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Edited version of your written advice
Authorisation Number: 1051433684451
Date of advice: 25 September 2018
Ruling
Subject: Purchase and lease of substantial commercial equipment
Is Company X liable to pay income tax under subsection 128B(5A) of the Income Tax Assessment Act 1936 (ITAA 1936) on rental payments it receives from Company B under the novated Sub Leases?
Answer
No
Question 2
Does the Commissioner consider that Company X has a permanent establishment (PE) in Australia under Article 5 of the Convention between the Government of Australia and the Relevant Government of the for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (the Relevant Convention) and will it, therefore, require Company X to include income it derives from Company B 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 Company Y required to withhold an amount under section 12-245 of Schedule 1 to the Tax Administration Act 1953 (TAA 1953) from interest it pays to Company F in relation to the Loan, or from interest it pays to Company G in relation to the Replacement Loan?
Answer
No
Question 4
Is Company Y liable to pay income tax under subsection 128B(5A) of the ITAA 1936 on rental payments it receives from Company X under the head leases?
Answer
No
Question 5
Does the Commissioner consider that Company Y has a PE in Australia in accordance with Article 5 of the Agreement between the Government of Australia and the Relevant Government for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (the Relevant Agreement) and will it, therefore, require Company Y to include the income it derives from Company X under the head leases of the equipment in its assessable income under subsection 6-5(3) of the ITAA 1997 in determining its Australian taxable income?
Answer
No
Question 6
Is Company Y nonetheless required to include the rental income it derives from Company X under the head leases in its assessable income under subsection 6-5(3) of the ITAA 1997?
Answer
Yes
Question 7
Is Company Y 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 Company Y entitled to claim deductions under section 8-1 of the ITAA 1997 for interest expenses incurred in respect of the Loan and the Replacement 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 Company Y is subject to the taxation of financial arrangement (TOFA) regime in Division 230, is Company Y entitled to claim deductions under subsection 230-15(2) of the ITAA 1997 for losses made in relation to the Loan and the Replacement 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 Company Z, Company Y or Company X in connection with any of the following schemes:
a) the incorporation of Company Y
b) the incorporation of Company X
c) the acquisition of the equipment by Company Y
d) the simultaneous execution of the head leases of the equipment from Company Y to Company X
e) the simultaneous novation to Company X of Company U’s beneficial interest in the leases of the equipment to Company B (which leases are, following the novation, now the subleases)
f) the execution of the 2017 Lease Extension
g) the execution of the 2018 Lease Extension
h) the execution of the 2018 Extension Deed
i) any combination of the above.
Answer
No
This ruling applies for the following period:
2017 - 2025
The scheme commences on:
2017
Relevant facts and circumstances
Company Z is the parent entity of the group. Company X, Company Y, Company F and Company G are wholly-owned subsidiaries of Company Z.
Company B is an Australian company.
Company Y is a resident of Ireland for income tax purposes. Company Y purchased the equipment from Company U.
Company U is unrelated third party to the Company Z group who, simultaneously with the sale of the equipment to Company Y, novated their interest in a lease over the equipment to Company X.
Company X is a resident of Country XY for income tax purposes.
Company Y’s purchase of the equipment was funded by a Loan from Company F and which was subsequently replaced with the Replacement Loan from Company G.
Company X leases the equipment from Company Y under a head lease.
Company B subleases the equipment from Company X under the novated sublease.
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
Income Tax Assessment Act 1997 Division 820
Tax Administration Act 1953 section 12-245 of Schedule 1