Edited version of your private ruling

Authorisation Number: 1012455540248

Ruling

Subject: Infrastructure asset: validity of partnership and income tax deductions

Question 1

Will the arrangement be considered to be a partnership (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) pursuant to Division 5 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the sub-lease granted by the Partnership be re-characterised as a notional sale and loan agreement under Division 240 of the ITAA 1997?

Answer

No

Question 3

Will the partners hold the depreciating assets subject to the head lease for the purposes of determining deductions for their decline in value pursuant to the following items in the table in section 40-40 of the ITAA 1997?

· Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease.

· Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease).

Answer

Yes

Question 4

Will Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 apply to determine the first element of the cost for the depreciating assets held by each of the partners?

Answer

Yes

Question 5

Will the partners be entitled to a deduction for capital works pursuant to the head lease under Division 43 of the ITAA 1997?

Answer

Yes

Question 6

Will there be or can it reasonably be expected or has there been, financial benefits in relation to any tax preferred use of the asset, provided to the partners (or a connected entity) such that section 250-15(c) of the ITAA 1997 is satisfied?

Answer

No

Question 7

Will the non-commercial loss rules in Division 35 of the ITAA 1997 apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10?

Answer

No

Question 8

Will the interest on borrowing by the partners individually to fund the capital contributions be deductible under section 8-1 of the ITAA 1997?

Answer

Yes

Question 9

To the extent that stamp duty is payable on the assignment of the head lease, will an immediate deduction be available under subsection 25-20(1) of the ITAA 1997 to the individual partner for the income year which the assignment occurs?

Answer

Yes

Question 10

Will Part IVA of the ITAA 1936 apply to the proposed acquisition or part thereof such that the Commissioner will determine that all or part of a deduction shall not be allowable?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013 to Year ended 30 June 2052

The scheme commences on:

The date the ruling is made.

Relevant facts and circumstances

Background facts and assumptions

The partners of the Partnership (the partners) are seriously contemplating an investment in an infrastructure asset (Infrastructure Asset).

The Infrastructure Asset is currently owned by the vendor.

Details of infrastructure asset

Construction of the Infrastructure Asset was commenced and completed after 30 June 1997.

The Infrastructure Asset is currently operated by the vendor.

The vendor operates the Infrastructure Asset under a Project Deed, and the partners understand the Project Deed provided the vendor with right and obligation to finance, design, construct, commission, operate and maintain the Infrastructure Asset. At the end of the above arrangement, the Infrastructure Asset would be transferred back to its legal owner.

The assets that comprise the Infrastructure Asset include depreciating assets, capital works and other assets.

Proposed investment structure

The partners have expressed in interest to invest in the Infrastructure Asset.

The partners are largely unrelated and have indicated that it is the partner's strong preference to own a direct economic interest in the Infrastructure Asset that is proportionate to their investment.

The partners do not wish to be jointly or severally liable for the actions or obligations of other partners investing in the Infrastructure Asset.

The proposed investment will be structured such that each partner will acquire a direct proportional interest in the underlying asset commensurate to the capital injected.

The partners will acquire and own an interest in the proposed asset.

The partners will be in receipt of income jointly.

The partners will not be in a general law partnership but will be in receipt of income jointly.

Proposed Investment

The Infrastructure Asset is owned by the vendor through a leasehold interest granted by its legal owner.

The Infrastructure Asset head lease will be assigned to the new partnership. The Infrastructure Asset head lease will not be novated to the partnership. The partners will pay a lease premium for the assignment of the head lease. The partner's note that other assets legally owned by the vendor and required to operate the Infrastructure Asset will be sold to the partnership for market value consideration.

The partners will not operate the Infrastructure Asset. Instead an operating company (OpCo) will be appointed to run and manage the day to day operations of the Infrastructure Asset. OpCo will have operating control and responsibility over the road on a day to day basis including operation, management and all other maintenance and administration of the Infrastructure Asset.

To provide OpCo with operating control over Infrastructure Asset, the partners will grant a sub-lease over the assets subject to the head lease. Should other assets be required to operate the asset, a lease of those assets will be executed by the partners (OpCo Lease) to OpCo. OpCo will pay a lease fees for the use of those assets.

The assets subject to the sub-lease (and possible OpCo Lease) are expected to comprise land, fixtures to land and chattels.

The sub-lease (and possible OpCo Lease) are expected to contain the following provisions:

(a) A specified term,

(b) Opco will not have an obligation, right or contingent right to remove or acquire the assets subject to the sub-lease (or OpCo Lease), and

(c) The legal title to the leased assets will not pass to OpCo at any time.

Funding arrangements

Each partner will obtain funding for their capital contribution independently. This may include personal equity/cash, debt from external lenders (either limited recourse debt or otherwise) or a mix of the above. The acquisition structure provides flexibility such that the partners can finance the equity component on their own terms and with their chosen financier.

Partner details

The partners investing in the Infrastructure Asset will comprise companies, trusts and individuals.

It is anticipated that additional entities may be invited and subsequent take up offers to invest in the Infrastructure Asset.

The partners may appoint a company (Nominee Co) to execute contracts on their behalf. The Nominee Co will be granted power of attorney to enter into contracts by the partners.

Nominee Co will not hold any legal or beneficial interest in the assets or property subject to the relevant contract. The Nominee Co will be an agent which acts on behalf of the partners.

The majority of the partners will have a 30 June year end for income tax purposes.

To date, the partners have not advised whether they will seek to apply for a substituted accounting period.

Other

OpCo will be a tax resident company, incorporated in Australia.

It shares will initially be owned directly by the partners but there will be additional external shareholders.

Shareholders will be free to sell their shares.

In particular, external equity may be raised initially or at a later date if other toll road operators want to invest in order to assist with economies of scales in operating more than one toll road.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Paragraph 177D(b)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

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

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Subsection 35-10(1)

Income Tax Assessment Act 1997 Subsection 40-25(1)

Income Tax Assessment Act 1997 Subsection 40-35(1)

Income Tax Assessment Act 1997 Subsection 40-35(2)

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Subsection 40-180(1)

Income Tax Assessment Act 1997 Subsection 40-180(2)

Income Tax Assessment Act 1997 Section 40-185

Income Tax Assessment Act 1997 Paragraph 40-185(1)(b)

Income Tax Assessment Act 1997 Division 43

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

Income Tax Assessment Act 1997 Subsection 43-10(2)

Income Tax Assessment Act 1997 Subsection 43-70(1)

Income Tax Assessment Act 1997 Subsection 43-75(1)

Income Tax Assessment Act 1997 Subsection 43-85(1)

Income Tax Assessment Act 1997 Subsection 43-120(2)

Income Tax Assessment Act 1997 Subsection 43-140(1)

Income Tax Assessment Act 1997 Table 43-140

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 Division 240

Income Tax Assessment Act 1997 Section 240-10

Income Tax Assessment Act 1997 Division 250

Income Tax Assessment Act 1997 Section 250-15

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

Income Tax Assessment Act 1997 Section 250-50

Income Tax Assessment Act 1997 Section 250-55

Income Tax Assessment Act 1997 Section 250-60

Income Tax Assessment Act 1997 Subsection 250-85(1)

Income Tax Assessment Act 1997 Subsection 250-85(8)

Income Tax Assessment Act 1997 Section 974-160

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

Issue 1

Question 1

Summary

The Commissioner is of the view that the Partnership will be a tax law partnership, and not a general law partnership, for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997.

Detailed reasoning

The term 'partnership' is relevantly defined in paragraph 995-1(1)(a) of the ITAA 1997 as an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly.

Therefore there are two limbs within this partnership definition, being:

1. An association of persons carrying on a business as partners which is referred to as a general law partnership.

2. An association of persons being in receipt of ordinary income or statutory income jointly, which is referred to as a tax law partnership.

1. General law partnership

The Partnership will be considered to be a general law partnership if the partners' investment in the Infrastructure Asset is considered to be the carrying on of a business as partners.

The term 'business' is defined by subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The Commissioner, as per paragraph 10 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production, considers that this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law.

Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant:

· Whether the activity has a significant commercial purpose or character.

· Whether the taxpayer has more than just an intention to engage in business.

· Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity.

· Whether there is repetition or regularity of the activity.

· Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business.

· Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

· The size, scale and permanency of the activity.

· Whether the activity is better described as a hobby, a form of recreation or a sporting hobby.

However as per the facts provided, the Partnership will not operate the Infrastructure Asset. Instead OpCo (or if not OpCo, then a new operator/entity) will be appointed by the Partnership, via the grant of a sub-lease, to run and manage the day to day operations of the Infrastructure Asset.

On that basis, the Commissioner accepts that it will be OpCo that will be carrying on the business of operating the Infrastructure Asset, and not the Partnership.

In conclusion, the Commissioner is therefore of the view that the Partnership will not be a general law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997.

2. Tax law partnership

The Partnership will be considered to be a tax law partnership if the partners' investment in the Infrastructure Asset is considered to be the receipt of ordinary income or statutory income jointly.

The Commissioner, at paragraph 11 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property, provides the following view on what he considers to be a tax law partnership:

11. Tax law partnerships exist only for tax purposes. General law does not recognize tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of such profits from the use of such property result in a partnership. The receipt of income of income jointly from investments without carrying on business is outside the definition of a partnership under general law.

As per the facts provided, the partners will be in joint receipt of ordinary income from OpCo via the sub-lease between this entity and the Phoenix Tax Law Partnership pursuant to their respective part ownership of the Infrastructure Asset via the head lease.

In conclusion, the Commissioner is of the view that the Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997.

Question 2

Summary

The sub-lease granted by the Partnership to OpCo will not be characterised as a notional sale and loan arrangement under Division 240 of the ITAA 1997.

Detailed reasoning

Section 240-10 of the ITAA 1997, when read in conjunction with paragraph 2.15 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 1999 provides that an arrangement will be treated as a notional sale and notional loan for the purposes of Division 240 of the ITAA 1997 if:

(a) the arrangement is a hire purchase agreement as defined in subsection 995-1(1) of the ITAA 1997

(b) the arrangement relates to any goods, and

(c) the special conditions applicable to hire purchase agreements contained in Subdivision 240-I of the ITAA 1997 are satisfied.

As stated before, the term 'hire purchase agreement' is defined in subsection 995-1(1) of the ITAA 1997 as:

(a) a contract for the hire of goods where:

(i) the hirer has the right, obligation or contingent obligation to buy the goods

(ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods, and

(iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised, or

(b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid

As per the facts provided, the sub-lease granted by the Partnership to OpCo is expected to contain the following provisions:

· Opco will not have an obligation, right or contingent right to remove or acquire the assets subject to the sub-lease (or OpCo Lease).

· The legal title to the leased assets will not pass to OpCo at any time.

On that basis, the sub-lease will not satisfy neither paragraph (a) or (b) of the hire purchase agreement definition in subsection 995-1(1) of the ITAA 1997.

In conclusion, as the sub-lease is not a hire purchase agreement, the Commissioner is of the view that it will not be characterised as a notional sale and loan arrangement.

Question 3

Summary

The partners will hold the depreciating assets subject to the head lease for the purposes of determining deductions for their decline in value pursuant to the following items in the able in section 40-40 of the ITAA 1997:

· Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease.

· Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease).

Detailed reasoning

Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under Division 40 of the ITAA 1997) of a depreciating asset that you held for any time during the year. (emphasis added)

The definition of the term 'held' in subsection 995-1(1) of the ITAA 1997 refers directly to the term 'hold' within the same provision, which in the context of holding a depreciating asset is defined to have the meaning given by section 40-40 of the ITAA 1997.

In other words, to be a holder of a depreciating asset, one of the 10 items in the table in section 40-40 of the ITAA 1997 must apply. In addition, the affect of subsections 40-35(1) and 40-35(2) of the ITAA 1997 provides that where there is more than one holder of a depreciating asset (the underlying asset), it is the value of each entity's interest in the underlying asset that is subject to the decline in value, not the underlying asset itself.

The first nine items of the table in section 40-40 of the ITAA 1997 apply to specific kinds of depreciating assets, whereas Item 10 applies to any depreciating asset. Because the specific items apply in preference to the general item, Item 10 applies as the default rule. That is, Item 10 may apply if none of the other nine items apply.

When considering which of the first nine items will or will not apply, it is noted that the partners have not been able to provide precise details of the head lease, such as:

· whether the legal owner, as the lessor, has rights to recover any of the depreciating assets subject to the head lease, or

· whether any of the depreciating assets are fixed to the land.

Furthermore, the Commissioner has been specifically requested to consider whether the partners will be the holder of depreciating assets subject to the head lease under the following items of the table in section 40-40 of the ITAA 1997:

· Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease.

· Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease).

However, before considering these items, it is first necessary to consider whether Item 7 of the table in section 40-40 of the ITAA 1997 will apply in the event that such depreciating assets are deemed to be assets of the Partnership and not of its partners. Item 7 provides that a depreciating asset that is a partnership asset is held by the partnership and not any particular partners. Via ATO Interpretative Decision ATO ID 2009/135 Income Tax Capital Allowances: hold - tax law partnership, the Commissioner is of the view that the Partnership as a tax law partnership will not hold the depreciating assets under this item. In other words, Item 7 only applies to general law partnerships.

Having determined that Item 7 of the table in section 40-40 of the ITAA 1997 will not apply, the Commissioner will now consider the application of both Item 2 and Item 10 in that table as specifically requested.

Item 2

A depreciating asset that is fixed to land that is subject to a quasi-ownership right is held by the owner of that right if they have the right to remove the asset. A 'quasi-ownership right' over land is defined by subsection 995-1(1) of the ITAA 1997 to include a lease of the land such as the head lease.

In conclusion, to the extent that the partners have a right to remove depreciating assets fixed to land under the head lease, the Commissioner will view the partners as the holder of those assets.

Item 10

Where Items 1 to 9 do not apply, any depreciating asset that is owned by both a legal owner and equitable owner will be held by the legal owner.

In conclusion, to the extent that the partners each acquire legal title to depreciating assets of which Item 1 to 9 do not apply (being assets formerly owned by the vendor or otherwise as provided under the head lease), the Commissioner will view the partners as the holder of those assets.

Question 4

Summary

Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will apply to determine the first element of the cost for the depreciating assets held by each of the partners.

Detailed reasoning

Subsection 40-180(1) of the ITAA 1997 provides that the first element of the cost of a depreciating asset the partners hold is:

(a) if an item in the table in subsection 40-180(2) of the ITAA 1997 below applies, the amount specified in that item, or

(b) otherwise, the amount the partners are taken to have paid to hold the asset under section 40-185.

Paragraph 40-180(1)(a)

Of the items of the table in subsection 40-180(2) of the ITAA 1997, it is evident that only Item 5 is needed to be considered. As per the response to Question 3, the Commissioner is of the view that a tax law partnership such as the Partnership does not hold depreciating assets, and concluded that the partners will each hold the depreciating assets.

In conclusion, the Commissioner is of the view that Item 5 does not apply, and in turn paragraph 40-180(1)(a) of the ITAA 1997 does not apply.

Paragraph 40-180(1)(b)

With paragraph 40-180(1)(a) of the ITAA 1997 not applying to the depreciating assets held by the partners, it is now necessary to consider whether paragraph 40-180(1)(b) of the ITAA 1997 applies.

To that end, paragraph 40-185(1)(b) relevantly provides that the amount you are taken to have paid to hold a depreciating asset, is the sum of the applicable amounts set out in the table in relation to holding the asset.

As per the facts provided, the partners will pay a lease premium for the assignment of the head lease.

On that basis, Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will relevant, which provides that the amount the partners are taken to have paid to hold a depreciating asset is the amount they have paid for it.

In conclusion, the Commissioner is of the view that the amount the partners will be taken to have paid to hold their depreciating assets (and therefore the first element of the cost of these assets as per paragraph 40-180(1)(b) of the ITAA 1997) is the part of the lease premium paid by the partners that specifically relates to these assets as per Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997.

Question 5

Summary

The partners will be entitled to a deduction for capital works subject to the head lease under Division 43 of the ITAA 1997.

Detailed reasoning

Subsection 43-10(1) of the ITAA 1997 provides that the partners can deduct an amount for capital works for an income year, and subsection 43-10(2) of the ITAA 1997 then provides that the partners can only deduct the amount if:

(a) the capital works have a construction expenditure area

(b) there is a pool of construction expenditure for that area, and

(c) you use your area in the income year in the way set out in Table 43-140 (Current year use).

As per the facts provided, there is capital works expenditure relating to the Infrastructure Asset. Therefore, for the purposes of considering paragraphs 43-10(1)(a) to 43-10(1)(c) of the ITAA 1997, this capital works expenditure meets the definition of construction expenditure under subsection 43-70(1) of the ITAA 1997.

Furthermore, it is noted that construction of the Infrastructure Asset by the vendor was commenced and completed after 30 June 1997.

(a) the capital works have a construction expenditure area

For capital works commenced after 30 June 1997, subsection 43-75(1) of the ITAA 1997 provides that the construction expenditure area is the part of the capital works on which the construction expenditure was incurred that, at the time when it was incurred by an entity:

· was to be owned by the entity

· was to be leased by the entity (such as the head lease), or

· was to be held by the entity under a quasi-ownership right over land (as stated in the response to Question 3 above, is defined by subsection 995-1(1) of the ITAA 1997 to include a lease of the land such as the head lease) granted by an exempt Australian government agency (collectively defined by subsection 995-1(1) of the ITAA 1997 and Division 50 of the ITAA 1997 to include the vendor).

As the vendor incurred the construction expenditure pursuant to the previous head lease (i.e. via being leased to the vendor or held under a quasi-ownership right by the vendor, but not owned by the vendor), the Commissioner is of the view that the capital works subject to the head lease will have a construction expenditure area.

(b) there is a pool of construction expenditure for that area

Subsection 43-85(1) of the ITAA 1997 provides that a pool of construction expenditure is so much of the construction expenditure incurred by the entity on capital works as is attributable to the construction expenditure area.

As the vendor incurred the construction expenditure pursuant to the previous head lease, the Commissioner is of the view that there will be a pool of construction expenditure attributable to the construction expenditure area.

(c) you use your area in the income year in the way set out in Table 43-140 (Current year use)

The term 'your area' is relevantly defined in subsection 43-120(2) of the ITAA 1997 as the part of the construction expenditure area that the partners lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency, and that:

(a) is attributable to a pool of construction expenditure incurred by another lessee or holder of a quasi-ownership right over land, and

(b) has been continuously leased or held since the construction was completed by the lessee or holder who incurred the expenditure.

With respect to determining whose part of the construction expenditure area it will be for the purposes of determining if subsection 43-120(2) of the ITAA 1997 applies, the Commissioner has relied upon the view expressed in ATO Interpretative Decision ATO ID 2009/134 Income Tax Capital Works: your area - tax law partnership, and is of the view:

· that it is not the Partnership, as a tax law partnership, who will lease or hold the part of the construction expenditure area, and

· that it is its' partners who will each lease or hold a part of the construction expenditure area relative to their share.

Having now determined whose part of the construction expenditure it is, the Commissioner is the view that subsection 43-120(2) of the ITAA 1997 applies in that each partner's part of the construction expenditure area relative to their share:

(a) will be attributable to the construction expenditure incurred by the vendor pursuant to the previous head lease, and

(b) will be continuously leased or held since the construction was completed by the vendor, as the head lease will be assigned from the vendor to the Partnership.

Subsection 43-140(1) of the ITAA 1997 provides that Table 43-140 sets out the way in which you must use your area in an income year for a capital works deduction to be allowed.

As per the facts provided, the partners will sub-lease the Infrastructure Asset to OpCo in return for the receipt of ordinary income.

As the Infrastructure Asset will include each partner's part of the construction expenditure area relative to their share, the Commissioner is of the view that each of the partners will use their area for the purpose of producing assessable income.

Question 6

Summary

Financial benefits have not, will not and cannot reasonably be expected to be provided to the partners (or a connected entity) in relation to any tax preferred use of the asset such that paragraph 250-15(c) of the ITAA 1997 is not satisfied.

Detailed reasoning

Division 250 of the ITAA 1997 may apply to deny or reduce capital allowance deductions where an asset is put to a tax preferred use and the partners have an insufficient economic interest in the asset. For Division 250 to apply to the partners, the general test under section 250-15 of the ITAA 1997 must be met, that being:

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

(a) the asset is being *put to a tax preferred use; and

(b) the *arrangement period for the *tax preferred use of the asset is greater than 12 months; and

(c) *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 the partners (or a *connected entity) by:

(i) a *tax preferred end user (or a connected entity); or

(ii) any *tax preferred entity (or a connected entity); or

(iii) any entity that is a foreign resident; and
(d) disregarding this Division, the partners would be entitled to a *capital allowance in relation to:

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

(ii) expenditure in relation to the asset; and

(e) the partners lack a *predominant economic interest in the asset at that time.

Tax preferred use

Under section 250-60 of the ITAA 1997 an asset is being put to a 'tax preferred use' if a tax preferred end user (or a connected entity) directly or indirectly uses, or effectively controls the use of the asset.

End user of an asset

Under section 250-50 an entity is an end user of an asset if the entity (or a connected entity) holds rights as a lessee under a lease of the asset.

Tax preferred end user

Under section 250-55 of the ITAA 1997:

An *end user of an asset is a tax preferred end user if:

(a) the end-user (or a *connected entity) is a *tax preferred entity; or

(b) the end user is an entity that is a foreign resident.

Connected entity

A connected entity is an associate in accordance with section 318 of the ITAA 1936 or another member of the same wholly owned group if the entity is a company and is a member of such a group.

As the partners have not yet executed the documents and contracts that will determine their responsibilities and key terms of the project, it cannot be concluded whether (a) any of the assets involved with the Infrastructure Asset will be put to a 'tax preferred use' and (b) whether the arrangement period for the tax preferred use of any assets will be greater than 12 months.

The partners state that a tax preferred use should only arise for the partners where they are involved with the provision of transport facilities to the tax preferred entity.

Financial benefits

Under section 974-160 of the ITAA 1997, for the purposes of the act, a financial benefit is:

· anything of economic value and

· includes property and services and

· includes anything specified in the regulations to be a financial benefit for the purposes of the ITAA 1997.

For the purposes of Division 250 of the ITAA 1997, the *financial benefits provided in relation to a tax preferred use of an asset include (but are not limited to) the items listed in section 250-85(1) being:

(a) a financial benefit provided in relation to:

(i) bringing the asset into a state, condition or location in which it can be *put to the tax preferred use; or


(ii) the start of the *tax preferred use of the asset; and

(b) a financial benefit provided in relation to the end of the tax preferred use of the asset; and

(c) a financial benefit provided in relation to the termination or expiration of an *arrangement that deals with:

(i) the tax preferred use of the asset; or


(ii) the provision of financial benefits in relation to the tax preferred use of the asset; and

(d) a financial benefit provided in relation to the purchase or acquisition of the asset by, or transfer of the asset to, the *tax preferred end user (or a *connected entity).

Under subsection 250-85(8) of the ITAA 1997 a financial benefit may be provided in relation to a tax preferred use of an asset even if it is provided before the tax preferred use of the asset starts.

From the facts provided, in relation to any tax preferred use of the infrastructure asset, including prior to any tax preferred use:

· there will be no financial benefits provided to the partners directly or indirectly by any tax preferred entity (or a connected entity) to enter into the proposed arrangement,

· there will be no financial benefits provided to the partners directly or indirectly by any tax preferred entity (or a connected entity) at the upon any termination or expiration of the arrangement, including, the infrastructure asset has no guaranteed residual value

· the infrastructure asset will be operated solely by the private sector

· the risks and rewards of the operations will be assumed by OpCo (or a new operator/entity)

Therefore, the financial benefits provided by the public to OpCo and by OpCo to the partners over the course of the project will not be in relation to the tax preferred use of the infrastructure asset.

In conclusion, financial benefits in relation to the tax preferred use of the infrastructure asset have not, will not and cannot reasonably be expected to be provided to the partners (or a connected entity) such that section 250-15(c) of the ITAA 1997 is not satisfied.

Question 7

Summary

The non-commercial loss rules in Division 35 of the ITAA 1997 will not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10?

Detailed reasoning

Division 35 of the ITAA 1997 prevents losses of individual taxpayers carrying on a business activity either alone or in partnership from being offset against other assessable income in the year the loss is incurred.

As stated in the note to section 35-10(1) of the ITAA 1997, the 'section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly…'.

The Explanatory Memorandum to the New Business Tax System (Integrity Measure) Bill 2000 states that the 'new rules do not change the general law tests that determine whether an individual is carrying on a business activity; or … and the new rules do not apply to:

… the receipt of passive investment income from activities which do not constitute the carrying on of a business. These activities include the receipt of rent from a negatively geared investment property, dividends from shares or interest on financial investments such as infrastructure bonds.

As determined in question 1 above, the partners will not be carrying on a business, but will be in joint receipt of ordinary income from OpCo (or a new operator/entity). The Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(a) of the ITAA 1997.

In conclusion, the Commissioner's view is that Division 35 of the ITAA 1997 does not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10.

Question 8

Summary

The interest incurred on borrowings by an individual partner to fund the capital contributions will be deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

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

(a) it is incurred in gaining or producing the your assessable income; or

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

However, subsection 8-1(2) of the ITAA 1997 states that the partners cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents the partners from deducting it.

In order for the expenditure to be deductible under section 8-1 of the ITAA 1997 it must have the essential character of an outgoing incurred in gaining assessable income (Lunney v. FCT (1958) 100 CLR 478).

There must be a sufficient nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FCT (1949) 78 CLR 47).

The expenditure must not be capital, private or domestic in nature.

The deductibility of interest is determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put ( Fletcher & Ors v. FC of T 91 ATC 4950, FC of T v . Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52 ).

The purpose of the borrowing will be ascertained from the use to which the borrowed funds were put (Kidston Goldmines Limited v. FC of T 91 ATC 4538 at 4545; (1991) 22 ATR 168 at 176). However, a rigid tracing of funds will not always be necessary or appropriate (FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380 at 4388; (1992) 23 ATR 494 at 504).

It is not necessary, that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances:

· The interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities,

· The interest is not private or domestic,

· The period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost,

· The interest is incurred with one end in view, the gaining or producing of assessable income, and

· Continuing efforts are undertaken in pursuit of that end.

The partners state that they will obtain funding for their capital contribution independently and this may include personal equity/cash, debt from external lenders or a mix of both equity or debt.

The partners expect that the money borrowed to invest in the proposed Infrastructure Asset would result in rental income being received.

As the Infrastructure Asset is already an income producing asset any interest expenditure incurred by a partner will not be prior to the derivation of income.

There will be no private or domestic use of the Infrastructure Asset.

In conclusion, the interest on the borrowed amounts relating to the servicing of a loan by a partner which will fund the acquisition of the income producing Infrastructure Asset as outlined above would be deductible under section 8-1 of the ITAA 1997.

Question 9

Summary

To the extent that stamp duty is payable on the assignment of the head lease, an immediate deduction will be available to the individual partner for the income year which the assignment occurs as per subsection 25-20(1) of the ITAA 1997.

Detailed reasoning

Subsection 25-20(1) of the ITAA 1997 states that the partners can deduct expenditure the partners incur for preparing, registering or stamping:

(a) A lease of property, or

(b) An assignment or surrender of a lease of property,

if the partners have used or will use the property solely for the purpose of producing assessable income.

The term assignment is explained in ATO Interpretative Decision ATO ID 2012/4 Income Tax Capital Works: your area - assignee of that lessee's lease which references LexisNexis Butterworths, Halsbury's Laws of Australia ,Volume 16 (at 11 November 2011) explains an assignment at paragraph 245-1530:

An assignment is the transfer by agreement of the interest held by one person (the assignor) to another person (the assignee) and includes another party taking over the residue of the term of a lease, or where possession is given up for the remainder of the term...An assignment does not constitute the creation of a new lease.

ATO ID 2012/4 further states that the essential feature distinguishing novation from assignment, as observed by the High Court in Olsson v. Dyson (1969) 120 CLR 365, is that in the case of novation the parties to the contract mutually agree to discharge that contract and a new contract is formed in substitution for the old contract.

The proposed Infrastructure Asset head lease will be assigned from the vendors to the partners. The head lease will not be novated to the partners. As part of this process, the rights and obligations of the vendors will not be extinguished but a new lease granted to the partners.

The partners will use the head lease solely to produce assessable income in the form of rent derived from the sub-lease and OpCo Lease.

Therefore, any expenditure incurred by way of stamp duty when assigning the head lease of the Infrastructure Asset from the vendor to the partners for the purpose of producing assessable income, will entitle the partners to a deduction in accordance with subsection 25-20(1) of the ITAA 1997.

Question 10

Summary

Part IVA of the ITAA 1936 will not apply to the proposed acquisition or part thereof such that the Commissioner will determine that all or part of a deduction shall not be allowable.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

It must be noted from the outset that a private binding ruling only determines whether Part IVA applies. Specifically, a private binding ruling is not a Part IVA determination and cannot lead to the necessary action to give effect to the determination as required under subsection 177F(1) of the ITAA 1936.

In broad terms, Part IVA will apply where the following requirements are satisfied:

· there is a scheme (see section 177A of the ITAA 1936);

· a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C); and

· the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b) of the ITAA 1936).

The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

Scheme

A scheme is defined in subsection 177A(1) of the ITAA 1936 as:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

The partners have expressed an interest to invest in the Infrastructure Asset.

The partners have referred to this arrangement as the Partnership.

The partners are largely unrelated and have indicated a preference to own a direct economic interest in the Infrastructure Asset that is proportionate to their investment.

The proposed investment will be structured such that each investor will acquire a direct proportional interest in the underlying asset commensurate to the capital injected.

The partners state that the scheme should include all the transaction steps to fund and acquire the relevant interest in the infrastructure asset.

The partners state given the breadth of the definition of a scheme, part or all of the arrangement may constitute a scheme to which Part VIA may apply. However, it should not be determinative as to whether Part IVA applies.

Based on the above information, the Commissioner concludes that the above scenario would satisfy the definition of scheme pursuant to subsection 177A(1) of the ITAA 1936.

Tax benefit

Paragraph 62 of PS LA 2005/24 states:

Part IVA will not apply unless a taxpayer obtained, or would obtain, a tax benefit in connection with a scheme.

Subsection 177C(1) of the ITAA 1936 states:

…the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(a) an amount not being included in assessable income of the taxpayer of a year of income where that amount would have included, or might reasonably be expected to have been included, in assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; and…

Paragraph 64 of PS LA 2005/24 states:

There are two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out…In relation to determining what 'might reasonably be expected' to have happened…

Paragraph 69 of PS LA 2005/24 states:

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D.

What might reasonably be expected requires more than a possibility. As the High Court held in Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 385; 123 ALR at 461; 94 ATC 4663 at 4671; 28 ATR 344 at 353:

A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.

The partners have identified a counterfactual in their private binding ruling application being a general law partnership as to a tax law partnership.

The partners have acknowledged that the tax benefit in the proposed transaction may be the capital works deductions (Division 43) and the capital allowance deductions (Division 40) which are allowable to the partners as a result of the scheme. Each of the deductions may ultimately be used to offset a partner's share of the net income of the partnership.

However, the partners state the commercial objectives and anticipated outcomes of the proposed investment include:

· From a commercial perspective, a majority of partners expressed a desire to obtain a direct (as opposed to an investment via a general law partnership) investment into the asset. The partners wish to be economically exposed to all the risks and rewards of owning a part of the proposed infrastructure asset.

· Given the risk associated with such ownership, partners were not willing to enter into the transaction should they be jointly and severally liable. The partners expressed a desire not to be jointly and severally liable for the conduct of the partners in a general law partnership over the term of the asset ownership.

· Partners indicated a desire to set certain contractual parameters in relation to other partners conduct during the period of ownership of the infrastructure asset.

The partners contend that the proposed acquisition structure involves each partner acquiring a direct economic interest in the Infrastructure Asset. There are no interposed entities or other mediums involved in the transaction.

It is the partners' view, that it is not possible to posit an alternative transaction which satisfies the commercial objectives. The partners would only enter into this investment structure to obtain a direct investment in the Infrastructure Asset.

Counterfactual alternative

If the partners did not enter into the proposed scheme at all, they would not be able to deduct any amounts under Division 40 and Division 43 of the ITAA 1997. The partners would also not be able to deduct any amounts under section 8-1 for interest expenses for funding their contribution into the Infrastructure Asset.

However, the partners would also not incur the expense of funding the capital amount for the share of the lease nor be eligible to receive any distributions from the income generated by the infrastructure asset or the possibility of the likely capital gain or loss after the period when the lease expires.

Given the tax law definition of partnership broadly incorporates the general law definition, the income or deduction position of partners would not be altered as a result of the acquisition via a general law or tax law partnership as both are taxed in accordance with Division 5 of the ITAA 1936. As a result, there would not be additional deductions or reduced income as a result of the proposed investment such that no tax benefit arises, and if there were such a tax benefit it would be merely incidental to the scheme and would not be the dominant purpose for entering into the scheme.

If the partners bought units in stapled infrastructure securities listed on the Australian Securities Exchange they would not have the direct exposure that a partner of a tax law partnership will provide. Stapled infrastructure securities would be a more liquid asset and have inherent market risk.

Purpose of the scheme

Section 177D of Part IVA of the ITAA 1936 states:

This part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b) having regard to:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any other person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

The eight factors listed in paragraph 177D(b) of the ITAA 1936 make up the core test for distinguishing schemes where the dominant purpose of carrying out the scheme is to obtain a tax benefit. The application of the eight factors is therefore dependent upon there being a scheme and a tax benefit obtained in connection with that scheme.

Paragraph 79 of PS LA 2005/24 states that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit.

Paragraph 85 of PS LA 2005/24 states:

The consideration of purpose or dominant purpose under paragraph 177D(b) requires an objective conclusion to be drawn. The conclusion required by section 177D is not about a person's actual, i.e. subjective, dominant purpose or motive. Section 177D requires an objective conclusion as to purpose to be reached having regard to objective facts. The actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion under section 177D.

(i) manner in which the scheme was entered into or carried out

Paragraph 93 of PS LA 2005/25 states:

The first factor…enables contrivance and artificiality to be identified by comparing the manner in which the scheme was entered into or carried out with the manner in which the counterfactual would have been implemented, for example, by the presence of a step or steps in a relevant transaction or arrangement that would not be expected to be present in a more straightforward or ordinary method of achieving the outcome of the transaction or arrangement.

The partners contend that the transaction has been executed in the most straightforward method being an investment by the partners in the Infrastructure Asset. There has been no unnecessary interposition of entities or the flowing of funds through unnecessary mediums or jurisdictions. The transaction is consistent with commercial rationale and in a manner which is the most simple and commercially expedient.

Based on the available information, the steps outlined to acquire the Infrastructure Asset do not suggest contrivance or artificiality.

This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(ii) the form and substance of the scheme

Paragraph 95 of PS LA 2005/24 states:

The second factor…requires that substance, rather than form, be the subject of inquiry. Put simply the factor directs attention to whether there is a discrepancy between the form of the scheme and its substance, meaning its commercial and economic substance. A discrepancy…may well indicate the scheme has been implemented in a particular form as the means to obtain a tax benefit if the substance of the scheme may be achieved…by some other more straightforward or commercial transaction or dealing.

The partners contend that the acquisition is a result of the partners wishing to obtain, inter alia, a direct interest in an asset and to be governed by an Investors Agreement to dictate the terms of certain dealings. The ownership of such an asset provides the partners an opportunity to generate a commercially attractive return on investment (and ideally increased over the project) and the partners are fully exposed to business and financial risk associated with the acquisition of the Infrastructure Asset.

The partners further state the form of this transaction will be congruent with the substance of the transaction. Similarly, the legal form and the legal rights and obligations of each partner are consistent with the commercial and economic substance of the scheme. There is no divergence between the legal form of the scheme and its substance.

The manner of the proposed investment does not point to a purpose to obtain a tax benefit but the partners wishing to obtain a direct interest in the Infrastructure Asset to generate a return as well as being exposed to business and financial risks. Any disparity between the form and the substance would therefore be attributable to the desire of the partners to own a direct interest in the Infrastructure Asset being exposed to business and financial risk rather than avoid income tax.

This factor is neutral in determining whether the requisite purpose exists.

(iii) the timing at which the scheme was entered into and the length of the period during which the scheme was carried out

Paragraph 101 of PS LA 2005/24 states:

This factor will enable consideration of the extent to which the timing and duration of the scheme go towards delivering the relevant tax benefit or are related to commercial opportunities or requirements.

The partners contend that the acquisition of the Infrastructure Asset is ultimately a long term investment in an impaired asset.

Based on the above information, the transaction will not be implemented at a particular time or across a particular period in time indicating a purpose of obtaining a tax benefit.

This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

As stated in paragraph 105 of PS LA 2005/24:

The fourth factor expressly focuses on the tax benefit and any other tax consequence resulting from the scheme.

The partners contend that they will not enter into the transaction for the dominant purpose of obtaining depreciation and capital works deductions. These deductions are an incident of commercial outcome of obtaining an interest in the Infrastructure Asset and the exposure to its value.

Based on the available information, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme

The fifth factor involves identifying changes in financial position of the taxpayer that may be reasonably expected to result from the scheme, not just the changes that have resulted or will result (paragraph 227 of PS LA 2005/24).

The partners state that in the transaction at hand, from a financial and legal perspective, they obtain a direct interest in the asset. Thus, the change in financial position and the business and commercial risks, are consistent with the commercial purpose of the transaction.

Furthermore, the partners contend that all negotiations and transaction steps to execute the transaction will be the result of a competitive bidding process and at arm's length dealings. Therefore, the change in financial position of any person is solely a result of a commercial transaction.

Under the proposed investment, the partners would include in their assessable income any amount distributed from the partnership.

Based on the available information, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(vi) Any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme

The sixth factor involves identifying changes in financial position of any person who has or has had a connection with the relevant taxpayer that may be reasonably expected to result from the scheme, not just the changes that have resulted or will result (paragraph 227 of PS LA 2005/24).

Based on the information provided, there does not appear to be any change in the financial position of any person that has resulted, will result or may reasonably be expected to result from the scheme.

This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(vii) Any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

Based on the information provided, there does not appear to be any consequences for the relevant taxpayer or any other person for the scheme having been entered into or carried out.

This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

(viii) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

Paragraph 110 of PS LA 2005/24 states that:

The eighth factor inquires into the nature of the connection between the taxpayer and any other person whose financial position is reasonably expected to change as a result of the scheme or for whom there are any other consequences from the scheme. The existence of any connection between the taxpayer and these other persons is relevant to the identification of the other factors, such as the manner of the scheme, the form and substance of the scheme, and the tax, financial and other consequences of the scheme. This factor requires the circumstance that parties are not dealing with each other at arm's length in connection with the scheme to be taken into account.

Paragraph 111 of PS LA 2005/24 states:

This factor requires attention to be paid to the existence of any family relationship between the taxpayer and the persons who are affected in any way by the scheme. This could assist a taxpayer in some cases. Many dealings which would be decidedly odd between strangers may be entirely explicable between family members. For example, a businessman who gives assets to strangers for less than they are worth may be subject to suspicion but a gift to his family could stand in a different light. Of course, it would be a different matter again if the family members do not benefit in substance from the arrangement.

The partners contend that the transaction will be concluded between arm's length parties and a variety of unrelated partners who are seeking to invest in the infrastructure asset. There is nothing to suggest the above criteria points to a dominant purpose of a tax benefit.

The proposed transaction is in no way 'blatant, artificial or contrived'. The bidding process and acquisition structure are clear. They involve various unrelated parties and legal effect of the entire transaction is reflective of the commercial and economic effect.

All things considered, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists.

Conclusion

What the partners are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177D(b) of the ITAA 1936, these factors indicate that the dominant purpose of the proposed investment is not to obtain a tax benefit. Therefore, Part IVA will not apply to this arrangement.