Finance and Investment Division 250 Working Group minutes - 2 December 2008
Attachment A
Example 1
Issues 1.01, 2.01 and 2.03 – Applying the level of expected financial benefits test
This example aims to illustrate the following issues in relation to the application of the level of expected financial benefits test:
In a multi-tenanted building, what is the relevant Division 43 asset put to a tax preferred use?
Is there a requirement to test each depreciating asset separately?
How is the market value of the relevant asset determined?
How are the expected financial benefits in relation to the relevant assets determined?
How is the discount rate determined?
The majority of these issues arise because Division 250 appears to assume an arrangement with a single tax preferred end user, with a term equal to the effective life of the assets. These assumptions are not valid in relation to real property where there are likely to be multiple tenants, only some of which may be tax preferred end users, and none of whom would have leases over the property for the remainder of its effective life.
Background
RealTrust is the owner of a five storey commercial office building and land which it uses to derive rental income. RealTrust acquired the land and building as well as the building fit-out for $100 million from a developer upon completion of construction on 1 July 2008. The acquisition was 70% funded by limited recourse debt (that is, section 250-115 does not apply).
The building is pre-tenanted, with leases of all five floors commencing on 1 July 2008. Each floor is identical. One floor is leased to a tax preferred entity as defined in section 995-1 with the remaining four floors of the building being leased to non-tax preferred entities. Rent is paid annually in arrears.
Other relevant circumstances are as set out in Figure 1.
Figure 1.1
Tax preferred entity
4th Floor
3rd Floor
Non-tax preferred entities
2nd Floor
1st Floor
Ground Floor
Building value1:
$50 million
Land value:
$50 million
Undeducted Division 43 expenditure:
$40 million
Total Division 40 adjustable values:
$5 million
Rental yield
7% p.a.
Floor rental:
$1.4 million p.a. (i.e. $100M/5 x 7%)
Lease term:
10 years
Inclusive of Division 43 expenditure and Division 40 assets
Adjustable value after the acquisition
The tax preferred entity is a tax preferred end user for the purposes section 250-50 and section 250-55 as a holder of rights as lessee under a lease of the fourth floor of the building. As the tax preferred entity is a tax preferred end user, the fourth floor of the building is put to a tax preferred use under sub-section 250-60(1), with the tax preferred use being the lease.
Subscribe
