Edited version of private ruling

Authorisation Number: 1011671104816

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Australian taxation implications of proposed operating lease

Issue 1 Question 1

Will the Sub-Lease be considered a 'genuine lease' resulting in rental payments (including reserve payments) payable by the Lessee under the Sub-Lease being allowable in full as a deduction when incurred under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

1 January 2016 to 31 December 2016

1 January 2017 to 31 December 2017

1 January 2018 to 31 December 2018

1 January 2019 to 31 December 2019

1 January 2020 to 31 December 2020

1 January 2021 to 31 December 2021

1 January 2022 to 31 December 2022

1 January 2023 to 31 December 2023

1 January 2024 to 31 December 2024

The scheme commences on:

1 January 2012

Issue 2 Question 1

Will Australian withholding tax apply to rent payable by the Lessee to the Sub-Lessor under the Sub-Lease pursuant to subsection 17A(5) of the International Tax Agreements Act 1953 (Agreements Act) and the application of the Country B DTA of the Agreements Act?

Answer

No.

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

1 January 2016 to 31 December 2016

1 January 2017 to 31 December 2017

1 January 2018 to 31 December 2018

1 January 2019 to 31 December 2019

1 January 2020 to 31 December 2020

1 January 2021 to 31 December 2021

1 January 2022 to 31 December 2022

1 January 2023 to 31 December 2023

1 January 2024 to 31 December 2024

The scheme commences on:

1 January 2012

Issue 3

Question 1

Will the Commissioner exercise the discretion under paragraph 177F(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel a tax benefit that is referable to a deduction allowable, or that would but for section 177F of the ITAA 1936 be allowable, to the Lessee in connection with the Sub-Lease from the Sub-Lessor to the Lessee?

Answer

No.

Question 2

Will the Commissioner exercise the discretion under subsection 177F(2A) of the ITAA 1936 to cancel a tax benefit that is covered by section 177CA obtained, or that would but for section 177F of the ITAA 1936 be obtained, by the Lessee in connection with the Sub-Lease from the Sub-Lessor to the Lessee?

Answer

No.

This ruling applies for the following periods:

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

1 January 2016 to 31 December 2016

1 January 2017 to 31 December 2017

1 January 2018 to 31 December 2018

1 January 2019 to 31 December 2019

1 January 2020 to 31 December 2020

1 January 2021 to 31 December 2021

1 January 2022 to 31 December 2022

1 January 2023 to 31 December 2023

1 January 2024 to 31 December 2024

The scheme commences on:

1 January 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

An Australian resident Lessee intends to lease substantial equipment. The lease arrangement is as follows.

The non-resident Head-Lessor and non-resident Sub-Lessor are wholly owned subsidiaries of a non-resident Leasing Company (referred to collectively as 'the Lessors', where required).

The non-resident Head-Lessor is a resident of Country A and is entitled to the benefits conferred by a double tax agreement between Australia and Country A (Country A DTA).

The non-resident Sub-Lessor is a resident of Country B and is entitled to the benefits conferred by a double tax agreement between Australian and Country B (Country B DTA).

The Australian resident Lessee will sub-lease the substantial equipment to related Australian resident sub-lessees. The terms of the sub-lease will be negotiated on arm's length basis.

The Australian resident Lessee will use the substantial equipment wholly in gaining or producing assessable income by way of sub-leasing the substantial equipment for lease rentals. The Sub-Lessees will use the substantial equipment wholly in gaining or producing assessable income.

Delivery of the substantial equipment will take place outside Australia.

The purchase price of the substantial equipment represents an arm's length market price and will be paid through a combination of:

§ payments paid by the Purchasing Company, and

§ proceeds from a finance arrangement.

The Purchasing Company is also a wholly owned subsidiary of the non-resident Leasing Company. The Purchasing Company is a resident of Country C.

On the delivery date, the Purchasing Company will assign its right to acquire the Substantial equipment to the Financier.

The Financier is a resident of and incorporated in Country D. It is not a related entity of the Lessors or the Lessee.

Part of the purchase price of the substantial equipment will be funded by the Financier and guaranteed by the Guarantor.

The Guarantor requires as a pre-condition to the guarantee that the legal title in the substantial equipment be held by the Financier and that the Financier reside in a jurisdiction where the Guarantor is familiar with the legal structure.

The Lessors have entered into similar financing arrangements in the past.

The Financier will enter into a Finance Lease to the Head-Lessor for the same period as the Head Lease to the Sub-Lessor and subsequently Sub-Lease to Lessee.

The Finance Lease will be executed outside Australia.

The Finance Lease will contain an option to purchase the substantial equipment at the expiry of the Finance Lease for nominal consideration. It is expected that the Head Lessor will exercise the option to purchase the substantial equipment at the expiry of the Finance Lease given the nominal exercise price.

The Finance Lease from the Financier to the Head Lessor constitutes a hire purchase agreement as defined in subsection 995-1(1) of the ITAA 1997.

Under the Finance Lease, Head Lessor will have all the benefits and burdens of ownership and intends to exercise its option of purchase on expiry of the Finance Lease.

The Head Lessor will lease the substantial equipment to the Sub-Lessor under a Sub-Lease.

The Sub-Lessor does not have an office or employees in Australia. It does not already have substantial equipment located within Australia which is available for lease in Australia (and which is used within Australia).

Rental payments received by Sub-Lessor will be paid by the Lessee directly into the Sub-Lessor's bank account outside Australia. No other activities of the Sub-Lessor other than the receipt of rental payments under the Sub-Lease arise in Australia. The Sub-Lessor will not undertake any repairs or maintenance of the substantial equipment during the lease term.

The Sub-Lessor will not operate the substantial equipment.

Country B is often used by the Leasing Company to Sub-Lease substantial equipment.

All lease negotiations between the Lessors and the Lessee have been undertaken outside of Australia. The Head Lease and Sub-Lease will be executed outside Australia, effective from the date of delivery of the substantial equipment.

The terms of the Head Lease will be similar in all material respects to the terms of the Sub-Lease and the Lease terms are standard within the industry. The Lease terms include.

§ The rental payments are negotiated on an arm's length basis with reference to normal commercial terms and reflect the market value for the substantial equipment of this nature leased in the current environment.

§ No restrictions are placed on the use of the substantial equipment other than regulatory and legal restrictions.

§ There will be no right, option or obligation provided to the Lessee to purchase the substantial equipment or otherwise guarantee any residual value of the substantial equipment during the term of the lease or at the termination of the lease.

§ The Lessee will be responsible to maintain the substantial equipment at its own expense.

§ Reserve payments will be paid by the Lessee to the Sub-Lessor to ensure funds available for certain activities in relation to the substantial equipment for the lease term. The Lessee may draw on these funds to reimburse the cost of the activities incurred by the Lessee during the lease term. Remaining balance will be retained by the Sub-Lessor. The reserve payments will be on-paid to the Head Lessor.

§ The Lessee will, at its own expense, maintain insurance in relation to the use of the substantial equipment.

§ The substantial equipment will be under the exclusive control of the Lessee during the lease term.

§ The rental payments will not be grossed up for withholding tax where applicable, unless there is a change in law in Australian following the commencement of the operating leases.

§ The operating leases contain a tax indemnity clause in respect of taxes arising as a result of the operation of the substantial equipment, subject to broad exclusions.

§ At all times during the term of the Leases, full legal title to the substantial equipment will remain with the Financier, notwithstanding the delivery of the substantial equipment to and the possession and use of the substantial equipment by the Lessee and Sub-Lessees.

§ Delivery of the substantial equipment will take place outside Australia.

At the end of the lease term, the Head Lessor may seek to place the substantial equipment on lease with a new lessee or sell the substantial equipment.

For commercial reasons and after consideration of reasonable commercial alternatives, the Lessee chose to lease the substantial equipment from the Lessors. Alternatives available to the Lessee included other forms of arrangements.

Key commercial considerations included lower cost outlays, preservation of working capital, lower risks and managing residual value exposures.

The rental payments and reserve payments do not constitute income listed in subsection 128B(3) of the ITAA 1936.

Assumption

The substantial equipment is used by the Lessee and its Sub-Lessees wholly in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 26-25

Income Tax Assessment Act 1997 Section 701-1

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

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(2B)

Income Tax Assessment Act 1936 Subsection 128B(3)

Income Tax Assessment Act 1936 Subsection 128B(5A)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177CA

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Paragraph 177F(1)(b)

Income Tax Assessment Act 1936 Subsection 177F(2A)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Subsection 4(2)

International Tax Agreements Act 1953 Section 17A

International Tax Agreements Act 1953 Subsection 17A(5)

International Tax Agreements Act 1953 Paragraph 17A(5)(b)

International Tax Agreements Act 1953 - Applicable double tax agreements

Reasons for decision

Issue 1

Question 1

Summary

The rental payments and reserve payments are deductible under section 8-1 of the ITAA 1997

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that:

§ it is incurred in gaining or producing assessable income, or

§ it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income;

except where, the loss or outgoing is:

§ of a capital, private or domestic nature, or

§ is incurred in relation to gaining or producing exempt income.

The rental payments and reserve payments payable under the Sub-Lease will be fully deductible under section 8-1 of the ITAA 1997 when incurred if:

§ the lease is a 'genuine lease', that is, in practical effect, an ordinary commercial lease entered into in the normal course of trade

§ the amounts will be incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

§ the amounts are not capital, or of a capital nature, and

§ the amounts are not prevented from being deductible under section 26-25 of the ITAA 1997.

Genuine lease

Pursuant to Taxation Rulings IT 28 and IT 2051, an agreement is accepted as a 'genuine lease' for income tax purposes if the lessee (or an associate of the lessee) does not have an obligation, right or option to purchase the leased item at any time either during or at the end of the term of the lease. It would be unacceptable if the obligation, right or option were to be given to an associate of the lessee or the lessor has a right or option to require the lessee or an associate to purchase.

Under the terms of the Sub-Lease from the Sub-Lessor to the Lessee, the Lessee has no option to purchase the substantial equipment and no obligation to guarantee the residual value of the substantial equipment. Accordingly, the Sub-Lease from the Sub-Lessor to the Lessee is a 'genuine lease' for Australian income tax purposes.

Rental payments

On the facts, the Lessee is carrying on a business of leasing substantial equipment. The Lessee will use the substantial equipment wholly in gaining or producing its assessable income by way of sub-leasing it to the Sub-Lessees for lease rent revenues. The Sub-Lessees will use the substantial equipment wholly in gaining or producing its assessable income. This establishes the necessary nexus between the outgoing and the gaining or producing of assessable income.

In return for the rental payments, the Lessee will not receive anything other than the right to possession and use of the substantial equipment for the purpose of producing assessable income during the term of the lease. In accordance with the nature of a 'genuine lease', the rental payments by the Lessee under the Sub-Lease are not payments made for the acquisition of the substantial equipment or for obtaining any other capital advantage. The rental payments will therefore be outgoings necessarily incurred by the Lessee in carrying on its business for the purpose of gaining or producing assessable income and are not of a capital nature, or related to the earning of exempt income.

Reserve payments

Under the operating sub-lease, reserve payments are payable by the Lessee to the Lessor. Pursuant to the terms of the operating sub-lease, the Lessee may draw on the relevant reserves for certain activities in relation to the substantial equipment for which costs are incurred by the Lessee during the lease term.

The reserve payments are not paid for the purpose of acquiring, preserving or promoting capital assets or the income earning structure of the Lessee, and are therefore not capital in nature.

The reserve payments are an agreed condition of the Sub-Lease and are therefore, paid in connection with securing the use of the substantial equipment for the lease term. Accordingly, the reserve payments are incurred in carrying on a business for the purpose of gaining or producing assessable income. As such, the reserve payments payable by the Lessee during the lease term will be deductible under section 8-1 of the ITAA 1997.

Applicability of section 26-25 of the ITAA 1997

The rental payments and reserve payments under the Sub-Lease will be a 'royalty' as defined in subsection 6(1) of the ITAA 1936. Section 26-25 of the ITAA 1997 will not prevent the Lessee from deducting the rental and reserve payments payable as the Lessee will not be required to withhold and pay royalty withholding tax on these amounts (see Issue 2 below).

In conclusion, the rental and reserve payments payable by the Lessee will be allowable in full as a deduction under section 8-1 of the ITAA 1997 in the years of income in which they are incurred.

Note: we have limited our answer to the question raised in your application. This ruling does not consider tax implications which arise in relation to the reimbursement of certain costs from the Sub-Lessor to the Lessee. Should you need a private ruling on this or any other matter you will need to lodge another application.

Issue 2

Question 1

Summary

Pursuant to subsection 17A(5) of the International Tax Agreements Act 1953 (Agreements Act), rental payments payable by an Australian resident to a non-resident are not subject to Australian withholding tax under section 128B of the ITAA 1936 where the rental payments are not royalties for the purposes of the applicable double tax agreement.

Detailed reasoning

Generally, royalties paid by an Australian resident to a non-resident are subject to royalty withholding tax under section 128B of the ITAA 1936. Pursuant to subparagraph 128(2B)(b)(i) of the ITAA 1936, withholding tax applies to royalties paid to a non-resident by an Australian resident where that royalty is not an outgoing wholly incurred by the Australia resident payer in carrying on business in a foreign country at or through a permanent establishment in that foreign country.

Subsection 6(1) of the ITAA 1936 defines the term 'royalty' to include payments for the use of, or right to use, any industrial, commercial or scientific equipment. The definition of royalty in section 995-1 of the ITAA 1997 takes its meaning from the definition in the ITAA 1936. Taxation Ruling TR 98/21 provides guidance on this meaning of the definition of 'royalty' for the purposes of subsection 6(1) of the ITAA 1936.

On the facts, rental payments payable by the Lessee to the Sub-Lessor under the Sub-Lease are royalties for the purposes of the ITAA 1936 and ITAA 1997, as the rental payments made by the Lessee are for the right to use equipment as defined in subsection 6(1) of the ITAA 1936.

Notwithstanding the provisions of the ITAA 1936, in determining the liability to tax on Australian sourced income received by a non-resident, it is also necessary to consider any applicable double tax agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 such that those Acts are read as one. Where there are any inconsistencies, subsection 4(2) of the Agreements Act provides that the provisions of the Agreements Act override the ITAA 1936 and ITAA 1997 (except in limited circumstances).

The relevant double tax agreement here is the Convention between Australia and Country B (the Country B DTA).

On the facts, the Sub-Lessor is entitled to the benefits conferred by the Country B DTA.

The Royalties Article of the Country B DTA deals with the source rules for the taxation of royalties to which a resident of Australia or Country B is beneficially entitled. The Royalties Article does not include amounts paid or credited as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment.

The rental payments by the Lessee under the Sub-Lease are not amounts that fall within the scope of the Royalties Article of the Country B DTA and, therefore, will not be treated as royalties for the purposes of that Convention.

Paragraph 17A(5)(b) of the Agreements Act provides that section 128B of the ITAA 1936 does not apply to the payment of a royalty if the relevant Convention does not treat the amounts payable as a royalty.

Accordingly, as the rental payments payable by the Lessee under the Sub-Lease are not a royalty for the purposes of the Royalties Article of the Country B DTA, subsection 17A(5) of the Agreements Act applies and the rental payments payable by the Lessee to the Sub-Lessor for the lease of the substantial equipment are not subject to Australian withholding tax under section 128B of the ITAA 1936.

Issue 3

Question 1 and 2

Summary

For Part IVA to apply, paragraph 177D(a) of the ITAA 1936 requires that a taxpayer obtain, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. The Commissioner will not exercise his discretion under section 177F of the ITAA 1936 to cancel a tax benefit where the taxpayer does not obtain a tax benefit in connection with a scheme to which Part IVA applies.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision. Subsection 177F(1) of the ITAA 1936 gives the Commissioner the discretion to cancel a tax benefit that has been obtained, or would but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Before the Commissioner can exercise the discretion in section 177F of the ITAA 1936, the requirements of Part IVA must be satisfied. Broadly, the requirements are:

i. a scheme, as defined in section 177A of the ITAA 1936 was carried on by the taxpayer

ii. a tax benefit, as identified in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITA 1936, have been obtained in connection with the scheme, and

iii. having regard to section 177D of the ITAA 1936, it is reasonable to conclude that the sole or dominant purpose of the scheme was to obtain the tax benefit.

Scheme

Identification of the scheme sets the parameters for determining whether a taxpayer has obtained a tax benefit in connection with a scheme and whether the dominant purpose of a person in entering into or carrying out the scheme or a part thereof was to enable the taxpayer to obtain a tax benefit.

The term 'scheme' for the purposes of Part IVA is defined in subsection 177A(1) of the ITAA 1936 to mean:

a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

b) any scheme, plan, proposal, action, course of action or course of conduct.

This definition of 'scheme' is broad. It allows the concept of 'scheme' to be cast on a wide or narrow basis. It encompasses not only a series of steps but also the taking of one step. A step or steps in a wider scheme could comprise a narrower scheme however the isolated steps must themselves constitute a scheme.

A scheme, as defined, is wide enough to cover a series of interrelated acts by a person or persons over a period of time.

Whether a scheme is wider or narrower should not be relevant in determining if the test in section 177D of the ITAA 1936 is met with respect to the scheme. The scheme ultimately matters only in the context of whether there is a tax benefit obtained by the taxpayer in connection with the scheme for which the conclusion in paragraph 177D(b) of the ITAA 1936 can be reached.

Tax benefit

Paragraph 177D(a) of the ITAA 1936 requires that the taxpayer obtain a 'tax benefit' in connection with the scheme. Subsection 177C(1) of the ITAA 1936 provides the meaning of the phrase 'the obtaining by a taxpayer of a tax benefit in connection with a scheme'.

It is a prerequisite of section 177D, and in turn section 177C of the ITAA 1936 to correctly identify the relevant taxpayer. Both provisions specify that it is the obtaining of a tax benefit by 'the taxpayer'.

Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, relating broadly to:

a) an amount not being included in the assessable income of the taxpayer for a year of income

b) a deduction being allowable to the taxpayer in relation to a year of income

c) a capital loss being incurred by the taxpayer during a year of income

d) a foreign tax credit being allowable to the taxpayer.

Where the tax benefit is an allowable deduction, it is not a requirement that the deduction has formally been allowed.

A tax benefit can also arise for the purpose of section 177CA of the ITAA 1936 if a taxpayer is not liable to pay withholding tax on an amount where, but for the scheme the taxpayer would have or could reasonably be expected to have been liable to pay. Section 177CA of the ITAA 1936 does not require that a withholding tax liability is actually reduced. It is sufficient that there is a reasonable expectation that but for the scheme, the relevant amount would have been subject to withholding tax.

For the purposes of subsection 177C(1) of the ITAA 1936, a tax benefit is obtained in connection with a scheme where the relevant tax benefit:

§ would not have been obtained if the scheme had not been entered into or carried out, or

§ might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out ('reasonable expectation test')

Where it is possible to say that a tax benefit would not have been obtained but for the scheme, it is not necessary to refer to the reasonable expectation test.

Counterfactual

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or 'counterfactual'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.

A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.

In applying the reasonable expectation test to identify the counterfactual(s), it may be useful to consider:

§ the most straightforward and usual way of achieving the commercial and practical outcome of the scheme (disregarding the tax benefit)

§ commercial norms, for example, standard industry behaviour

§ social norms, for example, family obligations

§ behaviour of relevant parties before/after the scheme compared with the period of operation of the scheme, and

§ the actual cash flow.

If a tax benefit is obtained in connection with a scheme that also achieves a wider commercial objective (disregarding the tax benefit), then it is reasonable to expect that in the absence of the scheme the wider objective would still have been pursued by the means of a transaction or dealing with a different form or shape.

Dominant purpose

The counterfactual(s) also forms the background against which an objective conclusion as to purpose of a person occurs in accordance with section 177D of the ITAA 1936.

For Part IVA to apply to a scheme in connection with which the taxpayer obtained a tax benefit, it is necessary to conclude, having regard to the factors in paragraph 177D(b) of the ITAA 1936 that the person who entered into or carried out the scheme, or any part of it, did so for the 'purpose' of enabling the taxpayer to obtain the tax benefit.

The test refers to the purpose of the person (or one of the persons) that entered into or carried out the scheme, or any part of the scheme. That person need not be the taxpayer obtaining a tax benefit.

Pursuant to subsection 177A(5) of the ITAA 1936, 'purpose' includes the dominant purpose where there are two or more purposes.

It is possible for Part IVA to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. The key issue is whether the particular scheme, or any part of it, was entered into or carried out by any person for the relevant purpose having regard to the factors in paragraph 177D(b) of the ITAA 1936.

The consideration of purpose or dominant purpose under paragraph 177D(b) of the ITAA 1936 requires an objective conclusion to be drawn. The conclusion required is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors.

The paragraph 177D(b) of the ITAA 1936 factors provide the context in which the dominant purpose of the scheme is to be considered. Such consideration involves comparison of the scheme with the 'alternative hypothesis', i.e. the counterfactual.

Broadly, the factors consist of three overlapping sets:

§ how the scheme was implemented (subparagraphs 177D(b)(i)-(iii))

§ the effect of the scheme (subparagraphs 177D(b)(iv)-(vii)), and

§ the connection between the taxpayer and other persons.

While the factors in paragraph 177D(b) of the ITAA 1936 will not be equally relevant in every case, each of the factors are taken into account and weighed together in arriving at a conclusion as to dominant purpose.

The issue in question here is whether or not the Commissioner will exercise his discretion under section 177F of the ITAA 1936. Accordingly, the Commissioner must consider whether or not a tax benefit has been obtained, or would but for section 177F of the ITAA 1936 be obtained, by the taxpayer in connection with a scheme to which Part IVA applies. For present purposes, the Commissioner is asked to consider the application of Part IVA to the following specific circumstances.

1. a tax benefit that is referable to a deduction allowable, or that would but for section 177F of the ITAA 1936 be allowable, to the Lessee in connection with the Sub-Lease from the Sub-Lessor to the Lessee; and

2. a tax benefit that is covered by section 177CA of the ITAA 1936 obtained, or that would but for section 177F of the ITAA 1936 be obtained, by the Lessee in connection with the Sub-Lease from the Sub-Lessor to the Lessee.

For present purposes, the relevant scheme (within the meaning in subsection 177A(1) of the ITAA 1936) is the Sub-Lease from the Sub-Lessor to the Lessee and the relevant taxpayer is the Lessee.

With regard to the relevant scheme, the following could potentially give rise to a tax benefit (relevant tax benefit):

§ deductions for rental payments payable by the Lessee under the Sub-Lease,

§ deductions for reserve payments payable by the Lessee under the Sub-Lease, and/or

§ liability to remit royalty withholding tax withheld on rental payments payable to the Sub-Lessor under the Sub-Lease.

The mere identification of a tax deduction is not sufficient for Part IVA to apply. It is necessary for the deduction to be obtained in connection with the scheme. This requires a consideration of the counterfactuals.

Having regard to the ultimate commercial outcome of the scheme and standard industry behaviour, it is reasonable to accept on the facts that the counterfactuals could be certain others forms of arrangement.

It is apparent from these facts that the relevant tax benefit is obtained in connection with a scheme that achieves the wider commercial objective of the Lessee carrying on its business. Given the circumstances, it is reasonable to expect that a tax benefit similar to the kind identified would have been obtained if the Lessee had entered into certain other forms of arrangement. On this basis, it cannot be concluded that the relevant tax benefit would not have been obtained, or might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out.

On the facts, the relevant tax benefit is consistent with the pursuit of a commercial objective. As it cannot be concluded that the Lessee obtained a tax benefit in connection with the scheme, it is therefore not strictly necessary to have regard to the factors in paragraph 177D(b) of the ITAA 1936 to determine whether the scheme was entered into for the sole or dominant purpose of obtaining the relevant tax benefit.

While it is unnecessary to consider the factors separately, an analysis of the available facts and circumstances against the factors as a whole indicates that the Lessee or the Sub-Lessor did not enter into the scheme with the requisite dominant purpose.

It is reasonable to accept on the facts that the dominant purpose of entering into the relevant scheme was for the Lessee to obtain the substantial equipment for use in its ordinary course of carrying on its business. The facts support the finding of a straightforward and usual way of achieving the commercial outcomes sought by the Lessee and the overall transaction does not appear blatant or artificially contrived.

Accordingly, on the facts and circumstances of this scheme, it cannot reasonably be concluded that the Lessee entered into the scheme for the dominant purpose of obtaining a relevant tax benefit in connection with the scheme. The Commissioner will not exercise the discretion under paragraph 177F(1)(b) or subsection 177F(2A) of the ITAA 1936 to cancel a relevant tax benefit.