Edited version of private advice

Authorisation Number: 1051976064044

Date of advice: 9 June 2022

Ruling

Subject: Application of the fourth exclusion under section 250-40 of the ITAA 1997

Question

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

Answer

Yes.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

The scheme commences on:

xx of 20xx

Relevant facts and circumstances

Entity X is an Australian resident.

Entity X purchased X assets from Entity B.

Entity X is the legal owner and holder of X Assets for the purpose of Division 40 of the ITAA 1997.

Under the Arrangement, Entity B (as Buyer) will purchase 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 financial benefits are in relation to tax preferred use of assets.

X assets are depreciable assets with no guaranteed residual value.

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 X Assets have a Step 3 alternative assessable amount.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Section 58-5

Income Tax Assessment Act 1997 Section 250-40

Income Tax Assessment Act 1997 Subsection 250-40(1)

Income Tax Assessment Act 1997 Subsection 250-40(3)

Income Tax Assessment Act 1997 Subdivision 250-D

Income Tax Assessment Act 1997 Subsection 250-155(8)

Income Tax Assessment Act 1997 Subsection 250-160(1)

Income Tax Assessment Act 1997 Subsection 250-160(2)

Income Tax Assessment Act 1997 Subsection 250-160(3)

Income Tax Assessment Act 1997 Section 250-180

Income Tax Assessment Act 1997 Paragraph 250-180(3)(a)

Income Tax Assessment Act 1997 Subdivision 250-E

Income Tax Assessment Act 1997 Section 974-160

Petroleum Resource Rent Tax Assessment Act 1989

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Background

The requirements for Division 250 to apply to an arrangement are outlined in section 250-15 and state that this Division applies to you and an asset at a particular time if:

•         the asset is being put to a tax asset use; and

•         the arrangement for tax preferred use is greater than 12 months; and

•         the financial benefits in relation to the tax preferred use of the asset flow from a tax preferred end user, entity or foreign resident;

•         apart from this division there would be an entitlement to capital allowances in relation to the decline in value or expenditure in relation to the asset; and

•         you lack a predominant economic interest in the asset at that time.

An arrangement subject to Division 250 may be excluded pending the application of the exclusionary provisions provided for under section 250-20 to 250-45.

You advised the Commissioner that you have not considered the requirements of section 250-15 to establish if Division 250 would prima facie apply. You have taken this approach given that you propose the fourth exclusion in section 250-40 applies.

The Commissioner considers that it is likely the arrangement satisfies the requirements of section 250-15 and as such Division 250 applies, unless subject to the exclusionary provisions. The Commissioner has not made a conclusion on the application of section 250-15 and has considered if the requirements for the fourth exclusion are satisfied.

The fourth exclusion is contained in section 250-40 and states that Division 250 will not apply if at the time the asset is put to a tax preferred use 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 periodif Division 250 did not apply.

Division 250 Assessable Amount

Overview

The Division 250 assessable amount is defined in subsection 250-40(2) as the sum of the present values of all 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-D, an amount will be included in assessable income under Division 250 if it is subject to deemed loan treatment.

Under subsection 250-160(1) financial benefits will be subject to deemed loan treatments where amounts are received by you from members of the tax preferred sector for work conducted under normal operation conditions. These amounts must be cash settable and cannot have been provided by one of your connected entities.

Subsection 250-160(2) further provides that a relevant portion of the end value of an asset forms a financial benefit subject to deemed loan treatment where the asset is a privatised asset that is not to be transferred to a member of the tax preferred sector at the end of the arrangement under a legally enforceable arrangement. The end value is calculated under section 250-180.

Subsection 250-160(3) works to limit 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).

Treatment of revenue

Under the Arrangement, Entity B (as Buyer) will purchase output generated by the Entity X (as Seller), and make Periodical Payments in respect of the output.

The financial benefits that Entity X makes under the Arrangement would not be referrable to the cost of the assets and would therefore not be payments that would represent a return on an investment for the purposes of subsection 250-160(3).

Financial benefits would only be subject to deemed loan treatment under Division 250 to the extent to which they represent a return on investment. Accordingly, the financial benefits provided by Entity B to Entity X are not subject to deemed loan treatment under subsection 250-160(3) such that the Division 250 assessable amount excludes this amount.

Treatment of the end value of the assets

On the facts provided the asset is a privatised asset as defined by section 58-5 and has no enforceable arrangement over it whereby Entity X is required to transfer the asset to a tax preferred sector entity at the end of the Arrangement. Revenue received from the end value of the asset when it is sold represents a return on investment and does not constitute a recovery of production costs or a provision of services. Subsection 250-160(2) and 250-160(3) of the ITAA 1997 are subsequently satisfied and a portion of the end value of the asset is therefore a financial benefit subject to deemed loan treatment.

In addition, paragraph 250-180(3)(a) is satisfied and the value of the asset is the adjustable value at the end of the arrangement period as calculated using the asset's effective life and the prime cost method.

The asset is a depreciating asset with $xx residual value. The present value of the asset's end value will be less than its adjustable value at the start of the arrangement period and will therefore not give rise to a gain on sale constituting a financial benefit under Division 250.

Assessable amount

Under subsection 250-155(8) the overall gain from the loan are the present value of the sums of the financial benefits subject to deemed loan treatment less the adjustable value of the asset at the start of the arrangement period.

The end value of the asset is the only value subject to deemed loan treatment under the arrangement. As the asset is a depreciating asset with xx residual value, the present value of the asset's end value will be less than its adjustable value at the start of the arrangement period. Therefore, the Division 250 assessable amount will be $xx.

Alternative assessable amount

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

1. 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
2. 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.

The term financial benefit for the purpose of subsection 250-40(3) is defined in section 974-160 to mean, broadly, anything of economic value.

Conclusion

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

Accordingly, the fourth exclusion applies to the arrangement such that Division 250 does not apply to Entity X or the X Assets.