Product Ruling

PR 2006/17

Income tax: Oxley Plantations Macadamia Project 2006

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No guarantee of commercial success

The Tax Office 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 and how the product fits an existing portfolio. 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 in the Ruling part of this document are available, provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document.

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

Potential participants should be aware that the Tax Office will be undertaking review activities to confirm the scheme has been implemented as described below and to ensure that the participants in the scheme 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 entity(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 Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'taxation provision(s)' identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. In this Ruling this scheme is referred to as the 'Oxley Plantations Limited Macadamia Project 2006' or simply as 'the Project'.

Relevant taxation provision(s)

2. The relevant taxation provisions 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 of the ITAA 1997;

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section 17-5 of the ITAA 1997;

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Division 27 of the ITAA 1997;

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Division 35 of the ITAA 1997;

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Division 40 of the ITAA 1997;

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Subdivision 61-J of the ITAA 1997;

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Division 70 of the ITAA 1997;

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Division 328 of the ITAA 1997;

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Division 328 of the Income Tax (Transitional Provisions) Act 1997;

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

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sections 82KZME and 82KZMF of the ITAA 1936; and

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Part IVA of the ITAA 1936.

All legislative references in this Ruling are to the ITAA 1997 unless otherwise indicated.

Goods and Services Tax

3. All fees and expenditure referred to in this Ruling include the 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. Although this Ruling deals with the laws 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 entities

7. The class of entities to whom this Ruling applies is the persons more specifically identified in the Ruling part of this Product Ruling and who enter into the scheme specified below on or after the date this Ruling is made. They will have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement as set out in the description of the scheme. In this Ruling, each of these persons, referred to as a Grower, will be a 'wholesale client' within the meaning of section 761G of the Corporations Act 2001 or will accept a 'personal offer' within the meaning of section 1012E of the Corporations Act 2001.

8. The class of entities to whom this Ruling applies does not include:

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persons who intend to terminate their involvement in the scheme prior to its completion, or who otherwise do not intend to derive assessable income from it;

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persons who participate in the Project through offers made other than through the Information Statement;

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persons who are accepted to participate in the Project after 15 May 2006;

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persons who as part of their interest in a Nutlot, also have an interest in trees from the trial planting; and

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persons who finance their participation in the Project through entities associated with the Project.

Qualifications

9. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out, is carried out in accordance with the scheme described in paragraphs 15 to 54.

10. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:

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this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and

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this Ruling may be withdrawn or modified.

11. This work 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:

Commonwealth Copyright Administration

Attorney General's Department

Robert Garran Offices

National Circuit

Barton ACT 2600

or posted at: http://www.ag.gov.au/cca

Date of effect

12. This Ruling applies prospectively from 15 March 2006, 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).

13. If a taxpayer has a more favourable private ruling (which is legally binding), the taxpayer can rely on the private ruling if the income year to which the private ruling relates has ended, or has commenced but not yet ended. However, if the scheme 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

14. This Product Ruling is withdrawn and ceases to have effect after 30 June 2008. The Ruling continues to apply, in respect of the taxation provision(s) ruled upon, to all persons within the specified class who enter into the scheme specified below. Thus, the Ruling continues to apply to those persons, even following its withdrawal, who entered into the specified scheme prior to withdrawal of the Ruling. This is subject to there being no change in the scheme or in the persons' involvement in the scheme.

Scheme

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

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Application for a Product Ruling dated 19 August 2005 and additional correspondence and emails dated 30 August 2005, 5, 14, 16, 20, 22, 26 September 2005, 3, 7, 14, 20, 24, 26, 31 October 2005, 2, 3, 9, 22, 24, 25, 28, 30 November 2005, 1, 2, 5, 6,7,9, 14 December 2005, 3, 19, 23, 27, 30, 31 January 2006, 2, 3, 14, 20, 21, 22, 27, 28 February 2006, 6 and 8 March 2006;

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Draft Information Statement for Oxley Plantations Macadamia Project 2006, received 28 February 2006;

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Draft Constitution of the Oxley Plantations Macadamia Project 2006, dated 8 March 2006, received on 2 February 2006;

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Draft Land Use Agreement between Oxley Plantations Ltd (OPL) and the Grower received 2 February 2006;

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Draft Management Agreement between OPL (the Manager) and the Grower received 8 March 2006;

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Lease Agreement for the existing plantation between Oxley Plantations Properties Proprietary Limited as Trustee for OP2005 Property Trust (OPP) and OPL received 19 August 2005;

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Lease Agreement for the new plantation between OPP and OPL received 6 December 2005;

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Draft Operations Agreement Establishment and Landcare Services between OPL and OPP, received 27 February 2006;

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Draft Purchase Agreement between OPL (as agent for the Growers) and the Buyer received 8 March 2006; and

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Draft Syndicate Agreement between Syndicate Members, received 6 March 2006.

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

16. The documents highlighted are those that Growers may enter into. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which Growers, or any associate of the Growers, will be a party to, which are a part of the scheme. The effect of these agreements is summarised as follows.

17. In accordance with the above documents, a Grower who participates in the scheme must be a wholesale client or accept a personal offer. This Ruling does not apply unless the Grower will be a wholesale client for the purposes of section 761G of the Corporations Act 2001 or will accept a personal offer within the meaning of section 1012E of the Corporations Act 2001.

Overview

18. The main features of the Oxley Plantations Macadamia Project 2006 are as follows:

19. As the Project's Growers are wholesale clients or have accepted an offer that is a small scale offering, the Project will not be a registered managed investment scheme under the Corporations Act 2001. An offer to participate in the scheme will be made through an Information Statement. The offer under the Information Statement is for a minimum of 300 Nutlots and a maximum of 450 Nutlots.

20. The Project involves the business of planting and cultivating new macadamia nut trees as well as the cultivation of established macadamia nut trees.

21. To participate in the Project applicants must apply for a minimum of two 0.1 hectare Nutlots by completing the application form, executing the Power of Attorney shown in the Information Statement and paying the Application Money.

22. When Growers are accepted into the Project, OPL will allocate the Grower's Nutlots, place their details in a Register and enter into Agreements with OPL and its associates.

23. This Ruling only applies in respect of Growers accepted into the Project from the date of this Product Ruling to 15 May 2006.

24. The Project land on which the Grower will be growing and cultivating macadamia trees are on two properties located in Brooklet and Fernleigh on the Alstonville plateau in Northern New South Wales. OPL will enter into a Head Lease with the Land Owner for each property.

25. OPL will grant the Grower a licence to use and occupy two or more identifiable Nutlots each of 0.1 hectares, for the Term of the Project. Each Nutlot will consist of:

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0.07 hectares of new macadamia nut plantation; and

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0.03 hectares of established macadamia nut plantation.

26. There has been a trial planting undertaken on the Fernleigh property of approximately 0.9 hectares which will not from part of this scheme. This Ruling will not apply to a Grower where part of their Nutlot consists of trees from the trial planting.

27. A Grower will also enter into a Management Agreement with OPL to establish and manage their Nutlot. This includes supplying and planting the trees and providing the ongoing maintenance of the trees. OPL will also be responsible for harvesting, procuring the processing of and selling the Grower's macadamia nuts.

Constitution

28. The Constitution establishes the Project and operates as a deed binding all of the Growers and OPL (clause 2.1). The Constitution sets out the terms and conditions under which OPL agrees to act and thereby manage the Project.

29. OPL will hold the Application Money on bare trust (clause 13). OPL will deposit the Application Money into a bank account solely for this Project. Once OPL is satisfied that all documents have been executed the Application Money is released and applied against the fees due to OPL (clause 14).

30. In summary, the Constitution also sets out provisions relating to:

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the Term and purpose of the Project (clause 3 and 4);

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the purpose to which the land will be used for the Project under the Information Statement (clause 5);

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procedures relating to Applications and the affect of an Applicant's Application being accepted by OPL and their interest in the Project (clause 6 and 7);

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the maintenance of a register of Growers of the Project (clause 8);

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the transfer and transmission of Nutlots (clause 9 and 10);

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preparation of the Land Use and Management Agreements by OPL (clause 11);

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procedures relating to Grower default (clause 12);

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the keeping of a separate Proceeds Fund for the holding of Proceeds and any other money and procedures relating to the distribution of Grower's entitlements (clause 15 and 16);

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outline of Managers duties, rights and powers to operate and manage the Project (clause 18, 19 and 20);

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resolution of complaints made by the Growers in relation to the Project or OPL (clause 21);

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the right of OPL to be paid fees and other expenses (clause 24);

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procedures for calling a meeting of Growers (clause 25);

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how the Manager is to hold property of the Grower (clause 26);

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limitation of liability and the extent of indemnities (clause 27); and

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procedures of winding up the Project (clause 28).

Head Lease

31. The Project will be conducted on two properties in Bangalow Northern New South Wales.

32. Both properties are owned by Oxley Plantations Properties Pty Ltd as trustee for OP2005 Property Trust (the Lessor) and will be leased to OPL under two separate Head Leases. Each Head Lease sets out the terms and conditions under which the Lessor will lease the Land to OPL during the Term of the Project.

33. OPL is authorised under each Head Lease to licence part of the Land as Nutlots and further licence the macadamia nut trees as detailed in clause 7(a).

Land Use Agreement

34. OPL grants to the Grower a licence for the Term of the agreement to use and occupy the Grower's Nutlot for the purposes of growing, maintaining and harvesting the Trees planted or to be planted on the Nutlot. In addition, the Manager licenses the Trees to the Grower for the Term of the Agreement (clause 2).

35. The Term of the licence will commence on the date the Manager accepts the Grower's application for an Interest in the Project and continue until the earlier of termination of Grower's Interest, and 30 June 2022 (clause 3).

36. In summary, the Land Use Agreement also sets out provisions relating to:

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the obligations and rights of Grower's and Grower's ability to delegate (clause 4);

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Manager's obligations to provide the Grower with access to the Grower's Nutlot (clause 5);

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Manager's responsibility to obtain relevant approvals (clause 6);

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the amount and timing of licence fees payable by the Grower (clause 7); and

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procedures following termination of agreement by the Grower or Manager (clause 8).

Management Agreement

37. A Grower will engage OPL as an independent contractor to manage the Nutlot on the terms and conditions contained in the agreement.

38. OPL must conduct the establishment services on behalf of the Grower which are usually necessary for establishing a macadamia nut plantation on the Grower's Nutlot. The Manager must carry out those duties in accordance with sound horticultural and environmental practices for similar macadamia nut plantations.

39. OPL must perform the establishment duties under clause 4.1 during the period from the commencement date of the agreement until 31 May 2006 (clause 4.2).

40. OPL is responsible for the initial landcare services that relate to the Grower's Nutlot. The Manager must perform these duties under clause 5.1 from the commencement date of the agreement until 31 May 2006 (clause 5.2).

41. OPL must also provide initial management duties which include managing and maintaining the Grower's Nutlot during the Initial Management Period. OPL's duties under clause 6.1 must be carried out by 30 June 2006 (clause 6.3).

42. During each subsequent financial year of the Project OPL will provide the ongoing management services, listed in clause 6.2(a) to (dd) which include harvesting the Grower's Produce on a nut in shell basis, transfer the harvested Grower's Produce to available facilities for processing undertake any necessary marketing services and negotiate terms of sale.

43. A Grower is entitled to receive proceeds of sale of the accumulated macadamia nuts sold on a pro-rata basis according to the Grower's Nutlots contribution to the produce (clause 6.4(b)).

Operations Agreement - Establishment and Landcare Services

44. The Manager engages OPP to establish a macadamia plantation. OPP will provide Establishment Services on the Land. The Establishment Services include the sourcing and acquiring tree seedlings, preparing the Land, and planting the optimum number of Trees on the Land.

45. OPP will conduct the Establishment Services in accordance with sound horticultural and environmental practices and industry practice for similar macadamia nut plantations.

46. OPP will also provide Landcare Services as referred to in Item 4 of Schedule 3 which include constructing drainage works, erosion control earthworks and eradicating plant growth detrimental to the Land.

47. All the Establishment Services and Landcare Services will be performed by 31 May 2006.

48. OPP will replace and replant the Trees which fail in the first two years after planting except due to an Uncontrolled Event.

Pooling of amounts and distribution of Proceeds

49. The Management Agreement (clause 6.4) and Constitution (clause 15) set out provisions relating to the pooling of amounts from the sale of the Growers Produce and the distribution of Proceeds from that sale or from insurance proceeds. This Product Ruling only applies where the following principles apply to those pooling and distribution arrangements:

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only Growers who have contributed Grower Produce or insurance proceeds to the pool making up the Proceeds are entitled to benefit from distributions from those Proceeds; and

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any pools of macadamia nuts or other Proceeds must consist only of Grower Produce or other Proceeds contributed by Growers in the Oxley Plantations Macadamia Project 2006.

Fees

50. A Grower will pay the fees and charges per Nutlot , set out in clause 7 of the Management Agreement and the licence fee, set out in clause 7 of the Land Use Agreement. These are as follows: Management Agreement

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$770 is payable upon Application for establishment duties to be provided in the period from the commencement date to 31 May 2006;

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$258.50 is payable upon Application for initial landcare duties to be provided in the period from the commencement date to 31 May 2006;

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$3, 929.20 is payable upon Application for initial management duties to be provided in the period from the commencement date to 30 June 2006;

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$1, 155 for ongoing management duties in the period from 1 July 2006 to 30 June 2007, payable on 1 December 2006, plus 8.25 % of the Gross Harvest Proceeds of the sale of nut in shell received and payable from the Gross Harvest Proceeds attributable to the Grower's Produce; and

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estimated operating costs to properly operate the Nutlot for the ongoing management duties from 1 July 2007 to the termination of the Project plus $82.50 increased in accordance with Consumer Price Index movements from 1 July 2010 plus 8.25% of the Gross Harvest Proceeds of the sale of nut in shell received and payable from the Gross Harvest Proceeds attributable to the Grower's Produce.

Land Use Agreement

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$173.80 for a licence fee payable on Application for the period from the commencement date until 30 June 2006; and

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$272.80 for a licence fee payable from Net Proceeds for each Year of the Project within 28 days of receipt by the Manager of the Gross Harvest Proceeds, and increased in accordance with Consumer Price Index movements from 1 July 2010.

51. From the 2008 Year, the Manager will undertake an annual reconciliation of the operating costs at the end of each financial year to ensure the amount received by the Manager is equal to the actual operating costs to properly manage, maintain and harvest the Nutlot, and market the Grower's Produce (clause 7.4(c)).

Finance

52. A Grower can fund their involvement in the Project themselves or borrow from an independent lender. This Ruling will not apply to a Grower who finances their participation in the Project through entities associated with the Project.

53. Where an application is accepted subject to finance approval by any lending institution, a Grower cannot rely on this Ruling if written evidence of that approval has not been given to the Manager by 15 May 2006. A Grower also cannot rely on this Product Ruling if Application Money's otherwise remain unpaid by 15 May 2006.

54. 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 of the ITAA 1936 or the funding arrangements transform the Project into a scheme to which Part IVA of the ITAA 1936 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, are involved or become involved in the provision of finance to Growers for the Project.

Ruling

Application of this Ruling

55. This Ruling applies only to a Grower who will be a wholesale client for the purposes of section 761G of the Corporations Act 2001 or will accept a personal offer within the meaning of section 1012E of the Corporations Act 2001 and who is accepted to participate in the Project and who has executed a Management Agreement and a Land Use Agreement on or before 15 May 2006.

Minimum subscription

56. 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 Information Statement, a Grower's application will not be accepted and the Project will not proceed until the minimum subscription of 300 Nutlots is achieved.

The Simplified Tax System (STS)

Division 328

57. To be an 'STS taxpayer' a Grower must be eligible to be an 'STS taxpayer' and must have elected to be an 'STS taxpayer' (Division 328). For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different under the STS where a Grower who was an 'STS taxpayer' prior to 1 July 2005 continues to use the cash accounting method (called the 'STS accounting method') - see sections 328-120 and 328-125 of the Income Tax (Transitional Provisions) Act 1997.

58. For such Growers, a reference in this Ruling to an amount being deductible when 'incurred' will mean that amount is deductible when paid and a reference to an amount being included in assessable income when 'derived' will mean that amount is included in assessable income when received.

25% entrepreneurs tax offset

Subdivision 61-J

59. For the first income year starting on or after 1 July 2005, Subdivision 61-J provides for a tax offset of up to 25% of income tax liability related to the business income of a business in the STS with annual group turnover of less than $75,000. Entitlement to the offset varies depending on the type of entity and is therefore outside the scope of this Ruling.

Assessable income

Section 6-5

60. 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.

Trading stock

Section 70-35

61. A Grower who is not an 'STS taxpayer' may, in some years, hold nuts in shell produce 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.

62. 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.

Section 328-285

63. A Grower who is an 'STS taxpayer' may, in some years, hold nuts in shell 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)).

64. 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 and licence fee

Section 8-1

65. A Grower who is accepted to participate in the Project on or before 15 May 2006 may claim deductions, on a per Nutlot basis, for the following expenditure set out in the Table below.

Notes:

(i)

If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted.

(ii)

The management fees and the licence fee shown in the Management Agreement and the Land Use Agreement are deductible in the year that they are incurred.

(iii)

This Ruling does not apply to Growers who choose to prepay management or licence fee (see paragraphs 90 to 94). Amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in sections 82KZME to 82KZMF of the ITAA 1936. Any Grower who prepays such amounts may request a private ruling on the taxation consequences of their participation in the Project.

(iv)

The licence fee included in the initial subscription of $173.80 payable on application is not fully deductible. An amount of $14.48 per month or part thereof, for the period from the commencement date to 30 June 2006 will be deductible in the year ended 30 June 2006.

Deductions for capital expenditure (non-'STS taxpayers')

Division 40

66. A Grower who is not an 'STS taxpayer' will also be entitled to tax deductions relating to the landcare operations and macadamia trees. All deductions shown in the following Table are determined under Division 40.

Notes:

(v)

If the Grower is registered or required to be registered for GST, amounts of capital expenditure would need to be adjusted for GST.

(vi)

Any capital expenditure incurred for a landcare operation (as defined in section 40-635) is fully deductible in the year it is incurred under Subdivision 40-G, section 40-630.

(vii)

Macadamia trees are a 'horticultural plant' as defined in subsection 40-520(2). As Growers hold the land under a licence, one of the conditions in 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 macadamia trees 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 macadamia trees 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 macadamia trees enter their first commercial season (section 40-530, item 2). The Manager will inform Growers of when the macadamia trees enter their first commercial season.

Deductions for capital expenditure ('STS taxpayers')

Subdivision 328-D and Subdivisions 40-F and 40-G

67. A Grower who is an 'STS taxpayer' will also be entitled to tax deductions relating to landcare operation and macadamia trees. Deductions relating to the cost of landcare operations must be determined under Subdivision 40-G. Deductions for the macadamia trees must be determined under Subdivision 40-F.

68. 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 'landcare operation' 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 (ix).

Notes:

(viii)

If the Grower is registered or required to be registered for GST, amounts of capital expenditure would need to be adjusted for GST.

(ix)

Any capital expenditure incurred for a 'landcare operation' (as defined in section 40-635) is fully deductible in the year it is incurred under Subdivision 40-G, section 40-630. 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-G (although expenditure on some items of plant can only be deducted under Division 328). 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 $1,000, 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 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', the expenditure is fully deductible under Subdivision 40-G.

(x)

Macadamia trees are a 'horticultural plant' as defined in subsection 40-520(2). As Growers hold the land under a licence, one of the conditions in 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 macadamia trees 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 macadamia trees 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 macadamia trees enter their first commercial season (section 40-530, item 2). The Manager will inform Growers of when the Trees enter their first commercial season.

Tax outcomes for all Growers

Interest

69. 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 94 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 - exercise of Commissioner's discretion

70. A Grower who is an individual accepted into the Project by 15 May 2006 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for these Growers for the income years ending 30 June 2006 to 30 June 2008 . This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise.

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

71. For a Grower who participates in the Project and incurs expenditure as required by the Management Agreement and the Land Use 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 to 82KZMF (but see paragraph 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.

Commissioner of Taxation
15 March 2006

Appendix 1 - Explanation

Is the Grower carrying on a business?

72. For the amounts set out in the Tables above to constitute allowable deductions the Grower's horticultural activities as a participant in the Oxley Plantations Macadamia Project 2006 must amount to the carrying on of a business of primary production.

73. Where there is a business, or a future business, the gross proceeds from the sale of the nuts in shell will constitute gross assessable income in their own right. The generation of 'business income' from such a business, or future business, provides the backdrop against which to judge whether the outgoings in question have the requisite connection with the operations that more directly gain or produce this income.

74. For schemes such as that of the Oxley Plantations Macadamia Project 2006, 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 Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55.

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

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the Grower has an identifiable interest in land rights over the land (by licence) on which the Grower's macadamia trees are established;

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the Grower has a right to harvest and sell the nuts in shell from those macadamia trees;

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

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

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

76. In this Project, each Grower enters into a Management Agreement and Land Use Agreement.

77. Under the Land Use Agreement each individual Grower will have rights over a specific and identifiable area of 0.10 hectares of land. The Land Use Agreement provides the Grower with an ongoing interest in the specific Trees on the licenced area for the Term of the Project. Under the Land Use Agreement the Grower must use the land in question for the purpose of carrying out horticulture activities, and for no other purpose. The Land Use Agreement allows the Manager to come onto to the land to carry out its obligations under the Management Agreement.

78. Under the Management Agreement the Manager is engaged by the Grower to establish, cultivate and maintain the Trees on the Grower's identifiable area of land during the Term of the Project.

79. The Manager is also engaged to harvest and sell, on the Grower's behalf, the nuts in shell grown on the Grower's macadamia trees.

80. 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.

81. 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 the nuts in shell that will return a before-tax profit, that is, a profit in cash terms that does not depend in its calculation on the fees in question being allowed as a deduction.

82. The pooling of nuts in shell from macadamia trees grown on the Grower's Nutlot with the nuts in shell of other Growers is consistent with general horticultural practices. Each Grower's proportionate share of the sale proceeds of the pooled nuts in shell will reflect the proportion of the macadamia trees contributed from their Nutlot.

83. The Manager's services are also consistent with general horticultural practices. They are of the type ordinarily found in horticulture ventures that would commonly be said to be businesses. While the size of a Nutlot is relatively small, it is of a size and scale to allow it to be commercially viable.

84. The Grower's degree of control over the Manager as evidenced by the Management Agreement. During the Term of the Project, the Manager will provide the Grower with regular progress reports on the Grower's Nutlot and the activities carried out on the Grower's behalf. Growers are able to terminate arrangements with the Manager in certain instances, such as cases of default or neglect.

85. The horticulture 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 horticultural activities in the Oxley Plantations Macadamia Project 2006 will constitute the carrying on of a business.

The Simplified Tax System

Division 328

86. 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.

87. The question of whether a Grower is eligible to be an 'STS taxpayer' is outside the scope of this Product Ruling (but refer to Taxation Ruling TR 2002/6 and Taxation Ruling TR 2002/11). 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 and licence fee

Section 8-1

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

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

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

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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.

89. The management and licence fee associated with the horticulture activities will relate to the gaining of income from the Grower's business of horticulture (see above), and hence have a sufficient connection to the operations by which income (from the harvesting and sale of nuts in shell) 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 scheme. 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.

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 (for example, the performance of management services or the leasing 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.

Application of the prepayment provisions to this Project

91. Under the scheme to which this Product Ruling applies management and licence fee are incurred annually. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme.

92. A Grower who is an 'STS taxpayer' who continues to use the 'STS accounting method' can, therefore, claim a deduction for each of the relevant amounts in the income year in which the amount is paid. A Grower who is not an 'STS taxpayer' using the 'STS accounting method' can claim a deduction for each of the relevant amounts in the income year in which the fee is incurred.

93. However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays all or some of the expenditure payable under the Management Agreement and/or the Land Use Agreement or prepays interest under any loan agreement. Where such a prepayment is made these prepayment provisions will also apply to 'STS taxpayers' because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF.

94. As noted in the Ruling section above, Growers who prepay management and licence fees or interest are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project.

Expenditure of a capital nature

Division 40

95. 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 the establishment of the macadamia trees is of a capital nature. This expenditure falls for consideration under Division 40.

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

Section 35-55 - exercise of Commissioner's discretion

96. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years 30 June 2006 to 30 June 2008 the Commissioner has applied the principles set out in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses. Accordingly, based on the evidence supplied, the Commissioner has determined that for those income years ended 30 June 2006 up to and including 30 June 2008:

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it is because of its nature the business activity of a Grower will not satisfy one of the four tests in Division 35;

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there is an objective expectation that within a period that is commercially viable for the macadamia industry, a Grower's business activity will satisfy one of the four tests set out in Division 35 or produce a taxation profit; and

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a Grower who would otherwise be required to defer a loss arising from their participation in the Project under subsection 35-10(2) until a later income year is able to offset that loss against their other assessable income.

97. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances.

Section 82KL - recouped expenditure

98. The operation of section 82KL of the ITAA 1936 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

99. For Part IVA of the ITAA 1936 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).

100. The Oxley Plantations Macadamia Project 2006 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 65 to 71 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.

101. 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 the nuts in shell. 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) of the ITAA 1936 it cannot be concluded, on the information available, that participants will enter into the scheme for the dominant purpose of obtaining a tax benefit.

Appendix 2 - Detailed contents list

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

Not previously issued as a draft

References

ATO references:
NO 2006/4074

Related Rulings/Determinations:

TD 93/34
TR 92/20
TR 97/11
TR 98/22
TR 2000/8
TR 2001/14
TR 2002/6
TR 2002/11

Subject References:
carrying on a business
commencement of business
fee expenses
interest expenses
management fees
non-commercial losses
producing assessable income
product rulings
public rulings
tax avoidance
tax benefits under tax avoidance schemes
tax shelters
tax shelters project
taxation administration

Legislative References:
ITAA 1936 82KL
ITAA 1936 Pt III Div 3 Subdiv H
ITAA 1936 82KZL
ITAA 1936 82KZM
ITAA 1936 82KZMA
ITAA 1936 82KZMB
ITAA 1936 82KZMC
ITAA 1936 82KZMD
ITAA 1936 82KZME
ITAA 1936 82KZMF
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 35-55
ITAA 1997 35-55(1)(b)
ITAA 1997 Div 40
ITAA 1997 Subdiv 40-F
ITAA 1997 40-515(1)(b)
ITAA 1997 40-520(2)
ITAA 1997 40-525(2)
ITAA 1997 40-530
ITAA 1997 40-545
ITAA 1997 Subdiv 40-G
ITAA 1997 40-630
ITAA 1997 40-635
ITAA 1997 Subdiv 61-J
ITAA 1997 Div 70
ITAA 1997 70-35
ITAA 1997 Div 328
ITAA 1997 Subdiv 328-D
ITAA 1997 328-285(2)
ITAA 1997 Subdiv 328-F
ITAA 1997 Subdiv 328-G
IT(TP)A 1997 Div 328
IT(TP)A 1997 328-120
IT(TP)A 1997 328-125
TAA 1953
Copyright Act 1968
Corporations Act 2001

Case References:
Commissioner of Taxation v. Lau
(1984) 6 FCR 202
84 ATC 4929
(1984) 16 ATR 55