Edited version of private ruling

Authorisation Number: 1011650318163

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Ruling

Subject: Timber Project

Question

Will an amount be accepted as notional rent under paragraph 394-45(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), where you, as forestry manager, provide land for a forestry Managed Investment Scheme (MIS) in your capacity as lessee of the land?

Answer

Yes

This ruling applies for the following period:

2008-2009 income year

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

In your role as forestry manager of the project you own land used in the project.

You intend to establish a land trust, with yourself as the trustee. You will transfer the project land to the land trust. You, in your capacity as forestry manager, will initially hold an unregistered mortgage and vendor's lien in relation to the purchase price, both of which will give you an equitable interest in the land.

You, as forestry manager, will enter into a lease agreement with the trustee of the land trust, by which the trustee agrees to lease the land to the forestry manager for nil rent.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 394-45(1)

Income Tax Assessment Act 1997 paragraph 394-45(1)(a)

Income Tax Assessment Act 1997 paragraph 394-45(1)(b)

Reasons for decision

Direct forestry expenditure is defined under subsection 394-45(1) of the ITAA 1997 as:

(a) an amount paid under the scheme that is attributable to establishing, tending, felling and harvesting trees; and

(b) notional amounts reflecting the *market value of goods, services or the use of land, provided by the *forestry manager of the scheme, for establishing, tending, felling and harvesting trees.

A payment under paragraph 394-45(1)(a) of the ITAA 1997 is intended to include actual payments made by 'the scheme manager (or an associate of the scheme manager)'.

In the present case, neither the forestry manager nor an associate has made any payment in relation to the use of the land.

However, paragraph 394-45(1)(b) of the ITAA 1997 states that direct forestry expenditure also includes notional amounts reflecting the market value of the use of land, goods or services provided by the forestry manager that are used for establishing, tending, felling and harvesting.

'Provide' the land

The word 'provide' is defined by The Macquarie Dictionary (Multimedia Ed), Macquarie Library Pty Ltd (2000), as meaning 'to furnish or supply…to arrange for…'.

Determining whether the forestry manager has any form of ownership may assist in determining whether the forestry manager has any right to provide land.

The word 'owner' is defined by the Butterworths Australian Legal Dictionary, Reed International Books Australia Pty Limited (1997) as follows:

A person in whom the ownership of property is vested. Rights of ownership include the right to exclude others, to destroy or alter the property, to alienate the property, to maintain it, and recover possession of it. … Ownership may be equitable, legal, beneficial, joint, several, general or partial.

Whilst ownership is not a requirement of paragraph 394-45(1)(b) of the ITAA 1997, determining whether the forestry manager has any form of ownership in the present case, may assist in determining whether or not they are able to provide the land for establishing, tending, felling and harvesting trees.

Your capacity as lessee

You have entered into a lease agreement with yourself as trustee of the land trust.

Paragraph 8.58 of the Explanatory Memorandum provides that expenditure under paragraph 394-45(1)(a) of the ITAA 1997 is intended to include actual costs, including rent paid by the scheme manager for land used to establish trees.

Whilst rent is a usual feature of a lease, in circumstances where the lease is in deed form, rent (or consideration) is not an essential feature of a lease (Hayes v. Seymour-Johns (1981) 2 BPR 9366 (NSW Sup Ct); Francis Longmore & Co Ltd v. Stedman [1948] VLR 322; Bagust v. Rose (1963) 80 WN (NSW) 604; Knight's Case (1588) 5 Co Rep 54b; 77 ER 137 (KB)).

No rent is proposed to be paid under the proposed lease. Provided that the formalities of a valid lease are satisfied, you as forestry manager will have control of the premises to the exclusion of all others.

Subject to any term of the lease that restricts the use to which the land may be put by the lessee, you (in your capacity as lessee) can 'provide' the land for the purposes of paragraph 394-45(1)(b) of the ITAA 1997.

Therefore, notional rent between you as forestry manager and you as trustee of the land trust will form part of direct forestry expenditure as per paragraph 394-45(1)(b) of the ITAA 1997.