Edited version of your written advice

Authorisation Number: 1013139591793

Date of advice: 22 December 2016

Ruling

Subject: Purchase and lease of substantial commercial equipment

Question 1

Is Country A Company liable to pay income tax under subsection 128B(5A) of the Income Tax Assessment Act 1936 ('ITAA 1936') on rental payments it receives from Aus Company under the novated subleases?

Answer

No

Question 2

Does the Commissioner consider that Country A Company has a permanent establishment ('PE') in Australia under Article 5 of the Convention between the Government of Australia and the Government of the Country A and Country B for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ('the Country A Convention') and will it, therefore, require Country A Company to include income it derives from Aus Company under the novated subleases in its assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 ('ITAA 1997') in determining its Australian taxable income?

Answer

No

Question 3

Is Country B Company required to withhold an amount under section 12-245 of Schedule 1 to the Tax Administration Act 1953 ('TAA') from interest it pays to Foreign Lender Company in relation to the Loan?

Answer

No

Question 4

Is Country B Company liable to pay income tax under subsection 128B(5A) of the ITAA 1936 on rental payments it receives from Country A Company under the head leases?

Answer

No

Question 5

Does the Commissioner consider that Country B Company has a PE in Australia in accordance with Article 5 of the Agreement between the Government of Australia and the Government of Country B for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains ('the Country B Agreement') and will it, therefore, require Country B Company to include the income it derives from Country A Company under the head lease of the equipment in its assessable income under subsection 6-5(3) of the ITAA 1997?

Answer

No

Question 6

Is Country B Company nonetheless required to include the rental income it derives from Country A Company under the head lease in its assessable income under subsection 6-5(3) of the ITAA 1997?

Answer

Yes

Question 7

Is Country B Company entitled to a deduction for the decline in value of the equipment under section 40-25 of the ITAA 1997?

Answer

Yes

Question 8

Subject to the potential application of the thin capitalisation rules in Division 820 of the ITAA 1997, is Country B Company entitled to claim deductions under section 8-1 of the ITAA 1997 for interest expenses incurred in respect of the Loan?

Answer

Yes

Question 9

Subject to the potential application of the thin capitalisation rules in Division 820 of the ITAA 1997 and assuming that Country B Company is subject to the 'taxation of financial arrangements' ('TOFA') regime in Division 230 of the ITAA 1997, is Country B Company entitled to claim deductions under subsection 230-15(2) of the ITAA 1997 for losses made in relation to the Loan?

Answer

Yes

Question 10

Will the Commissioner make a determination under paragraphs 177F(1)(a), 177F(1)(b) or subsection 177F(2A) of the ITAA 1936 to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by Foreign Head Company, Country B Company or Country A Company in connection with any of the following schemes:

(a) the incorporation of Country B Company;

(b) the incorporation of Country A Company;

(c) the acquisition of the equipment by Country B Company;

(d) the simultaneous execution of the head lease of the equipment from Country B Company to Country A Company;

(e) the simultaneous novation to Country A Company of Unrelated Foreign Company's interest in the pre-existing lease of the equipment of Aus Company (the lease is, following the novation, now the sublease); or

(f) any combination of (a) to (e)

Answer

No

This ruling applies for the following periods:

2016 to 2020

The scheme commences on:

201X

Relevant facts and circumstances

Foreign Head Company is the parent entity of the group. Country B Company, Country A Company and Foreign Lender Company are wholly-owned subsidiaries (directly or indirectly) of Foreign Head Company.

Aus Company is an Australian company and operating the leased equipment in Australia.

Country B Company is a resident of Country B for income tax purposes. Country B Company purchased the equipment from an Unrelated Foreign Company.

Unrelated Foreign Company simultaneously with the sale of the equipment to Country B Company, novated its interest in the pre-existing lease over the equipment to Country A Company.

Country A Company is a resident of the Country A for income tax purposes.

Country B Company's purchase of the equipment was funded by a loan from Foreign Lender Company.

Country A Company leases the equipment from Country B Company under a head lease.

Aus Company subleases the equipment from Country A Company under the novated (sub)lease and maintained continuous possession and use of the equipment in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128B(5A)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 paragraphs 177F(1)(a)

Income Tax Assessment Act 1936 paragraph 177F(1)(b)

Income Tax Assessment Act 1936 subsection 177F(2A)

Income Tax Assessment Act 1997 subsection 6-5(3)

Income Tax Assessment Act 1997 section 40-25

Tax Administration Act 1953 section 12-245 of Schedule 1