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  • Early termination of an agribusiness (forestry) MIS

    This information is about the possible tax consequences for an investor in an agribusiness (forestry) MIS that is terminated early.

    This information is relevant to you if:

    • you hold an interest in an agribusiness (forestry) MIS
    • there is a product ruling issued for the MIS
    • you have claimed deductions in relation to your MIS interest
    • the MIS is to be terminated or has been wound up early.

    This is general information only.

    Purpose of an agribusiness (forestry) MIS

    An agribusiness (forestry) MIS is formed for the purpose of planting and tending trees to be harvested for timber.

    Such investments may be made on the basis that either:

    • the activity constitutes the carrying on of a business, so claims for deductions are made under general provisions
    • the provisions of Division 394 apply to the scheme – regardless of whether a business is being carried on.

    How to determine if your agribusiness (forestry) MIS is a Division 394 forestry MIS

    The product ruling for your agribusiness (forestry) MIS will identify if it is a Division 394 forestry MIS.

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    How to determine if your agribusiness (forestry) MIS was terminated early

    An agribusiness (forestry) MIS will be terminated early if it is wound up before the planned end of the arrangement.

    This is usually the result of an event that means the agribusiness (forestry) MIS is no longer viable.

    You can confirm the current status of your agribusiness MIS with the:

    • ASIC
    • responsible entity
    • administrator or the liquidator of your agribusiness MIS.

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    What happens to the product ruling if your interest in an agribusiness (forestry) MIS is terminated early

    We withdraw the product ruling if your interest in an agribusiness (forestry) MIS is terminated early.

    The notice of withdrawal contains an explanation about:

    • how the withdrawal affects your past and future deductions
    • any special conditions on how you treat those deductions.

    Unless there are special conditions, you can rely on the product ruling up to the date specified in the notice of withdrawal in relation to deductions you have already incurred and claimed. The deductions must be as described in the product ruling and the MIS must have been implemented in the way described in the product ruling.

    Check the notice of withdrawal to determine if any conditions exist for your agribusiness (forestry) MIS.

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    Non-Division 394 Agribusiness (forestry) MIS

    How you will be assessed on amounts received on cessation of the interest

    This information applies to all agribusiness (forestry) MISs where Division 394 does not apply. This is where deductions were allowed and claimed on the basis that an afforestation business is being carried on.

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    How CGT applies

    Ending your interest in the agribusiness (forestry) MIS as a result of it being wound up is a CGT event – possibly as a result of the cancellation, surrender or forfeiture of your investment in the MIS (referred to as a CGT Event C2).

    You need to calculate if you have made a capital gain or loss from the event.

    You can calculate your capital gain or loss by identifying the following elements:

    • the cost base or reduced cost base of your interest in the agribusiness MIS (items you previously deducted cannot be included in your cost base)
    • any capital proceeds you received on termination of your interest.

    Do not include the proceeds you receive from the sale of the trees in calculating your capital proceeds. Proceeds from the sale of trees in this situation are from the disposal of trading stock outside the ordinary course of your business. As such, the market value of the trees and not the amount you actually receive for the trees is included separately in your business income.

    Your capital gain or loss is calculated by deducting the cost base or reduced cost base from the capital proceeds.

    Example 2: Calculating capital gain or loss when interest ends

    Mr Russell acquires an interest in an agribusiness (forestry) MIS in 2008 for $3,500. He pays the fees using debt finance from the financier identified in the product ruling and claims deductions for the whole $3,500.

    In 2009, the MIS ceases to operate due to the insolvency of the responsible entity and Mr Russell's interest comes to an end. This is beyond his control and he remains entitled to deductions previously claimed.

    To calculate if he makes a capital gain or loss from the ending of his interest, Mr Russell needs to identify the cost base of his interest in the MIS. The fees and interest he paid cannot be included in that cost base. This is because he claimed these amounts as a deduction.

    The cost base of Mr Russell's interest in the MIS is therefore likely to be nil.

    Mr Russell receives an amount in respect of the trees growing on his woodlot, but no capital proceeds.

    Since no capital proceeds are received, he is taken to have received the market value of his interest in the MIS. The responsible entity has valued the MIS interest at nil.

    Mr Russell will not make a capital gain or loss from the ending of his interest in the MIS.

    However, the market value of the trees at the time of disposal will need to be included as business income in his income tax return for the year in which the MIS ceases to operate. This is since this disposal is of trading stock outside the ordinary course of business.

    End of example

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    Business income

    Whether an amount received due to the disposal of produce (or otherwise), is an important consideration in determining the character of payments to individual members of the agribusiness (forestry) MIS.

    Disposal of assets that are, or are deemed to be, trading stock gives rise to assessable income. While Taxation Determination TD 2010/9 deals with non-forestry MISs, the discussion on proceeds received is relevant as well.

    When you cease to hold your interest, you have also disposed of the trees. This constitutes a disposal of trading stock outside the ordinary course of business and you must include the market value of the trees as business income in your income tax return for the income year.

    Because you include the market value of the trees in your assessable income, you can ignore the amount you actually received in relation to the trees.

    Any capital proceeds (apart from amounts received in relation to the trees themselves) are taken into account in calculating net capital gains or losses.

    Example: Calculating market value

    Ms Spencer invests in a non-Division 394 managed investment agribusiness (forestry) MIS in 2007, and claims deductions in her 2007 and 2008 taxation returns.

    In 2009, due to the insolvency of the responsible entity, a liquidator sells the MIS assets (the trees) and Ms Spencer's interest ends.

    Following the disposal, the liquidator pays Ms Spencer $500 for the trees. The market value of the trees at the time of sale is $550.

    Ms Spencer remains entitled to the relevant deductions she previously claimed. She will need to include the market value of the trees at the time of cessation ($550) in her assessable income – not the $500 she actually receives.

    End of example

    Note: this is a very complex area of the law. If you are unsure of the nature of the payment you received from the agribusiness (forestry) MIS, provide the details of the payment by:

    See also:

    Deductions you claimed in earlier years

    The Commissioner will allow deductions already claimed, provided the MIS was carried out in the way described in the product ruling and the expense was identified in the product ruling.

    NCL rules

    For individuals, the NCL rules apply to defer losses generated from business activities. This is unless certain tests are met, or the Commissioner exercises, or commits to exercising, his discretion to not apply the rules.

    The relevant product ruling specifies the income years for which losses do not need to be deferred.

    Generally, for a forestry scheme there are no years when losses need to be deferred. This is where the Commissioner has exercises, or commits to exercising, his discretion to not apply the rules for the period of expected losses, because of the nature of the forestry industry.

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    See also:

    NCL rules that continue to apply

    Once your MIS interest ceases, you no longer carry on a business. This means the NCL rules will not apply to any future deductions, such as ongoing interest expenses.

    However, losses that were deferred under the NCL rules will continue to be deferred until either:

    • the activity recommences
    • you undertake a similar activity and earn assessable income from that activity (see paragraphs 49 to 54 of TR 2001/14).

    Expenditure you could otherwise claim as a deduction, but is a deferred loss under the NCL rules, does not form part of the cost base of any asset associated with the business. It is not taken into account when calculating your capital gain or loss on the cessation of the business.

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    See also:

    If you claimed losses that should have been deferred

    The relevant product ruling specifies the income years when losses do not need to be deferred.

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    For all other years, the NCL deferral rules apply and you must defer those losses.

    If you already claimed a deduction for the loss and realise your loss should have been deferred, request an amendment to the relevant income tax return to remove the deduction for the loss.

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    Division 394 forestry MIS

    This information is for all agribusiness (forestry) MISs where deductions have been claimed under Division 394 for amounts paid under a forestry MIS.

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    See also:

    How early termination of your agribusiness (forestry) MIS may affect deductions

    Division 394 contains specific rules that govern your entitlement to retain these deductions in some circumstances:

    • if you are an initial investor you must generally hold your interest in the MIS for at least four years
    • the forestry manager must establish a plantation within 18 months of the agribusiness MIS first receiving payments.

    If you cease holding your interest within four years, but all other requirements were met, you are still entitled to your deductions provided the cessation was due to factors beyond your control.

    If your agribusiness MIS does not satisfy the 18-month-establishment rule, you are not entitled to retain your deductions under Division 394. However, you may be entitled to make a claim for deductions under general provisions of the income tax law if your activities constitute carrying on a business.

    See also:

    • subsection 394-10(5A) of the Income Tax Assessment Act 1997
    • TD 2010/15 Income tax: does failure to plant all the trees intended to be established under a forestry managed investment scheme covered by Division 394 of the Income Tax Assessment Act 1997 mean that no deduction is allowable under Division 394 of that Act in respect of a participant's initial contribution to the scheme?

    How to treat a payment from a Division 394 (forestry) MIS on winding up

    Where a CGT event happens to an interest you hold in a Division 394 (forestry) MIS project as an initial participant, the market value of that interest, or the decrease in market value of that interest if still held after the event, is included in your assessable income. You ignore the amount you actually received because of the CGT event.

    The relevant amount is included in your assessable income in the income year in which the CGT event happens.

    CGT events for these purposes include those relating to:

    NCL rules

    For individuals, the NCL rules apply to defer losses generated from business activities. That is unless certain tests are met, or the Commissioner exercises, or commits to exercising, discretion not to apply the rules.

    The relevant product ruling specifies the income years when losses do not need to be deferred. For all other years, the NCL deferral rules apply and you must defer those losses.

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    See also:

    Interest deductions

    If you have to pay interest on a loan used to pay for your investment in an MIS

    Even though your interest in the MIS ceased, you can continue to claim a deduction for interest on the loan for the term of the loan, provided:

    • the loan was implemented in accordance with the finance arrangements identified in the product ruling
    • the purpose of the loan was to invest in the MIS with the intention to derive assessable income from it
    • you had the intention to keep your interest for the duration of the MIS
    • you genuinely incurred the expense and have a legal obligation to repay the loan
    • there continues to be a direct connection between the loan and your investment in the MIS.

    Where a business activity has ceased, ongoing interest will continue to be deductible. This is unless an event or circumstance breaks the connection between the loan and the business activity.

    If you refinance, renegotiate or otherwise alter the purpose of the loan, the connection to the income earning activity may be broken and the interest may no longer be deductible.

    See also:

    • TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities – refer to paragraph 50 for guidance on identifying if the necessary connection still exists

    Claiming borrowing expenses for your loan

    You can claim borrowing expenses as a deduction in instalments over a five-year period, or the life of the loan, whichever is less.

    You can continue to claim a deduction for borrowing expenses as set out in the product ruling regarding your MIS.

      Last modified: 01 Aug 2017QC 21849