Edited version of your written advice

Authorisation Number: 1012744949382

Ruling

Subject: Public Private Partnership

Question 1

Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) not apply to the Partnership in relation to its interest in the Project on the basis that the Partnership does not satisfy paragraph 250-15(d) of the ITAA 1997 as payments made by the Partnership in satisfaction of its obligations under the Project Deed do not give rise to capital expenditure that would entitle the Partnership to capital allowances in respect of the decline in value of assets or expenditure in relation to assets?

Answer

Yes.

Question 2

Will the thin capitalisation provisions in Division 820 of the ITAA 1997 not apply to Entity X on the basis that Entity X satisfies the conditions in subsection 820-39(3) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

30 June 2015 to 30 June 2035

Relevant facts and circumstances

Entity G has entered into a contract with the Partnership for the finance, design, construction, operation and maintenance of a new asset (the Project).

Establishment of partnership

The investing entities for the Project have established a general law partnership named the Partnership.

Contractual Arrangements

Project Deed

The Partnership and Entity G have entered into the Project Deed which specifies the obligations of each party in relation to the Project.

The Partnership has agreed to finance, design, construct, commission and operate the Project.

The Partnership is required to make the following payments under the Project Deed:

• A payment to entity G for Licence A which is a non-exclusive licence to use and occupy, and to permit the Partnership contractors to use and occupy a site.

• A payment to entity G for Licence B which is a licence to use and occupy, and to permit the Partnership contractors to use and occupy, assets.

• A payment to entity G for Licence C which is a licence to access, and to permit the Partnership contractors to access, other assets.

The Project Deed provides that each payment for Licence B and Licence C (together the Licence Payments) will be paid on each date in accordance with the Project Deed.

The Project Deed provides that none of the rights conferred by Licence B or Licence C create any tenancy or any estate or interest in the assets or any land on which any assets are located.

The Project Deed provides that the Partnership may engage in specific commercial opportunities subject to the consent of Entity G.

Entity G is required to make the following payments under the Project Deed:

• Service Payments to the Partnership.

• Construction Payment to the Partnership once construction is completed.

The Project Deed provides that Entity G has no obligation to pay the Construction Payment unless and to the extent Entity G receives the corresponding Receivables Purchase Payment from Entity X under the Receivables Purchase Deed.

Under the Project Deed all fixtures affixed to the site will be owned from the time they are affixed by Entity G.

D&C Contract

The Partnership has entered into the D&C Contract with the D&C Contractor. Under the D&C Contract the D&C Contractor will undertake construction of the Project in return for construction fees (Construction Fee).

The Partnership will use the Construction Payment received from Entity G, as well as equity funding and funding under a loan arrangement with Entity X, to satisfy contractual payment obligations to the D&C Contractor under the D&C Contract.

The Partnership will at no time have a proprietary interest in the assets that comprise the assets under the Project Deed.

O&M Contract

The Partnership has entered into the O&M Contract with O&M Contractor under which it will subcontract its obligations to provide services under the Project Deed. The Partnership will make payments to O&M Contractor as consideration for O&M Contractor fulfilling its obligations under the O&M Contract.

Establishment of Securitisation Trust

The Securitisation Trust is established under the Trust Deed of Securitisation Trust (Trust Deed) for the purpose of beneficially owning shares in securitisation vehicles. The Trust Deed establishes that the trustee of the Securitisation Trust is Entity Z.

The Trust Deed identifies that the beneficiaries of the Securitisation Trust are such charitable beneficiaries as may be designated from time to time.

The Securitisation Trust will be the beneficial owner of all the issued shares of an Australian tax resident company, Entity Q. Entity Q will acquire 100% of the issued shares in Entity X.

Establishment of Entity X

Entity X was incorporated with nominal equity to raise funds under a Facility Agreement and for the purposes of acquiring, funding and holding securitised assets.

The manager of the Group (of which Entity X is a member) has confirmed that Entity X is not encumbered by any previous operating history and is a special purpose vehicle created specifically for the Project.

Entity X is currently neither foreign controlled nor an associate of an outward investor entity.

Entity X is expected to be tax neutral.

The Constitution of Entity X (Constitution) provides that:

• Entity X is a single purpose entity established for the sole purpose of undertaking the Project, and it does not carry on any other business or activity other than as contemplated or permitted by the Project or as necessary or desirable in connection with the implementation of the Project.

• Entity X will have at least two independent directors.

• Directors of Entity X do not have the power to merge or consolidate Entity X with another entity.

• Directors of Entity X must or must ensure that Entity X does not employ any employees.

Entity X has entered into:

• a loan with the Partnership which will be established under a Loan Agreement under which funds drawn down by Entity X under the Facility Agreement will be on-lent to the Partnership (On Loan);

• a fixed-for-floating interest rate swap (Interest Rate Swap) with third party financiers (Swap Counterparties) to manage the floating interest rate risk of Entity X between financial close and post completion of construction;

• a fixed-for-floating interest rate swap (Interest Rate On Swap) the term of which will mirror the term of the Interest Rate Swap; and

• a Facility Agreement that will comply with section 128F of the ITAA 1936.

Entity X has entered into the Facility Agreement for the primary and predominant purpose of acquiring the future rights from Entity G to each future Licence Payment from the Partnership under the Receivables Purchase Deed.

The Facility Agreement will be a debt interest for Australian income tax purposes. The value of the Facility Agreement will, at all times, be at least 50% of the assets of Entity X.

The Facility Agreement provides that:

• Entity X is a single purpose entity established for the sole purpose of undertaking the Project and it does not carry on any other business or activity other than as contemplated or permitted by the Transaction Documents, as defined in the Facility Agreement, or which is reasonably incidental to such business, and it has not incurred a liability which it has not fully discharged other than under the Transaction Documents, or in connection with, or reasonably incidental to, the Project, consistent with the Facility Agreement.

• Entity X and Entity Q will not elect to form or become members of a tax consolidated group consistently with the Facility Agreement.

• Entity X will not sell, or otherwise dispose of, part with possession of, or create or allow an interest in its property, whether in one or more related or unrelated transactions, other than in specific cases as outlined in the Facility Agreement.

• Entity X will not amend or agree to amend or permit or allow to be amended its constituent documents in any way (other than changes of a minor or technical nature to correct a manifest error) consistent with the Facility Agreement.

• Entity X will not carry on any business or activity other than as expressly contemplated by the Transaction Document, as defined of the Facility Agreement, consistent with the Facility Agreement.

• Entity X will not amalgamate, merge or consolidate with or into any other person or enter into any corporate restructuring, reorganisation or plan of arrangement without the prior written consent of the Agent as defined in the Facility Agreement consistent with the Facility Agreement.

• Entity X will not have brought against it any proceedings by, or which include, the Partnership, for the winding up, receivership or liquidation of Entity X pursuant to the Syndicated Agreement.

• Entity X is prohibited from incurring or allowing to exist any financial indebtedness other than permitted financial indebtedness, as defined the Facility Agreement.

• Entity X will not issue any share, grant any right to acquire any such share, nor alter any right attaching to its voting shares, nor issue any other form of capital or marketable security, other than where such issue of a share or marketable security, or grant or alteration of right is to an existing owner of a share or marketable security in Entity X consistent with the Facility Agreement.

Entity X will hold itself out to the world as an independent entity to ensure its isolation from the consequences of the insolvency of others by:

• maintaining proper books, accounts, records and procedures in relation to its business and undertaking as required by law and sufficient to record and monitor the progress of the Project and to identify the assets, works and services financed by the Facilities in accordance with the Facility Agreement;

• maintaining a complete and up to date register of Project assets and proper books of account that give a true and fair view of its financial position and results of operations in accordance with the Facility Agreement;

• ensuring it is not a party to, or does not enter into any class order, guarantee or similar arrangement in relation to Chapter 2M of the Corporations Act 2001 pursuant to the Facility Agreement;

• ensuring that each Financial Report and other financial statements furnished by it under any Finance Document as defined in the Syndicated Facility Agreement in relation to itself are prepared in accordance with Chapter 2M of the Corporations Act 2001 and the Accounting Standards in accordance with the Facility Agreement; and

• acting in accordance with its constituent documents (including the Constitution).

Securitisation Structure

A securitised licence structure has been adopted as a feature of the Project. In this structure the right to receive each Licence Payment from the Partnership is purchased from Entity G by Entity X for a single lump sum. The Partnership thereafter pays each Licence Payment to Entity X.

Entity G directs that the single lump sum payment for the Licence Payments from Entity X be re-directed and paid to the Partnership. The payment satisfies the obligation of Entity G to pay the Construction Payment on completion of the works. The Partnership will use the lump sum payment to repay some of the construction costs.

The Partnership thereafter receives Service Payments from Entity G. The Service Payments will be used to repay loans, pay operating costs, pay each Licence Payment due to Entity X and pay distributions to equity investors.

The securitisation has been established through the Receivables Purchase Deed and Payment Directions Deed.

Receivables Purchase Deed

Entity G, the Partnership and Entity X will enter into a Receivables Purchase Deed.

The Receivables Purchase Deed will provide that Entity X agrees to purchase the Receivables. The Receivables are defined in the Receivables Purchase Deed as including all of the right, title and interest in the Licence Payments held by Entity G.

The Receivables Purchase Deed will provide that Entity X must pay to, or as directed by, Entity G the Receivables Purchase Payment for the Receivables.

The Receivables Purchase Deed will provide that Entity G and the Partnership will not institute, or join to become party to, any action:

• for the winding up or deregistration of Entity X; or

• to appoint any liquidator, administrator or controller (as defined in the Corporations Act 2001) to Entity X or any of its assets.

Payment Directions Deed

Entity G, the Partnership, Entity X and the Agent under the Facility Agreement will enter into a Payment Directions Deed.

Under the Payment Directions Deed Entity G irrevocably directs that the Receivables Purchase Payment is to be paid to, or as directed by, the Partnership in full and final satisfaction of the obligation of Entity G to pay the Construction Payment to the Partnership.

Relevant legislative provisions

Corporations Act 2001 Chapter 2M

Income Tax Assessment Act 1936 Subsection 51(1)

Income Tax Assessment Act 1936 Section 128F

Taxation Administration Act 1953 Part IVC

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 8-1

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

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

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 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 Division 820

Income Tax Assessment Act 1997 Section 820-39

Income Tax Assessment Act 1997 Subsection 820-39(3)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(a)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(b)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(c)

Income Tax Assessment Act 1997 Subsection 820-39(4)

Reasons for decision

Question 1

Detailed reasoning

Division 250 denies or reduces capital allowance deductions that would otherwise be available in relation to an asset if the asset is put to a tax preferred use and the taxpayer has insufficient economic interest in the asset.

The general test for the application of Division 250 is set out in section 250-15 which provides that the Division will apply to a taxpayer 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 you (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, you 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) you lack a predominant economic interest in the asset at that time.

Each of the conjunctive requirements in paragraphs 250-15(a) to 250-15(e) must be present for the general test to be satisfied. If one of the paragraph requirements is not satisfied then Division 250 will not apply. In the context of this ruling it is appropriate to first consider the requirement in paragraph 250-15(d). In the event that paragraph 250-15(d) is not satisfied then it will be unnecessary to consider the remaining requirements in section 250-15.

The entitlement to a capital allowance in relation to the decline in the value of an asset or expenditure in relation to an asset is determined by considering the capital allowance provisions in Division 40 and Division 43. However, if particular expenditure is deductible under section 8-1 (or any other provision) then it cannot also be deductible under Division 40 or Division 43 due to the operation of section 8-10. It is therefore appropriate as a starting point to consider whether or not the expenditure of the Partnership in relation to the Project is deductible under section 8-1.

Section 8-1 relevantly provides:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

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

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

(2) However, you 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 your non-assessable non-exempt income; or

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

The word 'incurred' although used in various provisions is not defined in the ITAA 1997. The word 'incurred' therefore takes its general legal meaning.

Useful guidance on the meaning of 'incurred' can be found in Taxation Ruling TR 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) which sets out in detail the view of the Commissioner on whether an outgoing is 'incurred' for the purposes of section 8-1.

TR 97/7 provides that a taxpayer incurs an outgoing at the time that they owe a present money debt that they cannot escape. In incurring an outgoing a taxpayer need not actually have paid any money provided that the taxpayer is definitively committed in the year of income. A loss or outgoing may be incurred even though it remains unpaid provided that the taxpayer is 'completely subjected' to the loss or outgoing. That is, it must be a presently existing liability to pay a pecuniary sum, even though the liability may be defeasible by others and even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation. Whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise.

The High Court of Australia considered the meaning of 'incurred' in section 51(1) of the ITAA 1936 which was the predecessor to section 8-1 in a number of decisions, including: Commissioner of Taxation (Cth) v James Flood Pty Ltd (1953) 88 CLR 492, Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) (1981) 144 CLR 616 and Coles Myer Finance Ltd v Commissioner of Taxation (1993) 176 CLR 640.

The meaning of 'incurred' in section 8-1 has been considered in a number of decisions, including: Malouf v Federal Commissioner of Taxation (2009) 174 FCR 581, Commissioner of Taxation v CityLink Melbourne Ltd (2006) 228 CLR 1 and Transurban City Link Ltd v Commissioner of Taxation (2004) 135 FCR 356.

The Partnership is in the business of financing, designing, constructing, operating and maintaining the Project. The Partnership will derive assessable income from its business in the form of the Construction Payment from Entity G, Service Payments from Entity G and other commercial revenues.

The Partnership is obligated to make a payment to Entity G for the Licence A and additional payments to Entity G for the Licence B and Licence C under the Project Deed. The Partnership is obligated to make payments to the D&C Contractor under the D&C Contract and the O&M Contractor under the O&M Contract.

The payments above are necessarily incurred in carrying on the business of the Partnership for the purpose of gaining or producing assessable income and satisfy paragraph 8-1(1)(b).

The payments will not be prevented from being deducted under section 8-1 by paragraph 8-1(2)(b), paragraph 8-1(2)(c) or paragraph 8-1(2)(d). The remaining issue to be considered is whether or not the payments to be made by the Partnership are a loss or outgoing of capital or of a capital nature. In the event that the payments are considered to be such a loss or outgoing then they will be prevented from being deducted under section 8-1 by paragraph 8-1(2)(a).

The courts have established a number of principles or tests to be applied in determining whether a loss or outgoing is capital or of a capital nature. In Sun Newspapers Ltd v The Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) Dixon J at page 359 said:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.

In Sun Newspapers Dixon J at page 363 in reference to determining whether expenditure is on revenue or capital account said:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play a part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

In Hallstroms Proprietary Limited v Federal Commissioner of Taxation (1946) 72 CLR 634 (Hallstroms) Dixon J at page 646 referred to Sun Newspapers and further considered the distinction between revenue and capital:

…the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.

In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 (GP International Pipecoaters Pty Ltd) at page 137 Brennan, Dawson, Toohey, Gaudron and McHugh JJ summarised:

The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. and Associated Newspapers Ltd. v Federal Commissioner of Taxation; Colonial Mutual Life Assurance Society Ltd. v Federal Commissioner of Taxation; Cooper v Federal Commissioner of Taxation (affirmed on other grounds); and see the differing analyses of what the subject expenditure was for in Cliffs International Inc. v Federal Commissioner of Taxation.

In Commissioner of Taxation v Citylink Melbourne Limited (2006) 228 CLR 1 (Citylink) Crennan J (with whom Gleeson CJ and Gummow J agreed) at 43 in reference to the decisions in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 summarised:

The characterisation of an outgoing depends on what it "is calculated to effect", to be judged from "a practical and business point of view". The character of the advantage sought by the making of the expenditure is critical.

The payment the Partnership is obligated to make to Entity G for the Licence A under the Project Deed and the payments to the D&C Contractor under the D&C Contract have a close connection to the creation of assets under the Project Deed. The fact that the payment to Entity G for Licence A under the Project Deed and payments to the D&C Contractor under the D&C Contract are paid for the purpose of bringing assets into existence for use by the Partnership in deriving its income is an indicator that they could possibly be losses or outgoings of capital or that they are of a capital nature.

The Partnership is also obligated to make payments to Entity G for Licence B and Licence C under the Project Deed and to the O&M Contractor under the O&M Contract. However, as those payments are directly connected with fulfilling service obligations under the Project Deed they do not have a close relationship to the creation of any assets under the Project Deed.

However, whether any of the payments above are losses or outgoings of capital or are of a capital nature depends primarily upon a consideration of the character of the advantage sought in making the payments.

The Project Deed provides that all fixtures affixed will be owned by Entity G from the time they are affixed and as such ensures that the payments for Licence A and to the D&C Contractor do not give rise to any ownership rights in the assets on the part of the Partnership. The Project Deed would therefore help support a conclusion that the character of the advantage sought (and the manner in which it is to be used) by the Partnership in making the payment for the Licence A and payments to the D&C Contractor is not 'the acquisition of the means of production' through the creation and/or ownership of the assets which will be constructed as part of the Project.

Rather, the Partnership from a business point of view seeks to fulfil its contractual obligations to Entity G, the D&C Contractor and the O&M Contractor and to derive regular returns in the form of the Construction Payment from Entity G, the Service Payments from Entity G and other commercial revenues under the Project Deed. This business point of view supports a conclusion that the character of the advantage sought by the Partnership in making the various payments identified above is not the establishment or extension of the profit yielding business structure of the Partnership but rather the fulfilment of its obligations to deliver construction and other services and the derivation of regular returns under the Project Deed.

In all the circumstances the payments to be made by the Partnership are not a loss or outgoing of capital or of a capital nature and will therefore not be prevented from being deducted under section 8-1 by paragraph 8-1(2)(a).

As paragraph 250-15(d) will not be satisfied Division 250 will not apply in relation to payments to be made by the Partnership in satisfying obligations under the Project Deed.

Question 2

Detailed reasoning

Taxation Determination 2014/18 Income tax: can the exemption in section 820-39 of the Income Tax Assessment Act 1997 apply to the special purpose finance entity established as part of the 'securitised licence structure' used in some social infrastructure Public Private Partnerships? (TD 2014/18) confirms that a special purpose entity (SPE) that seeks finance for a project which is established as part of the securitised licence structure in some social infrastructure public private partnerships can satisfy section 820-39 provided that the SPE satisfies the conditions in subsection 820-39(3).

Section 820-39 exempts certain special purpose entities from the application of the thin capitalisation rules in Division 820. Division 820 will not apply to Entity X if it can satisfy each condition in subsection 820-39(3). Subsection 820-39(3) provides:

(a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and

(b) the total value of debt interests in the entity is at least 50% of the total value of the entity's assets; and

(c) the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances.

The conditions in subsection 820-39(3) are cumulative; as such, in the event any one condition in subsection 820-39(3) is not satisfied then the exemption in section 820-39 will not apply. It is therefore necessary to consider whether each condition is satisfied in subsection 820-39(3).

Paragraph 820-39(3)(a)

Paragraph 13 of TD 2014/18 states in the context of identifying the purpose for which a company was established in paragraph 820-39(3)(a):

13. …in determining whether an entity satisfies paragraph 820-39(3)(a), it is insufficient to look merely to the objects or purposes for which the body was incorporated including the clauses in the entity's memorandum of association or constitution. Thus, it is possible that an entity will not have the requisite purpose at one particular time (for example at the time of its establishment) but will satisfy paragraph 820-39(3)(a) during the income year being tested.

Paragraph 17 of TD 2014/18 further states:

17. Having regard to the context in which paragraph 820-39(3)(a) appears, requiring the entity to be a 'special purpose entity', an entity will satisfy paragraph 820-39(3)(a) if it is established for the main or dominant purpose of performing the activities required by the paragraph. If the entity is established for some other main or dominant purpose it will not satisfy paragraph 820-39(3)(a).

Entity X is a SPE which has been established to raise finance for the Project and manage the attendant risks. Entity X will raise senior debt by entering into the Loan Facility. Entity X will use those funds to provide the On Loan to the Partnership for the purposes of fulfilling construction obligations under the Project Deed. Entity X will also use the funds to purchase the Initial Receivables as per the Receivables Purchase Deed.

Entity X will consistently with paragraph 19 of TD 2014/18:

• assume and manage the risks associated with the payment of the Licence Payment Receivables during the Operations Phase of the Project;

• assume and manage the risk associated with the repayment for the Loan Facility as the return of Entity X is dependent on the Licence Payments and receipts under the On Loan;

• assume and manage the risks associated with the credit rating of the Partnership (and indirectly the credit rating of Entity G) given the primary source of cash flows from the Project stem from Entity G in the form of the Service Payments.

• manage the risk associated with any floating rate interest on the Syndicated Loan Facility which will be managed by way of entering into an Interest Rate Swap with third party financiers between financial close and two years post completion of construction.

Entity X will satisfy the requirements of paragraph 820-39(3)(a).

Paragraph 820-39(3)(b)

Division 974 sets out the tests that determine whether an interest can be characterised as a 'debt interest'. Subsection 974-15(1) provides that a 'scheme' will give rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity.

The Commissioner accepts that the Loan Facility is a debt interest pursuant to Division 974 and will constitute 50% or more of the total assets of Entity X.

Entity X will satisfy the requirements of paragraph 820-39(3)(b).

Paragraph 820-39(3)(c)

Whether Entity X will satisfy the criteria of an internationally recognised rating agency is a question of fact the resolution of which requires a consideration of criteria published by internationally recognised ratings agencies.

Paragraph 28 of TD 2014/18 states that an entity can self-assess whether or not it is 'insolvency-remote' according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances.

A number of rating agencies have published criteria outlining the characteristics that must be satisfied in order for a SPE to be classified as 'insolvency-remote' or 'bankruptcy-remote'. Paragraph 31 of TD 2014/18 provides examples of published criteria, including:

• Standard & Poor's (S&P) Criteria for Special-Purpose Entities in Project Finance Transactions;

• S&P's Legal: Guide to Legal Issues in Rating Australian Securitisation; and

• Fitch Ratings Criteria for Special-Purpose Vehicles in Structured Finance Transactions (Fitch Ratings Criteria).

Subsection 820-39(4) provides that an entity is not required to obtain an actual rating from an internationally recognised rating agency.

The Fitch Ratings Criteria dated May 2012 provides a number of characteristics which will be considered below.

Formation of an SPV (Type of Vehicle)

The Fitch Ratings Criteria on page 3 provide that '…an SPV in a structured finance transaction is a limited liability company, a trust, limited liability partnership or other form of body corporate (depending on the local law in the place of establishment).' Entity X is a proprietary company limited by shares and established under the Corporations Act 2001.

Formation of an SPV (Operational History)

The Fitch Ratings Criteria on page 3 provide that:

A newly formed SPV created for a specific securitisation transaction will, by definition, not be encumbered by any previous operating history. A newly established SPV has the benefit of a limited and known operating history and few creditors and liabilities at the outset of the transaction. For this reason, a new vehicle may have a reduced bankruptcy risk.

Entity X was incorporated and the manager of the group of which Entity X is a member has confirmed that Entity X is not encumbered by any previous operating history and is a special purpose vehicle created specifically for the Project.

Formation of an SPV (Separate Existence)

The Fitch Ratings Criteria on pages 3-4 provide that:

Fitch will consider not only whether an SPV has an independent legal existence, but also whether it has a separate existence in respect of, eg maintenance of its own accounts, books and records, advisors, place of business and assets and funds. The agency will also consider whether the SPV has the ability to operate independently of the originator and any related party and the SPV's owner and any other affiliates. In some jurisdictions, matters such as management and shareholder control will also be a factor in this assessment.

Entity X is required to maintain proper books, accounts, records and procedures in relation to its business and undertaking as required by law and sufficient to record and monitor the progress of the Project and to identify the assets, works and services financed in accordance with the Facility Agreement.

Entity X will keep a complete and up to date register of Project assets and proper books of account that give a true and fair view of its financial position and results of operations in accordance with the Facility Agreement.

Entity X will ensure that each Financial Report and other financial statements furnished by it under the Finance Documents in relation to itself are prepared in accordance with Chapter 2M of the Corporations Act 2001 and the Accounting Standards in accordance with the Facility Agreement.

Entity X will ensure it is not a party to, or does not enter into any class order, guarantee or similar arrangement in relation to Chapter 2M of the Corporations Act 2001 pursuant to the Facility Agreement.

Formation of an SPV ('Orphaned or Not')

The Fitch Ratings Criteria on page 4 provide that:

SPVs may be (and in Europe commonly are) "orphaned", that is, not legally or beneficially owned or controlled by the originator of the securitised assets nor any other enterprise with an interest in those assets or the SPV. In such cases, the beneficial ownership of the SPV will often be held on trust for a charity by the immediate legal owner, which will often be a professional company specialising in the management of such vehicles and which performs the management duties for a fee.

The Trust Deed establishes that the trustee of the Securitisation Trust is Entity Z. The Trust Deed identifies that the beneficiaries of the Securitisation Trust are such charitable beneficiaries as may be designated from time to time.

Formation of an SPV (Jurisdiction)

The Fitch Ratings Criteria on page 5 provide that:

Whether any SPV in the structure is exposed to tax liabilities in its jurisdiction of creation, or whether taxes will be imposed to reduce the cash flows or other income or proceeds available from the underlying assets, will have a consequential impact on the ability of an SPV issuer to service its rated debt.

Entity X is expected to be tax neutral.

Formation of an SPV (Legal Opinion)

The Fitch Ratings Criteria on page 5 provide that:

Fitch expects to receive for its review the legal opinion issued by the transaction lawyers in the jurisdiction where the SPV is formed.

Typically, the legal opinion will confirm inter alia:

(a) the due incorporation (or establishment), existence and (where such concept is legally relevant) good standing of the SPV;

(b) the power, capacity and authority of the SPV to enter into and perform its obligations under the transaction documents to which it is a party (under whatever governing law);

(c) any transaction documents to which the SPV is a party (under whatever governing law) constitute legal, valid, binding and enforceable obligations against it;

(d) any local legal, regulatory or tax requirements or consequences that affect the SPV;

(e) all necessary licences, consents, authorisations etc have been obtained and are valid; and

(f) that the enforcement of the transaction documents will not bring any other party onshore (into the issuer's country of establishment).

Entity X will receive from transaction lawyers a legal opinion at financial close which will confirm that:

• (a), (b) and (c) will be satisfied;

• (d) and (e) as far as are relevant will be satisfied; and

The legal opinion from transaction lawyers at financial close will not consider whether (f) is satisfied as it will not be relevant to the transaction.

Limitations on Activities

The Fitch Ratings Criteria on page 6 provide that:

Fitch would expect such restrictions typically to include:

• prohibition of change of ownership, reorganisation or other actions;

• covenants to maintain a separate business existence;

• limited ability to amend the constitutional documents;

• restrictions on any asset dealings (beyond those necessary for the SPV to enter into and perform its obligations under the relevant structured finance transaction documents);

• narrowly defined objects and powers (to those necessary for the SPV to enter into and perform its obligations under the structured finance transaction documents);

• restricted powers of directors;

• no additional borrowings, finance raisings, guarantees, additional granting of security and the like (save in limited exceptional circumstances where debt is subordinated and the subordinated creditors have agreed to be subordinated to the existing structured financing);

• no operating business;

• no employees; and

• no commingling of assets with other parties.

The Directors of Entity X must or must ensure that Entity X does not merge or consolidate with another entity consistent with the Constitution.

The Directors of Entity X must or must ensure that Entity X does not employee any employees in accordance with the Constitution.

Entity X is a single purpose entity established for the sole purpose of undertaking the Project and it does not carry on any other business or activity other than as contemplated or permitted by the Transaction Documents, as defined in the Facility Agreement, or which is reasonably incidental to such business, and it has not incurred a liability which it has not fully discharged other than under the Transaction Documents, or in connection with, or reasonably incidental to, the Project, consistent with the Facility Agreement.

Entity X will not sell, or otherwise dispose of, part with possession of, or create or allow an interest in its property, whether in one or more related or unrelated transactions, other than in specific cases as outlined in the Facility Agreement.

Entity X will not amend or agree to amend or permit or allow to be amended its constituent documents in any way (other than changes of a minor or technical nature to correct a manifest error) consistent with the Facility Agreement.

Entity X will not carry on any business or activity other than as expressly contemplated by the Transaction Document, as defined in the Facility Agreement, consistent with the Facility Agreement.

Entity X will not amalgamate, merge or consolidate with or into any other person or enter into any corporate restructuring, reorganisation or plan of arrangement without the prior written consent of the Agent as defined in the Facility Agreement consistent with the Facility Agreement.

Entity X will not issue any share, grant any right to acquire any such share, nor alter any right attaching to its voting shares, nor issue any other form of capital or marketable security, other than where such issue of a share or marketable security, or grant or alteration of right is to an existing owner of a share or marketable security in Entity X consistent with the Facility Agreement.

Limited Recourse and Non-Petition Provisions

The Fitch Ratings Criteria at page 6 provide that:

As all the transaction creditors involved in a potential structured finance transaction are known and identifiable (the noteholders, security trustee, liquidity providers, swap counterparty, and any other party contracting directly with the SPV), they can (subject to any applicable legal restrictions) agree contractually in the transaction documents to limit their (individual) legal rights to take bankruptcy or other recovery action against the SPV or its assets.

Entity X will not have brought against it any proceedings by, or which include, the Partnership, for the winding up, receivership or liquidation of Entity X pursuant to the Facility Agreement.

Entity X will not have brought against it any proceedings by, or which include, Entity G or the Partnership for the winding up of Entity X consistent with the Receivables Purchase Deed.

Entity X will satisfy the criteria of the Fitch Ratings Criteria which are from an internationally recognised rating agency and will therefore satisfy the requirements of paragraph 820-39(3)(c).

Conclusion

The thin capitalisation provisions contained within Division 820 will not apply to Entity X as it will satisfy each condition in subsection 820-39(3).