Finance and Investment Division 250 Working Group minutes - 2 December 2008
Attachment B
Division 250 Issues Register
The following issues list has been split between issues which are seen to require legislative change and issues which it is considered can be dealt with administratively by the Tax Office. Each section is ordered in terms of high to LOW priority.
Two examples are also provided to illustrate particular issues, as indicated in the table.
1. Submissions to Treasury
Number
Issue
Description
Priority
Submission
1.01
Applying the level of expected financial benefits test
This test requires the taxpayer to calculate the sum of the present value of the expected financial benefits that members of the tax preferred sector have provided or are reasonably likely to provide. Pursuant to subsection 250-105(2), the discount rate to be used in working out the present value is the internal rate of return for the arrangement. This raises a number of issues as discussed in Example 1.
High
That section 250-105 be amended such that taxpayers can apply either the rate prescribed in sub-section 250-105(1) or the IRR inherent in the investment (rather than the particular arrangement).
1.02
Present value of expected financial benefits
Using the IRR may not always be appropriate in determining the PV of the expected financial benefits under certain types of leases: e.g. those considered to be a genuine 'operating' lease for tax purposes such as shopping centre leases, where there is no rate of return that is implicit in the lease rentals or the lease arrangement.
High
For the purpose of section 250-235, allow the use of the discount rates listed in section 250-105. This would ensure that genuine operating leases are not likely to be subject to Division 250.
1.03
Working out the end value of Division 43 assets that appreciate in value
The end value of an asset is worked out under section 250-180. It is unclear how that provision applies to Division 43 assets which appreciate in value, e.g. buildings.
Refer to Example 2.
High
Modify the definition of end value so that it is equal to the undeducted construction expenditure at the end of the arrangement.
1.04
Application to non-Australian property
A tax preferred end user is defined in section 250-55 to include a non-resident. Under the CFC rules, the attributable income of a CFC is calculated on the basis that the CFC is a resident of Australia. Accordingly, Division 250 may apply inappropriately to a CFC where, for example, a CFC leases offshore property to a non-resident. Other situations where Division 250 may inappropriately apply include:
Determination of FIF income under the calculation method
Calculation of foreign branch income
Direct holdings of non-Australian property by an Australian resident
Non-Australian property held through foreign partnerships, foreign trusts or foreign hybrids.
High
Remove arrangements in relation to non-Australian real property from scope of Division 250.
1.05
Exception to LRD test and short term or low value arrangements where financing from tax preferred sector
One of the exceptions to the exclusions for the LRD test (refer s.250-115(4) – (6)) and certain short term or low value arrangements is the provision of financing or support for financing, e.g. by way of loan, guarantee, indemnity, security, etc., by a member of the tax preferred sector (subsection 250-35(4)). The exception to the exclusion applies even if the member of the tax preferred sector is unrelated to the tax preferred end user under the particular arrangement. For example, a taxpayer may borrow from an offshore financial institution to construct an asset that is leased to a tax exempt entity in Australia. Even though the financial institution may be unrelated to the tax exempt end user, the exclusion would not be available. This is particularly relevant in the context of non-Australian property. In addition, where provision of financing or support for financing is provided on an arm’s length basis this should not result in an exception from the exclusions to the LRD test.
High
Modify the exclusion to only include the financing or support for financing provided by an entity associated with the tax preferred end user on other than arm’s length terms.
1.06
Expenditure in relation to an asset
One of the conditions in the general test in section 250-15 is that the taxpayer must, apart from the operation of Division 250, be entitled to a capital allowance in relation to a decline in the value of an asset or expenditure in relation to an asset. Capital allowances include deductions over 5 years for blackhole expenditure under section 40-880.
Low
Clarify that this type of capital allowance would not be in relation to the decline in value of the asset or expenditures in relation to an asset, and therefore not subject to Division 250.
1.07
Exception to short term or low value arrangements where irregular financial benefits
One of the exceptions to the exclusion for certain short term or low value arrangements is where the financial benefits that are provided are not provided on a regular periodic basis (and at least annually) (subsection 250-35(6)). However, with some arrangements, e.g. property leases, it is not uncommon for financial benefits to be provided that are irregular or once-off. Examples are rent free periods or lease incentives. Does the receipt of such benefits by the taxpayer automatically exclude the application of the exclusion for short term or low value arrangements?
Low
Amend ss250-35(6) to remove the requirement that financial benefits must be 'provided on a regular periodic basis (and at least annually)'.
2. Submissions to the ATO
Number
Issue
Description
Priority
Submission
2
Other issues
2.01
Identifying the relevant asset
What is the relevant asset for the purposes of Division 250? An 'asset' may comprise separate items that may be recognised as assets in their own right. The EM gives the example of a floating restaurant, which comprises many separate components, e.g. the ship, stove, fridge, etc. Another example is a shopping centre where the relevant asset could be the whole centre, each shop within the centre, or the plant and equipment within each shop. See Example 1.
High
Given the potential compliance burden of identifying each and every asset under an arrangement, the ATO should provide an administrative shortcut or ruling permitting a certain level of aggregation, e.g. aggregation of assets into two pools – one for Division 40 assets and another for Division 43 assets, or the aggregation of Division 40 assets with a de minimus adjustable value. Refer to Example 1.
For Division 43 assets it should be made clear that only the part of the capital works that are put to a tax preferred use should be relevant for the purposes of Division 250. Refer to Example 1.
2.02
Definition of 'limited recourse debt'
The definition of 'limited recourse debt' is set out in section 243-20. It is unclear if the ATO's guidance in TR 96/22 on the non-recourse debt requirement in section 51AD continues to be applicable. Furthermore, in what circumstances would it be unreasonable for an obligation to be treated as limited recourse debt under subsection 243-20(6). In addition, the practical implications of applying the LRDT are unclear where a single debt facility has been used to fund multiple property acquisitions.
High
Clarification by way of ruling. Request ATO to update its existing rulings to reflect the introduction of Division 250.
2.03
Expected financial benefits
The expected financial benefits that are taken into account under section 250-135 are those in relation to the tax preferred use of an asset. Under property leases, rental may have three components – land, building (Division 43) and plant and equipment (Division 40). Only the rental received in respect of the building, and the plant and equipment, would be financial benefits taken into account under section 250-135. Guidance is sought on the basis on which rental is to be apportioned between those components. Refer Example 1.
High
ATO should provide an administrative shortcut or ruling setting out that taxpayer can apply certain reasonable methods to allocate financial benefits to Division 40 assets, Division 43 assets and other assets including a pro rata allocation based on relative market values or tax cost, or some other reasonable method provided that the taxpayer applies the method consistently.
2.04
Working out a reasonable estimate of the end value
Under section 250-160, the financial benefits subject to deemed loan treatment include a reasonable estimate of the end value of the asset in some circumstances including where the asset is not to be purchased, acquired by, or transferred to, a member of the tax preferred sector at the end of the arrangement. There is no guidance on how a reasonable estimate of end value is determined. It may be difficult to estimate the end value (especially where the end value will be an accounting estimate or the market value of the asset) for arrangements that will be in place for many years.
Medium
ATO should provide an administrative shortcut or ruling outlining what is considered to be an acceptable way to estimate future market value including the future tax written down value of an asset or the balance of undeducted expenditure, and/or setting out other acceptable ways to determination future market values.
2.05
Commissioner's discretion
There is currently no guidance on when the Commissioner would exercise his discretion in section 250-45.
Medium
ATO ruling on Division 250 providing examples of situations where the exercise of the discretion may be appropriate (for example for certain non-Australian property).
2.06
Addition and improvement during the lease
Where an arrangement is subject to Division 250, clarification regarding whether an acquisition of assets or improvements to Division 43 assets during the arrangement period will impact on the overall gain or loss for the purposes of sub-division 250-E.
There is a provision for re-estimation of the Div 250 gain/loss where there is a material change in the value or timing of financial benefits subject to deemed loan treatment, which includes the end value of the asset. Is this intended to provide for re-estimate for material additions or improvements to assets which are put to tax preferred use following the start of the arrangement? The examples in s250-255(2) do not address this issue.
Where there is no re-estimation the taxpayer should not be denied capital allowances for the relevant assets.
Medium
ATO ruling on Division 250 to clarify whether a re-estimation of the overall gain/loss can be made in these circumstances.
2.07
Apportionment rule
Where an asset is used by both tax preferred users and non-tax preferred users (for example, lift/escalator in a building where only some floor space is leased to tax preferred user), it is necessary to work out the disallowed capital allowance percentage in respect of the lift of escalator.
This is based on the sum of the present values of financial benefits that are subject to deemed loan treatment over the market value of the asset.
Medium
ATO ruling on Division 250 regarding what are acceptable methods of allocating financial benefits, for example based on floor space, rental or actual use. In working out the actual use, one may have regard to a number of staff/employees of tax preferred user and or the actual need for use by the tax preferred user. For example, if the tax preferred user is located the ground floor, it would not use a lift as often as the tenants using higher floors.
2.08
Exclusion for low value assets.
Clarification that the relevant assets for the purposes of the $40 million threshold are only the Division 43 and 40 assets, and not the land.
Low
Seek guidance in a ruling on Division 250.
2.09
Start of the arrangement period
The start of the arrangement period is usually when the tax preferred use starts, being when an end user 'holds rights as lessee' under a lease of the asset – does this include pre-completion leases which are entered into prior to the completion of a development and prior to possession of the premises? Although Div 250 will not apply in the period of development (as there is no asset in relation to which capital allowance would be available), however once it is complete, then does the arrangement period for calculating the Div 250 gain/loss start at the date of execution of the lease or possession of the premises? When does a party hold rights as lessee?
Low
Seek guidance in a ruling on Division 250.
2.10
Meaning of effective control and use
What is the meaning of 'effective control' and 'use'? Is the existing ATO guidance on these concepts in TR 96/22 and IT 2602 still relevant even though that guidance was released in the context of section 51AD and Division 16D?
Low
Clarify ATO's interpretation of these terms. Request ATO to update its existing rulings to reflect the introduction of Division 250 so that the interpretation under the old ruling applies to Division 250.
2.11
Right to control the use of an asset
Section 250-80 states that Division 250 applies to an arrangement as if it were a lease where, amongst other things, the arrangement gives a right to control the use of the asset (other than for temporary purposes of ensuring public health or safety, protecting the environment or continuing the supply of an essential service). There is no guidance on when a taxpayer will have a right to control the use of an asset. Similar terminology is used in AASB Interpretation 4 but the explanatory memorandum states that the accounting classification of the arrangement does not necessarily determine this question.
Low
Clarify the ATO's interpretation of the types of arrangements caught by section 250-80.
2.12
In substance leases
Under section 250-80, certain arrangements are deemed to be leases for the purposes of Division 250. The lessee of an asset is taken to be an end user of the asset under subsection 250-50(4). However, the note to section 250-80 states that 'Even if this section applies to treat an arrangement in relation to an asset as a lease, the requirements in section 250-50 still need to be satisfied before an entity can be an end user of the asset.' It is unclear what the purpose of this note is given that a lessee is automatically treated as an end user under section 250-50 without having to satisfy the effective control or use requirements stipulated in that provision.
Low
Clarify the ATO's interpretation of sections 250-50 and 250-80. There should be no need to satisfy the effective control or use tests in the case of an 'in substance' lease. If there was such a requirement, that would obviate the need for section 250-80.
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