Edited version of private ruling

Authorisation Number: 1011815916414

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Ruling

Subject: Section 8-1 and Division 250 of the Income Tax Assessment Act 1997

Issue 1 Question 1

Will the entity be entitled to deductions for the fees payable pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2 Question 1

Will the entity satisfy the test in subsection 250-15(d) of the ITAA 1997 in relation to the asset, such that Division 250 of the ITAA 1997 applies to the entity?

Answer

No.

Issue 2 Question 2

Does Division 250 of the ITAA 1997 apply to the entity in relation to expenditure which falls within Subdivision 40-I of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

1 July 2012 to completion

Relevant facts and circumstances

The project members will form an unincorporated association (the entity) to carry on the business activities of, and derive the income earned by, the entity in relation to the Project.

The terms and conditions of the Project will be governed by a Project Deed between the entity and the Other Party.

Pursuant to the Project Deed, the entity will construct an asset for, and on behalf of, the Other Party then provide management services in relation to that asset for, and on behalf of, the Other Party.

Pursuant to the Project Deed, and in consideration for the construction work and management services, Other Party will pay specified amounts to the entity. These amounts are assessable income in the hands of the entity.

The entity will pay relevant Fees to the Other Party in exchange for the right to access the land on which the construction works and management services will be conducted.

The Project Deed confers no ownership, control or legal entitlement to possession in respect of the relevant areas or assets of the Project to the entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 40-25.

Income Tax Assessment Act 1997 section 43-10.

Income Tax Assessment Act 1997 section 40-40.

Income Tax Assessment Act 1997 section 250-15.

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

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Issue 1

Question 1

Will the entity be entitled to deductions for the Fees payable pursuant to section 8-1 of the ITAA 1997?

Summary

The entity will be entitled to deductions for the Fees payable pursuant to section 8-1 of the ITAA 1997.

Reasoning

Subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that:

· it is incurred in gaining or producing your assessable income; or

· it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Subsection 8-1(2) of the ITAA 1997 provides that you cannot deduct a loss or outgoing to the extent that:

· it is a loss or outgoing of capital, or of a capital nature; or

· it is a loss or outgoing of a private or domestic nature; or

· it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

· a provision of this Act prevents you from deducting it.

The first exclusion in paragraph 8-1(2)(a) of the ITAA 1997 prevents an amount from being deducted if it is capital or of a capital nature.

The established principles on the distinction between capital and income are well known. The nature or character of the expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Payment of the Fees entitles the entity to access the land for the purpose of fulfilling its obligations under the Project Deed. Fulfilling these obligations is a necessary precondition to the entity deriving its assessable income. The character of the advantage sought by paying the fees is the ability to derive assessable income over the life of the Project. Viewed in this way, payment of the fees is similar to a rental payment. The Fees do not create an enduring benefit for the entity and are not capital in nature.

The Fees do not fall within any other exclusion in subsection 8-1(2) of the ITAA 1997.

Issue 2

Question 1

Does the entity satisfy the test in subsection 250-15(d) of the ITAA 1997 in relation to the asset, such that Division 250 of the ITAA 1997 applies to the entity?

Summary

The entity does not satisfy the test in subsection 250-15(d) of the ITAA 1997 as the entity would not be entitled to a capital allowance in relation to the decline in value of the asset or expenditure in relation to the asset.

Reasoning

The general test of Division 250 of the ITAA 1997 is that the division applies to you and an asset at a particular time if:

· the asset is being put to a tax preferred use; and

· the arrangement period for the tax preferred use of the asset is greater than 12 months; and

· 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:

· a tax preferred end user (or a connected entity); or

· any tax preferred entity (or a connected entity); or

· any entity that is a foreign resident; and

· disregarding this Division, you would be entitled to a capital allowance in relation to:

· a decline in the value of the asset; or

· expenditure in relation to the asset; and

· you lack a predominant economic interest in the asset at that time.

Paragraph 250-15(d)(i): Would you be entitled to a capital allowance in relation to a decline in value of the asset?

To satisfy this element, you must be entitled to a deduction under Division 40 of the ITAA 1997 for the decline in value of depreciating assets you hold during the year of income. The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. It is necessary to determine if the entity holds the asset in accordance with this table.

On the facts, the asset is an improvement to the relevant land. The entity does not have the right to remove the asset from the land. The asset is and will remain property of the Other Party.

Accordingly, the entity does not hold the asset under any item of the table in section 40-40 of the ITAA 1997, and would not be eligible for a deduction for any decline in value of the asset. Therefore, the entity would not satisfy paragraph 250-15(d)(i) of the ITAA 1997.

Paragraph 250-15(d)(ii): Would you be entitled to a capital allowance in relation to expenditure in relation to the asset?

Paragraph 250-15(d)(ii) of the ITAA 1997 considers whether you are entitled to a deduction for capital works under Division 43 of the ITAA 1997.

Section 43-10 of the ITAA 1997 provides that you can only deduct an amount for capital works for an income year if, among other things, the capital works have a 'construction expenditure area'. For capital works begun after 30 June 1997, the construction expenditure area of capital works means the part of the capital works on which the 'construction expenditure' was incurred that, at the time it was incurred by an entity, was to be owned or leased by the entity or held by the entity under certain quasi-ownership rights (section 43-75 of the ITAA 1997). Accordingly, a threshold requirement for a taxpayer to deduct an amount for an income year under section 43-10 of the ITAA 1997 is that it incurs 'construction expenditure'.

Construction expenditure is defined in subsection 43-70(1) as capital expenditure incurred in respect of the construction of capital works, subject to the exclusions listed at subsection 43-70(2) of the ITAA 1997.

The distinction between business expenditure that is revenue and capital in nature was outlined above.

On the facts, the entity carries out construction works and management services in relation to the asset as part of its ordinary business operations and in accordance with its obligations under the Project Deed. The entity incurs expenditure in carrying out the construction works and management services and receives specified amounts from the Other Party in return for fulfilling its obligations under the Project Deed.

The character of the advantage sought by the entity in incurring the construction expenditure and maintenance expenditure is the derivation of its assessable income and not the creation of an enduring benefit.

As the expenditure the entity incurs in the course of the Project are not capital expenditure, the entity will not be entitled to a deduction for capital works under Division 43 of the ITAA 1997.

Since the entity will not be entitled to a capital allowance in relation to a decline in value of the asset under Division 40 of the ITAA 1997 or expenditure in relation to capital works under Division 43 of the ITAA 1997, subsection 250-15(d) of the ITAA 1997 is not satisfied and Division 250 of the ITAA 1997 will not apply to the entity.

Question 2

Does Division 250 of the ITAA 1997 apply to the entity in relation to expenditure which falls within Subdivision 40-I of the ITAA 1997?

Summary

Division 250 of the ITAA 1997 does not apply to the entity in relation to expenditure which falls within Subdivision 40-I of the ITAA 1997.

Reasoning

Subdivision 40-I allows a taxpayer to claim a deduction over a period of time with respect of certain capital expenditure. The subdivision divides capital expenditure into two broad categories of capital expenditure. The first category deals with capital expenditure that is incurred on a qualifying project and the second category deals with certain business related expenditure.

Capital expenditure which falls within Subdivision 40-I of the ITAA 1997 will not give rise to a separate asset to which Division 250 of the ITAA 1997 can apply. Accordingly, the expenditure would fall outside the operation of Division 250 of the ITAA 1997.