Product Ruling

PR 2009/50

Income tax: Rewards Group Premium Timber Project 2009 - Late Growers

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No guarantee of commercial success

The Commissioner does not sanction or guarantee this product. Further, the Commissioner gives 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. The Commissioner recommends 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.

Terms of use of this Product Ruling

This Product Ruling has been given on the basis that the entity(s) who applied for the Product 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 Product Ruling.

What this Ruling is about

1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. In this Product Ruling this scheme is referred to as the 'Rewards Group Premium Timber Project 2009 - Late Growers', or simply as 'the Project'.

2. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Ruling, terms defined in the Project agreements have been capitalised.

Class of entities

3. This part of the Product Ruling specifies which entities;

•

are subject to the taxation obligations; and

•

can rely on the taxation benefits;

set out in the Ruling section of this Product Ruling.

4. The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers.

5. Growers are those entities that:

•

meet the definition of 'initial participant' in subsection 394-15(5); and

•

are accepted to take part in the scheme specified below on or after the date this Product Ruling is made.

6. A Grower will have executed the relevant Project Agreements set out in paragraph 42 of this Ruling between the date of this Ruling and 31 December 2009 inclusive and will hold a 'forestry interest' in the Project.

7. The class of entities who can rely on this Product Ruling does not include:

•

Growers who are accepted into this Project before the date of this Ruling or after 31 December 2009;

•

Growers who participate in the scheme through offers made other than through the Supplementary Product Disclosure Statement;

•

Growers whose Application Fees, including all loan moneys, are not paid in full to Rewards Projects Ltd by 31 December 2009, either by the Grower and/or on the Grower's behalf by a lending institution; or

•

Growers who enter into finance agreements with QPR Capital Finance Pty Ltd (QPR) outside the terms specified in paragraphs 81 to 85 of this Ruling.

Superannuation Industry (Supervision) Act 1993

8. 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

9. 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 42 to 85 of this Ruling.

10. 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

•

this Product 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

Copyright Law Branch

Attorney-General's Department

National Circuit

Barton ACT 2600

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

Date of effect

12. This Product Ruling applies prospectively from 23 September 2009, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 23 September 2009 until 31 December 2009 being the closing date for entry into the scheme. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for all income years up to the income year in which the scheme is terminated in accordance with the Project Replacement Constitution.

13. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme.

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 any creditable acquisition that it makes, it must be registered or required to be registered for GST and hold a valid tax invoice.

Ruling

Structure of the Project

18. The Project is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is the establishment and tending of Sandalwood and Teak Trees for felling in Australia.

19. Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for an 'initial participant'^[1] in the defined class of entities (see paragraphs 4 to 7 of this Ruling) who is accepted to participate in the 'forestry managed investment scheme' described at paragraphs 42 to 84 of this Ruling between 23 September 2009 and 31 December 2009 inclusive.

20. An entity that takes part in the Project as a 'subsequent participant'^[2] is not covered by this Product Ruling but may request a private ruling on their participation in the Project. A 'subsequent participant' is an entity that does not meet the definition of 'initial participant' in subsection 394-15(5).

Carrying on a business

21. Although not relevant for the purposes of Division 394, a Grower (as described in paragraphs 4 to 7 of this Ruling) who takes out insurance over the trees on their Woodlot per clause 19 of the Replacement Constitution and who will stay in the Project until it is completed will be considered to be carrying on a business of primary production. Such Growers who are individuals will be subject to the operation of Division 35 (see paragraphs 39 and 40 of this Ruling).

The '70% DFE rule' and the establishment of the trees

22. The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by Rewards Projects Ltd. On the basis of that information, the Commissioner has decided that as at 30 June 2009 it was reasonable to expect that the '70% DFE rule'^[3] would be satisfied. The Tax Office may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'.

23. The Ruling will only apply if Rewards Projects Ltd establishes all of the Trees that were intended to be established under the Project within 18 months of the end of the income year in which the first 'participant' in the Project is accepted.^[4] For this Project the Trees must be established by 31 December 2010.

24. In the context of this Project, the Trees will be established when they are planted on the land acquired for the purposes of the Project at the average rate per hectare specified. Rewards Projects Ltd is required by section 394-10 of Schedule 1 of the Taxation Administration Act 1953 (TAA) to notify the Tax Office if the Trees are not established by 31 December 2010.

Allowable deductions

Sections 8-5, 394-10, 394-20 and Division 27

25. A Grower in the Project can claim deductions for the amounts shown in the Table below that are paid to Rewards Projects Ltd (sections 8-5 and 394-10).

26. The deductibility of these amounts remains subject to a requirement that a CGT event^[5] does not happen in relation to the Grower's 'forestry interest' within 4 years of the Grower first paying an amount under the scheme (see paragraphs 28 to 30 of this Ruling).

27. The amount is deductible in the income year in which it is paid, or is paid on behalf of the Grower (subsection 394-10(2) and section 394-20). Where a Grower does not fully pay an amount, or it is not fully paid on their behalf in an income year, it is deductible only to the extent to which it has been paid. Any unpaid amount is then deductible in the year or years in which it is actually paid.

Notes:

(i)

If the Grower is registered or required to be registered for GST, amounts need to be adjusted for GST (for example, input tax credits): Division 27.

(ii)

Growers will be notified by Rewards Projects Ltd of the years in which these amounts are paid. Harvests and thinnings are expected to occur from 2016.

(iii)

The Pruning Fee is payable in respect of each Harvest conducted on the Teak Block. The Pruning Fee is initially set at $60 and will be indexed from 1 July 2010.

'CGT event' within 4 years for Growers who are 'initial participants'

Subsections 394-10(5) and (6)

28. A deduction for the Initial Fee is not allowable where a 'CGT event' happens in relation to the 'forestry interest' of a Grower within 4 years of when an amount is first paid under the scheme. For Late Growers the relevant date will be 1 July 2014 (subsection 394-10(5)).

29. Where deductions for these amounts have already been claimed by a Grower the Commissioner may amend their assessment at any time within two years of the 'CGT event' happening (subsection 394-10(6) of the ITAA 1997). The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936.

30. Growers whose deductions are disallowed because of subsection 394-10(5) are still required to include in assessable income the market value of the 'forestry interest' at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event'.

Interest on loans to finance the 'forestry interest' of a Grower

Section 8-1

31. A Grower in the Project who obtains a 12 months interest free loan from QPR, on the terms specified in paragraphs 81 to 85 of this Ruling, can claim deductions for interest incurred on overdue amounts (paragraph 8-1(1)(a)). Growers who borrow from QPR on terms other than as specified in paragraphs 81 to 85 of this Ruling or from other financiers may apply for a private ruling on the deductibility of loan interest or may self assess the deductibility of the interest.

Borrowing costs

Section 25-25

32. The Loan Application Fee payable to QPR is $250 or 0.25% of the Finance Application Amount, whichever is the greater. This amount is a borrowing expense and is deductible under section 25-25.

33. The deduction for the borrowing expense must be calculated. The amount deductible will depend on the term of the loan. As the loan term is 12 months, the deduction for the borrowing expense is spread over the period of the loan on a straight line basis from the date the loan begins.

34. The deductibility or otherwise of borrowing costs arising from loan agreements entered into with financiers other than QPR is outside the scope of this Ruling.

Assessable income, 'CGT events' and the 'forestry interests' of Growers who are 'initial participants'

Sections 6-10 and 394-25

35. Where a 'CGT event' (other than a 'CGT event' in respect of a thinning^[6] - see paragraph 39 of this Ruling) happens to a 'forestry interest' held by a Grower in this Project, the market value of the 'forestry interest', or the decrease in the market value of the 'forestry interest', is included in the assessable income of the Grower (sections 6-10 and 394-25).

36. The relevant amount is included in the Grower's assessable income in the income year in which the 'CGT event' happens (subsection 394-25(2)).

37. 'CGT events' for these purposes include those relating to:

•

a clear-fell harvest of all or part of the trees grown under the Project;

•

the sale, or any other disposal of all or part of the 'forestry interest' held by the Grower; or

•

any other 'CGT event' that results in a reduction of the market value of the 'forestry interest held by the Grower.

Amounts received by Growers where the Project trees are thinned

Section 6-5

38. An amount received by a Grower in respect of a thinning of the trees grown in this Project is not received as a result of a 'CGT event' and is not otherwise assessable under Division 394. The amount is a distribution of ordinary income that arises as an incident of a Grower holding a 'forestry interest' in the Project. Growers include amounts received for thinning the trees in their assessable income in the income year in which the amounts are derived (section 6-5).

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

Section 35-55 exercise of Commissioner's discretion

39. A Grower who will stay in the Project until its completion and who takes out insurance over the trees on their Woodlot(s) will be considered to be carrying on a business of primary production. Such a Grower, who is an individual, and is accepted into the Project on or before 31 December 2009, may make losses from the Project that may be affected by the loss deferral rule in section 35-10 in Division 35. Division 35 does not apply however to Growers who do not carry on a business.

40. The discretion in paragraph 35-55(1)(b) will be exercised for a Grower to whom the loss deferral rule would otherwise apply, for the income years ended 30 June 2010 to 30 June 2027. Exercise of the discretion in this case however is conditional on the Project being carried out in the manner described in paragraphs 42 to 84 of this Ruling, but will allow Growers referred to who make losses, to offset them against their other assessable income in the income years in which those losses arise.

Prepayment, non-commercial losses and anti-avoidance provisions

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

41. Where a Grower is accepted to participate in the Project set out at paragraphs 42 to 84 of this Ruling, the following provisions have application as indicated:

•

interest paid by a Grower to QPR does not fall within the scope of sections 82KZM, 82KZME and 82KZMF of the ITAA 1936;

•

section 82KL of the ITAA 1936 does not apply to deny the deductions otherwise allowable; and

•

the relevant provisions in Part IVA of the ITAA 1936 will not be applied to cancel a tax benefit obtained under a tax law dealt with in this Ruling.

Scheme

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

•

Application for a Product Ruling as constituted by documents provided on 10 July 2009 and additional correspondence between Rewards Projects Ltd and the Tax Office dated 24 July 2009, 4 August 2009, 6 August 2009, 24 August 2009, and 2 September 2009;

•

additional correspondence between Rewards Projects Ltd and the Tax Office concerning the earlier Product Ruling PR 2008/73 Income tax: Rewards Group Premium Timber Project 2009 dated 30 October 2008, 16 September 2008, 6 and 12 November 2008, and 3, 9 and 11 December 2008;

•

Product Disclosure Statement (PDS) for the Project, received 24 July 2009;

•

Draft Supplementary Product Disclosure Statement received 4 August 2009;

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Draft Planting Services Fund Deed received 6 August 2009;

•

Draft Replacement Constitution for the Rewards Group Premium Timber Project 2009, received 3 December 2008;

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Compliance Plan for the Project, received 24 August 2009;

•

Draft Head Lease between the landowner (Lessor) and Rewards Projects Ltd (as Lessee), received 16 September 2008;

•

Licence Agreement between Rewards Projects Ltd and the Grower, received 24 August 2009;

•

Management Agreement between Rewards Projects Ltd (as Responsible Entity) and the Grower, received 24 August 2009; and

•

Operations Agreement between Rewards Projects Ltd and Rewards Management Pty Ltd, received 24 August 2009.

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

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

44. 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. The effect of these agreements is summarised as follows.

Overview

45. The main features of the Rewards Group Premium Timber Project 2009 Late Growers are as follows:

46. The Project will be a registered managed investment scheme under the Corporations Act 2001. Rewards Projects Limited has been issued with Australian Financial Service Licence 224000 and will be the Responsible Entity for the Project.

47. The objective of the Project is to establish and manage long term commercial plantations of timber for the purpose of harvesting and sale. The Project is a blend of two plantation forestry species, Teak and Sandalwood.

48. An offer to participate in the Project will be made through a PDS and a Supplementary PDS. The offer under the PDS is for 9,000 Woodlots (forestry interests) of 0.25 hectares, which equates to a total of 2,250 hectares. 4,684 Woodlots (or 1,171 hectares) have already been sold in the 2008-09 income year, under the project detailed in Product Ruling PR 2008/73 Income tax: Rewards Group Premium Timber Project 2009.

49. An entity that participates in the Project as a Grower will do so by acquiring a minimum of one 'forestry interest' in the Project on or before 31 December 2009. There is no minimum subscription for the Project.

50. Applicants execute a Power of Attorney contained in the Supplementary PDS. The Power of Attorney irrevocably appoints Rewards Projects Ltd to enter into, on behalf of the Grower, a Licence and a Management Agreement and any other documents required to hold an interest in the Project.

51. For the purposes of this Ruling, Applicants who are accepted to participate in the Project on or after the date this Product Ruling is made and whose agreements (see paragraph 42 of this Ruling) are executed and Subscription Money is paid by 31 December 2009 will become Growers in the Project.

52. Rewards Projects Ltd will enter into an agreement to lease land from the landowners on which the Plantation will be established. Project land must meet the requirements set out by the Independent Forester as stated in the PDS.

53. Teak Blocks will be located in far north Queensland close to the timber processing centre of Ravenshoe and the ports of Cairns, Mourilyan and Townsville. Sandalwood Blocks will be located in the central wheatbelt region of Western Australia within proximity to the port of Fremantle.

54. This Land will be divided into Teak Blocks of 0.1 hectares and Sandalwood Blocks of 0.15 hectares which together will comprise a Woodlot. Growers accepted in the Project will be granted a licence over the Woodlots.

Replacement Constitution

55. The Replacement Constitution establishes the Project and operates as a deed binding all Growers and Rewards Projects Ltd. The Replacement Constitution sets out the terms and conditions under which Rewards Projects Ltd agrees to act as Responsible Entity and thereby manage the Project. Upon acceptance into the Project, Growers are bound by the Replacement Constitution by virtue of their participation in the Project. Rewards Projects Ltd will keep a register of Growers accepted into the Project.

56. To acquire an interest in the Project, an entity must make an application for 'forestry interests' in accordance with clause 3. Growers must complete and sign the Application Form provided in the Supplementary PDS and pay the Subscription Money in a form acceptable to the Responsible Entity.

57. Under clause 8.2 of the Replacement Constitution, Rewards Projects Ltd holds the Subscription Money on bare trust and will deposit all funds received from applicants in a Project bank account.

58. Once Rewards Projects Ltd has accepted the application and all of the Project documents have been executed, the Subscription Money may be released and applied against the Project Fees due as payment for each Woodlot's Initial Services (clause 3.6).

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

•

the general functions, powers and duties of the Responsible Entity (clause 6);

•

complaints and dispute resolution (clause 12);

•

distributions from the Fund (clause 11);

•

provisions relating to termination (clause 14);

•

transfer of Grower's interests (clause 17); and

•

what happens if there is a total or partial destruction of Grower's Woodlots (for example, for a Grower without insurance, total destruction of a Growers Woodlots means no further fees are payable and there is no entitlement to harvest proceeds, clause 18).

60. The Replacement Constitution also provides that insurance against loss or damage to the Trees is optional. If requested by the Grower, the Responsible Entity will endeavour to procure insurance cover against destruction or damage of the Grower's Woodlot by fire and other usual risks (clause 19.1). For the purpose of this Ruling only Growers who, from the time of planting until the end of the term of the Project, take out insurance in respect of the trees against damage or destruction in terms of clause 19 of the Replacement Constitution for the Project will be considered to be carrying on a business. Whether insurance is taken out or not will have no bearing on the deductibility of the initial application fee under Division 394 .

Compliance Plan

61. As required by the Corporations Act 2001, Rewards Projects Ltd, as Responsible Entity, has prepared a Compliance Plan. The purpose of the Compliance Plan is to ensure that Rewards Projects Ltd manages the Project in accordance with its obligations and responsibilities contained in the Replacement Constitution and that the interests of Growers are protected.

Licence Agreement

62. Growers participating in the scheme will enter into a Licence Agreement with Rewards Projects Ltd in its capacity as the Responsible Entity of the Project. Growers are granted a Licence to use their Woodlot(s) for the purpose of cultivating and harvesting their Trees upon the terms and conditions set out in the Licence.

63. The Licence will commence on the date the Grower's application is accepted under the PDS and will continue until the completion of the final harvest or the final distribution of receipts to Growers in approximately 20 years.

64. Clause 2.3 gives the Grower full entitlement to the Trees to be planted on the Woodlot and the Timber there until all the Trees have been harvested.

Management Agreement

65. The Management Agreement is annexed to the Replacement Constitution as Schedule 1. Under the Management Agreement, Rewards Projects Ltd is appointed to carry out the Initial Services and Ongoing Services, on behalf of each Grower.

66. The Initial Services (Annexure A) are:

•

ensure that the Woodlots are ready for planting, including ripping, mounding and herbicide spraying (if required);

•

for the Sandalwood Block, supply sufficient Host Tree seedlings and Sandalwood seed and plant the Host Trees and sow the Sandalwood seed to the specifications recommended in the Management Plan; and

•

for the Teak Block, supply sufficient tissue culture Teak plantlets, grow out the Teak plantlets in the nursery and during the wet season, plant the Teak plants to the specifications recommended in the Management Plan.

67. The Manager shall complete the Initial Services during the Initial Period, which is the 18 month period from 1 July 2009 to 31 December 2010.

68. The Ongoing Services (Annexure B) will be provided throughout the Term of the Agreement. Within 12 months of planting and sowing seeds, the Responsible Entity will conduct a survival count and replant or resow (as the case may be) the Trees, Host Trees and seeds to ensure there is an average stocking per hectare of 1,125 Teak Trees, 1,100 Host Trees and 1,400 Sandalwood seedlings.

69. The Ongoing Services include pruning of the remaining trees within 12 months following any harvest on the Teak Block. The Manager will also be responsible for insuring the Plantation against public risk for an amount of not less than $5,000,000 during the Term of the Project.

70. Each Grower appoints Rewards Projects Ltd to act as their agent to market and sell their trees (clause 7.1). Rewards Projects Ltd has entered into forward sales agreements with purchasers for the supply of Teak and Sandalwood logs.

Operations Agreement

71. Rewards Projects Ltd will subcontract the management services under an Operations Agreement with Rewards Management Pty Ltd as the Manager. The Operations Agreement requires the Manager to carry out the Initial Services and the Ongoing Services in accordance with sound silvicultural and forestry practices adopted within the forestry industry and substantially in accordance with the Project's Management Plan (clause 2.1).

Planting Services Fund Deed

72. This agreement provides that Rewards Management Pty Ltd (as manager), on or before 31 July 2009, paid to Rewards Projects Ltd (as Responsible Entity) a Certified Amount, being a sum of money to cover the minimum cost of carrying out the Planting Services. This Certified Amount will be held in a Planting Services Fund (clause 2.1). If the manager fails to perform planting services in a proper and timely manner, the Responsible Entity may use the fund to secure alternative contractors to complete the balance of work (clause 2.6). The Independent Forester will review the fund before 31 January 2010 in respect of woodlots issued between the date of issue of this Ruling and 31 December 2009, and the Manager will pay any additional amount necessary to ensure the Planting Services Fund exceeds the revised Certified Amount (clause 2.10). If the Manager completes all the Planting Services, all of Fund will be released to the Manager.

Harvesting and distribution of proceeds

73. The Grower is entitled to the Teak and Sandalwood trees planted on the Woodlot and has a right to the Timber from those trees. Harvesting will take place as and when deemed appropriate by the Responsible Entity in producing the best overall result for the Grower. The Responsible Entity expects to conduct thinning harvests of Trees on a progressive basis between the ages of 5 and 18 years with the final harvest to take place in the final year of the Project.

74. The proceeds from sale of the Grower's Timber will be paid direct to the Responsible Entity who must deposit them into a Proceeds Fund. From each Grower's share, the Responsible Entity will pay the costs of harvest and sale as advised by the Manager plus any outstanding fees or amounts owing by the Growers to the Responsible Entity. The balance will then be distributed to the Growers on a proportionate basis.

Fees

75. Under the terms of the Management Agreement and the Licence Agreement, a Grower will make payments as described below on a per 'forestry interest' basis.

76. The Project has an upfront Initial Fee of $6,050 which represents the total cost for establishment and planting of each Woodlot (Item 2 of the Schedule to the Management Agreement).

77. There are no annual maintenance fees or rent payable during the term of the Project. These costs will be paid out of sales proceeds from each of the harvests.

78. At each relevant harvest, the Grower is required to pay a Maintenance Fee for Ongoing Services to the Responsible Entity. The amount payable is equal to 13.42% and 13.53% of the Grower's net sales proceeds from each harvest of Teak and Sandalwood respectively, after deducting the costs referred to in paragraph 73 of this Ruling (Item 3 of the Schedule to the Management Agreement).

79. The Grower is required to pay a Pruning Fee from the net sales proceeds of each relevant harvest from the Teak Block. The amount payable to the Responsible Entity will initially be set at $60 and will be indexed annually from 1 July 2010 (Item 4 of the Schedule to the Management Agreement).

80. A Licence Fee is also payable to the Responsible Entity. The amount payable is equal to 22.33% and 17.05% of the Grower's net sales proceeds from each harvest of Teak and Sandalwood respectively (Item 4 of the Schedule to the Licence Agreement).

Interest free finance offered by QPR

81. To finance all or part of the cost of their 'forestry interest' a Grower can enter into a 12 month interest free finance arrangement with QPR or, alternatively, borrow from an independent lender external to the Project.

82. The Application Form included with the Supplementary PDS outlines the terms and conditions of the 12 month interest free loan available from QPR. The finance offered by QPR as is set out below and only this arrangement is covered by this Product Ruling. A Grower cannot rely on this Product Ruling if they enter into a finance arrangement with QPR that materially differs from that set out in the documentation provided with the application for this Product Ruling.

83. A Grower who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility or otherwise of interest incurred under finance arrangements not covered by this Product Ruling. A Grower cannot rely on any part of this Ruling if the Application Fees are not paid in full on or before 31 December 2009 by the Grower or, on the Grower's behalf by a lending institution.

84. The full terms of the Loan Agreement offered by QPR are included in the Supplementary PDS at section 9 of the Application Form. The Loan Agreement provides the following features:

•

the financier will take security over the Grower's Woodlot;

•

a loan Application Fee is payable, calculated at 0.25% of the loan amount, subject to a minimum amount of $250. This, and any applicable stamp duty or other fees, will be paid approximately one month after acceptance of an application;

•

the Loan Term is 12 months;

•

the loan is interest free, except that interest will be charged on overdue amounts at a Base Rate plus 4.5% interest per annum calculated daily; and

•

the 12 equal monthly loan repayments are due to commence approximately one month after acceptance of an application and no later than 31 January 2010.

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

Commissioner of Taxation
23 September 2009

Appendix 1 - Explanation

Structure of the Project

86. In return for payment of the Initial Fee and the other fees and expenses required during the term of the Project under the Management Agreement and the Licence Agreement, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)).

87. Under the Replacement Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the harvest and thinning of the trees grown on the Project land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants'^[7] in the Project.

Is the Grower carrying on a business?

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

89. More recently, and in relation to a managed investment scheme similar to that which is the subject of this Ruling, the Full Federal Court in Hance v. FC of T; Hannebery v. FC of T [2008] FCAFC 196; 2008 ATC 20-085 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90).

90. Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 4 to 7 of this Ruling), who take out insurance over their trees and who stay in the Project until its completion, will be carrying on a business of primary production involving afforestation activities.

Allowable deductions

Sections 8-5, 12-5, 394-10 and 394-20

91. Section 8-5 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in a table in section 12-5 and includes payments under a 'forestry managed investment scheme' that meet the requirements of subsection 394-10(1).

The '70% DFE rule'

Paragraph 394-10(1)(c) and section 394-35

92. The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that as at 30 June 2009, the amount of 'direct forestry expenditure'^[8] under the scheme would be no less than 70% of the amount of payments under the scheme.^[9]

93. The amount of all 'direct forestry expenditure' is the amount of the net present value of all 'direct forestry expenditure' that the Responsible Entity, as 'forestry manager'^[10] of the Project, has paid or will pay under the scheme (subsection 394-35(2)).

94. The 'amount of payments under the scheme' is the amount of the net present value of all amounts (that is, the fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3)).

95. Both of the above amounts were determined as at 30 June 2009 taking into account

•

the timing requirements in subsections 394-35(4) and (5);

•

any amounts that can reasonably be expected to be recouped (subsection 394-35(6));

•

the discount rate in subsection 394-35(7); and

•

the market value rule in subsection 394-35(8).

96. Applying all of these requirements to the information provided by the Responsible Entity of the Project, the Commissioner has determined that the Project would satisfy the '70% DFE rule' on 30 June 2009.

The other elements for deductibility under subsection 394-10(1)

97. The requirement of paragraph 394-10(1)(d) that Growers in the Project not have day to day control over the operation of the Project is clear from the Project Agreements as are the alternative elements of paragraph 394-10(1)(e) relating to the number of Growers in the scheme and the Responsible Entity's role in other managed investment schemes.

98. The final requirement for deductibility requires all the Project trees to be established within 18 months of 30 June 2009 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting timeline provided with the application for this Ruling by the Responsible Entity indicates that all the trees required to be established under the scheme will be planted on the Project land by 31 December 2010.

99. Accordingly, subject to the qualifications set out below, amounts paid by Growers to the Responsible Entity in relation their 'forestry interests' satisfy all requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)).

100. Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year.

Loss of deductions previously allowed under subsection 394-10(1)

101. Two situations may lead to a loss of deductions previously allowed to Growers.

102. The first of these situations will occur if the Responsible Entity fails to establish the trees on the Project land within 18 months. Where this occurs the Responsible Entity is required to notify the Commissioner within 3 months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA).

103. The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within 4 years from 30 June of the income year they paid an amount under the scheme, for example, the Initial Fee (see subsection 394-10(5)).

104. For the purposes of this provision, the Commissioner is able to amend the assessment of a Grower within 2 years of the relevant 'CGT event' happening. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6) of the ITAA 1997).

105. Where a 'CGT event' happens to the 'forestry interest' of a Grower within 4 years, the market value of the forestry interest at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event' is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed or may disallow the deductions previously allowed under section 394-10.

Prepayment provisions

Sections 82KZL to 82KZMF

106. 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 that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and section 82KZMF of the ITAA 1936.

107. However, subsection 394-10(7) of the ITAA 1997 specifically provides that sections 82KZMD and 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10 of the ITAA 1997.

Borrowing costs

Section 25-25

108. A deduction is allowable for expenditure incurred by a Grower in borrowing money to the extent that the borrowed money is used for the purpose of producing assessable income (subsection 25-25(1)).

109. In this Project the Loan Application Fee payable to QPR is incurred to borrow money that is used or is to be used solely for income producing purposes during each income year over the term of the loan.

110. The deduction for the borrowing expense is spread over the shorter of the period of the loan or 5 years (subsection 25-25(4)).

Assessable income, 'CGT events' and the 'forestry interests' of Growers who are 'initial participants'

Sections 6-10, 10-5 and 394-25

111. Section 6-10 includes in assessable income amounts that are not ordinary income. These amounts, called statutory income, are listed in the table in section 10-5 and include amounts that are included in the assessable income of 'initial participants' of a 'forestry managed investment scheme' by subsection 394-25(2).

Subsection 394-25(2)

112. Where a 'CGT event' (other than for a 'CGT event' in respect of a thinning)^[11] happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if:

•

the Grower can deduct or has deducted an amount under section 394-10; or

•

the Grower would have met the condition immediately above if subsection 394-10(5) had not applied to disallow the deduction(s). Paragraphs 28 to 30 and 106 to 108 of this Ruling explain when deductions will be disallowed under subsection 394-10(5).

Market value rule applies to 'CGT events'

113. If, as a result of the 'CGT event' the Grower either:

•

no longer holds the 'forestry interest'; or

•

otherwise - where the Grower continues to hold the 'forestry interest', but there is a decrease in the market value of the 'forestry interest',

then the market value of the 'forestry interest' at the time of the event, or the reduction of the market value of the 'forestry interest' as a result of the event, is included in the assessable income of the Grower in the income year in which the 'CGT event' happens (subsection 394-25(2)). A market value rule applies rather than the amount of money actually received from the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same.

114. The market value amount included in the assessable income of a Grower is the value of the 'forestry interest' just before the 'CGT event', or where the Grower continues to hold their interest after the event, the amount by which the market value of the 'forestry interest' is reduced as a result of the 'CGT event' (subsection 394-25(2)).

115. Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell harvest of the trees grown under the Project.

Section 6-5 - amounts received by Growers where the Project trees are thinned

116. Section 394-25 specifically excludes from the operation of Division 394 a 'CGT event' that happens in respect of a thinning (see paragraph 394-25(1)(c)).

117. Thinning amounts received by a Grower in this Project do not arise as a result of a 'CGT event' and are not otherwise assessable under Division 394. The receipt of an amount arising from a thinning of the Project trees is a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. It is an item of ordinary income and is assessable under section 6-5 in the year in which it is derived.

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

118. In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years ended 30 June 2010 to 30 June 2027, the Commissioner has applied the principles set out in Taxation Ruling TR 2007/6 Income tax: non commercial business losses: Commissioner's discretion. Based on the evidence supplied, 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 afforestation industry, a Grower's business activity will satisfy one of the four tests set out in Division 35 or produce a taxation profit.

119. 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.

120. The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) for Growers who will stay in the project until its completion 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

121. The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefit(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 8-5 of the ITAA 1997.

Part IVA - general tax avoidance provisions

122. 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).

123. The Rewards Group Premium Timber Project 2009 will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraph 28 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.

124. Growers to whom this Ruling applies will derive assessable income from holding or disposing of their 'forestry interest' in the Project. 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 Growers will enter into the scheme for the dominant purpose of obtaining a tax benefit.

Appendix 2 - Detailed contents list

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

Not previously issued as a draft

References

ATO references:
NO 2009/7215

Related Rulings/Determinations:

TR 97/11
TR 98/22
TR 2007/6
PR 2008/73

Subject References:
4 year holding period
70 per cent DFE rule
carrying on a business
DFE
direct forestry expenditure
forestry interest
forestry MIS
interest expenses
managed investment schemes
market value substitution rule
payments under the scheme
producing assessable income
product rulings
reasonable expectation
tax avoidance
taxation administration

Legislative References:
ITAA 1936 82KL
ITAA 1936 Pt III Div 3 Subdiv H
ITAA 1936 82KZL
ITAA 1936 82KZLA
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 170
ITAA 1936 177A
ITAA 1936 177C
ITAA 1936 177D
ITAA 1936 177D(b)
ITAA 1936 318
ITAA 1997 6-5
ITAA 1997 6-10
ITAA 1997 8-1
ITAA 1997 8-1(1)
ITAA 1997 8-1(1)(a)
ITAA 1997 8-1(2)
ITAA 1997 8-1(2)(a)
ITAA 1997 8-5
ITAA 1997 10-5
ITAA 1997 12-5
ITAA 1997 25-25
ITAA 1997 25-25(1)
ITAA 1997 25-25(4)
ITAA 1997 Div 27
ITAA 1997 Div 35
ITAA 1997 35-10
ITAA 1997 35-55
ITAA 1997 35-55(1)(b)
ITAA 1997 Div 394
ITAA 1997 394-10
ITAA 1997 394-10(1)
ITAA 1997 394-10(1)(c)
ITAA 1997 394-10(1)(d)
ITAA 1997 394-10(1)(e)
ITAA 1997 394-10(1)(f)
ITAA 1997 394-10(2)
ITAA 1997 394-10(4)
ITAA 1997 394-10(5)
ITAA 1997 394-10(6)
ITAA 1997 394-10(7)
ITAA 1997 394-15(1)
ITAA 1997 394-15(2)
ITAA 1997 394-15(4)
ITAA 1997 394-15(5)
ITAA 1997 394-20
ITAA 1997 394-25
ITAA 1997 394-25(1)(c)
ITAA 1997 394-25(2)
ITAA 1997 394-25(3)
ITAA 1997 394-30
ITAA 1997 394-35
ITAA 1997 394-35(1)
ITAA 1997 394-35(2)
ITAA 1997 394-35(3)
ITAA 1997 394-35(4)
ITAA 1997 394-35(5)
ITAA 1997 394-35(6)
ITAA 1997 394-35(7)
ITAA 1997 394-35(8)
ITAA 1997 394-40
ITAA 1997 394-45
ITAA 1997 995-1
TAA 1953
TAA 1953 Sch 1 394-10
SISA 1993
Copyright Act 1968
Corporations Act 2001

Case References:
Hance v. FC of T; Hannebery v. FC of T
[2008] FCAFC 196
2008 ATC 20-085