Edited version of private advice

Authorisation Number: 1012653721083

Ruling

Subject: Application Construction and services project

Question 1

Will the Payments incurred by Entity M be deductible pursuant to section 8-1 of the Income Tax Assessment Act 1997 (the 'Act')?

Answer

Yes

Question 2

Will Division 250 of the Act apply to Entity M in relation to its interest in the assets on the basis that Entity M satisfies the general test by virtue of paragraph 250-15(d) of the Income Tax Assessment Act 1997?

Answer

No

Relevant facts and circumstances

Entity M entered into an Agreement with Entity Q to design, construct and provide services in respect of a facility asset for Entity Q (the Project).

The Project comprises of a design and construction phase followed by a services phase. At the conclusion of the Project, the entity's rights to access the facility under the Agreement will come to an end and Entity Q will have unencumbered legal ownership of the facility. The terms of the Agreement are such that Entity M will have no underlying proprietary right in the facility asset.

Entity Q will grant Entity M rights to access the areas necessary for the construction of the facility asset and to provide the services for the duration of the Project. Entity M pays licence payments to Entity Q over the services phase for the non-exclusive rights to enter the facility asset in order to provide the contracted services. The rights revert to Entity Q at the relevant time.

Entity Q will pay certain payments to Entity M over the construction phase. The payments will equal the costs incurred by Entity M. Entity Q will also pay certain other payments to Entity M during the services phase. The payments are income of the entity according to ordinary concepts.

Entity M will subcontract the design and construction of the facility asset and the provision of the services.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Paragraph 8-1(1)(a)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(b)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(c)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(d)

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Subsection 230-20(4)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Subdivision 40-I

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 43-75

Income Tax Assessment Act 1997 Division 250

Income Tax Assessment Act 1997 Section 250-15

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

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

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

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

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

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

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

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

All legislative references are to provisions of the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The licence payments will be deductible under section 8-1.

Detailed reasoning

The licence payments incurred by the entity will be deductible pursuant to section 8-1. The payments that Entity M incurs are not capital or capital in nature because they are incurred in the ordinary course of the business that Entity M carries on.

Question 2

Summary

Division 250 will not apply as Entity M is not entitled to a deduction for capital allowances for the decline in value of an asset, nor for capital expenditure in relation to an asset in respect of the Project.

Detailed reasoning

For Division 250 to apply, a taxpayer must be entitled to a capital allowances deduction pursuant to Division 40, or to a deduction for project works pursuant to Division 43.

On the basis that the payments incurred by Entity M are deductible under section 8-1, the payments are not capital nor capital in nature and it is therefore not necessary to consider if Entity M is entitled to claim a deduction for capital allowances under Division 40 or for expenditure on project works pursuant to Division 43. Therefore, as Entity M does not satisfy one of the conjunctive requirements for Division 250 to apply, in this circumstance paragraph 250-15(d), Division 250 will not apply.