Income tax: AgriWealth 2009 Softwood Timber Project

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 AgriWealth 2009 Softwood Timber Project, or simply as 'the Project'. The Land Rights Agreement which forms part of the Project is outside the scheme to which this Ruling relates.

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 42 of this Ruling on or before 30 June 2009 and will hold a 'forestry interest' in the Project. In this Ruling, each of these Growers will be wholesale clients for the purpose of the Corporations Act 2001 .

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; • participate in the scheme through offers made other than through the Information Memorandum, 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 Price, including all loan monies, is not paid in full to Agriwealth Capital Limited by 30 June 2009, either by the Grower, and/or on the Grower's behalf by a lending institution; or • Growers who enter into finance arrangements with the Preferred Financier or Agriwealth Capital Limited other than those described at paragraphs 83 to 98 of this Ruling.

This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA 1993). The Commissioner 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 42 to 98 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 3 June 2009, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 3 June 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 amounts and percentages referred to in this Product Ruling exclude the Goods and Services Tax (GST), unless otherwise specified. The transactions in respect of this scheme may, where appropriate, have GST implications. Those GST implications are outside the scope of this Product Ruling.

The AgriWealth 2009 Softwood Timber Project is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is the establishment and tending of Radiata pine trees for felling in Australia. However, the Put Option Fee does not form part of the scheme for the purposes of subsection 394-15(1).

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 3 to 7 of this Ruling) who is accepted to participate in the 'forestry managed investment scheme' described at paragraphs 42 to 98 of this Ruling on or after 3 June 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).

A Grower (as described in paragraphs 3 to 7 of this Ruling) in the Project is not considered to be carrying on a business of primary production.

The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by the Manager. 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' [3] 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 the Manager 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. [4] For this Project the trees must be established 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 850 stems per hectare. The Manager 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 deductions for the amounts shown in the Table below that are paid to the Manager (sections 8-5 and 394-10).

The deductibility of these amounts remains subject to a requirement that a CGT event [5] does not happen in relation to the Grower's 'forestry interest' before 1 July 2013 (see paragraphs 29 to 31 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.

Amounts that are allowable deductions under Division 394 cannot also be claimed as deductions under section 8-1 (section 8-10). Fee Amount Year deductible Establishment Services Fee $25,800 30 June 2009

Deductions for the Establishment Services Fee 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 the Preferred Financier or a Grower and AgriWealth Capital Limited (Manager). 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.

The Loan Application Fee of $250 plus 0.5% of the Principal payable to the Preferred Financier is a borrowing expense and is deductible under section 25-25. The deduction for the borrowing expense is spread over 5 years on a straight line basis from the date the loan begins.

The deductibility or otherwise of borrowing costs arising from loan agreements entered into with financiers other than the Preferred Financier is outside the scope of this Ruling.

The Put Option Fee is capital in nature and not deductible under section 8-1 or section 394-10. The Put Option Fee does not form part of the 'forestry managed investment scheme' for the purposes of subsection 394-15(1).

Where a 'CGT event' (other than a 'CGT event' in respect of a thinning [6] - see paragraph 39 of this Ruling) 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).

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 a thinning of the trees grown in 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 amounts received for thinning the trees in their assessable income in the income year in which the amounts are derived under section 6-5.

An amount received by a Grower in respect of sales of Carbon Sequestration Rights and Salinity Credits constitutes a distribution of ordinary income that arises as an incident of the Grower holding an interest in the Project. Growers include such amounts received in their assessable income in the income year in which those amounts are derived under section 6-5.

Where a Grower is accepted to participate in the Project set out at paragraphs 42 to 98 of this Ruling, the following provisions of the ITAA 1936 or the ITAA 1997 have application as indicated: • interest paid by a Grower to the Preferred Financier or Agriwealth Capital Limited does not fall within the scope of sections 82KZM, 82KZME and 82KZMF; • losses arising from participation in the Project are not within the scope of Division 35; • 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 provided on 21 October 2008, 21 November 2008, 19, 23 and 24 February 2009, 17 April 2009 and 8, 11, 12, 22 and 26 May 2009, and additional correspondence and emails dated 20 November 2008, 7 and 30 January 2009, 9, 13, 19, 23 and 24 February 2009, 6, 9, 10, 11, 17 and 23 March 2009, 14, 15, 17, 21, 22 and 30 April 2009 and 6, 8, 11, 12, 19, 25, 26 and 28 May 2009; • Draft Information Memorandum of the AgriWealth 2009 Softwood Timber Project, received on 22 May 2009; • Draft Tree Constitution of the AgriWealth 2009 Softwood Timber Project, received on 22 May 2009; • Draft Forestry Management Agreement of the AgriWealth 2009 Softwood Timber Project between AgriWealth Capital Limited (Manager) (ACL) and the Grower, received on 22 May 2009; • Draft AgriWealth Management Agreement of the AgriWealth 2009 Softwood Timber Project between the Manager and AgriWealth Pty Limited (AgriWealth), received on 11 May 2009; • Draft Forestry Management Agreement of the AgriWealth 2009 Softwood Timber Project between AgriWealth and Forestry Commission of New South Wales (Forests NSW), received on 21 November 2008; • Draft Timberlot Agreement of the AgriWealth 2009 Softwood Timber Project between the Grantor, the Manager and the Grower, received on 11 May 2009; • Certificates of Title in relation to Project Land owned by the Manager, received on 21 November 2008; • Title Register Searches and Land and Property Information in relation to the Project land, received on 23 and 24 February 2009; • Contract for sale of land between the Manager and the Vendor, received on 21 November 2008; • Draft Put Option Deed of the AgriWealth 2009 Softwood Timber Project between the Manager and the Grower, received on 26 May 2009; • Draft Guarantee (in relation to Put Option Deed ) of the AgriWealth 2009 Softwood Timber Project between AgriWealth and the Grower, received on 11 May 2009; • Draft Finance Application and Loan Agreement in relation to the AgriWealth 2009 Softwood Timber Project between the Borrower, the Guarantor and the Preferred Financier, received on 11 May 2009; and • Draft Loan Agreement in relation to the AgriWealth 2009 Softwood Timber Project between the Manager, the Grower and the Guarantor, received on 11 May 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.

In accordance with the above documents, a Grower who participates in the scheme must be a wholesale client. This Ruling does not apply unless the Grower is a wholesale client as defined in section 761G of the Corporations Act 2001 . The meaning of wholesale client is explained in the Information Memorandum for this Project.

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 AgriWealth 2009 Softwood Timber Project are as follows: Location Tumut/Tumbarumba/Hume and Oberon/Bathurst regions of NSW Species of trees to be planted under the scheme Radiata pine ( Pinus radiata) Term of the Project 26 years Date all trees are due to be planted on scheme land 31 December 2010 Number of trees per hectare Minimum of 850 Number of hectares offered for cultivation 1,000 Size of each 'forestry interest' 0.5 hectares Minimum allocation of 'forestry interests' per Grower One Initial cost $25,800 Establishment Services Fee Other costs • Roading, Harvest and Haulage fees in excess of the Roading, Harvest and Haulage Contribution Payments made by the Manager at the time of Thinnings and Final Harvest; • Rehabilitation costs in excess of those included at clause 23.3.20 of Schedule 1 of the Forestry Management Agreement; and • Insurance premiums in relation to any insurance taken out by the Manager on behalf of Growers.

The Project will be an unregistered managed investment scheme under the Corporations Act. Agriwealth Capital Limited will be the Manager for the Project.

The Project will involve the establishment and tending of pinus radiata trees for felling in Australia over a 26 year period.

An offer to participate in the Project will be made through an Information Memorandum (IM). The offer under the IM is for 1,000 hectares, which corresponds to 2,000 Timberlots in the Project.

An entity that participates in the Project as a Grower will do so by acquiring a Timberlot in the Project on or before 30 June 2009, which will consist of a minimum of one Timberlot of 0.5 hectares in size.

To participate in the Project as a Grower each applicant must complete the 2009 Application Form and pay the Application Price. Under the Constitution, the Manager is appointed as agent, attorney and/or trustee in relation to the Project. Upon acceptance of an Application, the Manager will be authorised to execute a Timberlot Agreement, Put Option Deed, Put Option Deed Guarantee and Forestry Management Agreement on behalf of the Grower.

For the purposes of this Ruling, Applicants who are accepted to participate in the Project and who execute the Timberlot Agreement, Put Option Deed, Put Option Deed Guarantee and Forestry Management Agreement on or before 30 June 2009 will become Growers in the Project.

The Manager currently owns 292.57 hectares of land for the Project and is contracted to purchase a further 397 hectares. The acquisition of the remaining land required for the Project is being negotiated by the Manager. The Project Land will be divided into 0.5 hectare lots and licenced to the Growers accepted in the Project via the Timberlot Agreements.

The Constitution establishes the Project and operates as a deed binding all Growers and the Manager. The Constitution sets out the terms and conditions under which the Manager agrees to act as Manager 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, an entity must make an application for Timberlots in accordance with clause 2. Among other things, the application is to be completed in a form approved by the Manager, signed by or on behalf of the Applicant, lodged at the registered office of the Manager and accompanied by payment of the full amount of the Application Price in a form acceptable to the Manager.

Under clause 2.5 of the Constitution, until an Application is accepted, the Manager holds the Application Price in one or more bank accounts in it's own name in accordance with the requirements of the Corporations Act.

Once the Manager has accepted the Application and all of the Project Documents have been executed the Application Price will be held by the Manager on its own behalf and paid as required by each Grower's Forestry Management Agreement and Put Option Deed (clauses 2.5.2 and 4.2).

In summary, the Constitution also sets out provisions relating to: • nature of Grower's interests in the Project (clause 1.2); • the powers, duties and obligations of the Manager (clause 7); • change of Manager (clause 12); • fees and expenses (clause 22); • termination of the Project (clauses 24 and 25);and • distribution of the Harvest Proceeds (clause 25.2).

Under the Forestry Management Agreement the Manager intends to establish a forestry managed investment scheme for the purpose of establishing, tending, felling and harvesting trees in Australia.

The Grower wishes to establish a plantation pursuant to Forestry Rights granted by the Manager and wishes to appoint the Manager to provide Establishment Services to the Grower.

The Establishment Services to be provided by the Manager are listed at clause 23.3. Services which are not provided by the Manager, but which may be able to be provided by separate agreement, are listed at clause 24.1. The Manager intends to sub-contract the Establishment Services to AgriWealth.

The Establishment Services include: • Arranging for the harvesting of Plantation Produce at First and Second Thinnings and Final Harvest; • Contributing to the harvest, road construction and maintenance costs, harvesting expenses and haulage expenses up to the Roading, Harvest and Haulage Contribution Payments; and • Rehabilitation of the Plantation Land after Final Harvest.

In consideration of the Manager agreeing to carry out the Establishment Services, the Grower agrees to pay the Manager the Establishment Services Fees set out in Schedule 2. The Establishment Services Fees will be the only fees paid by the Grower to the Manager in return for the Establishment Services.

The Grower is entitled to all Carbon Sequestration Rights, Carbon Sequestration Benefits, Salinity Credits and Salinity Credit Benefits produced by or derived from their Forestry Rights and related Plantation Produce. These Rights and Benefits are calculated by reference to the size of the Grower's Forestry Right Land compared with the overall size of the Plantation Land of all Growers (clause 5).

Under this Agreement the Manager engages AgriWealth as an independent contractor to provide Forestry Services to the Manager for the purposes of establishing and managing the Growers' plantation.

AgriWealth intends to sub-contract the Forestry Services to Forests NSW.

AgriWealth will have the right to carry out on behalf of and in the name of the Manager and the Growers all functions which the Manager and the Growers are entitled or obliged to perform or carry out in the exercise of its or their rights or obligations under the Timberlot Agreement and Forestry Management Agreement against the Manager granting the relevant Forestry Right.

AgriWealth will engage Forests NSW as an independent contractor and a disclosed agent to perform the Forestry Services, as described in Schedule 1, in respect of each Plantation.

The Contract commences on the date the Contract is executed and will terminate upon completion of all Forestry Services and final settlement of accounts between the Parties after Final Harvest of all Plantations, unless terminated earlier as provided in the Contract. However, the Contract should not continue after 30 June 2042.

The Contract shall apply only to the Plantation Establishment and Management Plan agreed by AgriWealth and Forests NSW for the Plantations intended to be established during the calendar year of 2010.

The purpose of this Agreement is to grant a forestry right to the Grower over the Forestry Right Land.

The particulars of the Forestry Right (Timber) and Forestry Right (Carbon Sequestration) are as follows: (a) The right to enter the Forestry Right Land. (b) The right to establish, maintain and Harvest a crop of Trees on the Forestry Right Land. (c) The right to construct and use such buildings, works and facilities as may be necessary or convenient to enable the Grower to establish, maintain and Harvest a crop of Trees on the Forestry Right Land. (d) The right to any Salinity Credits and Carbon Sequestration Rights and any benefit to be derived from such Salinity Credits and Carbon Rights that may attach to the Forestry Right Land.

The Forestry Right shall commence on the date of execution of the Timberlot Agreement and continue for the term of the Project.

Growers will be granted a Put Option by the Manager in respect of part of their Timberlot(s) (Put Option Property). Growers must pay $175 to the Manager on or before 30 June 2009 as consideration for this right, per Timberlot. The Put Option (if exercised) will require the Manager to purchase the Put Option Property for the Sale Consideration of $6,100 per part Timberlot between 1 July 2013 and 18 July 2018. Clause 4.1 of the Put Option Deed allows the Manager to set off any amount payable and not paid by the Grower to the Manager against the Sale Consideration. The Manager has secured a Guarantee from Agriwealth in respect of the consideration payable by the Manager should the Put Option be exercised by a Grower.

The Forestry Management Agreement sets out provisions relating to the Grower's entitlement to Harvest Proceeds.

The Grower authorises the Manager to collect for distribution to the Grower in accordance with the Constitution, the Harvest Proceeds from sale of the Plantation Produce to which the Grower is entitled.

The Harvest Proceeds to which the Grower is entitled will be calculated by reference to the size of the Grower's Forestry Right Land compared with the overall size of the Plantation Land of all Growers after deducting the Manager's reasonable estimate of all moneys owing by the Grower to the Manager or AgriWealth, including Rehabilitation expenses (in excess of those included at clause 23.3.20 of Schedule 1 of the Forestry Management Agreement) and any other costs for which the Grower is or will be liable in terms of the Forestry Management Agreement or the Timberlot Agreement. These costs will be calculated pro rata by reference to the size of the Grower's Forestry Right Land compared with the overall size of the Plantation Land of all Growers.

Under the terms of the Forestry Management Agreement, the Establishment Services Fee is $25,800 per Timberlot and is payable by Growers when the Application Form is lodged.

Under the terms of the Put Option Deed, the Put Option Fee is $175 per Timberlot and is payable by Growers when the Application Form is lodged.

Growers will be required to pay any roading, harvest and haulage fees in relation to their Forestry Right Land, that are in excess of the Roading, Harvest and Haulage Contribution Payments paid by the Manager.

Growers will be required to pay Rehabilitation Costs in excess of those included at clause 23.3.20 of Schedule 1 of the Forestry Management Agreement.

To finance all or part of the cost of their Timberlot a Grower can enter into a finance arrangement with the Preferred Financier or the Manager 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 the Preferred Financier or the Manager 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 other than the Preferred Financier 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 Price is not paid in full on or before 30 June 2009 by the Grower or, on the Grower's behalf, by a lending institution.

A Grower can finance the cost of their Application Price by borrowing that amount from the Preferred Financier.

Subject to the Preferred Financier accepting the Grower's application, the Grower will be bound by the terms and conditions of the Loan Agreement and the Information Memorandum.

There are three finance options offered by the Preferred Financier to Growers to finance their interests in the Project.

As security for the due and punctual payment of all Moneys owed to the Preferred Financier under the Loan Agreement, Growers will charge to the Preferred Financier all of the Grower's interests in the Project. Should a Grower exercise the Put Option, this charge will be reduced to the remaining interest held by a Grower. The charge will include the Put Option Sale Consideration.

10 and 12 year loan with terms and conditions as follows: • applies to up to 100% of the Application Price; • equal monthly interest repayments for the first 3 years followed by equal monthly principal and interest repayments for the remaining period of the loan; • loan application fee of $250 plus 0.5% of the amount borrowed up to a maximum of $1,250; and • indicative interest rate of 10.95% per annum.

15 year loan with terms and conditions as follows: • applies to up to 100% of the Application Price; • equal monthly principal and interest repayments for the period of the loan; • loan application fee of $250 plus 0.5% of the amount borrowed up to a maximum of $1,250; and • indicative interest rate of 10.95% per annum.

A Grower can finance the cost of their Application Price by borrowing that amount from the Manager.

Subject to the Manager accepting the Grower's application, the Grower will be bound by the terms and conditions of the Loan Agreement and the Information Memorandum.

There are two finance options offered by the Manager to Growers to finance their interests in the Project.

As security for the due and punctual payment of all Moneys owed to the Manager under the Loan Agreement, Growers will charge to the Manager all of the Grower's interests in the Project. Should a Grower exercise the Put Option, this charge will be reduced to the remaining interest held by a Grower. The charge will include the Put Option Sale Consideration.

The amount of finance provided by the Manager will not exceed its credit facility of $5 million.

1 year loan with terms and conditions as follows: • applies to up to 100% of the Application Price; • interest free repayments of 12 equal monthly instalments commencing on 31 July 2009; • nil loan application fee; and • Growers may make early repayment of instalments without incurring additional fees.

15 year loan with terms and conditions as follows: • applies to up to 100% of the Application Price; • Interest will be charged monthly in arrears on the outstanding balances, calculated daily, at the Specified Interest Rate of 12%. However, where monthly repayments are made on or before the due date and on or before the Reset Date (being 1 July 2013), the interest rate will be reduced to the Initial Interest Rate of 5%; • loan repayments of 180 equal monthly instalments of principal and interest commencing on 31 July 2009; and • nil loan application fee.

This Ruling does not apply if the finance arrangement entered into by the Grower includes or has any of the following features: • there are split loan features of a type referred to in Taxation Ruling TR 98/22; • there are indemnity arrangements or other collateral agreements in relation to the loan designed to limit the borrower's risk; • 'additional benefits' are or will be granted to the borrowers for the purpose of section 82KL of the ITAA 1936 or the funding arrangements transform the Project into a 'scheme' to which Part IVA of the ITAA 1936 may apply; • the loan or rate of interest is non-arm's length; • repayments of the principal and payments of interest are linked to the derivation of income from the Project; • the funds borrowed, or any part of them, will not be available for the conduct of the Project but will be transferred (by any mechanism, directly or indirectly) back to the lender or any associate of the lender; • lenders do not have the capacity under the loan agreement, or a genuine intention, to take legal action against defaulting borrowers; or • entities associated with the Project, other than the Preferred Financier and the Manager, are involved or become involved in the provision of finance to Growers for the Project.

In return for payment of the Establishment Services Fee required under the Forestry Management Agreement 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)).

However, the Put Option Fee does not form part of the scheme for the purposes of subsection 394-15(1) because this fee is not concerned with establishing and tending trees for felling in Australia.

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 and share of proceeds of thinnings 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 a Grower (as described in paragraphs 3 to 7 of this Ruling), in the AgriWealth 2009 Softwood Timber Project is not considered to 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 the Manager, 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 the Manager of the Project 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 is clear from the Project Agreements as are the alternative elements of paragraph (e) relating to the number of Growers in the scheme and the Manager'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 the Manager 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 the Manager 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 the Manager fails to establish the trees on the Project land within 18 months. Where this occurs the Manager 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 Application Price (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) of the ITAA 1997).

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 and thinnings 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; (1999) 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; (1988) 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 the Preferred Financier or the Manager will potentially fall within the prepayment provisions. However, the conditions applying to the loans to which this Ruling applies (see paragraphs 83 to 98 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.

A deduction is allowable for expenditure incurred by a Grower in borrowing money to the extent that the borrowed money is used for the purpose of producing assessable income (subsection 25-25(1)).

In this Project the Loan Establishment Fee of $250 plus 0.5% of the amount borrowed payable to the Preferred Financier is incurred to borrow money that is used or is to be used solely for income producing purposes during each income year over the term of the loan.

The deduction for the borrowing expense is spread over the period of the loan or 5 years, whichever is the shorter (subsection 25-25(4)).

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' (other than for a 'CGT event' in respect of a thinning) [11] 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 29 to 31 and paragraphs 116 to 120 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.

Based on the arrangement set out in the Product Ruling application and as ruled upon herein, where the Put Option is exercised, the Manager has estimated that there will be a decrease in the market value of the forestry interest of $6,100 (the value assigned to the Put Option).

Section 394-25 specifically excludes from the operation of Division 394 a 'CGT event' that happens in respect of a thinning (see paragraph 394-25(1)(c)).

Thinning 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 an amount arising from a thinning of the Project trees 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.

Division 35 has no application to losses arising from the Grower's participation in the Project, as a Grower who is an 'initial participant' in the Project is not carrying on a business activity.

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 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 AgriWealth 2009 Softwood Timber Project 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 paragraph 28 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 The '70% DFE rule' and the establishment of the trees 22 Section 394-35 and subsection 394-10(4) 22 Allowable deductions 25 Sections 8-5, 394-10 and 394-20 25 'CGT event' within 4 years for Growers who are 'initial participants' 29 Subsections 394-10(5) and (6) 29 Interest on loans to finance the 'forestry interest' of a Grower 32 Section 8-1 32 Borrowing costs 33 Section 25-25 33 Put Option Fee 35 Assessable income, 'CGT events' and the 'forestry Interest' of Growers who are 'initial participants' 36 Sections 6-10, 17-5 and 394-25 36 Amounts received by Growers for Thinning the Project Trees and for Carbon Sequestration Rights and Salinity Credits 39 Section 6-5 39 Prepayment provisions, non-commercial losses and anti-avoidance provisions 41 Division 35 of the ITAA 1997 and sections 82KZM, 82KZME, 82KZMF and 82KL and Part IVA of the ITAA 1936 41 Scheme 42 Overview 46 Constitution 54 Forestry Management Agreement 59 AgriWealth Management Agreement 65 Management Forestry Contract 68 Timberlot Agreement 71 Put Option Deed and Put Option Deed Guarantee 74 Pooling of Timber and Entitlements to Net Proceeds 75 Fees 78 Establishment Services Fee 78 Put Option Fee 79 Roading, harvest and haulage fees 80 Rehabilitation costs 81 Finance 82 Finance offered by the Preferred Financier 85 Loan Options 89 Finance offered by the Manager 91 Loan Options 96 Appendix 1 - Explanation 99 Structure of the Project 99 Is the Grower carrying on a business 102 Allowable deductions 105 Sections 8-5, 12-5, 394-10 and 394-20 105 The '70% DFE rule' 106 Paragraph 394-10(1)(c) and section 394-35 106 The other elements for deductibility under subsection 394-10(1) 111 Loss of deductions previously allowed under subsection 394-10(1) 116 Interest on loans to finance the 'forestry interest' of a Grower 121 Section 8-1 121 Prepayment provisions 126 Sections 82KZL to 82KZMF 126 Borrowing costs 130 Section 25-25 130 Assessable income, 'CGT events' and the 'forestry interests' of Growers who are 'initial participants' 133 Sections 6-10, 10-5 and 394-25 133 Subsection 394-25(2) 134 Market value rule applies to 'CGT events' 135 Amounts received by Growers where the Project trees are thinned 139 Section 6-5 139 Sections 35-10 and 35-55 - deferral of losses from non-commercial business activities and the Commissioner's discretion 141 Section 82KL - recouped expenditure 142 Part IVA - general tax avoidance provisions 143 Appendix 2 - Detailed contents list 146