Edited version of private ruling

Authorisation Number: 1011618244726

This edited version of the Applicant's ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

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Ruling

Subject: Concessional contributions and non-arm's length income

Questions

1. Will the payment of lease inducement to a superannuation fund (the Fund) by a manager (the Manager) of an agricultural managed investment scheme (the Scheme) to secure the Fund's agreement to lease land to the Manager in connection with the Scheme represent contributions to the Fund for the purposes of Subdivisions 292-A, 292-B, 292-C and 295-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

2. Will the payment of a referral fee to the Fund by the Manager of the Scheme in return for the Fund sourcing a member of the Fund as a major investor of the Scheme represent contributions to the Fund for the purposes of Subdivisions 292-A, 292-B, 292-C and 295-C of the ITAA 1997?

Answer: Yes.

3. Will the payment of rent to the Fund by the Manager of the Scheme represent contributions to the Fund for the purposes of Subdivisions 292-A, 292-B, 292-C and 295-C of the ITAA 1997?

Answer: No.

4. Is the payment of lease inducement to the Fund by the Manager of the Scheme non-arm's length income to the Fund for the purposes of Subdivision 295-H of the ITAA 1997?

Answer: Yes.

5. Is the payment of a referral fee to the Fund by the Manager of the Scheme non-arm's length income to the Fund for the purposes of Subdivision 295-H of the ITAA 1997?

Answer: Yes.

6. Is the payment of rent to the Fund by the Manager of the Scheme non-arm's length income to the Fund for the purposes of Subdivision 295-H of the ITAA 1997?

Answer: No.

This ruling applies for the following period

Year ending 30 June  2011

The scheme commences on

1 July 2010

Relevant facts and circumstances

The Applicant is the Manager of the Scheme, under which a certain type of plantation of less than 100 hectares is to be established.

To implement the Scheme, the Applicant initially approached the Fund to purchase the land required. When the Fund rejected the proposal, the Applicant offered to lease the land required from the Fund.

The Applicant advised that normally their Schemes were offered to public wholesale investors at large. However, when approaching the Fund to make the land available for the Scheme, the corporate trustee of the Fund advised that it could source a member of the Fund as a single investor to subscribe for the full allocation being offered. The member, who is also a director of the corporate trustee of the Fund, subsequently participates in the Scheme as a major investor (the Major Investor). Also participating in the Scheme are two minor investors who are not related to the Major Investor. They participate on the same terms and conditions, and pay the same establishment services fee, as the Major Investor.

In the agreement for lease executed by the corporate trustee of the Fund as lessor and the Applicant as lessee, it was agreed that:

(a) standing trees on the land to be leased must be removed before a specified date; and

(b) the lessee must pay the lessor an agreed amount of lease inducement in consideration of the lessor making the land available for the lease.

The standing trees to be cleared from the land are of a particular volume and carry a certain market value. The Fund has not contracted the Applicant or any other third party to harvest and haul the standing trees on the land to be leased.

According to the Applicant, in making the land available for the lease the Fund has to incur a number of costs, and the agreed amount of lease inducement, calculated by reference to similar costs per cubic metre of land that may be incurred in harvesting a similar plantation, is a direct reimbursement of those costs.

The Applicant further submitted that the lease inducement to be incurred under the Scheme is incurred as part of making the land available for the Scheme and that the cost is therefore not a harvesting cost.

The Applicant has also agreed that if the major investor sourced by the Fund invests in the Scheme, the Applicant will pay the Fund a referral fee (or commission) based on a certain percentage of the establishment services fee (excluding Goods and Services Tax (GST)) that the Applicant receives from the major investor. This percentage is above the normal rate of referral fee the Applicant pays.

When responding to the Commissioner's questions as to:

(a) how the rate of referral fee agreed between the Applicant and the corporate trustee of the Fund was arrived at,

(b) what the service in respect of which the referral fee is paid was, and

(c) why the Applicant would not provide an equivalent discount to the major investor instead.

the Applicant gave the following replies:

(a) The percentage was advised by the Fund as a rate required in order to refer the transaction.

(b) If the Applicant did not agree to the percentage then the investor would not be referred.

(c) The percentage referral fee paid by the Applicant was determined on a case-by-case basis. Each investor opportunity presented to the Applicant was assessed by the Applicant from a commercial perspective. If a referrer requested a rate that was in excess of what the Applicant normally paid the Applicant determined whether it was an amount they could afford to pay and whether the profit from the transaction that remained after payment of the fee justified the risks the Applicant faced with as a result of entering into the relevant transaction. The Applicant did not have a fixed approach to referral fees. Normally, they paid a certain percentage, however, if a higher rate was required in order to complete a transaction they were flexible to pay the higher rate provided the resulting profit was reasonable.

(d) The service is the referral of the investor.

(e) The Applicant's engagement was with the Fund. They were not in a position to discount the investment cost to the investor because that was not what was required to be undertaken in order to refer the investor. The investor would be referred if the Applicant agreed to the referral fee. If the Applicant did not agree to pay the referral fee then the investor would not invest. The Applicant did not have a choice as was suggested.

(f) The referral fee is a normal commercial feature of selling product. The Applicant first approached the Fund because the land the Fund owns is suitable for establishing the certain type of plantations. The Applicant's initial approach to the Fund was to buy the land. The Fund rejected the Applicant's proposal as it wants to retain ownership. Instead the suggestion was for the Applicant to lease the land. Following those discussions the Fund advised that it would refer an investor into the transaction of the basis that the Applicant paid a referral fee of a certain percentage (which was higher than the normal percentage paid).

With regard to the other two investors, the Applicant advised that although the same rate of referral fee would apply, the Applicant would not pay the Fund a referral fee in relation to those other two investors as the Fund did not introduce those investors.

Under a lease which is yet to be executed by the corporate trustee of the Fund as lessor and the Applicant as lessee, it is stated, among other things, that:

(a) the lease will be for a period in excess of 20 years with an option to be renewed for another number of years; and

(b) the lessee must pay the lessor the agreed rent plus GST, which is calculated as a percentage of the land's current market value and is reviewable annually.

Under a management agreement between the Major Investor and the Applicant, the former will pay the latter an agreed establishment services fee. The Major Investor is also required to pay the Applicant a licence fee equivalent to the rent payable by the Applicant to the Fund. The Major Investor's investment in the Scheme will be funded by a loan for a period in excess of 10 years provided by an entity related to the Major Investor.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 292-15.

Income Tax Assessment Act 1997 Section 292-20.

Income Tax Assessment Act 1997 Subsection 292-20(2).

Income Tax Assessment Act 1997 Section 292-25.

Income Tax Assessment Act 1997 Section 292-85.

Income Tax Assessment Act 1997 Subsection 292-85(2).

Income Tax Assessment Act 1997 Subsection 292-85(3).

Income Tax Assessment Act 1997 Subsection 292-85(4).

Income Tax Assessment Act 1997 Subsection 292-90(1).

Income Tax Assessment Act 1997 Section 295-160.

Income Tax Assessment Act 1997 Subsection 295-550(1)

Income Tax Assessment Act 1997 Section 960-50.

Income Tax Assessment Act 1997 Section 960-285.

Income Tax Assessment Act 1997 Subsection 960-285(2).

Income Tax Assessment Act 1997 Subsection 995-1(1)

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5.

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess No-concessional Contributions Tax) Act 2006 Section 5.

Superannuation Industry (Supervision) Act 1993 Section 62

Taxation Administration Act 1953 Schedule 1, Division 359

Reasons for decision

Summary of decision

The payment by the Manager of the Scheme to the Fund of a lease inducement in return for the Fund leasing out land for the Scheme represents a contribution by the Manager to the Fund and is a concessional contribution. However, the payment is considered to be non-arm's length income of the Fund.

The payment by the Manager to the Fund of a referral fee in return for the Fund sourcing the Major Investor represents a contribution by the Manager to the Fund and is a concessional contribution. However, the payment is considered to be non-arm's length income of the Fund.

The payment by the Manager to the Fund of rent calculated by reference to current market value of land is income of the Fund and is not a contribution by the Manager. The payment is not considered to be non-arm's length income of the Fund.

Detailed reasoning

What contribution embraces

The Income Tax Assessment Act 1997 (ITAA 1997) does not define the term 'contribution'. According to The Macquarie Dictionary 3rd edition 1998. The ordinary meaning of 'contribution' is:

1. the act of contributing;

2. something contributed.

The ordinary meaning of 'contribute' is:

1. ...give [money, time etc.] to a common stock or for a common purpose';

...

2. to make contribution; furnish a contribution'.

In Taxation Ruling 2010/1 the Commissioner has given his view on what would constitute 'contributions' to superannuation funds and the reasons for taking such a view, as per the paragraphs that follow.

Consistent with basic principles of statutory interpretation, it is necessary to ascertain the meaning of a 'contribution' to a superannuation fund having regard to the context and underlying purpose of the legislative provisions in which the term appears. An analysis of the statutory context, in particular the scheme of the ITAA 1997 and related superannuation legislation, will help determine whether the legislation intends to adopt the ordinary meaning of 'contribution', as per CIC Insurance Limited v. Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 at 408; Project Blue Sky Inc. v. Australian Broadcasting Authority [1998] HCA 28 at paragraphs 69 and 70; (1998) 194 CLR 355 at 381-382.

In Australia, the income tax law provides concessions to superannuation funds that comply with the regulatory provisions in the Superannuation Industry (Supervision) Act 1993 (SISA). Such funds are referred to as complying superannuation funds. Many of the references to a contribution in the ITAA 1997 are specifically related to complying superannuation funds.

A complying superannuation fund must be a regulated superannuation fund under the SISA. In turn, a regulated superannuation fund must have a trustee. Accordingly, in Australia, superannuation funds will almost invariably take the form of a trust.

The trustee of a superannuation fund holds the assets and the income, profits or gains arising from the investment of the assets, or the realisation of those investments, on behalf of the members of the Fund. In this regard, the sole purpose test in the SISA requires fund trustees to maintain the Fund solely for the purpose of providing retirement or similar types of benefits to, or in respect of, fund members.

While adherence to the sole purpose test is critical in establishing that a superannuation fund complies with the SISA, substantially similar tests define the existence of a superannuation fund. A superannuation fund is a fund that has the sole purpose of providing real monetary benefits, or benefits of a monetary value, to members on retirement, death or other cessation of employment, as per Scott v. Commissioner of Taxation (No 2) (1966) 40 ALJR 265 at 272 per Windeyer J; Mahony v. Commissioner of Taxation (1967) 41 ALJR 232 at 232 per Kitto J; Walstern v. Federal Commissioner of Taxation [2003] FCA 1428 at paragraphs 53 and 54; (2003) 138 FCR 1 at 15-16.

The application of the sole purpose test and the authorities considering the meaning of a 'superannuation fund' provide the context from which the meaning of contribution can be determined.

The purpose of the rules dealing with the tax treatment of superannuation contributions is also relevant in identifying the meaning of the concept. Although the ITAA 1997 does not contain any specific object clause in relation to the contribution deduction provisions, paragraph 1.9 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 states:

The object of this Schedule is to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life.

The explicit relationship recognised in the Explanatory Memorandum between contributions made and benefits ultimately received by the Fund supports the proposition that a contribution, regardless of its form, must enable the Fund to derive real benefits on behalf of fund members.

In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the Fund or all of the members in general.

A person's purpose is the object which they have in view or in mind. Generally, a person will be said to intend the natural and probable consequences of their acts and likewise their purpose may be inferred from their acts. This is a determination of a person's objective purpose, not their subjective intention.

This approach is based on views expressed in relation to the former superannuation contribution deduction provisions of the ITAA 1936. For example, Hill J said in Raymor Contractors Pty Ltd v. Federal Commissioner of Taxation (1991) 91 ATC 4259 at 4270; (1991) 21 ATR 1410 at 1423:

In the context of section 82AA, purpose is the object which the taxpayer has in view or in mind. There may be a fine distinction between purpose and intention but it is not necessary to explore that distinction, cf Plimmer v. Commissioner of Inland Revenue (NZ ) (1957) 11 ATD 480 at 483-484. Generally speaking a person will be said to intend the natural and probable consequences of his acts and likewise his purpose may be inferred from them. In the present case the taxpayer's purpose in making the payments in each year of income may be inferred from the objective evidence …

An objective determination of a person's purpose may in some cases lead to the conclusion that the person's purpose is to benefit one or more particular members of the Fund or all of the members in general. This may occur when a transaction or arrangement is entered into because of a connection or relationship between the person and the superannuation provider or cannot be explained by reference to commercial or arm's length dealings.

In general terms, the Commissioner considers that the matter of whether an amount is a superannuation contribution is determined by having regard to whether a superannuation provider is given something of value and whether what is given is given for a particular purpose.

Specifically, the Commissioner considers that a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the Fund or all of the members in general.

As such, it is clearly appropriate to consider the natural and probable consequences of a transaction or arrangement to determine whether a contribution has been made.

Lease Inducement

The Fund agrees to lease out land to the Applicant on the condition that the Applicant pays the Fund an agreed amount of lease inducement. Based on the market value of the land at 30 June 2010, the lease Inducement is more than three times the market value of the land.

Had the member of the Fund, who is also a director of the corporate trustee, not been the Major Investor in the Scheme, it would be difficult to understand how, commercially, it could be justified for the Applicant to pay an amount that is more than three times the market value of the land, not to mention that one would expect that it is usually a lessor who pays a lessee an incentive to induce the latter to enter into a lease, as was the case in Federal Commissioner of Taxation v. Montgomery (1999) 73 ALJR 1160; (1999) 42 ATR 475; (1999) 164 ALR 435; (1999) 99 ATC 4749; [1999] HCA 34; (1999) 198 CLR 639 and Commissioner of Taxation v. Cooling (1990) 22 FCR 42; (1990) 94 ALR 121; (1990) 21 ATR 13; (1990) 90 ATC 4472.

The Major Investor, in their capacity as a director of the corporate trustee of the Fund, has either negotiated directly with the Applicant, or has otherwise agreed to the corporate trustee demanding from the Applicant, the lease inducement to be paid to the Fund. Effectively the Major Investor meets this outlay personally via the establishment services fee they pay to the Applicant. It is, therefore, reasonable for the Commissioner to infer from the arrangement that:

(a) the Applicant pays the Fund the lease inducement because of the Major Investor's relationship with the Fund even though the amount involved cannot be explained by reference to commercial or arm's length dealings; and

(b) the payment has the ultimate purpose of benefiting the Major Investor as a member of the Fund because, by having another party meeting the clearance or harvesting costs the Fund should legitimately be meeting itself as part of its operating cost, the Fund will be able to retain more of its earnings which will eventually increase the retirement benefits for the Major Investor as a member of the Fund.

The Applicant explained that the Fund as lessor of the land has to incur a number of costs in making the land to be leased in a suitable state for the establishment of a new plantation and that the lease inducement is a direct reimbursement of those costs, calculated by reference to similar costs per cubic metre of land that may be incurred in harvesting a similar plantation. The Applicant has also provided information about the volume of standing trees to be cleared from the land to be leased and the market value of those standing trees.

On the basis of the aforementioned information, the Commissioner accepts that the lease inducement is intended to be a direct reimbursement to the Fund of the costs the Fund has to incur in making the land suitable for the establishment of a new plantation, irrespective of whether the costs involved are labelled as 'costs of land availability' or 'costs of clearing the land by harvesting existing trees'.

Where a party satisfies a liability of a superannuation provider or reimburses the superannuation provider for a liability incurred in operating the Fund, it may be reasonably inferred that it is to provide benefits for the members of the Fund.

The Commissioner explains the meaning of 'reimbursement' in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement. Paragraph 3 states:

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

It has been suggested that a reimbursement of an expense incurred by a superannuation provider merely reflects the payer's intention to treat a particular expense as its own and not the superannuation provider's. The Commissioner does not accept that it is open to a superannuation provider to treat an expense properly incurred in operating a superannuation fund as an expense of another person. A person who agrees to reimburse the superannuation provider for such an expense is doing so to benefit the members of the Fund and the reimbursement payment will be treated as a contribution.

Had the Applicant not agreed to lease the land, the Fund would have to pay the costs of clearing the land, which will, of necessity, include the costs of harvesting the existing trees, by a similar amount out of its own resources if its corporate trustee decides, for whatever reasons, to harvest the existing trees on the land. Payment of the lease inducement by the Applicant effectively relieves the Fund of such costs it would otherwise have to incur in order to realise the value of the existing trees it owns. This is so irrespective of whether the lease inducement is a cost of land availability (as the Applicant would prefer it to be called as such) or a harvesting cost.

Having considered all these factors, the Commissioner has come to the view that the lease inducement, instigated by the corporate trustee of the Fund and agreed to by the Applicant, is to benefit the Major Investor as a member of the Fund and is, therefore, a contribution to the Fund.

According to item 1 of the table in section 295-160 of the ITAA 1997, contribution to a complying superannuation fund to provide superannuation benefits for someone else (except a contribution that is a roll-over superannuation benefit) is assessable income of the complying superannuation fund.

As the lease inducement is a contribution to provide superannuation benefits for someone else and is, therefore, included in the assessable income of the Fund, it is a concessional contribution in respect of the Major Investor as a member of the Fund for the financial year in which it is paid (section 292-25 of the ITAA 1997).

If the lease inducement exceeds the member's concessional contributions cap, the excess amount will be liable to excess concessional contributions tax under section 292-15 of the ITAA 1997 and will form part of the member's non-concessional contributions for the same financial year (subsection 292-90(1)).

Referral fee

In return for the Fund sourcing a member of the Fund as the Major Investor, the Applicant has agreed with the corporate trustee of the Fund (of which the Major Investor is a director) that the Applicant will pay the Fund a referral fee equal to an agreed percentage of the establishment services fee (before GST) the Applicant receives from the Major Investor, although the Applicant also advised that the normal rate is lower than that agreed to be paid.

On being asked what service the Fund provided so as to warrant a payment of a referral fee, the Applicant replied that the service is the referral of the investor.

Financial planners and other professionals receive a commission from a manager of an agricultural managed investment scheme after they successfully refer clients to the manager. Before that happens, the normal course of their business would require, among other things, that they:

(a) are licensed by the relevant regulatory authority;

(b) understand clients' financial capability, needs and preferences, both short and long-terms;

(c) explain to clients the details of the particular forestry managed investment scheme they recommend, the pros and cons of the investment decision, including tax consequences, under different scenarios;

(d) provide after-sale services as and needed;

(e) incur expenses in running the business; and

(f) risk potential liability for any ill advice they may have given to clients.

The Fund is clearly not running a business of providing financial advice of any sort to the public and referring clients to a manager of an agricultural managed investment scheme, otherwise its sole purpose as a superannuation fund could be called into question. On the other hand, the Applicant explained that the percentage was advised by (the corporate trustee of) the Fund as a rate required in order to refer the transaction and that if the Applicant did not agree to the percentage then the investor would not be referred. This being the case, the questions that have to be asked are:

(a) Why the trustee of the Fund is so insistent in receiving, or alternatively what is the underlying purpose of the Fund receiving, that referral fee?

and

(b) On what basis does the trustee of the Fund decide, with the Applicant's agreement, that the rate of referral fee should be a particular percentage?

It is not uncommon for financial planners to return part of the commission they receive from the manager of an agricultural managed investment scheme to their clients for commercial reasons. On being asked why the Applicant would not provide an equivalent discount to the Major Investor (instead of paying the referral fee to the Fund), the Applicant's reply was that the Applicant was not in a position to discount the investment cost to the Major Investor because that is not what is required to be undertaken in order to refer the Major Investor.

Under the loan agreement with a related entity, the Major Investor will borrow a sum of money to fund their investment in the Scheme and will pay interest at an agreed rate where monthly repayments are made on or before the due date or a higher interest where interest is to be charged monthly in arrears on the outstanding balance. Providing the Major Investor an equivalent discount will reduce the amount that the Major Investor has to borrow and, in turn, the amount of interest that the Major Investor has to pay. Instead, the corporate trustee of the Fund, of which the Major Investor is a director, prefers the referral fee to be paid to the Fund.

It is, therefore, reasonable for the Commissioner to infer that the purpose of the referral fee is to benefit the Major Investor as a member of the Fund. As the referral fee is to benefit a member of the Fund, the Commissioner will take it as a contribution by the Applicant to the Fund for the purposes of the relevant sections and subsections of the ITAA 1997 as cited before.

Rent

Under the lease the Applicant agrees to pay the Fund a market rent based on the land's market value and reviewable annually with reference to the Consumer Price Index (CPI) and the then market value of the land. As such the market rent is income relating to a fund asset, representing a return on an investment and is income under ordinary concepts. Accordingly, the Commissioner's view is that it is assessable income of the Fund and not a contribution to the Fund.

Non-arm's length income

Subsection 295-550(1) of the ITAA 1997 provides that:

An amount of *ordinary income or *statutory income is non-arm's length income of a *complying superannuation fund, a *complying approved deposit fund or a *pooled superannuation trust (other than an amount to which subsection (2) applies or an amount *derived by the entity in the capacity of beneficiary of a trust) if:

(a) it is derived from a *scheme the parties to which were not dealing with each other at *arm's length in relation to the scheme; and

(b) that amount is more than the amount that the entity might have been expected to derive if those parties had been dealing with each other at arm's length in relation to the scheme.

There are three requirements that must be satisfied in order for an amount of income to be non-arm's length income under subsection 295-550(1) of the ITAA 1997:

· there must be a scheme;

· the parties to the scheme must not have been dealing with each other at arm's length; and

· the income derived from the scheme must be greater than the income that might have been expected if the parties were dealing with each other at arm's length.

Subsection 995-1(1) of the ITAA 1997 defines 'scheme' as follows:

scheme means:

(a) any ^*arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct,

whether unilateral or otherwise

The Commissioner considers that parties are dealing with each other at arm's length in relation to a scheme if the independent minds and wills of the parties are applied to the scheme and their dealing is a matter of real bargaining. If this is not the case, the Commissioner will consider that the parties are not dealing with each at arm's length in relation to the scheme.

If the relationship of the parties is such that one party has the ability to influence or control the other, this will suggest that the parties may not be dealing at arm's length.

The final requirement for an amount of income to be non-arm's length income under subsection 295-550(1) of the ITAA 1997 is that the amount of income derived from the scheme must be greater than the amount of income that might have been expected if the parties were dealing with each other at arm's length in relation to the transaction.

This is a question of fact. When considering this issue, the Commissioner will take into account all relevant matters.

Through the Scheme:

(a) the Major Investor, being a member and a director of the corporate trustee of the Fund, pays the Applicant an establishment services fee as an investor in the Scheme;

(b) the Major Investor's payment is funded by a loan obtained from a related entity;

(c) the Applicant, as the Manager of the Scheme, leases the land from the Fund and pays the Fund a lease inducement in addition to the rent; and

(d) the Applicant, as the Manager of the Scheme, pays the Fund a referral fee in return for the Fund sourcing a member of the Fund as the Scheme's Major Investor.

The first requirement under subsection 295-550(1) of the ITAA 1997 is therefore satisfied.

As the Major Investor in the Scheme is a member and director of the corporate trustee of the Fund, which is the lessor, the relationship between the Major Investor and the lessor is not at arm's length.

In their capacity as investor, the Major Investor pays the Applicant an establishment services fee. Then, in their capacity as a director of the corporate trustee of the Fund the Major Investor has either negotiated directly with the Applicant, or has otherwise agreed to the corporate trustee demanding from the Applicant, a lease inducement and a referral fee.

Given that it is one and the same person who carries two different capacities simultaneously, it is reasonable to infer that the Major Investor knows well, if not in fact has planned, that through the sourcing of themself as the Major Investor and the leasing out of the land to the Applicant, part of what the Major Investor pays the Applicant will eventually go to the Fund and that, therefore, the Major Investor agrees to pay the Applicant an establishment services fee, over 50% of which the Applicant will pay to the Fund by way of the lease inducement and the referral fee.

It is understandably in the Applicant's interest to see that the Scheme proceeds with the Major Investor participating. Therefore, it is reasonable to infer that to achieve that end, the Applicant is agreeable to paying the Fund a lease inducement that is disproportionate to the market value of the land to be leased and a referral fee that is higher than the usual rate because, after all, whatever the Applicant pays the Fund comes from the Major Investor. On the other hand, the Applicant might not have agreed to another lessor on similar terms had it been another agricultural managed investment scheme in which investors at large may participate because, in such a case, investors will only pay the Applicant an establishment services fee that the Applicant considers commercially viable and that they consider reasonable. On this basis, the Commissioner is of the view that in the entire arrangement, the Applicant and the Major Investor (the latter in their dual capacities) are not dealing with each other at arm's length.

It should be noted that in the final report of the Parliamentary Joint Committee on Corporations and Financial Services¹ and that by the Senate Select Committee on Agriculture and Related Industries - Food Production in Australia², prepared after the collapse of Great Southern and Timbercorp, both being managed investment scheme (MIS) companies, serious questions were raised about the MIS industry including the commercial viability of MIS Schemes.

With respect to the lease inducement, as it is considered to be a concessional contribution made to the Fund by the Applicant, it is included as assessable income of the Fund under section 295-160 of the ITAA 1997 (Item 1 of the table contained in section 295-160).

As income of the Fund, even if it is proper for the Applicant to bear the Fund's costs of making the land available, the fact that the lease inducement is more than three times the market value of the land to be leased would suggest that it is an amount more than the amount that the Fund might have been expected to derive if the parties involved were dealing with each other at arm's length. The Commissioner, therefore, takes the view that the Lease Inducement received by the Fund is a non-arm's length income of the Fund under subsection 295-550(1) of the ITAA 1997.

Similarly, the referral fee, as it is considered to be a concessional contribution made to the Fund by the Applicant, is included as assessable income of the Fund under section 295-160 of the ITAA 1997 (Item 1 of the table contained in section 295-160).

Ordinarily, the situation of a person (such as a financial planner) referring a prospective investor to a forestry Manager for a referral fee involves two separate entities. On the other hand, the Major Investor is both the person making the referral, purportedly as a director of the corporate trustee of the Fund, and the person being referred as the investor. A payment of a referral fee in such circumstances, particularly where it is paid to the Fund, would not be considered to be an arm's length transaction as the parties are not acting on an arm's length basis.

The Commissioner accepts that, where it is customary to do so, a manager of an agricultural managed investment scheme may pay a referral fee to a referrer who may not be a financial planner or other professional person. The Commissioner also accepts that, when commercially justifiable, a rate of referral fee similar to that agreed between the Applicant and the corporate trustee of the Fund may not necessarily be excessive.

However, where the referrer and the referee are one and the same entity, it would be expected that a referral fee would not be paid. A payment in such circumstances would, as already noted above, indicate that the parties involved are not necessarily acting on an arm's length basis.

Whilst it may be argued that the referral is being made in the Major Investor's capacity as a director of the corporate trustee of the Fund, the immediate question to be asked is why the Major Investor chooses to refer themself in their trustee capacity rather than in their personal capacity. An answer that may reasonably be inferred from their choice is that the referral fee, as assessable income of the Fund, may be taxed concessionally whereas the referral fee in their hands as an individual will not.

In consideration of these factors, the Commissioner considers that the referral fee paid by the Applicant to the Fund as an amount that is more than the amount that the Fund might have been expected to receive if the parties were dealing with each other at arm's length. The Commissioner, therefore, takes the view that the Referral Fee received by the Fund is non-arm's length income of the Fund under subsection 295-550(1) of the ITAA 1997.

On the question of whether the market rent received by the Fund from the Applicant is non-arm's length income, the Commissioner's view is that as the market rent is and will be based on the land's market value and changes in the CPI, the Fund is not receiving an amount that is more than the amount that it might have been expected to receive on an arm's length basis, the market rent received by the Fund is not non-arm's length income under subsection 295-550(1) of the ITAA 1997.

Further issues for the Applicant to consider

Limits on concessional contributions

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. For the 2010-11 income year the annual cap is $25,000.

The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) and subsection 960-285(2) of the ITAA 1997).

Concessional contributions are any contributions made to the superannuation fund in the relevant income year that are included in the assessable income of the Fund. Under paragraph 292-25(2)(c) of the ITAA 1997 the following amounts are excluded from being concessional contributions:

(i) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the Fund as a result of a choice made under section 305-80;

(ii) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount;

(iii) a contribution made to a constitutionally protected fund (CPF).

A person will be taxed on concessional contributions over the cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2007).

Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply for people aged 50 or over. For the 2009-10 to the 2011-12 income years, as a result of changes announced in the May 2009 Budget, the annual cap is $50,000 (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997).

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Limits on non-concessional contributions

From 1 July 2007, non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2009-10 income year onwards the annual cap is always six times the concessional contributions cap. Therefore, for the 2010-11 income year the annual cap is $150,000.

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to the person's superannuation fund account (spouse contributions); and

· transfers from foreign superannuation funds (excluding amounts included in the Fund's assessable income).

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (section 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2007). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

As a concession, to accommodate larger contributions, persons under age 65 in an income year are able to bring forward future entitlements to two years worth of non-concessional contributions. This means a person under age 65 will be able to contribute non-concessional contributions totalling $450,000 over three income years without exceeding their non-concessional contributions cap (subsections 292-85(3) and (4) of the ITAA 1997).

The bring-forward will be triggered automatically when contributions in excess of the annual non-concessional contributions cap are made in an income year by a person who is under age 65 at any time in the year where a bring-forward has not already commenced (subsection 292-85(3) of the ITAA 1997).

Where a bring-forward has been triggered, the two future years' entitlements are not indexed.

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