Some applications have involved arrangements in which it was proposed to charge participants specific amounts for the preparation of a management plan. The management plan, as the name suggests, typically would set out what actions the manager had taken already in operating the arrangement (for example, site and seedling selection) and what action they proposed to take in the future (for example, in relation to future maintenance and harvesting and sale of the produce).
We have decided that such amounts are capital in nature, and so are not deductible under the general deduction provisions. The reason for this is that we consider that a management plan really sets out, in further detail, what the legal obligations of the manager are, as per the relevant agreement(s). As a result, charging a fee for the preparation of such a plan is seen as the same as charging for the preparation of the agreement itself.
Commonly, such an agreement contains many of the participant's key rights in relation to the business they are said to be going to carry on. Case law has usually regarded one-off expenditure on bringing such agreements into existence (that is, bringing one of the core structural assets of the business into being) as capital expenditure.
Some applications have raised the issue as to whether some part of the fees to be charged to a participant is not for a specific service, but is to be put aside into a maintenance fund. The question then arises as to whether that part of the fees would be an allowable deduction.
Our view is that either this part of the fees is capital or, if it could be identified as being for work of a revenue nature, the prepayment rules would apply to allow deductions to be claimed over the period of time that the work will be carried out.
Availability of suitable land
We have been asked why we require so much information about the land to be used in a scheme. The two main reasons for this are:
- The manager's ability to gain access to suitable land is relevant to their being able to get the scheme up and running and, therefore, whether we should issue a product ruling for the scheme.
- The suitability of the land for the scheme and how it is described will affect the accuracy of how closely the arrangement described in the product ruling matches the arrangement actually carried out and, therefore, whether or not the ruling is binding on the Commissioner. It is in the best interests of the participants, the manager and the ATO, that this description is as accurate as possible.
However, the fact that the promoter may not have acquired the land at the time of applying for the product ruling will not necessarily mean that we will decide against issuing a ruling.