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Edited version of private ruling
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Ruling
Subject: Securitisation - Division 250 and Division 820 of the ITAA 1997
All references are to the Income Tax Assessment Act 1997
Issue 1
Question 1
Will Division 250 not apply to the Entity because the Entity does not satisfy the general test in section 250-15 by virtue of the operation of paragraph 250-15(d)?
Answer
Yes.
This ruling applies for the following period:
1 July 2011 to completion
The scheme commences in:
Income year ending 30 June 2012
Issue 2
Question 1
Will Division 820 not apply to the Entity because the Entity falls within the exemption contained in section 820-39?
Answer
Yes.
This ruling applies for the following period:
1 July 2011 to completion
The scheme commences in:
Income year ending 30 June 2012
Relevant facts and circumstances
· The Entity is established specifically for the purpose of obtaining finance for the Project.
· The Project involves two phases: the construction of a capital asset (construction works) for and on behalf of the Owner, and after completion of the construction works, the provision of management services in connection with the capital asset (management services).
· The project members will form an unincorporated joint venture (the Project JV) to carry out the construction works and management services. Each project member will hold a 50% interest in the Project JV.
· The Owner and the Project JV will enter into a Project Deed which specifies each party's obligations in relation to the Project.
· Pursuant to the Project Deed, and in consideration for the construction works, the Owner will pay a construction payment to the Project JV at the completion of the construction works.
· Pursuant to the Project Deed, and in consideration for the management services, the Owner will pay specified amounts to the Project JV.
· The Project JV will pay relevant Fees to the Owner for the right to access the relevant Area on which the construction works and management services will be conducted.
· The Project Deed confers no ownership, control or legal entitlement to possession in respect of the relevant Area or capital asset of the Project to the Project JV.
· The Entity will enter into an Agreement with the Owner and the Project JV under which the Entity will purchase the right to receive the relevant Fees payable by the Project JV to the Owner for the right to access the Area (the Receivables).
· In consideration for the Receivables, the Entity will pay a specified amount (Consideration) to the Owner at the completion of the construction works.
· The Entity will obtain funds from external debt providers (External Loan) and make an on-loan to the Project JV to finance the construction works under the Project (On-loan). The On-loan will be repaid by the Project JV over the term of the Project. The Owner will not guarantee nor support the repayment of the On-loan by the Project JV.
· The Entity will be wholly owned by a Holding Entity. The Holding Entity will ultimately be owned by Aus Co and Overseas Co. Aus Co and Overseas Co will each hold a 50% ownership interest in the Holding Entity.
· The Entity and external debt providers will enter into a Loan Agreement. The Loan Agreement governs the terms and conditions of the External Loan.
· Under the terms of the Loan Agreement, the Entity will grant a first ranking fixed and floating charge over its assets in favour of the external debt providers.
· The Entity's assets will comprise the Receivables and the On-loan to the Project JV.
· The Entity is a separate legal entity and will carry on its activities as an independent entity.
· The activities of the Entity will be restricted to activities related to obtaining the External Loan, providing the On-loan to the Project JV and purchasing the Receivables from the Owner.
· The Entity will not issue or raise further unrelated debt subsequent to the External Loan.
· The Owner will not have a direct or indirect ownership in the Entity at any time during the term of the Project.
· At all times, the Entity will be predominantly funded by debt interests (that is, more than 50%).
Assumption
The Entity is an insolvency-remote special purpose entity according to the criteria of an internationally recognised rating agency that are applicable to the Entity's circumstances.
Reasons for decision
Issue 1 Question 1
Summary
Division 250 will not apply to the Entity because the general test in section 250-15 is not satisfied. The general test in section 250-15 is not satisfied because the Entity would not be entitled to a capital allowance in relation to a decline in value of, or expenditure in relation to, the right to the Receivables.
Detailed reasoning
Division 250 operates to deny or reduce certain capital allowance deductions that would be available to you in relation to an asset if the asset is put to a tax preferred use in certain circumstances. The Division applies to you and an asset if the 'general test' in section 250-15 is satisfied in relation to you and the asset and none of the exclusions referred to in paragraph 250-10(b) apply.
The general test in section 250-15 has five requirements, all of which must be satisfied. One of the five requirements is contained in paragraph 250-15(d):
(c) …
(d) disregarding this Division, you would be entitled to a capital allowance in relation to:
(i) a decline in the value of the asset; or
(ii) expenditure in relation to the asset
(e) …
The asset being tested is the right to the Receivables from the Project JV, which the Entity acquired from the Owner under the Agreement.
The term 'capital allowance' is relevantly defined in subsection 995-1(1) to mean a deduction under Division 40 or Division 43.
Under Division 40, you are entitled to a deduction for the decline in value of a depreciating asset that you held for any time during the year (section 40-25). The term 'depreciating asset' is defined in section 40-30.
On the facts, the Receivables are not depreciating assets within the definition of that term in section 40-30. Therefore, the Entity would not be entitled to a deduction for the decline in value of the Receivables.
Division 43 provides a deduction for capital works.
Pursuant to section 43-10, you may be entitled to deduct an amount for capital works for an income year. Capital works to which Division 43 applies is specified in section 43-20.
On the facts, the Receivables are not capital works to which Division 43 applies.
As the Entity will not be entitled to a capital allowance in relation to the decline in value, or expenditure in relation to, the Receivables, paragraph 250-15(d) is not satisfied and Division 250 will not apply to the Entity.
Issue 2 Question 1
Summary
The thin capitalisation rules in Division 820 will not apply to the Entity because the Entity satisfies the conditions contained in subsection 820-39(3).
Detailed reasoning
The object of the thin capitalisation rules in Division 820 is to ensure that certain entities do not reduce their tax liabilities by using an excessive amount of debt capital to finance their Australian operations.
Section 820-39 provides an exemption from the thin capitalisation rules in Division 820 for special purpose entities that satisfy the conditions in subsection (3) of that section.
The conditions in subsection 820-39(3) are:
(a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself);
(b) the total value of debt interests in the entity is at least 50% of the total value of the entity's assets; and
(c) the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances.
Paragraph (a)
Paragraph 820-39(3)(a) requires the Entity to be established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself).
Paragraph 1.8 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No.5) 2003 clarifies the meaning of paragraph (a) by stating that it "is a purpose test that seeks to exclude entities that are not specifically established for what might be commonly referred to as securitisation or origination activity". The Explanatory Memorandum goes on to state that paragraph (a) "also seeks to exclude entities that undertake any activities not related to the process of securitisation or origination".
The Entity will be established for the purpose of obtaining finance for the Project. The Entity's activities will be restricted to activities related to obtaining the External Loan, providing the On-loan to the Project JV and purchasing the Receivables from the Owner under the Agreement.
In this case, the Entity has assumed some or all of the economic risks associated with the Receivables, since the Entity's return is contingent on the recoverability of the Receivables. At least part of the credit risk on the Receivables has passed from the Owner to the Entity.
Accordingly, on the facts, paragraph 820-39(3)(a) is satisfied.
Paragraph (b)
Pursuant to paragraph 820-39(3)(b) the total value of debt interests in the Entity must represent at least 50% of the total value of the Entity's assets.
On the facts, the External Loan obtained by the Entity is a debt interest as defined in section 974-15.
In this case, the Entity will at all times be predominantly funded by debt (that is, more than 50%) Accordingly, the requirement in paragraph 820-39(3)(b) is satisfied.
Paragraph (c)
Paragraph 820-39(3)(c) is satisfied on the assumption that the Entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the Entity's circumstances.
In conclusion, as the Entity satisfies all of the conditions in subsection 820-39(3), the thin capitalisation rules in Division 820 will not apply to the Entity.
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