Product Ruling

PR 2003/19

Income tax: Rosedale Vines Project No. 3

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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. 3 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 70 (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 ATO 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 Product Ruling may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Intellectual Property Branch

Department of Communications, Information Technology and the Arts

GPO Box 2154

Canberra ACT 2601

or by e-mail: commonwealth.copyright@dcita.gov.au.

Date of effect

11. This Ruling applies prospectively from 30 April 2003 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 2005. 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 as constituted by documents provided on 23 December 2002, 14 March 2003, 27 March 2003, 1 April 2003 and 11 April 2003 and additional correspondence dated 18 February 2003, 27 February 2003, 5 March 2003, 10 March 2003, 11 March 2003, 3 April 2003, 8 April 2003, 9 April 2003 and 10 April 2003;

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Draft Prospectus of the Rosedale Vines Project No. 3 dated April 2003;

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Draft Constitution of the Rosedale Vines Project No. 3 received 14 March 2003;

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Draft Licence Agreement (Commencement Date to 30 June 2008) of the Rosedale Vines Project No. 3, between Barossa Vines Ltd ('Licensor') and the Grower received 14 March 2003;

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Draft Licence Agreement (1 July 2008 to 30 June 2013) of the Rosedale Vines Project No. 3, between Barossa Vines Ltd and The Grower received 14 March 2003;

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Draft Licence Agreement (1 July 2013 to 30 June 2018) of the Rosedale Vines Project No. 3, between Barossa Vines Ltd and the Grower received 14 March 2003;

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Draft Memorandum of Lease between Rosedale Vines Ltd ('Lessor') and Barossa Vines Ltd ('Lessee') dated 7 March 2002;

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Draft Management Agreement of the Rosedale Vines Project No. 3 between Barossa Vines Ltd ('Responsible Entity') and the Grower received 11 April 2003;

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Compliance Plan for the Rosedale Vines Project No. 3 received 14 March 2003;

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Custodian Agreement between Barossa Vines Ltd and Tower Trust (SA) Ltd dated 10 March 2003;

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Viticultural Report for the Rosedale Vines Project No. 3 dated 19 November 2002;

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Draft Vineyard Management Agreement of the Rosedale Vines Project No. 3, between the Responsible Entity and SA Viticulture Pty Ltd ('Vineyard Manager') received 11 April 2003; and

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Loan Agreement with Statewide Finance Services Pty Ltd received 27 February 2003.

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. 3' and is summarised as follows:

The Project

18. The Rosedale Vines Project No. 3 is registered as a Managed Investment Scheme under the Corporations Act 2001. The Responsible Entity for the Project is Barossa Vines Ltd.

19. The Project Land of 55.5 hectares is situated in the Barossa Valley Region of South Australia. The land is leased from Rosedale Vines Ltd by the Responsible Entity through 3 leases detailed in the Seventh Schedule of the Project's Constitution. The land is divided into Site One and Site Two, with both sites sharing a common boundary.

20. The Project is for a maximum of 555 'Vineyard Lots', each being 0.1 hectare in size. After the Prospectus has issued, the Responsible Entity may allot additional Vineyard Lots. The Responsible Entity will only do this if it acquires additional land, with similar characteristics to the land already acquired and a viticultural expert reports that the land is suitable for the Project.

21. The Prospectus states that the minimum subscription for the Project is 100 Vineyard Lots. Each Grower may subscribe for a minimum of one Vineyard Lot. The Manager will plant approximately 185 vines per Vineyard lot (1,850 per hectare).

22. Irrigation water for the Vineyard Lots located in Site One will be sourced from an existing bore that is annually recharged with 'off peak' mains water. For Vineyard Lots located in Site Two, SA Water has made available an annual amount of 50 megalitres of 'off peak' mains water. To store this water the Responsible Entity may arrange to build an above ground holding dam. The landowner (Rosedale Vines Ltd) will pay the cost of this dam.

23. Growers applying under the Prospectus enter into a Management Agreement and 3 Licence Agreements. The Responsible Entity agrees to licence to the Grower an identifiable area of land, which is the Vineyard Lot, for the purpose of cultivating vines and harvesting grapes until the Project is terminated on 30 June 2018.

24. Each Grower is required to subscribe for one 'B' Class Share in the land owner, Rosedale Vines Ltd at a cost of $2,500 payable $1 on application and $2,499 on 1 July 2008.

25. Growers applying under this Prospectus join as either Applicant Group 1 Growers or Applicant Group 2 Growers, depending on the date of application. Growers will be known as Applicant Group 1 Growers where applications are accepted on or before 1 June 2003 and the establishment services will be provided during the Establishment Period up to 30 June 2003. Applications received during the period 2 June 2003 to 30 June 2003 will not be accepted until on or after 1 July 2003. These Growers, together with applicants where the application is received and accepted on or after 1 July 2003 and before the Prospectus expires, will be known as Applicant Group 2 Growers. Establishment services for this Group will be provided during the period from 1 July 2003 up to 30 June 2004.

26. Under the Management Agreement, each Grower appoints the Responsible Entity, Barossa Vines Ltd, as the sole and exclusive agent to harvest the grapes and then market and sell the grapes.

27. Growers will execute a Power of Attorney enabling the Responsible Entity, Barossa Vines Ltd, to act on their behalf as required when they make an application for a Vineyard Lot.

Constitution

28. The Constitution establishes the Project and operates as a deed binding on all the Growers and the Responsible Entity. The Constitution sets out the terms and conditions under which Barossa Vines Limited agrees to act as the Responsible Entity and thereby manage the Project. Growers are bound by the Constitution by virtue of their participation in the Project.

29. All Project property, as defined in clause 1 of the Constitution, will be held by either the Responsible Entity or an agent appointed by the Responsible Entity on trust for the Growers. A Custodian may also be appointed by the Responsible Entity to hold the Project property (clause 3 of the Constitution).

30. The Responsible Entity will cause all Application Fees and all other Project Property of a monetary nature received by it to be delivered to the Custodian (if appointed) for deposit into an account maintained by the Custodian for that purpose, not later than the next business day following the receipt of those moneys. If for any reason a Custodian is not required by the Corporations Act 2001 to be appointed then the Responsible Entity must open or cause to be opened with a recognised bank trading in Australia a trust account into which all Application Fees must be deposited (clause 7.11 of the Constitution).

31. All Gross Proceeds will be payable to the Responsible Entity. The Responsible Entity will then immediately forward the full amount of such Gross Proceeds to the Custodian for deposit into the Gross Proceeds Account. These proceeds will be invested in authorised investments until disbursed (clause 13 of the Constitution).

Compliance Plan

32. 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 if the rights of the Growers are protected.

Licence Agreements

33. Growers participating in the arrangement will enter into three consecutive Licence Agreements between the Licensor, Barossa Vines Ltd and the Growers. The first Licence Agreement commences from the date of acceptance of Growers into the Project until 30 June 2008, the second Licence Agreement will be in effect from 1 July 2008 to 30 June 2013 and the third Licence Agreement will be in effect from 1 July 2013 to 30 June 2018. Growers obtain a licence over land to use their Vineyard Lots for the purpose of establishing and maintaining a vineyard and to subsequently harvest grapes for sale to the wine industry.

34. 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

35. Each Grower enters into a Management Agreement with the Responsible Entity, contracting the Responsible Entity to establish and maintain the Vineyard Lot in accordance with good viticultural practices. During the Establishment Period the Responsible Entity will carry out the following activities:

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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;

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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.

36. These activities will be completed by 30 June 2003 for Applicant Group 1 Growers and by 30 June 2004 for Applicant Group 2 Growers.

37. After the Establishment Period, the Responsible Entity will maintain and continue to manage each Vineyard Lot, by carrying out activities that include:

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pruning 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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operating the irrigation system in order to irrigate the Grower's Vineyard Lot in accordance with good viticultural practices;

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fertilising 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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protecting 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 inspecting the grapevines, trellising and irrigation equipment;

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

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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.

38. The activities provided after the Establishment Period are paid for by Vineyard Operating Costs and the Annual Management Fees.

39. The Responsible Entity will send a report to the Grower within 90 days of the end of each financial year containing a review of the operations of the Growers interest during the financial year.

40. In addition, the Responsible Entity will be responsible for ensuring that insurance policies are taken out to cover the destruction or loss of grapevines and the grapes as well as a public liability insurance policy. Each Grower will pay the Grower's Proportion of the Insurance Premiums or the premiums will be reimbursable to the Responsible Entity from the Gross Proceeds of the Project (clause 11 of the Management Agreement and clauses 9.7 and 13.3 of the Constitution).

Harvesting

41. Under the Management Agreement, the Responsible Entity will be responsible for the harvesting of the grape produce grown on the vineyard. The Responsible will determine when the harvest will commence by assessing the maturity of the grapes in accordance with good viticultural practices.

42. The Responsible Entity will determine how and where the grapes are to be stored and whether mechanical or hand harvesting will be the most cost efficient option.

43. The costs of providing the above harvesting services will be met from the Growers' payments of Harvesting Costs (clauses 9 and 12 of the Management Agreement).

Sale of grapes

44. The grapes from each Grower's Vineyard Lot in the Project will be pooled and sold, by the Responsible Entity on behalf of the Growers. The Responsible Entity will use all reasonable endeavours to sell the grapes at a price equivalent to the price likely to be paid for the majority of the fruit variety grown in the vicinity of the land.

45. Any share of produce that is unsold at the end of a financial year will constitute trading stock of the Grower.

46. The Gross Proceeds from the sale of the grapes will be paid into a Gross Proceeds Account to be established by the Responsible Entity. However, before these proceeds are distributed to Growers, the amounts referred to in clauses 13.3.1, 13.3.2 and 13.3.3 of the Constitution will be deducted from the proceeds. The amounts deducted include annual Management Fees and Vineyard Operating Costs payable by the Growers on and after 1 July 2005. The remaining proceeds or 'Net Proceeds' will be distributed to the Growers within 28 days of receipt of the Gross Proceeds. The distribution to each Grower will be based on each Grower's Proportion of Vineyard Lots licenced to the Grower. However, in the event of a partial or total destruction of the vines or grapes on the Grower's Vineyard Lots, the Grower's Proportion will be reduced accordingly (section 13.3 of the Constitution).

47. Where the total of the amounts referred to in clauses 13.3.1, 13.3.2 and 13.3.3 of the Constitution for a Financial Year exceed the Gross Proceeds, each Grower must pay the Grower's Proportion of this deficiency to the Responsible Entity. If the Responsible Entity chooses, the amount of the deficiency can 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. No amount may be carried forward beyond the final year of the Project.

Vineyard Management Agreement

48. Under the Vineyard Management Agreement, the Responsible Entity will engage 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.

49. Under this Agreement, 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.

Fees

50. The following amounts are payable by the Growers to the Responsible Entity (Barossa Vines Ltd) for each Vineyard Lot:

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A fee of $9,130 payable on application. The activities for this fee will be completed by 30 June 3003 for Applicant Group 1 Growers and by 30 June 2004 by Applicant Group 2 Growers. The fee consists of a Management Fee of $7,753, an initial planting and preparation fee of $237, trellising costs of $630 and irrigation costs of $510;

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Vineyard Operating Costs of $220 payable on 1 July 2003 by Applicant Group 1 Growers and on application by Applicant Group 2 Growers. For both Grower groups, $220 is payable on 1 July 2004. Commencing on 1 July 2005 and on 1 July of each succeeding financial year, an amount equal to the Grower's Proportion of the Vineyard Operating Costs;

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For the period from 1 July 2003 to 30 June 2004, the amounts paid cover all costs of providing the maintenance and management activities listed in paragraph 37. From 1 July 2005 the amounts cover only the actual direct costs incurred by the Vineyard Manager in providing the activities listed in paragraph 37;

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Annual Management Fees equal to 7.5% of the Grower's proportion of the gross proceeds, due each year, commencing from 1 July 2005;

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These fees cover the costs of providing the maintenance and management activities listed in paragraph 37, that are not covered by the Vineyard Operating Costs that are payable after 30 June 2005. These could include the costs of engaging a Vineyard Manager and costs not directly associated with a Grower's Vineyard lot, such as administrative costs;

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Licence Fee of $330 payable on application by Applicant Group 1 Growers and $660 payable on application by Applicant Group 2 growers.

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Annual Licence Fees of $330 per annum, payable annually in advance on 1 July of each financial year. The first payment is due on 1 July 2003 for Applicant Group 1 Growers and 1 July 2004 for Applicant Group 2 Growers. From and including the year ending 30 June 2005, the fees will be adjusted to reflect movements in the Consumer Price Index (CPI).

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Harvesting Costs. Commencing on 1 July immediately following the first harvest and thereafter on 1 July immediately following each succeeding harvest, the Grower's proportion of the harvesting costs; and

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Insurance Premiums. The Grower's Proportion of the Insurance Premiums or the premiums will be reimbursable to the Responsible Entity from the Gross Proceeds of the Project.

51. Management Fees and Vineyard Operating Costs payable on 1 July 2005 and thereafter, plus Harvesting Costs and Insurance Premiums, will be deducted from the Gross Proceeds. If gross proceeds are insufficient in any financial year, the Grower will either be required to pay the amount of the excess, 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. No amount may be carried forward beyond the final year of the Project (Clause 13.3 of the Constitution).

Shares

52. Growers must also subscribe for a share in the landowning company, Rosedale Vines Ltd, for each Vineyard Lot. The cost of each share is $2,500, of which $1 is payable on application and $2,499 on 1 July 2008. These amounts are payable to the Responsible Entity on behalf of the landowning company.

Finance

53. Growers can fund their involvement in the Project themselves, borrow from an independent lender or borrow from a finance company, Statewide Finance Services Pty Ltd (Statewide), an entity associated with the Responsible Entity. Growers are required to obtain their own finance for the development.

54. Growers are able to borrow from Statewide an amount equal to their full application fee less a deposit of at least 20%. The deposit and the amount borrowed from Statewide will be paid to Responsible Entity, that will then pay the money to the Custodian, as defined in the Project's Constitution. The Custodian will transfer the deposit and the amount borrowed from Statewide into an Application Fund that is maintained by the Custodian (clause 7.11 of the Project's Constitution). Standard terms for the finance are, as follows:

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no application fee;

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one year interest free - repayable by 12 monthly instalments;

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one to two years at fixed interest of 10% per annum, repayable by monthly instalments over the term of the loan; and

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the loan is secured.

55. A loan will only be provided by Statewide to a Grower if Statewide has sufficient monies to provide to the Grower. If sufficient monies are not available, the Grower can obtain monies from elsewhere.

56. The loan is provided by Statewide on a full recourse basis and recovery action will be taken in respect of any default by the borrower.

57. This Ruling will not apply to Growers who enter into finance arrangements with Statewide or its associates, with terms and conditions that differ in any way from those set out in paragraphs 54 to 56.

58. The Responsible Entity may conditionally accept a Grower's Application, subject to the approval of finance by the lender identified in the Application. The Application must include a letter from the lender agreeing to lend the amount. The lender has 28 days after the date of the Application to provide the funds. If the funds have not been provided within 28 days, the Application will be refused (clause 7.6 of the Constitution).

59. 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;

•

'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;

•

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

•

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

•

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;

•

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 are involved or become involved in the provision of finance to Growers for the Project.

Ruling

Application of this Ruling

60. This Ruling applies only to Growers who are accepted to participate in the Project:

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on or before 1 June 2003 (Applicant Group 1 Growers); or

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on or between 1 July 2003 and the date when the Prospectus expires (Applicant Group 2 Growers); and

•

the Grower has executed a Licence Agreement and a Management Agreement.

A Grower's participation in the Project must constitute the carrying on of a business of primary production.

61. This Ruling does not apply to:

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Growers who do not engage the Responsible Entity to establish and maintain their Vineyard Lot; or

•

Application Group 1 Growers whose application has been conditionally accepted by the Responsible Entity subject to finance for the payment of the Application Fee, where the finance has not been approved by the lender and the funds have not been made available to the Responsible Entity on or by 15 June 2003.

Minimum Subscription

62. 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. Under the terms of the Prospectus a Grower's application will not be accepted and the Project will not proceed until the minimum subscription of 100 Vineyard Lots is achieved.

The Simplified Tax System ('STS')

Division 328

63. 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:

•

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

•

must have elected to be an 'STS taxpayer'.

Qualification

64. 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

65. 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.

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

Trading stock

Section 70-35

67. A Grower who is not an 'STS taxpayer' may, in some years, hold grapes that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grower must include the amount of that excess in assessable income.

68. Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grower may claim the amount of that excess as an allowable deduction.

Deductions for Management Fees, Vineyard Operating Expenses, Licence Fees and Interest

Section 8-1

69. 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 144).

(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 116 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.

(iii)

The deductibility or otherwise of interest arising from loan agreements entered into with financiers other than Statewide Finance Services Pty Ltd, the internal financier, is outside the scope of this Ruling. However all Growers, including those who finance their participation in the Project other than with Statewide Finance Services Pty Ltd, should read the discussion of the prepayment rules in paragraphs 110 to 117 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.

Deductions for capital expenditure

Division 40

70. 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:

(iv)

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 144).

(v)

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.

(vi)

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 1 June 2003, the trellising will be installed and first used during the year ended 30 June 2003. For Growers who are accepted into the Project on after 1 July 2003 (see below), the trellising will be installed and first used during the year ended 30 June 2004. The Project Manager will advise Growers when that occurs to enable Growers to calculate the deduction for the decline in value.

(vii)

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.

(viii)

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).

(ix)

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.

Tax outcomes for Growers who are 'STS taxpayers'

Assessable income

Sections 6-5 and 328-105

71. 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.

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

Trading stock

Section 328-285

73. A Grower who is an 'STS taxpayer' may, in some years, hold grapes that will constitute trading stock on hand. Where, for such a Grower, for an income year, the difference between the value of all their trading stock at the start and a reasonable estimate of it at the end, is less than $5,000, they do not have to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)).

74. Alternatively, a Grower who is an 'STS taxpayer' may instead choose to account for trading stock in an income year under the provisions of Division 70 (subsection 328-285(2)).

Deductions for Management Fees, Vineyard Operating Costs, Licence Fees and Interest

Sections 8-1 and 328-105

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

Notes:

(x)

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 144).

(xi)

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.

(xii)

Where a Grower 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 110 to 124). In such cases, the tax deduction for the prepaid fee must be determined using the formula shown in paragraph 116, 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.

(xiii)

The deductibility or otherwise of interest arising from loan agreements entered into with financiers other than Statewide, the internal financier, is outside the scope of this Ruling. However all Growers, including those who finance their participation in the Project other than with Statewide, should read the discussion of the prepayment rules in paragraphs 110 to 117 (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.

Deductions for capital expenditure

Division 328 and Subdivision 40-F

76. 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.

77. 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 Subdivision 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 (xvii) below.

78. Under Division 328, if the 'cost' of a 'depreciating asset' at the end of the income year is less than $1,000 (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:

(xiv)

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 144).

(xv)

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.

(xvi)

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 2003 (or the year ended 30 June 2004 for Growers accepted into the Project on or after 1 July 2003) by multiplying the 'cost' of the interest by half the 'general STS pool rate, that is, 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 2003 (or the year ended 30 June 2004 for Growers accepted into the Project on or after 1 July 2003) 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.

(xvii)

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 2003 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).

(xviii)

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 (subsection 40-530(2)). The Project Manager will inform Growers of when the Grapevines enter their first commercial season.

Tax outcomes that apply to all Growers

Shares

79. The shares in Rosedale Vines Ltd are CGT assets (section 108-5 of the ITAA 1997) and the amounts paid by a Grower to acquire those assets is an outgoing of capital and not allowable as a deduction.

80. The amounts paid for each share will represent the first element of the cost base of the share (subsection 110-25(2)). Any disposal of the shares by a Grower will be a CGT event and may give rise to a capital gain or loss.

Dividends relating to the shares

81. Dividends paid out of profits by Rosedale Vines Ltd are included in the assessable income of shareholders under section 44(1) of the ITAA 1936.

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

Section 35-55 - Commissioner's discretion

82. For a Grower who is an individual and who enters the Project during the year ended 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 2003 to 30 June 2005 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.

83. For a Grower who is an individual and who enters the Project during the year ended 30 June 2004 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 2003 to 30 June 2005 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.

84. 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 131 in the Explanations part of this ruling);

•

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

•

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).

85. 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, that is, 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.

86. 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 ATO 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

87. 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 and 82KZMF (but see paragraphs 110 to 124);

•

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.

Explanation

Is the Grower carrying on a business?

88. 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. 3 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.

89. For schemes such as that of the Rosedale Vines Project No. 3, 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, (1984) 16 ATR 55.

90. 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.

91. In this Project, each Grower enters into a Management Agreement and three Licence Agreements.

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

93. 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.

94. 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.

95. 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.

96. 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.

97. 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.

98. 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.

99. The Grower's degree of control over the Responsible Entity as evidenced by the Management Agreement, and supplemented by the Corporations Act 2001, 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.

100. 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. 3 will constitute the carrying on of a business.

The Simplified Tax System

Division 328

101. 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.

102. 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 Project fees

Section 8-1

103. 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.

104. 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, 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

105. 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.

106. 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 110 to 124) 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

107. 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'.

108. 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.

109. 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

110. 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.

111. 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

112. Where the requirements of subsections 82KZME(2) and (3) are met, the formula in subsection 82KZMF(1) (see paragraph 116) 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)).

113. 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.

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

115. 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.

116. 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)


117. 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

118. 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.

119. 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.

120. 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.

121. On this basis, provided a Grower incurs expenditure as required under the Project agreements, as set out in paragraphs 28 to 49, 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

122. Although not required under either the Management Agreement or the Licence Agreements, 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 121 above, section 82KZMF will apply to apportion the expenditure and allow a deduction over the period in which the prepaid benefits are provided.

123. 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.

124. 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

125. 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.

126. 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'.

127. The tax treatment of capital expenditure has been dealt with in a representative way in paragraphs 70 and 76 to 78 in the Tables and the accompanying Notes.

Deferral of losses from non-commercial business activities

Division 35

128. 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.

129. 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.

130. 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.

131. 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.

132. In broad terms, the four tests mentioned in paragraph 128 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).

133. A Grower who is accepted to participate 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. 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.

134. 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.

135. 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;

(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.

136. 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 2006 (for Growers who are accepted during the income year ended 30 June 2003 and for Growers who are accepted during the income year ended 30 June 2004).

137. The Commissioner will decide for such Growers that it would be reasonable to exercise the second arm of the discretion until the year ended 30 June 2005 (for Growers who are accepted during the income year ended 30 June 2003) and again the income year ended 30 June 2005 (for Growers who are accepted during the income year ended 30 June 2004). Subsection 35-55(2) prevents the Commissioner exercising the discretion beyond this year.

138. 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 86), in the manner described in the Arrangement (see paragraphs 14 to 59). 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) 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.

139. 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

140. 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

141. 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).

142. The Rosedale Vines Project No. 3 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 69 to 86 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.

143. 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

144. 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 $4,400 less $400, or $4,000.

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 $2,200 less $200, or $2,000.

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 $4,000 (not $4,400).

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 $2,000 only, not one tenth of $2,200).

Detailed contents list

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

Commissioner of Taxation
30 April 2003

Not previously released in draft form.

References

ATO references:
NO 2003/00689

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 40-535
ITAA 1997 40-540
ITAA 1997 40-545
ITAA 1997 Div 70
ITAA 1997 70-35
ITAA 1997 Div 328
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
(1984) 16 ATR 55