Income tax: WA Blue Gum Project 2009 (Growers not in Joint Venture)

This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Ruling relates. In this Product Ruling this scheme is referred to as the scheme, the WA Blue Gum Project 2009, or simply as the Project.

All legislative references in this Product Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. Where used in this Product Ruling, the word 'associate' has the meaning given in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). In this Product Ruling, terms defined in the Project agreements have been capitalised.

This part of the Product Ruling specifies which entities: • are subject to the taxation obligations; and • can rely on the taxation benefits, set out in the Ruling section of this Product Ruling.

The members of the class of entities who are subject to those taxation obligations and who can rely on those taxation benefits are referred to in this Product Ruling as Growers.

Growers are those entities that: • meet the definition of 'initial participant' in subsection 394-15(5); and • are accepted to take part in the scheme specified below on or after the date this Product Ruling is made.

A Grower will have executed the relevant Project agreements set out in paragraph 44 of this Ruling on or before 30 June 2009 and will hold a 'forestry interest' in the Project.

The class of entities who can rely on this Product Ruling does not include: • Growers who are accepted into this Project before the date of this Ruling or after 30 June 2009; • Growers who participate in the scheme through offers made other than through the Combined Product Disclosure Statement and Financial Services Guide (PDS); or who enter into an undisclosed arrangement with the promoter or a promoter associate, or an independent adviser that is interdependent with scheme obligations and/or scheme benefits (which may include tax benefits or harvest returns) in any way; • Growers whose Application Money, including all loan monies, is not paid in full to WA Blue Gum Limited (WABG) by 30 June 2009, either by the Grower, and/or on the Grower's behalf by a lending institution; • Growers who enter into finance arrangements with Albany Financial Pty Ltd (Albany) other than those described at paragraphs 89 to 91 of this Ruling; or • Joint Venture Growers.

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 44 to 92 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 Copyright Law Branch Attorney-General's Department National Circuit Barton ACT 2600 or posted at: http://www.ag.gov.au/cca

This Product Ruling applies prospectively from 20 May 2009, the date this Product Ruling is made. It therefore applies only to the specified class of entities that enter into the scheme from 20 May 2009 until 30 June 2009, 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 all income years up to the income year in which the scheme is terminated in accordance with the Constitution.

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.

Although this Product Ruling deals with the income tax 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 any creditable acquisition that it makes, it must be registered or required to be registered for GST and hold a valid tax invoice.

The WA Blue Gum Project 2009 is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is the establishment and tending of Eucalyptus globulus (Tasmanian blue gum) trees for felling in Australia.

Subject to the stated qualifications, this part of the Product Ruling sets out in detail the taxation obligations and benefits for an 'initial participant' [1] in the defined class of entities (see paragraphs 4 to 7 of this Ruling) who is accepted to participate in the 'forestry managed investment scheme' described at paragraphs 44 to 92 of this Ruling on or after 20 May 2009 and on or before 30 June 2009.

An entity that takes part in the Project as a 'subsequent participant' [2] is not covered by this Product Ruling but may request a private ruling on their participation in the Project. A 'subsequent participant' is an entity that does not meet the definition of 'initial participant' in subsection 394-15(5).

Although not relevant for the purposes of Division 394, a Grower (as described in paragraphs 4 to 6 of this Ruling) who will stay in the Project until it is completed will be considered to be carrying on a business of primary production. Such Growers who are individuals will be subject to the operation of Division 35 (see paragraphs 41 and 42 of this Ruling).

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.

The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by WABG. On the basis of that information the Commissioner has decided that on 30 June 2009 it will be reasonable to expect that the '70% DFE rule' [4] will be satisfied. The Tax Office may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'.

The Ruling will only apply if WABG establishes all of the trees that were intended to be established under the Project within 18 months of the end of the income year in which the first 'participant' in the Project is accepted. [5] For this Project the trees must be established on or before 31 December 2010.

In the context of this Project, the trees will be established when they are planted on the land acquired for the purposes of the Project at the average rate of approximately 1,000 trees per hectare. WABG is required by section 394-10 of Schedule 1 of the Taxation Administration Act 1953 (TAA) to notify the Tax Office if the trees are not established by 31 December 2010.

A Grower in the Project can claim, on a per hectare basis, deductions for the amounts shown in the Table below that are paid to WABG (sections 8-5 and 394-10).

The deductibility of these amounts remains subject to a requirement that a CGT event [6] does not happen in relation to the Grower's 'forestry interest' before 1 July 2013 (see paragraphs 32 to 34 of this Ruling).

The amount is deductible in the income year in which it is paid, or is paid on behalf of the Grower (subsection 394-10(2) and section 394-20). Where a Grower does not fully pay an amount, or it is not fully paid on their behalf in an income year, it is deductible only to the extent to which it has been paid. Any unpaid amount is then deductible in the year or years in which it is actually paid.

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.

Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). Fee Amount Year(s) deductible Establishment fee $5,500 2009 Tending fees $110 per annum, Indexed All years from 2010 to final year of Project Rent for Sub-lease executed on or before 30 June 2009 $489.50 per annum, Indexed All years from 2010 to final year of Project Rent for Sub-lease executed after 30 June 2009 As paid See Note (i) All years from 2010 to final year of Project Insurance costs As paid All years from 2010 to final year of Project Harvest, Delivery and supervision expenses As paid The year(s) in which such expenses are paid Incentive fee 15% of the amount by which the net proceeds from the sale of the Wood exceeds $17,050, Indexed Final year of Project Unforseen expenses As paid The year(s) in which such amount is paid Note: (i) Where a Grower enters into the Sub-lease after 30 June 2009, the Rent payable under the Sub-lease for the year ending 30 June 2010 will be 1/12 of $489.50, Indexed, for each full and part calendar month that the Grower is granted the Sub-lease. Thereafter, the annual Rent payable will be $489.50, Indexed. The Rent deductible in each year will be equal to the amount paid by the Grower in the relevant year.

Deductions for the establishment fee, the tending fees, Rent, insurance and unforseen expenses are not allowable where a 'CGT event' happens in relation to the 'forestry interest' of a Grower before 1 July 2013 (subsection 394-10(5)).

Where deductions for these amounts have already been claimed by a Grower the Commissioner may amend their assessment at any time within two years of the 'CGT event' happening (subsection 394-10(6) of the ITAA 1997). The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936.

Growers whose deductions are disallowed because of subsection 394-10(5) are still required to include in assessable income the market value of the 'forestry interest' at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event'.

A Grower in the Project can claim deductions for interest incurred on a loan to fund their investment in the Project (paragraph 8-1(1)(a)). This Ruling only applies to loans between a Grower and Albany. Growers who borrow from other financiers may apply for a private ruling on the deductibility of loan interest or may self assess the deductibility of the interest.

Any credit (or similar) card merchant fees incurred by a Grower using their credit (or similar) card to pay any fees under the Project will be deductible under section 8-1. The deduction is allowable in the year in which the merchant fee is incurred.

Where a 'CGT event' happens to a 'forestry interest' held by a Grower in this Project the market value of the 'forestry interest', or the decrease in the market value of the 'forestry interest', is included in the assessable income of the Grower (sections 6-10 and 394-25), less any GST payable on those proceeds (section 17-5).

The relevant amount is included in the Grower's assessable income in the income year in which the 'CGT event' happens (subsection 394-25(2)).

'CGT events' for these purposes include those relating to: • a clear-fell harvest of all or part of the trees grown under the Project; • the sale, or any other disposal of all or part of the 'forestry interest' held by the Grower; or • any other 'CGT event' that results in a reduction of the market value of the 'forestry interest held by the Grower.

An amount received by a Grower in respect of carbon and/or other environmental credits under this Project is not received as a result of a 'CGT event' and is not otherwise assessable under Division 394. The amount is a distribution of ordinary income that arises as an incident of a Grower holding a 'forestry interest' in the Project. Growers include such amounts received in their assessable income in the income year in which the amounts are derived (section 6-5) less any GST payable on those proceeds (section 17-5).

Growers who will stay in the Project until its completion will be considered to be carrying on a business of primary production. Such Growers who are individuals and accepted into the Project in the year ended 30 June 2009 may make losses from the Project that may be affected by the loss deferral rule in section 35-10. Division 35 does not apply however, to Growers who do not carry on a business.

The discretion in paragraph 35-55(1)(b) will be exercised for such Growers to whom the loss deferral rule would otherwise apply, for the income years ended 30 June 2009 to 30 June 2018. Exercise of the discretion in this case however is also conditional on the Project being carried out in the manner described in paragraphs 44 to 92 of this Ruling, but will allow Growers referred to who make losses, to offset them against their other assessable income in the income years in which those losses arise.

Where a Grower is accepted to participate in the Project set out at paragraphs 44 to 92 of this Ruling, the following provisions of the ITAA 1936 have application as indicated: • interest paid by a Grower to Albany does not fall within the scope of sections 82KZM, 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: • Application for a Product Ruling as constituted by documents and information received on 24 December 2008, 22 January 2009, 23 January 2009, 17 February 2009, 14 April 2009, 23 April 2009, 24 April 2009 and 1 May 2009; • Draft Combined Product Disclosure Statement and Financial Services Guide for the WA Blue Gum Project 2009 to be issued by WABG, received on 23 January 2009; • Draft Constitution for the WA Blue Gum Project 2009, received on 24 December 2008; • Draft Compliance Plan for the WA Blue Gum Project 2009, received on 24 December 2008; • Draft Sub-lease to be entered into by WABG and the Sub-Lessor, received on 24 December 2008; • Draft Sub-lease 2009 to be entered into by each Grower and WABG, received on 23 April 2009; • Draft Agreement to Sub-lease 2009 which may be entered into by each Grower and WABG, received on 24 December 2008; • Draft Project Management Contract 2009 to be entered into by each Grower and WABG, received on 1 May 2009; • Draft Wood Purchase Agreement 2009 to be entered into by each Grower, WABG and WA Chip & Pulp Co Pty Ltd (the Purchaser), received on 23 April 2009; • Draft Plantation Services Agreement to be entered into between WABG and WACAP Treefarms Pty Ltd (the Contractor), received on 23 April 2009; • Draft Agreement for the Provision of Consulting Services to be entered into between WABG and URS Australia Pty Ltd, received on 24 December 2008; • Scheme Property Custody Agreement between WABG and Sandhurst Trustees Limited (the Custodian), dated 12 April 2000; and • Draft Loan Agreement 2009 which may be entered into by a Grower and Albany, received on 23 April 2009. Note: certain information has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation.

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

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.

The main features of the WA Blue Gum Project 2009 are as follows: Location South west region of Western Australia Species of trees to be planted under the scheme Eucalyptus globulus (Tasmanian blue gum) Term of the Project Approximately 10 years The Project will terminate when the Plantation has been Harvested Date all trees are due to be planted on scheme land 31 December 2010 Number of trees per hectare Average of approximately 1,000 Number of hectares offered for cultivation 500 Oversubscriptions may be accepted Size of each 'forestry interest' 1 hectare Minimum allocation of 'forestry interests' per Grower 3 Minimum subscription None Initial cost per hectare $5,500 for the establishment of the Plantation Ongoing costs per hectare • tending fees of $110 per annum, Indexed; and • Rent of $489.50 per annum, Indexed. Other costs • Harvest, Delivery and supervision expenses; • insurance; • incentive fee; • unforseen expenses.

The Project will be a registered managed investment scheme under the Corporations Act 2001 . WABG has been issued with an Australian Financial Services Licence (Number 246264) and will be the Responsible Entity for the Project.

An offer to participate in the Project will be made through the PDS. The offer under the PDS is for 500 hectares, which corresponds to 500 'forestry interests' in the Project, although WABG reserves the right to accept oversubscriptions. An entity that participates in the Project as a Grower will do so by acquiring 'forestry interests' in the Project on or before 30 June 2009. There is no minimum amount that must be raised under the PDS.

To participate in the Project, Applicants must complete the Application and Power of Attorney Forms contained in the PDS and pay the relevant Application Money on or before 30 June 2009. The Custodian has been appointed under the Scheme Property Custody Agreement to protect the interests of the Growers in their dealings with WABG.

The Power of Attorney irrevocably appoints WABG to enter into, on behalf of the Grower, an Agreement to Sub-lease (where necessary), a Sub-lease, a Project Management Contract and a Wood Purchase Agreement.

For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute either the Agreement to Sub-lease or the Sub-lease, and the Project Management Contract on or before 30 June 2009 will commence participation as Growers in the Project. This Ruling only applies in respect of Growers who are accepted into the Project during the period from the date of this Ruling to on or before 30 June 2009.

A Grower will Sub-lease from WABG at least three identifiable areas of land, called Leased Areas, in south west Western Australia. Each Leased Area will be one hectare in size.

Pursuant to the Project Management Contract, Growers will engage WABG to manage the Project and be responsible for establishing and tending the Plantation of Tasmanian blue gum ( Eucalyptus globulus ) trees on the Land for the purpose of felling and sale on the Grower's behalf.

The Constitution establishes the Project and operates as a deed binding all Growers and WABG. The Constitution sets out the terms and conditions under which WABG 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.

WABG shall open, or cause to be opened, an Application Fund into which all Application Monies received from Applicants and accrued interest will be deposited and held on trust for the Growers, separately from any other property (clause 6).

Once WABG has accepted the application and all of the Project Agreements have been executed, the Application Money may be released against the establishment fee due to WABG.

In summary, the Constitution also sets out provisions relating to: • the distribution of income (clause 7); • the Responsible Entity's entitlement to remuneration (clause 8); • a Register of Growers (clause 9); • the assignment of Grower interests (clause 10); • the additional powers and other activities of the Responsible Entity (clauses 14 and 15); • meetings of Growers, including voting requirements (clause 19); • complaints handling and dispute resolution (clauses 20 and 21); and • the termination and winding up of the Project (clauses 23 and 24).

As an alternative to participation by a Grower as a single entity, the terms of the Constitution provide that two entities may participate in the Project as Joint Venture Growers. This Ruling does not apply to Joint Venture Growers. A separate Product Ruling PR 2009/34 has issued for entities who participate as Joint Venture Growers.

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

WABG, as Responsible Entity, has engaged Sandhurst Trustees Limited to act as the Custodian of the Property. The Property includes all Application Money and Harvest Income until disbursed or distributed in accordance with the Constitution and Project Agreements, but does not include property legally vested in a Grower.

The land that will be used for the Project (the 'Project Land') will be leased or sub-leased by WABG from various farmers and/or WA Chip & Pulp Co Pty Ltd and/or WACAP Treefarms Pty Ltd.

The 'Head Leases' set out the terms and conditions under which the Lessor or Sub-lessor will lease or sub-lease the Project Land to WABG for the purpose of growing, tending and harvesting plantations of trees planted on the Sub-Leased Area.

The Lessor or Sub-lessor acknowledges that plantations of trees planted on the Sub-Leased Area and any rights, benefits and credits derived from such trees are the property of WABG.

Either at the time their application is accepted or when sufficient suitable land is available prior to 30 September 2010, Growers will enter into a Sub-lease with WABG, as the Landholder, to use the Leased Area for the purpose of Establishing, tending and Harvesting a plantation of eucalyptus trees for commercial wood production. The Leased Area is set out in Part 1 of the Schedule.

WABG warrants to the Grower that it is entitled to grant this Sub-lease to the Grower and that all relevant consents have been obtained (clauses 3 and 4).

WABG and the Grower acknowledge that the Plantation and the carbon, environmental or any other credits derived from the Plantation are and shall remain the property of the Grower until the end of the Term and the Grower shall be entitled to Harvest the Plantation and to retain all income from the sale of the Wood (clause 9.17).

If there is damage to or reduction in the viability of the Plantation, the Grower is required to reduce the Plantable Area by the area which has been damaged or is no longer viable or, where the whole of the Plantation is damaged or no longer commercially viable, to terminate the Sub-lease. The area which has been destroyed or is no longer viable will be deemed surrendered back to WABG and all obligations of the Grower in relation to that area under the Sub-lease shall end (clause 10). The Grower's share of the Relevant Harvest Income will be proportionally reduced.

The Sub-lease shall operate on and from its commencement date until completion of Harvesting. The Grower may extend the Term by giving written notice to WABG (clause 5).

The Sub-lease also sets out provisions relating to: • the Rent payable by Growers (clause 6); • the Grower's covenants, the Landholder's covenants and mutual covenants (clauses 7, 8 and 9); • termination (clauses 13 and 14); and • dispute resolution (clause 15).

Where there is no Project Land available for a Grower on or before 30 June 2009, the Grower will be required to enter into an Agreement to Sub-lease with WABG.

Pursuant to the terms of the Agreement to Sub-lease the parties undertake to enter into a Sub-lease of the Land on or before the Starting Date, being a date no later than 30 September 2010, which will allow all the Establishment services referred to in the Project Management Contract to be completed within the Establishment Period. The parties are bound by all the provisions of the Sub-lease from the Starting Date.

Growers engage WABG, as the Project Manager, for the term of the Project to carry out such services as are required to Establish and tend the Plantation for felling in accordance with the Plantation and Tending Plan and sound silvicultural and environmental practices.

The Project Management Contract will commence upon its execution and terminate when the whole of the Plantation has been Harvested (clause 5).

Commencing on the date that a Sub-Lease is entered into by the Grower, WABG will perform or cause to be performed all the Plantation Services listed in clause 4.2 in relation to the Land and the Plantation. The Plantation Services include the Establishment of the Plantation within the Establishment Period, ending no later than 31 December 2010.

The Establishment of the Plantation requires the planting of the seedlings at an average stocking rate of approximately 1,000 trees per hectare.

The Harvesting of the Plantation shall be conducted in accordance with the terms of the Wood Purchase Agreement (clause 10).

At the cost of the Grower, WABG will keep current policies of fire insurance on behalf of the Grower with a reputable insurer, provided that such insurance is reasonably available (clause 4.2(i)).

The Project Management Contract also sets out provisions relating to: • the rights and duties of the Project Manager (clause 6); • the Grower's ability to express opinions and give recommendations to the Project Manager, object to and disallow any changes to the Plantation Development and Tending Plan (clause 7); • the Project Manager's obligation to report to the Grower (clause 8); • carbon and other environmental credits and debits (clause 11); • the Project Manager's entitlement to fees (clause 13 and Part 4 of the Schedule); • termination (clause 14); and • dispute resolution (clause 16).

The Project Manager will engage the Contractor as an independent contractor to carry out the Plantation Services required to Establish and tend the Plantation on the Land during the Term in accordance with the Plantation Development and Tending Plan and sound silvicultural and environmental practices for the purposes of felling and Harvesting the Plantation.

Growers authorise WABG, as the Project Manager, to sell the Wood under the Wood Purchase Agreement on their behalf. WABG agrees to sell and the Purchaser agrees to purchase for the Purchase Price all Wood grown on the Land, Harvested and Delivered in accordance with the Harvest Plan and on terms and conditions set out in the Wood Purchase Agreement.

The Purchaser may Harvest, Deliver and purchase the Wood, for a price offered as being fair and reasonable at the relevant time. WABG may seek alternative prices for Harvest and Delivery and an alternative Purchase Price for the Wood. Where such alternatives are obtained the Purchaser retains the right to match the price offered by the other party.

The Constitution sets out the circumstances relating to the pooling of Growers' timber and the distribution of Harvest Income (clause 7). This Product Ruling only applies where the following principles apply to those pooling and distribution arrangements: • only Growers who have contributed Wood from their Leased Area to the pool making up the Relevant Harvest Income are entitled to benefit from distributions from those proceeds; and • Wood is only pooled with the Wood of Growers accepted to participate in the WA Blue Gum Project 2009.

Under the terms of the Project Management Contract and the Sub-lease, a Grower will make payments as described below on a per hectare basis. Fees payable under the Project Management Contract • the Application Money of $5,500 for Establishment of the Plantation within the Establishment Period, payable on application; • an annual tending fee of $110, Indexed, for the tending of the Plantation, payable for the period beginning 1 July 2009 until the Plantation has been Harvested. The first annual tending fee is payable on 30 November 2009, and thereafter on 30 September in each year; • a fee of 15% of the amount that results when the Relevant Harvest Income due to the Grower exceeds $17,050, Indexed. This fee will be paid by way of deduction from the Proceeds Fund upon the date on which the Harvest Income is distributed to the Grower; • the Grower's proportion of Harvest (including roading and supervision), Delivery and other expenses incurred by WABG arising out of the sale of the Wood. This fee will be paid by way of deduction from the Proceeds Fund upon the date on which the Harvest Income is distributed to the Grower; • any unforseen expenses in relation to fertiliser and/or insect issues may be borne between the Growers in proportion to the number of hectares held by each Grower. The Growers may vote to meet such expenses at a meeting convened by WABG; and • the insurance premium at cost plus a 10% service fee to insure the Plantation against fire, payable to WABG on 15 November 2009 and thereafter on 15 November of each year. Fees payable under the Sub-lease • if a Grower enters into the Sub-lease on or before 30 June 2009, annual Rent of $489.50, Indexed, as consideration for the granting of the Sub-lease, is payable for the period beginning 1 July 2009 until the Plantation has been Harvested. The first Rent is payable on 30 November 2009, and thereafter on 30 September in each year; or • if a Grower enters into the Sub-lease after 30 June 2009, the Rent for the year commencing 1 July 2009 will be 1/12 of $489.50, Indexed, for each full and part calendar month the Grower is granted the Sub-lease, payable on entry into the Sub-lease. After this period, annual Rent of $489.50, Indexed, as consideration for the granting of the Sub-lease, is payable on 30 September in each year.

A merchant fee for the use of a credit or similar card to pay the fees under the Project may also be incurred.

To finance all or part of the cost of their 'forestry interest' a Grower can enter into a Loan Agreement with Albany (a lender associated with WABG) or, alternatively, 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 they enter into a finance arrangement with Albany that materially differs from that set out in the documentation provided with the application for this 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 incurred under finance arrangements not covered by this Product Ruling.

A Grower cannot rely on any part of this Ruling if the Application Monies are not paid in full on or before 30 June 2009 by the Grower or, on the Grower's behalf, by a lending institution.

Subject to Albany accepting the Grower's application for finance of the Application Money, the Grower will be bound by the terms and conditions of the Loan Agreement. Albany will provide the Grower with the loan on a full recourse basis and will pursue recovery action against any defaulting borrowers.

The key features of the Loan Agreement are: • a Principal Sum of up to 80% of the Application Money; • no application or establishment fee; • a loan term of 5 years, ending on 15 June 2014; • a requirement to pay equal monthly principal and interest instalments by way of direct debit, commencing on 15 July 2009; • a fixed interest rate of approximately 9.95% per annum; and • a fixed interest rate of 13.5% per annum applies in the event of overdue repayments of the Principal Sum.

As security for the payment of any outstanding monies under the Loan Agreement, the Grower will assign to Albany its right, title and interest in and under the Project Management Contract, the Sub-lease, the Wood Purchase Agreement, all money payable to the Grower under the Wood Purchase Agreement or under any policies of insurance. The assignment shall be void upon the repayment of all outstanding monies under the Loan Agreement.

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 Albany, are involved or become involved in the provision of finance to Growers for the Project.

In return for payment of the establishment fee and the other fees and expenses required under the Project Management Contract and Sub-lease during the term of the Project, Growers will hold a 'forestry interest' in a 'forestry managed investment scheme'. The Project qualifies as a 'forestry managed investment scheme' because its purpose is for 'establishing and tending trees for felling in Australia' (see subsection 394-15(1)).

Under the Constitution of the Project and the other supporting agreements, the holding of a 'forestry interest' in the Project gives each Grower a right to a share in the proceeds of the Harvest of the trees grown on the Project Land. That share of proceeds is determined using the number of 'forestry interests' held by a Grower as a proportion of all 'forestry interests' held by 'participants' [7] in the Project.

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

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

Application of these principles to the arrangement set out above leads to the conclusion that Growers (as described in paragraphs 4 to 6 of this Ruling), who stay in the Project until its completion, will be carrying on a business of primary production involving afforestation activities.

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

The threshold test for Growers in the Project to be entitled to deductions under subsection 394-10(1) is the '70% DFE rule' in paragraph 394-10(1)(c). Under that rule it must be reasonable to expect that on 30 June 2009, the amount of 'direct forestry expenditure' [8] under the scheme will be no less than 70% of the amount of payments under the scheme. [9]

The amount of all 'direct forestry expenditure' is the amount of the net present value of all 'direct forestry expenditure' that WABG, as 'forestry manager' [10] of the Project, has paid or will pay under the scheme (subsection 394-35(2)).

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

Both of the above amounts are determined as at 30 June 2009 taking into account: • the timing requirements in subsections 394-35(4) and (5); • any amounts that can reasonably be expected to be recouped (subsection 394-35(6)); • the discount rate in subsection 394-35(7); and • the market value rule in subsection 394-35(8).

Applying all of these requirements to the information provided by WABG, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2009.

The requirement of paragraph 394-10(1)(d) that Growers in the Project not have day to day control over the operation of the Project (despite having a right to express opinions and give recommendations) is clear from the Project Agreements as are the alternative elements of paragraph (e) relating to the number of Growers in the scheme and WABG's role in other managed investment schemes.

The final requirement for deductibility requires all the Project trees to be established within 18 months of 30 June 2009 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting timeline provided with the application for this Ruling by WABG indicates that all the trees required to be established under the scheme will be planted on the Project Land by 31 December 2010.

Accordingly, subject to the qualifications set out below, amounts paid by Growers to WABG in relation their 'forestry interests' satisfy all requirements of subsection 394-10(1). The amounts are allowable deductions in the income year in which they are paid (subsection 394-10(2)).

Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10).

Where a Grower does not fully pay an amount, or the amount is not fully paid on their behalf in an income year (see section 394-20), it is deductible only to the extent to which it has been paid. The unpaid balance is then deductible in the year or years in which it is actually paid. This may occur, for example, if all or part of the amount is borrowed and the financier fails to transfer the funds to the account of the 'forestry manager' on or before 30 June in an income year.

Two situations may lead to a loss of deductions previously allowed to Growers.

The first of these situations will occur if WABG fails to establish the trees on the Project Land within 18 months of the end of the income year in which the first Grower is accepted into the Project. Where this occurs WABG is required to notify the Commissioner within 3 months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA).

The second situation where a Grower may have deductions disallowed is where a 'CGT event' happens to their 'forestry interest' within 4 years from 30 June of the income year they paid an amount under the scheme, for example, the establishment fee (see subsection 394-10(5)).

For the purposes of this provision, the Commissioner is able to amend the assessment of a Grower within 2 years of the relevant 'CGT event' happening. The Commissioner's power to amend in these circumstances applies despite section 170 of the ITAA 1936 (subsection 394-10(6)).

Where a 'CGT event' happens to the 'forestry interest' of a Grower within 4 years, the market value of the forestry interest at the time of the 'CGT event' or the decrease in the market value of the 'forestry interest' as a result of the 'CGT event' is still included in the assessable income of the Grower by section 394-25. The amount must be included in assessable income even where an amendment has disallowed or may disallow the deductions previously allowed under section 394-10.

Where a Grower borrows money to fund their investment in the Project the deductibility of the interest incurred on the loan monies falls for consideration under the general deduction provisions of section 8-1. If the interest incurred by the Grower is deductible under the first positive limb in subsection 8-1(1) there is no requirement to consider whether it is also deductible under the second positive limb of that provision. Court decisions show that the same basic test applies to both limbs (see Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431, at CLR 56; ATD 435).

Under the first positive limb of subsection 8-1(1) the interest incurred by a Grower will be deductible if it is incurred in gaining or producing a Grower's assessable income and is not excluded by one of the negative limbs in subsection 8-1(2). The question of whether an outgoing [is] ... incurred in gaining or producing the assessable income is a question of characterisation ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613, at CLR 17; ATC 4957; ATR 621). To the extent that ... outgoings of interest ... can properly be characterised as of a kind referred to in the first limb of [section 8-1] they must draw their character from the use of the borrowed funds ( Fletcher , at CLR 19; ATC 4958; ATR 623). [T]he characterisation of interest will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are put ( Federal Commissioner of Taxation v. Roberts (1992) 37 FCR 246; 92 ATC 4380; (1992) 23 ATR 494, at FCR 257; ATC 4388; ATR 504).

Growers in the Project use the borrowed funds to acquire a 'forestry interest' in a 'forestry managed investment scheme'. The holding of that 'forestry interest' will produce assessable income for a Grower in the form of the proceeds of a full or part disposal of the 'forestry interest' or, as a proportionate share of the Harvest proceeds. The tests of deductibility of interest under the first limb of subsection 8-1(1) are, therefore, met unless one of the exclusions in subsection 8-1(2) apply.

For the purposes of this Project, only the capital exclusion in paragraph 8-1(2)(a) is relevant. The use of borrowed funds to purchase a capital asset, such as a 'forestry interest', does not mean that the interest outgoings are on capital account (see Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139, at CLR 470; ATC 4249; ATR 148). Interest [is a] periodic payment for the use, but not the permanent acquisition of a capital item. Therefore, a consideration of the often-cited three matters identified by Dixon J in Sun Newspapers Ltd v. FC of T ... assigns interest ... to revenue ( Australian National Hotels Ltd v. Federal Commissioner of Taxation (1988) 19 FCR 234; 88 ATC 4627; (1988) 19 ATR 1575, at FCR 241; ATC 4633-4634; ATR 1582).

Therefore, the capital exclusion in subsection 8-1(2) does not apply to the interest and, subject only to the potential application of the prepayment provisions, a deduction for the interest can be claimed in the year in which it is incurred (Note: the meaning of 'incurred' is explained in Taxation Ruling TR 97/7.)

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 that will not be wholly done within the same year of income as the year in which the expenditure is incurred. For schemes such as this Project, the main operative provisions are sections 82KZMD and 82KZMF of the ITAA 1936.

However, subsection 394-10(7) of the ITAA 1997 specifically provides that sections 82KZMD and 82KZMF of the ITAA 1936 do not affect the timing of amounts deductible under section 394-10 of the ITAA 1997.

Accordingly, under the scheme to which this Product Ruling applies, only deductions for interest payable under a loan with Albany will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Ruling applies (see paragraphs 89 to 91 of this Ruling) do not require any prepayment of interest over the term of the loan. Accordingly, the prepayment provisions have no application to Growers who enter into those loans.

If a Grower chooses to prepay interest on these loans that Grower may request a private ruling on how the prepayment provisions will affect the timing of their interest deduction.

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

Where a 'CGT event' happens to a 'forestry interest' held by a Grower in this Project, subsection 394-25(2) includes an amount in the assessable income of the Grower if: • the Grower can deduct or has deducted an amount under section 394-10; or • the Grower would have met the condition immediately above if subsection 394-10(5) had not applied to disallow the deduction(s). Paragraphs 32 to 33 and paragraphs 111 to 112 of this Ruling explain when deductions will be disallowed under subsection 394-10(5).

If, as a result of the 'CGT event' the Grower either: • no longer holds the 'forestry interest'; or • otherwise - where the Grower continues to hold the 'forestry interest', but there is a decrease in the market value of the 'forestry interest', then the market value of the 'forestry interest' at the time of the event, or the reduction of the market value of the 'forestry interest' as a result of the event, is included in the assessable income of the Grower in the income year in which the 'CGT event' happens (subsection 394-25(2)). A market value rule applies rather than the amount of money actually received from the 'CGT event' (subsection 394-25(3)). However, the market value and the actual amount of money received may be the same.

The market value amount included in the assessable income of a Grower is the value of the 'forestry interest' just before the 'CGT event', or where the Grower continues to hold their interest after the event, the amount by which the market value of the 'forestry interest' is reduced as a result of the 'CGT event' (subsection 394-25(2)).

Section 394-25 will apply where the 'forestry interest' is sold, is extinguished, or ceases, and will include 'CGT events' such as a full or partial sale of the 'forestry interest' or from a full or partial clear-fell harvest of the trees grown under the Project.

Carbon and/or other environmental credit amounts received by a Grower in this Project do not arise as a result of a 'CGT event' and are not otherwise assessable under Division 394. The receipt of such an amount is a distribution that arises as an incident of the Grower holding a 'forestry interest' in the Project. It is an item of ordinary income and is assessable under section 6-5 in the year in which it is derived.

In deciding to exercise the discretion in paragraph 35-55(1)(b) on a conditional basis for the income years ended 30 June 2009 to 30 June 2018, the Commissioner has applied the principles set out in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion. 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) for Growers who will stay in the Project until its completion 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 benefit(s)'. Insufficient 'additional benefits' will be provided to trigger the application of section 82KL of the ITAA 1936. It will not apply to deny deductions otherwise allowable under sections 8-1 and/or 8-5 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 WA Blue Gum Project 2009 will be a 'scheme' and a Grower will obtain a 'tax benefit' from entering into the 'scheme', in the form of tax deductions for the amounts detailed at paragraphs 31, 35 and 36 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 will derive assessable income from holding or disposing of their 'forestry interest' in the Project. 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 Growers 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 3 Superannuation Industry (Supervision) Act 1993 8 Qualifications 9 Date of effect 12 Changes in the law 14 Note to promoters and advisers 16 Goods and Services Tax 17 Ruling 18 Structure of the Project 18 Carrying on a business 21 Concessions for 'small business entities' 22 The '70% DFE rule' and the establishment of the trees 24 Section 394-35 and subsection 394-10(4 ) 24 Allowable deductions 27 Sections 8-5, 394-10 and 394-20 and Division 27 27 'CGT event' within 4 years for Growers who are 'initial participants' 32 Subsections 394-10(5) and (6 ) 32 Interest on loans to finance the 'forestry interest' of a Grower and merchant fees 35 Section 8-1 35 Assessable income, 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' 37 Sections 6-10, 17-5 and 394-25 37 Amounts received by Growers for carbon and other environmental credits 40 Section 6-5 40 Division 35 - deferral of losses from non-commercial business activities 41 Section 35-55 - exercise of Commissioner's discretion 41 Prepayment provisions and anti-avoidance provisions 43 Sections 82KZM, 82KZME, 82KZMF and 82KL and Part IVA 43 Scheme 44 Overview 47 Constitution 55 Compliance Plan 60 Scheme Property Custody Agreement 61 'Head Leases' 62 Sub-lease 2009 65 Agreement to Sub-lease 2009 71 Project Management Contract 2009 73 Plantation Services Agreement 80 Wood Purchase Agreement 2009 81 Pooling of Growers' timber and distribution of proceeds 83 Fees 84 Finance 86 Finance offered by Albany 89 Appendix 1 - Explanation 93 Structure of the Project 93 Is the Grower carrying on a business? 95 Allowable deductions 98 Sections 8-5, 12-5, 394-10 and 394-20 98 The '70% DFE rule' 99 Paragraph 394-10(1)(c) and section 394-35 99 The other elements for deductibility under subsection 394-10(1 ) 104 Loss of deductions previously allowed under subsection 394-10(1 ) 109 Interest on loans to finance the 'forestry interest' of a Grower 114 Section 8-1 114 Prepayment provisions 119 Sections 82KZL to 82KZMF 119 Assessable income, 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' 123 Sections 6-10, 10-5 and 394-25 123 Subsection 394-25(2 ) 124 Market value rule applies to 'CGT events' 125 Amounts received by Growers for carbon and other environmental credits 128 Section 6-5 128 Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion 129 Section 82KL - recouped expenditure 132 Part IVA - general tax avoidance provisions 133 Appendix 2 - Detailed contents list 136