Income tax: BioForest Sustainable Timber and Biofuel Project 2007 (Growers using finance with Willmott Forests Ltd or MIS Funding No. 1 Pty Ltd)

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

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

The class of entities who can rely on those tax benefits are referred to as Growers. Growers will be those entities that are accepted to participate in the scheme specified below on or after 16 May 2007, the date this Product Ruling is made and who have executed the relevant Project agreements set out in paragraph 28 of this Ruling on or before 30 June 2007. They must have a purpose of staying in the scheme until it is completed (that is being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement.

The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling only includes those who enter into a finance arrangement with: • Willmott Forests Ltd, a related party, as described in paragraphs 77 to 82 of this Ruling; or • MIS Funding No. 1 Pty Ltd, as described in paragraphs 83 to 89 this Ruling.

The class of entities who can rely on the tax benefits set out in the Ruling section of this Product Ruling does not include entities who: • intend to terminate their involvement in the scheme prior to its completion, or who otherwise do not intend to derive assessable income from it; • are accepted into this Project before 16 May 2007 or after 30 June 2007; • participate in the scheme through offers made other than through the Product Disclosure Statement; or • are associates of BioForest Ltd.

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.

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 28 to 90 of this Ruling.

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.

This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: Commonwealth Copyright Administration Attorney General's Department Robert Garran Offices National Circuit Barton ACT 2600 or posted at: http://www.ag.gov.au/cca

This Product Ruling applies prospectively from 16 May 2007, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 16 May 2007 until 30 June 2007, 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 the income years up to 30 June 2009.

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; • it is not later withdrawn by notice in the Gazette ; or • the relevant provisions are not amended.

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

If this Product Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met: • the income year or other period to which the rulings relate has not begun; and • the scheme to which the rulings relate has not begun to be carried out.

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

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.

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.

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.

All fees and expenditure referred to in this Product Ruling include the Goods and Services Tax (GST) where applicable. In order for an entity (referred to in this Ruling as a Grower) to be entitled to claim input tax credits for the GST included in its expenditure, it must be registered or required to be registered for GST and hold a valid tax invoice.

Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for a Grower in the defined class of entities who enters into the scheme described at paragraphs 28 to 90 of this Ruling.

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

To be an 'STS taxpayer' a Grower must be eligible to be an STS taxpayer and must have elected to be an STS taxpayer (Division 328 of the ITAA 1997). For a Grower participating in the Project, the recognition of income and the timing of tax deductions is different depending on whether the Grower was an STS taxpayer prior to 1 July 2005 and continues to use the cash accounting method (called the 'STS accounting method') - see sections 328-120 and 328-125 of the Income Tax (Transitional Provisions) Act 1997 .

For these Growers only, a reference in this Ruling to an amount being deductible when 'incurred' will mean that amount is deductible when paid and a reference to an amount being included in assessable income when 'derived' will mean that amount is included in assessable income when received.

For the first income year starting on or after 1 July 2005, Subdivision 61-J provides for a tax offset of up to 25% of income tax liability related to the business income of a business in the STS with annual group turnover of less than $75,000. Entitlement to the offset varies depending on the type of entity and is therefore outside the scope of this Ruling.

That part of the gross sales proceeds from the Project attributable to the Grower's produce, less any GST payable on those proceeds (section 17-5), will be assessable income of the Grower under section 6-5.

A Grower may claim tax deductions for the following fees and expenses on a per Timberlot basis, as set out in the Table below. Fee Type Year ending 30 June 2007 Year ending 30 June 2008 Year ending 30 June 2009 Establishment Services fee $5,500 See Notes (i) & (ii) Interest on loans with MIS Funding No. 1 Pty Ltd As incurred See Notes (iii) & (iv) As incurred See Notes (iii) & (iv) As incurred See Notes (iii) & (iv) Loan Application Fee Must be calculated See Note (v) Must be calculated See Note (v) Must be calculated See Note (v) Notes : (i) If the Grower is registered or required to be registered for GST, amounts of outgoing would need to be adjusted as relevant for GST (for example, input tax credits): Division 27. (ii) Under section 82KZMG of the Income Tax Assessment Act 1936 (ITAA 1936) the Establishment Services fee incurred to participate in the Project is expenditure for 'seasonally dependent agronomic activities' (see paragraphs 107 to 109 of this Ruling) and is deductible in the income year in which it is incurred. The application fee payable to participate in the Willmott Forests - 2007 Product Disclosure Statement (Willmott Forests Project) under the 2007 Premium Forestry Blend is outside of the scope of this Ruling. However, Product Ruling PR 2006/127, that issued for the Willmott Forests Project may apply to this application fee. (iii) The interest incurred is an allowable deduction under section 8-1 to the extent that it relates to the Establishment Services fee paid to participate in the Project. The interest incurred that relates to the application fee paid to participate in the Willmott Forests Project is outside of the scope of this Ruling. However, PR 2006/127 that issued for the Willmott Forests Project may apply to that interest. (iv) The deductibility or otherwise of interest arising from agreements entered into with financiers other than MIS Funding No. 1 Pty Ltd, is outside the scope of this Ruling. Prepayments of interest to MIS Funding No. 1 Pty Ltd, is also not covered by this Product Ruling. Growers who prepay interest may request a private ruling on the deductibility of the interest incurred. (v) The Loan Application Fee payable to MIS Funding No. 1 Pty Ltd to the extent that it relates to borrowing the Establishment Services fee is a borrowing expense and is deductible under section 25-25. It is incurred for borrowing money that is used or is to be used during that income year solely for income producing purposes. The deduction is spread over the period of the loan or 5 years, whichever is the shorter. The amount of the Loan Application Fee to the extent that it relates to the application fee paid to participate in the Willmott Forest Project is outside of the scope of this Ruling. However, PR 2006/127 that issued for the Willmott Forests Project may apply to that interest.

A Grower who is an individual accepted into the Project in the year ended 30 June 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for Growers for the income years ended 30 June 2007 to 30 June 2022 or the year before clearfell, whichever is the earliest . This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise.

For a Grower who commences participation in the Project and incurs the expenditure set out in the Land Sourcing and Management Agreement and in either a Lease Agreement (NSW)/Forestry Right or a Profit à Prendre (Queensland)/Forestry Right, the following provisions of the ITAA 1936 have application as indicated: • expenditure by a Grower does not fall within the scope of sections 82KZME and 82KZMF; • section 82KL does not apply to deny the deductions otherwise allowable; and • the relevant provisions in Part IVA will not be applied to cancel a tax benefit obtained under a tax law dealt with in this Ruling.

The scheme that is the subject of this Ruling is specified below. This scheme incorporates the following documents: • Application for a Product Ruling as constituted by documents provided on 27 October 2006 and additional correspondence, including emails, dated 12, 16, 20 and 23 December 2006, 10 January 2007, 12 and 15 March 2007, 3 and 30 April 2007 and 1, 4, 7 and 9 May 2007; • Draft Product Disclosure Statement for the BioForest Sustainable Timber and Biofuel Project 2007, received 10 January 2007; • Draft First Supplementary Product Disclosure Statement for the BioForest Sustainable Timber and Biofuel Project 2007, received 30 April 2007; • Draft document, 'The 2007 Premium Forestry Blend', received 30 April 2007; • Draft Constitution establishing the BioForest Sustainable Timber and Biofuel Project 2007, received 23 December 2006; • Draft Compliance Plan for the BioForest Sustainable Timber and Biofuel Project 2007, received 16 December 2006; • Draft Land Sourcing and Management Agreement for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Grantor and Manager) and the Grower, received 23 December 2006; • Draft Lease (New South Wales ) for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Grantor and Manager) and the Grower, received 23 December 2006; • Draft Profit à Prendre (Queensland ) for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Grantor and Manager) and the Grower, received 23 December 2006; • Draft Profit à Prendre Forestry Right for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Transferor and Manager) and the Grower, received 23 December 2006; • Draft Profit à Prendre Forestry Right for Carbon Benefits for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Transferor and Manager) and the Grower, received 23 December 2006; • Draft Loan Agreements and loan documents including Application Forms, received 20 December 2006; • Instalment Agreement for the BioForest Sustainable Timber and Biofuel Project 2007 between BioForest Ltd (as Responsible Entity) and the Grower, received 20 December 2006; • Draft Loan Agreement - 2007 Premium Forestry Blend [ ] Years [Principal & Interest] between MIS Funding No. 1 Pty Ltd and the Grower, received 12 March 2007; • Draft Loan Agreement - 2007 Premium Forestry Blend [ ] Years [Optional Interest Only] between MIS Funding No. 1 Pty Ltd and the Grower, received 12 March 2007; • Draft Terms Agreement - 2007 Premium Forestry Blend between Willmott Forests Ltd and the Grower, received 30 April 2007; • Origination and Management Deed between MIS Funding No. 1 Pty Ltd and Willmott Forests Ltd, received 1 May 2007; and • Draft Financing Agreement between Willmott Forests Ltd and BioForest Ltd, received 7 May 2007. Note : certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

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.

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

The main features of the BioForest Sustainable Timber and Biofuel Project 2007 are as follows: Location North East Coast of New South Wales (NSW) and South East Queensland (QLD) Type of business to be carried on by each Grower Commercial growing and cultivation of: • Silky Oak ( Grevillea robusta ); and • She-oak ( Casuarina cunninghamiana ), for the purpose of harvesting and selling the produce. Number of hectares offered for cultivation 2,000 Size of each interest (Timberlot) Approximately 0.5 hectares Minimum allocation per Grower 3 Timberlots Number of trees to be established per hectare 800 Silky Oak trees and 11,400 She-oak trees The term of the Project Approximately 15 years Initial minimum cost $16,500 for 3 Timberlots Other costs Rent, Costs of Felling, Costs of Sale, Costs of Processing and Insurance Premiums.

The Project will be a registered managed investment scheme under the Corporations Act 2001 . BioForest Ltd has been issued with an Australian Financial Service Licence 297650 and will be the Responsible Entity for the Project.

The Project involves establishing, cultivating and harvesting Silky Oak and She-oak plantations and the subsequent sale of the plantations' produce. The Project may also involve processing the Silky Oak produce before its sale. The term of the Project is approximately 15 years.

An offer to participate in the Project will be made through a Product Disclosure Statement (PDS). The offer under the PDS is for 2000 hectares, which corresponds to 4000 Timberlots in the Project.

An entity that participates in the Project will do so by acquiring an interest in the Project on or before 30 June 2007. Each interest will consist of a minimum of 3 identifiable areas of land, each of 0.5 hectares in size and referred to as a 'Timberlot'. Initial cost is $5,500 per Timberlot.

When a Grower makes an application for Timberlots, the Grower will execute a Power of Attorney enabling BioForest to act on their behalf. This enables BioForest to enter into the Land Sourcing and Management Agreement, the Lease/Forestry Right and/or the Profit à Prendre/Forestry Right on behalf of the Grower.

A Grower participating in the Project will enter into a Land Sourcing and Management Agreement with BioForest (as the Grantor). Under the agreement, the Grantor agrees to grant a Lease/Forestry Right or a Profit à Prendre/Forestry Right in respect of a Timberlot to the Grower, within the period of 9 months commencing on the date of execution of the agreement.

BioForest is seeking suitable sites for the Project in NSW and QLD. This Product Ruling only applies to land which meets BioForest's site selection criteria. These criteria are as follows: • minimum land area is 40 hectares (within 1 kilometre radius). It must be reasonably 'regular' in shape and relatively smooth and flat; • long term rainfall (greater than 20 years records) must be greater than 800 millimetres per annum; • soils must be free draining to a depth of at least 3 metres (that is, no hard pans that impede drainage). Consideration will be given to soils that have an impeding layer less than 1 metre below surface and where it is considered that the effect of the impediment could be minimised by ripping; • sites will preferably be where the water table is at least 1 metre from the surface in the wettest period of the year, that is, no waterlogging; • sites will already be cleared of trees for agricultural use; and • sites will have a recent history of fertilizer application.

After the Lease/Forestry Right or the Profit à Prendre/Forestry Right of the Timberlot has been granted to a Grower, the Land Sourcing and Management Agreement provides that BioForest (as the Manager) will be responsible for establishing and cultivating trees on the Timberlot. The Manager will plant a minimum of 400 Silky Oak and 5,700 She-oak trees on each Timberlot. The Establishment Services must be completed within 12 months of the execution of the Land Sourcing and Management Agreement.

Each Grower will use their Timberlots for the purpose of carrying on a business of cultivating and harvesting Silky Oak ( Grevillea robusta ) and She-oak ( Casuarina cunninghamiana ) and the sale of harvested produce.

The Ruling only applies to Growers who are accepted into the Project on or after, 16 May 2007 and on or before 30 June 2007 and fund their participation in the Project with: • Willmott Forests Ltd, as described in paragraphs 77 to 82 of this Ruling; or • MIS Funding No. 1 Pty Ltd, as described in paragraphs 83 to 89 of this Ruling.

For other financing arrangements or when the Grower pays the Establishment Services fee in full on application, a separate Product Ruling, PR 2007/2, which has also issued for the Project may apply to that Grower.

The finance from Willmott Forests Ltd and MIS Funding No. 1 Pty Ltd is only available for Growers who are involved in the 2007 Premium Forestry Blend. The 2007 Premium Forestry Blend is where the Project for which this Ruling has issued is linked with the Willmott Forests Project - 2007 Product Disclosure Statement (Willmott Forests Project) for which PR 2006/127 has issued. Under the 2007 Premium Forestry Blend, a Grower must apply for a minimum of three 'Premium Blend Woodlots'. A Premium Blend Woodlot is: • one Timberlot in the Project (with an Establishment Services fee of $5,500 per Timberlot); and • two Woodlots in the Willmott Forests Project (with an application fee of $4,290 per Woodlot).

The application price for each Premium Blend Woodlot is $14,080.

In addition, this Ruling only applies to the Timberlots in the Project acquired under the 2007 Premium Forest Blend. To determine if any tax benefits are available for the Woodlots acquired in the Willmott Forests Project under the 2007 Premium Forestry Blend, the Grower must refer to PR 2006/127 that issued for the Willmott Forests Project .

The Constitution establishes the Project and operates as a deed binding on all of the Growers and BioForest as the Responsible Entity. The Constitution sets out the terms and conditions under which BioForest agrees to act as the Responsible Entity for the Project. Growers are bound by the Constitution by virtue of their participation in the Project.

Under the terms of the Constitution, all moneys received from Growers on application shall be paid to the Responsible Entity. The Responsible Entity shall deposit the moneys into the Application Fund (clauses 3.3 and 5). The application moneys will be released when the Responsible Entity is reasonably satisfied that certain specified criteria in the Constitution have been met (clauses 5, 7 and 8).

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

A Land Sourcing and Management Agreement (Management Agreement) will be entered into between BioForest (as the Grantor and Manager) and the Grower.

Under the Management Agreement, the Manager agrees to determine the location of areas of land or Timberlots that will be used by the Grower to carry on a long term commercial afforestation business. The Timberlots will be located in NSW and/or QLD. After the Timberlots are located and within 9 months of the execution of the Management Agreement, the Grantor will grant to the Grower: • a Lease/Forestry Right of the Timberlots, for the Timberlots located in NSW; and/or • a Profit à Prendre/Forestry Right for the Timberlots, located in QLD.

Under the Management Agreement the Grower appoints BioForest to manage the Grower's Timberlots. The Manager must provide the 'Establishment Services' and 'Services' as specified in the Management Agreement (clauses 1.1 and 5).

The Establishment Services will be completed during the 12 month period commencing from the date of execution of the Management Agreement (the Establishment Period). However, these services will only be conducted after a Lease/Forestry Right and/or a Profit à Prendre/Forestry Right is granted to the Grower for the Timberlots.

The Services will be provided from the expiry of the Establishment Period until the end of the Project.

The Establishment Services are paid for by the Establishment Services fees and the Services are paid for by Management and Maintenance fee (item 3 in the Schedule).

The Grower will appoint the Manager to arrange for the harvest and sale of the Forest Produce grown on the Grower's Timberlots (clauses 7 and 8 of the Management Agreement).

The Silky Oak trees are expected to be thinned when they are 10 years of age producing a commercial harvest of small sawlogs. They will be clear-felled at approximately 15 years of age. The She-oak trees, which re-grow after harvest, will be harvested at 2 to 3 yearly intervals until the final harvest at approximately 9 years (a total of 4 harvests).

The Manager will use its best endeavours to arrange for the processing of the Silky Oak produce and the sale of all the produce (whether processed or not). In determining whether to process the Silky Oak produce, the Manager will have regard to what is in the best interests of the Growers and consider all other relevant factors (clause 8 of the Management Agreement).

The unprocessed produce and, if applicable, the processed produce from each Grower's Timberlots will be pooled with other Growers' produce from the Project and sold by the Manager on behalf of the Growers. However, the produce will not be pooled with produce from the plantations of other growers outside this Project (clause 30 of the Constitution). The Manager will use its best endeavours to negotiate the sale of the produce for the maximum practicable price available, having regard to relevant factors such as marketable volumes, terms of contract and stability of purchaser (clause 8 of the Management Agreement).

The Growers' proceeds from the sale of the produce will be paid into a Proceeds Fund bank account (clause 3.3 of the Constitution). A Grower's Proportional Interest in these proceeds will be distributed to the Grower after deducting the amounts referred to in clause 10 of the Management Agreement. These deductions include: • the Grower's Proportional Interest of the Costs of Felling, the Costs of Sale and if applicable the Costs of Processing; and • Rent and Management and Maintenance fees due by the Grower to the Manager.

In the event of a partial or total destruction of the Trees on a Grower's Timberlots, and any successful claim made pursuant to a policy of insurance, the Manager will hold the Grower's insurance proceeds in the Proceeds Fund on trust for the Grower. On receipt by the Manager of insurance proceeds, the Manager must determine the Grower's Proportional Interest of the insurance proceeds and as soon as practicable after receipt, the Manager must pay to the Grower any Proportional Interest less any deductions and costs as stipulated under clause 12 of the Lease/Forestry Right/Profit à Prendre Agreement (clause 10(e) of the Management Agreement).

In the case of partial destruction of a Grower's Timberlot(s) and the remaining Trees being of sufficient quality and quantity to warrant the Project continuing, the Grower's Proportional Interest in the Forest Produce will be reduced to reflect a smaller number of Trees to be harvested by the Manager on the Grower's behalf (clause 12(i) of the Lease/Forestry Right/Profit à Prendre).

If the Manager determines that amounts in the Proceeds Fund are too small to be distributed, the Manager may postpone distribution of those amounts until it determines that a reasonable amount is available for distribution (clause 30.5 of the Constitution).

Where the Manager makes a determination under the Management Agreement that a Grower's Timberlots will be located in NSW, the Manager will execute a Lease/Forestry Right on behalf of the Grower to lease the Timberlots to the Grower. Where the Manager determines that a Grower's Timberlots will be located in QLD, it will execute a Profit à Prendre/Forestry Right on behalf of the Grower. The Manager may also determine that the Grower's Timberlots will be located in both NSW and QLD. In this situation, both a Lease/Forestry Right and a Profit à Prendre/Forestry Right will be executed on behalf of the Grower.

To protect the rights of the Growers (as described in paragraph 65 of this Ruling), the Manager will register with the relevant State land authorities the Lease/Forestry Right and/or the Profit à Prendre/Forestry Right held by the Growers during the term of the Project.

Both the Lease/Forestry Right and the Profit à Prendre/Forestry Right will give the Grower full right and interest in the produce and the right to have the produce sold (clause 11.3 of both the Lease and Deed of Profit à Prendre and clause 13.3 of the Forestry Right). The Lease/Forestry Right or Profit à Prendre/Forestry Right will terminate on the date that the final distribution of the sale proceeds is made to the Grower or on the date the Project is terminated, pursuant to the terms of the Constitution.

Each Grower must pay Rent to the Manager for the leasehold interest and/or the profit à prendre being an amount as specified in the Schedule to the Lease/Forestry Right and the Schedule to the Profit à Prendre.

Under both the Lease/Forestry Right and Profit à Prendre/Forestry Right, among other things, the Grower: • must not use the Timberlots for any purpose other than commercial silviculture; • must cultivate and work the Timberlots for the purpose of commercial silviculture; • shall keep the Timberlots reasonably free of noxious weeds, scrub and undergrowth and prevent erosion or degradation of the Timberlots; and • shall comply will all laws and regulations relating to the use and occupancy of the Grower's Timberlots.

The Manager will arrange for insurance that will be paid for by the Grower, to insure against destruction or damage to each Timberlot. In addition, the Grower may take out additional insurance cover for each of the Grower's Timberlots, at the Grower's own expense (clauses 5.4 and 12 of the Lease and Profit à Prendre and clauses 7.4 and 14 of the Forestry Right).

If all or substantially all of the Trees on the Grower's Timberlots are destroyed by fire or other cause, the Management Agreement and Lease/Forestry Right and/or Profit à Prendre/Forestry Right will terminate with effect from the time the event causing the destruction or damage occurs. However, the rights of the Manager and Grower will continue until all amounts required to be paid to the Grower out of the Proceeds Fund have been paid.

The Grower must pay the following amounts to the Manager for each Timberlot: • Establishment Services fee of $5,500 payable on application (item 3 of the Schedule to the Management Agreement); • Management and Maintenance fee of 11% of Net Proceeds of Sale (item 3 of the Schedule to the Management Agreement); • Rent of 25% of Gross Proceeds of Sale for any harvests of She-oak and 7% Gross Proceeds of Sale for any harvests of Silky oak (item 6 of the Schedule to the Lease/Forestry Right and Profit a Prendre/Forestry Right); • Costs of Felling, Costs of Sale and if applicable the Costs of Processing equal to the Grower's Proportional Interest of these costs. These costs are deducted from the Grower's Gross Proceeds of Sale (clause 10 of the Management Agreement); and • Annual Insurance Premiums that are applicable to the Timberlot are payable when advised by the Manager (clause 5.4 of both the Lease and the Deed of Profit à Prendre and clause 7.4 of the Forestry Right).

In the event of total destruction of the Grower's Trees on their Timberlots, where the destruction is caused by an event which is not covered by an insurance policy or against which insurance is not available, the Grower will be required to pay an amount to be determined under the agreements to cover the accrued Management and Maintenance fees and Rent at the time the Timberlots are destroyed.

To fund their involvement in the Project a Grower can either: • pay the application price under the Terms Agreement - 2007 Premium Forestry Blend (Terms Agreement); or • borrow from MIS Funding No. 1 Pty Ltd.

For other financing arrangements or when the Grower pays the Establishment Services fee in full on application, a separate Product Ruling, PR 2007/2, which has also issued for the Project may apply to that Grower.

A Grower cannot rely on this Product Ruling if they enter into a finance arrangement under the Terms Agreement or with MIS Funding No. 1 Pty Ltd that materially differs from that set out in the documentation provided to the Tax Office with the application for this Product Ruling.

Other than where a Terms Agreement is in place Growers cannot rely on any part of this Ruling if the Establishment Services fee is not paid in full to BioForest Ltd on or before 30 June 2007 on the Grower's behalf by MIS Funding No. 1 Pty Ltd.

The finance from Willmott Forests Ltd and MIS Funding No. 1 Pty Ltd is only available for Growers who participate in the 2007 Premium Forestry Blend, which is described at paragraphs 43 and 44 of this Ruling.

A Grower can finance the application price of $14,080 for each Premium Blend Woodlot by entering into a Terms Agreement with Willmott Forests Ltd, a related party.

The terms of payment are: • 12 months, interest free

The Grower is required to pay the application price by 12 monthly payments. The payments commence at the end of the following month after the Grower has been accepted to participate in the Project (clause 5(a)).

Each monthly payment in respect of the 'BioForest Amount' is paid to Willmott Forests Ltd on behalf of BioForest Ltd under this agreement and the Financing Agreement between Willmott Forests Ltd and BioForest Ltd. The BioForest Amount is the amount of $5,500 payable for each Timberlot that is included in the application price.

The terms of payment are secured by a mortgage over the Grower's interests in the Project and the Willmott Forests Project. Normal debt recovery procedures, including legal action, will be taken in the case of defaulting Growers (clauses 6 and 7).

There is no Terms Agreement application fee, however, a Grower is required to pay all of the costs, charges and expenses of Willmott Forests Ltd relating to the Terms Agreement and all stamp and transaction duties, registration fees and taxes in connection with the mortgaged property or the application or any other document (clause 5(d)).

A Grower can finance the application price of $14,080 for each Premium Blend Woodlot by borrowing that amount from MIS Funding No. 1 Pty Ltd.

Subject to MIS Funding No. 1 Pty Ltd accepting the Grower's application, the Grower will be bound by the terms and conditions of either the 'Loan Agreement - 2007 Premium Forestry Blend [ ] Years [Principal & Interest]' or the 'Loan Agreement - 2007 Premium Forestry Blend [ ] Years [Optional Interest Only]' (the Loan Agreements).

The loans options are: Principal and interest options : • 3 year term with an interest rate of 11.0% per annum; • 5 year term with an interest rate of 11.0% per annum; • 7 year term with an interest rate of 11.0% per annum; • 10 year term with an interest rate of 11.0% per annum; or • 12 year term with an interest rate of 11.0% per annum. Interest only period followed by principal and interest • 3 years interest only, with the principal payable at the end of the 3 year interest only term, with an interest rate of 11.0% per annum; • 5 year term with an interest rate of 11.0% per annum (first 3 years interest only); • 7 year term with an interest rate of 11.0% per annum (first 3 years interest only); • 10 year term with an interest rate of 11.0% per annum (first 3 years interest only); or • 12 year term with an interest rate of 11.0% per annum (first 3 years interest only).

The above interest rates are indicative rates only. The actual rate will be set and fixed for the period of the loan on 30 June 2007. The interest will accrue on the unpaid balance of the loan and is charged monthly in arrears (item 1.5 of the Project's First Supplementary Product Disclosure Statement and clause 11 of the Loan Agreements).

For each loan option, a Loan Application Fee of 0.3% of the amount of the loan is payable on application. This fee together with the application price forms part of the loan amount (clause 15 of the Loan Agreements).

Loan repayments are due on the last business of each month commencing from July 2007 (clause 5(a) of the Loan Agreements).

The above loans are secured by a mortgage over the Grower's interests in the Project and the Willmott Forests Project. Normal debt recovery procedures, including legal action, will be taken in the case of defaulting borrowers (clauses 6 and 7 of the Loan Agreements).

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 the Willmott Forests Ltd or MIS Funding No. 1 Pty Ltd are involved or become involved, in the provision of finance to Growers for the Project.

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

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

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

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

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

Subdivision 328-F sets out the eligibility requirements that a Grower must satisfy in order to enter the STS and Subdivision 328-G sets out the rules for entering and leaving the STS.

Changes to the STS rules apply from 1 July 2005. The question of whether a Grower is eligible to be an STS taxpayer is outside the scope of this Product Ruling (but refer to Taxation Ruling TR 2002/6 and Taxation Ruling TR 2002/11). Therefore, any Grower who relies on those parts of this Ruling that refer to the STS will be assumed to have correctly determined whether or not they are eligible to be an STS taxpayer.

The Establishment Services fee is deductible under section 8-1 (see paragraphs 43 and 44 of TR 2000/8). A 'non-income producing' purpose (see paragraphs 47 and 48 of TR 2000/8) is not identifiable in the arrangement and there is no capital component evident in the Establishment Services fees (see paragraphs 49 to 51 of TR 2000/8).

The tests of deductibility under the first limb of section 8-1 are met. The exclusions do not apply. Subject to the prepayment provisions (see paragraphs 102 to 109 of this Ruling) a deduction for these amounts can be claimed in the year in which they are incurred. (Note: the meaning of 'incurred' is explained in Taxation Ruling TR 97/7.)

Some Growers may finance their participation in the Project through a Loan Agreement with MIS Funding No. 1 Pty Ltd. Applying the same principles as that used for the Establishment Services fee, interest incurred under such a loan has sufficient connection with the gaining of assessable income to be deductible under section 8-1.

Other than where the prepayment provisions apply (see paragraphs 102 to 109 of this Ruling), a Grower can claim a deduction for such interest in the year in which it is incurred.

The prepayment provisions contained in Subdivision H of Division 3 of Part III of the ITAA 1936 affect the timing of deductions for certain prepaid expenditure. These provisions apply to certain expenditure incurred under an agreement in return for the doing of a thing under the agreement (for example, the performance of management services or the leasing of land) that will not be wholly done within the same year of income as the year in which the expenditure is incurred. If expenditure is incurred to cover the provision of services to be provided within the same income year, then it is not expenditure to which the prepayment rules apply.

For this Project, the only prepayment provisions that are relevant are section 82KZL of the ITAA 1936 (an interpretive provision) and section 82KZMG of the ITAA 1936 (an operative provision). References to sections 82KZME and 82KZMF of the ITAA 1936 are made only in respect their interaction with section 82KZMG and to confirm that these provisions have no application to expenditure incurred by Growers who participate in the scheme set out in this Ruling.

Other than the Establishment Services Fee (see below) the fees payable under scheme to which this Product Ruling applies are payable out of harvest proceeds and the interest payable to MIS Funding No.1 Pty Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to expenditure incurred by Growers under this scheme.

However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays interest under the Loan Agreements with MIS Funding No. 1 Pty Ltd. Where such a prepayment is made these prepayment provisions will also apply to STS taxpayers because there is no specific exclusion in section 82KZME that excludes them from the operation of section 82KZMF.

As noted in the Ruling part above, Growers who prepay interest are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project.

Expenditure that meets the requirements of section 82KZMG of the ITAA 1936 is excluded from the application of the prepayment rules in sections 82KZME and 82KZMF of the ITAA 1936 that would otherwise apply. Section 82KZMG provides a '12 month rule' that, in effect, facilitates an immediate deduction for certain prepaid expenditure incurred under a plantation forestry managed agreement. The 12 month rule applies to expenditure for 'seasonally dependent agronomic activities' that will be carried out during the establishment period of a particular planting of trees. Seasonally dependent agronomic activities are explained in Taxation Determination TD 2003/12. Whilst the establishment period itself may exceed 12 months, each seasonally dependent agronomic activity must be completed within 12 months of commencement of its eligible service period (as defined in subsection 82KZL(1) of the ITAA 1936), and by the end of the following income year.

Under the Land Sourcing and Management Agreement each Grower incurs an Establishment Services fee of $5,500 per Timberlot for seasonally dependent agronomic activities that will be carried out during the 'establishment period' of the trees.

The expenditure for seasonally dependent agronomic activities meets all other requirements of section 82KZMG of the ITAA 1936 and, therefore, a deduction is allowable in the income year ended 30 June 2007 for the full amount of expenditure incurred by the Grower for the Establishment Services fee.

In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years 30 June 2007 to 30 June 2022 or the year before clearfell, whichever is the earliest , 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.

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.

The exercise of the Commissioner's discretion under paragraph 35-55(1)(b) is conditional on the Project being carried on in the manner described in this Ruling during the income years specified. If the Project is carried out in a materially different way to that described in the Ruling a Grower will need to apply for a private ruling on the application of section 35-55 to those changed circumstances.

The operation of section 82KL of the ITAA 1936 depends, among other things, on the identification of a certain quantum of 'additional benefits(s)'. Insufficient additional benefits will be provided to trigger the application of section 82KL. It will not apply to deny the deduction otherwise allowable under section 8-1 of the ITAA 1997.

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).

The Project will be a 'scheme'. A Grower will obtain a tax benefit from entering into the scheme, in the form of tax deductions for the amounts detailed at paragraph 25 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.

Growers to whom this Ruling applies intend to stay in the scheme for its full term and derive assessable income from the harvesting and sale of the timber. 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 subsection 177D(b) of the ITAA 1936 it cannot be concluded, on the information available, that participants will enter into the scheme for the dominant purpose of obtaining a tax benefit.

The following is a detailed contents list for this Ruling: Paragraph What this Ruling is about 1 Class of entities 2 Superannuation Industry (Supervision) Act 1993 6 Qualifications 7 Date of effect 10 Changes in the law 15 Note to promoters and advisers 17 Goods and Services Tax 18 Ruling 19 Application of this Ruling 19 The Simplified Tax System (STS) 21 Division 328 21 25% entrepreneurs' tax offset 23 Subdivision 61-J 23 Assessable income 24 Section 6-5 and section 17-5 24 Deduction for Establishment Services fee, interest and Loan Application fee 25 Section 8-1, section 25-25 and Division 27 of the ITAA 1997 and section 82KZMG of the Income Tax Assessment Act 1936 25 Division 35 - deferral of losses from non-commercial business activities 26 Section 35-55 - exercise of Commissioner's discretion 26 Prepayment provisions and anti-avoidance provisions 27 Sections 82KZME, 82KZMF and 82KL and Part IVA 27 Scheme 28 Constitution 46 Compliance Plan 48 Land Sourcing and Management Agreement 49 Harvesting and Sale 55 Lease/Forestry Right and deed of Profit à Prendre/Forestry Right 63 Fees 70 Finance 72 Terms Agreement 77 Finance offered by MIS Funding No. 1 Pty Ltd 83 Appendix 1 - Explanation 91 Is the Grower carrying on a business? 91 The Simplified Tax System 96 Division 328 96 Deductibility of the Establishment Services fee and interest 98 Section 8-1 98 Prepayment provisions 102 Sections 82KZL to 82KZMG 102 Application of the prepayment provisions to this Project 104 Sections 82KZME and 82KZMF 104 Section 82KZMG 107 Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion 110 Section 82KL - recouped expenditure 113 Part IVA - general tax avoidance provisions 114 Appendix 2 - Detailed contents list 117