Edited version of private ruling

Authorisation Number: 1011674993619

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: PPP

Issue 1

Will the Joint Venture (JV) be entitled to deductions in respect of the decline in value pursuant to section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) or capital works expenditure pursuant to section 43-10 of the ITAA 1997 in relation to the Project assets?

No.

Issue 2

Will Division 250 of the ITAA 1997 apply to the JV in respect of the decline in value pursuant to section 40-25 of the ITAA 1997 or capital works expenditure pursuant to section 43-10 of the ITAA 1997 in relation to the Project assets?

No.

Issue 3

Will Division 250 of the ITAA 1997 apply to the Project Unincorporated Joint Venture in respect of deductions available under section 40-830 of the ITAA 1997 in relation to the Project Amounts incurred by the Project Unincorporated Joint Venture?

No.

This ruling applies for the following period

1 July 2010 to 30 June 2048

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.

The consortium was short-listed for the Request for Proposals phase of the Public Private Partnership Facility.

The Project Members will form JV which will jointly carry on the business activities and derive the income earned by the JV in relation to the Facility.

It is envisaged that the Project Terms will comprise:

§ a design and construction phase (D&C Phase); and

§ an operating and maintenance phase (O&M Phase) beginning upon the cessation of the D&C Phase.

JV will be responsible for:

§ providing services of the design, construction and commissioning of the Facility;

§ the provision of facilities maintenance and a range of other services across the site; and

§ the financing of the Project over the duration of the Project Term

Project Agreement

The terms and conditions associated with the design, construction and maintenance of the Project facilities will be governed by the Project Agreement between the Corporation and the JV.

D&C Obligations

Pursuant to the Project Agreement the JV will be responsible for providing services of the design and construction of the Works.

The Corporation will pay the JV a lump sum payment (the Completion Payment) for the design and construction of the Project at the end of the construction period, equal to the total amount payable to the Construction Subcontractor for the Works.

The O&M Obligations

Pursuant to the Project Agreement, the JV will be responsible for:

§ providing services of the management, operation, maintenance and repair of the Facilities and the Project Infrastructure; and

§ the procurement of all goods and services and other utilities necessary for the operation of the Facilities and Project Infrastructure.

The Corporation will pay the JV Monthly Service Payments (MSPs) for the operation and maintenance of the Site during the O&M Phase. The Corporation will pay the MSPs following completion of the D&C Phase.

Access agreement terms

The Corporation will grant the JV access to each Site under the access agreement for the term of the Project. The JV will pay the Corporation access fees on and from the date of completion pursuant to the access agreement.

The access agreement confers no ownership, control or legal entitlement to possession in respect of the relevant areas to the JV, nor will it extend to the JV an entitlement to access fees or profits in respect of the areas.

Plant and equipment procurement terms

The JV will be responsible for providing services of the provision, maintenance and replacement of all goods, services and other utilities procured for the purposes of the Project.

The Project Agreement will be amended such that the JV:

§ has the obligation to procure the equipment on behalf of the Corporation in accordance with the Project Agreement;

§ does not obtain at any stage beneficial title to the plant and equipment (that is the Corporation has beneficial and legal title to all plant and equipment); and

§ does not have at any time a right to remove any of the plant and equipment from the Site.

Upon termination of the Project Agreement, the Corporation's future obligations to pay the MSPs will cease and the JV must handover the Site to the Corporation for nil consideration.

The JV will incur project amounts which will exceed $5million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 250.

Income Tax Assessment Act 1997 Section 250-15.

Income Tax Assessment Act 1997 Paragraph 250-15(d)

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Division 43.

Income Tax Assessment Act 1997 Section 43-10.

Income Tax Assessment Act 1997 Subdivision 40-I.

Income Tax Assessment Act 1997 Section 43-830.

Reasons for decision

Issue 1

Will the JV be entitled to deductions in respect of the decline in value pursuant to section 40-25 of the ITAA 1997 or capital works expenditure pursuant to section 43-10 of the ITAA 1997 in relation to the Project assets?

Summary

JV does not hold a (depreciating) asset and therefore the JV is not entitled to a deduction under Division 40 of the ITAA 1997.

The JV will not have a 'construction expenditure area' of capital works, as required by section 43-75 of the ITAA 1997, because the JV will not have a proprietary interest in the assets that comprise the Project at any time over the course of the construction phase, or upon completion of the Project.

Reasoning

Capital Allowances: asset - Division 40

An entity is required to 'hold a depreciating' asset in order to obtain an entitlement to a capital allowance deduction.

The meaning of 'a depreciating asset' is defined in section 40-30 of the ITAA 1997. 'Hold' in reference to a depreciating asset has the meaning given by section 40-40 of the ITAA 1997.

The table in section 40-40 of the ITAA 1997 lists particular circumstances when an entity holds a depreciating asset. The primary rule is that an entity holds a depreciating asset if it owns the asset (item 10 of the table in section 40-40). However, there are items that identify an entity as the holder of a depreciating asset in various other circumstances although the entity does not own the asset.

Item 3 of that table specifies that an owner of the quasi-ownership right (while it exists) will be a holder of the depreciating asset where it is:

… an improvement to land (whether a fixture or not) subject to a quasi-ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner's own use where the owner of the right has no right to remove the asset.

JV is contracted to provide services of constructing the Project. It will subcontract the construction but will receive full construction payments from the Corporation.

Therefore in making the construction payment to JV, the Corporation incurs capital expenditure in return for the carrying out by JV of providing construction works on the land. The Corporation, and not JV, receives the enduring benefit of the Project and improvements that are depreciating assets on land.

ATO Interpretative Decision 2005/278 expresses the ATO view that the relevant owner of a depreciating asset subject to a quasi-ownership right arising from improvements to land is the entity that obtains the enduring benefit of the improvements. While JV has access to the facility, it does not obtain the enduring benefit of the facility.

At no time over the course of the construction phase, or upon completion of the Project, will the JV have a proprietary interest in the assets that comprise the Project.

Thus, the JV will not hold a (depreciating) asset and therefore the JV is not entitled to a deduction under Division 40 of the ITAA 1997.

Division 43 - Construction Expenditure

Section 43-10 of the ITAA 1997 provides that an entity may only deduct an amount for capital works for an income year if, among other things, the capital works have a 'construction expenditure area'.

The JV will not have a 'construction expenditure area' of capital works, as provided for in section 43-75 of the ITAA 1997, because the JV will not have a proprietary interest in the assets that comprise the Project at any time over the course of the construction phase, or upon completion of the Project.

As subsection 43-75(1) of the ITAA 1997 is not satisfied, the JV will not be entitled to a deduction under Division 43 in relation to the Project.

Issue 2

Will Division 250 of the ITAA 1997 apply to the JV in respect of the decline in value pursuant to section 40-25 of the ITAA 1997 or capital works expenditure pursuant to section 43-10 of the ITAA 1997 in relation to the Project assets?

Summary

Division 250 of the ITAA 1997 will not apply to the JV in respect of the decline in value pursuant to section 40-25 of the ITAA 1997 or capital works expenditure pursuant to section 43-10 of the ITAA 1997 in relation to the Project assets.

Reasoning

Division 250 of the ITAA 1997 applies only if each paragraph of section 250-15 is satisfied and none of the specific exclusions apply. That is, if one of the paragraphs is not satisfied, Division 250 will not apply.

Section 250-15 of the ITAA 1997 inter alia states:-

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

(a) the asset …

(d) disregarding this Division, you would be entitled to a *capital allowance in relation to:

(i) a decline in value of the asset; or

expenditure in relation to the asset; and ...

Subsection 995-1(1) of the ITAA 1997 states:-

In this Act, except so far as the contrary intention appears:

Capital allowance means a deduction under:

(a) Division 40 (capital allowances) of this Act; or

(ab) Division 43 (capital works) of this Act; or …

Capital Allowances: asset - Division 40

For the reasons outlined in Issue 1 above, the JV does not hold a depreciating asset and therefore the JV is not entitled to a deduction under section 40-25 of the ITAA 1997 in respect of the Project.

Division 43 - Construction Expenditure

For reasons outlined in Issue 1 above, the JV will not be entitled to a deduction under section 43-10 of the ITAA 1997 in respect to the Project.

Conclusion

As there is no expenditure in relation to an asset that is subject to a deduction pursuant to Division 40 or Division 43 of the ITAA 1997, paragraph 250-15(d) of the ITAA 1997 is not satisfied. Therefore, Division 250 of the ITAA 1997 does not apply to the construction expenditure in respect of the Project.

Issue 3

Will Division 250 of the ITAA 1997 apply to the JV in respect of deductions available under section 40-830 of the ITAA 1997 in relation to the Project Amounts incurred by the JV?

Summary

Division 250 of the ITAA 1997 will not apply in respect of capital expenditure incurred by the JV under Subdivision 40-I of the ITAA 1997.

Reasoning

Capital Allowance: Expenditure - Division 40-I

JV will incur expenditure that will exceed $5 million subject to Subdivision 40-I of the ITAA 1997.

To the extent that such amount is capital expenditure under Subdivision 40-I of the ITAA 1997 the expenditure itself will not give rise to a separate asset to which Division 250 of the ITAA 1997 can apply. The expenditure will not give rise to capital allowances in relation to the decline in value of an asset for the purposes of subparagraph 250-15(d)(i) of the ITAA 1997. Further, for the purposes of subparagraph 250-15(d)(ii) of the ITAA 1997, the expenditure incurred is not in relation to an asset for which the taxpayer will be entitled to capital allowances under either Divisions 40 or 43 of the ITAA 1997.