1012734023166 | Legal database

Disclaimer
This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012734023166

Ruling

Subject: Public Private Partnership and taxation of financial arrangement rules.

Legislative references

All legislative references are to the Income Tax Assessment Act 1997.

Question 1

Will the Concession Fees that will be paid by Project Trust to the statutory body in consideration for the statutory body's payment of Infrastructure Payments to Project Trust, be a financial arrangement for the purposes of Division 230?

Answer

Yes.

Question 2

If the answer to question 1 is negative, will the Concession Fees that will be paid by Project Trust, be deductible under section 8-1?

Answer

Not applicable.

Question 3

For the purpose of determining whether Division 250 will apply to the scheme, will Project Trust be entitled to a capital allowance deduction for the infrastructure for:

• the decline in value of those assets, or

• capital works expenditure of those assets?

Answer

No.

This ruling applies for the following periods

Relevant income years of the Project Term.

The scheme commences on

The Financial Close date.

Relevant facts and circumstances

Project entities

1. The entities that are involved in the Project are:

• Principal investing entities in the Project

Neither of the principal investing entities are a resident of Australia for tax purposes, nor have a permanent establishment in Australia.

• Trustee Holding Co as trustee for the Holding Trust

• Holding Trust - an Australian resident unit trust that is wholly owned by the principal investing entities. Holding Trust will hold all of the issued units of a subsidiary, Project Trust.

• Trustee Co as trustee for the Project Trust.

• Project Trust - a wholly owned subsidiary of Holding Trust and principal vehicle for the Project.

• Finance Co - a private company securitisation vehicle that is a wholly owned subsidiary of a Charitable Trust.

• Charitable Trust - owns all of the shares in Finance Co and has only one Australian charitable deductible gift recipient as its beneficiary.

• Trustee of Charitable Trust - an independent third party trustee company of the Charitable Trust.

• Senior Debt Providers

• Statutory body that will enter into various agreements to facilitate the Project.

The Project

2. The statutory body undertook a procurement process in relation to the Project. The principal investing entities were the successful tenderers in the procurement process.

3. The Project will involve the construction of new infrastructure and will also involve the provision of asset management and maintenance services for the infrastructure. The statutory body will retain ownership and control of the infrastructure.

4. On or before Financial Close, the statutory body and Trustee Co as trustee for the Project Trust will enter into the Project Deed.

The Project Deed

5. The legal and equitable rights and obligations of Project Trust and the statutory body are contained in the terms of the Project Deed and other Project Documents.

6. The Project Deed imposes an obligation on Project Trust to:

• pay the statutory body Concession Fees

• provide Asset Management Services to the statutory body, and

• construct and carry out the infrastructure on land owned by the statutory body.

7. The Project Deed imposes obligations on the statutory body to:

• pay various amounts to Project Trust.

• collect certain other income

• provide a non-exclusive licence to Project Trust to enter and use the areas to carry out the Asset Management Services, and

• provide a construction licence to Project Trust to construct the new infrastructure.

8. Infrastructure Payments is defined to mean certain payments but does not include the Asset Management Payments, the Construction Payments and the Construction Payments GST Amount.

9. Concession Fee means each amount set out in the Project Deed.

10. The Concession Fees are periodic payments of a fixed amount and the total amount is known at the start of the Project.

11. The Infrastructure Payments are payments of a variable amount. However, a minimum level of Infrastructure Payments must be provided, which is known at the start of the Project.

12. The Infrastructure Payments are provided solely in respect of the Concession Fees, and the Concession Fees are provided solely in respect of the Infrastructure Payments.

13. Asset Management Services means the services identified in the Project Deed.

14. Asset Management Payments are defined as being in consideration for the provision of the Asset Management Services.

15. New Infrastructure works means:

• the development of Detailed Design for infrastructure

• demolition of structures to enable the construction of the new infrastructure

• site investigations and environmental testing of the new infrastructure site

• procuring Relevant Authority approvals in respect of the construction and occupation of the new infrastructure

• connection and installation of Utilities for the new infrastructure

• the procurement of assets and materials for the infrastructure

• construction of the new infrastructure, and

• commissioning and completion activities required in respect of the new infrastructure.

all in accordance with the Project Documents and other relevant documents.

16. Construction Payments are defined as being in consideration for, and relating specifically to, the payments to be made by the Project Trust to the Construction Contractor.

17. Project Default events include:

• Project Trust committing a breach of any of its material obligations under the Project Deed or any other Project Document, and

• Project Trust failing to achieve Completion of the new infrastructure works by the Date for Completion in respect of that new infrastructure works.

18. In addition to the rights and obligations set out above, there are other rights and obligations, which are essentially administrative in nature and which facilitate or support the rights and obligations set out above.

19. The statutory body owns the areas.

20. The Project Trust acknowledges that it does not have a caveatable interest in relation to the areas or the new infrastructure works site.

21. The Project Trust will have a non-exclusive licence to enter and use the areas to carry out the Asset Management Services.

22. The Project Deed provides that the non-exclusive licence to enter and use the areas to carry out the Asset Management Services is in consideration for the provision by the Project Trust of the Asset Management Services.

23. The Project Deed provides that the construction licence is in consideration for the Project Trust constructing and carrying out the new infrastructure works.

Project term

24. The term of the Project Deed will:

• commence on the date of Financial Close being the date on which the statutory body gives notice of satisfaction of all of the conditions precedent under the Project Deed, and

• end on the Expiration Date unless it is terminated under a clause of the Project Deed.

Securitisation arrangement

25. Project Trust has the right to receive the Infrastructure Payments in consideration for the payment of Concession Fees.

26. The purpose of exchanging the Infrastructure Payments and Concession Fees under the Project Deed is so that Project Trust can provide the statutory body with a fixed, certain and assignable stream of payments that enhances the commercial ability of the statutory body to effectively securitise its future cash flow by way of the Receivables Purchase Agreement.

27. Finance Co has been established solely for the purpose of securitising the future cash flows of the Concession Fee Payments and to provide funding for the Project. In consideration for receiving the Concession Fee Payments, Finance Co will pay Receivables Purchase Payments to the statutory body.

28. On or before Financial Close, Finance Co will enter into the Receivables Purchase Agreement with the statutory body where Finance Co will pay the Purchase Price on the Purchase Date in return for the Concession Fee payments from the statutory body.

29. Under the Receivables Purchase Agreement, the statutory body will assign to Finance Co all of its rights, title and interest to receive the Concession Fee Payments from Project Trust.

30. The statutory body, Finance Co and Trustee Co as trustee for the Project Trust will enter into a Payment Directions Deed where the statutory body will direct Project Trust to pay the Concession Fees to Finance Co.

31. Under the Payment Directions Deed, the statutory body will direct each Purchase Price payable by Finance Co to the statutory body (other than an amount that the statutory body is entitled to retain) to Project Trust in satisfaction of:

(i) the Purchase Price of the Receivables by Finance Co to the statutory body, and

(ii) each Construction Payment payable by the statutory body to Project Trust.

32. The Concession Fee Payments that Finance Co receives will be used to repay the senior debt (and interest), and repay other loans (and interest) over the term of the Project.

Funding

33. On commencement, Finance Co will initially borrow senior debt with a five year term of up to $X (plus capitalised interest) on a limited recourse basis from Senior Debt Providers. Finance Co will use this initial funding for the initial Purchase Price and some of Finance Co's up-front costs.

34. Finance Co will borrow additional senior debt with five year terms up to $Y (including capitalised interest) on a limited recourse basis from the Senior Debt Providers. These borrowings will fund the additional Receivable Purchase Payments enabling the payment of a percentage of the costs of construction of the infrastructure over the period to the expected completion.

35. Finance Co will also receive additional funds from other loans that will be used for the additional payment of the Receivables Purchase Payments enabling the funding of the remaining percentage of the costs of the construction of the infrastructure over the period to the expected completion.

36. Refinancing of the senior debt facilities under the loan agreement will occur when those facilities mature. It is intended that the refinancing of the senior debt facilities will be on equivalent terms to the loan agreement.

Assumptions

1. Project Trust is required to, or will make the election to, apply the TOFA rules in Division 230.

2. Project Trust has not made, and will not make, a tax-timing method election under Division 230.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 section 230-10

Income Tax Assessment Act 1997 subsection 230-20(4)

Income Tax Assessment Act 1997 section 230-45

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

Income Tax Assessment Act 1997 Division 250

Income Tax Assessment Act 1997 section 250-15

Income Tax Assessment Act 1997 subsection 974-160(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Detailed reasoning

Division 230 sets out the income tax treatment of gains and losses from financial arrangements. If Division 230 applies to a financial arrangement, then other provisions outside of Division 230 that would otherwise include those gains in assessable income or losses as an allowable deduction, will not apply (subsection 230-20(4)).

Under subsection 230-45(1), an arrangement is a 'financial arrangement' if under that arrangement there is:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

* denotes a term defined in subsection 995-1(1).

Under subsection 974-160(1), the term 'financial benefit':

(a) means anything of economic value; and

(b) includes property and services; and

even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

Further, benefits and obligations are to be looked at separately and not set off against each other.

However, an essential element that must be satisfied for an arrangement to be a 'financial arrangement' is that the right or obligation must be cash settlable. Under subsection 230-45(2), a right to receive, or an obligation to provide, a financial benefit is cash settlable if, and only if:

(a) the benefit is money or a *money equivalent; or

(b) in the case of a right - you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another *financial arrangement; or

(c) in the case of an obligation - you intend to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

(d) you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

(e) you deal with the right or obligation, or with similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer's margin, or from both; or

(f) none of paragraphs (a) to (e) applies but you satisfy subsection (3); or

(g) you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements.

The Concession Fees and the Infrastructure Payments are payable or receivable in money and the Project Trust will have cash settlable rights and obligations. However, although the financial benefit is cash settlable, consideration must be given to the grouping and disaggregation rules in subsection 230-55(4) to determine whether the Concession Fees and Infrastructure Payments are a financial arrangement for the purposes of Division 230.

Grouping and disaggregation rules

Where there are a number of rights or obligations to receive or provide financial benefits, consideration must be given to the grouping and disaggregation rules in subsection 230-55(4) to determine whether the rights or obligations themselves are an arrangement or two or more separate arrangements. The following factors are used to make that determination:

(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), and

(f) the objects of Division 230.

Taxation Ruling TR 2012/4 Income tax: the operation of subsection 230-55(4) of the Income Tax Assessment Act 1997 (ITAA 1997) in determining what is an 'arrangement' for the purposes of the taxation of financial arrangements under Division 230 of the ITAA 1997 provides the Commissioner's view on the application of subsection 230-55(4) in determining whether a number of rights and/or obligations are themselves an arrangement or are two or more separate arrangements for the purposes of Division 230.

Paragraph 138 of TR 2012/4 provides that regard must always be had to each of the criteria in subsection 230-55(4), however, in a particular fact pattern it may be that one or more criteria are more significant than the others.

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

This factor includes a consideration of the substance of the rights and/or obligations (paragraph 15 of TR 2012/4).

When the right to receive variable Infrastructure Payments and the obligation to pay the Concession Fees are considered together, the nature of the right and obligation is such that in substance it appears to be an exchange of cash flows with a financing element. The minimum amount of Infrastructure Payments that must be made exceeds the total Concession Fees that must be paid over the life of the arrangement. That is, there is a financing element unique to these rights and obligations.

When considered in combination with all the rights and obligations under the Project Deed, the nature of combined rights and obligations would suggest that the rights and obligations related to asset management give rise to a separate asset management services arrangement, and the rights and obligations in relation to construction give rise to a separate construction arrangement.

Accordingly, this factor would indicate that the obligation to pay the Concession Fees and the right to receive the Infrastructure Payments gives rise to an arrangement separate to the other rights and obligations under the Project Deed for the purposes of Division 230.

(b) Terms and conditions

This factor includes an examination of the terms and conditions in which the rights and/or obligations are expressed, including those relating to payment and consideration (paragraph 16 of TR 2012/4).

The Project Deed states that the Infrastructure Payments are provided solely in respect of the Concession Fees, and that the Concession Fees are provided solely in respect of the Infrastructure Payments.

The applicant has submitted that the agreed amounts and timing of the Concession Fees payable by the statutory body are calculated by Project Trust to provide it with a commercial return over the term of the Project, commensurate with the assumption of the risk associated with accepting variable Infrastructure Payments (subject to a lower limit).

Construction Payments is defined in the Project Deed as being in consideration for, and relating specifically to, the payments to be made by the Project Trust to the Construction Contractor.

Asset Management Payments is defined in the Project Deed as being in consideration for the provision of the Asset Management Services.

The consideration received for the Construction Works and the Asset Management Services is set by reference to an independent, arm's length cost, and the Project Trust will be commercially adequately compensated for the services and works by the Construction Payments and Asset Management Payments.

The Project Deed states that the licence that provides access for Project Trust to carry out its Asset Management Services is in consideration for the provision by the Project Trust of the Asset Management Services.

Similarly, the Project Deed provides that the construction licence is in consideration for the Project Trust constructing and carrying out the new infrastructure works.

However, the amount of Infrastructure Payments is subject to the operation of a clause of the Project Deed, which provides that the statutory body may withhold an amount from the Infrastructure Payments should the Project Trust fail to satisfy the relevant Service Level Requirements.

As such, this factor does not conclusively indicate whether the Concession Fees and the Infrastructure Payments give rise to an arrangement separate to the other rights and obligations under the Project Deed for the purposes of Division 230.

(c) Circumstances surrounding their creation and their proposed exercise

This factor requires consideration of the context surrounding the life cycle of the rights and/or obligations from creation to what is proposed as exercise or performance. It requires an objective assessment of the purposes of the entities involved, where evidence of the subjective purpose may be relevant though not determinative (paragraphs 17 and 18 of TR 2012/4).

The rights and obligations under the Project Deed will be created under the one contract at the same time, and will be extinguished together at the end of the Project (except for the obligations in respect of the Construction Works and right to Construction Fees, which will extinguish at the end of the Construction Phase).

The main purpose of the statutory body paying Infrastructure Payments as consideration for the Concession Fees is to provide the statutory body with certainty over its cash flow stream, allowing it to more effectively securitise its future cash flow by way of the Receivables Purchase Agreement, which the statutory body will utilise to pay Construction Fees to the Project Trust.

In contrast, the main purpose of the rights and obligations related to Asset Management Services is to transfer the risk of the Asset Management Services from the statutory body to the Project Trust. Similarly, the main purpose of the rights and obligations related to the construction of the new infrastructure is to transfer the construction risk from the statutory body to the Project Trust.

It does not seem likely that the Project Trust and the statutory body would enter into an arrangement regarding the Asset Management Services, Construction Works, Licences, Asset Management Payments and Construction Payments, without also including the Concession Fees and Infrastructure Payments.

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

This factor requires consideration of whether the rights and/or obligations can be dealt with separately or must be dealt with together in accordance with the terms and conditions of the arrangement (paragraph 19 of TR 2012/4).

The Project Deed does not provide for separate treatment of the Concession Fees and Infrastructure Payments upon termination. Should there be a breach under the Project Deed all the rights and obligations, including the obligation to provide the Concession Fees and right to receive Infrastructure Payments, will be terminated.

The Project Deed provides that the Project Trust cannot assign its rights or interests under the Project Deed without the statutory body's consent.

This would indicate that the Concession Fees and the Infrastructure Payments do not give rise to an arrangement separate to the other rights and obligations under the Project Deed for the purposes of Division 230 (see example 6 at paragraph 69, example 7 at paragraph 83, and example 8 at paragraph 93 of TR 2012/4).

(e) Normal commercial understandings and practices

This factor requires consideration of normal commercial understandings and practices in relation to rights and/or obligations (including whether they are regarded commercially as separate things or as a group or series that forms a whole) (paragraph 20 of TR 2012/4).

The applicant has submitted that the various rights and obligations under the Project Deed could give rise to several transactions (for example, asset management in respect of the infrastructure; construction; and payment of the Concession Fees in consideration of the Infrastructure Payments) which are commercially distinct in nature and purpose from each other and could be performed separately.

(f) Objects of Division 230

This factor requires consideration of the objects of Division 230 as set out in section 230-10 (paragraph 21 of TR 2012/4).

Very broadly, section 230-10 provides that the objects of Division 230 are:

• to minimise tax distortions on commercial decision-making by, for gains and losses from financial arrangements, aligning tax recognition of such gains and losses with the reality of what gains and losses occur and when they occur

• to align tax and commercial recognition of gains and losses from financial arrangements by ensuring the time of recognition of those gains and losses is reasonable, and by generally recognising such gains and losses on revenue account, and

• to appropriately take account of, and minimise, compliance costs.

Treating all of Project Trust's rights and obligations under the Project Deed as a single arrangement for Division 230 purposes, instead of as two or more separate arrangements, means that ultimately the arrangement will not be a 'financial arrangement' under subsection 230-45(1) (as there would be non-insignificant non-cash settlable rights and obligations in respect of the Asset Management Services, Construction Works, and licences). In that instance, any gains or losses would be assessed under the other general income tax provisions and not under Division 230.

The obligation to provide Concession Fees and the right to receive Infrastructure Payments would give rise to a significant arrangement, both in terms of the amounts involved and its term of X years. Due to its long duration, it would be reasonable to recognise the tax gains and tax losses over the term of the arrangement rather than by reference to each individual financial year.

Due to the commercial risks involved, Project Trust's net financial position would not be known with certainty until the all the rights and obligations cease. Accordingly, recognising the net commercial gain or loss progressively over the term of the arrangement, rather than by each individual financial year, would minimise Project Trust's decision making and risk taking as it would tend to reduce fluctuations in the recognition of tax gains and losses and would more closely align the tax and commercial recognition of gains and losses.

Conclusion

Applying the factors under subsection 230-55(4), on balance, the Commissioner accepts that the rights and obligations in respect of the Concession Fees and Infrastructure Payments will give rise to a financial arrangement separate to the other rights and obligations under the Project Deed for the purposes of Division 230.

Accordingly, the right to receive Infrastructure Payments and the obligation to pay Concession Fees will constitute a Division 230 financial arrangement and any gains or losses arising from the arrangement will be assessable or deductible under Division 230.

Question 2

If the answer to question 1 is negative, will the Concession Fees that will be paid by Project Trust, be deductible under section 8-1?

Detailed reasoning

Not applicable as the answer to question 1 was positive.

Question 3

For the purpose of determining whether Division 250 will apply to the scheme, will Project Trust be entitled to a capital allowance deduction for the infrastructure for:

• the decline in value of those assets, or

• capital works expenditure of those assets?

Detailed reasoning

Division 250 denies or reduces capital allowance deductions that would otherwise be available in relation to an asset if the asset is put to a tax preferred use and the taxpayer has insufficient economic interest in the asset.

The general test for the application of Division 250 is set out in section 250-15 which provides that the Division will apply to a taxpayer and an asset at a particular time if:

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

(b) the *arrangement period for 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 connected entity); or

(iii) any entity that is a foreign resident; and

(d) disregarding this Division you 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; and

(e) you lack a *predominant economic interest in the asset at that time.

* denotes a term defined in subsection 995-1(1).

Each of the conjunctive requirements in paragraphs 250-15(a) to 250-15(e) must be present for the general test to be satisfied. If one of the paragraph requirements is not satisfied, then Division 250 will not apply.

Project Trust is a special purpose entity that will be in the business of constructing infrastructure for the statutory body and will provide Asset Management Services for the infrastructure.

Under the Project Deed, Project Trust is obliged to construct the new infrastructure on land owned by the statutory body.

Under the Project Deed, the Project Trust does not have a caveatable interest in relation to the area or the new infrastructure works site.

Under the Project Deed, the statutory body is the owner of the areas. The statutory body will therefore have ownership and control of the infrastructure.

Project Trust will conduct its business by facilitating the construction of the new infrastructure and also facilitating the Asset Management Services for the infrastructure.

The income that the Project Trust will receive from the statutory body in the form of Construction Payments during the Construction Phase will be incidental and relevant to its business activities. Accordingly, those amounts received will be income according to ordinary concepts and will be included in its assessable income under subsection 6-5(2).

Similarly, the payments Project Trust will make to subcontractors to facilitate the new infrastructure works will be payments made in the ordinary course of the Project Trust's business of facilitating the construction of the new infrastructure.

Accordingly, these payments will ordinarily be deductible under section 8-1 and will not be capital or of a capital nature as the infrastructure are not assets to which the Project Trust will have ownership or control of, or have an enduring benefit to.

Paragraph 250-15(d) requires an entitlement to a capital allowance deduction for the decline in value of a depreciating asset pursuant to Division 40 or for expenditure on capital works pursuant to Division 43.

As the construction expenditure for the new infrastructure is not capital or of a capital nature and the Project Trust will not have ownership or control of the infrastructure, it will not be entitled to a capital allowance deduction under Division 40 or a deduction for capital works expenditure under Division 43.

Therefore, paragraph 250-15(d) will not be satisfied and Division 250 will not apply to Project Trust.

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).