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Advice

Subject: Division 250

Question

Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to ABCP?

No.

This ruling applies for the following period

1 July 2010 to 30 June 2030

Relevant facts

The ABCP a consortium was short-listed for the Facility.

The ABCP is tendering to design, build, operate and maintain the Facility.

The consortium of investors will establish the relevant entities. The relevant entities will enter into a partnership agreement to form the ABCP. The investors will further establish ABCH Pty Ltd and ABC which are registered in a State and ABC will be the key contracting party with the Corporation in relation to the Facility.

ABC will enter into a Project Agreement with the Corporation, which specifies each party's obligations in relation to the Project.

In particular prior to and during the construction phase, ABC will:

a) Finance and provide services to the Corporation of designing, constructing and commissioning the Works and achieving Completion, in consideration of the Corporation making periodic Construction Payments, in accordance with the proposed construction draw-down schedule;

b) Engage the design, build and operate joint venture relevant entities to carry out the design and construction of the Facility. ABC will use Construction Payments received from the Corporation to satisfy its contractual payment obligations to the relevant entities, which will arise over the design and construction phase;

c) Enter into a licence with the Corporation in respect of the site on which ABC will be required to construct the Facility under the Project Agreement; and

d) Not have a proprietary interest in the assets that comprise the Facility at any time over the course of the construction phase, or upon completion of the Facility.

Upon Completion of the Facility, ABC will:

a) Enter into a licence with the Corporation over the Facility. The licence will not provide ABC with the right to remove assets fixed to the area of land that is subject to the licence;

b) Enter into a contract with the relevant entities under which it will subcontract its obligations under the Project Agreement to manager, operate, maintain and repair the Facility over the Operations Phase of the Project to the relevant entities;

c) Provide services of Managing, Maintaining and repairing the Project Infrastructure in consideration of the Corporation paying Monthly Services Charges (MSCs);

d) Procure the equipment on behalf of the Corporation. ABC will not at any stage obtain beneficial title to the plant and equipment; and

e) The Corporation will remain the owner of the Site including items affixed to the Facility throughout the design, construction and operation phase or the Facility.

ABC's main business is providing services of the design, construction, management and maintenance of the site. The Construction Payments and O&M payments received from the Corporation is consideration for providing the construction and operation and management services under the relevant contractual agreements.

The Corporation will assign to ABCP the licence fees payable by ABC to the Corporation under the licence in consideration for ABCP making the Securitisation Payments to the Corporation.

The only relevant asset held (legally or beneficially) by ABCP is the stream of licence receivables payable under the Operating Licence. There are no other payments for assets (or if there are, these payments are made in the ordinary course of the Partnership's business and are neither capital nor capital in nature).

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 250.

Income Tax Assessment Act 1997 Paragraph 250-15(d).

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 40-25.

Income Tax Assessment Act 1997 Section 40-30.

Income Tax Assessment Act 1997 Section 40-40.

Income Tax Assessment Act 1997 Division 43.

Income Tax Assessment Act 1997 Section 43-10.

Income Tax Assessment Act 1997 Section 43-75.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

As ABCP will not be entitled to capital allowance deductions under Division 40 or Division 43 of the ITAA 1936 in relation to the Facility, Division 250 of the ITAA 1997 will not apply to ABCP to the Facility.

Reasons for Decision

Division 250 of the ITAA 1997 applies only if each of section 250-15 is satisfied and none of the specific exclusions apply. That is, if one of the paragraphs is not satisfied, Division 250 will not apply.

Section 250-15 of the ITAA 1997 inter alia states:-

This Division applies to you and an asset at a particular time if:

(a) the asset …

(d) disregarding this Division, you would be entitled to a *capital allowance in relation to:

(i) a decline in value of the asset; or

expenditure in relation to the asset; and ...

Subsection 995-1(1) of the ITAA 1997 states:-

In this Act, except so far as the contrary intention appears:

Capital allowance means a deduction under:

(a) Division 40 (capital allowances) of this Act; or

(ab) Division 43 (capital works) of this Act; or …

Capital Allowances - Division 40

Under Division 40 of the ITAA 1997 (other than Subdivision 40-I) an entity must hold a depreciating asset in order to have an entitlement to a capital allowance deduction.

Except as provided by subsection 40-30(2) of the ITAA 1997, an intangible asset is not a depreciating asset.

Subsection 40-30(1) of the ITAA 1997 inter alia states:

A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over time it is used, except:

…

an intangible asset, unless it is mentioned in subsection (2).

The only asset that will be held by the ABCP is the right to an income stream from licence receivables payable to the ABCP by the Corporation under the licence.

The right to the licence receivable is an intangible asset but is not an intangible asset that is mentioned in subsection 40-30(2) of the ITAA 1997 and therefore it is not a depreciating asset for the purposes of Division 40.

As the right to the licence receivables is not a depreciating asset for the purposes of Division 40 of the ITAA 1997, there is no entitlement to a deduction under Division 40.

Division 43 - Construction Expenditure

Section 43-10 of the ITAA 1997 provides that one can only deduct an amount for capital works for an income year if, among other things, the capital works have a 'construction expenditure area'.

ABCP will not have a 'construction expenditure area' of capital works, as provided for in section 43-75 of the ITAA 1997, because ABCP will not have a proprietary interest in the assets that comprise the Facility at any time over the course of the construction phase or upon completion of the Facility.

Therefore, ABCP will not be entitled to a deduction under Division 43 of the ITAA 1997 in relation to the Facility as subsection 43-75(1) is not satisfied.

Conclusion

As there is no expenditure in relation to an asset that is subject to a deduction pursuant to Division 40 or Division 43 of the ITAA 1997, paragraph 250-15(d) of the ITAA 1997 is not satisfied. Therefore, Division 250 of the ITAA 1997 will not apply to ABCP in respect to the Facility.

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