Edited version of your private ruling

Authorisation Number: 1012612356362

Ruling

Subject: Application of Division 230

Question 1

Is the Priority Partnership Interest (PPI) capital amount contributed and any subsequent re-investment of a PPI distribution as an additional PPI capital amount taken to be separate financial arrangements under section 230-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does the accruals method in subdivision 230-B of the ITAA 1997 apply to the loss from the PPI?

Answer

Yes

Question 3

If the answer to Question 2 is no, does the realisation method in Subdivision 230-B of the ITAA 1997 apply to the loss from the PPI?

Answer

As the answer to Question 2 is yes, it is not necessary to answer this question.

Relevant facts and circumstances

1. N Co is the provisional head company of a multiple entry consolidated group (MEC) group (N MEC group).

2. P, a limited partnership is a corporate limited partnership for Australian tax purposes.

3. P is a member of the N MEC group and is an eligible tier 1 company.

4. ABC is a non-resident company and is the general partner in P.

5. XYZ, a dual resident company is a limited partner in P.

6. XYZ acquired a PPI issued by P.

7. An amending deed (Amending Deed) was subsequently entered into to enable the acquisition of a further PPI and to terminate the existing PPI.

8. The existing PPI was terminated and repaid and P issued a promissory note to XYZ in satisfaction of its obligation to repay the existing PPI.

9. XYZ subsequently acquired further PPI in P by way of endorsement of the promissory note.

10. The terms of the PPI are set out in the Amending Deed. A summary of the key terms are:

• The PPI arrangement is for a 10 year term and P must pay the PPI capital amounts contributed and any unpaid distributions on maturity date;

• Distributions of X% per annum are payable on the total PPI capital amount outstanding on a cumulative and compounding basis. PPI distributions can only be sourced from current year profits of P and are at the discretion of the general partner;

• Any distributions are credited to the current account of the PPI holder or paid in cash. If the balance of the current account exceeds a certain amount on a fixed date of any year, that balance will be debited and the amount applied as an additional PPI capital contribution with the same distribution rate and maturity date as the PPI;

• The profit and losses of P must be determined by the general partner in accordance with generally accepted accounting principles consistently applied and may include an increase or decrease in the value of the assets of the partnership as determined by the general partner from time to time. The general partner will determine when the profits of the partnership will be distributed to partners in any financial year;

• Any losses of P in respect of any financial year will be borne by the partners in the same proportion as apply to their contributions to partnership capital determined at the end of that financial year;

• The partnership will continue until it is dissolved or otherwise according to law; and

• The partnership may be dissolved only with the approval in writing of all limited partners.

11. The PPI distributions payable to XYZ in respect of the PPI were re-contributed to P as additional PPI capital amounts (Additional PPI).

12. N Co has made an election, pursuant to Item 103(2) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA Act), for Division 230 of the ITAA 1997 to apply to its financial arrangements from 1 July 2009.

13. N Co has also made an election under Item 104(2) of the TOFA Act, for Division 230 of the ITAA 1997 to apply to its existing financial arrangements. Therefore, Division 230 of the ITAA 1997 applies to all financial arrangements N Co started to have prior to 1 July 2009.

14. N Co did not make an election under Subdivisions 230-C, 230-D, 230-E or 230-F of the ITAA 1997 for the purposes of calculating gains and losses with respect to Division 230 financial arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 230-B

Income Tax Assessment Act 1997 Section 230-45

Income Tax Assessment Act 1997 Subsection 230-45(1)

Income Tax Assessment Act 1997 Paragraph 230-45(2)(a)

Income Tax Assessment Act 1997 Section 230-50

Income Tax Assessment Act 1997 Section 230-55

Income Tax Assessment Act 1997 Subsection 230-55(4)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(a)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(b)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(c)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(d)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(e)

Income Tax Assessment Act 1997 Paragraph 230-55(4)(f)

Income Tax Assessment Act 1997 Subsection 230-100(2)

Income Tax Assessment Act 1997 Subsection 230-115(1)

Income Tax Assessment Act 1997 Subsection 230-115(2)

Income Tax Assessment Act 1997 Subsection 230-115(3)

Income Tax Assessment Act 1997 Division 974

Income Tax Assessment Act 1997 Section 974-20

Income Tax Assessment Act 1997 Paragraph 974-160(1)(a)

All legislative references in this Ruling are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Question 1

Is the Priority Partnership Interest (PPI) capital amount contributed and any subsequent re-investment of a PPI distribution as an additional PPI capital amount taken to be separate financial arrangements under section 230-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The PPI capital amount contributed and any subsequent re-investment of a PPI distribution as an additional PPI capital amount are taken to be a single financial arrangement.

Detailed reasoning

1. Broadly, an arrangement will be a financial arrangement if it satisfies the definition of a financial arrangement under subsection 230-45(1) or is an equity interest or right or obligation in relation to equity interest in section 230-50.

2. In this case, the PPI gives rise to a debt interest as it satisfies the test for a debt interest under section 974-20. The PPI will satisfy the debt test in section 974-20 for the following reasons:

• the PPI is a financing arrangement for P; and

• P receives a financial benefit from XYZ in the form of the PPI contributions; and

• P has an effectively non-contingent obligation to provide financial benefits (i.e. the PPI capital amount contributed and any PPI distribution not paid or credited) at maturity; and

• it is substantially more likely than not that the value of the financial benefits to be provided (in nominal terms) will be at least equal to the value of the financial benefit received; and

• the value provided and the value received under the PPI are not both nil.

3. Under subsection 230-45(1) a taxpayer has a financial arrangement if, under an arrangement (as identified pursuant to subsection 230-55(4)) the taxpayer has a legal or equitable right and/or obligation to provide a financial benefit that is cash settlable. A financial arrangement will not exist where the taxpayer has a legal or equitable right and/or obligation to provide a benefit that is not cash settlable.

4. The rights and obligations that arise under the PPI arrangements are financial benefits as defined in paragraph 974-160(1)(a) because they are "anything of economic value".

5. P has a cash settlable right to receive a financial benefit and a cash settlable obligation to provide a financial benefit within the meaning of paragraph 230-45(2)(a). There is no right to receive nor obligation to provide a something that is not cash settlable.

6. Subsection 230-55(4) provides the criteria for determining whether the rights and obligations under the PPI and Additional PPI are themselves an arrangement or two or more arrangements for the purposes of Division 230.

7. Paragraphs 230-55(4)(a) to (f) list a number of matters that are relevant in determining whether the rights and/or obligations arise under one or more separate arrangements as follows:

(a) the nature of the rights and/or obligations;

(b) their terms and conditions (including those relating to any payment or other consideration for them);

(c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);

(d) whether they can be dealt with separately or must be dealt with together;

(e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole);

(f) the objects of this Division.

In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other

8. In applying the factors in subsection 230-55(4) to the facts, the following are relevant:

• The rights and obligations of the PPI and Additional PPI are created under one contract with the same maturity date. The arrangement provides P a right to receive PPI contributions and an obligation to repay each PPI capital amount and any unpaid PPI distributions. Therefore, the rights and obligations created by each PPI are of the same nature;

• A PPI distribution is to be paid in cash or credited to XYZ's account at the rate of X% per annum on a cumulative and compounding basis. As the distribution is calculated based on the total PPI capital amount outstanding, this indicates an aggregation of the rights;

• The funds from the PPI and Additional PPI are used for the same purposes - to provide finance to the N Co tax consolidated group;

• The terms in relation to the repayment of each PPI capital amount and PPI distributions support the notion that they must be dealt with together as a single arrangement;

• The PPI are treated as one arrangement for accounting and commercial purposes; and

• Having regard to the objects of Division 230 and the circumstances of the present scheme, it is considered that treating the PPI and Additional PPI as a single arrangement would not distort the tax outcomes, but would reflect the commercial substance of the arrangement.

9. Having regard to the factors listed in subsection 230-55(4), it is concluded that the rights and obligations under the PPI and Additional PPI are taken to be one single arrangement and therefore a single financial arrangement to which Division 230 applies.

Question 2

Does the accruals method in subdivision 230-B of the ITAA 1997 apply to the loss from the PPI?

Summary

The accruals method applies to the PPI in accordance with Subdivision 230-B.

Detailed reasoning

10. In the absence of any elective tax-timing method applying to a financial arrangement, any gain or loss from the arrangement will be brought to the account under the accruals or the realisation methods contained in Subdivision 230-B.

11. Subsection 230-100(2) provides that the accruals method in Subdivision 230-B applies to gain or loss you have from a financial arrangement if the gain or loss is an overall gain or loss from the arrangement and the gain or loss is sufficiently certain at the time when you start to have the arrangement.

12. In deciding whether a gain or loss is sufficiently certain, subsection 230-115(1) provides that regard must be had only to financial benefits that you are sufficiently certain to receive or to provide.

13. Further, in determining the financial benefits that you are sufficiently certain to receive or to provide, subsections 230-115(2) and (3) require the following consideration:

230-115(2)

A *financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

(a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the *financial arrangement for the rest of its life); and

(b) at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy.

230-115(3)

In applying subsection (2) to the *financial benefit:

(a) you must have regard to:

(i) the terms and conditions of the *financial arrangement; and


(ii) accepted pricing and valuation techniques; and


(iii) the economic or commercial substance and effect of the arrangement; and


(iv) the contingencies that attach to the other financial benefits that are to be provided or received under the arrangement; and

(b) you must treat the financial benefit as if it were not contingent if it is appropriate to do so having regard to the contingencies that attach to the other financial benefits that are to be received or provided under the arrangement.

14. In the present case, having regard to the matters in subsection 230-115(3), it is considered that:

• under the arrangement, P received the PPI capital amount at the start of the arrangement. The receipt of the PPI contribution creates obligations in P to provide certain financial benefits to XYZ;

• there is an obligation to provide PPI distributions at a rate of X% per annum on a cumulative compounding basis to the extent profits allow. Given the structure of the Group, P should have a reasonable expectation that it will have sufficient profits to pay PPI distributions. The PPI distribution amounts P is obligated to make are determinable with reasonable accuracy and therefore are financial benefits that P is sufficiently certain to provide; and

• P has a contractual obligation to repay the PPI capital contribution amounts at maturity. These payments are fixed or determinable with reasonable accuracy and therefore are financial benefits that P is sufficiently certain to provide.

15. It can be determined from the above that P has a sufficiently certain loss in relation to the PPI. As the conditions in subsection 230-100(2) are satisfied, the financial benefit provided in relation to the PPI will be a loss calculated in accordance with the accruals method in Subdivision 230-B.

Question 3

If the answer to Question 2 is no, does the realisation method in Subdivision 230-B of the ITAA 1997 apply to the loss from the PPI?

Summary

As the response to Question 2 is 'yes', it is not necessary to answer this question.

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