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Ruling

Subject: Redemption of units and adjustment to the redemption price

Question 1

If the Fund is required to make a payment under the Deed, can such a payment be included in the capital gains tax (CGT) cost base of the units under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 2

If the answer to Question 1 is no, is the Fund entitled to claim a tax deduction in accordance with section 40-880 of the ITAA 1997 for any payment made under the Deed?

Answer

No.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 3

If the answer to Question 2 is no, is the Fund able to obtain a tax deduction in accordance with subsection 230-15(2) of the ITAA 1997 for any payment under the Deed?

Answer

Yes.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 4

If the Fund receives a payment under the Deed, should this receipt be treated as assessable income in accordance with section 6-5 of the ITAA 1997?

Answer

No.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 5

If the answer to Question 4 is no, does the receipt of the payment under the Deed reduce the CGT cost base of the units pursuant to subsection 110-45(3) of the ITAA 1997?

Answer

No.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 6

If the answer to Question 5 is no, does a CGT event occur if the Fund receives a payment under the Deed?

Answer

Yes.

This ruling applies for the following period

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

Question 7

If the Fund receives a payment under the Deed, will this receipt be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply?

Answer

Yes.

This ruling applies for the following periods

The years commencing with the income year ended 30 June 2011 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.

The scheme commences on:

On or after 30 June 2010

Relevant facts and circumstances

Trust A is an unlisted unit trust which invests indirectly in real estate assets located in various states and territories in Australia. The investments are made with a long-term objective of deriving and maximising rental yields and capital growth in relation to those investment assets.

Trust A is highly illiquid and in that respect the trustee does not generally offer a liquidity or redemption facility. Trust A's deed however provides that the Trustee is not obliged to, but may in its discretion, repurchase units or cause units to be redeemed out of the proceeds of a new issue or in such other circumstances as the Trustee permits.

The Fund, which is a complying superannuation fund, subscribed for $XX units (new units) in Trust A.

The Trustee used the proceeds from the subscription to fund the partial redemption of the unit holdings of a number of existing investors (Exiting Investors).

Trusts in which Trust A has an interest have been involved in a legal dispute which currently remains unresolved.

This dispute was in existence at the time the Fund sought to subscribe for the new units. It was uncertain as to whether the outcome of the legal dispute would be in the Trustee's favour, such that it would receive a payment as a result of the legal dispute, or whether the Trustee would be unsuccessful and therefore be required to make a payment. Under both scenarios, it was anticipated that the outcome could have a material effect on the value of the assets of Trust A, and therefore the relevant unit value.

The parties agreed that both the benefit of a successful outcome to the legal dispute and the detriment associated with an unsuccessful outcome was to be borne by the Exiting Investors, and that the Fund should not be financially exposed to the outcome of the dispute. Each Exiting Investor therefore entered into a separate Deed with the Trustee and the Fund as part of each subscription for new units. Though there were some differences between the deeds, they were materially similar. In light of this, a reference in this Ruling to the Deed is, unless otherwise specified, a reference to each of the deeds which the Fund entered into with the Trustee and the Exiting Investors.

The Fund has not made an election under sub-item 103(2) of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 160ZH(4)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 15-5

Income Tax Assessment Act 1997 section 25-40

Income Tax Assessment Act 1997 section 20-25

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 110-25,

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 110-25(4)

Income Tax Assessment Act 1997 subsection 110-25(5)

Income Tax Assessment Act 1997 subsection 110-25(6)

Income Tax Assessment Act 1997 subsection 110-35(1)

Income Tax Assessment Act 1997 subsection 110-45(3)

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 paragraph 40-880(5)(b)

Income Tax Assessment Act 1997 section 230-15

Income Tax Assessment Act 1997 subsection 230-15(2)

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

Income Tax Assessment Act 1997 section 230-55

Income Tax Assessment Act 1997 subsection 230-55(4)

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 section 230-45

Income Tax Assessment Act 1997 section 230-100

Income Tax Assessment Act 1997 section 230-75

Income Tax Assessment Act 1997 section 230-460

Income Tax Assessment Act 1997 subsection 230-460(1)

Income Tax Assessment Act 1997 subsection 230-460(8)

Income Tax Assessment Act 1997 subsection 230-460(13)

Income Tax Assessment Act 1997 subsection 230-100(3)

Income Tax Assessment Act 1997 subsection 230-110(1)

Income Tax Assessment Act 1997 section 230-70

Income Tax Assessment Act 1997 subsection 230-115(2)

Income Tax Assessment Act 1997 subsection 230-130(3)

Income Tax Assessment Act 1997 subsection 230-135(2)

Income Tax Assessment Act 1997 subsection 230-15(2)

Income Tax Assessment Act 1997 Division 295

Income Tax Assessment Act 1997 section 295-85

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 subsection 110-25(1)

Income Tax Assessment Act 1997 paragraph 295-85(3)(a)

Income Tax Assessment Act 1997 paragraph 295-85(3)(b)

Income Tax Assessment Act 1997 subsection 295-85(4)

Income Tax Assessment Act 1997 subsection 295-85(3)

Reasons for decision

Question 1

Summary

If the Fund is required to make a payment under the Deed, this payment will not be included in the CGT cost base of the units under section 110-25 of the ITAA 1997.

Detailed reasoning

The cost base and reduced cost base of a CGT asset each consist of five elements (subsection 110-25(1) of the ITAA 1997 and subsection 110-55(1) of the ITAA 1997 respectively).

Relevantly, the first of these elements (as per subsection 110-25(2) of the ITAA 1997) is the total of:

(a) the money you paid, or are required to pay, in respect of *acquiring it; and

(b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).

If the Fund is required to make a payment under the Deed, it is necessary to consider whether this payment may constitute money paid 'in respect of' the acquisition of their units in Trust A.

Paragraphs 101 and 102 of Taxation Ruling TR 95/35 (which considers the treatment of compensation receipts) provide guidance of the meaning of the phrase 'in respect of' the acquisition of the asset as it applied to subsection 160ZH(4) of the Income Tax Assessment Act 1936 (which was the predecessor to subsection 110-25(2) of the ITAA 1997). These paragraphs specifically state:

101. Broadly speaking, money, property, or money and property come within the cost base and are regarded as paid or given in respect of the acquisition of the asset in terms of paragraph 160ZH(4)(a), (b) or (c) if there is some direct and substantial link between the money or property and the acquisition of the asset. In determining whether there is a direct and substantial link, we believe it is appropriate to consider the following indicators:

· the necessity for the payment of money or the giving of property;

· the degree of temporal relationship between the payment of money or the giving of property and the acquisition of the asset;

· the purpose (objective and subjective) of the payment of money or the giving of property;

· the nature of the asset;

· the circumstances of the acquisition of the asset including:

parties (e.g., whether money paid or property given to a third party);

terms of the contract or agreement; and

arising from a wrong or by a lack of consent;

the extent of causation;

· whether money paid or property given is in proportion to the value of the asset; and

· whether the degree of connection is diminished if money is paid or property is given for multiple benefits rather than solely to acquire the asset (e.g., for services).

102. The question whether a connection or link exists is a question of fact and degree.

In the current circumstances, there is an evident, over-arching connection between the subscription for units in Trust A by the Fund and the execution of the Deed (and the rights and obligations arising from same) as the parties seek to 'adjust' the consideration paid by the Fund for their units in Trust A (and correspondingly the consideration received by an Exiting Investor from the redemption of their units) to take into account the outcome of the legal dispute.

The fact that the Fund, the trustee of Trust A and the Exiting Investor were parties to the Deed and that the redemption of the units and Deed occurred contemporaneously also support this link.

In contrast however, the following attributes suggest that an amount paid by the Fund under the Deed to an Exiting Investor is not money paid 'in respect of' the acquisition of the units in Trust A but money paid to discharge a separate and independent liability:

· The Deed (and its associated rights including the right to payment) is a separate agreement primarily between the Fund and the Exiting Investor. The issue of units in Trust A to the Fund occurred effectively independent of the Deed under the terms of the trust deed of Trust A and at the sole discretion of the trustee;

· Whether a payment is required to be made under the Deed is directly linked to the legal dispute, and the future costs/receipts stemming from the same. The issue of units in Trust A to the Fund is merely a precursory factual matter instigating the creation of the Deed; and

· Although the trustee for Trust A was a party to the Deed, its responsibilities under this agreement are largely of an administrative nature, for example calculating the adjustment amount in accordance with the Deed.

Overall, taking into consideration the above attributes, it is considered that, although a general link exists between a payment made under the Deed and the units issued in Trust A to the Fund, such a payment is not money paid by the Fund 'in respect of' the acquisition of the units in Trust A but money paid to discharge a separate and independent liability. It is considered that the Fund and the Exiting Investor have effectively entered into a financial arrangement that is largely independent of the issue of units. The arrangement in this instance is focussed on the outcome of the legal dispute. Although a payment made under the Deed is predicated on the issue of units in the Trust A to the Fund (and the consideration paid for same), this link is not sufficient to treat this payment as money paid 'in respect of' the acquisition of the units in Trust A.

For completeness, it is also noted that a payment made under the Deed by the Fund will not come within the other cost base elements as such a payment:

· for the purposes of the second element, does not fall within the category of 'incidental costs', which is the subject of a strict definition in subsection 110-35(1) of the ITAA 1997;

· is not considered to be a cost of owning the asset for the purposes of the third element (subsection 110-25(4) of the ITAA 1997);

· for the purposes of the fourth element, is not incurred for the purpose or expected effect of increasing or preserving the original asset's value, and nor does it relate to installing or moving the original asset (subsection 110-25(5) of the ITAA 1997); and

· cannot be considered to have been incurred to 'establish, preserve or defend' the taxpayer's title to, or a right over, the asset for the purposes of the fifth element (subsection 110-25(6) of the ITAA 1997).

Question 2

Summary

If the Fund is required to make a payment under the Deed it will not be able to claim a tax deduction for this payment in accordance with section 40-880 of the ITAA 1997.

Detailed reasoning

Paragraph 40-880(5)(b) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that you can deduct an amount for it under any other provision in the Act. The analysis in Question 3 provides that any payment under the Deed will be deductible under subsection 230-15(2) of the ITAA 1997. As a consequence paragraph 40-880(5)(b) of the ITAA 1997 will operate to deny a deduction under section 40-880 of the ITAA 1997 in respect of any payment the Fund makes under the Deed.

Question 3

Summary

If the Fund is required to make a payment under the Deed, it will be able to claim a tax deduction for this payment under section 230-15 of the ITAA 1997.

Detailed reasoning

Division 230 of the ITAA 1997 applies to income years commencing on or after 1 July 2010 (where no election for it to start one year earlier has been made).

Division 230 of the ITAA 1997 brings to account gains and losses on financial arrangements.

Arrangement

In order to determine whether gains and losses arise under a financial arrangement, it is first necessary to identify the relevant 'arrangement'. An 'arrangement' is defined in subsection 995-1(1) of the ITAA 1997 as '…any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.'

The scope of the arrangement for the purposes of Division 230 of the ITAA 1997 is determined by subsection 230-55(4) of the ITAA 1997.

Generally, under section 230-55 of the ITAA 1997, a contract will define the boundaries of an arrangement, especially where the form of the contract is consistent with its substance. Paragraph 2.47 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (EM) provides that:

2.47 The various rights and obligations subsisting under a contract will typically constitute the relevant arrangement for the purposes of Division 230. That is, the contract is typically viewed on a 'stand-alone' basis. In this context, the contract is neither aggregated with another contract (or contracts), nor disaggregated into component parts, when determining the relevant arrangement to be considered under Division 230.

In the current circumstances, it is initially necessary to consider whether each Deed should be treated as separate from each arrangement to subscribe for units in Trust A.

In this regard, it is noted that as the rights and obligations under the Deed arise under a single contract, it will prima facie be viewed on a 'stand-alone' basis for the purposes of Division 230 of the ITAA 1997.

Having regard to each of the factors listed in subsection 230-55(4) of the ITAA 1997, each Deed should still be regarded on a stand-alone basis for the purposes of Division 230 of the ITAA 1997. It is considered that the following matters support this conclusion:

The Deed arises in a separate contract to the arrangement to dispose of or redeem units.

The parties to the Deeds differ from those to the arrangement to dispose of or redeem units.

The Deed allows the Fund to assign any of its rights under the Deed with the express consent of the other party. This indicates that while the Deed and the arrangement to dispose of or redeem units are related in form, in substance they are treated as separate bundles of rights and obligations which be dealt with separately and without reference to the other.

The rights and obligations of the Fund under each Deed are commercially understood to be separate from those under the Subscription Deeds.

Financial arrangement

Since the only non-insignificant rights and obligations contained within the Deed are cash settlable, it will be a financial arrangement under section 230-45 of the ITAA 1997.

Exceptions?

Division 230 of the ITAA 1997 does not apply to gains and losses from a financial arrangement to the extent that an entity's rights and obligations under the arrangement are the subject of an exception under section 230-460 of the ITAA 1997 (see subsection 230-460(1) of the ITAA 1997).

Subsection 230-460(8) of the ITAA 1997 provides that a right or obligation under a guarantee or indemnity is the subject of an exception unless, among other things, the guarantee or indemnity is given in relation to a financial arrangement. Even if the Deed is an indemnity according to the ordinary meaning of 'indemnity', it will still be an indemnity that is given in relation to a financial arrangement (i.e. the arrangement to acquire the units or the units themselves) and so this exclusion will not apply.

Further, the exception in subsection 230-460(13) of the ITAA 1997 which deals with proceeds from certain business sales will not apply because any obligation to make a payment under the Deed does not relevantly arise from the sale of a business or interests in a trust that operates a business.

It follows that Division 230 of the ITAA 1997 will bring to account gains and losses from the Deed.

Sufficiently certain particular loss

The accruals method will apply to a loss made from a financial arrangement if:

· the loss arises from a financial benefit that the entity is to provide under the arrangement, and

· the loss becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to provide the benefit (subsection 230-100(3) of the ITAA 1997).

The Fund will have a sufficiently certain loss from a financial arrangement at a particular time if it is sufficiently certain at that time that it will make a loss from the arrangement of a particular amount when it provides a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997).

Whether or not the Fund will make a loss from the arrangement of a particular amount when it provides a particular financial benefit depends upon whether there is any financial benefit received, or to be received, that is reasonably attributable to the payment of the Amount under the Deed (section 230-70 of the ITAA 1997). Given that there is no financial benefit to be received under this arrangement, if a financial benefit is provided, it will be a loss in its entirety.

Thus a payment of the Amount under the Deed will give rise to a loss for the Fund when the payment is provided.

Sufficiently certain financial benefits

However, in deciding whether it is sufficiently certain at a particular time that the Fund will make a loss from a financial arrangement, only sufficiently certain financial benefits are to be considered.

A financial benefit is treated as one that the Fund is sufficiently certain to provide only if:

· it is reasonably expected that the Fund will provide the financial benefit (assuming that the Fund will continue to have the financial arrangement for the rest of the financial arrangement's life), and

· at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997).

The latest time at which the Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date. As a consequence, the time when it becomes sufficiently certain that the Fund will provide a financial benefit will therefore be the time that the Fund will have a sufficiently certain loss for the purposes of subsection 230-110(1) of the ITAA 1997.

Period over which the loss is to be spread

The period over which the loss is to be spread is the period to which the loss relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement.

How is the loss spread?

The loss will be spread as described above using a method of the type described in 230-135(2) of the ITAA 1997.

Conclusion

Any payment by the fund under the Deed will be a loss eligible for a tax deduction under subsection 230-15(2) of the ITAA 1997.

Question 4

Summary

If the Fund receives a payment under the Deed, this receipt will not be treated as assessable income in accordance with section 6-5 of the ITAA 1997.

Detailed reasoning

The provisions relating to the taxation of complying superannuation funds are contained in Division 295 of the ITAA 1997.

Section 295-85 of the ITAA 1997 makes the CGT rules the primary code for determining the tax treatment of the gains or losses generated on the disposal of a CGT asset by a complying superannuation fund.

Paragraph 295-85(2)(a) of the ITAA 1997 modifies the normal CGT rules so that a CGT event happening to a CGT asset of the Fund is not affected by the following provisions:

· section 6-5 of the ITAA 1997 (ordinary income),

· section 8-1 of the ITAA 1997 (amounts you can deduct), and

· sections 15-15 and 25-40 of the ITAA 1997 (profit-making undertakings or plans);

Subsection 6-5(1) of the ITAA 1997 provides that:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

An exception to this treatment is contained in paragraph 295-85(3)(b) of the ITAA 1997 for CGT assets of the Fund that are:

· debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;

· a deposit with a bank, building society or other financial institution;

· a loan (secured or not); or

· some other contract under which an entity is liable to pay an amount (whether the liability is secured or not).

In the current circumstances the Deed (and the right to a payment) does not fall within one of the categories specified in paragraph 295-85(3)(b) of the ITAA 1997.

Therefore the Deed (and the right to a payment under the Deed) will not fall within any of the exclusions in paragraph 295-85(3)(b) of the ITAA 1997.

Further, the Deed (and the right to a payment under the Deed) is not trading stock. Therefore, the exception for trading stock in subsection 295-85(4) of the ITAA 1997 will not apply.

As none of the exceptions in either of subsections 295-85(3) or 295-85(4) of the ITAA 1997 apply, if the Fund receives a payment under the Deed this receipt will not treated as assessable income under section 6-5 of the ITAA 1997 as CGT event C2 will happen (see Question 6 below).

Question 5

Summary

If the Fund receives a payment in accordance with the Deed this receipt will not reduce the CGT cost base of the units pursuant to subsection 110-45(3) of the ITAA 1997.

Detailed reasoning

Subsection 110-45(3) of the ITAA 1997 provides that expenditure does not form part of any element of the cost base to the extent of any amount you have received as recoupment of it, except so far as the amount is included in your assessable income.

Under subsection 995-1(1) of the ITAA 1997, 'recoupment' has the meaning given by section 20-25 of the ITAA 1997. Subsection 20-25(1) of the ITAA 1997 states that a recoupment of a loss or outgoing includes:

(a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b) a grant in respect of the loss or outgoing.

In the current circumstances, the cost base of the New Units acquired by the Fund in Trust A is, under the first cost base element, primarily made up of the money paid by the Fund to the Trustee in exchange for the issued units.

As noted above, it is considered that the Fund and each Exiting Investor have effectively entered into a financial arrangement through the execution of the Deed that is largely independent of the issue of units. This arrangement is focussed on the outcome of the legal dispute.

The Deed sets-out the circumstances in which an Exiting Investor will be required to make a payment to the Fund. It is evident from this clause (and its associated defined terms) that the key variable that will determine whether an Exiting Investor is required to make a payment to the Fund are the losses incurred and amounts received by the trustee of Trust A in connection with the legal dispute.

Although a payment made under the Deed is predicated on the issue of units in Trust A to the Fund (and the consideration paid for same), it is considered that the receipt of such a payment is not a recoupment of the monies that were paid by the Fund to the Trustee in exchange for their units in Trust A. In contrast, such a payment is considered to be an amount paid by the Exiting Investor to the Fund to discharge an independent obligation created by the Deed. It is therefore not a recoupment of expenditure which forms part of the first element (nor any other element) of the cost base of the new units in Trust A acquired by the Fund. Consequently the receipt by the Fund of a payment made under the Deed will not reduce the CGT cost base of these units pursuant to subsection 110-45(3) of the ITAA 1997.

Question 6

Summary

CGT event C2 will occur if the Fund receives a payment to under the Deed.

Detailed reasoning

In accordance with subsection 104-25(1) of the ITAA 1997, CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) f the asset is a *convertible interest - being converted.

Subsection 108-5(1) of the ITAA 1997 defines a CGT asset as:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

Note 1 to section 108-5 of the ITAA 1997 relevantly provides the following examples of CGT assets:

· land and buildings;

· shares in a company and units in a unit trust;

· options;

· debts owed to you;

· a right to enforce a contractual obligation;

· foreign currency.

As an intangible asset, the right to a potential payment created by the Deed is considered to be a CGT asset in the form of a contractual right (a right to enforce a contractual obligation).

If the Fund receives a payment from an Exiting Investor (under the Deed), this right to a potential payment will be satisfied and CGT event C2 will occur.

Question 7

Summary

If the Fund receives an amount under the Deed, such an amount will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply.

Detailed reasoning

The relevant arrangement and financial arrangement for the purposes of Division 230 of the ITAA 1997, being each Deed was discussed in Question 3, and this reasoning remains relevant here.

It follows that Division 230 of the ITAA 1997 will bring to account gains on the Deeds.

Sufficiently certain particular gain

The accruals method will apply to a gain made from a financial arrangement if:

· the gain arises from a financial benefit that the entity is to receive under the arrangement, and

· the gain becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to receive the benefit (subsection 230-100(3) of the ITAA 1997).

The Fund will have a sufficiently certain gain from a financial arrangement at a particular time if it is sufficiently certain at that time that the Fund will make a gain from the Deed of a particular amount when it receives a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997).

Whether or not the Fund will make a gain from the arrangement of a particular amount when it receives a particular financial benefit depends upon whether there is any financial benefit provided, or to be provided, that is reasonably attributable to the receipt of the Amount under the Deed (section 230-75 of the ITAA 1997). Given that there is no financial benefit to be provided under this arrangement, if a financial benefit is received, it will be a gain in its entirety.

The time when the financial benefits are sufficiently certain

In deciding whether it is sufficiently certain at a particular time that the Fund will make a gain from a financial arrangement, only sufficiently certain financial benefits are to be considered.

A financial benefit is treated as one that the Fund is sufficiently certain to receive only if:

· it is reasonably expected that the Fund will receive the financial benefit (assuming that the Fund will continue to have the financial arrangement for the rest of the financial arrangement's life), and

· at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997).

The latest time at which the Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date.

Period over which the gain is to be spread

The period over which the gain is to be spread is the period to which the gain relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement.

How is the gain spread?

The gain will be spread using a method of the type described in 230-135(2) of the ITAA 1997.

Inclusion of the gain in assessable income

The allocation of a gain from the financial arrangements consisting of the Deed to an interval that is wholly within an income year causes the gain to be included in assessable income under subsection 230-15(1) of the ITAA 1997 (see subsection 230-170(1) of the ITAA 1997).

However, if the interval to which the gain is allocated straddles an income year, the gain is to be allocated between those income years on a reasonable basis.

Conclusion

An amount received by the Fund under the Deed will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply.