1012559114328 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012559114328

Ruling

Subject:

In order to protect the privacy and commercial in-confidence components of this private ruling the following summary is provided.

The ruling concerned the following:

The entity enters into agreements with an originating entity that include designing, constructing, commissioning, maintaining, and providing services over multiple years in relation to, particular assets for the originating entity (the project).

The project comprises a design and construction phase followed by an operating phase. At the conclusion of the project, the entity's rights to access the project assets will end and the originating entity will have legal ownership of the assets. The terms of the agreements are such that the entity has no underlying proprietary right to the assets, does not acquire ownership rights over the assets and has no right to remove assets fixed to land.

Under the agreements, amongst other things, the entity is granted rights to access the areas necessary for the construction of the assets and delivery of the services for the project duration. The entity pays amounts (the rights payments) to the originating entity over the life of the project for the non-exclusive rights to enter, occupy and access the assets. Those rights revert to the originating entity at the time provided for under the agreements.

In consideration for the entity constructing the assets, the originating entity pays construction payments to the entity, and pays amounts (the service payments) to the entity in consideration for the provision of the services under the agreements. The construction payments and service payments are income of the entity according to ordinary concepts.

The scheme ruled on commences on the date the agreements are executed.

Question 1

Will the rights payments incurred by the entity payments be deductible pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The Commissioner ruled:

Yes

The rights payments incurred by the entity will be deductible pursuant to section 8-1 of the Income Tax Assessment Act 1997. The rights payments the entity incurs are not capital or capital in nature when outlaid by the entity because they are incurred in the ordinary course of carrying on its business.

Question 2

Will Division 250 of the Income Tax Assessment Act 1997 apply to the entity in relation to its interest in the assets on the basis that the entity satisfies the general test by virtue of paragraph 250-15(d) of the Income Tax Assessment Act 1997?

The Commissioner ruled:

Division 250 of the Income Tax Assessment Act 1997 does not apply to the entity in relation to its interest in the assets on the basis that the entity satisfies the general test by virtue of paragraph 250-15(d) of the Income Tax Assessment Act 1997.

For Division 250 to apply, a taxpayer must be entitled to a capital allowance pursuant to Division 40 of the Income Tax Assessment Act 1997 or Division 43 of the Income Tax Assessment Act 1997. As the payments made by the entity in constructing the assets and providing the services are deductible to it under section 8-1 of the Income Tax Assessment Act 1997, those payments do not have the character of capital expenditure and the entity will not be entitled to a capital allowance under either Division 40 or Division 43. Division 250 does not apply to the entity on the basis that it will not be entitled to a capital allowance as required by paragraph 250-15(d).

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