What is tax treatment of participation in a MIS?
An investor is generally taken to be carrying on a business by entering into the various agreements with the project manager. This is significant for taxation purposes for the following reasons:
- Expenses are more likely to be revenue in nature and deductible under S.8-1.
- The investor can be classed as a small business entity and entitled to the small business concessions e.g. prepayment and capital allowances;
- The non-commercial loss rules in Div 35 may apply to deductions claimed under the project by individual investors.
- Primary productions provision such as income averaging will be available;
- The entrepreneurs tax offset may be available; and
- The grower investor is carrying on an enterprise for GST purposes and may be entitled to input tax credits for invested funds.
What is the tax treatment of forestry projects?
For many years the tax treatment of forestry projects was determined under the ordinary provision of ITAA36 (e.g. S.25 and S.51) and the ITAA97 (e.g. S.6-5 and S.8-1). This was on the basis that the grower investor was carrying on a business.
Government announced that effective from 1 July 2007, investors would be entitled to immediate up-front deductions for all expenditure and this was given effect by the insertion of Div 394 into the ITAA 97.
Note that the Div 394 only applies to amounts paid by a participant in a forestry managed investment scheme on or after 1 July 2007, not prior to 1 July 2007.
The following are the typical expenditure incurred in a forestry scheme and when they can be deductible:
| Establishment fees | Deductible up front in the year they are incurred or paid |
| Borrowing costs | Deductible where the cost is generally claimed over 5 year with a pro-rata made in the first and last year. |
| Interest on loan used to finance entry into the investment | Deductible on the basis the borrowed funds are used to produce assessable income in the form of proceeds on a sale of forestry interest or a share of harvest proceeds. |
| RentPlantation Service feesHarvest Supervision fees Harvest and delivery fees |
Often they can be charged as a % of the net sale proceeds of the timber. Hence they are incurred/deductible once the year they sale proceeds are received. If they are on an annual basis, they will be deductible in the year they are payable. |
This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.
