Application checklist
You must provide all information in the Division 394 application checklist. You should check the date of the version you are working from, because checklists are updated from time to time.
We will only provide a 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).
We will request this information if it's outdated or not provided.
Specific interest in land
A specific interest in land, such as a lease, is not required – the only requirement is that investors hold a 'forestry interest', which is a right to benefits produced by the scheme.
Terms payment option
We have found that several 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 (see section 394-20 of the ITAA 1997), it is deductible only to the extent to which it has been paid (subsection 394-10[2] of the ITAA 1997). The unpaid balance is then deductible in the income year(s) 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 (DFE) amounts
Goods and services tax
Goods and services tax (GST) should be excluded from the DFE calculation: Section 394-40 of the ITAA 1997 excludes payments of GST by participants. Subsection 394-35(6) of the ITAA 1997 reduces amounts paid by a forestry manager to the extent to which that amount can reasonably be expected to be recouped (for example, by way of input tax credits).
Deferred fees
We have been asked how deferred fees set as a percentage of harvest proceeds should be treated for the purposes of the DFE calculation. Our view is that the amounts 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 Consumer price index (CPI) before calculating the net present value of all costs for the DFE calculation. CPI rates are published by the Australian Bureau of Statistics and reproduced by us to provide figures based on 'All groups CPI weighted average of eight capital cities'. You can access these figures from the Consumer price index (CPI) rates that we provide.
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 – this is calculated by applying a rental yield to the land value. We expect applicants to 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 legislation is to allow for the market value of the notional use of land, that being the market value of rent – rent being payment for the use of the land. Therefore, we accept a reasonable valuation, as at the time the product ruling application 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
We have been asked whether a promoter can provide a guaranteed rate of return for a scheme that qualifies under Division 394, given that there is no requirement for individual participants to be carrying on their own business.
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 to determine whether there is any wider impact that will give us cause for concern. 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).
We are concerned about buy-back mechanisms in a Division 394 arrangement if they provide a guaranteed return. We will examine whether there are any concerns regarding the dominant purpose and whether it may trigger the anti-avoidance provisions of Part IVA of the ITAA 1936.
We will also review the timing of any buy-back mechanism, as participants must hold their forestry interest for at least four 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.
Finance principles
The financing principles were introduced because some financing arrangements give rise to concerns as to the potential application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 ruling in relation to Division 394 that includes financing arrangements will also consider whether those financial arrangements are consistent with the financing principles.