Income tax: Oak Valley Truffle Project 2008

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 Oak Valley Truffle Project 2008 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. In this Product Ruling, those entities that can rely on the tax benefits set out in this Ruling are referred to as Growers.

The class of entities who can rely on those tax benefits consists of entities that are accepted to participate in the scheme specified below on or after 16 January 2008, the date this Product Ruling is made, and which execute relevant Project Agreements mentioned in paragraph 33 of this Ruling between 16 March 2008 and 15 June 2008. 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 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 the Grower's Trufferie is established; • are accepted into this Project before 16 March 2008 or after 15 June 2008; or • participate in the scheme through offers made other than through the combined Prospectus and Product Disclosure Statement (PDS/Prospectus).

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 33 to 81 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.

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This Product Ruling applies prospectively from 16 January 2008, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 16 January 2008 until 15 June 2008, 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 2010.

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 may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect.

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 33 to 81 of this Ruling.

The Grower's participation in the Project must constitute the carrying on of a 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 the Grower is granted a lease under the Lease and Sub-lease for 2008 Growers (Lease and Sub-lease) and at the time of execution of their Project Operations Agreement for 2008 Growers (Project Operations Agreement).

From the 2007-08 income year, a range of concessions previously available under the simplified tax system (STS), will be available to an entity if it carries on a business and satisfies the $2 million aggregated turnover test (a 'small business entity').

A 'small business entity' can choose the concessions that best suit its needs. Eligibility for some small business concessions is also dependent on satisfying some additional conditions. Because of these choices and the eligibility conditions the application of the small business concessions to Growers who qualify as a 'small business entity' is not able to be dealt with in 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 revenue expenditure set out in the Table below on a per Trufferie basis. Fee Type Year ending 30 June 2008 Year ending 30 June 2009 Year ending 30 June 2010 Management Fees $6,600 See Notes (i), (ii) & (iv) $6,600 See Notes (i), (ii) & (iv) $4,180 See Notes (i), (ii) & (iv) Rent Must be calculated See Notes (i), (ii), (iii) & (iv) $671 (indexed) See Notes (i), (ii) & (iv) $671 (indexed) See Notes (i), (ii) & (iv) Interest payable under the Terms Agreement in relation to Management Fees and Rent As incurred See Notes (ii), (iv) & (v) As incurred See Notes (ii), (iv) & (v) Nil 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) Subject to Note (iii) the Management Fees, Rent and interest payable under the Terms Agreement for 2008 Terms Growers (Terms Agreement) in relation to the Management Fees and Rent are deductible under section 8-1 in the income year in which they are incurred. (iii) For the year ended 30 June 2008 rent payable under the Lease Agreement is $671. However, the amount that can be claimed as a deduction for Rent in the year ended 30 June 2008 is $55.91 per month for each month or part month that the Grower is granted the sub-lease to use the Trufferie. (iv) This Ruling does not apply to Growers who choose to prepay fees or who choose, or are required to prepay interest under a loan agreement (see paragraphs 96 to 100 of this Ruling). Subject to certain exclusions, amounts that are prepaid for a period that extends beyond the income year in which the expenditure is incurred may be subject to the prepayment provisions in sections 82KZME and 82KZMF of the Income Tax Assessment Act 1936 (ITAA 1936). Any Grower who prepays such amounts may request a private ruling on the taxation consequences of their participation in the Project. (v) The deductibility or otherwise of interest arising from agreements entered into with financiers other than Watershed Premium Wines Ltd, in relation to the Terms Agreement, is outside the scope of this Ruling. Growers who enter into agreements with other financiers may request a private ruling on the deductibility of the interest incurred.

A Grower will also be entitled to tax deductions for the application fee payable under the Terms Agreement and for the establishment of the truffles. All deductions shown in the following Table are determined under Division 40, on a per Trufferie basis. Fee Type Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010 Application fee - Terms Agreement (Watershed Premium Wines Ltd) $10 See Notes (i) and (vi) $10 See Notes (i) and (vi) $10 See Notes (i) and (vi) Establishment of the truffles Nil See Note (vii) Nil See Note (vii) Nil See Note (vii) Notes: (vi) The application fee payable to Watershed Premium Wines Ltd, in relation to the Terms Agreement, is not deductible in full when it is incurred. Under section 40-880 it is deductible in equal proportions over five income years beginning in the year in which the application fee is incurred (see paragraphs 94 and 95 of this Ruling). (vii) A 'horticultural plant' is a 'depreciating asset' as defined in section 40-30 and Oak trees, Hazelnut trees and truffles are 'horticultural plants' as defined in subsection 40-520(2). As Growers hold the land under a lease, one of the conditions in subsection 40-525(2) is met and a deduction for 'horticultural plants' is available under paragraph 40-515(1)(b) for their decline in value. The deduction for the Oak and Hazelnut trees is determined using the formula in section 40-545 and is based on the capital expenditure incurred that is attributable to their establishment. If the Oak and Hazelnut trees have an 'effective life' of 30 years or more for the purposes of section 40-545, this results in a straight-line write-off at a rate of 7% per annum. The deduction is allowable when the truffles, harvested from the Oak and Hazelnut trees enter their first commercial season (section 40-530, item 2). The Responsible Entity will inform Growers of when the truffles enter their first commercial season and the amount that may be claimed as a tax deduction.

The shares in Truffle Properties Limited are CGT assets (section 108-5) and the amounts paid by a shareholder to acquire the shares are an outgoing of capital and not allowable as a deduction.

The amounts paid for each share will represent the first element of the cost base of the share (subsection 110-25(2)). Any disposal of the shares by a shareholder will be a CGT event and may give rise to a capital gain or loss.

A Grower who is a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, for such a Grower, for an income year, the difference between the value of all their trading stock at the start and a reasonable estimate of it at the end, is less than $5,000, they can choose not to account for that difference under the ordinary trading stock rules in Division 70 (subsection 328-285(1)).

Where the small business entity chooses to account for changes in the value of their trading stock for an income year, they will have to do a stocktake and account for the change in the value of all their trading stock (Subdivision 70-C).

A Grower who is not a 'small business entity' may, in some years, hold truffles and hazelnuts that will constitute trading stock on hand. Where, in an income year, the value of trading stock on hand at the end of an income year exceeds the value of trading stock on hand at the start of an income year a Grower must include the amount of that excess in assessable income.

Alternatively, where the value of trading stock on hand at the start of an income year exceeds the value of trading stock on hand at the end of an income year, a Grower may claim the amount of that excess as an allowable deduction.

A Grower who is an individual accepted into the Project by 15 June 2008 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 these Growers for the income years ended 30 June 2008 to 30 June 2014. 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 expenditure as required by the Project Operations Agreement and the Lease and Sub-lease, 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 (but see paragraphs 96 to 100 of this Ruling); • 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 identified and described in the following documents: • Application for a Product Ruling received on 31 August 2007 as constituted by documents and additional correspondence, including emails, received on 26 October 2007; • Draft Product Disclosure Statement/Prospectus of the Oak Valley Truffle Project 2008 received 26 October 2007; • Draft Constitution for the Oak Valley Truffle Project 2008 received 26 October 2007; • Draft Lease and Sub-lease for 2008 Growers of the Oak Valley Truffle Project 2008, between Truffle Properties Limited (Land Owner), Watershed Premium Wines Ltd (Responsible Entity) and the Grower received 31 August 2007; • Draft Umbrella Lease between Truffle Properties Limited (Lessor) and Watershed Premium Wines Ltd (Lessee) received 31 August 2007; • Draft Project Operations Agreement for 2008 Growers of the Oak Valley Truffle Project 2008 between Watershed Premium Wines Ltd (Responsible Entity) and the Grower received 26 October 2007; • Draft Compliance Plan for the Oak Valley Truffle Project 2008 received 31 August 2007; • Draft Marketing and Management Agreement of the Oak Valley Truffle Project 2008, between Truffle Projects Pty Ltd (Manager) and Watershed Premium Wines Ltd (Responsible Entity) received 31 August 2007; and • Draft Terms Agreement for 2008 Terms Growers for the Oak Valley Truffle Project 2008 between Watershed Premium Wines Ltd (Responsible Entity) and the 2008 Terms Grower received 26 October 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. The effect of these agreements is summarised as follows.

All Australian Securities and Investment Commission (ASIC) requirements are, or will be, complied with for the term of the agreements. The effect of these agreements is summarised as follows.

Following is a summary of the scheme: Location 10 kms south-west of Manjimup, Western Australia Type of business Commercial growing and cultivation of Oak and Hazelnut trees for the purpose of harvesting truffles and hazelnuts for sale The term of the Project 20 years Size of each interest 0.2 hectare Number of hectares offered for cultivation Up to a maximum of 45 hectares Number of trees per interest 50 Oak and 50 Hazelnut trees Initial cost per interest $14,287 comprising a Management Fee of $6,600, Rent of $671 and $7,016 for 3,508 ordinary shares in Truffle Properties Limited Ongoing costs Annual Management Fees and Rent, Harvest Fees and insurance costs

The Project is registered as a managed investment scheme under the Corporations Act 2001. Watershed Premium Wines Ltd has been issued with Australian Financial Service Licence No 296166 and will be the Responsible Entity for the Project.

The Project involves the commercial growing, cultivation and harvesting of truffles and hazelnuts.

An offer to participate in the Project will be made through a combined PDS/Prospectus. The offer under the PDS/Prospectus is for approximately 45 hectares which corresponds to 225 Trufferies. There is no minimum subscription for the Project. There are no oversubscriptions offered under the PDS/Prospectus.

The offer under the PDS/Prospectus is a stapled interest. A Grower that participates in the Project will do so by acquiring an interest in the Project which will consist of a minimum of one Trufferie. For each Trufferie applied for, an Applicant must also apply for 3,508 ordinary shares in the Land Owner, Truffle Properties Limited. The shares can be held by any entity and can be held in a different name from the Trufferie owner. Once the Responsible Entity has allotted a Trufferie to a Grower, the offer is no longer stapled and the shares can be transferred separately to the interest in the Trufferie. This Ruling does not address the tax consequences of disposing of shares in Truffle Properties Limited.

Applicants execute a Power of Attorney contained in the PDS/Prospectus. The Power of Attorney irrevocably appoints Watershed Premium Wines Ltd to enter into, on behalf of the Grower, a Lease and Sub-lease, a Project Operations Agreement, the application for shares in Truffle Properties Limited and any other documents required to hold an interest in the Project.

Watershed Premium Wines Ltd will allocate established Trufferies to Applicants who are accepted as Growers in the Project. Truffle Properties Limited (the Land Owner) will plant approximately 50 Oak and 50 Hazelnut trees which have been inoculated with black truffle fungus on each Trufferie.

This Ruling only applies to Applicants who are accepted to participate in the Project and who are granted a lease under the Lease and Sub-lease and who execute the Project Operations Agreement on or after 16 March 2008 and on or before 15 June 2008.

The Project will be conducted on land located approximately 10 kilometres south-west of Manjimup, Western Australia on the corner of Seven Day Road and Appadene Road.

The Project land is owned by Truffle Properties Limited and will be leased to the Grower. Specifically, the property is described as Lot 102 on Deposited Plan 47397 being the whole of the land comprised in Certificate of Title Volume 2616 Folio 415 and Lot 11 on Diagram 92046 being the whole of the land comprised in Certificate of Title Volume 2156 Folio 98.

The Constitution establishes the Project and operates as a deed binding on all Growers and Watershed Premium Wines Ltd. The Constitution sets out the terms and conditions under which Watershed Premium Wines Ltd agrees to act as Responsible Entity and thereby manage the Project. Upon acceptance into the Project, Growers are bound by the Constitution by virtue of their participation in the Project.

In order to acquire an interest in the Project, the Grower must make an application for a Trufferie in accordance with the PDS/Prospectus. Among other things, the application must be completed in a form approved by the Responsible Entity, signed by or on behalf of the Applicant and accompanied by the payment of the Application Money in a form acceptable to the Responsible Entity.

Watershed Premium Wines Ltd holds the Application Money on bare trust and will deposit all Application Moneys received from applicants in a Trust Account (clause 6).

Once Watershed Premium Wines Ltd has accepted the application and all of the Project Documents have been executed and remain in force, the Application Money may be applied against the fees due to Watershed Premium Wines Ltd (clause 3.6).

Under the Constitution, the Responsible Entity will keep a register of Growers. The Constitution also sets out provisions relating to: • the Responsible Entity's powers (clause 6); • delegation of powers (clauses 7 and 9); • complaints handling (clause 13); and • winding up the Project (clause 15).

As required by the Corporations Act, a Compliance Plan has been prepared for the Project. Its purpose is to ensure that Watershed Premium Wines Ltd manages the Project in accordance with its obligations and responsibilities contained in the Constitution and that the interests of Growers are protected.

Growers are granted an interest in the Trufferie in the form of a lease to use their Trufferie for the purpose of conducting their truffle and hazelnut business upon the terms and conditions as set out in the Agreement.

The Lease and Sub-lease sets out the rights and obligations of the parties to the Agreement. Under the terms of the Lease and Sub-lease each Grower will lease a minimum of 1 Trufferie of 0.2 hectares. The Lease and Sub-lease shall operate from the date the Trufferie is allotted to the Grower and will continue until the Project is terminated on 30 June 2028 (Part 4 of the Schedule).

Clause 4 provides that the improvements on the Land, including the irrigation, are the property of the Land Owner. The Land Owner grants the Grower the non-exclusive right to use: • the irrigation for the purpose of cultivating the trees; • the right to draw water from any dams on the Land or any other dam or water source for which the Land Owner has access; and • all other infrastructure, plant and equipment available to, or owned by, the Land owner in or about the Land.

The Land Owner acknowledges that subject to any provisions of the Lease and Sub-lease the Grower's truffles and hazelnuts will remain the property of the Grower during the Term of the Lease and Sub-lease (clause 2.4).

The Grower's obligations are set out in detail in clause 5 under which the Grower agrees to use the Trufferie for the purpose of cultivating, maintaining and harvesting the truffles and hazelnuts in accordance with sound silvicultural practices.

Under the Project Operations Agreement the Grower appoints the Responsible Entity to manage the Trufferie and to carry out management services subject to the terms and conditions of the Agreement. The Agreement will commence on the date the Responsible Entity accepts the Grower's application under the PDS/Prospectus and shall continue until its termination under clause 15.

The following Initial Services will be provided during the Initial Period, being from the Commencement Date to 30 June 2008: • testing of Oak and Hazelnut trees for infection; • certifying the trees as having been inoculated and infected with Truffle; • irrigate the Oak and Hazelnut trees and maintain the trees in accordance with sound silvicultural practices; • vermin control; and • maintain the irrigation system installed by the Land Owner.

As part of the Initial Services the Responsible Entity will apply lime, herbicide and fertiliser to the Trufferie between 16 June 2008 and 30 June 2008.

The Responsible Entity will commence the provision of the Ongoing Services from 1 July 2008 until the expiry of the Lease.

The Ongoing Services include: • maintain the irrigation system installed by the Land Owner; • irrigate the Oak and Hazelnut trees on the Land; • maintain the Trufferies in a proper and skilful manner pursuant to the Trufferie Establishment and Maintenance Plan; • to tend to and cultivate the Oak and Hazelnut trees according to the principles of sound silvicultural practice, including the application of fertiliser and other chemicals, as the Manager deems appropriate to promote tree and truffle growth and yields; • to do such things as may reasonably be required to eradicate, exterminate and keep the Trufferies and the Land free from disease, vermin, noxious weeds, rabbits, kangaroos, insect pests and all other pests; and • to keep the following insurance policies current with a reputable insurer: (i) a public risk insurance policy in respect of the Trufferies at the Manager's cost; (ii) insurance on behalf of all Growers' Trufferies in relation to hail, fire, malicious damage, lightning and explosions for such period as is promised to the Grower under the Project Operations Agreement; and (iii) to develop and continually monitor the Truffle Processing and Marketing Plan.

The Responsible Entity will send a report to the Grower no later than 31 July 2009 and by 31 July of each succeeding year summarising details of all hazelnuts and truffles harvested in the preceding financial year and any other comments that may reasonably affect the Project.

Watershed Premium Wines Ltd will enter into a Marketing and Management Agreement with Truffle Projects Pty Ltd. Under this Agreement Watershed Premium Wines Ltd engages Truffle Projects Pty Ltd (the Manager) as an independent contractor to carry out its duties and obligations under the Project Operations Agreement for the Term of the Project (clause 2). The Manager may delegate its responsibilities under this Agreement.

The Project Operations Agreement sets out the provisions relating to the Grower's entitlement to harvest proceeds. This Product ruling only applies where the following principles apply to the pooling and distribution arrangements. • only Growers who have contributed truffles and hazelnuts are entitled to benefit from distributions of harvest proceeds from the pool; and • any pooled proceeds must consist only of proceeds contributed by Growers in the Oak Valley Truffle Project 2008.

Where a Grower's Trufferie is damaged the Grower, the Land Owner and the Responsible Entity will assess the damage and determine whether the obligations under the Project Operations Agreement should be terminated. Where the Trufferies are partially destroyed the size of the Trufferie will be reduced and there will be a corresponding reduction in the Grower's fees. In addition, the Grower's proportional interest in the pooled produce will be reduced.

The proceeds from the sale of the Grower's truffles and hazelnuts will be paid into a Trust Account held by the Bare Trustee (clause 6 of the Constitution). A Grower's Prescribed Proportion of the proceeds will be distributed to the Grower after deducting the fees and costs referred to in clause 12 of the Constitution. If the aggregate sum to be distributed is less than $1,000, then at the discretion of the Responsible Entity, the distribution to Growers may be postponed. The term 'Prescribed Proportion' is defined in the Constitution.

Under the terms of the Project Operations Agreement, and the Lease and Sub-lease a Grower will make payments as described below on a per Trufferie basis.

The following Fees are payable under the Project Operations Agreement: • a Management Fee of $6,600 for Initial Services, payable on application (see paragraphs 71 and 72 of this Ruling for payment options); • a Management Fee of $6,600 for Ongoing Services provided from 1 July 2008 until 30 June 2009, payable on or before 1 June 2009 (Part 2 of the Schedule); • Management Fees of $4,180 and $4,840 for Ongoing Services provided in each of the Financial Years ended 30 June 2010 and 30 June 2011, payable on or before 1 June 2010 and 1 June 2011 respectively (Part 2 of the Schedule); • for the Financial Year ended 30 June 2012 and each succeeding Financial Year until the expiry of the Lease and Sub-lease, Management Fees based on the actual cost to the Responsible Entity of performing the Ongoing Services, plus 20% of the Net Proceeds, plus the Grower's share of insurance premiums (clause 4.2); and • a Harvest Fee equal to 5.5% of the Grower's share of the Gross Proceeds for Harvesting, freighting and making the truffles and hazelnuts available for sale (clause 7.4).

Rent of $671 for the Initial Period is payable on application (see paragraphs 71 and 72 of this Ruling for payment options).

For the Financial Year ended 30 June 2009, and each succeeding Financial Year, a Grower is required to pay an amount of Rent equal to the amount paid in the previous Financial Year indexed by CPI or 3%, whichever is the greater. The annual Rent is payable in arrears on 1 June of each year for the Term of the Project.

Application Money of $14,287 per Trufferie is payable on application. The Application Money consists of: • a Management Fee of $6,600 for the provision of Initial Services; • Rent of $671 for the Initial Period; and • $7,016 for the purchase of 3,508 ordinary shares in Truffle Properties Limited.

Upon signing the Application Form, the Grower acknowledges that the full amount of the application money is immediately due and payable. However, under the PDS/Prospectus, the Responsible Entity is offering a Terms Agreement for payment of the Application Money (see paragraphs 76 to 80 of this Ruling).

A Grower who does not pay the Application Money in full upon application may enter into a Terms Agreement with Watershed Premium Wines Ltd or borrow from an independent lender external to the Project.

Only the finance arrangements set out below are covered by this Product Ruling. A Grower cannot rely on this Product Ruling if the Grower enters into a finance arrangement with Watershed Premium Wines Ltd that materially differs from that set out in the documentation provided to the Tax Office with the application for the Product Ruling. A Grower who enters into a finance arrangement with an independent lender external to the Project may request a private ruling on the deductibility or otherwise of interest under finance arrangements not covered by this Product Ruling.

Other than where a Terms Agreement is in place Growers cannot rely on any part of this Ruling if the Application Money is not paid in full on or before 15 June 2008 by the Grower or, on the Grower's behalf, by a lending institution.

If a Grower chooses to pay the Application Money under the Terms Agreement, they must complete a Terms Application Form and Direct Debit Request. Growers must pay a non-refundable application fee of $50 per Trufferie applied for.

Under the Terms Agreement a deposit of $711 is payable on application with the balance payable by 12 equal monthly instalments of $1,208 (including interest at 11.5% per annum daily reducing). The deposit will be applied as follows: • $50 for the application fee payable under the Terms Agreement; and • $661 for the GST on the Management Fees and Rent payable in the Initial Year.

The first monthly payment is due one month from the date of Allotment. The full amount of the Application Money must be paid no later than 12 months from the date the Grower is accepted to participate in the Project.

If a Grower does not pay the required instalments under the Terms Agreement, the balance of principal, interest and any additional costs payable under the Agreement becomes immediately due and payable to the Responsible Entity. In addition, the Responsible Entity may take legal action to recover the balance of principal and interest and any costs payable under this Agreement or any other legal action relating to this Agreement, take possession of the Grower's Trufferie and do anything an owner of the secured property is entitled to do (clause 9.2 of the Terms Agreement).

Watershed Premium Wines Ltd may charge the Grower interest on overdue amounts (clause 2.6).

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 Watershed Premium Wines Ltd in relation to the Terms Agreement, are involved or become involved in the provision of finance to Growers for the Project.

For the amounts set out in paragraphs 23 and 24 of this Ruling to constitute allowable deductions, the Grower's horticulture activities as a participant in the Oak Valley Truffle Project 2008 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 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, are more specific to arrangements such as the Oak Valley Truffle Project 2008. 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 Oak Valley Truffle Project 2008 is accepted to be carrying on a business of growing and harvesting truffles and hazelnuts for sale.

Other than part of the Rent payable in the year ended 30 June 2008, the Management Fees and Rent are 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, other than part of the Rent in the Initial Period, there is no capital component evident in the Management Fees and interest (see paragraphs 49 to 51 of TR 2000/8).

Subject to paragraphs 89 and 90 of this Ruling the tests of deductibility under the first limb of section 8-1 are met and the exclusions do not apply.

One of the exclusions under section 8-1 relates to expenditure that is capital, or is capital in nature. Any part of the expenditure of a Grower entering into a horticulture business which is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and hence will not be deductible under section 8-1. The Commissioner is of the view that a portion of the Rent payable by a Grower will be capital expenditure.

A Grower who enters the Project on or before 15 June 2008 pays Rent of $671 in the year ended 30 June 2008 which is equivalent to the amount of Rent payable for one full income year. As the Grower does not lease the land for the full income year and there is no reduction in the Rent in the initial year to reflect the actual period of the lease, it is considered that part of the Rent is a premium paid by the Grower for the grant of the lease and is capital in nature. Therefore, under section 8-1 Growers will be entitled to a partial deduction of $55.91 calculated on a pro-rata monthly basis for each month or part month that the Grower is granted the lease to use the Trufferie from Truffle Properties Limited.

Subject to this qualification and provided that the prepayment provisions do not apply (see paragraphs 96 to 100 of this Ruling) a deduction for the Management Fees and Rent 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 Terms Agreement with Watershed Premium Wines Ltd. Applying the same principles as that used for the Management Fees and Rent, interest incurred under the Terms Agreement in interest payable under the Terms Agreement in relation to the Management Fees and Rent 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 96 to 100 of this Ruling), a Grower can claim a deduction for interest in relation to the Management Fees and Rent in the year in which it is incurred.

Growers who elect to pay their Grower's contribution under the Terms Agreement must pay an application fee of $50 per Trufferie. This expenditure does not constitute a borrowing expense and is therefore not deductible under section 25-25. As it is capital in nature it is also not deductible under section 8-1.

However, section 40-880 will allow the application fee to be deducted in equal proportions over five income years starting in the year in which the Grower incurred the amount (subsection 40-880(2). Section 40-880 applies to capital expenditure that is incurred in relation to a business and which is not taken into account elsewhere or denied deductibility under another provision of income tax law.

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 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 sections 82KZME and 82KZMF of the ITAA 1936 (operative provisions).

Under the Scheme to which this Product Ruling applies the Management Fees and Rent are incurred annually and the interest payable to Watershed Premium Wines Ltd is incurred monthly in arrears. Accordingly, the prepayment provisions in sections 82KZME and 82KZMF of the ITAA 1936 have no application to this Scheme.

However, sections 82KZME and 82KZMF of the ITAA 1936 may have relevance if a Grower in this Project prepays all or some of the expenditure payable under the Project Operations Agreement and/or Lease and Sub-lease, or prepays interest under a loan agreement (including loan agreements with lenders other than Watershed Premium Wines Ltd in relation to the Terms Agreement). Where such a prepayment is made these prepayment provisions will also apply to small business entities because there is no specific exclusion contained in section 82KZME that excludes them from the operation of section 82KZMF.

As noted in the Ruling section above, Growers who prepay fees or interest referred to in paragraph 23 of this Ruling are not covered by this Product Ruling and may instead request a private ruling on the tax consequences of their participation in this Project.

Any part of the expenditure if a Grower that is attributable to acquiring an asset or advantage of an enduring kind is generally capital or capital in nature and will not be an allowable deduction under section 8-1. In this Project, expenditure attributable to the establishment of the truffles and the application fee for the Terms Agreement (where applicable) are of a capital nature. This expenditure falls for consideration under Division 40.

The tax treatment of capital expenditure has been dealt with in a representative way in the Table and the accompanying notes in paragraph 24 of this Ruling.

In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income year ending 30 June 2008 to 30 June 2014, 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 truffle farming 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 of the ITAA 1936. 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 Oak Valley Truffle Project 2008 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 paragraphs 23 and 24 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 truffles and hazelnuts. There are no facts that would suggest that Growers have the opportunity of obtaining a tax advantage other than the tax advantages identified in this Ruling. There is no non-recourse financing or round robin characteristics, and no indication that the parties are not dealing at arm's length or, if any parties are not dealing at arm's length, that any adverse tax consequences result. Further, having regard to the factors to be considered under paragraph 177D(b) of the ITAA 1936 it cannot be concluded on the information available, that 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 5 Qualifications 6 Date of effect 9 Changes in the law 14 Note to promoters and advisers 16 Goods and Services Tax 17 Ruling 18 Application of this Ruling 18 Concessions for small business 20 Assessable income 22 Sections 6-5 and 17-5 22 Deductions for Management Fees, Rent and interest 23 Section 8-1 23 Deductions for capital expenditure 24 Division 40 24 Shares in Truffle Properties Limited 25 Part 3-1 25 Treatment of trading stock 27 Section 328-285 27 Section 70-35 29 Division 35 - deferral of losses from non-commercial business activities 31 Section 35-55 - exercise of Commissioner's discretion 31 Prepayment provisions and anti-avoidance provisions 32 Sections 82KZME, 82KZMF and 82KL and Part IVA 32 Scheme 33 Overview 36 Constitution 46 Compliance Plan 51 Lease and Sub-lease for 2008 Growers 52 Project Operations Agreement 57 Marketing and Management Agreement 63 Pooling of truffles and hazelnuts and Grower's entitlement to Net Proceeds 64 Fees 67 Project Operations Agreement 68 Lease and Sub-lease 69 Application Money 71 Finance 73 Terms Agreement 76 Appendix 1 - Explanation 82 Is the Grower carrying on a business 82 Deductibility of Management Fees, Rent and Interest on the terms Payment 87 Terms Agreement application fee 94 Section 40-880 94 Prepayment provisions 96 Sections 82KZL to 82KZMF 96 Application of the prepayment provisions to this Project 98 Expenditure of a capital nature 101 Division 40 101 Division 35 - deferral of losses from non-commercial business activities 103 Section 35-55 - exercise of Commissioner's discretion 103 Section 82KL - recouped expenditure 106 Part IVA - general tax avoidance provisions 107 Appendix 2 - Detailed contents list 110