Product Ruling

PR 2007/56

Income tax: Barossa Vines Project 2007 - Applicant Group 2

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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 Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. In this Product Ruling this scheme is referred to as the Barossa Vines Project 2007 or simply as 'the Project'.

Class of entities

2. This part of the Product Ruling specifies which entities can rely on the tax benefits set out in the Ruling section of this Product Ruling and which entities cannot rely on those tax benefits.

3. The class of entities who can rely on those tax benefits are referred to as Growers. Growers will be those in Applicant Group 2 who apply for an interest in the Project after the date of this Ruling or before 30 November 2007, and whose applications are accepted by the Responsible Entity on or after 1 July 2007 . They have executed the relevant Project Agreements set out in paragraph 31 of this Ruling. They must 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.

4. The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who:

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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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are accepted into this Project before the date of this Ruling or after 30 November 2007;

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participate in the scheme through offers made other than through the Prospectus & Product Disclosure Statement (PDS);

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who enter into finance arrangements with entities associated with this Project, other than those specified in paragraphs 84 to 99 of this Ruling; or

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have their application conditionally accepted by the Responsible Entity subject to finance from:

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MI Professional Funding Pty Ltd; or

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The Responsible Entity under the Loan Agreement for Terms Payment Option,

for the payment of the initial fee, where the funds have not been made available to the Responsible Entity by 15 December 2007.

Superannuation Industry (Supervision) Act 1993

5. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Tax Office gives no assurance that the product is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this product may contravene the provisions of SISA 1993.

Qualifications

6. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 31 to 99 of this Ruling.

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

•

this Product 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 Product Ruling may be withdrawn or modified.

8. 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

9. This Product Ruling applies prospectively from 6 June 2007, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme after the date of this Ruling or before 30 November 2007, being the closing date for entry into the scheme, and whose applications are accepted by the Responsible Entity on or after 1 July 2007 . This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2010.

10. However the Product Ruling only applies to the extent that:

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there is no change in the scheme or in the entity's involvement in the scheme;

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it is not later withdrawn by notice in the Gazette; or

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the relevant provisions are not amended.

11. If this Product Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)).

12. If this Product Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met:

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the income year or other period to which the rulings relate has not begun; and

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the scheme to which the rulings relate has not begun to be carried out.

13. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA).

Changes in the law

14. Although this Product Ruling deals with the laws enacted at the time it was issued, later amendments to the law may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to the extent of those amendments this Product Ruling will be superseded.

15. Entities who are considering participating in the scheme 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

16. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes 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 Product Ruling is issued.

Goods and Services Tax

17. All fees and expenditure referred to in this Product 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.

Ruling

Application of this Ruling

18. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 31 to 99 of this Ruling.

19. The Grower's participation in the Project must constitute the carrying on of business of primary production. Provided the Project is carried out as described below, the Grower's business of primary production will commence at the time of execution of their Licence Agreements and Management Agreement.

Minimum subscription

20. 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 PDS, a Grower's application will not be accepted and the Project will not proceed until the minimum subscription of 100 interests is achieved.

The Simplified Tax System (STS)

Division 328

21. 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 of the ITAA 1997). For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different depending on whether the Grower was an STS taxpayer prior to 1 July 2005 and 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.

22. 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

23. 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 and section 17-5

24. 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.

Deductions for Management Fees, Vineyard Operating Costs, Licence Fees, and interest on loans with the Preferred Financier

Section 8-1 and Division 27

25. A Grower may claim tax deductions for the following fees and expenses on a per Vineyard Lot basis, as 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 as relevant for GST (for example, input tax credits): Division 27.

(ii)

The Licence Fees and the Vineyard Operating Costs are deductible under section 8-1 in the income year that the relevant fee is incurred. For the year ending 30 June 2010 the Responsible Entity will advise each Grower of the amount to be paid.

For the year ended 30 June 2008, the Licence Fee is $11 per month or part thereof, for the period from the date the Grower is accepted into the Project (Commencement Date) to 30 June 2008.

(iii)

This Ruling does not apply to Growers who choose to prepay fees or who choose, or who are required to prepay interest under a loan agreement (see paragraphs 111 to 115 of this Ruling). Subject to certain exclusions, 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 and 82KZMF of the Income Tax Assessment Act 1936 (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 deductibility or otherwise of interest arising from agreements entered into with financiers other than the Preferred Financier, is outside the scope of this Ruling. Prepayments of interest to any lender, including the Preferred Financier, are not covered by this Product Ruling. Growers who enter into agreements with other financiers and/or prepay interest may request a private ruling on the deductibility of the interest incurred.

Deductions for capital expenditure

Division 40 and Subdivision 328-D

26. A Grower may claim tax deductions for the following capital expenses on a per Vineyard Lot basis:

Notes:

(v)

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

Growers can either self-assess the effective life (section 40-105) or use the Commissioner's determination of effective life (section 40-100). The Commissioner has determined that trellising has an effective life of 20 years. For Growers who are accepted into the Project after 30 June 2007, the trellising will be installed and first used during the year ended 30 June 2008.

For a Grower who purchases one or two Vineyard Lots in this Project, their interest in the trellising will be a 'low cost asset' that is, 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.

(vi)

For STS taxpayers 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 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 and the asset is a 'low cost asset'.

Where a Grower acquires more than two Interests , the Grower's interest in the trellising may not be a low cost asset as the cost may 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 2008 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 financial year ending 30 June 2008 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.

(vii)

For non-STS taxpayers an 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 for water facilities is available under Subdivision 40-F, paragraph 40-515(1)(a). This deduction is equal to one-third of the capital expenditure of $302 per Vineyard Lot 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).

(viii)

For STS taxpayers, if the expenditure is on a 'depreciating asset' and the cost apportionable to that depreciating asset is less than $1,000, the asset is treated as a 'low-cost asset' and that amount is deductible in full when the asset is first used or held ready for use. This is 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 asset is not treated as a low-cost asset, the tax deduction allowable in the year ending 30 June 2008 is determined by multiplying its cost by half the relevant STS pool rate, that is, by 15%. At the end of the year, it is allocated to the relevant STS pool and in subsequent years the full pool rate of 30% will apply.

If the Grower chooses to use Subdivision 40-F, the deductions are claimed under paragraph 40-515(1)(a). The deduction is equal to one third of the capital expenditure incurred by the 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)

The Grapevines meet the definition of 'horticultural plant' 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 the decline in value of horticultural plants is available under paragraph 40-515(1)(b).

The deduction for the Grapevines is determined using the formula in section 40-545 and is based on the capital expenditure of $121 per Vineyard Lot 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% per annum. 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.

Shares

27. The shares in Barossa Vines Landholding Ltd are CGT assets (section 108-5) and the amounts paid by a Grower to acquire the shares are an outgoing of capital and not allowable as a deduction.

28. 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.

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

Section 35-55 - exercise of Commissioner's discretion

29. A Grower who is an individual accepted into the Project in the year ended 30 June 2007 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 Growers for the income years ended 30 June 2008 to 30 June 2011 . 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.

Prepayment provisions and anti-avoidance provisions

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

30. For a Grower who commences participation in the Project and incurs expenditure as required by the Licence Agreements and Management Agreement, the following provisions of the ITAA 1936 have application as indicated:

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expenditure by a Grower does not fall within the scope of sections 82KZME and 82KZMF (but see paragraphs 113 to 115 of this Ruling);

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

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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.

Scheme

31. 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 received on 7 September 2006 as constituted by the following documents and additional correspondence, including emails, received 27 and 29 September 2006, 15, 21 and 22 December 2006, 20 February 2007, 13, 16, 20, 23 and 29 March 2007;

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Prospectus & Product Disclosure Statement of the Barossa Vines Project 2007 dated 24 January 2007;

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Constitution of the Barossa Vines Project 2007 received 29 March 2007;

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Licence Agreement No. 1 (Commencement Date to 30 June 2012 ) of the Barossa Vines Project 2007, between Barossa Vines Ltd (Licensor) and the Grower received 29 March 2007;

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Licence Agreement No 2 (1 July 2012 to 30 June 2017 ) of the Barossa Vines Project 2007, between Barossa Vines Ltd and the Grower received 29 March 2007;

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Licence Agreement No 3 (1 July 2017 to 30 June 2022 ) of the Barossa Vines Project 2007, between Barossa Vines Ltd and the Grower received 29 March 2007;

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Draft Memorandum Of Lease (Sturt Highway Block) between Barossa Vines Landholding Ltd (Landholder and Lessor) and Barossa Vines Ltd (Lessee) received 15 December 2006;

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Draft Memorandum Of Lease (Eckermann Block) between Barossa Vines Landholding Ltd ('Landholder' and 'Lessor') and Barossa Vines Ltd ('Lessee') received 22 March 2007;

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Management Agreement of the Barossa Vines Project 2007 between Barossa Vines Ltd (Responsible Entity) and the Grower received 29 March 2007;

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Draft Assignment of Licence Agreement of the Barossa Vines Project 2007, between the Assignor, the Assignee and Barossa Vines Ltd received 7 September 2006;

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Draft Assignment of Management Agreement of the Barossa Vines Project 2007, between the Assignor, the Assignee and Barossa Vines Ltd received 7 September 2006;

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Compliance Plan for the Barossa Vines Project 2007 received 7 September 2006;

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Viticultural Report for the Barossa Vines Project 2007 received 22 March 2007;

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Vineyard Management Agreement of the Barossa Vines Project 2007, between the Responsible Entity and Agribusiness Services Pty Ltd (Vineyard Manager) received 16 March 2007;

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Letter between Preferred Financier and Responsible Entity dated 16 March 2007;

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Loan Agreement for Terms Payment Option - 12 months only , received 20 February 2007; and

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Draft Application for Term Finance for the Preferred Financier, received 20 February 2007.

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

32. The documents highlighted are those that a Grower 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 a Grower, or any associate of a Grower, will be a party to, which are a part of the scheme.

33. All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements.

Overview

34. The main features of the Project are as follows:

35. The Project will be a registered managed investment scheme under the Corporations Act 2001. Barossa Vines Ltd has been issued with an Australian Financial Service Licence No. 227136 and will be the Responsible Entity for the Project.

36. The Project will involve the applicants or 'Growers', establishing and maintaining a vineyard, for the purpose of producing wine grapes for sale.

37. An offer to participate in the Project will be made through a combined Prospectus & PDS. The offer under the PDS is for 90 hectares, which corresponds to 1,800 Vineyard Lots in the Project. In addition, the offer is for shares in the 'Landholder', Barossa Vines Landholdings Ltd.

38. A Grower that participates in the Project will do so by acquiring an interest in the Project, which will consist of a minimum of one Vineyard Lot each of 0.05 hectares in size. The Grower must also subscribe for one 'D' class share in the Landholder, for each Vineyard Lot they acquire.

39. Applicants execute a Power of Attorney contained in the PDS. The Power of Attorney irrevocably appoints Responsible Entity to enter into, on behalf of the Grower, the Licence Agreements, the Management Agreement and the application for shares in the Landholder.

40. For the purposes of this Ruling, Applicants who apply after the date of this Ruling and are accepted to participate in the Project on or after 1 July 2007, and who execute the relevant agreements on or before 30 November 2007 will become 'Applicant Group 2' Growers.

41. Under terms of the PDS, the interests in the Growers' Vineyard Lots will be issued after a minimum subscription of 100 Vineyard Lots has been achieved.

42. The Responsible Entity is currently leasing Land for the Project within the Barossa Valley, South Australia. Specifically, it is described as:

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Eckermann block - the whole of land comprised in Certificate of Title Register Book Volume 5966 Folio 906, comprising 84.62 hectares of which approximately 74.86 hectares is planned to be the area of vineyard; and

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Sturt Highway block - the portion of land comprised in Certificate of Title Register Book Volume 5466 Folio 479 (the portion comprising of approximately 15 hectares) all of which are planned to be the area of the vineyard.

43. This Land will be divided into 0.05 hectare Vineyard Lots and licensed to the Growers accepted in the Project.

44. Water for the Eckermann Road block will be obtained from an existing 50 megalitre (Ml) dam and is supplied from the regional irrigation water infrastructure. Water for the Sturt Highway block will be obtained from a dam with minimum 100 Ml storage capacity currently under construction. This information is detailed in the PDS under the heading Viticultural Report.

Constitution

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

46. In order to acquire an interest in the Project, the Grower must make an Application for Vineyard Lots in accordance with clause 7. Among other things, the Application must be completed in a form approved by the Responsible Entity, signed by or on behalf of the Applicant, lodged at the registered office, or such other place as the Responsible Entity will from time to time determine and accompanied by payment of the Application Fee in a form acceptable to the Responsible Entity.

47. Under clause 7.11 of the Constitution, the Responsible Entity holds the Application Fee on trust. The Responsible Entity will deposit all Application Fees received from applicants in a Project bank account.

48. Once the Responsible Entity has accepted the Application and all of the Project documents have been executed and remain in force (clause 7.14) the Application Fee may be transferred and applied against the fees due to the Responsible Entity (clause 7.15).

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

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Fees and expenses (clause 4);

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Gross Proceeds (clause 13);

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Register of Growers (clause 14); and

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Insurance (clause 17).

Compliance Plan

50. 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.

Leases

51. Under the Memorandums of Lease, Barossa Vines Landholding Ltd (the 'Lessor') leases the Project Land to the Responsible Entity. The Lessor agrees the Responsible Entity may licence the land or portions of the land without the consent of the Lessor. Also, the Lessor agrees to provide, at the Lessor's cost, an adequate water supply to enable the Responsible Entity to irrigate the vineyards on the leased land.

Licence Agreements

52. The Responsible Entity, as Licensor, grants a licence to the Grower for a portion of the Project Land, the Grower's Vineyard Lot, for the purpose of establishing and maintaining a vineyard and subsequently to harvest and sell grapes. The terms and conditions under which the licence of the Vineyard Lot is granted to the Grower are contained in the Licence Agreements.

53. Each Grower will enter into three consecutive Licence Agreements with the Licensor. The first Licence Agreement takes effect from the Commencement Date until 30 June 2012, the second Licence Agreement will be in effect from 1 July 2012 to 30 June 2017 and the third Licence Agreement will be in effect from 1 July 2017 to 30 June 2022. The Commencement Date is the date the Grower is accepted into the Project.

Management Agreement

54. Each Grower enters into a Management Agreement with the Responsible Entity, contracting the Responsible Entity to establish, manage and maintain the Grower's Vineyard Lot in accordance with good viticultural practices.

55. During the Establishment Period, the Responsible Entity will carry out the following activities to establish the vineyard on behalf of the Grower:

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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 (the PDS states that the Responsible Entity will plant approximately 93 rootlings per Vineyard lot, that is, 1,860 per hectare);

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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 (clause 2).

56. The Responsible Entity will provide initial management services during the Establishment Period. These services include:

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eradicating vermin;

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fertilising;

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controlling diseases;

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regular inspection of trellising, irrigation and Grapevines; and

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providing any other services incidental to conduct of the Grower's Business, including engaging the services of an external viticultural consultant (clause 3 of the Management Agreement and clause 1.1 of the Vineyard Management Agreement).

57. The Establishment Period, for Growers in Applicant Group 2, is defined in the Management Agreement (clause 30) as from the Commencement Date to 1 January 2008.

58. After the Establishment period, the Responsible Entity will provide ongoing vineyard maintenance and management services for the term of the Project. These services 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;

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fertilising the Grower's Vineyard Lot as required 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 and replanting any of the Grapevine rootlings which dies at any time during the first 12 months following planting (clause 2.5) subject to clauses 2.6 and 2.7; and

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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 (clause 3).

59. The Responsible Entity will send a report to the Grower within 90 days of the end of each financial year containing information on matters considered material to the Grower's Business, including harvest and sales results, the Proceeds of Sale and the condition of the Grower's Vineyard Lot.

60. In addition, the Responsible Entity must ensure 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. This is provided cost of insuring the risk is reasonable. Each Grower will pay the Grower's Proportion of the Insurance Premiums or the premiums will be reimbursed 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

61. Under the Management Agreement, the Responsible Entity must harvest all of the mature Grapes grown on the Grower's Vineyard Lot (clause 5). The Responsible Entity will determine when the harvest will commence by assessing the maturity of the Grapes in accordance with good viticultural practices.

62. Harvesting may be done mechanically or by hand or a combination of both. Until sold, the Responsible Entity will use reasonable endeavours to store the Grapes so as to maintain their quality.

63. The costs of providing the harvesting services will be met from the Grower's payment of Harvesting Costs (clauses 9 and 12), which will be deducted from the Gross Proceeds.

Sale of Grapes

64. The Grower unconditionally appoints the Responsible Entity as its sole and exclusive agent to market and sell the Grapes, for the term of the Project (clause 6). The Grapes from each 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.

Vineyard Management Agreement

65. Under the Vineyard Management Agreement, the Responsible Entity will engage the Vineyard Manager, Agribusiness Services Pty Ltd, to establish the Growers' Vineyard Lots and to manage and maintain the Vineyard Lots on the terms and conditions contained in the Agreement. The Vineyard Manager will be subject to the direction of the Responsible Entity in all matters relating to the Vineyard Management Agreement.

66. The Vineyard Manager will perform services including planting and the installation of irrigation during the Establishment Period. After the Establishment Period the Vineyard Manager will provide Ongoing Services and Harvesting Services in relation to the Vineyard Lots.

Pooling of Crops and Grower's entitlement to proceeds

67. The Constitution sets out the circumstances relating to the pooling of Growers' produce and the distribution of proceeds from the sale of the produce. This Product Ruling only applies where the following principles apply to those pooling and distribution arrangements:

•

only Growers who have contributed produce from a harvest to a pool are entitled to benefit from distributions from the proceeds of sale; and

•

produce can only be pooled with the produce of Growers who are accepted to participate in the Project.

68. The Grower's share of the pool or Gross Proceeds is based on the proportion of the Vineyard Lots they licence in relation to total number of the Vineyard Lots licensed under the Project.

69. However, before the distribution, the proceeds will be reduced by any of the Grower's fees or costs payable under the Licence Agreements, Management Agreement or amounts payable by the Grower under the Constitution (clause 13.3 of the Constitution).

70. In the event that a Grower's Vineyard Lot(s) is destroyed or partially destroyed, the Grower's sale proceeds will be reduced in accordance with the terms of clause 13.3.6 of the Constitution.

Fees

71. Under the Management Agreement and the Licence Agreements the Grower is required to pay the following:

•

initial fees on application;

•

Vineyard Operating Costs;

•

annual Management Fees;

•

annual Licence Fees;

•

reimbursement of insurance costs; and

•

Harvesting Costs.

Initial Fees on Application

72. For each Grower, an initial Management Fee of $4,400 per Vineyard Lot, is payable on application. This Management Fee consists of:

•

$121 for initial planting and preparation, to be provided by 30 June 2008;

•

$358 for trellising to be provided by 30 June 2008;

•

$302 for installing irrigation to be provided by 30 June 2008; and

•

$3,619 for all other maintenance and management services to be provided by 30 June 2008 (clause 12 of the Management Agreement).

73. Also, on application a Licence Fee is payable of $11 for each month, or part thereof, for the period from the Commencement Date to 30 June 2008 (item 6 of Schedule 1 to the Licence Agreement No. 1).

Vineyard Operating Costs

74. The Vineyard Operating Costs for the financial years ending 30 June 2008 and 30 June 2009 are $330 per year. These amounts are payable by the Grower on 1 July on application and then on 1 July in the following financial year.

75. From 1 July 2009, Vineyard Operating Costs will be the actual direct costs incurred by the Vineyard Manager (on behalf of the Responsible Entity) in maintaining and managing the Grower's Vineyard Lot. These costs will be payable from the Grower's Gross Proceeds derived from the Project (item 6 of Schedule 1 to the Management Agreement and clause 9.7 of the Constitution).

Annual Management Fees

76. From 1 July 2009 until the end of the Project, the Management Fee will be an amount equal to 8.25% of the Grower's Proportion of the Gross Proceeds and will be deducted from these proceeds (item 5 of Schedule 1 to the Management Agreement and clause 13.3 of the Constitution).

Annual Licence Fees

77. The Licence Fees for the financial years ending 30 June 2009 and 30 June 2010 are $132 per year. These amounts are payable by the Grower on 1 July in each financial year. From 1 July 2008 the fees will be adjusted to reflect movements in the Consumer Price Index (CPI).

78. Commencing from 1 July 2010 until the end of the Project, the Licence Fees will be 2.75% of the Grower's Proportion of the Gross Proceeds and the fees will be deducted from these proceeds (item 6 of Schedule 1 to the Licence Agreement No. 1 and clause 13.3 of the Constitution).

Reimbursement of Insurance Costs

79. The Grower's Proportion of the cost of insurance taken out by the Responsible Entity on behalf of the Growers will be reimbursable to the Responsible Entity from the Grower's Gross Proceeds (clause 11 of the Management Agreement and clause 9.7 of the Constitution).

Harvesting Costs

80. Harvesting Costs will be deducted from the Grower's Proportion of the Gross Proceeds commencing on 1 July immediately following the first harvest and thereafter on 1 July immediately following each succeeding harvest (item 7 of Schedule 1 to the Management Agreement and clause 9.7 of the Constitution).

Fees and costs that are deducted from Gross Proceeds

81. The Gross Proceeds from the sale of the Grapes will be paid into a Gross Proceeds Account to be established by the Responsible Entity. From 1 July 2009 Vineyard Operating Costs, annual Management Fees, insurance costs and Harvesting Costs will be deducted from the Gross Proceeds before the proceeds are distributed to the Grower. From 1 July 2010, Licence Fees will also be deducted from these proceeds.

82. If Gross Proceeds are insufficient to pay any fees 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 years, 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

83. Each Grower must also subscribe for a share in the Landholder, Barossa Vines Landholding Ltd, for each Vineyard Lot. The cost of each share is $1,000 of which $1 is payable on application and $999 on 1 July 2012.

Finance

84. A Grower who does not pay the initial fee in full upon application can enter into a Terms Payment Option with the Responsible Entity; borrow from MI Professional Funding Pty Ltd as the Preferred Financier, or from an independent lender external to the Project.

85. Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with the Preferred Financier that materially differs from that set out in the documentation provided to the Tax Office with the application for this Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project other than the Preferred Financier may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling.

86. Growers cannot rely on any part of this Ruling if the initial fee is not paid in full on or before 30 November 2007 by the Grower or, on the Grower's behalf, by:

•

MI Professional Funding Pty Ltd; or

•

The Responsible Entity under the Loan Agreement for Terms Payment Option.

87. Where an application is accepted subject to finance approval by any lending institution other then MI Professional Funding Pty Ltd or the Responsible Entity under the Loan Agreement for Terms Payment Option, Growers cannot rely on this Ruling if written evidence of that approval has not been given to the Responsible Entity by the lending institution by 30 November 2007.

Loan Agreement for Terms Payment Option

88. Where the Responsible Entity accepts an application from a Grower to pay the initial fee under the 'Loan Agreement for Terms Payment Option', the amount is payable by twelve equal monthly instalments of $367.

89. The monthly instalments are paid by direct debit commencing on 31 December 2007. The full amount of the initial fees must be paid no later than 12 months from the date the Grower is accepted to participate in the Project.

90. If a Grower does not pay the required instalments under the terms payment option, the Responsible Entity will undertake action to recover the debt. The Responsible Entity may take legal proceedings to recover the amount due, including, resuming all rights and interest which the Grower has in their Vineyard Lot(s).

91. The Grower is liable for the stamp duty payable under this option.

92. The Responsible Entity will offer loans on a full-recourse commercial basis only to the extent it has funds available to lend to Growers.

Finance offered by the Preferred Financer

93. Subject to the terms and conditions of the Application for Term Finance a Grower can finance the cost of their initial fee by borrowing that amount from the Preferred Financier.

94. Subject to the Preferred Financier accepting the Grower's application, the Grower will be bound by the terms and conditions of the Term of Loan Deed.

95. The loans offered are:

Principal and interest loans

•

2 years of monthly principal and interest payments, with an interest rate of 10.5% per annum - variable;

•

3 years of monthly principal and interest payments, with an interest rate of 10.95% per annum - variable;

•

4 years of monthly principal and interest payments, with an interest rate of 10.95% per annum - variable;

•

5 years of monthly principal and interest payments, with an interest rate of 10.95% per annum - variable;

•

7 years of monthly principal and interest payments, with an interest rate of 11% per annum - variable; or

•

10 years of monthly principal and interest payments, with an interest rate of 11.5% per annum - variable.

Principal and interest loans that include an interest only period

•

1 year of monthly interest only payments, followed by 2 years of monthly principal and interest repayments with an interest rate of 10.95% per annum - variable;

•

2 years of monthly interest only payments, followed by 2 years of monthly principal and interest repayments with an interest rate of 10.95% per annum - variable;

•

2 years of monthly interest only payments, followed by 3 years of monthly principal and interest repayments with an interest rate of 10.95% per annum - variable;

•

3 years of monthly interest only payments, followed by 4 years of monthly principal and interest repayments with an interest rate of 11% per annum - variable; or

•

3 years of monthly interest only payments, followed by 7 years of monthly principal and interest repayments with an interest rate of 11.5% per annum - variable.

96. The repayments are due monthly in arrears over the term of the loan commencing on 31 January 2008.

97. There is no loan application fee.

98. The loan will be secured by a fixed charge over the Grower's right, title and interest in the Vineyard Lots and the Project documents. The loan is on a full recourse basis and recovery action will be taken in respect of any default.

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

•

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

•

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 of the ITAA 1936 or the funding arrangements transform the Project into a 'scheme' to which Part IVA of the ITAA 1936 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

•

entities associated with the Project, other than Barossa Vines Ltd or the Preferred Financier, are involved or become involved in the provision of finance to Growers for the Project.

Commissioner of Taxation
6 June 2007

Appendix 1 - Explanation

Is the Grower carrying on a business?

100. For the amounts set out in paragraphs 25 and 26 of this Ruling to constitute allowable deductions the Grower's viticultural activities as a participant in the Project must amount to the carrying on of a business of primary production.

101. Two Taxation Rulings are relevant in determining whether a Grower will be carrying on of a business of primary production.

102. The general indicators used by the Courts are set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

103. Taxation Ruling TR 2000/8 Income tax: investment schemes, particularly paragraph 89, is more specific to arrangements such as the Project. As Taxation Ruling TR 2000/8 sets out, the relevant principles have been established in court decisions such as Commissioner of Taxation v. Lau (1984) 6 FCR 202; 84 ATC 4929; (1984) 16 ATR 55.

104. Having applied these principles to the arrangement set out above, a Grower in the Project is accepted to be carrying on a business of growing and harvesting grapes for sale.

The Simplified Tax System

Division 328

105. 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.

106. Changes to the STS rules apply from 1 July 2005. 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.

Deductions for Management Fees, Vineyard Operating Costs, Licence Fees and interest on loans with the Preferred Financier

Section 8-1

107. The Management Fees, Vineyard Operating Costs and Licence Fees are deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and there is no capital component evident in the Management Fees, Vineyard Operating Costs and Licence Fees (see paragraphs 49 to 51 of TR 2000/8).

108. The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Provided that the prepayment provisions do not apply (see paragraphs 111 to 115 of this Ruling) a deduction for these amounts can be claimed in the year in which they are incurred (Note: The meaning of incurred is explained in Taxation Ruling TR 97/7).

109. Some Growers may finance their participation in the Project through a Loan Agreement with the Preferred Financier. Applying the same principles as that used for the Management Fees, Vineyard Operating Costs and Licence Fees, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1.

110. Other than where the prepayment provisions apply (see paragraphs 111 to 115 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred.

Prepayment provisions

Sections 82KZL to 82KZMF

111. 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.

112. For this Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions).

Application of the prepayment provisions to this Project

113. Under the scheme to which this Product Ruling applies Management Fees, Vineyard Operating Costs and Licence Fees are incurred annually and the interest payable to the Preferred Financier is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this scheme.

114. 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 Licence Agreements and/or Management Agreement, or prepays interest under a loan agreement (including loan agreements with lenders other than the Preferred Financier). 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.

115. As noted in the Ruling section above, Growers who prepay 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 and Division 328

116. 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, irrigation and the establishment of the Grapevines is of a capital nature. This expenditure falls for consideration under Division 40 or Division 328. 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. The tax treatment of capital expenditure has been dealt with in a representative way in paragraphs 26 to 28 of this Ruling.

Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion

117. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the years ending 30 June 2008 to 30 June 2011, the Commissioner has determined that for those income years:

•

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

•

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

118. 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.

119. 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

120. 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 of the ITAA 1936. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997.

Part IVA - general tax avoidance provisions

121. 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).

122. The Project 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 25 to 26 of this Ruling 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.

123. 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 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) 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

124. The following is a detailed contents list for this Ruling:

Not previously issued as a draft

References

ATO references:
NO 2006/26460

Related Rulings/Determinations:

TR 97/7
TR 97/11
TR 98/22
TR 2000/8
TR 2002/6
TR 2002/11

Subject References:
carrying on a business
commencement of business
fee expenses
irrigation expenses
management fees expenses
non-commercial losses
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

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 40-70(1)
ITAA 1997 40-75(1)
ITAA 1997 40-100
ITAA 1997 40-105
ITAA 1997 40-440
ITAA 1997 Subdiv 40-F
ITAA 1997 40-515(1)(a)
ITAA 1997 40-515(1)(b)
ITAA 1997 40-520(1)
ITAA 1997 40-525(2)
ITAA 1997 40-530
ITAA 1997 40-540
ITAA 1997 40-545
ITAA 1997 Subdiv 61-J
ITAA 1997 108-5
ITAA 1997 110-25(2)
ITAA 1997 Div 328
ITAA 1997 Subdiv 328-D
ITAA 1997 Subdiv 328-F
ITAA 1997 Subdiv 328-G
IT(TP)A 1997 328-120
IT(TP)A 1997 328-125
TAA 1953
TAA 1953 Sch 1 357-75(1)
Copyright Act 1968
Corporations Act 2001
SISA 1993

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