Edited version of private advice

Authorisation Number: 1051859234444

Date of advice: 1 July 2021

Ruling

Subject: Division 250 of the ITAA 1997

Question 1

Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to amounts received by the Company under the Transfer?

Answer

Yes

Question 2

Will a balancing adjustment happen under section 250-275 of the ITAA 1997, which is to be included in the Company's assessable income for the year ending 30 June 20XX?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company is head company of a tax consolidated tax group which has at least two subsidiary members (Subsidiary Members).

The Subsidiary Members entered a lease for the Property. The Lease was for over XX years.

The Subsidiary Members constructed a building on the Property (the Premises).

The Subsidiary Members entered a sub-lease for the Premises with the State Government (Sub-lease1). The term of Sub-lease 1 was over XX years and ended in 20XX. The State Government paid rent.

Sublease 1 had options to renew. The options were not exercised.

The Subsidiary Members entered another sub-lease with the State Government (Sub-lease2) that started at the end of Sub-lease1. The term of Sub-lease2 is over XX years. The State Government pays rent.

The Subsidiary Members gave the State Government incentives to enter Sub-lease2.

The Company entered a contract to transfer its interest in payments under Sub-lease2 to Financial Institution for consideration (the Transfer).

The Company has self-assessed that it lacks a predominant economic interest in the Premises.

The Company has self-assessed that its Division 250 assessable amount is greater than the alternative assessable income.

The Company does not deduct amounts under Subdivision 328-D.

The total nominal values of all financial benefits to be provided by the State Government exceeds $XXXX.

At the start of Sub-lease2, the value of the Premises exceeds $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Division 250

Income Tax Assessment Act 1997 section 250-10

Income Tax Assessment Act 1997 section 250-15

Income Tax Assessment Act 1997 section 250-20

Income Tax Assessment Act 1997 section 250-25

Income Tax Assessment Act 1997 section 250-30

Income Tax Assessment Act 1997 section 250-35

Income Tax Assessment Act 1997 section 250-40

Income Tax Assessment Act 1997 section 250-45

Income Tax Assessment Act 1997 section 250-50

Income Tax Assessment Act 1997 section 250-55

Income Tax Assessment Act 1997 section 250-60

Income Tax Assessment Act 1997 section 250-115

Income Tax Assessment Act 1997 section 250-120

Income Tax Assessment Act 1997 section 250-125

Income Tax Assessment Act 1997 section 250-135

Income Tax Assessment Act 1997 section 250-155

Income Tax Assessment Act 1997 section 250-205

Income Tax Assessment Act 1997 section 250-265

Income Tax Assessment Act 1997 section 250-275

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Detailed reasoning

Division 250 operates to deny or reduce certain capital allowance deductions that would otherwise be available to you in relation to an asset if the asset is put to a tax preferred use in certain circumstances.

Section 250-10 provides that Division 250 applies to a taxpayer and an asset at a particular time if:

(a)    the general test in section 250-15 is satisfied in relation to you and the asset, and

(b)    none of the exclusions in sections 250-20, 250-25, 250-30, 250-40 and 250-45 apply.

All five requirements of the general test in section 250-15 must be satisfied in relation to the asset for Division 250 to apply. The asset being tested in this case is ....

Section 250-15 General Test

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

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

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

(e)    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 a foreign resident; and

(f)     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; and

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

Put to a tax preferred use

An asset is put to a tax preferred use if it is being leased and used by a tax preferred end user. Tax preferred end users are tax preferred entities (including exempt Australian government agencies and associated government entities of exempt Australian government agencies) and foreign residents (sections 250-50, 250-55, 250-60 and 995-1). 'Exempt Australian government agency' includes the Commonwealth, States and Territories (section 995-1).

The Premises is being sub-leased by the State Government and used by the State. The requirement in paragraph 250-15(a) is satisfied.

Arrangement period for the tax preferred use is greater than 12 months

The period of the tax preferred use is the term of Sub-lease2. The arrangement period is greater than 12 months, and the requirement in paragraph 250-15(b) is satisfied.

Financial benefits provided by a tax preferred end user

Financial benefits are anything of economic value (section 974-160). Under Sub-lease2 the State Government pays rent for the use of the Premises. The requirement in paragraph 250-15(c) is satisfied.

Entitled to a capital allowance

In the absence of Division 250, the Company would be entitled to capital allowance deductions under Division 43 for the construction of the building. The requirement in paragraph 250-15(d) is satisfied.

Lack a predominant economic interest in the asset at the time

Four tests need to be considered to determine if there is a lack of predominant economic interest for the purpose of paragraph 250-15(e):

(a)    section 250-115 (limited recourse debt test)

(b)    section 250-120 (right to acquire asset test)

(c)    section 250-125 (effectively non-cancellable, long term arrangement test), and

(d)    section 250-135 (level of expected financial benefits test).

The Company will lack a predominant economic interest in an asset at a particular time if one or more of the above tests apply to it and the asset at that time.

The Company has self-assessed that it lacks a predominant economic interest in the Premises. As such, the requirement in paragraph 250-15(e) is satisfied.

Conclusion on section 250-15

All conditions in section 250-15 are satisfied. As such, Division 250 will apply to the Company and the Premises, unless an exclusion in Division 250 applies.

Exclusions

Paragraph 250-10(b) states that Division 250 will not apply if one of the following exclusions apply:

(a)    Small business entities that chooses to deduct amounts under Subdivision 328-D (section 250-20)

(b)    Financial benefits under minimum value limit (section 250-25)

(c)    Certain short term or low value arrangements (section 250-30)

(d)    Sum of present value of financial benefits less than amount otherwise assessable (section 250-40)

(e)    Commissioner's determination to not apply Division 250 (section 250-45).

Small business entity that chooses to deduct amounts under Subdivision 328-D

The exclusion in section 250-20 does not apply.

Financial benefits under minimum value limit

Division 250 will not apply if the total of the nominal values of all financial benefits to be provided by the tax preferred end user under the arrangement does not exceed $5million.

The exclusion in section 250-25 does not apply.

Certain short term or low value arrangement

Division 250 will not apply if:

•         the period for the tax preferred use of the asset does not exceed 5 years, or

•         at the start of the arrangement, the total of the nominal values of all the financial benefits to be provided by the tax preferred end user under the arrangement does not exceed $XXXX, or

•         at the start of the arrangement, the value of the asset put to the tax preferred use under the arrangement does not exceed $XXXX.

The exclusion in section 250-30 does not apply.

Sum of present value of financial benefits less than amount otherwise assessable

Division 250 will not apply if, when the tax preferred use of the asset starts, the Division 250 assessable amount worked out under subsection 250-40(2) is less than the alternative assessable income worked out under subsection 250-40(3).

The Company has self-assessed that its Division 250 assessable amount is greater than the alternative assessable income. As such, the exclusion in section 250-40 does not apply.

Commissioner's determination to not apply Division 250

The Company has not requested the Commissioner to make a determination under section 250-45

Conclusion

As none of the exclusions apply, Division 250 will apply to the Company and the Premises.

Question 2

Detailed reasoning

Relevantly, section 250-265 provides that a balancing adjustment is made under section 250-275 if:

(a)    you transfer to another person all of your rights and/or obligations under the financial arrangement...

As the Company has transferred its rights to payments under Sub-lease2 to a financial Institution a balancing adjustment is required under section 250-275.

Subsection 250-275(1) provides the following method statement to make the balancing adjustment:

Step 1. Add up the following:

(a)    the total of all the financial benefits provided to you under the financial arrangement;

(b)    the amount or value of any other consideration you receive in relation to the transfer or cessation referred to in subsection 250-265(1);

(c)    the total of the amounts that have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement;

(d)    the total of the other amounts that would have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement if all your losses from the arrangement were allowable as deductions.

Step 2. Add up the following:

(a)    the total of all the financial benefits you have provided under the financial arrangement;

(b)    the amount or value of any other consideration you provide in relation to the transfer or cessation referred to in subsection 250-265(1);

(c)    the total of the amounts that have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement;

(d)    the total of the other amounts that would have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement if all your gains from the arrangement were assessable.

Step 3. Compare the amount obtained under Step 1 (the Step 1 amount) with the amount obtained under Step 2 (the Step 2 amount). If the Step 1 amount exceeds the Step 2 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a gain you make from the financial arrangement for the purposes of this Subdivision. If the Step 2 amount exceeds the Step 1 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a loss that you make from the arrangement. If the Step 1 amount and the Step 2 amount are equal, no balancing adjustment is made.

Step 1 amount includes the following:

Step 2 amount includes the following:

The Company has a balancing adjustment (gain) of $XX, which, in accordance with section 250-205, must be included in its assessable income in the income year ending 30 June 20XX.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

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).