Edited version of Administratively Binding Advice

Authorisation Number: 1012041086560

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Advice

Subject: Division 250 - put to a tax preferred use

Question 1

Is the Asset put to a tax preferred use by the Entity pursuant to paragraph 250-15(a) of the ITAA 1997?

Advice

No

Question 2

Are the payments made by the Entity to the Company financial benefits in relation to the tax preferred use of the Asset pursuant to paragraph 250-15(c) of the ITAA 1997?

Advice

No

Period

Relevant facts and circumstances

The Company is an Australian proprietary company.

The Company has incorporated a wholly owned subsidiary, Company F which has acquired 100 per cent of the shares in the Company G which holds the Asset.

Subsequent to the acquisition of the Asset, Company, as an eligible head company, has elected to form a tax consolidated group of which Company F and Company G are subsidiary joining members.

The business of the Company, including its subsidiaries, is limited to owning, maintaining and operating the Assets in accordance with an agreement.

The Entity is a company limited by guarantee established under the Corporations Act 2001 which is responsible for providing certain facilities and services for sale to customers in accordance with certain terms of the Entity's constitution.

There is no lease arrangement between the Company and the Entity.

The Entity collects all moneys due for providing certain facilities and services to customers and in turn pays the Company, less the Entity's costs.

The Entity is exempt from Australian income tax and is therefore a tax preferred entity as defined in section 995-1 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 250-15;

Income Tax Assessment Act 1997 section 250-15(a);

Income Tax Assessment Act 1997 section 250-15(c);

Income Tax Assessment Act 1997 section 250-15(c)(i);

Income Tax Assessment Act 1997 section 250-50;

Income Tax Assessment Act 1997 section 250-50(1)(a);

Income Tax Assessment Act 1997 section 250-55(a);

Income Tax Assessment Act 1997 section 250-60(1);

Income Tax Assessment Act 1997 section 250-60(2);

Income Tax Assessment Act 1997 section 250-60(3);

Income Tax Assessment Act 1997 section 974-160;

Income Tax Assessment Act 1997 section 995-1.

Part IVA

Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to provide advice on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to provide advice on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

Question 1

Is the Asset put to a tax preferred use by the Entity pursuant to paragraph 250-15(a) of the ITAA 1997?

Advice

No

Summary

The Asset is not put to a tax preferred use by the Entity pursuant to paragraph 250-15 (a) of the ITAA 1997.

Detailed reasoning

For Division 250 of the ITAA 1997 to apply to the Company, the general test under section 250-15 of the ITAA 1997 must be met, that being:

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

(a) the asset is being put to a tax preferred use; and

(b) the arrangement period of the tax preferred use of the asset is greater than 12 months; and

(c) financial benefits in relation to the tax preferred use of the asset have been, will be or can reasonably be expected to be, provided to you (or a connected entity) by:

(i) A *tax preferred end user (or a connected entity); or

(ii) Any *tax preferred entity (or a connected entity) ; or

(iii) Any entity that is not a an Australian resident; and

(d) …'

In applying paragraph 250-15(a) of the ITAA 1997, whether the Asset is put to a tax preferred use by the Entity is determined pursuant to section 250-60 of the ITAA 1997.

Subsection 250-60(1) of the ITAA 1997 provides that an asset is put to a tax preferred use at a particular time if an end user holds at that time rights as a lessee under a lease of the asset and the asset is used by or on behalf of an end user that is a tax preferred end user because of paragraph 250-55(a) of the ITAA 1997 (a tax preferred entity).

From the facts presented, there is no lease arrangement between the Company and the Entity to use the Asset. Therefore, subsection 250-60(1) of the ITAA 1997 does not apply to treat a use of the Asset as put to tax preferred use.

The alternative definition of put to tax preferred use, contained in subsection 250-60(2) of the ITAA 1997 also needs to be considered.

Subsection 250-60(2) of the ITAA 1997 provides that an asset is put to tax preferred use at a particular time if:

§ firstly, the asset is, or is to be, used wholly or partly in connection with the production, supply, carriage, transmission or delivery of goods; or the provision of services or facilities; and

§ secondly, some or all of the goods, services or facilities are, or are to be, produced for or supplied, carried, transmitted or delivered to or for an end user who is a tax preferred end user because of paragraph 250-55(a) of the ITAA 1997 (a tax preferred entity).

The Asset held by the Company is in connection with providing certain facilities and services for the purposes of subsection 250-60(2) of the ITAA 1997 in accordance with the definition contained in paragraph 250-60(3) of the ITAA 1997.

The Asset is used in providing certain facilities and services to customers via the Entity, a tax preferred entity. The key question is whether the Entity will be an end user for the purposes of applying subsection 250-60(2) of the ITAA 1997.

End User

Subsection 250-50(1) of the ITAA 1997 states:

'An entity (other than you) is an end user of an asset if the entity (or a connected entity):

(a) uses, or effectively controls the use of, the asset; or

(b) will use, or effectively control the use of, the asset; or

(c) is able to use, or effectively control the use of, the asset; or

(d) will be able to use, or effectively control the use of, the asset.'

For Division 250 of the ITAA 1997 to apply, the Entity must either use the Asset in the requisite sense or control the use of the Asset.

Use of the asset

The term 'use' is not defined within either of the Income Tax Assessment Acts.

The Explanatory Memorandum to Tax Laws Amendment (2007 Measures No.5) Bill 2007 ('the EM') at paragraph 1.29, states that Division 250 of the ITAA 1997 will apply to a taxpayer in respect of an asset only if, in a practical sense, a tax preferred end user has, or will have, the control or use of the asset during the arrangement period. This would suggest, (without going into a full discussion on case law - for example, Tourapark Pty Ltd v FCT, Hamilton Island Pty Ltd v FCT and Air Liquide Australia Ltd v. FCT) that the use required would be more than mere incidental use and would require a real and requisite direct use of the asset itself by the end user.

In this instance the Entity will pay the Company (the owner of the assets) for certain facilities and services provided to customers. This is consistent with certain terms of the Entity's constitution.

Therefore, from the facts presented the Entity does not itself use the Asset.

Effectively controls the use of the asset

Like the term 'use', the term 'effectively controls the use', is not defined in either of the Income Tax Assessment Acts.

Paragraph 1.34 of the EM states:

'Division 250 applies a test of effective control that is consistent with the test in section 51AD and Division 16D.'

The Commissioner of Taxation ('the Commissioner') has expressed the view of what 'effective control' means for these purposes in Taxation Ruling TR 96/22 Income tax: section 51AD - deductions not allowable if an asset financed by non-recourse debt is used by a tax exempt or other entity (As at 2 September 1998) ('TR 96/22') and Taxation Ruling No. IT 2602 Income tax: privately owned power stations: control by state electricity authorities ('IT 2602').

These rulings continue to be relevant in determining what is meant by 'effectively controls the use', for the purposes of subsection 250-50(1) of the ITAA 1997.

Paragraph 9 of TR 96/22 states:

'Control of use is effective control of the property. Effective control means day-to-day or de facto control.'

Paragraph 42 of TR 96/22 states:

'Effective control is a broad test that is not limited to the strict legal rights resulting from agreements or arrangements but includes any other arrangements, including financial ones, that could affect the question of who controls the use of the property for the production of goods or provision of services.'

Paragraph 43 of TR 96/22 reiterates the elements previously discussed in IT 2602 as relevant to considering who has effective control of the use of the asset.

The relevant indicia include:

§ Who controls the day-to-day operations of the assets;

§ The relevant financial arrangements relating to the assets (and who bears the financial risks in relation to the assets operations); and

§ Whether there is reversion of ownership of the assets to an exempt entity after current arrangements expire.

Day to Day operations

Paragraph 7 of IT 2602 states:

"It is accepted that where a taxpayer's power station is to supply power as part of the State grid, the State authority will need to coordinate the activities of the private station with other stations on the grid. In particular, the State authority may need to vary outputs or institute shutdowns. Where the State authority has such a coordinating or supervisory role which is limited only to such matters that are necessary to ensure a reliable and continuous supply of electricity on the grid, economy of operation of the grid, or public health and safety in emergency conditions, the State authority will not, on that basis alone, be regarded as controlling the use of the power station." (Emphasis added)

Paragraph 8 of IT 2602 goes on to state:

"In the context of the day-to-day operation of a power station, this Office sees effective control as meaning that a person, organisation or authority either operates the station on an immediate supervisory role (not in the sense explained in the previous paragraph) that enables it to direct other in that day-to-day operation. The staffing arrangements will be important in this regard …"

The Entity's primary responsibility is to provide certain facilities and services to customers. It is accepted that the Entity has authority to coordinate the activities of the Company.

The Entity does not own or maintain the assets. The Entity does not provide any personnel to Company nor does the Entity provide any supervisory functions with respect to the day to day operations.

As such, the Entity will not have responsibility for the day-to-day operations of the Asset.

Financial Arrangements

Paragraph 13 of IT 2602 states:

'While economic relationships will not generally be determinative of the question of control of a power station, examination of the whole commercial arrangement surrounding the ownership and operation of the station may point to a situation where the taxpayer's interest is largely of a financing kind…..'

IT 2602 further stipulates that the presence of fixed return charges or a fixed fee arrangement would be indicative of this type of relationship.

The Entity collects all moneys due for the provision of certain facilities and services to customers and in turn pays the Company, less the Entity's costs.

Therefore the Entity will not exert any financial control on the basis that the financial benefits provided by the Entity to Company are:

§ not fixed return charges;

§ not a fixed fee agreement; and

§ there is no agreement to transfer ownership to the asset.

The financial benefits paid by the Entity to the Company represent the market price for the provision of facilities and services.

Reversion of property to the exempt entity

The Company and the Entity do not have an arrangement in place to transfer ownership of the Asset to the Entity.

Therefore, for the above mentioned reasons, the Entity will not be an end user of the Asset as it neither uses nor controls the use of the Asset for the purposes of section 250-50 of the ITAA 1997.

It follows that the Asset is not put to a tax preferred use as set out in subsection 250-60(2) of the ITAA 1997 merely as a result of the arrangement between Company and the Entity.

Question 2

Are the payments made by the Entity to the Company financial benefits in relation to the tax preferred use of the Asset pursuant to paragraph 250-15(c) of the ITAA 1997?

Summary

The payments made by the Entity to the Company are not financial benefits in relation to the tax preferred use of the Asset pursuant to paragraph 250-15(c) of the ITAA 1997.

Detailed reasoning

As outlined in the Detailed Reasons for question 1, the Asset is not put to a tax preferred use by the Entity pursuant to paragraph 250-15(a) of the ITAA 1997.

Accordingly, the payments made by the Entity to the Company do not constitute financial benefits provided in relation to the tax preferred use of the Asset pursuant to paragraph 250-15(c) of the ITAA 1997.

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