Edited version of private ruling

Authorisation Number: 1011420153261

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Ruling

Subject: Indirect Infrastructure Bonds

Question 1:

That in respect of any interest in the Indirect Infrastructure Bonds (referred to as the IIBs) purchased by the Investor from Seller:

(i) interest or income accrued to the Investor under the IIBs will be non-assessable under section 159GZZZZE of the Income Tax Assessment Act 1936 (ITAA 1936) and will not give rise to a capital gain under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997); or alternatively

(ii) the Investor will be entitled to annually elect under section 159GZZZZG of the ITAA 1936 to include the interest or income accrued on the Investor's interest in the IIBs in its assessable income and thereupon become entitled to a rebate of tax equal to (currently) 30% of the interest so included.

Answer:

Yes.

Question 2:

That on the disposal of an interest in the IIBs by the Investor, no part of the consideration received, or any profit derived, in respect of the disposal will be included in the assessable income of the Investor pursuant to section 159GZZZZE of the ITAA 1936 and no part will be taken into account under Part 3-1 of the ITAA 1997.

Answer:

Yes.

Question 3:

That:

(i) Employer, or an 'associate' (as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)) of Employer reimbursing the Investor for or satisfying the Investor's obligation to pay interest to Financier on the Loan will be the provision of a 'fringe benefit' for the purposes of the FBTAA; and

(ii) no amount of the benefit received in the form of the reimbursement or payment of interest under the Loan (if any) will be included in the Investor's assessable income as the income derived (if any) will be non-assessable non-exempt income pursuant to section 23L of the ITAA 1936 and will not be included in assessable income under section 15-2 of the ITAA 1997.

Answer:

Yes.

Question 4:

That except to the extent they have been reimbursed by Employer, or an 'associate' (as defined in subsection 136(1) of the FBTAA), any interest incurred by the Investor in respect of moneys borrowed to fund the acquisition of an interest in the IIBs (in particular, moneys borrowed from Financier under the Loan) will be an allowable deduction pursuant to section 8-1 of the ITAA 1997 and section 159GZZZZF of the ITAA 1936 when paid.

Answer:

Yes.

Question 5:

That the anti-avoidance provisions of sections 82KJ, 82KK and 82KL of the ITAA 1936 will not apply to the Investor in relation to the proposed arrangements.

Answer:

Yes.

Question 6:

That the provisions of sections 82KZM, 82KZMA, 82KZMD and 82KZMF of the ITAA 1936 will not apply to deny immediate deductibility of interest paid by (or that would have been paid by) the Investor.

Answer:

Yes.

Question 7:

That in the event of the cancellation of the IIB certificate, the Investor's ability to rely on the rulings in Questions 1 to 6 will not be affected given the terms of subsection 159GZZZZE(1A) of the ITAA 1936.

Answer:

Yes.

Question 8:

That Part IVA of the ITAA 1936 will have no application to the Investor in relation to the proposed arrangements.

Answer:

Yes.

This ruling applies for the following period/s:

1 July 2009 to 30 June 2011.

The scheme commences on:

The scheme commenced in the year of income ending 30 June 2010.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The scheme that is the subject of the Ruling involves the investment in Indirect Infrastructure Bonds.

The details of the scheme are identified in the request for ruling and in the attached documentation.

Relevant provisions:

Income Tax Assessment Act 1936 Section 159GZZZZE.

Income Tax Assessment Act 1936 Section 159GZZZZG.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1936 Section 23L.

Income Tax Assessment Act 1997 Section 15-2.

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).

Income Tax Assessment Act 1936 Section 159GZZZZF.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1936 Section 82KJ.

Income Tax Assessment Act 1936 Section 82KK.

Income Tax Assessment Act 1936 Section 82KL.

Income Tax Assessment Act 1936 Section 82KZM.

Income Tax Assessment Act 1936 Section 82KZMA.

Income Tax Assessment Act 1936 Section 82KZMD.

Income Tax Assessment Act 1936 Section 82KZMF.

Income Tax Assessment Act 1936 Subsection 159GZZZZE(1A).

Income Tax Assessment Act 1936 Section 177D.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The income or gain is exempt, or assessable subject to the rebate.

Detailed reasoning

Taxation Determination TD 94/80 provides that interest paid under an infrastructure borrowing will not be included in assessable income pursuant to section 159GZZZZE of the ITAA 1936.

Taxation Determination TD 94/49 confirms that the income and deduction exemption referred to in section 159GZZZZE of the ITAA 1936 applies to payments, gains or losses during the exemption period.

Paragraph 2 of Taxation Determination TD 95/59 confirms that interest received by an investor in an infrastructure borrowing is either exempt from income tax, or if the investor chooses for section 159GZZZZE of the ITAA 1936 not to apply, may elect for the interest to be assessable but receive a rebate under section 159GZZZZG of the ITAA 1936.

The rebate percentage (30%) is determined by paragraph 159GZZZZG(1)(d) of the ITAA 1936.

It follows that the income or gain is exempt, or assessable subject to the rebate.

Question 2

Summary

The income or gain is exempt, or assessable subject to the rebate.

Detailed reasoning

TD 94/80 provides that interest paid under an infrastructure borrowing will not be included in assessable income pursuant to section 159GZZZZE of the ITAA 1936.

TD 94/49 confirms that the income and deduction exemption referred to in section 159GZZZZE of the ITAA 1936 applies to payments, gains or losses during the exemption period.

Paragraph 2 of TD 95/59 confirms that interest received by an investor in an infrastructure borrowing is either exempt from income tax, or if the investor chooses for section 159GZZZZE of the ITAA 1936 not to apply, may elect for the interest to be assessable but receive a rebate under section 159GZZZZG of the ITAA 1936.

The ruling is on the basis that the Investor has not exercised a rebate election in accordance with section 159GZZZZG of the ITAA 1936.

Question 3

Summary

The reimbursement or satisfaction of the Investors obligation will constitute a fringe benefit and for that reason will be exempt income under section 23L of the ITAA 1936.

Detailed reasoning

Chapter 9 of the NAT 1054 - Fringe Benefits Tax (FBT) - A Guide for Employers provides (at 9.1.) the following:

An expense payment fringe benefit may arise in two ways. The first is where an employer reimburses an employee for expenses incurred by the employee. The second is where an employer pays a third party in satisfaction of expenses incurred by an employee. In either case, the expenses may be 'business' expenses, private expenses or a combination of the two.

This applies where expenses are incurred by an employee that are paid or reimbursed by the employer.

Taxation Ruling TR 2001/10 on fringe benefits tax and salary sacrifice arrangements provides (variously) at 8, 9, 10 and 11:

In general terms, a fringe benefit is defined in subsection 136(1) of the FBTAA as a benefit provided to an employee (being a person who receives, or is entitled to receive, 'salary or wages') or an associate of the employee by the employer or an associate of the employer in respect of the employment of the employee.

Salary or wages is defined in subsection 136(1) of the FBTAA and means a payment, to the extent that it is assessable incomes, from which an amount must be withheld under either section 12-35, 12-40, 12-45, 12-115, or 12-120 of Schedule 1 to the TAA.

If a fringe benefit as defined by subsection 136(1) of the FBTAA, or an exempt benefit under the FBTAA, is ordinary income or statutory income derived under the ITAA 1997, section 23L of the ITAA 1936 provides that the income is exempt income. Therefore, even though the fringe benefit or exempt benefit may be income in nature, it is exempt income and subsection 6-15(2) of the ITAA 1997 ensures that it does not form part of the assessable income of the employee under section 6-5 or 6-10 of the ITAA 1997.

Subparagraphs 26(e)(iv) and 26(e)(v) of the ITAA 1936 specifically exclude amounts that are fringe benefits or exempt benefits from being included in a taxpayer's assessable income under paragraph 26(e).

It follows that the reimbursement or satisfaction of the Investors obligation will constitute a fringe benefit and for that reason will be exempt income under section 23L of the ITAA 1936.

Question 4

Summary

The scheme complies with TD 94/80.

Detailed reasoning

Section 159GZZZZF of the ITAA 1936 provides that the exclusion of the return (including interest or amounts in the nature of interest, or profit or loss, or amounts received by way of consideration for the acquisition or disposal of rights in relation to an infrastructure borrowing) under section 159GZZZZE of the ITAA 1936 is to be disregarded in determining allowable deductions in respect of infrastructure borrowings.

The investor has incurred interest expenditure in financing the acquisition of infrastructure bonds (infrastructure borrowings). The investment on the information provided is in accordance with TD 94/80.

It should be noted that under section 51AH of the ITAA 1936 a deduction for interest incurred would not be an allowable deduction to the extent that the expense has been reimbursed or has been paid by another person, and where the reimbursement or payment constitutes a fringe benefit.

Question 5

Summary

Sections 82 KJ, 82KK and 82 KL of the ITAA 1936 will not apply to the scheme.

Detailed reasoning

Section 82KJ of the ITAA 1936 applies where a taxpayer prepays a deductible expense with the aim of reducing the non-deductible capital amount payable for the acquisition of property.

As the consideration for the acquisition of the infrastructure bonds is no less than what it would have been if the interest outgoing had not been incurred, it follows that section 82KJ of the ITAA 1936 will not apply to deny the deduction for interest incurred in financing the acquisition of the bonds that is otherwise allowable under section 8-1 of the ITAA 1997.

Section 82KK of the ITAA 1936 applies where there is a timing mismatch in payments to associates so that income is recognised in a later year than the matching deduction.

Section 82KK of the ITAA 1936 will not apply as there is no party receiving the interest payment that is an associate of the Investor.

82KL of the ITAA 1936 applies where the Investor or an associate receives a compensating benefit that is an additional benefit to that for which the expenditure was incurred, such that the expected tax saving and the benefit recoups the investor for the expenditure. The expected tax saving would be the deduction for interest, the benefit for which the expenditure was incurred would be the profit to be derived from acquiring and selling the infrastructure bond. The Investor would not appear to derive any additional compensatory benefit to the above amounts.

The application advises that the additional benefit and the expected tax saving will not be equal to or greater than the amount of the eligible relevant expenditure as defined in section 82KH of the ITAA 1936. On these facts there would be insufficient additional benefits provided to trigger the application of section 82KL of the ITAA 1936, and therefore the provision would not apply to deny the deductions otherwise allowable under section 8-1 of the ITAA 1997.

Question 6

Summary

Sections 82KZM, 82KZMA, 82KZMD and 82KZMF of the ITAA 1936 will not apply to the scheme.

Detailed reasoning

Section 82KZM of the ITAA 1936 operates to spread over more than one year of income a deduction for prepaid expenditure incurred by a taxpayer that is either an Simplified Tax System (STS) taxpayer for the year of income, or is a taxpayer that is an individual and that does not carry on a business.

The Investor is not an STS taxpayer, is not carrying on a business, and is an individual.

Paragraph 82KZM(1)(ba) of the ITAA 1936 requires either the eligible service period in relation to the deductible interest be longer than 12 months or the eligible service period be 12 months or shorter but end after the last day of the year of income after the one in which the expenditure was incurred.

It is advised that the interest paid in advance by the Investor under the Loan is in respect of a period that does not exceed 12 months and which does not end later than the last day of the income year following that in which it is paid. It follows that section 82KZM of the ITAA 1936 would have no application.

Sections 82KZMA and 82KZMD of the ITAA 1936 set the amount and timing of deductions for expenditure for an investor who carries on a business or is a taxpayer that is not an individual and that does not carry on a business. As the application has advised that the Investor is an individual who is not carrying on a business, it would follow that sections 82KZMA and 82KZMD would not apply.

Subsections 82KZME and 82KZMF of the ITAA 1936 prevent prepaid expenditure made under certain agreements relating to tax shelter arrangement from being immediately deductible under section 8-1 of the ITAA 1997.

ATO Interpretative Decision ATO ID 2003/1119 confirms that subsections 82KZME(5) to 82KZME(9) of the ITAA 1936 provide certain exceptions to the tax shelter rules. It provides that where any of these exceptions apply, an individual taxpayer who does not incur the expenditure in carrying on a business may be eligible to claim an immediate deduction where the eligible service period is 12 months or less and it ends on or before the last day of the next income year.

Subsection 82KZME(6) of the ITAA 1936 excludes expenditure that is an allowable deduction because of section 159GZZZZF of the ITAA 1936 in respect of infrastructure borrowings from the provisions of section 82 KZMF of the ITAA 1936. It follows that the expenditure is excluded from section 159GZZZZF.

Question 7

Summary

The concessional treatment provided to a taxpayer by section 159GZZZZE of the ITAA 1936 will not be affected by any cancellation of the Direct Infrastructure Borrowing or the Indirect Infrastructure Borrowing Certificate.

Detailed reasoning

ATO Interpretative Decision ATO ID 2003/441 provides that the concessional treatment provided to a taxpayer by section 159GZZZZE of the ITAA 1936 will not be affected by any cancellation of the Direct Infrastructure Borrowing or the Indirect Infrastructure Borrowing Certificate, and refers to subsection 159GZZZZE(1A) of the ITAA 1936.

As cancellation of the Infrastructure Borrowing does not affect the concessional treatment provided by 159GZZZZE of the ITAA 1936, the interest incurred in relation to the Borrowing would remain deductible.

Question 8

Summary

The scheme complies with TD 94/80.

Detailed reasoning

TD 94/80 provides that a return on an infrastructure bond (taking into account its non taxable nature by grossing up) that exceeds the deductible expenses incurred in borrowing to acquire the infrastructure bond, would indicate that the expense has been incurred primarily for the purpose of deriving the return rather than for another purpose, such as for the derivation of a tax benefit.

As such, compliance by an investor with the provisions of TD 94/80 would indicate that the arrangement would not attract the provisions of Part IVA because section 177D of the ITAA 1936 would not be satisfied.

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