Edited version of your written advice

Authorisation Number: 1051423654647

Date of advice: 3 September 2018

Ruling

Subject: Application of Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997)

Question

If the X Assets are being put to a tax preferred use under the Z arrangement, does the Fourth Exclusion in section 250-40 of the ITAA 1997 apply to you and the X Assets?

Answer

Yes.

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20XX.

Qualifications

The Commissioner makes this Ruling based on the precise scheme identified in this Ruling.

Relevant facts and circumstances

Entity X is an Australian resident.

Under the Z Agreement, Entity B (as Buyer and a tax preferred entity) will purchase all the output generated by the Entity X (as Seller), and make Periodical Payments in respect of the output.

Entity X recovers its production costs from the Periodical Payment revenues it receives from Entity B.

The calculations of the alternative assessable amount for the X Assets using the method statement in subsection 250-40(3) are detailed in the table below:

The above table shows the aggregate result for each step in respect of the individual assets comprising the X Assets. Each individual asset has a Step 3 alternative assessable amount of greater than nil.

The discount rate used for determining the present values above is X.XX%.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 250-40

Income Tax Assessment Act 1997 Subdivision 250-D

Income Tax Assessment Act 1997 section 974-160

Income Tax Assessment Act 1997 subsection 995(1)

All references refer to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Summary

The arrangement in relation to you and the Assets will be excluded from Division 250 under section 250-40 (the fourth exclusion) because the condition in subsection 250-40(1) is satisfied. That is, the Division 250 assessable income is less than the alternative assessable amount.

Detailed reasoning

The fourth exclusion is contained in section 250-40 and states that Division 250 will not apply to you and an asset if at the time the asset’s tax preferred use starts; the Division 250 assessable amount is less than the alternative assessable amount.

Section 250-40 requires a comparison of the present value of the Division 250 assessable amount with the present value of assessable income and allowable deductions during the arrangement period as if Division 250 did not apply.

Paragraph 1.134 of the Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 5) Act 2007 (EM) provides the purpose of section 250-40:

1.134 Section 250-40 ensures that Division 250 does not apply to an arrangement that would otherwise come within its scope if the arrangement is not tax advantaged…

Paragraph 1.129 of the EM explains that the calculation in section 250-40 is a once-off calculation that is made at the start of the arrangement period.

Division 250 assessable amount

The Division 250 assessable amount is defined in subsection 250-40(2) as the sum of the present values of all the amounts that would be likely to be included in assessable income under Division 250 in relation to the tax preferred use of an asset.

Under Subdivision 250-E, an amount will be included in assessable income under Division 250 if it is subject to deemed loan treatment under Subdivision 250-D.

Subsection 250-160(3) limits financial benefits subject to deemed loan treatment to those which reasonably represent a return of, or on, an investment in the asset (as distinct, for example, from representing consideration for the provision of services or the recovery of production costs).

Financial benefit is defined in section 974-160 to mean anything of economic value and includes property and services.

In relation to financial benefits subject to deemed loan treatment, under the Agreement, Entity B will purchase all the output generated by Entity X and make Periodical Payments in respect of the output.

Entity X recovers its production costs from the Periodical Payments it receives from Entity B. The Payments are not referrable to the cost of the Entity X’s Assets but rather are calculated by reference to the amount of the output produced. While the Periodical Payment is a financial benefit within the definition in section 974-160, the financial benefit does not represent a return of, or on, an investment for the purposes of subsection 250-160(3). Accordingly, the financial benefits provided by Entity B to Entity X are not subject to deemed loan treatment pursuant to subsection 250-160(3). The Division 250 assessable amount for each of Entity X’s Assets in this case is therefore nil.

Alternative assessable amount

Subsection 250-40(3) provides that the alternative assessable amount is calculated as follows:

● total of the present values of the amounts that would be included in assessable income in relation to the financial benefits provided with regards to the tax preferred use of the asset during the period of the arrangement had Division 250 not applied, less

● total of the present values of the amounts that would be deductible in relation to the asset, or expenditure in relation to the asset, under Divisions 40 or 43 in relation to the period of the arrangement had Division 250 not applied.

Subsection 250-105(1) provides that for the purposes of section 250-40, the discount rate to be used in working out the present value of a future amount is the long-term bond rate as defined under subsection 995-1(1) for the financial year in which the relevant arrangement period starts.

Subsection 995-1(1) defines long term bond rate, for a period as:

(a) the average, expressed as a decimal fraction to 4 decimal places (rounding up if the fifth decimal place is 5 or more), of the daily assessed Australian Government bond capital market yields in respect of 10-year non-rebate Treasury bonds published by the Reserve Bank in relation to the period; or

(b) if no such yields in respect of bonds of that kind were published by the Reserve Bank in relation to the period, the decimal fraction determined by the Minister by legislative instrument for the purposes of this definition in relation to the period.

For the income year ending 30 June 20XX, the discount rate to be used to work out the alternative assessable amount under subsection 250-40(3) is X.XX%.

You calculated the alternative assessable amount using the method statement in subsection 250-40(3) for each asset and aggregated them as shown in the table below:

Each individual asset had a Step 3 alternative assessable amount greater than nil.

Based on your calculations the alternative assessable amount for each of the Assets is greater than the Division 250 assessable amount for X Entity at the start of the arrangement.

Accordingly, the fourth exclusion in section 250-40 applies to the Z arrangement such that Division 250 does not apply to you and the Assets.