31. Where an amount is not fully paid by a Grower, or on their behalf, in an income year, the amount is deductible only to the extent to which it has been paid. Any unpaid amount is then deductible in the year or years in which it is actually paid. 32. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). | 'CGT event' within 4 years for Growers who are 'initial participants' - subsections 394-10(5), 394-10(5A), 394-10(6) and section 394-25: 33. Deductions for the Establishment fees, the tending fees, the rent and the unforeseen expenses in relation to fertiliser and/or insect issues are not allowable where a 'CGT event' happens in relation to the 'forestry interest' of a Grower before 1 July 2021 (subsection 394-10(5)). 34. Where deductions for these amounts have already been claimed by a Grower, the Commissioner may amend their assessment at any time within two years after the 'CGT event' (subsection 394-10(6)). The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936. 35. Growers whose deductions are disallowed because of subsection 394-10(5) are still required by section 394-25 to include in assessable income the market value of the 'forestry interest' at the time of the 'CGT event', or any decrease in the market value of the 'forestry interest' as a result of the 'CGT event'. 36. However, deductions will not be affected where the 'CGT event' happens because of circumstances outside the Grower's control and the Grower could not reasonably have foreseen the 'CGT event' happening when they acquired the 'forestry interest' (subsection 394-10(5A)). | Interest on loans to finance the 'forestry interest', credit card merchant fees, and fire insurance costs of a Grower - section 8-1: 37. Interest incurred by a Grower on a loan with Albany Financial Pty Ltd to fund their investment in the Project is deductible in the income year in which the interest is incurred provided the interest is not prepaid or paid in advance (paragraph 8-1(1)(a)). Growers who borrow from other financiers or who prepay their interest with Albany Financial Pty Ltd may apply for a private ruling on the deductibility of the interest incurred or may self-assess the deductibility of the interest incurred. 38. Credit card merchant fees incurred by a Grower in paying any fees under the Project will be deductible under section 8-1. The deduction is allowable in the year in which the merchant fee is incurred. 39. Fire insurance costs paid to the Responsible Entity are deductible under section 8-1 in the income year in which they are incurred. Amounts received from any fire insurance claims will be assessable income in the financial year in which they are derived. | 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' - sections 6-10, 17-5 and 394-25: 40. Where a 'CGT event' (other than a 'CGT event' that happens in respect of thinning [7] ) happens to a 'forestry interest' held by a Grower in this Project, the market value of the 'forestry interest', or any decrease in the market value of the 'forestry interest', is included in the assessable income of the Grower (sections 6-10 and 394-25), less any GST payable on those proceeds (section 17-5). 41. The relevant amount is included in the Grower's assessable income in the income year in which the 'CGT event' happens (subsection 394-25(2)). 42. 'CGT events' for these purposes include those relating to: | Amounts received by Growers for carbon or other environmental credits, and insurance proceeds - sections 6-5 and 17-5: 43. An amount received by a Grower in respect of sales of carbon or other environmental credits, or the receipt of insurance proceeds, constitutes 'ordinary income' that arises as an incident of the Grower holding an interest in the Project. Growers should include their share of any such amounts received in their assessable income in the income year in which those amounts are derived (section 6-5) less any GST paid on those proceeds (section 17-5). | Deferral of losses from non-commercial business activities and annual exercise of Commissioner's discretion - Division 35: 44. For each of the income years ended 30 June 2017 to 30 June 2027, the Commissioner will exercise the discretion in subsection 35-55(1) once the following conditions are satisfied for the year concerned: 45. If these conditions are met for a given year, the Commissioner will exercise the discretion for that year under: 46. If the Commissioner determines that the discretion will not be exercised for a particular year or years, the Grower will be informed of that decision and the reasons. In any year where the discretion is not exercised, losses incurred by a Grower will be subject to the loss deferral rule in section 35-10 and the Grower will not be able to offset the losses from the Project against other assessable income. 47. The issue of this Product Ruling, of itself, does not constitute the exercise of the Commissioner's discretion in subsection 35-55(1) for any income year. | Prepayment provisions and anti-avoidance provisions - sections 82KZM, 82KZME, 82KZMF, 82KL and Part IVA of the ITAA 1936: 48. Where a Grower is accepted to participate in the Project set out at paragraphs 49 to 97 of this Ruling, the following provisions of the ITAA 1936 have application as indicated: 49. The scheme that is the subject of this Product Ruling is identified and described in the following documents: Note: Certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 50. The documents highlighted are those that a Grower may enter into. For the purposes of describing the scheme to which this Product Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, to which a Grower, or any associate of a Grower, will be a party, that are a part of the scheme. 51. All Australian Securities & Investments Commission requirements are, or will be, complied with for the term of the agreements. | Overview: 52. The main features of the W.A. Blue Gum Project 2017 are as follows: ($4,400 including GST) $20,000 for the minimum of five forestry interests ($22,000 including GST) ($550 for the minimum of five forestry interests, $605 including GST) Rent of $400, indexed annually ($440 including GST) ($2,000 for the minimum of five forestry interests, $2,200 including GST) Incentive fee Unforeseen expenses Fire insurance Transfer of interest fee 53. The Project will be a registered managed investment scheme under the Corporations Act 2001 (the Corporations Act). W.A. Blue Gum Limited has been issued with an Australian Financial Service Licence No. 246264 and will be the Responsible Entity for the Project. 54. The Project will involve the planting and growing of Tasmanian Blue Gums in the southwest region of Western Australia for the purpose of Harvest and sale of the timber. 55. An offer to participate in the Project will be made through the Combined Product Disclosure Statement and Financial Services Guide (CPDSFSG). The offer under the CPDSFSG is for up to 800 hectares, which corresponds to 800 'forestry interests' in the Project. 56. An entity that participates in the Project as a Grower will do so by acquiring a 'forestry interest' in the Project on or before 30 June 2017, which will consist of a minimum of five 'forestry interests', each of one hectare in size. 57. Applicants execute a Power of Attorney contained in the CPDSFSG. The Power of Attorney irrevocably appoints W.A. Blue Gum Limited to enter into, on behalf of the Grower, an Agreement to Sub-lease or a Sub-lease, a Project Management Contract, and a Wood Project Agreement. 58. For the purposes of this Product Ruling, Applicants who are accepted to participate in the Project and who execute the Agreement to Sub-lease or the Sub-lease, and the Project Management Contract, on or before 30 June 2017, will become Growers in the Project. 59. The Responsible Entity is currently seeking Land for the Project within the relevant geographic part of Australia. Land utilised by the Project must meet the requirements set out by the Independent Forester at page 40 of the Draft CPDSFSG. 60. Note that the CPDSFSG advises that where the Land for the Project is not available on or before 30 June 2017, acceptance of Applications is subject to Land being acquired and a Sub-lease being entered into on behalf of the Grower by 30 September 2018. | Constitution: 61. The Constitution establishes the Project and operates as a deed binding all Growers and W.A. Blue Gum Limited. The Constitution sets out the terms and conditions under which W.A. Blue Gum Limited agrees to act as Responsible Entity and thereby manage the Project. Upon acceptance into the Project, Growers are bound by the Constitution by virtue of their participation in the Project. 62. In order to acquire an interest in the Project, an entity must make an Application for 'forestry interests' in accordance with clause 4 of the Constitution. Among other things, the Application must be completed in a form approved by the Responsible Entity, signed by or on behalf of the Applicant, lodged at the registered office of the Responsible Entity, and accompanied by payment of the Application Money in a form acceptable to the Responsible Entity. 63. Under clause 6 of the Constitution, the Responsible Entity will open an Application Fund with an Australian bank or financial institution into which all Application Monies received from applicants will be deposited. 64. Once the Responsible Entity has accepted the Application and issued an Interest to a Grower, an amount equal to the Application Money in the Application Fund will be transferred to the Responsible Entity or at the direction of the Responsible Entity (clause 6.4 of the Constitution). 65. In summary, the Constitution also sets out provisions relating to: | Compliance Plan: 66. As required by the Corporations Act, W.A. Blue Gum Limited as the Responsible Entity has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure the Responsible Entity manages the Project in accordance with its obligations and responsibilities contained in the Constitution and the interests of Growers are protected. | Project Management Contract: 67. In consideration of the Growers paying the fees set out in Schedule 2 to the Project Management Contract, W.A. Blue Gum Limited as Project Manager agrees to provide the Plantation Services to the Growers (clauses 3 and 14 of the Project Management Contract). 68. The Fees Payable under Schedule 2 are: 69. The plantation Services to be provided by the Project Manager are set out at clause 4 and the Plan of the Project Management Contract, and include: 70. Clause 5 of the Project Management Contract explains that the term of the contract starts on the Commencement Date and terminates when the whole of the plantation has been Harvested. 71. Clause 7 of the Project Management Contract details that any insurance proceeds following fire or other damage to the plantation will be pooled and distributed proportionally to 'affected' Growers. 72. Clause 11 of the Project Management Contract explains the Harvesting will be conducted in accordance with the Wood Purchase Agreement. | Plantation Services Agreement: 73. The Project Manager will engage Ents Forestry Pty Ltd as Forestry Contractor to carry out the plantation services required to Establish and tend the plantation in accordance with the Plantation Development and Tending Plan. | Head Leases: 74. The Responsible Entity will secure the Project Land by entering into a head lease or Sub-lease (or a number of such leases) with lessors on or before 30 September 2018. | Sub-lease: 75. Each Grower will execute a Sub-lease with W.A. Blue Gum Limited, as the Landholder, either at the time their Application is accepted or prior to 30 September 2018. 76. The Schedule to the Sub-lease will identify: the leased area, the plantable area, the rent payable by the Grower, the commencement date of the Sub-lease, that the term is until completion of Harvesting and details of the relevant head lease(s). 77. The Sub-lease also provides that livestock can be grazed on the Leased Area, and that the Grower is entitled to any income derived from such grazing (except where by operation of the 'head lease', the head lessor grazes livestock). The Grower shall reimburse the Landholder for stamp duty in respect of the Sub-lease (clause 9.11(b) of the Sub-lease). 78. Carbon, environmental or other credits derived from the plantation are the property of the Grower until the end of the Term (clause 9.17 of the Sub-lease). 79. The Sub-lease can be terminated if the whole or a substantial part of the plantation is damaged, for example, by fire, such that the plantation is no longer commercially viable. Alternatively, if only part of the plantation is destroyed, the plantable area will be reduced (clause 10 of the Sub-lease). 80. Both the Landholder and the Grower shall be excused from performance of or liability under the Sub-lease if prevented by 'Force Majeure' (clause 12 of the Sub-lease). | Agreement to Sub-lease: 81. Where there is no Project Land available for a Grower on or before 30 June 2017, the Grower will be required to enter into an Agreement to Sub-lease with W.A. Blue Gum Limited. 82. Pursuant to the terms of the Agreement to Sub-lease, the parties undertake to enter into a Sub-lease of the Land on or before 30 September 2018, which will allow the Establishment of the plantation by 31 December 2018 in accordance with the Project Management Contract. | Wood Purchase Agreement: 83. This agreement is between the Growers, the W.A. Blue Gum Limited, and WA Chip & Pulp Co. Pty Ltd as Purchaser. 84. W.A. Blue Gum Limited and the Purchaser will agree on a Harvest Plan not less than six months out from Harvest and delivery. Not less than two months before Harvest, the Purchaser will give notice of the Proposed Purchase Price, including Harvest and delivery costs. W.A. Blue Gum Limited may seek alternative pricing from third parties, but the Purchaser retains the right to match the price offered by the third parties. | Pooling of money from the Harvest of timber and Grower's entitlement to a distribution: 85. Clause 7 of the Constitution provides that: 86. This Product Ruling only applies where the following principles apply to the pooling and distribution arrangements: | Custody Agreement: 87. W.A. Blue Gum Limited, as the Responsible Entity, has engaged Sandhurst Trustees Limited to act as the Custodian of the Property. The Property includes all Application Money and Harvest Income until disbursed or distributed in accordance with the Constitution and Project Agreements, but does not include property legally vested in a Grower. | Fees: 88. Under the terms of the Project Management Contract and the Sub-lease, a Grower will make payments as described below on a per 'forestry interest' basis. | Fees payable under the Project Management Contract: 89. The Application Money of $4,000 is to be paid by each Grower on Application for the Establishment of the plantation. 90. Following the Application Year, the following ongoing fees are payable to W.A. Blue Gum Limited: | Fees payable under the Sub-lease: 91. Where the Sub-lease commencement date is on or before 30 June 2017, Rent for the period from commencement date to 30 June 2017 will be nil. Rent of $400 per 'forestry interest' per annum, for the year ending 30 June 2018, will become first payable on 30 November 2017, and then indexed annually and payable on 30 September (clause 6 of the Sub-lease). 92. Where the Sub-lease commencement date is after 30 June 2017, rent for the period from commencement date to 30 June 2018 will be nil. Rent of $400 per 'forestry interest' per annum, for the year ending 30 June 2019, will become first payable on 30 November 2018, and then indexed annually and payable 30 September (clause 6 of the Sub-lease). | Finance: 93. To finance all or part of the cost of their 'forestry interest' a Grower can enter into a finance arrangement with Albany Financial Pty Ltd or, alternatively, borrow from an independent lender external to the Project. 94. Only the finance arrangement set out below is covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with Albany Financial Pty Ltd that materially differs from that set out in the documentation provided with the application for this Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling. 95. A Grower cannot rely on any part of this Product Ruling if the Application Monies are not paid in full on or before 30 June 2017 by the Grower or, on the Grower's behalf, by a lending institution. | Finance offered by Albany Financial Pty Ltd: 96. Subject to Albany Financial Pty Ltd accepting the Grower's Application, the Grower will be bound by the terms and conditions of the Loan Agreement, which include: | Other qualifications relating to finance: 97. This Product Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features: Commissioner of Taxation 3 May 2017 | Structure of the Project: 98. In return for payment of the fee for the Establishment of the plantation and the other fees and expenses required under the Plantation Management Contract, Sub-lease and Wood Purchase Agreement during the term of the Project, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)). 99. Under the Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the Harvest and share of the proceeds of any thinning of the trees grown on the Project Land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants' [8] in the Project. | Is the Grower carrying on an enterprise?: 100. An entity may be registered for GST if it is carrying on an 'enterprise' (section 23-10 of the GST Act). 101. The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done in the form of a business (paragraph 9-20(1)(a) of the GST Act). The use of the phrase 'in the form of' has been interpreted to indicate a wider meaning than the word 'business' in isolation. 102. However, subsection 9-20(2) of the GST Act provides that the term 'enterprise' does not include an activity, or series of activities, done by an individual or partnership without a reasonable expectation of profit or gain. 103. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number sets out the Commissioner's views on when an entity is carrying on an enterprise for the purposes of section 9-20 of the GST Act. 104. ATO Interpretative Decision ATO ID 2010/197 GST and agricultural managed investment scheme - Investor carrying on an enterprise considers a managed investment scheme similar to that described in this Product Ruling. This decision applies the principles set out in MT 2006/1 to conclude that the 'Grower' in that scheme was carrying on an enterprise for the purpose of section 9-20 of the GST Act. 105. Application of these principles to the arrangement set out in this Product Ruling leads to the conclusion that a Grower (as described in paragraphs 3 to 7 of this Product Ruling) will be carrying on an enterprise for the purpose of section 9-20 of the GST Act where there is a reasonable expectation of profit or gain from their participation in the Project. | Is the Grower carrying on a business?: 106. The general indicators used by the courts in determining whether an entity is carrying on a business are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 107. In relation to a managed investment scheme similar to that which is the subject of this Product Ruling, the Full Federal Court in Hance v. Federal Commissioner of Taxation; Hannebery v. Federal Commissioner of Taxation [2008] FCAFC 196; (2008) 2008 ATC 20-085; (2008) 74 ATR 644 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90). 108. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 3 to 7 of this Product Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving forestry activities. | Sections 8-5, 12-5, 394-10 and 394-20: 109. Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5, and includes payments under a 'forestry managed investment scheme' that meet the requirements of subsection 394-10(1). 110. Payments that relate to processing are not deductible to Growers as a payment under a 'forestry managed investment scheme'. However, a deduction will be available under section 8-1 as Growers will be carrying on a business activity. | The '70% DFE rule' - paragraph 394-10(1)(c) and section 394-35: 111. The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June 2017 the amount of 'direct forestry expenditure' [9] under the scheme will be no less than 70% of the amount of payments under the scheme. [10] 112. The amount of 'direct forestry expenditure' under the scheme is the amount of the net present value (on 30 June 2017) of all 'direct forestry expenditure' under the scheme that the Responsible Entity, as the 'forestry manager' [11] of the Project, has paid or will pay under the scheme (subsection 394-35(2)). 113. The 'amount of payments under the scheme' is the amount of the net present value (on 30 June 2017) of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)). 114. The above amounts are determined as at 30 June 2017 taking into account: 115. Based on the information provided by the Responsible Entity of the Project, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2017. | Other elements for deductibility under subsection 394-10(1): 116. The requirements of paragraphs 394-10(1)(a) and (b) are met as a Grower will hold a 'forestry interest' in the Project (see paragraph 6 of this Product Ruling) and will pay an amount under the Project. The requirement of paragraph 394-10(1)(d) is met as it is clear from the Project Agreements that Growers in the Project do not have day-to-day control over the operation of the Project. The requirement of paragraph 394-10(1)(e) relating to the number of Growers in the scheme and the Responsible Entity's role in other managed investment schemes is also met. 117. All of the trees intended to be Established under the Project must be Established within 18 months of 30 June 2017 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting and/or Coppicing timeline provided with the application for this Product Ruling by the Responsible Entity indicates that all the trees required to be Established under the scheme will be planted and/or Coppiced on the Project Land by 31 December 2018. 118. Accordingly, subject to the qualifications set out below, amounts paid by Growers to the Responsible Entity in relation to their 'forestry interests' satisfy all of the requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)). 119. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). 120. Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf, in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year. | Loss of deductions previously allowed under subsection 394-10(1): 121. Two situations may lead to a loss of deductions previously allowed to Growers under subsection 394-10(1). 122. The first of these situations will occur if the condition in subsection 394-10(4) is not met in relation to the Project. That is, the Responsible Entity fails to Establish all of the trees on the Project Land within 18 months of 30 June 2017. Where this occurs, the Responsible Entity is required to notify the Commissioner within three months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA). 123. The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within four years after 30 June of the income year in which they paid an amount under the scheme, for example, the fee for the Establishment of the plantation (see subsection 394-10(5)). 124. For the purposes of giving effect to subsection 394-10(5), the Commissioner is able to amend the assessment of a Grower within two years after the relevant 'CGT event'. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6)). 125. Where a 'CGT event' happens to the 'forestry interest' of a Grower within four years after 30 June 2017, the market value of the forestry interest at the time of the 'CGT event', or any decrease in the market value of the 'forestry interest' as a result of the 'CGT event', is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed, or may disallow, the deductions previously allowed under section 394-10. 126. However, subsection 394-10(5) will have no application where the 'CGT event' happens because of circumstances outside the Grower's control and the Grower could not reasonably have foreseen the 'CGT event' happening when they acquired the 'forestry interest' (subsection 394-10(5A)). | Interest on loans to finance the 'forestry interest' of a Grower - section 8-1: 127. Where a Grower borrows money to fund their investment in the Project, the deductibility of the interest incurred on the loan monies falls for consideration under the general deduction provisions of section 8-1. If the interest incurred by the Grower is deductible under the first positive limb in paragraph 8-1(1)(a), there is no requirement to consider whether it is also deductible under the second positive limb in paragraph 8-1(1)(b). Court decisions show that the same basic test applies to both limbs (see Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431, at CLR 56; ATD 435). 128. Under the first positive limb in paragraph 8-1(1)(a), the interest incurred by a Grower will be deductible if it is incurred in gaining or producing a Grower's assessable income and is not excluded by one of the negative limbs in subsection 8-1(2): 129. Growers in the Project use the borrowed funds to acquire a 'forestry interest' in a 'forestry managed investment scheme'. The holding of that 'forestry interest' will give rise to assessable income of a Grower in the form of the proceeds of a full or part disposal of the 'forestry interest' or, a proportionate share of the Harvest proceeds. Therefore, the tests of deductibility of interest under the first limb of subsection 8-1(1) are met, unless one of the exclusions in subsection 8-1(2) apply. 130. For the purposes of this Project, only the capital exclusion in paragraph 8-1(2)(a) is relevant. The use of borrowed funds to purchase a capital asset, such as a 'forestry interest', does not mean that the interest outgoings are on capital account (see Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; (1999) 99 ATC 4242; (1999) 41 ATR 139, at CLR 470; ATC 4249; ATR 148): 131. Therefore, the capital exclusion in subsection 8-1(2) does not apply to the interest incurred by a Grower under the loan entered into with Albany Financial Pty Limited as described in paragraphs 96 and 97 of this Product Ruling and, subject only to the potential application of the prepayment provisions, the interest is deductible in the year in which it is incurred. (Note: The meaning of 'incurred' is explained in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions. ) | Prepayment provisions - sections 82KZL to 82KZMF of the ITAA 1936: 132. The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and 82KZMF of the ITAA 1936. 133. However, subsection 394-10(7) specifically provides that sections 82KZMD and 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10. 134. Accordingly, under the scheme to which this Product Ruling applies, only deductions for interest payable under a loan with Albany Financial Pty Ltd will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Product Ruling applies (see paragraphs 93 to 97 of this Product Ruling) do not require any prepayment of interest over the term of the loan. Accordingly, the prepayment provisions have no application to Growers who enter into those loans. 135. If a Grower chooses to prepay interest on these loans, that Grower may request a private ruling on how the prepayment provisions will affect the timing of their interest deduction. | 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' - sections 6-10, 10-5 and 394-25: 136. Section 6-10 includes in assessable income amounts that are not 'ordinary income'. These amounts, called 'statutory income', are listed in the table in section 10-5, and include amounts that are included in the assessable income of 'initial participants' of a 'forestry managed investment scheme' by subsection 394-25(2). | Subsection 394-25(2): 137. Where a 'CGT event' (other than for a 'CGT event' that happens in respect of thinning [12] ) happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if: | Market value rule applies to 'CGT events': 138. The Grower's assessable income for the income year in which the 'CGT event' happens includes: 139. A market value rule applies, rather than the amount of money actually received being included in your assessable income, because of the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same. 140. Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell Harvest of the trees grown under the Project. | Amounts received by Growers for carbon or other environmental credits, and insurance proceeds - section 6-5: 141. Carbon and/or other environmental credit amounts and insurance proceeds received by a Grower in this Project do not arise as a result of a 'CGT event' and are not otherwise assessable under Division 394. The receipt of such amounts is a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. Each amount is 'ordinary income' and is assessable under section 6-5 in the year in which it is derived. | Deferral of losses from non-commercial business activities and the Commissioner's discretion - sections 35-10 and 35-55: 142. Based on information provided with the application for this Product Ruling, a Grower who is an individual and is accepted into the Project in the year ended 30 June 2017 and who carries on a business of forestry (alone or in partnership), is expected to incur losses from their participation in the Project which will be subject to Division 35. [13] These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year. 143. The exceptions to the loss deferral rule depend upon the circumstances of individual Growers and are outside the scope of this Product Ruling. 144. The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion. 145. Where a Grower with income for Division 35 purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: 146. Where a Grower with income for Division 35 purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: 147. A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: 148. In each year in which the Commissioner's discretion is exercised as set out in either paragraph 145 or 146 of this Product Ruling in relation to the business carried on by a Grower, the Grower, who would otherwise be required to defer a loss arising from their participation in the Project under section 35-10 until a later income year, is able to offset that loss against their other assessable income. | Recouped expenditure - section 82KL of the ITAA 1936: 149. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. Section 82KL of the ITAA 1936 will not apply to deny the deduction otherwise allowable under section 8-1. | General anti-avoidance provisions - part IVA of the ITAA 1936: 150. For Part IVA of the ITAA 1936 to apply, there must be a 'scheme' (subsection 177A(1) of the ITAA 1936), a 'tax benefit' (section 177C of the ITAA 1936) and a dominant purpose of entering into the scheme to obtain a tax benefit (subsection 177D(1) of the ITAA 1936). 151. The W.A. Blue Gum Project 2017 will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraphs 28 to 32 of this Product Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit. 152. Growers to whom this Product Ruling applies will derive assessable income from holding or disposing of their 'forestry interest' in the Project. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Product Ruling. There is no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing at arm's length or, if any parties are not dealing at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under subsection 177D(2) of the ITAA 1936, it cannot be concluded, on the information available, that Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit. 153. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Not previously issued as a draft

Ruling: This Product Ruling has been given on the basis that the entity(s) who applied for the Product Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling. 1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Product Ruling relates. In this Product Ruling this scheme is referred to as the W.A. Blue Gum Project 2017 Project or simply as 'the Project'. 2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Product Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Product Ruling, terms defined in the Project agreements have been capitalised. | Class of entities: 3. This part of the Product Ruling specifies which entities are subject to the taxation obligations and can rely on the taxation benefits set out in the Ruling section of this Product Ruling. 4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers. 5. Growers are those entities that: 6. A Grower will have executed the relevant Project Agreements set out in paragraph 49 of this Product Ruling on or before 30 June 2017 and will hold a 'forestry interest' in the Project. 7. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include: 8. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA. | Qualifications: 9. 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 49 to 97 of this Product Ruling. 10. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:


Appendix: Structure of the Project: 98. In return for payment of the fee for the Establishment of the plantation and the other fees and expenses required under the Plantation Management Contract, Sub-lease and Wood Purchase Agreement during the term of the Project, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)). 99. Under the Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the Harvest and share of the proceeds of any thinning of the trees grown on the Project Land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants' [8] in the Project. | Is the Grower carrying on an enterprise?: 100. An entity may be registered for GST if it is carrying on an 'enterprise' (section 23-10 of the GST Act). 101. The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done in the form of a business (paragraph 9-20(1)(a) of the GST Act). The use of the phrase 'in the form of' has been interpreted to indicate a wider meaning than the word 'business' in isolation. 102. However, subsection 9-20(2) of the GST Act provides that the term 'enterprise' does not include an activity, or series of activities, done by an individual or partnership without a reasonable expectation of profit or gain. 103. Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number sets out the Commissioner's views on when an entity is carrying on an enterprise for the purposes of section 9-20 of the GST Act. 104. ATO Interpretative Decision ATO ID 2010/197 GST and agricultural managed investment scheme - Investor carrying on an enterprise considers a managed investment scheme similar to that described in this Product Ruling. This decision applies the principles set out in MT 2006/1 to conclude that the 'Grower' in that scheme was carrying on an enterprise for the purpose of section 9-20 of the GST Act. 105. Application of these principles to the arrangement set out in this Product Ruling leads to the conclusion that a Grower (as described in paragraphs 3 to 7 of this Product Ruling) will be carrying on an enterprise for the purpose of section 9-20 of the GST Act where there is a reasonable expectation of profit or gain from their participation in the Project. | Is the Grower carrying on a business?: 106. The general indicators used by the courts in determining whether an entity is carrying on a business are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? 107. In relation to a managed investment scheme similar to that which is the subject of this Product Ruling, the Full Federal Court in Hance v. Federal Commissioner of Taxation; Hannebery v. Federal Commissioner of Taxation [2008] FCAFC 196; (2008) 2008 ATC 20-085; (2008) 74 ATR 644 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90). 108. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 3 to 7 of this Product Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving forestry activities. | Sections 8-5, 12-5, 394-10 and 394-20: 109. Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5, and includes payments under a 'forestry managed investment scheme' that meet the requirements of subsection 394-10(1). 110. Payments that relate to processing are not deductible to Growers as a payment under a 'forestry managed investment scheme'. However, a deduction will be available under section 8-1 as Growers will be carrying on a business activity. | The '70% DFE rule' - paragraph 394-10(1)(c) and section 394-35: 111. The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June 2017 the amount of 'direct forestry expenditure' [9] under the scheme will be no less than 70% of the amount of payments under the scheme. [10] 112. The amount of 'direct forestry expenditure' under the scheme is the amount of the net present value (on 30 June 2017) of all 'direct forestry expenditure' under the scheme that the Responsible Entity, as the 'forestry manager' [11] of the Project, has paid or will pay under the scheme (subsection 394-35(2)). 113. The 'amount of payments under the scheme' is the amount of the net present value (on 30 June 2017) of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)). 114. The above amounts are determined as at 30 June 2017 taking into account: 115. Based on the information provided by the Responsible Entity of the Project, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2017. | Other elements for deductibility under subsection 394-10(1): 116. The requirements of paragraphs 394-10(1)(a) and (b) are met as a Grower will hold a 'forestry interest' in the Project (see paragraph 6 of this Product Ruling) and will pay an amount under the Project. The requirement of paragraph 394-10(1)(d) is met as it is clear from the Project Agreements that Growers in the Project do not have day-to-day control over the operation of the Project. The requirement of paragraph 394-10(1)(e) relating to the number of Growers in the scheme and the Responsible Entity's role in other managed investment schemes is also met. 117. All of the trees intended to be Established under the Project must be Established within 18 months of 30 June 2017 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting and/or Coppicing timeline provided with the application for this Product Ruling by the Responsible Entity indicates that all the trees required to be Established under the scheme will be planted and/or Coppiced on the Project Land by 31 December 2018. 118. Accordingly, subject to the qualifications set out below, amounts paid by Growers to the Responsible Entity in relation to their 'forestry interests' satisfy all of the requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)). 119. Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). 120. Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf, in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year. | Loss of deductions previously allowed under subsection 394-10(1): 121. Two situations may lead to a loss of deductions previously allowed to Growers under subsection 394-10(1). 122. The first of these situations will occur if the condition in subsection 394-10(4) is not met in relation to the Project. That is, the Responsible Entity fails to Establish all of the trees on the Project Land within 18 months of 30 June 2017. Where this occurs, the Responsible Entity is required to notify the Commissioner within three months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA). 123. The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within four years after 30 June of the income year in which they paid an amount under the scheme, for example, the fee for the Establishment of the plantation (see subsection 394-10(5)). 124. For the purposes of giving effect to subsection 394-10(5), the Commissioner is able to amend the assessment of a Grower within two years after the relevant 'CGT event'. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6)). 125. Where a 'CGT event' happens to the 'forestry interest' of a Grower within four years after 30 June 2017, the market value of the forestry interest at the time of the 'CGT event', or any decrease in the market value of the 'forestry interest' as a result of the 'CGT event', is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed, or may disallow, the deductions previously allowed under section 394-10. 126. However, subsection 394-10(5) will have no application where the 'CGT event' happens because of circumstances outside the Grower's control and the Grower could not reasonably have foreseen the 'CGT event' happening when they acquired the 'forestry interest' (subsection 394-10(5A)). | Interest on loans to finance the 'forestry interest' of a Grower - section 8-1: 127. Where a Grower borrows money to fund their investment in the Project, the deductibility of the interest incurred on the loan monies falls for consideration under the general deduction provisions of section 8-1. If the interest incurred by the Grower is deductible under the first positive limb in paragraph 8-1(1)(a), there is no requirement to consider whether it is also deductible under the second positive limb in paragraph 8-1(1)(b). Court decisions show that the same basic test applies to both limbs (see Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431, at CLR 56; ATD 435). 128. Under the first positive limb in paragraph 8-1(1)(a), the interest incurred by a Grower will be deductible if it is incurred in gaining or producing a Grower's assessable income and is not excluded by one of the negative limbs in subsection 8-1(2): 129. Growers in the Project use the borrowed funds to acquire a 'forestry interest' in a 'forestry managed investment scheme'. The holding of that 'forestry interest' will give rise to assessable income of a Grower in the form of the proceeds of a full or part disposal of the 'forestry interest' or, a proportionate share of the Harvest proceeds. Therefore, the tests of deductibility of interest under the first limb of subsection 8-1(1) are met, unless one of the exclusions in subsection 8-1(2) apply. 130. For the purposes of this Project, only the capital exclusion in paragraph 8-1(2)(a) is relevant. The use of borrowed funds to purchase a capital asset, such as a 'forestry interest', does not mean that the interest outgoings are on capital account (see Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; (1999) 99 ATC 4242; (1999) 41 ATR 139, at CLR 470; ATC 4249; ATR 148): 131. Therefore, the capital exclusion in subsection 8-1(2) does not apply to the interest incurred by a Grower under the loan entered into with Albany Financial Pty Limited as described in paragraphs 96 and 97 of this Product Ruling and, subject only to the potential application of the prepayment provisions, the interest is deductible in the year in which it is incurred. (Note: The meaning of 'incurred' is explained in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions. ) | Prepayment provisions - sections 82KZL to 82KZMF of the ITAA 1936: 132. The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and 82KZMF of the ITAA 1936. 133. However, subsection 394-10(7) specifically provides that sections 82KZMD and 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10. 134. Accordingly, under the scheme to which this Product Ruling applies, only deductions for interest payable under a loan with Albany Financial Pty Ltd will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Product Ruling applies (see paragraphs 93 to 97 of this Product Ruling) do not require any prepayment of interest over the term of the loan. Accordingly, the prepayment provisions have no application to Growers who enter into those loans. 135. If a Grower chooses to prepay interest on these loans, that Grower may request a private ruling on how the prepayment provisions will affect the timing of their interest deduction. | 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' - sections 6-10, 10-5 and 394-25: 136. Section 6-10 includes in assessable income amounts that are not 'ordinary income'. These amounts, called 'statutory income', are listed in the table in section 10-5, and include amounts that are included in the assessable income of 'initial participants' of a 'forestry managed investment scheme' by subsection 394-25(2). | Subsection 394-25(2): 137. Where a 'CGT event' (other than for a 'CGT event' that happens in respect of thinning [12] ) happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if: | Market value rule applies to 'CGT events': 138. The Grower's assessable income for the income year in which the 'CGT event' happens includes: 139. A market value rule applies, rather than the amount of money actually received being included in your assessable income, because of the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same. 140. Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell Harvest of the trees grown under the Project. | Amounts received by Growers for carbon or other environmental credits, and insurance proceeds - section 6-5: 141. Carbon and/or other environmental credit amounts and insurance proceeds received by a Grower in this Project do not arise as a result of a 'CGT event' and are not otherwise assessable under Division 394. The receipt of such amounts is a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. Each amount is 'ordinary income' and is assessable under section 6-5 in the year in which it is derived. | Deferral of losses from non-commercial business activities and the Commissioner's discretion - sections 35-10 and 35-55: 142. Based on information provided with the application for this Product Ruling, a Grower who is an individual and is accepted into the Project in the year ended 30 June 2017 and who carries on a business of forestry (alone or in partnership), is expected to incur losses from their participation in the Project which will be subject to Division 35. [13] These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year. 143. The exceptions to the loss deferral rule depend upon the circumstances of individual Growers and are outside the scope of this Product Ruling. 144. The Commissioner will apply the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion when exercising the discretion. 145. Where a Grower with income for Division 35 purposes of less than $250,000 (that is, the Grower satisfies the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(b) is exercised for that year, the Commissioner will be satisfied that: 146. Where a Grower with income for Division 35 purposes of $250,000 or more (that is, the Grower does not satisfy the income requirement in subsection 35-10(2E)) incurs a loss in an income year from carrying on their business activity in a way that is not materially different to the scheme described in this Product Ruling, and the discretion in paragraph 35-55(1)(c) is exercised for that year, the Commissioner will be satisfied that: 147. A Grower will satisfy the income requirement in subsection 35-10(2E) where the sum of the following amounts is less than $250,000: 148. In each year in which the Commissioner's discretion is exercised as set out in either paragraph 145 or 146 of this Product Ruling in relation to the business carried on by a Grower, the Grower, who would otherwise be required to defer a loss arising from their participation in the Project under section 35-10 until a later income year, is able to offset that loss against their other assessable income. | Recouped expenditure - section 82KL of the ITAA 1936: 149. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. Section 82KL of the ITAA 1936 will not apply to deny the deduction otherwise allowable under section 8-1. | General anti-avoidance provisions - part IVA of the ITAA 1936: 150. For Part IVA of the ITAA 1936 to apply, there must be a 'scheme' (subsection 177A(1) of the ITAA 1936), a 'tax benefit' (section 177C of the ITAA 1936) and a dominant purpose of entering into the scheme to obtain a tax benefit (subsection 177D(1) of the ITAA 1936). 151. The W.A. Blue Gum Project 2017 will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraphs 28 to 32 of this Product Ruling that would not have been obtained but for the scheme. However, it is not possible to conclude the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit. 152. Growers to whom this Product Ruling applies will derive assessable income from holding or disposing of their 'forestry interest' in the Project. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Product Ruling. There is no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing at arm's length or, if any parties are not dealing at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under subsection 177D(2) of the ITAA 1936, it cannot be concluded, on the information available, that Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information. | This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling. | Harvesting, delivery and supervision expenses | In the southwest of Western Australia, between Bunbury and Albany | Species of trees to be planted and/or Coppiced under the scheme | Date all trees are due to be planted and/or Coppiced on scheme Land | Number of trees per hectare | 800-1000 trees per hectare with an average of 900, whether coppiced or planted | Number of hectares offered for cultivation | Approximately 800, subject to land being available | Size of each 'forestry interest' | Minimum allocation of 'forestry interests' per Grower | Initial cost per forestry interest | Ongoing annual costs per forestry interest | The question of whether an outgoing [is] ... incurred in gaining or producing the assessable income is a question of characterisation ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; (1991) 91 ATC 4950; (1991) 22 ATR 613, at CLR 17; ATC 4957; ATR 621). | To the extent that ... outgoings of interest ... can properly be characterised as of a kind referred to in the first limb of [section 8-1] they must draw their character from the use of the borrowed funds ( Fletcher, at CLR 19; ATC 4958; ATR 623). | [T]he characterisation of interest will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are put ( Federal Commissioner of Taxation v. Roberts (1992) 37 FCR 246; (1992) 92 ATC 4380; (1992) 23 ATR 494, at FCR 257; ATC 4388; ATR 504). | Interest [is a] periodic payment for the use, but not the permanent acquisition of a capital item. Therefore, a consideration of the often-cited three matters identified by Dixon J in Sun Newspapers Ltd v. FC of T ... assigns interest ... to revenue ( Australian National Hotels Ltd v. Federal Commissioner of Taxation (1988); 19 FCR 234; (1988) 88 ATC 4627; (1988) 19 ATR 1575, at FCR 241; ATC 4633-4634; ATR 1582). | 'CGT event' within four years for Growers who are 'initial participants' - subsections 394-10(5), 394-10(5A), 394-10(6) and section 394-25 | Appendix 2 - Detailed contents list


Related rulings: TR 97/7 TR 97/11 TR 98/22 TR 2007/6 MT 2006/1
Legislative references: ITAA 1936 ITAA 1936 Pt III Div 3 Subdiv H ITAA 1936 82KL ITAA 1936 82KZL ITAA 1936 82KZM ITAA 1936 82KZMD ITAA 1936 82KZME ITAA 1936 82KZMF ITAA 1936 Pt IVA ITAA 1936 170 ITAA 1936 177A(1) ITAA 1936 177C ITAA 1936 177D(1) ITAA 1936 177D(2) ITAA 1936 318 ITAA 1997 ITAA 1997 6-5 ITAA 1997 6-10 ITAA 1997 8-1 ITAA 1997 8-1(1) ITAA 1997 8-1(1)(a) ITAA 1997 8-1(1)(b) ITAA 1997 8-1(2) ITAA 1997 8-1(2)(a) ITAA 1997 8-5 ITAA 1997 8-10 ITAA 1997 10-5 ITAA 1997 12-5 ITAA 1997 17-5 ITAA 1997 Div 35 ITAA 1997 35-10 ITAA 1997 35-10(2) ITAA 1997 35-10(2C) ITAA 1997 35-10(2E) ITAA 1997 35-30 ITAA 1997 35-35 ITAA 1997 35-40 ITAA 1997 35-45 ITAA 1997 35-55 ITAA 1997 35-55(1) ITAA 1997 35-55(1)(b) ITAA 1997 35-55(1)(c) ITAA 1997 328-110 ITAA 1997 Div 394 ITAA 1997 394-10 ITAA 1997 394-10(1) ITAA 1997 394-10(1)(a) ITAA 1997 394-10(1)(b) ITAA 1997 394-10(1)(c) ITAA 1997 394-10(1)(d) ITAA 1997 394-10(1)(e) ITAA 1997 394-10(1)(f) ITAA 1997 394-10(2) ITAA 1997 394-10(4) ITAA 1997 394-10(5) ITAA 1997 394-10(5A) ITAA 1997 394-10(6) ITAA 1997 394-10(7) ITAA 1997 394-15(1) ITAA 1997 394-15(2) ITAA 1997 394-15(4) ITAA 1997 394-15(5) ITAA 1997 394-20 ITAA 1997 394-25 ITAA 1997 394-25(1) ITAA 1997 394-25(2) ITAA 1997 394-25(3) ITAA 1997 394-30 ITAA 1997 394-35 ITAA 1997 394-35(1) ITAA 1997 394-35(2) ITAA 1997 394-35(3) ITAA 1997 394-35(4) ITAA 1997 394-35(5) ITAA 1997 394-35(6) ITAA 1997 394-35(7) ITAA 1997 394-35(8) ITAA 1997 394-40 ITAA 1997 394-40(d) ITAA 1997 394-45 ITAA 1997 995-1(1) TAA 1953 TAA 1953 Sch 1 394-10 ANTS(GST)A 1999 ANTS(GST)A 1999 9-20 ANTS(GST)A 1999 9-20(1) ANTS(GST)A 1999 9-20(1)(a) ANTS(GST)A 1999 9-20(2) ANTS(GST)A 1999 23-10 Corporations Act 2001 SISA 1993
Case references: Australian National Hotels Ltd v. Commissioner of Taxation (1988) 19 FCR 234 (1988) 81 ALR 667 (1988) 19 ATR 1575 (1988) 88 ATC 4627
Other references: ATO ID 2010/197 DIS Hannebery and Hance (NSD 492-493 of 2008)