Edited version of private advice

Authorisation Number: 1051970015952

Date of advice: 2 June 2022

Ruling

Subject: Temporary full expensing - interest in infrastructure asset

Question 1

Will the hire-purchase agreements in Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to any aspect of this arrangement?

Answer

No.

Question 2

Will you hold the depreciating assets for the purposes of determining the deduction in your decline in value pursuant to the items in table in section 40-40 of the ITAA 1997?

Answer

Yes.

Question 3

Will item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 apply to determine the first element of the cost for the depreciating assets held by you?

Answer

Yes.

Question 4

Are you eligible to claim temporary full expensing under subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The ruling relates to an infrastructure project ('the Project').

Your role in the Project is as Investment Manager and Investor.

You are applying for the ruling in the capacity as an Investor in the Project.

You in its capacity as Investment Manager has developed a pilot model for the raising of funds from investors to invest in Infrastructure Assets in relation to retail and commercial premises.

The aim of the project would deliver rental income to investors.

The capital raise for the Project was completed during the ruling period.

The funds were used to form two Unincorporated Joint ventures (UJV) for the purposes of constructing and owning the Infrastructure Assets.

The Infrastructure Assets were installed ready for use before 30 June 20XX.

As the Investment Manager you have been granted power of attorney to enter into contracts on each investor's behalf.

You invested your own funds into the project to own an interest in the Infrastructure Assets.

Additional capital was raised through Entity A.

You have not chosen to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997.

The Infrastructure Assets are eligible depreciating assets under Division 40 of the ITAA 1997.

The Infrastructure Assets are not subject to Division 43 of the ITAA 1997.

The Infrastructure Assets are located and used in Australia.

None of the Infrastructure Assets are depreciated under low value pools, software development pools or are primary production assets.

Your aggregated turnover is less than $XX million and is a small business entity within the meaning of section 328-110 of the ITAA 1997.

You have not made any choices under section 40-190 of the ITAA 1997.

Structure of Arrangement

Each UJV are considered a tax law partnership.

A UJV bank account is opened in the name of the Investment Manager which is operated on behalf of all the UJV participants. All money received in relation to the arrangement must be paid into the UJV bank account.

Each UJV participant has an interest in the income of the UJV and is severally liable for the liabilities and bears the risk of losses of UJV in accordance with their respective UJV interest.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-35

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 subsection 40-180(1)

Income Tax Assessment Act 1997 subsection 40-180(2)

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 paragraph 40-185(1)(a)

Income Tax Assessment Act 1997 paragraph 40-185(1)(b)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 240-10

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 995-1(1)

Income Tax (Transitional Provisions) Bill 1997 section 40-150

Income Tax (Transitional Provisions) Bill 1997 subsection 40-150(2)

Income Tax (Transitional Provisions) Bill 1997 subsection 40-150(3)

Income Tax (Transitional Provisions) Bill 1997 subsection 40-150(4)

Income Tax (Transitional Provisions) Bill 1997 section 40-155

Income Tax (Transitional Provisions) Bill 1997 subsection 40-155(a)

Reasons for decision

Question 1

Summary

Based on the facts provided, you are a partnership for taxation purposes.

Detailed reasoning

Question 1

Summary

The arrangement is not a hire purchase agreement and therefore will not be subject to Division 240 as per section 240-10 of the ITAA 1997.

Detailed reasoning

A 'hire purchase agreement' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

"hire purchase agreement" means:

(a)  a contract for the hire of goods where:

(i)   the hirer has the right, obligation or contingent obligation to buy the goods;

Note: An example of a contingent obligation is a put option

(ii)  the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods; and

(iii)  title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or

(b)  an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.

Division 240

Section 240-10 of the ITAA 1997 states:

An arrangement is treated as a notional sale and notional loan if:

(a)         the arrangement is listed in the table below; and

(b)         the arrangement relates to the kind of property listed in the table; and

(c)         any conditions listed in the table are satisfied.

Application to your circumstances

Under the UJV Agreement you own an interest in the Infrastructure Assets. You in your capacity as Investment Manager enters into leases with businesses. There is no agreement for a hire purchase of the Infrastructure Assets.

Therefore, the agreement is not a 'hire purchase agreement' as defined in subsection 995-1(1).

Section 240-10 does not apply as the Agreement is not a Hire Purchase Agreement.

Question 2

Summary

You will hold the Infrastructure Assets under item 2 of the table in section 40-40 of the ITAA 1997.

Detailed reasoning

Depreciating assets

Section 40-25 of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.

Section 40-30 of the ITAA 1997 provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Who holds a depreciating asset?

The definition of held in subsection 995-1 of the ITAA 1997 refers to the term hold, which in the context of a depreciating asset is defined to have the meaning given by section 40-40 of the ITAA 1997.

Relevant also is section 40-35 of the ITAA 1997 which provides that for jointly held assets held by one or more entities you hold the asset as if your interest in the underlying asset were itself the asset. General law partnerships are the exception as the partners do not hold partnership assets, the partnership does.

Section 40-40 of the ITAA 1997 states:

Use this table to work out who holds a depreciating asset.

Paragraph 1.43 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 ('the EM') explains the policy item of item 2 of the table in section 40-40:

Where...a depreciating asset is fixed to land where the owner of the quasi-ownership right has a right to remove the asset, the uniform capital allowance system recognises that as the holder while the right of removal exists. Right of removal is consistent with the established legal concept, connoting a right to remove the asset for the benefit of the holder of the right, with the removal item being for their rather than the landowner's benefit. Often the right of removal will extend beyond the term of the quasi-ownership right allowing the quasi-owner reasonable time to remove the asset; they will remain a holder of the asset until that right ends, as until then they might exercise the right and remove the asset; they will remain a holder of the asset until that right ends, as until then they might exercise the right and remove the asset and continue to hold the asset. [Schedule 1, item 1, section 40-40, item 2 in the table]

That paragraph also contains an example (Example 1.5) of the application of item 2 of the table in section 40-40 of the ITAA 1997 to a taxpayer who has the right to remove fixtures while the lease subsists and for a reasonable time afterwards.

Quasi-ownership

A 'quasi-ownership right' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

995-1(1)

In this Act, except so far as the contrary intention appears:

"quasi-ownership right" over land means:

(a)  a lease of the land; or

(b)  an easement in connection with the land; or

(c)  any other right, power or privilege over the land, or in connection with the land.

Application to your situation

The Infrastructure Assets, together, form the depreciating asset for the purposes of section 40-30 of the ITAA 1997.

The assets are owned by the UJV which is considered a tax law partnership.

A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership)... in receipt of ordinary income or statutory income jointly'.

As the partners in the UJV are not carrying on a business as partners, but rather in receipt of ordinary income or statutory income jointly, section 40-35 of the ITAA 1997 will treat the partner as holding the interest in the underlying asset for the purposes of section 40-40 of the ITAA 1997.

Item 2 of the table in section 40-40 of the ITAA 1997 provides that if a depreciating asset is fixed to the land over which there is a quasi-ownership right and the owner of the right has a right to remove the asset, then the asset is held by the owner of the quasi-ownership right for as long as the right to remove the asset exists.

You are the holder of the depreciating asset under item 2 because you have a quasi-ownership right as a result of the sub lease agreement you entered into with the landlord and a requirement of the sub lease is that you are required to remove the Infrastructure Assets upon termination of the lease.

Conclusion

Therefore, for the purposes of identifying the holder of the Infrastructure Assets under Division 40 of the ITAA 1997, you are the holder of the Infrastructure Assets under item 2 of the table in section 40-40 of the ITAA 1997.

Question 3

Summary

Your first element cost will be the amount that you paid for the Infrastructure Assets under item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997.

Reason for Decision

Under subsection 40-180(1) of the ITAA 1997, the first element of cost of a depreciating asset is either the amount specified in an item in the table in subsection 40-180(2) or, if no item in that table applies, the amount a holder of the asset is taken to have paid to hold the asset under section 40-185 of the ITAA 1997.

Under section 40-185, the first element cost of a depreciating asset is taken to be the sum of the amounts specified in paragraph 40-185(1)(a) or the sum of the applicable amounts set out in the table in paragraph 40-185(1)(b) of the ITAA 1997 in relation to the holding of the asset.

Subsection 40-185(1)(b) of the ITAA states:

The sum of the applicable amounts set out in this table in relation to holding the asset or receiving the benefit.

Application to your situation

Based on the relevant facts and circumstances, paragraph 40-185(1)(a) of the ITAA 1997 does not apply as none of the items in the table in subsection 40-180(2) of the ITAA 1997 apply to you.

Paragraph 40-185(1)(b) of the ITAA 1997 therefore applies and the amount you are taken to pay to hold the asset is worked out under section 40-185 of the ITAA 1997. Paragraph 40-185(1)(b) item 1 will apply as you have paid an amount to acquire your interest the Infrastructure Assets.

Conclusion

Therefore, the first element cost for the Infrastructure Assets is the amount you paid to acquire your interest in the assets pursuant to paragraph 40-185(1)(b) of the ITAA 1997.

Question 4

Summary

The Infrastructure Assets are eligible for temporary full expensing under subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997ITTP 1997).

Detailed reasoning

Temporary Full Expensing

The government introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately deduct the full cost of eligible depreciating assets that are first held, and first used or install ready for use for a taxable purpose, between 2020 Budget time and 30 June 2023.

The temporary full expensing provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No 6) Act 2020 and Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Investment) Act 2022 No. 10 .

Small Business Entity

Section 40-155 of the ITTP 1997 provides for businesses with turnover under $5 billion that the section covers you for an income year if:

(a) you are a small business entity for the income year; or

(b) you would be a small business entity for the income year if:

(i)      each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference to $5 billion; and

(ii)     the reference in paragraph 328-110(5)(b) of that Act to a small business entity were instead reference to an entity covered by this section.

Eligible Asset

Subsection 40-150 of the ITTP 1997 provides that temporary full expensing is available for depreciating assets that are:

•         new or second-hand (it is a second-hand asset, only available for entities with aggregated turnover or below $50 million)

•         first held by the entity at or after the 2020 Budget time

•         first used or installed ready for use by the entity for tax purposes (such as a business purpose) between 2020 Budget time and 30 June 2023.

An asset is an eligible asset where the following requirements are satisfied:

•         the asset is not covered under Division 43 of the ITAA 1997 for buildings and other capital works. It is also not an asset to which section 40-45 of the ITAA 1997 states is an asset Division 40 of the ITAA 1997 does not apply (subsection 40-150(2) of the ITTP 1997),

•         it is located in Australia and is used principally in Australia for the principal purposes of carrying on its business (subsection 40-150(3) of the ITTP 1997), and

•         it is not allocated to a low-value pool or software development pool under Subdivision 40-E of the ITAA 1997 or it is a primary production depreciation asset that can be deducted under Subdivision 40-F of the ITAA 1997 (subsection 40-150(4) of the ITTP 1997).

Application to your situation

Small Business Entity

Your activities relating to being the Investment Manager and Investor of the Infrastructure Assets satisfy the requirements of being a small business entity in the year ended 30 June 2021 for the purposes of section 328-110 of the ITAA 1997 and therefore satisfy the requirements of paragraph 40-155(a) of the ITTP 1997.

Eligible Asset

You acquired the Infrastructure Assets after the 2020 Budget Time and they were installed ready for use by 30 June 2021.

Furthermore, none of the exceptions in subsection 40-150 of the ITTP 1997 apply.

Conclusion

Your interest in the Infrastructure Assets qualify for temporary full expensing under subdivision 40-BB of the ITTP 1997

Therefore, you are eligible to deduct the amount of your interest in the Infrastructure Assets for the income year ending 30 June 20XX.