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Ruling

Subject: Application of Division 250 of the Income Tax Assessment Act 1997

All legislative references are to the Income Tax Assessment Act 1997

Question 1

Does the taxpayer satisfy the test in section 250-15 in relation to the asset, such that Division 250 applies to the taxpayer?

Answer

No.

This ruling applies for the following periods:

Commencement date to completion

The scheme commences on:

Commencement date (as specified in the ruling)

Relevant facts and circumstances

The taxpayer is an Australian resident for income tax purposes and is established specifically for the purpose of obtaining finance for the Project.

The Project involves the construction and maintenance of certain assets. Another Entity and the Owner of the asset entered into a Project Agreement with respect to the construction and maintenance activities.

Pursuant to a separate Agreement, the taxpayer purchases the right to receive certain amounts payable by the Entity to the Owner (the Right). The rights conferred upon the taxpayer under the Agreement do not extend to the ownership or quasi ownership of assets in relation to the Project.

The taxpayer does not incur capital expenditure in respect of the construction activities.

All financial arrangements under the Project were entered into prior to the commencement date of Division 230, being 1 July 2010 and the taxpayer has not made a transitional election to have Division 230 apply to the pre-existing financial arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40-G

Income Tax Assessment Act 1997 Subdivision 40-H

Income Tax Assessment Act 1997 Subdivision 40-I

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 paragraph 40-30(1)(c)

Income Tax Assessment Act 1997 subsection 40-30(2)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 43-10(1)

Income Tax Assessment Act 1997 section 43-20

Income Tax Assessment Act 1997 subsection 43-20(1)

Income Tax Assessment Act 1997 subsection 43-20(2)

Income Tax Assessment Act 1997 subsection 43-20(5)

Income Tax Assessment Act 1997 Division 250

Income Tax Assessment Act 1997 paragraph 250-10(b)

Income Tax Assessment Act 1997 section 250-15

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

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

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

Income Tax Assessment Act 1997 subparagraph 250-15(d)(i)

Income Tax Assessment Act 1997 subparagraph 250-15(d)(ii)

Income Tax Assessment Act 1997 subsection 250-50(1)

Income Tax Assessment Act 1997 section 250-55

Income Tax Assessment Act 1997 section 250-60

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

Reasons for decision

Summary

Division 250 will not apply to the taxpayer because the 'general test' in section 250-15 is not satisfied. The general test in section 250-15 is not satisfied because the asset, which is the Right, is not being put to a tax preferred use. Further, the taxpayer would not be entitled to a capital allowance in relation to a decline in value of, or expenditure in relation to, the Right.

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.

Division 250 applies to you and an asset at a particular time if the 'general test' in section 250-15 is satisfied in relation to you and the asset and none of the exclusions referred to in paragraph 250-10(b) 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 the Right which the taxpayer acquired from the Owner.

This ruling considers the application of paragraphs (a), (c) and (d) of the general test in section 250-15.

Paragraph 250-15(a): asset being put to a tax preferred use

The term 'put to a tax preferred use' is a defined term, the meaning of which is explained by section 250-60.

Under section 250-60, an asset is put to a tax preferred use if an end user is a lessee of the asset, and the asset is to be used by a tax preferred end user and/or the asset is to be used wholly or principally outside Australia by a non-resident. An asset is also put to a tax preferred use if the asset is to be used wholly or partly in connection with the production, supply, carriage, transmission or delivery of goods or the provision of services or facilities, to or for a tax preferred end user (other than an exempt foreign government agency), or the asset is to be used wholly or principally outside Australia and the end-user is a non-resident.

An entity is an end user under subsection 250-50(1) if the entity:

· uses or effectively controls the use of the asset; or

· will use or effectively control the use of the asset; or

· is able to use, or effectively control the use of the asset; or

· will be able to use or effectively control the use of the asset.

An end-user is a tax preferred end user under section 250-55 if the end user (or connected entity) is a tax preferred entity or the end user is a foreign resident.

Therefore, for an asset to be put to a tax preferred use, it is necessary that an end user, that is a tax preferred entity or a non-resident, directly or indirectly uses, or effectively controls the use of, the asset.

Tax preferred entity is defined in subsection 995-1(1) as an exempt entity, an exempt Australian or foreign government agency, an associated government entity of an exempt Australian government agency, or a prescribed excluded state/territory body.

On the facts, the taxpayer is not a tax preferred end user and accordingly, the Right is not being put to a tax preferred use. Therefore, the requirement in paragraph 250-15(a) is not satisfied.

Paragraph 250-15(c): financial benefits in relation to the tax preferred use of the asset

As the Right is not being put to a tax preferred use, it follows that the requirement in paragraph 250-15(c) is not satisfied.

Paragraph 250-15(d): be entitled to a capital allowance

Paragraph 250-15(d) requires that the taxpayer be entitled to a capital allowance in relation to the decline in value of the asset (subparagraph 250-15(d)(i)); or expenditure in relation to the asset (subparagraph 250-15(d)(ii)).

A capital allowance is defined in subsection 995-1(1) to relevantly mean a deduction under Division 40 (capital allowances) or Division 43 (capital works).

Subparagraph 250-15(d)(i): capital allowance in relation to a decline in value of the asset

Division 40 contains capital allowance provisions which allow deductions for the decline in value of a depreciating asset.

A depreciating asset is defined in section 40-30. Subsection 40-30(1) states that "a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used". Paragraph 40-30(1)(c) specifically provides that an intangible asset is not a depreciating asset unless it is mentioned in subsection 40-30(2).

The Right is an intangible asset, but this type of intangible asset is not mentioned in subsection 40-30(2). Accordingly, the Right is not a depreciating asset as defined by subsection 40-30(1). Therefore, the taxpayer would not be entitled to a capital allowance under Division 40 in relation to the decline in value of the Right.

Subparagraph 250-15(d)(ii): capital allowance in relation to expenditure in relation to the asset

Subparagraph 250-15(d)(ii) considers whether you are entitled to a deduction for capital works under Division 43 or a deduction under Division 40 other than a deduction in relation to the decline in value of the asset.

Subsection 43-10(1) states that you can deduct an amount for capital works for an income year. Section 43-20 defines the capital works to which Division 43 applies.

Broadly, section 43-20 provides that Division 43 applies to:

· capital works being a building, or an extension, alteration or improvement to a building (subsection 43-20(1));

· capital works that are structural improvements, or extensions, alterations or improvements to structural improvements (subsection 43-20(2)); and

· capital works being environment protection earthworks, or extensions, alterations or improvements to environment protection earthworks (subsection 43-20(5)).

On the facts, the Right is not capital works to which Division 43 applies. Accordingly, the taxpayer would not be entitled to a capital allowance under Division 43 in relation to the Right.

Further, on the facts, the consideration for the Right is not an expenditure that is deductible under Subdivisions 40-G, 40-H or 40-I.

As the taxpayer would not otherwise be entitled to a capital allowance in relation to the decline in value of, or expenditure in relation to, the Right, paragraph 250-15(d) is not satisfied.

Conclusion

Division 250 will not apply to the taxpayer as all five requirements of the general test in section 250-15 are not satisfied.