Edited version of your private ruling

Authorisation Number: 1012478574273

Ruling

Subject: Income Tax ~~ Product ~~ timber

Question 1

Can you claim a deduction for the establishment services fee under Division 394 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

Question 2

Can you claim a deduction for council rates and other applicable statutory charges, which are determined annually and paid out of the sinking fund, under Division 394 of the ITAA 1997?

Answer:

Yes

Question 3

Can you claim a deduction for insurance costs, which are determined annually and paid out of the sinking fund during the first six (6) years of the project, under Division 394 of the ITAA 1997?

Answer:

Yes

Question 4

Will harvest proceeds from the sale of plantation produce for a thinning or final harvest be included in your assessable income under section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997?

Answer:

Yes

Question 5

Will interest income earned in the sinking fund form part of your assessable income in the year it is derived under section 6-5 of the ITAA 1997?

Answer:

Yes

Question 6

Will you be carrying on a business of primary production for income tax purposes?

Answer:

Yes

Question 7

Will you be carrying on an enterprise for the purposes of subsection 9-20(1) of the A New Tax (Goods and Services Tax) Act 1999 (GST Act) subject to the exclusions listed in subsection 9-20(2) of the GST Act?

Answer:

Yes

Question 8

Will the Commissioner exercise the discretion pursuant to paragraph 35-55(1)(b) or paragraph 35-55(1)(c) of the ITAA 1997 to allow you to claim a deduction for non-commercial business losses in the year in which they are incurred?

Answer:

Yes

Question 9

Will section 82KL of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Answer:

No

Question 10

Will section 82KZMD of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Answer:

No

Question 11

Will section 82KMF of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Answer:

No

Question 12

Will Part IVA of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Answer:

No

This ruling applies for the following periods:

Income years ended 30 June 2013 to 30 June 2044

The scheme commences:

Income year ending 30 June 2013

Relevant facts and circumstances

1. You have requested a private ruling on the tax consequences of investing in a specific managed invest scheme ('the project').

2. An offer to participate in the project has been made by the manager through the information memorandum (IM) for the project which sets out an opportunity for you to invest in specific interests, put options, sinking fund units and land trust units.

3. Under the IM you can apply for a minimum of one specific interest, one put option, and one sinking fund unit and/or one land trust unit.

4. You will complete the project application form to purchase interests in the project.

5. In addition, either you or your associate as defined in section 318 of the ITAA 1936 will apply for land trust units.

6. The project will be an unregistered managed investment scheme under the Corporations Act 2001 and you will be a wholesale client pursuant to section 715G of the Corporations Act 2001.

7. The project will be a 'specific managed investment scheme' as defined in subsection 394-15(1) of the ITAA 1997 and you will be an 'initial participant' in the project as defined in subsection 395-15(5) of the ITAA 1997.

8. The put option, the associated put option fee and the investment by you or your associate in the land trust do not form part of the scheme to which subsection 394-15(1) of the ITAA 1997 applies.

9. The purpose of the project is the establishment and tending of products for felling in Australia.

10. The manager manages, arranges and promotes similar schemes and will meet the definition of 'specific manager' in subsection 395-15(2) of the ITAA 1997.

11. By signing the application form, you appoint the manager as your attorney in accordance with the terms of the IM. In particular, you will authorise the manager to execute the relevant project agreements.

12. You will not obtain any finance in relation to your investment in the project.

13. The project land will be licensed to you under a project agreement.

14. All the products intended to be established under the project will be established on suitable project land by 31 December 20XX.

15. You will be the only grower in the project and you or your associate will be the only unit holder in the land trust.

Relevant legislative provisions

A New Tax (Goods and Services Tax) Act

A New Tax (Goods and Services Tax) Act 1999 section 23-10

A New Tax (Goods and Services Tax) Act 1999 section 9-20

Corporations Act 2001

Corporations Act 2001 section 715G

Income Tax Assessment Act 1997

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 12-5

Income Tax Assessment Act 1997 section 17-5

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 section 170

Income Tax Assessment Act 1997 section 355-205

Income Tax Assessment Act 1997 section 355-480

Income Tax Assessment Act 1997 Division 394

Income Tax Assessment Act 1997 section 394-10

Income Tax Assessment Act 1997 section 394-15

Income Tax Assessment Act 1997 section 394-25

Income Tax Assessment Act 1997 section 394-35

Income Tax Assessment Act 1997 section 394-40

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1936

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 82KL

Income Tax Assessment Act 1936 section 82KZMA

Income Tax Assessment Act 1936 section 82KZMD

Income Tax Assessment Act 1936 section 82KZME

Income Tax Assessment Act 1936 section 82KZMF

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 318

Taxation Administration Act 1953

Taxation Administration Act 1953 Schedule 1 subsection 394-10(1)

Reasons for decision

Question 1

Can you claim a deduction for the establishment services fee under Division 394 of the ITAA 1997?

Summary

Yes, subject to the discussion under the heading 'Circumstances affecting the deductibility of the establishment services fee' in the detailed reasoning for this question, you can claim a deduction for the establishment services fee.

Detailed Reasoning

Section 8-5 of the ITAA 1997 allows certain specific deductions to be claimed against the assessable income of a taxpayer. The list of specific deductions is shown in the table in section 12-5 of the ITAA 1997 and includes payments under a 'specific managed investment scheme' pursuant to subsection 394-10(1) of the ITAA 1997.

You can deduct an amount under subsection 394-10(1) of the ITAA 1997 where the following requirements are satisfied:

a. you hold a 'specific interest' in a 'specific managed investment scheme'; and

b. you pay an amount under the scheme; and

c. the scheme satisfies the '70% DFE rule' on 30 June 2013; and

d. you do not have day to day control over the operation of the scheme; and

e. at least one of these conditions is satisfied:

i. there is more than one participant in the scheme; or

ii. the 'specific manager' of the scheme, or an associate, manages, arranges or promotes similar schemes; and

f. the products intended to be established under the scheme will be established on or before 31 December 20XX.

Will the scheme satisfy the '70% DFE rule' on 30 June 2013?

Section 394-35 sets out the '70% DFE rule'. Under that rule, it must be reasonable to expect that on 30 June 2013, the amount of 'direct expenditure' under the scheme will be no less than 70% of the amount of payments under the scheme.

The amount of all 'direct expenditure' is the amount of the net present value of all 'direct expenditure' that the Manager, as 'specific manager' of the project has paid or will pay under the scheme (subsection 394-35(2) of the ITAA 1997).

The 'amount of payments under the scheme' is the amount of the net present value of all amounts (that is, fees and expenses) that all current and future 'participants' in the scheme have paid or will pay under the scheme (subsection 394-35(3) of the ITAA 1997).

Both of the above amounts are determined as at 30 June 2013 taking into account:

a. the timing requirements in subsection 394-35(4) and (5) of the ITAA 1997;

b. any amounts that can reasonable be expected to be recouped (subsection 394-35(6) of the ITAA 1997);

c. the discount rate in subsection 394-35(7) of the ITAA 1997; and

d. the market value rule in subsection 394-35(8) of the ITAA 1997.

The Australian Taxation Office (ATO) may undertake review activities during the term of the project to verify the information relied on for the purposes of the '70% DFE rule'.

On the basis of the information relied on for the purposes of this ruling, the Commissioner has decided that on 30 June 2013 it will be reasonable to expect that the '70% DFE rule' set out in section 394-35 of the ITAA 1997 will be satisfied.

Will the other requirements of subsection 394-10(1) of the ITAA 1997 be satisfied?

Under the arrangement described in this ruling, you will hold a 'specific interest' in a 'specific managed investment scheme' as defined in subsections 394-15(3) and (1) of the ITAA 1997, respectively. However, the put option, the associated put option fee and the investment by you or your associate in the land trust do not form part of the scheme to which subsection 394-15(1) of the ITAA 1997 applies.

You will be required to pay the establishment services fee on or before 30 June 2013 under the project agreements.

You have contracted the manager to carry out the day to day management of the project. You will be the only participant in the scheme; however, the manager, who meets the definition of 'specific manager' in subsection 394-15(2) of the ITAA 1997, manages, maintains, arranges and promotes similar schemes.

You will engage the manager as an independent contractor to perform the establishment services on the terms and conditions set out in the project agreements. Establishment services include the planting of cuttings or seedlings on or before 31 December 20XX.

Therefore, the project as described in this ruling will satisfy the requirements of subsection 394-10(1) of the ITAA 1997. Accordingly, you can deduct the establishment services fee in the income year it is paid to the manager (subsection 394-10(2) of the ITAA 1997).

Circumstances affecting the deductibility of the establishment services fee

The deductibility of the establishment services fee in the relevant income year is subject to the requirement that:

a. the establishment services fee is paid by you or on your behalf to the manager in full in the relevant income year;

b. the manager establishes all the product that are intended to be established under the project on or before 31 December 20XX; and

c. a capital gains tax (CGT) event does not happen in relation to your 'forestry interest' before 1 July 2017.

Payment requirement

Under Division 394, you can only deduct an amount in the income year you pay it (subsection 394-10(2) of the ITAA 1997). An amount will be paid during a financial year when cash flows from you, or from another entity on your behalf, to the manager's bank account in the financial year in which the deduction is claimed. If you do not fully pay the establishment services fee in the relevant income year, or it is not paid on your behalf, it is only deductible to the extent to which it has been paid. The unpaid balance is then deductible in the income year or years it is actually paid.

Establishment requirement

You cannot deduct an amount under subsection 394-10(1) of the ITAA 1997 if the manager fails to establish all the product intended to be established under the scheme for any reason within 18 months of the end of the relevant income year (paragraph 394-10(1)(f) and subsection 394-10(4) of the ITAA 1997). If the products are not established by 31 December 20XX, the manager must notify the Commissioner pursuant to subsection 394-10(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) and you will not be able to deduct any amounts in connection with the project under subsection 394-10(1) of the ITAA 1997. If you have already claimed a deduction for the establishment services fee you will need to amend your income tax return for the relevant income year or the Commissioner may issue an amended assessment.

CGT event within four years

You cannot claim a deduction for the establishment services fee, or any other amount, under subsection 394-10(1) of the ITAA 1997 where a CGT event happens in relation to your 'specific interest' before 1 July 2017 (subsection 394-10(5) of the ITAA 1997).

Where you have already claimed deductions for these amounts the Commissioner may amend your 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 1997.

Where your deductions have been disallowed under subsection 394-10(5) of the ITAA 1997, you are still required to include in your assessable income the market value of the 'specific interest' at the time of the CGT event or the decrease in market values of the 'specific interest' as a result of the CGT event (sections 6-10 and 394-25 of the ITAA 1997) less any GST payable on those proceeds (section 17-5 of the ITAA 1997) in the income year in which the CGT event happens (subsection 394-25(2) of the ITAA 1997.

However, deductions will not be affected where the CGT event happens because of circumstances outside of your control and you could not have reasonably foreseen the CGT event happening when you acquired your 'forestry interest' (subsection 394-10(5A) of the ITAA 1997).

Question 2

Can you claim a deduction for council rates and other applicable statutory charges, which are determined annually and paid out of the sinking fund, under Division 394 of the ITAA 1997?

Summary

Yes, subject to the requirements set out in the detailed reasoning for this question, you can claim a deduction for the council rates and other applicable statutory charges when they are paid out of the sinking fund under Division 394 of the ITAA 1997.

Detailed reasoning

As discussed in response to Question 1, above, the project as described in this ruling will satisfy the requirements of subsection 394-10(1) of the ITAA 1997.

Accordingly, you are entitled to claim a deduction for amounts paid under the specific managed investment scheme in the year in which they are paid subject to the following requirements:

a. the payment is not specifically excluded from deductibility under Division 394 (section 394-40 of the ITAA 1997);

b. the amount is paid by you or on your behalf to the manager in the income year in which the deduction is claimed (subsection 394-10(2) of the ITAA 1997);

c. the manager establishes all the products that are intended to be established under the project on or before 31 December 20XX (paragraph 394-10(1)(f) and subsection 394-10(4) of the ITAA 1997); and

d. a CGT event does not happen in relation to your 'specific interest' before 1 July 2017 (subsections 394-10(5) and 394-10(5A) of the ITAA 1997).

You will be required to meet the cost of council rates and other applicable statutory charges in relation to your interest in the project. However, the manager will establish a sinking fund for the purpose of meeting these costs which will be paid out of the sinking fund on your behalf when they are incurred.

You will be required to pay to the manager the sinking unit subscription. Additional sinking fund payments may be called upon by the manager in circumstances where there is a shortfall in the sinking fund.

Under section 394-10 of the ITAA 1997, you will be entitled to claim a deduction for amounts paid out of the sinking fund to meet the cost of council rates and other applicable statutory charges in the year in which the amounts are paid.

Question 3

Can you claim a deduction for insurance costs, which are determined annually and paid out of the sinking fund during the first six (6) years of the Project, under Division 394 of the ITAA 1997?

Summary

Yes, subject to the requirements set out in the detailed reasoning for this question, you can claim a deduction for insurance costs when they are paid out of the sinking fund for the first six years of the project under Division 394 of the ITAA 1997.

Detailed reasoning

As discussed in response to Question 1, above, the project as described in this ruling will satisfy the requirements of subsection 394-10(1) of the ITAA 1997.

Accordingly, you are entitled to claim a deduction for amounts paid under the specific managed investment scheme in the year in which they are paid subject to the following requirements:

a. the payment is not specifically excluded from deductibility under Division 394 (section 394-40 of the ITAA 1997);

b. the amount is paid by you or on your behalf to the manager in the income year in which the deduction is claimed (subsection 394-10(2) of the ITAA 1997);

c. the manager establishes all the products that are intended to be established under the project on or before 31 December 20XX (paragraph 394-10(1)(f) and subsection 394-10(4) of the ITAA 1997); and

d. a CGT event does not happen in relation to your 'specific interest' before 1 July 2017 (subsections 394-10(5) and 394-10(5A) of the ITAA 1997).

The manager will act as your agent in relation to insurance for the first six years of the Project. The cost of the insurance arranged by the manager for the first six years of the project will be paid out of the sinking fund, discussed in relation to Question 2, above.

Under section 394-10 of the ITAA 1997 you will be entitled to claim a deduction for amounts paid out of the sinking fund to meet the cost of insurance for the first six years of the project in the year in which the amounts are paid.

Question 4

Will harvest proceeds from the sale of plantation produce for a thinning or final harvest be included in your assessable income under section 6-5 of the ITAA 1997 or section 6-10 of the ITAA 1997?

Summary

Yes, proceeds you receive in respect of a thinning will form part of your assessable income in the income year it is derived under section 6-5 of the ITAA 1997. The market value of your 'specific interest' at the time of final harvest or the decrease in market value of your 'specific interest' as a result of a full or partial harvest will form part of your assessable income in the income year the harvest occurs under section 6-10 of the ITAA 1997.

Detailed reasoning

You will receive harvest proceeds from the sale of plantation produce following thinning of the product and from the final harvest.

Proceeds from a thinning

An amount you receive or are entitled to receive in respect of a thinning is a distribution of ordinary income that arises as an incident of you holding a 'specific interest' in the project. Any amount you receive from a thinning should de included in your assessable income in the income year it is derived under section 6-5 of the ITAA 1997 less any GST payable on those proceeds (section 17-5 of the ITAA 1997).

Proceeds from final harvest

Section 6-10 of the ITAA 1997 includes in assessable income amounts that are not ordinary income under section 6-5 of the ITAA 1997. These amounts, called statutory income, are listed in the table in section 10-5 of the ITAA 1997 and include amounts that are included in the assessable income of 'initial participants' of a 'specific managed investment scheme' by subsection 394-25(2) of the ITAA 1997.

Where a CGT event other than in respect of a thinning happens to your 'specific interest', you will be required to include an amount in your assessable income under subsection 394-25(2) of the ITAA 1997 if:

i. you can deduct or have deducted an amount under section 394-10 of the ITAA 1997; or  

ii. you would have met the condition immediately above if subsection 394-10(5) of the ITAA 1997, discussed in response to Question 1, above, had not applied to disallow the deduction(s).

The full or partial clear-fell harvest of the product grown under the project will constitute a CGT event as defined in subsection 995-1(1) of the ITAA 1997 for the purposes of subsection 394-25(2) of the ITAA 1997.

If you cease to hold your 'specific interest' following the harvest you will be required to include the market value of your 'specific interest' at the time of the CGT event in your assessable income in the income year the CGT event happens (paragraph 394-25(2)(a) of the ITAA 1997). If you continue to hold part of your 'specific interest' following the harvest you will be required to include the decrease in market value of your 'specific interest' as a result of the CGT event in your assessable income in the income year the CGT even happens (paragraph 394-25(2)(b) of the ITAA 1997). Any amount you actually receive or are entitled to receive as a result of the CGT event is not included in your assessable income (subsection 394-25(3) of the ITAA 1997).

Question 5

Will interest income earned in the sinking fund form part of your assessable income in the year it is derived under section 6-5 of the ITAA 1997?

Summary

Yes

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that your assessable income for an income year includes any ordinary income you derived during that year. Interest you receive or are entitled to receive from the sinking fund will constitute the distribution of ordinary income that arises as an incident of you holding an interest in the project. Therefore, any amount of interest or amount in the nature of interest received or entitled to be received by you from the sinking fund will constitute assessable income in the year it is derived (section 6-5 of the ITAA 1997).

Question 6

Will you be carrying on a business of primary production for income tax purposes?

Summary

Yes.

Detailed reasoning

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? (TR 97/11). Paragraph 9 of TR 97/11 provides that a person will be carrying on a business of primary production for the purposes of the ITAA 1997 if he or she produces 'primary production' as defined in subsection 995-1(1) of the ITAA 1997 and that activity amounts to the carrying on of a business.

The definition of primary production business in subsection 995-1(1) of the ITAA 1997 includes carrying on a business of planting and tending products in a plantation or forest that are intended to be felled. However, the ITAA 1997 does not provide guidance with respect to what amounts to the carrying on of a business.

Paragraphs 13 and 18 of TR 97/11 provide that the presence of some or all of the following factors will indicate an entity is carrying on a business:

· a significant commercial purpose or activity;

· a purpose and intention of the taxpayer in engaging in the activity;

· a profit making intention;

· repetition and regularity of the activity;

· similarity between the activities of the taxpayer and those of others engaged in the relevant industry/trade;

· the activity is planned, organised and carried on in a business like manner;

· the size, scale and permanency of the activity;

· the activity is not a hobby, recreation or sporting activity;

· a business plan exists;

· commercial sales of the relevant product; and

· the taxpayer has the requisite knowledge or skill.

The determination of whether or not an entity is carrying on a business is a question of fact to be determined in the circumstance and no one indicator in isolation is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). However, paragraph 17 of TR 97/11 expresses the view that, subject to the circumstances of the case, where there is an absence of a profit making motive it is likely that the activity will not constitute the carrying on of a business.

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

The purpose of the project is the establishment and tending of products for felling and subsequent sale. The project documentation is such to support a finding that you will enter into the project with the purpose and intention of engaging in a significant commercial activity in the nature of business. Further, the existence of the following features, among other matters, supports a finding that you will be carrying on a business:

· repetition, regularity and organisation of the activity;

· size, scale and permanency of the activity;

· the project is carried out in a similar manner as other forestry managed investment schemes in which 'Growers' are considered to be carrying on a business, including the scheme the subject of Hance and Hannebery; and

· the cash flow analysis provided for the project and taken into account in preparing this ruling indicates that you will make a profit if you do not obtain finance to fund your investment in the project.

Application of the principles set out in TR 97/11 and the reasoning of the Full Federal Court to the arrangement set out in this ruling leads to the conclusion that you will be carrying on a business of primary production involving afforestation activities.

Question 7

Will you be carrying on an enterprise for the purposes of subsection 9-20(1) of the GST Act subject to the exclusions listed in subsection 9-20(2) of the GST Act?

Summary

Yes.

Detailed reasoning

An entity may be registered for goods and services tax (GST) if it is carrying on an 'enterprise' (section 23-10 of the GST Act). The term 'enterprise' is defined in section 9-20 of the GST Act and includes an activity, or series of activities, done in the form of a business (paragraph 9-20(1)(a) of the GST Act). The use of the phrase 'in the form of' has been interpreted to indicate a wider meaning than the word 'business' in isolation.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purpose of entitlement to an Australian Business Number ( MT 2006/1) sets out the Commissioner's views on when an entity is carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Paragraph 170 of MT 2006/1 provides that the phrase 'in the form of a business' is broad and is founded on the longstanding concept of business. Further, paragraph 175 provides that the definition of 'business' for the purposes of the GST Act is the same as the definition of 'business' in subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997. Therefore, it can be interpreted in a similar way for the purposes of the GST Act as for the ITAA 1997 (paragraph 176 of MT 2006/1).

Further, ATO Interpretive Decision ATO ID 2010/197 Goods and Services Tax: GST and agricultural managed investment scheme - investor carrying on an enterprise considers a managed investment scheme which is similar to the subject of this Ruling. This decision applies the principles set out in MT 2006/1 to conclude that the 'Grower' in that scheme was carrying on an enterprise for the purpose of section 9-20 of the GST Act.

As discussed in response to Question 6, above, you will be carrying on a business of primary production for the purposes of the ITAA 1997. Accordingly, the application of the principles in TR 97/11 and MT 2006/1 and the consideration by the Full Federal Court in Hance and Hannebery to the arrangement set out in this ruling leads to the conclusion that you will be carrying on an enterprise for the purpose of section 9-20 of the GST Act.

Question 8

Will the Commissioner exercise the discretion pursuant to paragraph 35-55(1)(b) or paragraph 35-55(1)(c) of the ITAA 1997 to allow you to claim a deduction for non-commercial business losses in the year in which they are incurred?

Summary

Yes, the Commissioner will exercise the discretion in either paragraph 35-55(1)(b) or 35-55(1)(c) of the ITAA 1997, depending on whether or not you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997, for each of the relevant income years subject to the arrangement being carried on in a manner that is not materially different to the arrangement described in this ruling.

Detailed Reasoning

You are expected to incur losses from your participation in the project over several income years. These losses will be subject to the loss deferral rule in section 35-10 of the ITAA 1997 unless one of the relevant tests is satisfied, an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) of the ITAA 1997 on 30 June of each income year.

You have requested a ruling on whether the Commissioner will exercise the discretion in paragraph 35-55(1)(b) or paragraph 35-55(1)(c) of the ITAA 1997 for each of the income years in which you incur non-commercial business losses as a result of your participation in the Project.

Taxation Ruling TR 2007/6 Income tax: non commercial business losses: Commissioner's discretion provides guidance on how the discretion contained in subsection 35-55(1) of the ITAA 1997 may be exercised.

The Commissioner may exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 for a given year where you meet the income requirement in subsection 35-10(2E) of the ITAA 1997 for that year. If you do not meet the income requirement for the year in question, the Commissioner may exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997.

You will satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 where the sum of the following amounts is less than $250,000:

i. taxable income for that year (ignoring any loss arising from participation in the Project or any other business activity);

ii. total reportable fringe benefits for that year;

iii. reportable superannuation contributions for that year; and

iv. total net investment losses for that year.

Paragraph 35-55(1)(b) of the ITAA 1997 provides that the Commissioner may decide that the rule in subsection 35-10(2) of the ITAA 1997 does not apply where the Commissioner is satisfied that:

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

ii. there is an objective expectation that within a period that is commercially viable for the industry, the activity will satisfy one of the four tests set out in Division 35 or produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C) of the ITAA 1997).

Paragraph 35-55(1)(c) of the ITAA 1997 provides that the Commissioner may decide that the rule in subsection 35-10(2) of the ITAA 1997 does not apply where the Commissioner is satisfied that:

i. it is because of its nature that the business activity will not produce assessable income greater than the deductions attributable to it; and ·

ii. there is an objective expectation that within a period that is commercially viable for the industry, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C) of the ITAA 1997).

For each of the income years in which you have non-commercial losses arising from your investment in the project it will be due to the nature of the afforestation business activity you will be carrying on that the four tests in Division 35 will not be satisfied and that activity will not produce assessable income greater than the deductions attributable to it. Further, there is an objective expectation that within a commercially viable period for the industry the activity will produce assessable income greater than the deductions attributable to it for that year.

Therefore, the Commissioner will exercise the discretion in either paragraph 35-55(1)(b) or 35-55(1)(c) of the ITAA 1997, depending on whether or not you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997, for each of the relevant income years subject to the arrangement being carried on in a manner that is not materially different to the arrangement described in this ruling.

Question 9

Will section 82KL of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Summary

No

Detailed reasoning

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.

Therefore, section 82KL of the ITAA 1936 will not apply to deny otherwise allowable deductions under the project.

Question 10

Will section 82KZMD of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Summary

No

Detailed reasoning

Section 82KZMD of the ITAA 1936 sets the amount and timing of deductions for certain expenditure that, apart from section 82KZMD, a taxpayer could deduct under sections 8-1, 355-205 or 355-480 of the ITAA 1997 (section 82KZMA of the ITAA 1936). Further, subsection 394-10(7) of the ITAA 1997 specifically provides that section 82KZMD of the ITAA 1936 does not affect the timing of deductions under subsection 394-10(1) of the ITAA 1997.

Therefore, section 82KZMD of the ITAA 1936 does not affect the amount or timing of the deductions discussed in response to Questions 1-3, above.

Question 11

Will section 82KZMF of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Summary

No

Detailed reasoning

Section 82KZMF of the ITAA 1936 sets the amount and timing of deductions for certain expenditure that, apart from section 82KZMF, a taxpayer could deduct under sections 8-1, 355-205 or 355-480 of the ITAA 1997 (section 82KZME of the ITAA 1936). Further, subsection 394-10(7) of the ITAA 1997 specifically provides that section 82KZMF of the ITAA 1936 does not affect the timing of deductions under subsection 394-10(1) of the ITAA 1997.

Therefore, section 82KZMF of the ITAA 1936 does not affect the amount or timing of the deductions discussed in response to Questions 1-3, above.

Question 12

Will Part IVA of the ITAA 1936 apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you?

Summary

No

Detailed reasoning

Part IVA of the ITAA 1936 applies to deny the deductibility of all or part of otherwise deductible expenditure incurred by you where you have entered into a 'scheme' for the 'sole or dominant purpose' of obtaining a 'tax benefit'.

The project constitutes a 'scheme' pursuant to section 177A of the ITAA 1936 and you will obtain a 'tax benefit' from entering into the 'scheme' pursuant to paragraph 177C(1)(b) of the ITAA 1936, being allowable deductions that would not have been obtained but for the scheme.

You will derive assessable income in connection with the scheme in the form of harvest proceeds from thinning of the project products and final harvest. No adverse taxation consequences arise from the fact that parties to the arrangement are not dealing at arm's length.

The arrangement in its entirety, including the purchase of units in the land trust by you or your associate, set out in the 'Relevant facts and circumstances' section of this document and the project documentation provided by you is relevant for the purposes of Part IVA of the ITAA 1936. Having regard to the matters listed in section 177D of the ITAA 1936, it cannot be concluded at the time this ruling is issued that the scheme was entered into or carried out with the sole or dominant purpose of obtaining the tax benefit.

Therefore, Part IVA of the ITAA 1997 does not apply to deny the deductibility of all or part of otherwise deductible expenditure incurred by you in connection with the project.