Edited version of your written advice

Authorisation Number: 1013061349647

Date of advice: 1 August 2016

Ruling

Subject: Whether a 'Payments Swap' arrangement constitutes a financial arrangement under Division 230?

Question

Will the Project Trust's Payments Swap arrangement constitute a financial arrangement under Division 230?

Answer

Yes.

This ruling applies for the following periods:

Year ending 31 March 2017

Year ending 31 March 2018

Year ending 31 March 2019

Year ending 31 March 2020

Year ending 31 March 2021

Year ending 31 March 2022

Year ending 31 March 2023

Year ending 31 March 2024

Year ending 31 March 2025

Year ending 31 March 2026

Year ending 31 March 2027

Year ending 31 March 2028

Year ending 31 March 2029

Year ending 31 March 2030

Year ending 31 March 2031

Year ending 31 March 2032

Year ending 31 March 2033

Year ending 31 March 2034

Year ending 31 March 2035

Year ending 31 March 2036

Year ending 31 March 2037

Year ending 31 March 2038

Year ending 31 March 2039

Year ending 31 March 2040

Year ending 31 March 2041

Year ending 31 March 2042

Year ending 31 March 2043

Year ending 31 March 2044

Year ending 31 March 2045

Year ending 31 March 2046

The scheme commences on:

August 20XX

Relevant facts and circumstances

Transaction Overview

A large public entity (Entity ABC) and Project Trust will enter into a 30 year agreement (Agreement), under which Project Trust will commit to pay an upfront payment, being the Upfront Concession Fee (UCF), and quarterly payments, being the Ongoing Concession Fees (OCFs), to Entity ABC on Financial Close. These are paid in consideration for the right to receive monthly payments from Entity ABC (Payments Swap).

The Agreement will also require Project Trust to deliver the Hard FM Services in relation to the Infrastructure included in the Transaction and assuming Asset Risk for Hard FM Elements in consideration of payments (Hard FM Services Payments), referred to herein as the Hard FM Services arrangement.

Ownership structure

The Holding Trust is a unit trust established in X to act as the holding entity of Project Trust and its unit register will be kept in X.

Project Trust is a unit trust established in X and its unit register will be kept in X.

The trustees of Holding Trust and Project Trust are each companies incorporated in Australia.

Units in Project Trust are wholly owned by Holding Trust.

The terms of the trust deed for each of Holding Trust and Project Trust:

a. contain provisions which ensure their respective beneficiaries are presently entitled to all of the income of each trust as at the end of each income year;

b. contain provisions which restrict the transfer or registration of units in the trust where this would result in the trust becoming a 'public unit trust' for the purposes of Division 6C of Income Tax Assessment Act 1936 (ITAA 1936); and

c. have been drafted with the intention that Project Trust and Holding Trust will be fixed trusts for the purposes of section 272-65 in Schedule 2F to the ITAA 1936.

Charitable Trust, HoldCo and FinCo

The Charitable Trust has been established to act as the holding entity of HoldCo.

The beneficiaries of the Charitable Trust are charitable institutions in Australia.

HoldCo is a company incorporated in Australia for the sole purpose of acting as the holding entity of FinCo.

FinCo is a company incorporated in Australia for the sole purpose of:

a. raising senior debt from external financiers (Syndicated Facility)

b. entering into the intercompany loan with Project Trust (Intercompany Loan)

c. entering into related hedging arrangements, and an agreement pursuant to which Entity ABC will assign the right to receive the quarterly OCFs (Initial Receivables) to FinCo in exchange for the upfront Receivables Purchase Payment payable by FinCo (Receivables Purchase Agreement).

FinCo's and HoldCo's share capital comprise solely of ordinary shares that are wholly held by HoldCo and the trustee of the Charitable Trust respectively.

FinCo is contractually restricted by the transaction documents and/or its constituent documents to only undertake activities necessary for the above purpose.

FinCo's constitution provides that the board of FinCo must comprise of at least one independent non-executive director.

The directors of FinCo will at all times act independently of the Equity Investors, and pursuant to FinCo's constitution, questions arising at a meeting of directors are to be decided by a unanimous decision of the directors present and voting. Pursuant to FinCo's constitution, notwithstanding the initial directors of the company are the persons who have consented to act as directors, the company may by resolution passed in general meeting, remove any director and appoint another person in the director's place.

Funding

Prior to Financial Close, Holding Trust will call for committed equity from the Equity Investors pursuant to an equity subscription agreement (Shareholders and Unitholders Deed).

The Equity Investors will subscribe for all the units in Holding Trust pursuant to the Shareholders and Unitholders Deed.

Holding Trust will raise debt from Equity Investors (Unitholder Loan).

The Syndicated Facility, Unitholder Loan and Intercompany Loan will, at all times be debt interests for Australian income tax purposes and satisfy the definition of a debt interest as defined in subsection 974-15(1).

The value of the Syndicated Facility will at all times be at least 50% of FinCo's assets.

The Syndicated Facility obtained by FinCo will bear interest at a variable rate.

The Intercompany Loan will represent a cash advance facility (herein referred to as the On-Loan) provided by FinCo to Project Trust at Financial Close. The Intercompany Loan also allows for a cash advance facility provided by Project Trust to FinCo where FinCo has a cash shortfall, in order for it to meet its debt service obligations under the Syndicated Facility (Liquidity Loan). It is expected the On-Loan will remain in place for the majority of the Project term. The interest rate on the Intercompany Loan will be equal to the rate specified in the Financial Model.

Interest Rate Hedging Arrangements

On Financial Close, FinCo will enter into the External Swap. Under the External Swap, FinCo will be required to make regular fixed-rate payments based on an amortising notional principal to the swap providers, as specified in a schedule of payments. In return, the swap providers will be required to pay swap payments to FinCo referenced to a floating rate basis for each settlement period. Only the net amount payable for each period will be paid or received by FinCo under the External Swap.

On Financial Close, FinCo and Project Trust will also enter into the Equalisation Swap, under which:

a. If the actual financing costs on the Syndicated Facility and the Intercompany Loan are greater than the modelled financing costs in the Financial Model, Project Trust is required to pay the difference to FinCo; and

b. If the actual financing costs on which interest on the Syndicated Facility and the Intercompany Loan are less than the modelled financing amounts in the Financial Model, FinCo is required to pay the difference to Project Trust.

Key Project terms bid

The term of the Project will be the period beginning from satisfaction or waiver of the final condition precedent under the Agreement (Financial Close) and ending on 31 December 20YY, unless terminated earlier.

On or before Financial Close, Entity ABC will enter into the Agreement and the Receivables Purchase Agreement with Project Trust and FinCo respectively.

The Hard FM Services Arrangement

Project Trust will be the entity with the primary obligation of carrying out the Hard FM Services under the Agreement.

A KPI regime will apply to the performance of the Hard FM Services under the Agreement. If Project Trust fails to comply with those KPIs within agreed periods of time, Entity ABC may notify Project Trust and require rectification. If Project Trust fails to rectify the non-compliance, pursuant to the Agreement, Entity ABC may retain amounts worked out in accordance with the Agreement from the Hard FM Services Payments (Hard FM Retention Amounts). In the unlikely event that the Hard FM Retention Amounts were to exceed the amount of the monthly Hard FM Services Payments Entity ABC would be able to retain the excess amount from other payments due and payable by it under the Transaction Documents.

The Hard FM Retention Amounts will be paid to Project Trust once it is again complying with the relevant KPI.

Step in Rights

In addition to the KPI regime and pursuant to clause 18.2 of the Agreement, Entity ABC will have step-in rights (Step-in Rights) if an emergency or public safety incident occurs.

Compensation Events

Pursuant to the Agreement, Project Trust will be entitled to apply for relief from its obligations and/or claim compensation to the extent that an event (Compensation Event) occurs.

In relation to Compensation Events, the Agreement provides that in respect of compensation Entity ABC must pay the costs incurred by Project Trust.

Asset Risk for Hard FM Elements

Pursuant to the Agreement, Project Trust acknowledges and agrees that it is wholly and solely responsible for all liability, loss and claims arising out of or in connection with all Asset Risk, however such Asset Risk arises or is caused from time to time during the term of the Project.

Project Trust may obtain insurance against certain insurable risks assumed or pass those risks to the Hard FM Service subcontractor under the subcontract (Hard FM Services Subcontract). Any other assumed risks will remain with Project Trust.

In this regard, we understand that Project Trust will engage an independent third party services contractor (Third Party Contractor) under the Hard FM Services Subcontract.

Hard FM Services Payments

The amount of the Hard FM Services Payments set out in the Financial Model Outputs Schedule will not be contingent upon the amount of funds received by Entity ABC.

Hard FM Sinking Fund

Project Trust will be required to maintain a Hard FM sinking fund account (Hard FM Sinking Fund Account).

The funds in the Hard FM Sinking Fund Account must be used for the purpose of undertaking certain lifecycle works forming part of the Hard FM Services in respect of the Infrastructure in accordance with an agreed lifecycle and maintenance plan.

Relevantly, the Agreement provides that, to the extent that there are any excess funds in the Hard FM Sinking Fund Account as against the balance that is required to be maintained at such time, such funds may be withdrawn by Project Trust from the Hard FM Sinking Fund Account.

Access during Project Term

At all relevant times during the Project term, Entity ABC will remain the legal owner of the Infrastructure.

Project Trust will not get any proprietary interests in the Infrastructure through the payment of the Concession Fees. Consistent with standard Hard FM Services arrangements, access will be provided under a non-exclusive licence (Hard FM Licence).

Relevantly, pursuant to the Agreement, Entity ABC will grant the Hard FM Licence to Project Trust to access the area to which Project Trust will require access in order to carry out the Hard FM Services (Licensed Area).

Third Party Contractor Hard FM Subcontract

Project Trust will subcontract responsibility for the delivery of the Hard FM Services to Third Party Contractor under the Hard FM Services Subcontract. The terms of the Hard FM Services Subcontract will be on broadly back to back terms with Project Trust's rights and obligations under the Hard FM Services arrangement.

In particular, the scheduled Hard FM Services Payments to be received by Project Trust under the Agreement will be broadly back to back with the scheduled payments to Third Party Contractor under the Hard FM Services Subcontract except for a profit margin that is intended to cover the cost of insurances to be taken out by Project Trust to cover risks that cannot be passed to Third Party Contractor under the Hard FM Services Subcontract.

Under the Agreement, Project Trust is liable to pay Entity ABC an amount of Liquidated Damages being an amount equivalent to a portion of unavailable Infrastructure, which is to be paid by the Hard FM Services Contractor to Project Trust under the Hard FM Services Contract.

Payments Swap

Concession Fees

Pursuant to the Agreement, Project Trust will pay the UCF and OCFs (Concession Fees) to the Entity ABC solely in consideration for the assignment of the monthly amounts otherwise received by Entity ABC. This will provide Entity ABC with a fixed, certain and assignable stream of payments that enhances the commercial ability of Entity ABC to effectively securitise its future cash flow by way of the Receivables Purchase Agreement.

Monthly Net Revenue Amounts

The Monthly Net Revenue Amount will comprise a monthly payment in arrears being an amount calculated in accordance with the Agreement.

In addition, Entity ABC must, in the case of decreased revenue being incurred or likely to be incurred by the Project Trust as a result of a Compensation Event, pay the Estimated Cost Effect in accordance with the Agreement via an adjustment to the Monthly Net Revenue Amounts.

Retention and Set off of Amounts

Under the Agreement, Entity ABC has a general right to retain and offset amounts due and payable under any Transaction Document. Also under that clause the amount of any liquidated damages payable or receivable by Project Trust and Entity ABC must be set off.

Pursuant to the Agreement it is intended that negative Monthly Net Revenue Amounts must be offset against the monthly Hard FM Services Payments (to the extent there is a monthly Hard FM Services Payment which exceeds the Hard FM Retention Amount for that period).

Receivables Purchase Agreement

FinCo will enter into the Receivable Purchase Agreement and pay an upfront Receivables Purchase Payment to Entity ABC in consideration for the Initial Receivables.

A Payment Directions Deed will be entered into between Entity ABC, FinCo and Project Trust. Under the Payment Direction Deed, Entity ABC will direct the OCFs payable by Project Trust to Entity ABC to be paid directly to FinCo.

FinCo will apply the OCFs towards repayment of principal and payment of interest on the Syndicated Facility. OCFs (in excess of the amount required to repay principal and interest on the Syndicated Facility) will be lent to Project Trust under the Intercompany Loan.

Termination of the Project

Clauses of the Agreement provide for termination of the agreement after Financial Close in certain circumstances (Termination Event).

In each case, Entity ABC is required to make a payment as specified under the Agreement, the amount of which will vary depending on the applicable Termination Event.

In each case, the component of the payment made by Entity ABC to FinCo and Project Trust in respect of a Termination Event will be a full or partial refund of the Receivables Purchase Payment (Receivables Refund Payment) and the UCF (Termination Payment) respectively.

Other Information

As at Financial Close, Project Trust will have an aggregate turnover greater than A$100 million and/or financial assets of greater than A$100 million and/or total assets of greater than A$300 million for the purposes of section 230-455.

Project Trust will not make tax timing method elections to apply any of the methods for taking gains/losses into account referred to in subsections 230-40(1)(b) to (e).

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 8-1

Income Tax Assessment Act 1997 - section 230-5(2)

Income Tax Assessment Act 1997 - section 230-45

Income Tax Assessment Act 1997 - subsection 230-45(2)

Income Tax Assessment Act 1997 - subsection 230-45(3)

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

Income Tax Assessment Act 1997 - subsection 230-455(6)

Income Tax Assessment Act 1997 - section 974-160

Income Tax Assessment Act 1997 - section 995-1

Reasons for decision

Overview of the TOFA rules under Division 230

The Taxation of Financial Arrangements (TOFA) rules under Division 230 provides a comprehensive framework for taxing financial arrangements that certain taxpayers start to have in an income year commencing on or after 1 July 2010 unless:

a. an individual, or

b. a superannuation entity, managed investment scheme or an entity substantially similar to a managed investment scheme under foreign law with assets of less than $100 million, or

c. an ADI, a securitisation vehicle or other financial sector entity with an aggregated turnover of less than $20 million, or

d. another entity with an aggregated turnover of less than $100 million, financial assets of less than $100 million and assets of less than $300 million.

However an entity may, notwithstanding that Division 230 does not apply to them based on the above thresholds, irrevocably elect under subsection 230-455(7) to have Division 230 apply to financial arrangements that it has entered into after the beginning of the income year in which the election is made.

Financial arrangement

Under the TOFA rules, it is necessary to first identify a "financial arrangement" of an entity for the purposes of Division 230.

Under subsection 230-45(1), an arrangement is a 'financial arrangement' if under that arrangement there is:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;

unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

* denotes a term defined in subsection 995-1(1).

What is an "arrangement"

An "arrangement" is defined broadly to mean "any arrangement, agreement, understanding, promise or undertaking, whether express of implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings" in section 995-1.

Whether financial benefits under an arrangement are "cash settlable"

Generally, under subsection 230-45(2), a right to receive or obligation to provide a financial benefit is "cash settlable" if the benefit is money or money equivalent.

Grouping and disaggregation rules

The grouping and disaggregation rules must be considered where there are a number of rights or obligations to provide or receive financial benefits. The following factors under subsection 230-55(4) must be considered in determining whether the rights or obligations themselves are an arrangement or two or more separate arrangements:

a. The nature of the rights and/or obligations;

b. Their terms and conditions (including those relating to any payment or other consideration for them);

c. The circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purpose of one or more of the entities involved);

d. Whether they can be dealt with separately or must be dealt with together

e. Normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole); and

f. The objects of Division 230, namely to minimise the extent to which the tax treatment of gains and losses from financial arrangements creates distortions in commercial decision making and lowering compliance costs, and to align more closely the tax and commercial recognition of gains and losses from financial arrangements.

Application of the TOFA rules under Division 230

As Project Trust does not fall within an exception in subsection 230-5(2), Division 230 can apply.

The Payments Swap in this case involves the Project Trust with a right to receive more than one financial benefit.

Therefore, a threshold question is whether the rights and obligations in respect of the Payments Swap constitute a separate arrangement for Division 230 purposes, or whether these rights and obligations form part of the broader arrangement under the Agreement.

The "arrangement" for the purposes of Division 230

The rights and obligations created by the Agreement from the perspective of Project Trust include, amongst other things:

a. the right to receive the Monthly Net Revenue Amounts as they fall due and payable;

b. the obligation to pay the Concession Fees (comprising both the Upfront Concession Fee and the Ongoing Concession Fees);

c. the contingent right to receive the Termination Payment as a full or partial refund of the Upfront Concession Fee in the event that the requirements for receipt of the Termination Payment are satisfied under the Agreement;

d. the right to receive payments in the event of a Compensation Event;

e. the obligation to provide the Hard FM Services;

f. the right to receive the Hard FM Services Payments;

g. the obligation to pay and the right to receive Liquidated Damages; and

h. the assumption of Asset Risk.

Taxation Ruling TR 2012/4 (TR 2012/4) sets out the Commissioner's view on this matter and states at paragraphs 6 and 133 that an "arrangement" will often be the rights and obligations under a particular contract, unless the form differs from the economic or commercial substance of the arrangement. This analysis is consistent with that contained in the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (EM).

Paragraph 138 of TR 2012/4 provides that regard must always be had to each of the factors in subsection 230-55(4), however, in a particular fact pattern it may be that one or more criteria are more significant than the others.

The nature of the rights and obligations

At paragraph 15, the Commissioner states that this factor includes a consideration of the substance of the rights and/or obligations.

Project Trust will not obtain any proprietary interest in the Infrastructure through the payment of the Concession Fees. Consistent with typical Hard FM Services arrangements, access will be provided under the Hard FM Licence for nominal consideration. Nor will Project Trust carry out or control the operation of the Infrastructure. The day to day operation of the Infrastructure will continue to be carried out by Entity ABC. Rather, Project Trust will obtain discrete sets of rights and obligations under the Agreement that can be characterised respectively as a Payments Swap and a Hard FM Services arrangement.

Under the Payments Swap, the Concession Fees are paid solely for the right to receive the Monthly Net Revenue Amounts. The outgoing of the Concession Fees is made to gain exposure to the revenues related to the Infrastructure net of certain operational and maintenance costs incurred by Entity ABC to provide a commercial return on equity invested in Project Trust.

Under the Hard FM Services arrangement, Project Trust fulfils its obligations through the Hard FM Services Subcontract under which substantially all the risks and rewards of the delivery of those services are passed to the Third Party Contractor. A margin made by Project Trust on the delivery of those services is intended to cover the costs of insurance of risks that cannot be passed on to the Third Party Contractor under the Hard FM Services Subcontract.

These factors point towards the Payments Swap as an arrangement separate from all the other rights and obligations under the Agreement, namely the Hard FM Services arrangement for these purposes.

Their terms and conditions (including those relating to any payment or other consideration for them)

At paragraph 16 of TR 2012/4, the Commissioner states that where one amount is calculated and paid as consideration for a number of rights, it will tend to suggest an aggregation of rights. Alternatively, where the consideration is calculated and paid separately for different rights, it will tend to suggest such rights are separate.

The UCF and OCFs are scheduled payment obligations set out in the Financial Model Output Schedule that have been bid by the Equity Investors. They are payments solely in consideration of the Monthly Net Revenue Amounts that are calculated as set out in the Agreement.

The Hard FM Services Payments payable in consideration solely for the delivery of the Hard FM Services will be structured on broadly back to back terms with the Hard FM Services Subcontract with the Third Party Contractor.

Specifically, the Hard FM Services Payments are not calculated by reference to the quantum of funds received by Entity ABC, the amount of any resulting Monthly Net Revenue Amounts, or other amounts. As outlined in the Agreement, the Hard FM Payments will be set out in the Financial Model Outputs Schedule.

However, Project Trust's right to receive the Hard FM Services Payments set out in that schedule is dependent on the satisfactory performance of the Hard FM Services. The failure to meet KPI's in the provision of the Hard FM Services may result in the retention of some or all of the Hard FM Services Payments. Should the Hard FM Services Retention Amount exceed the Hard FM Services Payment for a period, the terms provide that it may be retained out of other payments made by to Entity ABC.

As noted above, the payment of Liquidated Damages by Project Trust to Entity ABC is directly attributable to failures in the delivery of the Hard FM Services and is back to back with a payment required to be paid by the Third Party Contractor to Project Trust under the Hard FM Services Subcontract. Accordingly, the payment of the Liquidated Damages by Project Trust should be considered part of the Hard FM Services arrangement and not part of the Payments Swap.

This factor does not conclusively indicate whether for the purposes of Division 230 the rights and obligations in respect of the Payments Swap give rise to an arrangement separate to the other rights and obligations under the Agreement.

The circumstances surrounding their creation and their proposed exercise or performance

At paragraphs 17 and 18 of TR 2012/4, the Commissioner states that this factor includes a consideration of the context surrounding the life cycle of the rights and/or obligations from creation to what is proposed as exercise or performance. It requires an objective assessment of the purposes of the entities involved, where evidence of the subjective purpose may be relevant though not determinative.

The structuring of the arrangement that gives rise to the relevant rights and obligations arises from a single bid process run by Entity ABC. The Entity ABC Infrastructure: Information Memorandum (IM) envisaged that a single preferred bidding consortium reaching financial close would assume those rights and obligations under a single contract (being the Agreement).

Project Trust submits that if it subcontracts to a separate entity to provide Hard FM Services, that separate entity would be a member of the successful bidder consortium and a party to the same Agreement.

Consistent with the proposed structure, the structure proposed by Entity ABC in the IM contemplated that a separate Hard FM Services Payment may be paid for the delivery of the Hard FM Services.

The Third Party Contractor is willing to undertake the performance of the Hard FM Services on broadly back to back terms with the Hard FM Services arrangement. The Third Party Contractor will not obtain any interest or upside in any profits or losses made by Project Trust under the Payments Swap. This indicates that the Hard FM Services arrangement (and the Hard FM Subcontract) should be considered as capable of performance separate from the Payments Swap.

This factor supports the position that the Payments Swap is a separate arrangement to the Hard FM Services arrangement.

Whether they can be dealt with separately or must be dealt with together

At paragraph 19 of TR 2012/4, the Commissioner states that this factor includes consideration of whether the rights and/or obligations can be dealt with separately or must be dealt with together in accordance with the terms and conditions of the arrangement.

Under the Agreement, a termination event would trigger a termination of the Project as a whole, including but not limited to the termination of third party arrangements, financing arrangements and the securitisation arrangement.

Further, the Agreement provides that Project Trust cannot assign its rights or interests under the Agreement without Entity ABC's consent.

This factor indicates that the rights and obligations in respect of the Payments Swap do not give rise to an arrangement separate from the Hard FM Services arrangement.

Normal commercial understandings and practices in relation to them

At paragraph 20 of TR 2012/4, the Commissioner states that this factor includes consideration of normal commercial understandings and practices in relation to rights and/or obligations (including whether they are regarded commercially as separate things or as a group or series that forms a whole).

The Payments Swap allows Entity ABC to transfer the risk around the demand for its Infrastructure, the risk of non-receipt of the expected monthly revenues from that Infrastructure, and of Soft FM and Hard FM costs to Project Trust. Such an arrangement is explicable on its own terms without reference to the Hard FM Services arrangement.

The Hard FM Services Subcontract which will be on broadly back to back terms with the Hard FM Services arrangement evidences the fact that such arrangements are common in the industry as standalone arrangements.

From an accounting perspective, the Payments Swap is treated as a financial arrangement separate from the Hard FM Services arrangement. As such, any profit arising on the Payments Swap will be brought to account according to accounting principles appropriate to financial arrangements of this kind.

This supports the treatment of the Payments Swap as an arrangement separate from the Hard FM Services arrangement for these purposes.

The objects of Division 230

At paragraph 21 of TR 2012/4, the Commissioner states that, very broadly, the objectives of Division 230 are:

a. To minimise tax distortions on commercial decision making by, for gains and losses from financial arrangements, aligning tax recognition of such gains and losses with the reality of what gains and losses occur and when they occur;

b. To align tax and commercial recognition of gains and losses from financial arrangements by ensuring that the time of recognition of those gains and losses is reasonable, and by generally recognising such gains and losses on revenue account; and

c. To appropriately take account of, and minimise, compliance costs.

This may involve considering the taxation implications that would arise if the arrangements were aggregated compared to if they were not.

Treating all of Project Trust's rights and obligations under the Agreement as a single arrangement for Division 230 purposes, instead of as two or more separate arrangements, means that ultimately the arrangement will not be a 'financial arrangement' under subsection 230-45(1) (as there would be non-insignificant non-cash settlable rights and obligations in respect of the Hard FM Services and the licence). In that instance, any gains or losses would be assessed under the general income tax provisions rather than Division 230.

The applicant has indicated that for accounting purposes it will recognise the net commercial gains and losses arising from the Concession Fees, and other amounts as earned or incurred progressively over the term of the arrangement. Aligning TOFA treatment with the accounting treatment would minimise the applicant's compliance costs, which is in line with the objectives of TOFA.

This factor supports the treatment of the Payments Swap as an arrangement considering the objects of Division 230.

Conclusion

Applying the factors under subsection 230-55(4), Project Trust's obligation to pay the Concession Fees in consideration for the right to receive the Monthly Net Revenue Amounts (and other amounts) does constitute a financial arrangement under Division 230.