Product Ruling

PR 2002/63

Income tax: Rosedale Vines Project No. 2

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FOI status:

may be released

Preamble

No guarantee of commercial success

The Australian Taxation Office (ATO) does not sanction or guarantee this product. Further, we give no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based.

Potential participants must form their own view about the commercial and financial viability of the product. This will involve a consideration of important issues such as whether projected returns are realistic, the 'track record' of the management, the level of fees in comparison to similar products, how this product fits an existing portfolio, etc. We recommend a financial (or other) adviser be consulted for such information.

This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out below in the Ruling part of this document are available provided that the arrangement is carried out in accordance with the information we have been given and have described below in the Arrangement part of this document.

If the arrangement is not carried out as described below, participants lose the protection of this Product Ruling. Potential participants may wish to seek assurances from the promoter that the arrangement will be carried out as described in this Product Ruling.

Potential participants should be aware that the ATO will be undertaking review activities to confirm the arrangement has been implemented as described below and to ensure that the participants in the arrangement include in their income tax returns income derived in those future years.

Terms of Use of this Product Ruling

This Product Ruling has been given on the basis that the person(s) who applied for the Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Ruling.

What this Product Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax laws' identified below apply to the defined class of persons who take part in the arrangement to which this Ruling refers. In this Ruling this arrangement is sometimes referred to as the Rosedale Vines Project No. 2 or simply as 'the Project'.

Tax law(s)

2. The tax laws dealt with in this Ruling are:

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Section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997');

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Section 8-1 (ITAA 1997);

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Section 17-5 (ITAA 1997);

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Division 27 (ITAA 1997);

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Division 35 (ITAA 1997);

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Division 40 (ITAA 1997);

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Division 328 (ITAA 1997);

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Section 82KL of the Income Tax Assessment Act 1936 ('ITAA 1936');

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Section 82KZME (ITAA 1936);

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Section 82KZMF (ITAA 1936); and

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Part IVA (ITAA 1936).

Goods and Services Tax

3. In this Ruling all fees and expenditure referred to include Goods and Services Tax ('GST') where applicable. In order for an entity (referred to in this Ruling as a Grower to be entitled to claim input tax credits for the GST included in its expenditure, it must be registered or required to be registered for GST and hold a valid tax invoice.

Changes in the Law

4. The Government is currently evaluating further changes to the tax system in response to the Ralph Review of Business Taxation and continuing business tax reform is expected to be implemented over a number of years. Although this Ruling deals with the taxation legislation enacted at the time it was issued, later amendments may impact on this Ruling. Any such changes will take precedence over the application of this Ruling and, to that extent, this Ruling will be superseded.

5. Taxpayers who are considering participating in the Project are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued.

Note to promoters and advisers

6. Product Rulings were introduced for the purpose of providing certainty about tax consequences for participants in projects such as this. In keeping with that intention, the Tax Office suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Ruling is issued.

Class of persons

7. The class of persons to whom this Ruling applies is the persons who are more specifically identified in the Ruling part of this Product Ruling and who enter into the arrangement specified 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. In this Ruling these persons are referred to as 'Growers'.

8. 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

9. The Commissioner rules on the precise arrangement identified 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. The Ruling will be withdrawn or modified.

10. 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. 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

11. This Ruling applies prospectively from 15 May 2002, 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).

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

Withdrawal

13. This Product Ruling is withdrawn and ceases to have effect after 30 June 2004. 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 arrangement specified below. Thus, the Ruling continues to apply to those persons, even following its withdrawal, who entered into the specified arrangement prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the person's involvement in the arrangement.

Arrangement

14. The arrangement that is the subject of this Ruling is specified below. This arrangement incorporates the following documents:

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Application for Product Ruling for Rosedale Vines Project No. 2 dated 20 February 2002;

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Prospectus of the Rosedale Vines Project No. 2 dated February 2002;

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Draft Constitution of the Rosedale Vines Project No. 2 received with the Application for Product Ruling;

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Draft Licence Agreement (Commencement Date to 30 June 2007) of the Rosedale Vines Project No. 2, between Barossa Vines Ltd ('Licensor') and the Grower received with the Application for Product Ruling;

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Draft Licence Agreement (1 July 2007 to 30 June 2012) of the Rosedale Vines Project No. 2, between Barossa Vines Ltd and The Grower received with the Application for Product Ruling;

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Draft Licence Agreement (1 July 2012 to 30 June 2017) of the Rosedale Vines Project No. 2, between Barossa Vines Ltd and the Grower received with the Application for Product Ruling;

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Draft Memorandum Of Lease between Rosedale Vines Ltd ('Lessor') and Barossa Vines Ltd ('Lessee') received with the Application for Product Ruling;

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Draft Management Agreement of the Rosedale Vines Project No. 2, between Barossa Vines Ltd ('Responsible Entity') and the Grower received with the Application for Product Ruling;

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Custodian Agreement between Barossa Vines Ltd and Tower Trust (SA) Ltd dated 7 May 2001;

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Draft Vineyard Management Agreement of the Rosedale Vines Project No. 2, between the Responsible Entity and Vines Management Pty Ltd ('Vineyard Manager') received with the Application for Product Ruling; and

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Correspondence received by the ATO from the applicant's representative dated 27 March 2002, 3 April 2002 and 16 April 2002.

15. The documents highlighted are those that the Growers enter into. There are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower, or an associate of the Grower will be a party to that are part of the arrangement to which this Ruling applies.

16. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of the agreements may be summarised as follows.

Overview

17. The arrangement is called "Rosedale Vines Project No. 2" and is summarised as follows:

The Project

18. Growers applying under the Prospectus enter into a Management Agreement and a Licence Agreement. Barossa Vines Ltd agrees to licence to the Grower an identifiable area of land called a 'vineyard lot' for the purpose of cultivating vines and harvesting grapes until the Project is terminated on 30 June 2017. Each vineyard lot is 0.1 hectare in size.

19. The Project Land is situated in the Barossa Valley Region of South Australia. Rosedale Vines Ltd is the owner of the land.

20. The Prospectus states that there is no minimum subscription for the Project. Each investor may subscribe for a minimum of one Vineyard lot. The Manager has planted approximately 185 vines per Vineyard lot (1,850 per hectare).

Constitution

21. The Constitution is binding on both the Responsible Entity, by virtue of it executing the deed, and all Growers, by virtue of the acceptance by the Responsible Entity of their application.

22. The Constitution sets out the terms and conditions under which the Responsible Entity agrees to act for the Growers and to manage the Project.

23. All fees and expenses for which Growers are liable due to their participation in the Project are detailed at clause 6.2.

24. The Constitution identifies two types of applicants. Clause 3.3 refers to applicants who apply for an interest in the Project on or before 15 June 2002 and whose applications are accepted by the Responsible Entity on or before that date. Clause 3.4 refers to applicants who apply for an interest in the Project after 15 June 2002 but on or before 15 November 2002, and whose applications are accepted by the Responsible Entity on or between 1 July 2002 and 15 November 2002. Therefore, no applications will be accepted between 16 June 2002 and 30 June 2002.

25. All Project property will be held by either the Responsible Entity or an agent appointed by the Responsible Entity on trust for the Growers or a Custodian appointed by the Responsible Entity.

26. All gross proceeds will be payable to the Responsible Entity and will be deposited by the Responsible Entity into the Gross Proceeds Account which will be invested in authorised investments until disbursed in accordance with clauses 15.2, 15.3 and 15.4 of this Constitution.

Compliance plan

27. The Responsible Entity has prepared a Compliance Plan in accordance with the Corporations Law. Under the Compliance Plan, a Compliance Committee will monitor to what extent the Responsible Entity meets its obligations as the Responsible Entity of the Project and the rights of the Growers are protected.

Licence Agreements

28. Growers participating in the arrangement will enter into three consecutive Licence Agreements between the Licensor and the Growers. The first Licence Agreement commences from acceptance of Growers into the Project until 30 June 2007, the second Licence Agreement will be in effect from 1 July 2007 to 30 June 2012 and the third Licence Agreement will be in effect from 1 July 2012 to 30 June 2017. Growers are granted an interest in land in the form of a licence to use their vineyard lots for the purpose of conducting their viticultural business.

29. Growers will not be obliged to engage any person, firm or corporation nominated or recommended by the Licensor for the performance of any work on the Grower's Vineyard Lot. Growers may appoint any contractor to perform such work on its own behalf.

Management Agreement

30. Each Grower enters into a Management Agreement with the Responsible Entity, contracting the Responsible Entity to establish and maintain the vineyard lot.

31. Each Grower entering into the Management Agreement must pay a Management Fee to the Responsible Entity of an amount equal to $9,130 for the provision of the following services during the Establishment Period:

•

preparing that part of the Grower's vineyard lot which can be used to satisfactorily grow Grapevines, obtaining healthy Grapevine rootlings for planting and planting these Grapevine rootlings on the Grower's vineyard lot (in accordance with good viticultural practices);

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spacing and trellising each Grapevine rootling on the Grower's vineyard lot in accordance with good viticultural practices so that grapes can be harvested commercially; and

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installing the appropriate irrigation equipment (as determined by the Responsible Entity in consultation with the Viticultural Consultant).

32. This Management Fee is comprised of the following:

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initial planting and preparation cost of $237;

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trellising expenses of $630;

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irrigation expenses of $510; and

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all other expenditure of $7,753.

33. Each Grower entering into the Management Agreement must pay Vineyard Operating Costs to the Responsible Entity for the ongoing maintenance and management of the Project. The services provided by the Responsible Entity in this regard are as follows:

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maintain the Grower's vineyard lot; and

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manage the Grower's vineyard lot by performing the following services;

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annually in accordance with good viticultural practices prune the Grapevines by mechanical or other methods;

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as permitted by Law, eradicate vermin which have or may cause damage to the Grapevines or the Grower's vineyard lot and put in place measures to control such vermin;

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operate the irrigation system in order to irrigate the Grower's vineyard lot in accordance with good viticultural practices;

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at the Responsible Entity's discretion conduct tests to ascertain the availability of nutrients in the soil on the Grower's vineyard lot and, based on the results, take whatever action is required to maintain the growth rate and productivity of the Grapevines;

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fertilizing the Grower's vineyard lot as required in accordance with good viticultural practice to maintain satisfactory rates of growth and productivity of the Grapevines;

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in its absolute discretion and without needing the Grower's consent, destroy any of the Grapevines, or the Grapes which have contracted an exotic, noxious or incurable disease;

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keep any improvements on the Grower's vineyard lot in good and substantial repair;

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maintain fire breaks in accordance with statutory and insurance requirements and in accordance with good viticultural practices;

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maintain the Grower's vineyard lot in accordance with good viticultural practices including, without limitation, soil management using methods to reduce erosion and maintain soil quality;

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protect the Grapevines from insect infestation and competition from competing growth using good viticultural practices including but not limited to applying herbicides to the Grower's vineyard lot and spraying under the Grapevines;

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regularly inspect and repair all trellising and irrigation equipment on the Grower's vineyard lot;

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regularly inspect the Grapevines;

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replace any of the Grapevines in need of replacement after the Establishment Period; and

provide any other service or thing which, in the reasonable opinion of the Responsible Entity, is incidental and or/ancillary to the conduct of the Grower's Business.

34. The Responsible Entity will harvest and sell the grapes produced on the Growers behalf, at a price equivalent to the price per tonne likely to be paid for the majority of the grape varieties grown in the area local to the Land and of the same variety, quality and use as the grapes to be sold. The Responsible Entity will recover all costs in relation to the harvest and sale of the grapes. In providing these services the Responsible Entity will charge Growers a harvesting fee which will equate to the costs incurred by the Vineyard Manager in harvesting the Grower's vineyard lot.

Vineyard Management Agreement

35. Under this Agreement the Responsible Entity engages the Vineyard Manager to establish Growers' vineyard lots on the land and to manage and maintain these Growers' vineyard lots on the terms and conditions of this Agreement and the Vineyard Manager.

36. In consideration of the payment by the Responsible Entity to the Vineyard Manager of the fee referred to in clause 8, the Vineyard Manager will, on and from the Commencement Date and subject in all matters to the direction of the Responsible Entity, provide to the Responsible Entity the initial services during the Establishment Period and thereafter ongoing services and harvesting services in relation to the Land.

Grower Payments

37. For Applicant Group 1 Growers:

Management Fees

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$9,130 payable on application for the period from date of acceptance to 30 June 2002;

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commencing on 1 July 2004 and for each succeeding financial year, 7.5% of the Grower's proportion of the gross proceeds.

Licence Fees

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$330 payable on application for the period from date of acceptance to 30 June 2002;

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$330 payable on 1 July 2002 for the year ended 30 June 2003;

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commencing on 1 July 2004 and on 1 July of each succeeding financial year until the end of the Project, an amount equal to the annual Licence Fee for the preceding financial year adjusted for movements in the Consumer Price Index payable annually in advance.

Vineyard Operating Costs

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$220 payable on 1 July 2002 for the year ended 30 June 2003;

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$220 payable on 1 July 2003 for the year ended 30 June 2004;

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commencing on 1 July 2004 and on 1 July of each succeeding financial year until the end of the Project, an amount equal to the Grower's proportion of the Vineyard Operating Costs.

Shares

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$1 payable on application;

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$2,499 payable on 1 July 2007.

Harvesting Costs

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Commencing on 1 July immediately following the first harvest, and thereafter on 1 July immediately following each succeeding harvest until the end of the Project, the Grower's proportion of the harvesting costs incurred by the Vineyard Manager in harvesting the Growers' vineyard lots for that harvest.

38. For Applicant Group 2 Growers:

Management Fees

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$9,130 payable on application for the period from date of acceptance to 30 June 2003;

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commencing on 1 July 2004 and for each succeeding financial year, 7.5% of the Grower's proportion of the gross proceeds.

Licence Fees

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$660 payable on application for the period from date of acceptance to 30 June 2003;

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$330 payable on 1 July 2002 for the year ended 30 June 2003;

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commencing on 1 July 2004 and on 1 July of each succeeding financial year until the end of the Project, an amount equal to the annual Licence Fee for the preceding financial year adjusted for movements in the Consumer Price Index payable annually in advance.

Vineyard Operating Costs

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$220 payable on 1 July 2002 for the year ended 30 June 2003;

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$220 payable on 1 July 2003 for the year ended 30 June 2004;

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commencing on 1 July 2004 and on 1 July of each succeeding financial year until the end of the Project, an amount equal to the Grower's proportion of the Vineyard Operating Costs.

Shares

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$1 payable on application;

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$2,499 payable on 1 July 2007.

Harvesting Costs

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Commencing on 1 July immediately following the first harvest, and thereafter on 1 July immediately following each succeeding harvest until the end of the Project, the Grower's proportion of the harvesting costs incurred by the Vineyard Manager in harvesting the Growers' vineyard lots for that harvest.

39. Management Fees, Licence Fees and Vineyard Operating Costs payable on 1 July 2004 and thereafter, plus harvesting costs, will be deducted from the Grower's proportion of the gross proceeds. If gross proceeds are insufficient in any financial year, the Grower will either be required to pay the amount, or if the Responsible Entity chooses, the amount will be carried forward to be deducted in a later financial year. The maximum period that such amounts will be carried over is two seasons, after which Growers will be required to pay any amounts outstanding.

Finance

40. Growers can fund their investment in the Project themselves, borrow from an independent lender or borrow from a finance company, Statewide Finance Services Pty Ltd, an entity associated with the applicant. Growers are required to obtain their own finance for the development.

41. This Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features:

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there are split loan features of a type referred to in Taxation Ruling TR 98/22;

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there are indemnity arrangements or other collateral agreements in relation to the loan designed to limit the borrower's risk;

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'additional benefits' are or will be granted to the borrowers for the purpose of section 82KL or the funding arrangements transform the Project into a 'scheme' to which Part IVA may apply;

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the loan or rate of interest is non-arm's length;

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repayments of the principal and payments of interest are linked to the derivation of income from the Project;

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the funds borrowed, or any part of them, will not be available for the conduct of the Project but will be transferred (by any mechanism, directly or indirectly) back to the lender or any associate of the lender;

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lenders do not have the capacity under the loan agreement, or a genuine intention, to take legal action against defaulting borrowers; or

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entities associated with the Project other than Statewide Finance Services Pty Ltd are involved or become involved in the provision of finance to Growers for the Project.

Ruling

Application of this Ruling

42. This Ruling applies only to Growers who are accepted to participate in the Project either, on or before 15 June 2002 or on or between 1 July 2002 and 15 November 2002, who have executed a Management Agreement and a Licence Agreement before that date and who engage the Responsible Entity to establish and maintain their Vineyard Lot. This Ruling does not apply to Growers who do not engage the Responsible Entity to establish and maintain their Vineyard Lot. The Grower's participation in the Project must constitute the carrying on of a business of primary production.

43. A Grower is not eligible to claim any tax deductions until the Grower's application to enter the Project is accepted and the Project has commenced.

The Simplified Tax System ('STS')

Division 328

44. For a Grower participating in the Project, the recognition of income and the timing of tax deductions, including those related to capital allowances, is different depending on whether the Grower is an 'STS taxpayer'. To be an 'STS taxpayer' a Grower:

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must be eligible to be an 'STS taxpayer'; and

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must have elected to be an 'STS taxpayer'.

Qualification

45. This Product Ruling assumes that a Grower who is an 'STS taxpayer' is so for the income year in which their participation in the Project commences. A Grower may become an 'STS taxpayer' at a later point in time. Also, a Grower who is an 'STS taxpayer' may choose to stop being an 'STS taxpayer', or may cease to be eligible to be an 'STS taxpayer', during the term of the Project. These are contingencies relating to the circumstances of individual Growers that cannot be accommodated in this Ruling. Such Growers can ask for a private ruling on how the taxation legislation applies to them.

Tax outcomes for Growers who are not 'STS taxpayers'

Assessable Income

Section 6-5

46. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5.

47. The Grower recognises ordinary income from carrying on the business of viticulture at the time that income is derived.

Deductions for Management Fees, Vineyard Operating Expenses and Licence Fees for Growers who are accepted into the Project on or before 15 June 2002

Section 8-1

48. A Grower who is not an 'STS taxpayer' may claim tax deductions for the following revenue expenses:

Notes:

(i)

If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (e.g., input tax credits): Division 27. See example at paragraph 123.

(ii)

The Management Fees, Vineyard Operating Expenses and Licence Fees shown in the Management Agreement and the Licence Agreement are deductible in full in the year that they are incurred. However, if a Grower chooses to prepay fees for the doing of a thing (e.g., the provision of management services or the leasing of land) that will not be wholly done in the income year the fees are incurred, the prepayment rules of the ITAA 1936 may apply to apportion those fees. In such cases, the tax deduction for the prepaid fee must be determined using the formula shown in paragraph 96 unless the expenditure is 'excluded expenditure'. 'Excluded expenditure' is an 'exception' to the prepayment rules and is deductible in full in the year in which it is incurred. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000.

Deductions for capital expenditure

Division 40

49. A Grower who is not an 'STS taxpayer' will also be entitled to tax deductions relating to trellising, water facilities (e.g., irrigation) and Grapevines. All deductions shown in the following Table are determined under Division 40.

Notes:

(iii)

If the Grower is registered or required to be registered for GST, amounts of capital expenditure would need to be adjusted as relevant for GST (e.g. input tax credits): Division 27. See example at paragraph 123.

(iv)

Trellising is a 'depreciating asset'. Each Grower's interest in the trellising is a 'depreciating asset'. The 'cost' of the asset is the amount paid by each Grower. The decline in value of the asset is calculated using the formula in either subsection 40-70(1) ('diminishing value method') or subsection 40-75(1) ('prime cost method'). Both formulas rely on the 'effective life' of the trellising.

Growers can either self-assess the 'effective life' (section 40-105) or use the Commissioner's determination of 'effective life' (section 40-100). The Commissioner has determined that trellising has an 'effective life' of 20 years. For Growers who are accepted into the Project on or before 15 June 2002 the trellising will be installed and first used during the year ended 30 June 2002. For Growers who are accepted into the Project on or between 1 July 2002 and 15 November 2002 (see below) the trellising will be installed and first used during the year ended 30 June 2003. The Project Manager will advise Growers when that occurs to enable Growers to calculate the deduction for the decline in value.

For a Grower who purchases the minimum allocation of one Vineyard Lot in this Project, their interest in the trellising will be a 'low cost asset' i.e., an asset costing less than $1,000. A 'low-cost asset' can be allocated to a 'low-value pool'. Once any 'low-cost asset' of a Grower is allocated to a 'low-value pool', all other 'low-cost assets' the Grower starts to 'hold' in that year or a later year must be allocated to that pool. If the Grower has already allocated an asset to a 'low-value pool', the trellising would also have to be allocated to that pool. Otherwise, the Grower must decide whether to create a 'low-value pool' If the asset is allocated to a 'low-value pool', the capital expenditure on the trellising will be deducted under the diminishing value methodology of the pool based on a rate of 18.75% in the year the trellising is first used and a rate of 37.5% in subsequent years (section 40-440). If the trellising is not allocated to a 'low-value pool', it can be written off based on the 'effective life' of the asset.

(v)

Any irrigation system, dam or bore is a 'water facility' as defined in subsection 40-520(1), being used primarily and principally for the purpose of conserving or conveying water. A deduction is available under Subdivision 40-F, paragraph 40-515(1)(a). This deduction is equal to one third of the capital expenditure incurred by each Grower on the installation of the 'water facility' in the year in which it is incurred and one third in each of the next 2 years of income (section 40-540).

(vi)

As Grapevines are affixed to land which the Grower does not own, they are not owned by the Grower, the conditions in subsection 40-525(3) cannot be met, and the Grapevines are not eligible for the 4 year write-off under section 40-550. However, Grapevines are a 'horticultural plant' as defined in subsection 40-525(2). As Growers hold the land under a licence, the condition in item 3 of subsection 40-525(2) is met and a deduction for 'horticultural plants' is available under paragraph 40-515(1)(b) for their decline in value. The deduction for the Grapevines is determined using the formula in section 40-545 and is based on the capital expenditure incurred by the Grower that is attributable to their establishment. If the Grapevines have an 'effective life' of greater than 13 but fewer than 30 years for the purposes of section 40-545, this results in a straight-line write-off at a rate of 13%. The deduction is allowable when the Grapevines enter their first commercial season (section 40-530, item 2). The Project Manager will inform Growers of when the Grapevines enter their first commercial season.

Deductions for Management Fees, Vineyard Operating Expenses and Licence Fees for Growers who are accepted into the Project on or between 1 July 2002 and 15 November 2002

Section 8-1

50. A Grower who is not an 'STS taxpayer' may claim tax deductions for the following revenue expenses:

Deductions for capital expenditure

Division 40

51. A Grower who is not an 'STS taxpayer' will also be entitled to tax deductions relating to trellising, water facilities (e.g., irrigation) and Grapevines. All deductions shown in the following Table are determined under Division 40.

Tax outcomes for Growers who are 'STS taxpayers'

Assessable Income

Section 6-5 and section 328-105

52. That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5.

53. The Grower recognises ordinary income from carrying on the business of viticulture at the time the income is received (paragraph 328-105(1)(a)).

Deductions for Management Fees, Vineyard Operating Costs and Licence Fees for Growers who are accepted into the Project on or before 15 June 2002

Section 8-1 and section 328-105

54. A Grower who is an 'STS taxpayer' may claim tax deductions for the following revenue expenses:

Notes:

(vii)

If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (e.g., input tax credits): Division 27. See example at paragraph 123.

(viii)

If, for any reason, an amount shown in the Table above is not fully paid in the year in which it is incurred by a Grower who is an 'STS taxpayer' then the amount is only deductible to the extent to which it has been paid, or has been paid for the Grower Any amount or part of an amount shown in the Table above which is not paid in the year in which it is incurred will be deductible in the year in which it is actually paid.

(ix)

Where a Member who is an 'STS taxpayer', pays the Management Fees, Vineyard Operating Costs and the Licence Fees in the relevant income years shown in the Management and Licence Agreements respectively, those fees are deductible in full in the year that they are paid. However, if a Grower chooses to prepay fees for the doing of a thing (e.g., the provision of management services or the leasing of land) that will not be wholly done in the income year the fees are incurred, the prepayment rules of the ITAA may apply to apportion those fees (see paragraphs 90 to 104) . In such cases, the tax deduction for the prepaid fee must be determined using the formula shown in paragraph 96, unless the expenditure is 'excluded expenditure'. 'Excluded expenditure' is an 'exception' to the prepayment rules, and is deductible in full in the year in which it is incurred. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000.

Deductions for capital expenditure

Subdivision 328-D and Subdivision 40-F

55. A Grower who is an 'STS taxpayer' will also be entitled to tax deductions relating to trellising, water facilities (e.g., irrigation) and Grapevines. Deductions relating to the 'cost' of trellising must be determined under Division 328. An 'STS taxpayer' may claim deductions in relation to water facilities under Subdivision 40-F. If the 'water facility' expenditure is on a 'depreciating asset' used to carry on the business, they may choose to claim a deduction under Division 328. Deductions for the Grapevines must be determined under Subdivision 40-F.

56. The deductions shown in the following Table assume, for representative purposes only, that a Grower has either chosen to or can only claim deductions for expenditure on water facilities under Subdivisions 40-F and not under Division 328. If the expenditure has been incurred on 'depreciating assets' and is claimed under Division 328, the deduction is determined as discussed in Note (xi) below.

57. Under Division 328, if the 'cost' of a 'depreciating asset' at the end of the income year is less than $1000 (a 'low-cost asset'), it can be claimed as an immediate deduction when first used or 'installed ready for use'. This is so provided the Grower is an 'STS taxpayer' for the income year in which it starts to 'hold' the asset and the income year in which it first uses the asset or has it 'installed ready for use' to produce assessable income.

Notes:

(x)

If the Grower is registered or required to be registered for GST, amounts of capital expenditure would need to be adjusted as relevant for GST (e.g., input tax credits) : Division 27. See example at paragraph 123.

(xi)

Trellising is a 'depreciating asset'. Where a Grower acquires the minimum allocation of one Vineyard Lot the Grower's interest in the trellising is a 'low-cost asset' as defined in subsection 40-425(2). 'Low cost assets' cannot be allocated to a 'general STS pool' (section 328-180). For Growers with one Vineyard Lot a deduction equal to the amount of the Grower's expenditure for the trellising is available in the income year in which they are used or 'installed ready for use'. This is so provided the Grower is an 'STS taxpayer' for the income year in which it starts to 'hold' the asset and the income year in which it first uses the asset or has it 'installed ready for use' to produce assessable income.

Where a Grower acquires more than one Vineyard Lot the Grower's interest in the trellising will not be a 'low cost asset' as its cost will be $1,000 or greater. For these Growers, their interest in the trellising is a 'depreciating asset' that can be allocated to a 'general STS pool'. The 'cost' of the asset is the amount paid by each Grower. For trellising allocated to a 'general STS pool' the tax deduction allowable is determined in the year ended 30 June 2002 (or the year ended 30 June 2003 for Growers accepted into the Project on or between 1 July 2002 and 15 November 2002 - see below) by multiplying the 'cost' of the interest by half the 'general STS pool rate, i.e., by 15%. Each Grower's interest in the trellising is allocated to their 'general STS pool' at the end of the year ended 30 June 2002 (or the year ended 30 June 2003 for Growers accepted into the Project on or between 1 July 2002 and 15 November 2002 - see below) and that part of the 'cost' not deducted in the first year is added to the pool balance. In subsequent years, the full pool rate of 30% will apply.

(xii)

Any irrigation system, dam or bore is a 'water facility' as defined in subsection 40-520(1), being used primarily and principally for the purpose of conserving or conveying water. If the expenditure is on a 'depreciating asset' (the underlying asset), the Grower may choose to claim a deduction under either Division 328 or Subdivision 40-F. For the purposes of Division 328, each Grower's interest in the underlying asset is itself deemed to be a 'depreciating asset'. If the 'cost' apportionable to that deemed 'depreciating asset' is less than $1000, the deemed asset is treated as a 'low-cost asset' and that amount is deductible in full when the underlying asset is first used or 'held' ready for use. This is so provided the Grower is an 'STS taxpayer' for the income year in which it starts to 'hold' the asset and the income year in which it first uses the asset or has it 'installed ready for use' to produce assessable income. If the deemed asset is not treated as a 'low-cost asset', the tax deduction allowable in the year ended 30 June 2002 is determined by multiplying its 'cost' by half the relevant STS pool rate. At the end of the year, it is allocated to the relevant STS pool and in subsequent years the full pool rate will apply. If the expenditure is not on a 'depreciating asset', or if they choose to use Subdivision 40-F, Growers must claim deductions under Subdivision 40-F, paragraph 40-515(1)(a). This deduction is equal to one third of the capital expenditure incurred by each Grower on the installation of the 'water facility' in the year in which it is incurred and one third in each of the next 2 years of income (section 40-540).

(xiii)

As Grapevines are affixed to land which the Grower does not own, they are not owned by the Grower, the conditions in subsection 40-525(3) cannot be met, and the Grapevines are not eligible for the 4 year write-off under section 40-550. However, Grapevines are a 'horticultural plant' as defined in subsection 40-525(2). As Growers hold the land under a licence, the condition in item 3 of subsection 40-525(2) is met and a deduction for 'horticultural plants' is available under paragraph 40-515(1)(b) for their decline in value. The deduction for the Grapevines is determined using the formula in section 40-545 and is based on the capital expenditure incurred by the Grower that is attributable to their establishment. If the Grapevines have an 'effective life' of greater than 13 but fewer than 30 years for the purposes of section 40-545, this results in a straight-line write-off at a rate of 13%. The deduction is allowable when the Grapevines enter their first commercial season (section 40-530(2)). The Project Manager will inform Growers of when the Grapevines enter their first commercial season.

Deductions for Management Fees, Vineyard Operating Expenses and Licence Fees for Growers who are accepted into the Project on or between 1 July 2002 and 15 November 2002

Section 8-1 and section 328-105

58. A Grower who is an 'STS taxpayer' may claim tax deductions for the following revenue expenses:

Deductions for capital expenditure

Subdivision 328-D and Subdivisions 40-F

59. A Grower who is an 'STS taxpayer' will also be entitled to tax deductions relating to trellising, water facilities (e.g., irrigation) and Grapevines. Deductions relating to the 'cost' of trellising must be determined under Division 328. An 'STS taxpayer' may claim deductions in relation to water facilities under Subdivision 40-F. If the 'water facility' is on a 'depreciating asset' used to carry on the business, they may choose to claim deductions under Division 328. Deductions for the Grapevines must be determined under Subdivision 40-F.

60. The deductions shown in the following Table assume, for representative purposes only, that a Grower has claimed expenditure on water facilities under Division 328. If the expenditure has been incurred on 'depreciating assets' and is claimed under Division 328, the deduction is determined as discussed in Note (xi) above.

61. Under Division 328, if the 'cost' of a 'depreciating asset' at the end of the income year is less than $1000 (a 'low-cost asset'), it can be claimed as an immediate deduction when first used or 'installed ready for use'. This is so provided the Grower is an 'STS taxpayer' for the income year in which it starts to 'hold' the asset and the income year in which it first uses the asset or has it 'installed ready for use' to produce assessable income.

Tax outcomes that apply to all Growers

62. The deductibility or otherwise of interest incurred by Growers who finance their participation in the Project through a loan facility with a bank or other financier is outside the scope of this Ruling. However all Growers who borrow funds in order to participate in the Project, should read the discussion of the prepayment rules in paragraphs 90 to 104 (below) as those rules may be applicable if interest is prepaid. Subject to the 'excluded expenditure' exception, the prepayment rules apply whether the prepayment is required under the relevant loan agreement or is at the Grower's choice.

Division 35 - Deferral of losses from non-commercial business activities

Section 35-55 - Commissioner's discretion

63. For a Grower who is an individual and who enters the Project during the year ended 30 June 2002 or 30 June 2003 the rule in section 35-10 may apply to the business activity comprised by their involvement in this Project. Under paragraph 35-55(1)(b) the Commissioner will decide for the income years ending 30 June 2002 to 30 June 2004 that the rule in section 35-10 does not apply to this activity provided that the Project is carried out in the manner described in this Ruling.

64. This exercise of the discretion in subsection 35-55(1) will not be required where, for any year in question:

•

the 'exception' in subsection 35-10(4) applies (see paragraph 111 in the Explanations part of this ruling, below); or

•

a Grower's business activity satisfies one of the tests in sections 35-30, 35-35, 35-40 or 35-45; or

•

the Grower's business activity produces assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)); or

•

the Commissioner is precluded from exercising the discretion under paragraph 35-55(1)(b) because of subsection 35-55(2).

65. Where, the exception in subsection 35-10(4) applies, the Grower's business activity satisfies one of the tests, or the discretion in subsection 35-55(1) is exercised, section 35-10 will not apply. This means that a Grower will not be required to defer any excess of deductions attributable to their business activity in excess of any assessable income from that activity, i.e., any 'loss' from that activity, to a later year. Instead, this 'loss' can be offset against other assessable income for the year in which it arises.

66. Growers are reminded of the important statement made on Page 1 of this Product Ruling. Therefore, Growers should not see the Commissioner's decision to exercise the discretion in paragraph 35-55(1)(b) as an indication that the Tax Office sanctions or guarantees the Project or the product to be commercially viable. An assessment of the Project or the product from this perspective has not been made.

Sections 82KZME - 82KZMF, 82KL, and Part IVA

67. For a Grower who participates in the Project and incurs expenditure as required by the Management Agreement and the Licence Agreement the following provisions of the ITAA 1936 have application as indicated:

•

expenditure by a Grower does not fall within the scope of sections 82KZME-82KZMF (but see paragraphs 92 to 104);

•

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

•

the relevant provisions in Part IVA will not be applied to cancel a tax benefit obtained under a tax law dealt with in this Ruling.

Explanations

Is the Grower carrying on a business?

68. For the amounts set out in the Tables above to constitute allowable deductions the Grower's viticulture activities as a participant in the Rosedale Vines Project No. 2 must amount to the carrying on of a business of primary production. These viticulture activities will fall within the definitions of 'horticulture' and 'commercial horticulture' in section 40-535 of the ITAA 1997.

69. For schemes such as that of the Rosedale Vines Project No. 2, Taxation Ruling TR 2000/8 sets out in paragraph 89 the circumstances in which the Grower's activities can constitute the carrying on of a business. As Taxation Ruling TR 2000/8 sets out, these circumstances have been established in court decisions such as FCT v. Lau 84 ATC 4929.

70. Generally, a Grower will be carrying on a business of viticulture, and hence primary production, if:

•

the Grower has an identifiable interest (by lease or by licence) in the land on which the Grower's Grapevines are established;

•

the Grower has a right to harvest and sell the grapes each year from those Grapevines;

•

the viticulture activities are carried out on the Grower's behalf;

•

the viticulture activities of the Grower are typical of those associated with a viticulture business; and

•

the weight and influence of general indicators point to the carrying on of a business.

71. In this Project, each Grower enters into a Management Agreement and Licence Agreement.

72. Under the Licence Agreement each individual Grower will have rights over a specific and identifiable area of land. The Licence Agreement provides the Grower with an ongoing interest in the specific Grapevines on the licenced area for the term of the Project. Under the licence the Grower must use the land in question for the purpose of carrying out viticultural activities and for no other purpose. The licence allows the Responsible Entity to come onto the land to carry out its obligations under the Management Agreement.

73. Under the Management Agreement the Responsible Entity is engaged by the Grower to establish and maintain a vineyard lot on the Grower's identifiable area of land during the term of the Project. The Responsible Entity has provided evidence that it holds the appropriate professional skills and credentials to provide the management services to establish and maintain the vineyard lot on the Grower's behalf.

74. In establishing the vineyard lot, the Grower engages the Responsible Entity to purchase and install trellising and water facilities (e.g., irrigation) and to acquire and plant vine seedlings/rootlings on the Grower's vineyard lot. During the term of the Project, these assets will be used wholly to carry out the Grower's viticulture activities. The Responsible Entity is also engaged to harvest and sell, on the Grower's behalf, the grapes grown on the Grower's vineyard lot.

75. 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 Project's description for all the indicators.

76. The activities that will be regularly carried out during the term of the Project demonstrate a significant commercial purpose. Based on reasonable projections, a Grower in the Project will derive assessable income from the sale of its grapes that will return a before-tax profit, i.e., a profit in cash terms that does not depend in its calculation on the fees in question being allowed as a deduction.

77. The pooling of grapes grown on the Grower's vineyard lot with the grapes of other Growers is consistent with general viticulture practices. Each Grower's proportionate share of the sale proceeds of the pooled grapes will reflect the proportion of the grapes contributed from their vineyard lot.

78. The Responsible Entity's services and the installation of assets on the Grower's behalf are also consistent with general viticulture practices. The assets are of the type ordinarily used in carrying on a business of viticulture. While the size of a vineyard lot is relatively small, it is of a size and scale to allow it to be commercially viable. (see Taxation Ruling IT 360).

79. The Grower's degree of control over the Responsible Entity as evidenced by the Management Agreement, and supplemented by the Corporations Act, is sufficient. During the term of the Project, the Responsible Entity will provide the Grower with regular progress reports on the Grower's vineyard lot and the activities carried out on the Grower's behalf. Growers are able to terminate arrangements with the Responsible Entity in certain instances, such as cases of default or neglect.

80. The viticulture 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. For the purposes of this Ruling, the Growers' viticulture activities in the Rosedale Vines Project No. 2 will constitute the carrying on of a business.

The Simplified Tax System

Division 328

81. Subdivision 328-F sets out the eligibility requirements that a Grower must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS.

82. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling. Therefore, any Grower who relies on those parts of this Ruling that refer to the STS will be assumed to have correctly determined whether or not they are eligible to be an 'STS taxpayer'.

Deductibility of Management Fees, Licence Fees and Vineyard Operating Expenses

Section 8-1

83. Consideration of whether the initial Management Fees, Vineyard Operating Expenses and Licence Fees are deductible under section 8-1 begins with the first limb of the section. This view proceeds on the following basis:

•

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

•

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

•

where all that happens in a year of income is that a taxpayer is contractually committed 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 in determining whether the outgoing in question has a sufficient connection with activities to produce assessable income.

84. The Management Fees, Vineyard Operating Expenses and Licence Fees associated with the viticulture activities will relate to the gaining of income from the Grower's business of viticulture (see above), and hence have a sufficient connection to the operations by which income (from the regular sale of grapes) is to be gained from this business. They will thus be deductible under the first limb of section 8-1. Further, no 'non-income producing' purpose in incurring the fee is identifiable from the arrangement. The fee appears to be reasonable. There is no capital component of the Management Fee. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply.

Possible application of prepayment provisions

85. Under the Management Agreement and the Licence Agreement neither the Management Fees, Vineyard Operating Expenses nor the Licence Fees are for things to be done beyond 30 June in the year in which the relevant amounts are incurred. In these circumstances, the prepayment provisions in sections 82KZME and 82KZMF have no application to these fees.

85. However, where a Grower chooses to prepay these fees for a period beyond the income year in which the expenditure is incurred, the prepayment provisions (see paragraphs 90 to 104) will apply to determine the amount and timing of the deductions regardless of whether the Grower is an 'STS taxpayer' or not. These provisions apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes 'STS taxpayers' from the operation of section 82KZMF. This is subject to the 'excluded expenditure' exception. For the purpose of this Ruling 'excluded expenditure' refers to an amount of expenditure of less than $1,000.

Timing of deductions

87. In the absence of any application of the prepayment provisions, the timing of deductions for the Management Fees, Vineyard Operating Expenses or the Licence Fees will depend upon whether a Grower is an 'STS taxpayer' or is not an 'STS taxpayer'.

88. If the Grower is not an 'STS taxpayer', the Management Fees, Vineyard Operating Expenses and the Licence Fees are deductible in the year in which they are incurred.

89. If the Grower is an 'STS taxpayer' the Management Fees, Vineyard Operating Expenses and the Licence Fees are deductible in the income year in which they are paid, or are paid for the Grower (paragraph 328-105(1)(b)). If any amount that is properly incurred in an income year remains unpaid at the end of that income year, the unpaid amount is deductible in the income year in which it is actually paid or is paid for the Grower.

Prepayment provisions

Sections 82KZL to 82KZMF

90. The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement (e.g., the performance of management services or the licencing of land) that will not be wholly done within the same year of income as the year in which the expenditure is incurred. If expenditure is incurred to cover the provision of services to be provided within the same year, then it is not expenditure to which the prepayment rules apply.

91. For this Project only section 82KZL (an interpretative provision) and sections 82KZME and 82KZMF are relevant. Where the requirements of sections 82KZME and 82KZMF are met, taxpayers determine deductions for prepaid expenditure under section 82KZMF using the formula in subsection 82KZMF(1). These provisions also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes 'STS taxpayers' from the operation of section 82KZMF.

Sections 82KZME and 82KZMF

92. Where the requirements of subsections 82KZME(2) and (3) are met, the formula in subsection 82KZMF(1) (see below) will apply to apportion expenditure that is otherwise deductible under section 8-1 of the ITAA 1997. The requirements of subsection 82KZME(2) will be met if expenditure is incurred by a taxpayer in return for the doing of a thing that is not to be wholly done within the year the expenditure is made. The year in which such expenditure is incurred is called the 'expenditure year' (subsection 82KZME(1)).

93. The requirements of subsection 82KZME(3) will be met where the agreement (or arrangement) has the following characteristics:

•

the taxpayer's allowable deductions under the agreement for the 'expenditure year' exceed any assessable income attributable to the agreement for that year; and

•

the taxpayer does not have effective day to day control over the operation of the agreement. That is, the significant aspects of the arrangement are managed by someone other than the taxpayer; and

•

either:

(a)

there is more than one participant in the agreement in the same capacity as the taxpayer; or

(b)

the person who promotes, arranges or manages the agreement (or an associate of that person) promotes similar agreements for other taxpayers.

94. For the purpose of these provisions, the agreement includes all activities that relate to the agreement (subsection 82KZME(4)).

95. There are a number of exceptions to these rules, but for Growers participating in this Project, only the 'excluded expenditure' exception in subsection 82KZME(7) is relevant. 'Excluded expenditure' is defined in subsection 82KZL(1). However, for the purposes of Growers in this Project, 'excluded expenditure' is prepaid expenditure incurred under the arrangement that is less than $1,000. Such expenditure is immediately deductible.

96. Where the requirements of section 82KZME are met, section 82KZMF applies to apportion relevant prepaid expenditure. Section 82KZMF uses the formula below, to apportion prepaid expenditure and allow a deduction over the period that the benefits are provided.

Expenditure * (Number of days of eligible service period in the year of income / Total number of days of eligible service period)


97. In the formula 'eligible service period' (defined in subsection 82KZL(1)) means, the period during which the thing under the agreement is to be done. The eligible service period begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years.

Application of the prepayment provisions to this Project

98. In this Project, an initial Management Fee of $7,753 an initial Licence Fee of either $330 or $660 and a Vineyard Operating Cost of $220 per vineyard lot will be incurred on execution of the Management Agreement and the Licence Agreement. The Management Fee, Licence Fee and Vineyard Operating Cost are charged for providing management services or licencing land to a Grower by 30 June of the year of execution of the Agreements. Under the Agreements, further annual expenditure is required each year during the term of the Project for the provision of management services and land until 30 June in those years.

99. In particular, the Management Fee is expressly stated to be for a number of specified services. No explicit conclusion can be drawn from the description of the arrangement that the initial Management Fee has been inflated to result in reduced fees being payable for Management Fees in subsequent years.

100. There is also no evidence that might suggest the management services covered by the fee could not be provided within the relevant expenditure year. Thus, for the purposes of this Ruling, it can be accepted that no part of the initial Management Fee, and the fees for subsequent years, is for the Responsible Entity doing 'things' that are not to be wholly done within the expenditure year. Under the Licence Agreement, Licence Fees are payable annually in advance for the licence of the land during the expenditure year.

101. On this basis, provided a Grower incurs expenditure as required under the Project agreements, as set out in paragraphs 37 to 39, then the basic precondition in subsection 82KZME(2) is not satisfied and, in these circumstances, section 82KZMF will have no application.

Growers who choose to pay fees for a period in excess of that required by the Project's agreements

102. Although not required under either the Management Agreement or the Licence Agreement, a Grower participating in the Project may choose to prepay fees for a period beyond the 'expenditure year'. Where this occurs, contrary to the conclusion reached in paragraph 101 above, section 82KZMF will apply to apportion the expenditure and allow a deduction over the period in which the prepaid benefits are provided.

103. For these Growers, the amount and timing of deductions for any relevant prepaid Management Fees, prepaid Vineyard Operating Costs or prepaid Licence Fees will depend upon when the respective amounts are incurred and what the 'eligible service period' is in relation to these amounts.

104. However, as noted above, prepaid fees of less than $1,000 incurred in an expenditure year will be 'excluded expenditure' and will be not subject to apportionment under section 82KZMF.

Expenditure of a capital nature

Division 40 and Division 328

105. Any part of the expenditure of a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to trellising, water facilities and the establishment of the Grapevines is of a capital nature. This expenditure falls for consideration under Division 40 or Division 328 of the ITAA 1997.

106. The application and extent to which a Grower claims deductions under Division 40 and Division 328 depends on whether or not the Grower is an 'STS taxpayer'.

107. The tax treatment of capital expenditure has been dealt with in a representative way in paragraphs 49, 51, 57 and 61 (above) in the Tables and the accompanying Notes.

Deferral of losses from non-commercial business activities

Division 35

108. Division 35 applies to losses from certain business activities for the income year ended 30 June 2001 and subsequent years. Under the rule in subsection 35-10(2), a deduction for a loss made by an individual (including an individual in a general law partnership) from certain business activities will not be taken into account in an income year unless:

•

the exception in subsection 35-10(4) applies;

•

one of four tests in sections 35-30, 35-35, 35-40 or 35-45 is met; or

•

if one of the tests is not satisfied, the Commissioner exercises the discretion in section 35-55.

109. Generally, a loss in this context is, for the income year in question, the excess of an individual taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity.

110. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2), can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies.

111. For the purposes of applying Division 35, subsection 35-10(3) allows taxpayers to group business activities 'of a similar kind'. Under subsection 35-10(4), there is an 'exception' to the general rule in subsection 35-10(2) where the loss is from a 'primary production business' activity and the individual taxpayer has other assessable income for the income year from sources not related to that activity, of less than $40,000 (excluding any net capital gain). As both subsections relate to the individual circumstances of Growers who participate in the Project they are beyond the scope of this Product Ruling and are not considered further.

112. In broad terms, the tests require:

(a)

at least $20,000 of assessable income in that year from the business activity (section 35-30);

(b)

the business activity results in a taxation profit in 3 of the past 5 income years (including the current year)(section 35-35);

(c)

at least $500,000 of real property, or an interest in real property, (excluding any private dwelling) is used on a continuing basis in carrying on the business activity in that year (section 35-40); or

(d)

at least $100,000 of certain other assets (excluding cars, motor cycles and similar vehicles) are used on a continuing basis in carrying on the business activity in that year (section 35-45).

113. A Grower who participates in the Project will be carrying on a business activity that is subject to these provisions. Information provided with the application for this Product Ruling indicates that a Grower who acquires the minimum allocation of vineyard lots in the Project is unlikely to have their activity pass one of the tests until the income year ended 30 June 2007. Growers who acquire more than one interest in the Project may however, find that their activity meets one of the tests in an earlier income year.

114. Therefore, prior to this time, unless the Commissioner exercises an arm of the discretion under paragraphs 35-55(1)(a) or (b), the rule in subsection 35-10(2) will apply to defer to a future income year any loss that arises from the Grower's participation in the Project.

115. The first arm of the discretion in paragraph 35-55(1)(a) relates to 'special circumstances' applicable to the business activity, and has no relevance for the purposes of this Product Ruling. However, the second arm of the discretion in paragraph 35-55(1)(b) may be exercised by the Commissioner where:

(i)

the business activity has started to be carried on; and

(ii)

because of its nature, it has not yet met one of the tests set out in Division 35; and

(iii)

there is an expectation that the business activity of an individual taxpayer will either pass one of the tests or produce a taxation profit within a period that is commercially viable for the industry concerned.

116. Information provided with this Product Ruling indicates that a Grower who acquires the minimum allocation of vineyard lots in the Project is expected to be carrying on a business activity that will either pass one of the tests, or produce a taxation profit, for the year ended 30 June 2005. The Commissioner will decide for such a Grower that it would be reasonable to exercise the second arm of the discretion until the year ended 30 June 2004. Subsection 35-55(2) prevents the Commissioner exercising the discretion beyond this year.

117. This Product Ruling is issued on a prospective basis (i.e., before an individual Grower's business activity starts to be carried on). The Project, however, may fail to be carried on during the income years specified above (see paragraph 48), in the manner described in the Arrangement (see paragraphs 14 to 41). If so, this Ruling, and specifically the decision in relation to paragraph 35-55(1)(b), that it would be unreasonable that the loss deferral rule in subsection 35-10(2) not apply, may be affected, because the Ruling no longer applies (see paragraph 9). Growers may need to apply for private rulings on how paragraph 35-55(1)(b) will apply in such changed circumstances.

118. In deciding that the second arm of the discretion in paragraph 35-55(1)(b) will be exercised on this conditional basis, the Commissioner has relied upon:

•

the report of the independent viticulturist.

Section 82KL - recouped expenditure

119. The operation of section 82KL depends, among other things, on the identification of a certain quantum of 'additional benefits(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1.

Part IVA - general tax avoidance provisions

120. 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).

121. The Rosedale Vines Project No. 2 will be a 'scheme'. A Grower will obtain a 'tax benefit' from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraphs 47 to 61 that would not have been obtained but for the scheme. However, it is not possible to conclude the scheme will be entered into or carried out with the dominant purpose of obtaining this tax benefit.

122. Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of their grapes. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There is no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing at arm's length or, if any parties are not dealing at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under paragraph 177D(b) it cannot be concluded, on the information available, that participants will enter into the scheme for the dominant purpose of obtaining a tax benefit.

Example

Entitlement to GST input tax credits

123. Susan, who is a sole trader and registered for GST, contracts with a manager to manage her viticulture business. Her manager is registered for GST and charges her a management fee payable every six months in advance. On 1 December 2001 Susan receives a valid tax invoice from her manager requesting payment of a management fee in advance, and also requesting payment for an improvement in the connection of electricity for her vineyard that she contracted him to carry out. The tax invoice includes the following details:

Susan pays the invoice by the due date and calculates her input tax credit on the management fee (to be claimed through her Business Activity Statement) as:

(1 / 11) * $4,400 = $400.


Hence her outgoing for the management fee is effectively $4400 less $400, or $4000.

Similarly, Susan calculates her input tax credit on the connection of electricity as:

(1 / 11) * $2,200 = $200.


Hence her outgoing for the power upgrade is effectively $2200 less $200, or $2000.

In preparing her income tax return for the year ended 30 June 2002, Susan is aware that the management fee is deductible in the year incurred. She calculates her management fee deduction as $4000 (not $4400).

Susan is aware that the electricity upgrade is deductible 10% per year over a 10 year period. She calculates her deduction for the power upgrade as $200 (one tenth of $2000 only, not one tenth of $2200).

Detailed contents list

124. Below is a detailed contents list for this Product Ruling:

Commissioner of Taxation
15 May 2002

Not previously issued in draft form.

References

ATO references:
NO T2001/008234

Related Rulings/Determinations:

TR 92/1
TR 92/20
TD 93/34
TR 97/11
TR 97/16
TR 98/22
TR 2000/8
PR 1999/95
IT 360

Subject References:
carrying on a business
commencement of business
crops as trading stock
fee expenses
horticulture
irrigation expenses
management Fees expenses
plantation forestry
primary production
primary production expenses
primary production income
producing assessable income
product rulings
public rulings
schemes and shams
tax administration
tax avoidance
tax benefits under tax avoidance schemes
tax shelters
tax shelters project
trading stock

Legislative References:
TAA 1953 Part IVAAA
ITAA 1936 Div 3 of Part III
ITAA 1936 82KL
ITAA 1936 82KZL
ITAA 1936 82KZL(1)
ITAA 1936 82KZME
ITAA 1936 82KZME(1)
ITAA 1936 82KZME(2)
ITAA 1936 82KZME(3)
ITAA 1936 82KZME(4)
ITAA 1936 82KZME(7)
ITAA 1936 82KZMF
ITAA 1936 82KZMF(1)
ITAA 1936 Pt IVA
ITAA 1936 177A
ITAA 1936 177C
ITAA 1936 177D
ITAA 1936 177D(b)
ITAA 1997 6-5
ITAA 1997 8-1
ITAA 1997 17-5
ITAA 1997 Div 27
ITAA 1997 Div 35
ITAA 1997 35-10
ITAA 1997 35-10(2)
ITAA 1997 35-10(3)
ITAA 1997 35-10(4)
ITAA 1997 35-30
ITAA 1997 35-35
ITAA 1997 35-40
ITAA 1997 35-45
ITAA 1997 35-55
ITAA 1997 35-55(1)
ITAA 1997 35-55(1)(a)
ITAA 1997 35-55(1)(b)
ITAA 1997 35-55(2)
ITAA 1997 Div 40
ITAA 1997 Subdiv 40-F
ITAA 1997 40-25
ITAA 1997 40-70(1)
ITAA 1997 40-75(1)
ITAA 1997 40-100
ITAA 1997 40-105
ITAA 1997 40-425(2)
ITAA 1997 40-440
ITAA 1997 40-515
ITAA 1997 40-515(1)(a)
ITAA 1997 40-515(1)(b)
ITAA 1997 40-520(1)
ITAA 1997 40-525(2)
ITAA 1997 40-525(3)
ITAA 1997 40-530
ITAA 1997 40-530(2)
ITAA 1997 40-535
ITAA 1997 40-540
ITAA 1997 40-545
ITAA 1997 40-550
ITAA 1997 Div 328
ITAA 1997 Subdiv 328-D
ITAA 1997 Subdiv 328-F
ITAA 1997 Subdiv 328-G
ITAA 1997 328-105
ITAA 1997 328-105(1)(a)
ITAA 1997 328-105(1)(b)
ITAA 1997 328-185
ITAA 1997 328-190
Copyright Act 1968

Case References:
FCT v. Lau
84 ATC 4929
16 ATR 55