Edited version of private ruling

Authorisation Number: 1011675042613

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Ruling

Subject: Division 250

Question 1

Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to ABC Pty Ltd?

Answer

No.

This ruling applies for the following period

1 July 2010 to 30 June 2030

Relevant facts and circumstances

The ABCP is a consortium tendering to design, build, operate and maintain the Plant (the 'Facility').

The consortium will establish ABC Holdings Pty Ltd, which in turn will establish ABC Pty Ltd (ABC). Both ABC Holdings Pty Ltd and ABC are registered in Victoria and ABC will be the key contracting party with the Corporation in relation to the Facility.

ABC will enter into a Project Agreement with the Corporation, which specifies each party's obligations in relation to the Project.

In particular prior to and during the construction phase, ABC will:

a) Finance and provide services to the Corporation of designing, constructing and commissioning the Works and achieving Completion, in consideration of the Corporation making periodic Construction Payments, in accordance with the proposed construction draw-down schedule;

b) Engage the design, build and operate joint venture to carry out the design and construction of the Facility. ABC will use Construction Payments received from the Corporation to satisfy its contractual payment obligations to the subcontractor, which will arise over the design and construction phase;

c) Enter into a construction licence with the Corporation in respect of the site on which ABC will be required to construct the Facility under the Project Agreement; and

d) Not have a proprietary interest in the assets that comprise the Facility at any time over the course of the construction phase, or upon completion of the Facility.

Upon Completion of the Facility ABC will:

a) Enter into an licence with the Corporation over the Facility. The licence will not provide ABC with the right to remove assets fixed to the area of land that is subject to the licence;

b) Enter into a contract with the subcontractor under which it will subcontract its obligations under the Project Agreement to manage, operate, maintain and repair the Facility over the Operations Phase of the Project to the subcontractor;

c) Provide services of Managing, Maintaining and repairing the Project Infrastructure in consideration of the Corporation paying Monthly Services Charges (MSCs);

d) Procure the equipment on behalf of the Corporation. ABC will not at any stage obtain beneficial title to the plant and equipment; and

e) Handover the Project Infrastructure to the Corporation at the end of the Contract Term.

ABC's main business is providing services of the design, construction, management and maintenance of the site. The Construction Payments and operation and maintenance payments received from the Corporation are consideration for providing the construction and operation and management services.

ABC is required to make payments to satisfy its obligations to the subcontractor under the subcontract.

The amounts paid by ABC to the subcontractor for the services are made in the ordinary course of ABC's business and are not capital, nor capital in nature.

The Corporation will remain the owner of the Site including items affixed to the Facility throughout the design, construction and operation phase or the Facility.

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 43-840.

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

Detailed reasoning

Division 250 of the ITAA 1997 applies only if each of the paragraphs in 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 states:-

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

(a) the asset is…

(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

An entity is required to 'hold a depreciating asset' in order to have 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.

For particular listed circumstances the table in section 40-40 identifies the holder of a depreciating asset. The primary rule is that the taxpayer holds an asset if they are the owner of it (item 10 of the table in section 40-40). However, there are items that identify a holder in various other circumstances even though they are not the asset's owner.

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.

The amounts paid by ABC to the subcontractor for the services are made in the ordinary course of ABC's business, firstly to design and construct and secondly upon completion, operate and maintain.

ABC is contracted to construct and maintain the Facility. It will subcontract the construction but will receive full construction payments from the Corporation.

The amounts paid by ABC are in the ordinary course of ABC's business and are not amounts paid for assets or things that are capital or capital in nature.

The construction payment to ABC is in return for ABC for the carrying out the service of construction on the land held by Corporation.

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

Entering into the licence with the Corporation over the Facility will not provide ABC with the right to remove assets fixed to the area of land that is subject to the licence.

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 ABC has access by way of the licence to the Facility, it does not obtain the enduring benefit of the Facility.

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

Capital Allowance: expenditure - Division 40-I

Amounts paid by ABC other than to the subcontractor for the services may be capital or capital in nature.

To the extent that such amount is capital expenditure subject to Subdivision 40-I of the ITAA 1997, the expenditure itself would not give rise to a separate asset to which Division 250 of the ITAA 1997can apply. That is, the expenditure relates to a Project and not to a tangible depreciating asset as provided for in subsection 40-30(1) of the ITAA 1997, nor to an intangible depreciating asset specified in subsection 40-30(2) of the ITAA 1997.

Division 43 - Construction Expenditure

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

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

Therefore, ABC will not be entitled to a deduction under Division 43 of the ITAA 1997 in relation to the Facility as subsection 43-75(1) of the ITAA 1997 is not satisfied.

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 1997is not satisfied. Therefore, Division 250 of the ITAA 1997 will not apply to ABC in respect to the Facility.