Edited version of private ruling

Authorisation Number: 1011825061077

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Ruling

Subject: Construction

Questions and answers

Issue 1

Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to A Co Ltd on the basis that it will satisfy the requisite criteria in paragraph 250-15(d) of the ITAA 1997, resulting in A Co Ltd not being entitled to claim capital allowance deductions under Division 40 or Division 43 of the ITAA?

Answer - No.

Issue 2

Will Division 250 apply to A Co Ltd by reason of a deduction being allowable under sub-division 40-I of the ITAA 1997?

Answer - No.

This ruling applies for the following periods:

1 July 2010 to expiry date.

Relevant facts and circumstances

All legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated

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 business of A Co Ltd is the design, construction and provision of the new facility followed by the provision of facilities management services during the period beginning from financial close and ending on the expiry date.

A tax preferred entity will pay A Co Ltd:

· a construction payment on completion, and transfer of ownership, of the new facility; and

· periodic amounts for the facilities management services in respect of the new facility.

Reasons for decision - A Co Ltd

The law

Under section 250-10, Division 250 can only apply to an asset if at the time, all the paragraphs of section 250-15 are first satisfied.

Section 250-15 requires, inter alia:-

'(d) …(the entity) would be entitled to a *capital allowance in relation to:-

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

(ii) expenditure in relation to the asset.'

The term capital allowance means for present purposes a deduction under Division 40 or Division 43.

To the extent that an amount is deductible under section 8-1:-

a. the relevant element of the cost of applicable deprecating asset is reduced for the purposes of Division 40 (and thus effectively not deductible under Division 40).

b. the amount is not deductible under Division 43.

Application to present case

Section 8-1

The periodic amounts received by A Co Ltd from the tax preferred entity for the provision of facilities management services under the relevant contract is income derived by A Co Ltd under section 6-5.

The construction payment received by A Co Ltd from the tax preferred entity for the design, construction and provision of the new facility under the relevant contract is income derived by A Co Ltd under section 6-5, in accordance with Taxation Ruling IT 2450.

A Co Ltd will procure the services from the relevant subcontractors under the relevant contracts in order for A Co Ltd to fulfil its obligations to the tax preferred entity in relation to the relevant services.

The payments made by A Co Ltd to the subcontractors for the services provided have the necessary connection with the incidence of assessable income such that the payments constitute outgoing incurred in the derivation of that assessable income for the purposes on section 8-1.

The only negative limb of section 8-1 in contention is whether or not the outgoings are of capital or capital nature.

It is appropriate for the nature of the payments to the subcontractors incurred by A Co Ltd to be characterised by reference to the advantage that is sought by making the expenditure.

The payments made by A Co Ltd to the subcontractors are commensurate with the advantage (the services of a sub-contractor on an ongoing basis) obtained, which is not of a permanent nature and does not result in the acquisition by A Co Ltd of an enduring benefit

Therefore, the payments made by A Co Ltd to the subcontractors are not capital, or capital in nature and the exclusion in paragraph 8-1(2)(a) does not apply.

The above view is supported by ATO ID 2005/277.

Division 40 and 43

Division 40

For the sake of completeness, premised on an amount paid to procure the services of the subcontractors not being deductible under section 8-1, the following is an analysis of Division 40 and Division 43 in relation to that expenditure.

Also, Division 40 cannot apply to assets where a deduction is available under Division 43.

In relation to Division 40, an entity may deduct an amount equal to the decline in value of a depreciating asset held for the period that the asset was installed ready for use and for a taxable purpose in the relevant income year.

The entity identified in column 3 of an item in the table in section 40-40 holds the relevant asset except where the entity is identified under any of the items in the table as not holding the relevant asset.

Although A Co Ltd has a quasi-ownership right over the site as A Co Ltd does not have any right to remove the assets, which are constructed under the Agreement, Item 2 of the table in section 40-40 does not apply to A Co Ltd.

Item 3 of the table in section 40-40 does not apply as any improvements to the relevant land under the Agreement are for the tax preferred entity and not A Co Ltd.

Item 4 of the table in section 40-40 does not apply as A Co Ltd has no right to remove assets fixed to the land.

It is accepted that items 5 and 6 of the table do not apply to A Co Ltd as it is not considered reasonable to expect that A Co Ltd will become the legal owner of the relevant assets or that the relevant assets will be disposed of at A Co Ltd's direction.

Items 1, 7, 8, 9 and 10 of the table in section 40-40 are not applicable.

Therefore, A Co Ltd would not hold any of the assets that are part of the project under section 40-40 and A Co Ltd would not be entitled to any capital allowance deductions under Division 40 in respect of such expenditure.

Division 43

In relation to Division 43, an entity may only deduct an amount for capital works if inter alia there is a construction expenditure area. The construction expenditure is required to be incurred by the relevant entity (the entity to which the deduction is available).

In this case, the expenditure incurred by A Co Ltd is expenditure incurred on revenue not capital account. In other words, the expenditure incurred is in the course of deriving assessable income by providing construction services to the tax preferred entity.

A Co Ltd will therefore not be entitled to any capital works deductions under Division 43 as the expenditure incurred will not be capital expenditure.

Sub-division 40-I

As A Co Ltd is not entitled to a deduction under Division 40 or Division 43, there is no capital allowance in relation to a decline in the value of an asset or expenditure in relation to an asset and thus neither sub-paragraphs 250-15(d)(i) or (ii) is satisfied.

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