Application form
You must provide all information in the current Division 394 application form.
We will only provide a product ruling for a project starting in the immediate income year.
Direct forestry expenditure (DFE) calculations and spreadsheets must be provided electronically in Microsoft Excel format.
Make sure:
- sufficient evidence is provided to verify the figures and assumptions used for DFE calculations
- the information provided is current (for example, independent land valuations).
Specific interest in land
A specific interest in land, such as a lease, is not a requirement for deductibility under subsection 394-10(1) – the only requirement is that investors hold a 'forestry interest', which is a right to benefits produced by the scheme.
Terms payment option
Some projects have included a terms payment option (see our financing principles) in a Division 394 product ruling application. If a grower does not actually fully pay an amount, or the amount is not actually fully paid on their behalf in an income year, it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the income year or years it is paid. Under terms payment options, usually no amount is paid until the subsequent income year. As a result, a grower taking this option would not be entitled to claim a deduction in the year the scheme commences.
Direct forestry expenditure amounts
Deferred fees
For the purposes of the DFE calculation, deferred fees set as a percentage of harvest proceeds, should be estimated based on the best available evidence at the time of estimation.
Consumer price index
We accept that future costs can be increased by the Consumer price index(CPI) before calculating the net present value of all costs for the DFE calculation..
Notional amounts for the use of land
If a forestry manager or associated entity owns the land on which the trees will be planted, the DFE calculation may include a notional rent amount, which is calculated by applying a rental yield to the land value. Applicants must provide acceptable market-based research to support the rental yield and land value used in calculating notional rent, taking into account the location and suitability of the land relevant to the type of forestry project, as well as the term of the project.
Land appreciation
We do not accept amounts for 'land appreciation' for the purposes of determining whether a forestry managed investment scheme meets the 70% DFE rule under section 394-45 of the ITAA 1997. Land appreciation is a notional uplift percentage applied to the land in addition to the CPI factor.
The intent of the law is to allow for the market value of the notional use of land, that being the market value of rent or payment for the use of the land. Therefore, we accept a reasonable valuation, as at the time the product ruling application form is lodged, of the land the scheme applicant owns, and apply a market-value rent to the land to calculate the notional rent amount. The current market value of the land is accepted because it is a fair and reasonable approach and minimises the compliance costs to promoters.
Sale of standing timber
We have been asked whether participants will be an 'initial participant' for the purposes of subsection 394-15(5) of the ITAA 1997 if the return on their investment will be made by the sale of standing timber. We consider that payments by the participant should result in the establishment of trees for felling. It does not matter who is to fell the trees or whether felling is undertaken by or for a participant in the scheme.
Guaranteed returns including buy-back mechanisms
Guaranteed returns remove or significantly reduce investor risk. If a guaranteed return is part of a scheme, we will consider it as part of the entire arrangement. One aspect we will examine is whether the guaranteed return is based on the anticipated market value at the time of disposal.
A buy-back mechanism refers to a means by which the participant's interest in the scheme can be acquired from them under an agreement related to the operation of that scheme. An example is a put option offered to a participant to allow them to dispose of all or part of their interest, for consideration, to an entity associated with the promoter or manager, prior to the participant deriving income from the sale of timber (on completion of the scheme).
If buy-back mechanisms in a Division 394 arrangement provide a guaranteed return, these will be examined in regard to 'dominant purpose' and whether the anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 are triggered.
We will also review the timing of any buy-back mechanism, as participants must hold their forestry interest for at least 4 years from the end of the income year in which the first payment was made to acquire that interest to be able to claim deductions for initial and ongoing payments made to a Division 394 forestry scheme.
Financing principles
The financing principles were developed because some financing arrangements give rise to concerns as to the potential application of Part IVA of the Income Tax Assessment Act 1936. Division 394 was enacted after the issue of the financing principles. However, the same Part IVA concerns of some financing arrangements can also apply to arrangements to which Division 394 applies. Therefore, any consideration of an application for a product ruling in relation to Division 394 that includes financing arrangements will also consider whether those financial arrangements are consistent with the financing principles.