Product Ruling

PR 1999/26

Income tax: Beechworth Winegrape Project

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FOI status:

May be releasedFOI number: I 1015597

Preamble

What this Product Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates. In this Ruling this arrangement is sometimes referred to as the Beechworth Winegrape Project, or just simply as 'the Project', or the 'Joint Venture'.

Tax law(s)

2. The tax law(s) that are dealt with in this Ruling are:

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sections 8-1, 42-15, 387-55, 387-125 and 387-165 of the Income Tax Assessment Act 1997 ('ITAA 1997'); and

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sections 82KL and 82KZM and Part IVA of the Income Tax Assessment Act 1936 ('ITAA 1936').

Class of persons

3. The class of persons to whom this Ruling applies is those who enter into the arrangement described below on or after the date this Ruling is made. They will have a purpose of staying in the arrangement until it is completed (i.e., being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement as set out in the description of the arrangement. In this Ruling, these persons are referred to as 'Farmers'.

4. The class of persons to whom this Ruling applies does not include persons who intend to terminate their involvement in the arrangement prior to its completion, or who otherwise do not intend to derive assessable income from it.

Qualifications

5. The Ruling provides this specified class of persons with a binding ruling as to the tax consequences of this product. The Commissioner accepts no responsibility in relation to the commercial viability of this product, and gives no assurance the prices charged for the product are reasonable, appropriate, or represent industry norms. A financial (or other) adviser should be consulted for such information.

6. The Commissioner rules on the precise arrangement identified in the Ruling.

7. The class of persons defined in the Ruling may rely on its contents, provided the arrangement (described below at paragraph 12 to 20) is carried out in accordance with details described in the Ruling. If the arrangement described in the Ruling is materially different from the arrangement that is actually carried out:

•

the Ruling has no binding effect on the Commissioner, as the arrangement entered into is not the arrangement ruled upon; and

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the Ruling will be withdrawn or modified.

8. A Product Ruling may only be reproduced in its entirety. Extracts may not be reproduced. As each Product Ruling is copyright, apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth, available from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra ACT 2601.

Date of effect

9. This Ruling applies prospectively from 19 May 1999, the date this Ruling is made. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

10. If a taxpayer has a more favourable private ruling (which is legally binding), the taxpayer can rely on the private ruling if the income year to which the private ruling relates has ended, or has commenced but not yet ended. However, if the arrangement covered by the private ruling has not begun to be carried out, and the income year to which it relates has not yet commenced, the Product Ruling applies to the taxpayer to the extent of the inconsistency only (see Taxation Determination TD 93/34).

Withdrawal

11. This Product Ruling is withdrawn and ceases to have effect after 30 June 2003. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the Ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

12. The arrangement that is the subject of this Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

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Draft Prospectus prepared for Beechworth Vineyard Project;

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Draft copy of a Managed Investment Scheme Constitution between BVL Management Limited ('BVLM') and Beechworth Vineyards Limited ('BVL') and the Farmer, which also incorporates a Joint Venture Agreement between BVLM, BVL and each Farmer in the Joint Venture;

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Draft copy of Equity Investment in Indigo Wine Company Limited ('IWC'), included in the Draft Prospectus;

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Draft copy of Loan Application , Principal and Interest Loan, included in the Draft Prospectus; and

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Draft copy of Loan Deed between BVL Management Limited and the Borrower.

Note: certain information received from BVL Management Limited has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

13. The documents highlighted are those that farmers enter into. The effect of each of these agreements is summarised as follows.

14. This arrangement is called the Beechworth Winegrape Project and will be registered as a Managed Investment Scheme under the Corporations Law. By entering into the Joint Venture Agreement, a Farmer will conduct in joint venture with others the business of acquiring, planting, growing and cultivating grapevines for the production of wine grapes, and the harvesting, marketing and sale of the wine grapes and bulk wine produced therefrom and profit sharing in wine production profits over a period of 20 years from the commencement date. A Farmer will commence business by entering into a Joint Venture Agreement with BVLM (the Manager), BVL (the Landowner) and other Farmers whereby BVLM will be engaged to manage the Joint Venture and the Farmers' interests in it for 20 years.

15. The Joint Venture Farmers will grow the wine grapes on a property known as Big Valley, which is located approximately 10 kilometres west of the town of Beechworth in North East Victoria. The relevant property will be leased to the Joint Venture Farmers by BVL. The property is the subject of an Agreement to Lease and an option to purchase by BVL. It is intended that BVL will lease the property from the present owners prior to the registration of the Draft Prospectus with the Australian Securities and Investments Commission and will complete the purchase of the property after 30 June 1999 and before 30 June 2000.

16. The Project aims to establish a vineyard of up to 140 hectares and, in this regard, up to 700 interests in the Joint Venture are on offer. The minimum investment per Farmer will be one participation or interest in the Joint Venture. The Project will not commence unless at least one hundred (100) Joint Venture interests / participations are taken up by Joint Venture Farmers by 30 June 1999. There is no maximum investment per Farmer in the Joint Venture. The planting of the vineyard will comprise 70 hectares of land in the first year of the Project and 70 hectares in the second year of the Project.

17. Each Joint Venture Farmer in the Project is required to subscribe for an equity stake in IWC, or to nominate another person or entity to do so. The required equity stake being the minimum equity interest in IWC comprises eight thousand (8,000) ordinary shares at a total cost of $4,000. Additional equity of a multiple of eight thousand (8,000) ordinary shares must be taken to equate to the number of participation interests in the Project. It is intended that the IWC group of companies will acquire grapes from the Joint Venture and make, store and market wine and share the proceeds with the Farmers on the basis specified in the Joint Venture, being a margin of 40% of the wholesale price per bottle sold, which includes sufficient commercial payment for the cost of the grapes produced by the Farmers.

18. The relevant property will be owned by BVL, which company is owned 100% by IWC. IWC also owns 100% of BVLM. IWC will be owned as to twenty percent (20%) by Joint Venture Farmers or their nominated entities / persons in the same proportion as their Joint Venture participation.

19. It is proposed that Australian Rural Group Limited will act as Custodian of the Project for the Joint Venture Farmers.

20. Possible projected returns for Joint Venture Farmers are set out in the Draft Prospectus. However, these are dependent upon a range of assumptions and BVLM does not give any assurance or guarantee whatsoever in respect of the future success of or financial returns associated with entering into the Joint Venture. Wine grape production is projected to commence in the year ending 30 June 2002. A harvest yield of 3.2 tonnes per hectare of wine grapes in the third year of the Project, increasing to 8.0 tonnes per hectare in Year 5 onwards, is anticipated. The Project is forecast to return (before allowing for any tax benefits) in excess of 15.38% averaged over the first 20 years.

Constitution and Joint Venture Agreement

21. In respect of the Project, a Farmer has an interest in specific property comprising the Managed Investment Scheme ('Scheme') property which is defined in the Constitution. There will be a Custodian of the Project for the Joint Venture Farmers as required by law. Farmers execute a power of attorney enabling BVLM to act on their behalf as required.

22. Farmers do not have any right to withdraw from the Scheme nor do they have a right to require their interest in the Scheme to be bought by the Manager or any other person or to have their interest in the Scheme redeemed (Clause 11, Constitution). A Farmer's / Member's Scheme interest may be transferred, provided such transfer is a transfer of the entire unencumbered interest in the Scheme (Clause 16, Constitution). BVLM keeps a register of Farmers.

23. The Farmers will remain Scheme members until the Scheme is determined on 30 June 2019, unless it is wound up earlier (Clause 7, Constitution).

24. The Farmers will each enter into a Joint Venture Agreement to carry out the Project as a Joint Venture and to appoint BVLM to manage the Joint Venture. The Project, as defined in the Joint Venture Agreement, is essentially the business of acquiring, planting, growing and cultivating grapevines to produce wine grapes and the harvesting, marketing and sale of the wine grapes and sharing in the profits from the sale of wine produced therefrom.

25. BVL, being the Landowner, will grant to the Custodian, as agent for the Manager, a lease of the relevant land. The Manager will hold the interest in the land, being the lease, on behalf of the Joint Venture of Farmers, to enable the vineyard to be planted out with grapevines.

Fees

26. The fees and contributions payable are as detailed below:

(a) management fees

A management fee of $3,000 will be payable for each interest in the Joint Venture in respect of the first year of the Project, which will be payable on settlement of the application in respect of the Joint Venture Farmer. This fee is payable in advance for services to be provided by the Manager for the period of twelve (12) months, from the date of payment.

A management fee of $3,000 will be payable for each interest in the Joint Venture in respect of the second year of the Project, which will be payable on the first anniversary of the Settlement Date. This fee is also payable in advance for services to be provided by the Manager for the period of twelve (12) months, from the date of payment.

A management fee of $2,500 will be payable for each interest in the Joint Venture in respect of the third year of the Project, which will be payable on the first anniversary of the Settlement Date. This fee is also payable in advance for services to be provided by the Manager for the period of twelve (12) months, from the date of payment.

Management fees in years subsequent to the third year will be payable on the anniversary of the Settlement Date yearly in advance on the basis of $2,500 for the third year and then that amount increased by the Consumer Price Index (All Groups) Melbourne, or 3%, whichever is the greater, in each subsequent year, until there are sufficient funds from income of the Joint Venture to enable management fees to be payable yearly in advance from those funds.

(b) Lease Rent Contribution fees

The property necessary for the Project and necessary fencing and machinery sheds and other structural improvements, excluding irrigation equipment and trellising, will be leased to the Joint Venturers in Years 1, 2, 3 and 4 for $125 per year for each interest in the Joint Venture. In Years 5 onwards, the previous year's Lease Rent Contribution fee will be increased by the Consumer Price Index (All Groups) Melbourne, or 3%, whichever is the greater, for each interest in the Joint Venture.

(c) Joint Venture contributions

Each Joint Venture Farmer will be required to pay to the Manager a Vineyard Establishment fee of $3,225 upon Settlement Date of the Farmer's interest in the Joint Venture to establish the first 70 hectares in total, or 0.1 hectare per Farmer, which is comprised and allocated as follows:

In addition, a further Vineyard Establishment fee of $3,225 is due per participation at the commencement of the second year to establish the second 70 hectares in total, or 0.1 hectare per Farmer, which is comprised and allocated as follows:

These fees must be applied by the Manager to acquire the necessary wine grape rootstock and undertake the necessary capital works for the benefit of the Joint Venture.

27. Each Joint Venture Farmer (or interests nominated by the Joint Venture Farmer) will be required to purchase shares in Indigo Wine Company Limited. A participation will require the payment of $4,000 of capital to acquire 8,000 shares in the company at an issue price of $0.50 per share, which payment will be required to be made on Settlement Date.

28. In the event that the Gross Income of the Joint Venture is insufficient in any year to meet payment of the relevant management fees and Lease Rent Contribution fees, the shortfall will be met by the Joint Venture Farmers and not from Gross Income of future years.

29. BVLM considers the fees and contributions payable above are reasonable and commercial.

Manager's services

30. The services to be provided by BVLM to the Joint Venture are specifically set out in the Joint Venture Agreement and they include:

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cultivating, fertilising and planting out the vineyard with rootstock in a healthy condition;

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carrying out field grafting, if required;

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applying water to the vineyard in order to maintain the grapevines on the vineyard in a healthy condition;

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prune and/or train, string up, de-shoot and/or take other measures that may be necessary in accordance with good viticultural practice to manage properly the growth of the grapevines to and along the trellises and to optimise as far as is reasonably possible in the circumstances the quality of the grapes produced therefrom;

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taking such reasonable measures as may be required to control the growth of weeds and other vegetable pests on the vineyard upon which the vines are growing;

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taking all reasonable measures in accordance with the principles of good viticultural practice and to the extent reasonably possible to deter and eradicate any insect, bird or animal pests from the vineyard that may detract from the health and vigour of the grapevines or yield thereof;

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taking representative soil samples from the vineyard from time to time and arranging to have those samples analysed by an accredited soil analysis laboratory and, having regard to the results and recommendations of any soil analysis undertaken, supply suitable fertiliser and apply it to the vineyard in accordance with the principles of good viticultural practice and in such quantities as may be required to promote healthy plant growth and yield;

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replacing any grapevines that die or become unproductive with juvenile grapevines of the same variety as those that die or have become unproductive;

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repairing and maintaining in a good condition all fences, trellises, accessways and other structural improvements and irrigation plant and equipment on the vineyard;

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arranging sales of the wine grapes and/or bulk wine from the vineyard, including entering into a contract or contracts to supply grapes harvested from the vineyard or bulk wine produced therefrom;

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harvesting the wine grapes from the vineyard at or about the time instructed by the buyers of the grapes or as estimated by the Manager as being the appropriate time for harvesting of the same;

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effecting the insurances referred to in this Agreement;

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employing such staff and labour as are necessary for the aforesaid purposes;

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carrying out the accounting, financial control and reporting needs and functions of the Joint Venture;

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keeping of proper books of account for the Joint Venture and preparation and filing of income tax returns; and

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doing all other things necessary or incidental to the carrying out of the Project to produce a viable business of growing, marketing and sale of wine grapes and/or bulk wine.

31. The Vineyard Establishment fee payable by each Farmer to the Manager is to meet the costs of the following acquisition and/or works:

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acquisition of suitable wine grape rootstock and the carrying out of field grafting, if required, to establish the vineyard and the planting out of the rootstock in the ground;

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the provision of trellising for the training of the grapevines;

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the provision of land care in respect of the vineyard;

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the establishment of dams required for irrigating the vineyard;

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the establishment of irrigation works other than dams (as mentioned above) for irrigating the vineyard; and

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the preparation of the land so that it is suitable for the planting out of the wine grape rootstock.

32. The Manager will subcontract all proposed services and work.

Planting

33. It is intended that premium and super-premium red and white grape varieties, for example, shiraz, merlot, cabernet sauvignon and pinot noir of the red varieties, and chardonnay, sauvignon blanc, riesling and pinot gris of the white varieties, will be planted. To this end, selective high quality grafted rootstock that is resistant to phylloxera will be purchased for the Project and field grafting will occur of the particular varieties required, if necessary. In order to maximise production levels, the quality of the soil will be enhanced prior to planting with the application of Aglime (calcium carbonate) fertiliser. This soil preparation will take place in the first year of the Project.

Finance

34. A finance option is offered by BVL Management Limited ('the Lender') to fund a Farmer's fees and expenses associated with the Joint Venture Project. The Lender will, if a loan option is taken, advance funds of $2,000 on the Settlement Date, $2,000 on the first anniversary of the Settlement Date and $1,400 on the second and third anniversaries of the Settlement Date, for each Joint Venture interest. Security is to be enforced over the Farmer's interest in the Project, i.e., the Farmer's interest in the Joint Venture including the rights obtained as a result of the various Agreements entered into and payments made.

35. An interest rate will be charged of 8% payable yearly in advance. The loans will be repayable by monthly repayments of $150 until the loan is repaid in full. The first repayment is required to be made on the first day of the month following the date of settlement of the loan.

36. The finance is provided as full recourse loans and the Lender will pursue legal action against outstanding borrowers. Finance arrangements organised directly by the Farmer with independent lenders are outside the arrangement to which this Ruling applies.

Ruling

Section 8-1

37. For the year ending 30 June 1999, section 8-1 will apply to Farmers entering the Joint Venture as follows:

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the management fee of $3,000 per Joint Venture interest paid by a Farmer on execution of the Joint Venture Agreement on or before 30 June 1999 will be an allowable deduction in the year of income that the fee is paid;

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the Lease Rent Contribution fee of $125 per Joint Venture interest paid by a Farmer on execution of the Joint Venture Agreement on or before 30 June 1999 will be an allowable deduction in the year of income that the fee is paid;

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where a Farmer borrows funds from BVL Management Ltd in order to fund, in part, the obligation to pay the management fees of $3,000 in respect of the Joint Venture Project, the interest incurred of $160 will be an allowable deduction in the year of income that the interest is paid.

38. For the years ending 30 June 2000 and 30 June 2001, and subsequent years of income, whichever year is applicable, section 8-1 will apply to Farmers in the Joint Venture as follows:

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the second year management fee of $3,000 per Joint Venture interest paid by a Farmer on the first anniversary of the settlement of the Joint Venture on or before 30 June 1999, the third year management fee of $2,500 per Joint Venture interest paid by a Farmer on the second anniversary of settlement of the Joint Venture on or before 30 June 1999, and the annual management fee of $2,500 (or indexed if applicable) thereafter in respect of a Joint Venture interest paid by a Farmer will be an allowable deduction in the year paid;

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the Lease Rent Contribution fee of $125 (or indexed if applicable) in allowable deduction in the year paid; and

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where a Farmer borrows funds from BVL Management Ltd in order to fund the obligation to pay the management fee in respect of the Joint Venture Project, the interest paid in relation to such loan will be an allowable deduction in the year paid.

Section 387-55

39. For the years ending 30 June 1999 and 30 June 2000, section 387-55 will apply to Farmers entering the Joint Venture on the basis that the capital expenditure of $100, being the Land Care cost component of the Vineyard Establishment fee of $3,225 per Joint Venture interest paid by a Farmer upon settlement and again at the commencement of the second year of the Joint Venture, will be allowable. The deduction is allowable in the year of income that the expenditure is paid as the amount is paid on a landcare operation as defined in paragraph 387-60(l)(d) or subparagraph 387-60(1)(e)(iii) of the ITAA 1997.

Section 387-125

40. For the years ending 30 June 1999, 30 June 2000 and 30 June 2001, section 387-125 will apply to the Dam Establishment and Irrigation Establishment component of the Vineyard Establishment fee of $3,225 per Joint Venture interest. An amount of $437 will be an allowable deduction to Farmers for those years of income, being one third of the sum of the capital expenditure of $360 and $950.

41. For the years ending 30 June 2000, 30 June 2001 and 30 June 2002, section 387-125 will apply to the Dam Establishment and Irrigation Establishment costs component of the Vineyard Establishment fee of $3,225 per Joint Venture interest. An amount of $437 will be an allowable deduction to Farmers for those years of income, being one third of the sum of the capital expenditure of $360 and $950. This deduction is available on the basis that Dam Establishment and Irrigation Establishment costs will be paid for over the first two years that the Farmers enter the Joint Venture, comprising the same amounts in each year, to enable the establishment of half the planting of the rootstock in the first year for each Farmer and half in the second year.

Section 387-165

42. In respect of the Vineyard Establishment fee of $3,225 paid by a Farmer in respect of a Joint Venture interest upon settlement and again at the commencement of the second year of the Joint Venture, $765 representing the cost of acquisition of rootstock and field grafting, $75 representing vine establishment, and $175 representing land preparation costs, are considered to be capital expenditure for establishing a horticultural plant for use in a horticulture business for the purposes of section 387-165. The write-off rate for this expenditure is 13% per annum ($132 pro-rated to the number of days in the income year in which the wine grape plant is owned by the Farmer and either used for commercial horticulture or held ready for that use).

43. No deduction is allowable until the year ending 30 June 2002. Section 387-165 will apply to Farmers in the Joint Venture to allow a deduction of $132 for one Joint Venture interest in that year of income. This is on the basis that the grapevines from the first planting enter their first commercial season in the fourth year of the Project and, hence, begin to be used for the purpose of producing assessable income in a horticultural business then.

44. In respect of the second planting of rootstock vine establishment and land preparation undertaken for plantings in the second year of the Project, section 387-165 will apply for the year ending 30 June 2003, being the relevant year the rootstock comprising the horticultural plant will be used in a horticulture business. This will result in a further deduction of $132 on a pro-rata basis to the Farmer in the year of income ending 30 June 2003.

45. For subsequent years of income, section 387-165 will apply to Farmers in the Joint Venture to allow a deduction of $132 for one Joint Venture interest in each year of income until the relevant expenditure is written off in full in respect of each of the first and second year plantings of rootstock. This will result in a deduction on a full year basis for the two year plantings of rootstock of $264 each year until the relevant costs are written off in full.

Section 42-15

46. In respect of the Vineyard Establishment fee of $3,225 incurred by a Farmer in respect of a Joint Venture interest upon settlement and again at the commencement of the second year of the Joint Venture, $800 representing the cost of trellising is considered to be capital expenditure incurred on plant to be used on the Farmers' behalf in the operation of the vineyard business. The trellising is attached to the land as a fixture and the Farmers are considered to be the owners of the trellising in accordance with Taxation Ruling IT 175. This is on the basis that the Farmers are entitled, in accordance with Clause 16.1 of the Joint Venture Agreement, to receive compensation for the market value of the trellising at the end of the term of the Joint Venture, based on its condition at that time. Accordingly, the Farmers will be treated as owners of the trellising for the purposes of depreciation of plant in accordance with section 42-15. The deduction for depreciation is allowable from the date it is installed and ready for use for the purpose of producing assessable income at a rate of 13% prime cost in accordance with section 42-125, on the basis that this is the method chosen by the Farmer under section 42-165.

Summary of deductions

47. For a Farmer who invests in the Project by 30 June 1999, the deductions available in each of the years ended 30 June 1999 to 30 June 2001 are set out hereunder:

Sections 82KZM, 82KL and Part IVA

48. For a Farmer who invests in the Project the following provisions of the ITAA 1936 have application as indicated:

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The expenditure by Farmers does not fall within the scope of section 82KZM;

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section 82KL does not apply to deny the deductions otherwise allowable; and

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the provisions in Part IVA will not be applied to the arrangement described in this Ruling.

Explanations

Section 8-1

49. Consideration of whether management fees are deductible under section 8-1 begins with the first limb of the section. This view proceeds on the following basis:

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the outgoings in question must have a sufficient connection with the operations or activities that directly gain or produce the taxpayer's assessable income;

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the outgoings are not deductible under the second limb if they are incurred before the business has commenced; and

•

where all that happens in a year of income is that a taxpayer contractually commits himself to a venture that may not turn out to be a business, there can be doubt about whether the relevant business has commenced, and hence, whether the second limb applies. However, that does not preclude the application of the first limb and determining whether the outgoings in question have a sufficient connection with activities to produce assessable income.

50. The growing of wine grapevines can constitute the carrying on of a 'primary production business', which is defined in subsection 995-l(1) to include a business of propagating and cultivating plants. Where there is a business, or a future business, the gross sale proceeds from the sale of the wine grapes and/or wine produced from the grapes and/or profit sharing in wine production profits will constitute gross assessable income. The generation of 'business income' from such a business, or future business, provides the backdrop against which to judge whether the outgoings in question have the requisite connection with the operations that more directly gain or produce this income. These operations will be the planting, tending and maintaining of the grapevines and harvesting the produce.

51. Under the Joint Venture Agreement, Farmers in this Project have rights in the form of a lease over an identifiable area of land consistent with the intention to carry on a business of growing wine grapevines to produce wine grapes and/or wine produced from the grapes for commercial exploitation. Under the Joint Venture Agreement, Farmers appoint BVLM, as Manager of the Joint Venture, to provide services such as planting, carrying out field grafting if required, cultivating, tending, pruning, fertilising, spraying, maintaining and otherwise caring for the wine grapevines. Farmers control their investment in the Joint Venture.

52. The Joint Venture Agreement gives Farmers full right, title and interest in the wine grapevines and their produce and the right to have the wine grapes and/or wine produced from the grapes sold for the Joint Venture Farmers' benefit.

53. The Joint Venture Farmers have the right to use the land for the growing of wine grapevines for producing wine grapes. They will appoint BVLM to perform the obligations and duties as imposed on the Manager under the Joint Venture Agreement. The Farmers' degree of control over BVLM, as evidenced by the Constitution of the Project being a Managed Investment Scheme which also incorporates the Joint Venture Agreement, and supplemented by the Corporations Law, is sufficient.

54. The general indicators of a business, as used by the Courts, are described in Taxation Ruling TR 97/11. Positive findings can be made from the arrangement's description for all the indicators discussed in that Ruling. Farmers who participate in this Project intend to derive assessable income from the Joint Venture Project. This intention is related to projections in the Draft Prospectus that suggest the Joint Venture Project should return a 'before tax' profit to the Farmers, i.e., a 'profit' in cash terms that does not depend on its calculation on the fees in question being allowed as a deduction.

55. Farmers will engage the professional services of a Manager who holds itself out as having the appropriate credentials. The Manager will subcontract certain works and services, as appropriate. These services are based on accepted commercial agricultural / viticultural practices and are of the type ordinarily found in ventures that would commonly be said to be businesses.

56. Farmers have a continuing interest in the Project from the time they enter into the Joint Venture. The activities, and hence the fees associated with their procurement, are consistent with an intention to commence regular activities that have an 'air of permanence' about them. The Farmers' activities of conducting in joint venture the growing of wine grapevines for producing wine grapes and/or wine produced from the grapes for commercial sale and/or profit sharing in wine production profits will constitute the carrying on of a business.

57. The management and Lease Rent Contribution fees associated with the aforementioned activities will relate to the gaining of income from this business and, hence, have a sufficient connection to the operations by which this income (from the sale of wine grapes and/or wines) is to be gained from this business. Those fees will thus be deductible under the first limb of section 8-1. Further, no 'non-income producing' purpose in incurring the fees is identifiable from the arrangement. No capital component is identifiable. The tests of deductibility under both the first and second limbs of section 8-1 are met.

Section 387-55

58. In accordance with the Joint Venture Agreement, the Vineyard Establishment fee of $3,225 per Joint Venture interest, payable by a Farmer upon settlement of the Joint Venture and at the commencement of the second year of the Project, includes an amount of $100 on account of land care costs to be incurred in both the first and second years of the Project. This is considered to be capital expenditure incurred at a particular time on a 'landcare operation' for the prescribed purposes as set out in section 387-55. Landcare operation, as relevant to the Project, includes, among other things, constructing surface or subsurface drainage works on the land primarily and principally for controlling salinity or assisting in drainage control and/or an operation primarily and principally for the purpose of preventing land degradation and/or eradicating weeds and other pests and/or other erosion control measures.

59. In order to qualify for a deduction under section 387-55, a business must be carried on at the time the expenditure is incurred. It is considered that a business has commenced at the time the expenditure is incurred. It is accepted that the execution of the Joint Venture Agreement is sufficient to constitute the commencement of a business. The business is considered to have commenced at the time the management fees were incurred by the Joint Venture Farmers. Further, it is considered the land care cost of $100 in the first and second year is primarily and principally for the purpose of assisting in drainage control and/or preventing land degradation and the eradication of weeds and other pests. Accordingly, the expenditure is deductible to a Joint Venture Farmer under section 387-55 in the year of income in which it is incurred.

Section 387-125

60. In accordance with the Joint Venture Agreement, the Vineyard Establishment fee of $3,225 per Joint Venture interest, payable by a Farmer upon settlement of the Joint Venture and at the commencement of the second year of the Project, includes an amount of $360 on account of Dam Establishment costs and $950 on account of Irrigation Establishment costs to be incurred in both the first and second year of the Project. These costs are considered to be capital expenditure incurred on the construction, manufacture, installation or acquisition of a 'water facility', primarily and principally for the purpose of conveying water for use in a primary production business, as set out in section 387-125. Examples of a water facility include a dam, tank, bore, irrigation channel (or similar improvement), pipe and pump. Under section 387-125 there is no requirement that the taxpayer actually own the 'water facility'.

61. The growing of wine grapevines to produce wine grapes for commercial exploitation is considered to be a primary production business, provided the taxpayer is actually carrying on a business. The Joint Venture Farmers of the Project satisfy the requirements of section 387-125. Accordingly, the dam and irrigation costs totalling $1,310 in each of the first and second years of the Project, are deductible in equal amounts over three (3) years of income, commencing the year of income the Farmers incur that expenditure, which will be the years of income ending 30 June 1999 and 30 June 2000.

Section 387-165

62. In accordance with the Joint Venture Agreement, the Vineyard Establishment fee of $3,225 per Joint Venture interest, payable by a Farmer upon settlement of the Joint Venture and at the commencement of the second year of the Project, includes an amount of $765 on account of the acquisition of rootstock and field grafting, $75 on account of vine establishment and $175 on account of land preparation cost totalling $1,015, to be incurred in both the first and second years of the Project. These costs are considered to be capital expenditure attributable to the establishment of a horticultural plant for use in a horticulture business as set out in Division 387-C. It is considered the necessary conditions for the application of section 387-165 are satisfied, having regard to the following matters:

•

wine grapevines fall within the definition of a horticultural plant;

•

the Joint Venture Farmers are treated as owners of the horticultural plant on the basis that they hold a lease over the relevant lands to which the plant is attached (section 387-210);

•

expenditure of a capital nature will be incurred in the establishment of the wine grapevines, such expenditure not being deductible under any other provision of the ITAA;

•

the wine grapevines are considered to have an effective life of greater than 13 years and less than 30 years;

•

the activities being carried on by the Farmers in Joint Venture constitute a horticulture business; and

•

no part of the expenditure is in respect of draining swamp or low-lying land or the clearing of land.

63. Accordingly, section 387-165 provides a write-off for the Vineyard Establishment fees. In the case of the first year's rootstock acquisition, establishment and land preparation costs totalling $1,015 per Joint Venture interest, it is considered the deductions under section 387-165 commence in the fourth year of the Project on the basis that it is then the grapevines enter their first commercial season and hence begin to be used for the purpose of producing assessable income in a horticultural business. The appropriate write-off for the second year fee of $1,015 on account of the same expenditure per Joint Venture interest will commence from the fifth year of the Project for the same reason mentioned earlier.

Section 42-15

64. In accordance with the Joint Venture Agreement, the Vineyard Establishment fee of $3,225 per Joint Venture interest, payable by a Farmer upon settlement of the Joint Venture and at the commencement of the second year of the Project, includes an amount of $800 on account of Trellising costs. These costs are considered to be capital expenditure on plant or equipment, used during the year of income for the purposes of producing assessable income when the trellising is installed ready for such use or so used.

65. Trellising is attached to the land as a fixture. However, in the case of the Farmers being Joint Venturers, they are lessees who are considered to be owners of the trellising. This is based on Taxation Ruling IT 175 and the fact that the Farmers as Joint Venturers are entitled to be compensated for the trellising at the end of the term of the Joint Venture by an amount per Farmer calculated as the market value of the trellising in its condition and state at the end of the term of the Joint Venture. The Farmers as Joint Venturers are treated as owners and, accordingly, depreciation is allowable on plant comprising trellising from the date it is installed and ready for use.

66. Depreciation is allowable at the rate of 13% prime cost in the circumstances under section 42-165, on the basis that this is the method chosen by the Farmers. On the basis that the trellising will be installed ready for use by 1 November 1999, a deduction of $69 for depreciation will be allowable for the year ending 30 June 2000. Additional trellising will be installed ready for use by 1 November 2000. The deduction allowable for the depreciation of the trellising for the year ending 30 June 2001 will be $173.

Section 82KZM

67. Under the Joint Venture Agreement, the fees totalling $3,125 per Joint Venture Interest will be incurred by a Farmer on execution of the Joint Venture Agreement comprising the management fees of $3,000 and Lease Rent Contribution fees of $125. The fees are payable by a Joint Venture Farmer for services that are provided within 13 months from the execution of the Joint Venture Agreement. The fees are expressly stated to be for a number of specified services. There is no evidence that might suggest the services covered by the fees could not be provided within 13 months of incurring the expenditure in question.

68. Thus, for the purposes of this Ruling, it can be accepted that no part of the Lease Rent Contribution fee of $125 and management fee of $3,000 is for the doing of things that are not to be wholly done within 13 months of the fees being incurred. On this basis, the basic precondition for section 82KZM's operation is not satisfied and it will not apply to the expenditure incurred by Farmers totalling $3,125 per Joint Venture interest in respect of the year ending 30 June 1999. Similarly, the section will not apply to Lease Rent Contribution fees and management fees incurred by Farmers in subsequent years of income.

Section 82KL

69. Section 82KL's operation depends, among other things, on the identification of a certain quantum of 'additional benefit(s)'. Here, there may be a loan provided by BVL Management Limited to the Joint Venture Farmer. The loan is provided on a full recourse basis, and on commercial terms. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deductions otherwise allowable under section 8-1.

Part IVA

70. For Part IVA to apply there must be a 'scheme' (section 177A); a 'tax benefit' (section 177C); and a dominant purpose of entering into the scheme to obtain a tax benefit (section 177D). The Beechworth Winegrape Project will be a 'scheme' commencing when the Prospectus is issued. The Joint Venture Farmers will obtain a 'tax benefit' from entering into the scheme, in the form of the deduction for the Lease Rent Contribution fee and management fee per Joint Venture interest allowable under section 8-1, and deductions allowable under subdivisions 387-A, 387-B and 387-C, and section 42-15 that would not have been obtained but for the scheme. However, it is not possible to conclude that the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit.

71. Farmers who invest in this Project intend to stay in the scheme for its full term and derive assessable income from the eventual harvesting and sale of the wine grapes and/or the wine produced therefrom and/or profit sharing in wine production profits. Further, there are no features of the Project that should result in insufficient 'real money' coming into the Manager's hands that might suggest the Project was so 'tax driven' and so designed to produce a tax deduction of a certain magnitude that would attract the operation of Part IVA.

Interest deductibility

72. Some Farmers intend to finance their investment through a loan facility with BVL Management Ltd. Whether the interest is deductible under section 8-1 depends on the same reasoning as that applied to whether the Lease Rent Contribution fee and management fee of $3,125 per Joint Venture interest incurred in the year ending 30 June 1999 will be deductible. The interest incurred in the year ending 30 June 1999, and in subsequent years of income, will be in respect of a loan to finance the business operations - the growing of the wine grapevines to produce wine grapes and/or wine - that will continue to be directly connected with the gaining of 'business income' from the Project. Such interest will, thus, also have a sufficient connection with the gaining of assessable income.

Detailed contents list

73. Below is a detailed table of contents list for this Ruling:

Commissioner of Taxation
12 May 1999

No draft issued

References

ATO references:
NO 99/2840-5

Related Rulings/Determinations:

IT 175
PR 1999/1
TR 97/11

Subject References:
carrying on a business
commencement of business
fee expenses
horticulture
interest expenses
land car operation
management fees expenses
primary production
primary production expenses
producing assessable income
product rulings
public rulings
schemes administration
tax avoidance
tax benefits under tax avoidance schemes
tax shelters
tax shelters project
water facility

Legislative References:
ITAA1936 82KL
ITAA1936 82KZM
ITAA1936 Pt IVA
ITAA1936 177A
ITAA1936 177C
ITAA1936 177D
ITAA1997 8-1
ITAA 1997 42-15
ITAA 1997 42-125
ITAA 1997 42-165
ITAA 1997 387-A
ITAA 1997 387-55
ITAA 1997 387-60(1)(d)
ITAA 1997 387-60(1)(e)(iii)
ITAA 1997 387-B
ITAA 1997 387-125
ITAA 1997 387-C
ITAA 1997 387-165
ITAA 1997 387-210
ITAA 1997 995-1(1)