text: PR 2019/2 | Legal database
  PR 2019/2
  Income tax: W.A. Blue Gum Project 2019
  1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified in the Ruling section (below) apply to the defined class of entities, who take part in the scheme to which this Product Ruling relates. In this Product Ruling this scheme is referred to as W.A. Blue Gum Project 2019 or simply as 'the Project'.
  are accepted to take part in the scheme specified below on or before 30 June 2019.
  6. A Grower will have executed the relevant Project Agreements set out in paragraph 49 of this Product Ruling on or before 30 June 2019 and will hold a 'forestry interest' in the Project.
  entities who are accepted into this Project before the date of this Product Ruling or after 30 June 2019
  entities who participate in the scheme through offers made other than through the W.A. Blue Gum Project 2019 Combined Product Disclosure Statement and Financial Services Guide, or who enter into an undisclosed arrangement with:
  entities whose Establishment fee, including all loan moneys, are not paid in full to W.A. Blue Gum Limited by 30 June 2019, either by the Grower and/or on the Grower's behalf by a lending institution
  11. This Product Ruling applies prospectively from 22 May 2019, the date it is published. It therefore applies only to the specified class of entities that enter into the scheme from 22 May 2019 until 30 June 2019 being the closing date for entry into the scheme. This Product Ruling provides advice on the availability of tax benefits to the specified class of entities for the income years up to 30 June 2029 being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application.
  18. The W.A. Blue Gum Project 2019 is a 'forestry managed investment scheme' as defined in subsection 394-15(1). Its purpose is the Establishment (by way of planting and/or Coppicing) and tending of Eucalyptus Globulus (Tasmanian Blue Gum) trees for felling in Australia.
  19. 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 Product Ruling) who is accepted to participate in the 'forestry managed investment scheme' described below at paragraphs 49 to 97 of this Product Ruling on or after the date of issue and on or before 30 June 2019.
  22. Although not relevant for the purposes of Division 394, a Grower (as described in paragraphs 3 to 7 of this Product 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 (whether carrying on that business alone or in partnership), will be subject to the operation of Division 35 (see paragraphs 44 to 47 and 142 to 148 of this Product Ruling).
  Concessions for 'small business entities[3]'
  25. The taxation obligations and benefits set out below have been determined using the information provided to the Commissioner by W.A. Blue Gum Limited. On the basis of that information, the Commissioner has decided that on 30 June 2019 it will be reasonable to expect that the '70% DFE rule'[4] will be satisfied. The Australian Taxation Office (ATO) may undertake review activities during the term of the Project to verify the information relied on for the purposes of the '70% DFE rule'.
  26. This Product Ruling will only apply if W.A. Blue Gum Limited 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 an amount is first paid under the Project by a 'participant' in the Project.[5] For this Project, the trees must be Established by 31 December 2020.
  27. In the context of this Project, the trees will be Established when they are planted and/or Coppiced on the Land acquired for the purposes of the Project at the average rate of 900 trees per hectare. W.A. Blue Gum Limited is required by section 394-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to notify the Commissioner if all of the trees are not Established by 31 December 2020.
  Establishment fee $4,545.45 per forestry interest
  ($22,727.25 for the minimum of five forestry interests)
  Annual tending fee $122.75 per forestry interest per annum, indexed annually
  ($613.75 for the minimum of five forestry interests)
  Rent is payable under the terms of the Sub-lease W.A. Blue Gum Project 2019 which will commence on or after execution of the respective head lease held by W.A. Blue Gum Limited. Where the head lease and subsequent Sub-leases have not been executed, no deduction can be claimed for rent in the financial year.
  a 'CGT event[6] does not happen in relation to the Grower's 'forestry interest' before 1 July 2023 (see paragraphs 33 to 36 of this Product Ruling).
  33. Deductions for the Establishment fees, the tending fees, the rent and the unforeseen expenses in relation to fertiliser and/or insect issues are not allowable where a 'CGT event' happens in relation to the 'forestry interest' of a Grower before 1 July 2023 (subsection 394-10(5)).
  44. For each of the income years ended 30 June 2019 to 30 June 2029, the Commissioner will exercise the discretion in subsection 35-55(1) once the following conditions are satisfied for the year concerned:
  application for a Product Ruling as constituted by documents received on 27 March 2019, and additional documents received on 2 April 2019, 4 April 2019,11 April 2019, 12 April 2019, 1 May 2019, 2 May 2019, 3 May 2019 and 7 May 2019.
  Draft Combined Product Disclosure Statement and Financial Services Guide for the W.A. Blue Gum Project 2019, received on 27 March 2019
  Draft Constitution for the W.A. Blue Gum Project 2019, received on 27 March 2019
  Draft Compliance Plan for the W.A. Blue Gum Project 2019, received on 27 March 2019
  Draft Project Management Contract for the W.A. Blue Gum Project 2019 entered into by each Grower and W.A. Blue Gum Limited (as Project Manager), received on 27 March 2019 including the Draft Plantation Development and Tending Plan, received on 27 March 2019
  Draft Plantation Services Agreement for the W.A. Blue Gum Project 2019 entered into by W.A. Blue Gum Limited (as Project Manager) and Ents Forestry Pty Ltd (as Forestry Contractor), received on 3 May 2019
  Draft Sub-lease between unidentified sub-lessor and W.A. Blue Gum Limited, received on 27 March 2019
  Draft Sub-lease for the W.A. Blue Gum Project 2019 between each Grower and W.A. Blue Gum Limited (as Landholder), received on 27 March 2019
  Draft Agreement to Sub-lease for the W.A. Blue Gum Project 2019 between W.A. Blue Gum Limited and each Grower, received on 27 March 2019
  Draft Wood Purchase Agreement for the W.A. Blue Gum Project 2019 between each Grower and W.A. Blue Gum Limited and W.A. Chip & Pulp Co. Pty Ltd (as Purchaser), received on 27 March 2019
  Draft Loan Agreement for the W.A. Blue Gum Project 2019 between a Grower and Albany Financial Pty Ltd (as Financier), received on 27 March 2019
  Custody Agreement between W.A. Blue Gum Limited and Sandhurst Trustees Limited (as the Custodian), received on 27 March 2019, and
  Draft Guarantee and Indemnity for W.A. Blue Gum Limited (as Project Manager) and draft Guarantee and Indemnity for Albany Financial Pty Ltd (as Financier), received on 27 March 2019 (guarantors required where the Grower is a company).
  52. The main features of the W.A. Blue Gum Project 2019 are as follows:
  Date all trees are due to be planted and/or Coppiced on scheme Land 31 December 2020
  Initial cost per forestry interest $5,000 Establishment (GST inclusive) $25,000 for the minimum of five forestry interests (GST inclusive)
  Ongoing annual costs per forestry interest Tending fee of $135, indexed annually (GST inclusive)
  ($675 for the minimum of five forestry interests (GST inclusive)
  Rent of $440, indexed annually (GST inclusive)
  ($2,200 for the minimum of five forestry interests (GST inclusive)
  53. The Project will be a registered managed investment scheme under the Corporations Act 2001 (Cth) (Corporations Act). W.A. Blue Gum Limited has been issued with an Australian Financial Service Licence No. 246264 and will be the Responsible Entity for the Project.
  56. An entity that participates in the Project as a Grower will do so by acquiring a 'forestry interest' in the Project on or before 30 June 2019, which will consist of a minimum of five 'forestry interests', each one hectare in size.
  58. For the purposes of this Product Ruling, Applicants who are accepted to participate in the Project and who execute the Agreement to Sub-lease or the Sub-lease, and the Project Management Contract, on or before 30 June 2019, will become Growers in the Project.
  59. The Responsible Entity is currently seeking Land for the Project within the relevant geographic part of Australia. Land utilised by the Project must meet the requirements set out by the Independent Forester at page 38 of the Draft CPDSFSG.
  60. Note that the CPDSFSG advises that where the Land for the Project is not available on or before 30 June 2019, acceptance of Applications is subject to Land being acquired and a Sub-lease being entered into on behalf of the Grower by 30 September 2020.
  the Establishment of the plantation no later than 31 December 2020
  74. The Responsible Entity will secure the Project Land by entering into a head lease or Sub-lease (or a number of such leases) with lessors on or before 30 September 2020.
  75. Each Grower will execute a Sub-lease with W.A. Blue Gum Limited, as the Landholder, either at the time their Application is accepted or prior to 30 September 2020.
  76. The Schedule to the Sub-lease will identify: the leased area, the plantable area, the rent payable by the Grower, the commencement date of the Sub-lease that the term is until completion of Harvesting and details of the relevant head lease(s).
  81. Where there is no Project Land available for a Grower on or before 30 June 2019, the Grower will be required to enter into an Agreement to Sub-lease with W.A. Blue Gum Limited.
  82. 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 30 September 2020, which will allow the Establishment of the plantation by 31 December 2020 in accordance with the Project Management Contract.
  Wood is only pooled with the Wood of Growers accepted to participate in the W.A. Blue Gum Project 2019.
  89. The Application Money of $5,000 is to be paid by each Grower on Application for the Establishment of the plantation.
  an annual tending fee of $135, indexed, first payable 30 November 2019 and thereafter on 30 September each year, but not payable in any income year ended 30 June for any hectare upon which no trees have been Established
  an Incentive Fee calculated as 15% of [the amount due per hectare to the Grower from the Harvest of the plantation less $18,000 (GST inclusive and indexed) per hectare of plantable area, multiplied by the number of hectares of plantable area].
  91. Where the Sub-lease commencement date is on or before 30 June 2019, rent for the period from commencement date to 30 June 2019 will be nil. Rent of $440 (GST inclusive) per 'forestry interest' per annum, for the year ending 30 June 2020, will become first payable on 30 November 2019, and then indexed annually and payable on 30 September (clause 6 of the Sub-lease).
  92. Where the Sub-lease commencement date is after 30 June 2019, rent for the period from commencement date to 30 June 2020 will be nil. Rent of $440 (GST inclusive) per 'forestry interest' per annum, for the year ending 30 June 2021, will become first payable on 30 November 2020, and then indexed annually and payable 30 September (clause 6 of the Sub-lease).
  95. A Grower cannot rely on any part of this Product Ruling if the Application Monies are not paid in full on or before 30 June 2019 by the Grower or, on the Grower's behalf, by a lending institution.
  repayment of principal and interest by equal monthly instalments on the fifteenth day of each month by direct debit, commencing 15 July 2019 and ending 15 June 2024
  107. In relation to a managed investment scheme similar to that which is the subject of this Product Ruling, the Full Federal Court in Hance v Federal Commissioner of Taxation; Hannebery v Federal Commissioner of Taxation [2008] FCAFC 196; 2008 ATC 20-085; (2008) 74 ATR 644 applied these principles to conclude that 'Growers' in that scheme were carrying on a business of producing almonds (at FCAFC 90; ATC 90).
  111. 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 2019 the amount of 'direct forestry expenditure'[9] under the scheme will be no less than 70% of the amount of payments under the scheme.[10]
  112. The amount of 'direct forestry expenditure' under the scheme is the amount of the net present value (on 30 June 2019) of all 'direct forestry expenditure' under the scheme that the Responsible Entity, as the 'forestry manager'[11] of the Project, has paid or will pay under the scheme (subsection 394-35(2)).
  113. The 'amount of payments under the scheme' is the amount of the net present value (on 30 June 2019) 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)).
  114. The above amounts are determined as at 30 June 2019 taking into account:
  115. Based on the information provided by the Responsible Entity of the Project, the Commissioner has determined that the Project will satisfy the '70% DFE rule' on 30 June 2019.
  117. All of the trees intended to be Established under the Project must be Established within 18 months of 30 June 2019 (see paragraph 394-10(1)(f) and subsection 394-10(4)). The planting and/or Coppicing timeline provided with the application for this Product Ruling by the Responsible Entity indicates that all the trees required to be Established under the scheme will be planted and/or Coppiced on the Project Land by 31 December 2020.
  122. The first of these situations will occur if the condition in subsection 394-10(4) is not met in relation to the Project. That is, the Responsible Entity fails to Establish all of the trees on the Project Land within 18 months of 30 June 2019. Where this occurs, the Responsible Entity is required to notify the Commissioner within three months of the end of the 18 month period (section 394-10 of Schedule 1 to the TAA).
  125. Where a 'CGT event' happens to the 'forestry interest' of a Grower within four years after 30 June 2019, the market value of the forestry interest at the time of the 'CGT event', or any 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.
  127. 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 paragraph 8-1(1)(a), there is no requirement to consider whether it is also deductible under the second positive limb in paragraph 8-1(1)(b). 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).
  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; (1991) 91 ATC 4950; (1991) 22 ATR 613, at CLR 17; ATC 4957; ATR 621).
  [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; (1992) 92 ATC 4380; (1992) 23 ATR 494, at FCR 257; ATC 4388; ATR 504).
  130. 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 Deputy 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).
  142. Based on information provided with the application for this Product Ruling, a Grower who is an individual and is accepted into the Project in the year ended 30 June 2019 and who carries on a business of forestry (alone or in partnership), is expected to incur losses from their participation in the Project which will be subject to Division 35.[13] These losses will be subject to the loss deferral rule in section 35-10 unless an exception applies or, for each income year in which losses are incurred, the Commissioner exercises the discretion in subsection 35-55(1) on 30 June of that specific income year.
  151. The W.A. Blue Gum Project 2019 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 28 to 32 of this Product 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.