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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1052087093854

Date of advice: 16 February 2023

Ruling

Subject:Income tax - assets - property

Question 1

Would the Commissioner make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 to apply to Entity A and its interest in the Division 43 asset (the Building) that forms part of the Property?

Answer

Yes

Question 2

Would the Commissioner make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 to apply to Entity A and its interest in Division 40 of the ITAA 1997 depreciating assets that form part of the Property leased to Entity B?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A

  1. Entity A is an investment trust. Entity A is not a small business entity for Australian income tax purposes.
  2. Entity A invests in commercial real estate.

The Property

  1. The Building is located at the Property.
  2. A reference to the Property refers to the land, the Building, and all of its components. A reference to the Building refers only to the physical structure of the building and not the land on which it sits.
  3. Prior to the acquisition described below, the freehold in the Property was wholly owned by Entity C, a member of the tax-preferred sector as defined in section 995-1 of the ITAA 1997.

Acquisition

  1. On X July 20XX, Entity A entered into a Contract of Sale with the Entity C to purchase an interest in the Property. Entity C retained the remaining interest, such that the Property became held between Entity A and Entity C as tenants-in-common.
  2. Entity A entered into and incurred obligations under the Contract of Sale. The Contract of Sale is the entire agreement.
  3. Entity A's acquisition was settled in 20XX for a total acquisition price of $X, including consideration of $X million for Undeveloped Land. Entity A's acquisition is subject to a covenant on the Undeveloped Land.
  4. The Deed provides a right of first refusal to a co-owner in the event the other co-owner intends to sell its proportionate interest.
  5. Under the terms of the sale of its interest in the Property, the Entity C assigned the corresponding interest in its Lease with Entity B in relation to the Property, including the Building existing thereon, (but excluding the Undeveloped Land) to Entity A.
  6. The Deed between Entity A and Entity C provides that the Entity A has the right to enforce the Lease and Sub-Leases. Entity A and Entity C are to share the gross income and incidental benefits (including depreciation and building allowances) derived from the Property, the Property Expenses and share all Losses. They are also not partners, joint venturers or in an agency relationship.
  7. Entity A would pay Entity C an uplift fee if certain development works occur on the Undeveloped Land.
  8. Entity A's acquisition was made subject to each of the Lease, the Entity C Sub-Lease and the other Existing Sub-Leases. If the Lease ends that does not mean the Sub-Leases end.
  9. The lease arrangements in relation to the Property at the time of the acquisition by Entity A encompassed:
  1. the Lease between Entity C as lessor and Entity B as lessee, which on acquisition a corresponding interest was subsequently assigned by Entity C to Entity A;
  2. an Entity C Sub-Lease between Entity B as sub-lessor and its related party Entity C as sub-lessee for the whole premises. Entity C operates the Building under this arrangement; and
  3. in addition, various further sub-leases between Entity C (which is both sub-lessee as noted above, but also sub-lessor) in relation to arrangements with unrelated tenants. These further sub-leases are a mix of entities, with only some entities being members of the tax-preferred sector. The total commencing rental applicable to these various Sub-Leases payable to Entity C amounts to approximately $X million. For ease of reference, these other leases will be referred to as the 'Other Existing Sub-Leases'.
  1. The funding of the acquisition of Entity A's share of the Property was via X% equity provided by its Parent. For the purposes of section 250-115 of the ITAA 1997, no limited recourse debt was used to fund the acquisition.

The Lease

  1. The major existing tenant of the Property is Entity B, a company limited by guarantee.
  2. Entity B is a tax-preferred entity as defined in section 995-1 of the ITAA 1997. One of Entity B's purposes is to assist Entity C by securing Entity C's ongoing tenure at relevant property. Entity B's income and property will only be applied towards the promotion of this and related purposes.
  3. Entity C is Entity B's sole member and appoints Entity B's directors. Entity C may also wind up Entity B and receive its surplus assets.
  4. The key terms of the Lease are as follows:
    1. a commencement date of 1 July 20XX and expiry date of 30 June 20XX;
    2. an option for the tenant to renew the Lease for X further terms of X years each;
    3. commencing rental of $X plus GST per annum payable in equal monthly instalments in advance of the relevant month, with annual CPI reviews, and market reviews on the Xth anniversary of the commencement date (and the Xth anniversary of any extended option period);
    4. permitted use of the Building being for its intended purpose.
    5. Entity B has no right to acquire the Property at the end of the Lease.
    6. There is no guaranteed residual value in respect of the Property at the end of the Lease.
  5. The option to renew the Lease is at the discretion of Entity B. The lessors Entities A and C must renew the Lease on Entity B's request, assuming there has been no defaults (for example, non-payment of rent or non-compliance with essential terms).
  6. As its sole member, Entity C would be in a position to, and could direct Entity B to, not renew the Lease at the end of the initial period.
  7. The option to renew the Entity C Sub-Lease is at the discretion of Entity C. Entity B must similarly renew the Entity C Sub-Lease at the request of Entity C, assuming there has been no defaults.
  8. Under the terms of the Lease between Entities A and C (as co-owners and lessors) and Entity B (as head lessee), Entity B is required to pay the rent under the Entity B regardless of any vacancies under the Sub-Leases between Entity B and the various sub-tenants. This rental and the associated obligations are therefore independent of the rent arising under the Sub-Leases that exist.
  9. Entity B's property (as lessee) includes those items of plant, equipment, services, artwork, furnishings and loose property in the Building which have been brought onto or into the Building by or for the Entity B and are owned by the Entity B, Entity B's Agents or any person claiming through Entity B. Entity B's Property does not include the lessors' property or the Building Services.
  10. Entity B must at its own cost equip the Building with all fittings, equipment, floor coverings, lighting and facilities which are not already in the Building necessary, in their opinion, for the conduct of the business. Entity B must pay for all expenditure (including capital expenditure and/or expenditure on works of a structural nature) for any necessary repair or works to comply with legal requirement in relation to the Building, with the Entity A or C to have no liability as lessors. Entity B also provides the Building Services. It also must keep and maintain its private hospital registration.
  11. Entities A and C, as lessors, have property that includes the buildings on the land, Building Services within the Building (land and building excluding the Undeveloped Land), fixtures in the Building, fittings in the Building that are not easily removable (that is they cannot be removed without causing material damage to the Building); and Replacement Items (installed by Entity B).

Relationship between Entity A and Entity C group

  1. The relationship between the Entity A and Entity C groups is an arm's length commercial relationship between 2 organisations with independent ownership/control and management.
  2. The options within the Lease to renew are genuine. There are no adverse commercial consequences to Entity C for choosing not to exercise this option.

Cost breakdown of Entity A's interest in the Property

  1. The market value of Entity A's interest in the Property at the commencement of the Lease has been apportioned by Entity A to determine the cost of different classes of assets for the purposes of determining the application of Division 250 of the ITAA 1997.
  2. Entity A's interest in the Building constitutes between X% of the total value of Entity A's interest in the Property at the commencement of the lease.
  3. The Division 40 depreciating assets constitute X% of the total value of the Property at the commencement of the lease.
  4. The expected financial benefits that Entity A will receive for the Lease have been attributed across the assets in proportion to their starting value for the purposes of determining whether the test in section 250-135 of the ITAA 1997 has been satisfied.
  5. Based on calculations provided by the taxpayer, the present value of the rental income received over the course of the lease by Entity A that is attributable to Division 40 assets is greater than X% of the market value of the Division 40 assets at the commencement of the lease.
  6. Based on calculations provided by the taxpayer, the present value of the rental income received over the course of the Lease by Entity A that is attributable to the Building is just over X%.

Assumption

  1. The first, second, third and fourth exclusions in sections 250-20, 250-25, 250-30 and 250-40 will not apply in relation to the Entity A and any assets that make up the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 250-5

Income Tax Assessment Act 1997 section 250-15

Income Tax Assessment Act 1997 section 250-20

Income Tax Assessment Act 1997 section 250-25

Income Tax Assessment Act 1997 section 250-30

Income Tax Assessment Act 1997 section 250-40

Income Tax Assessment Act 1997 section 250-45

Income Tax Assessment Act 1997 section 250-50

Income Tax Assessment Act 1997 section 250-55

Income Tax Assessment Act 1997 section 250-60

Income Tax Assessment Act 1997 section 250-65

Income Tax Assessment Act 1997 subsection 250-105(2)

Income Tax Assessment Act 1997 section 250-110

Income Tax Assessment Act 1997 section 250-115

Income Tax Assessment Act 1997 section 250-120

Income Tax Assessment Act 1997 section 250-125

Income Tax Assessment Act 1997 section 250-130

Income Tax Assessment Act 1997 section 250-135

Reasons for decision

Question 1

Would the Commissioner make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 to apply to Entity A and its interest in the Building that forms part of the Property?

Summary

The Commissioner will make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 to apply to Entity A and its interest in the Building that forms part of the Property.

Detailed reasoning

Division 250 - the general test

Division 250 applies if the general test in section 250-15 is satisfied.

Section 250-15 provides that the Division applies to you and an asset if:

a)    The asset is being put to a tax preferred use; and

b)    The arrangement period for the tax preferred use of the asset is greater than 12 months; and

c)    The financial benefits in relation to the tax preferred use of the asset have been, will be, or can reasonably be expected to be, provided to you (or a connected entity) by:

                              i.        A tax preferred end user (or a connected entity); or

                             ii.        Any tax preferred entity (or a connected entity); or

                            iii.        Any entity that is a foreign resident; and

d)    Disregarding this Division, you would be entitled to a capital allowance in relation to:

                              i.        A decline in the value of the asset; or

                             ii.        Expenditure in relation the asset; and

e)    You lack a predominant economic interest in the asset at that time.

Division 250 applies on an asset-by-asset basis, and only to assets for which capital allowance deductions can be claimed. As such, the first step is to identify the relevant assets that form the Property being leased.

The Property is a composite asset. Composite assets may either themselves be an asset, or their separate components may be separate assets. Subsection 250-75(2) states that this is a question of fact and degree and can only be determined in light of all the circumstances of a particular case. Example 2 under the subsection notes that a floating restaurant consists of many separate components that are all treated as separate assets.

Similarly, a large building is a composite asset that has a number of clearly separable components. It consists of a number of separate assets, primarily the Land, the Building (the Division 43 asset), and the Division 40 assets in the Building, such as carpet, fans, air-conditioning etc. Each of these is a separate asset for the purposes of the Division. The Building is considered a separate asset to the land itself by virtue of subsection 250-75(1) of the ITAA 1997.

Paragraph 250-15(a) of the ITAA 1997

Section 250-60 of the ITAA 1997 provides that an asset is 'put to a tax preferred use' at a particular time if an end user holds at that time rights as lessee under a lease of the asset and the asset is used by, or on behalf of, an end user who is a 'tax preferred end user' because of paragraph 250-55(a) of the ITAA 1997.

Paragraph 250-55(a) of the ITAA 1997 provides that an 'end user' of an asset is a 'tax preferred end user' if the end user is a 'tax preferred entity'. Subsection 995-1(1) of the ITAA 1997 defines a 'tax preferred entity' to include an 'exempt entity'. An 'exempt entity' is defined in subsection 995-1(1) of the ITAA 1997 as an entity all of whose ordinary income and statutory income is exempt from income tax because of the Income Tax Assessment Act 1936, ITAA 1997 or another Commonwealth law.

Subsection 250-50(1) of the ITAA 1997 provides that an entity is an 'end user' of an asset if the entity uses, or effectively controls the use of, the asset. Subsection 250-50(4) of the ITAA 1997 provides that an entity is taken to be an end user of an asset if the entity holds rights as a lessee under a lease of the asset.

Paragraph 250-15(a) of the ITAA 1997 will be satisfied as Entity B (being an 'exempt entity') will be a 'tax preferred end user' and will lease the Property, which will include the Building, Land and Division 40 of the ITAA 1997 depreciating assets. This means that the Building, Land and Division 40 of the ITAA 1997 depreciating assets will be 'put to a tax preferred use'. Even where the Entity C Sub-Lease is taken into account, the lessee under that arrangement is Entity C, another exempt entity, tax preferred end user, and connected entity to Entity A.

As such, this requirement is satisfied.

Paragraph 250-15(b) of the ITAA 1997

Paragraph 250-15(b) of the ITAA 1997 will be satisfied as the 'arrangement period' (as defined in section 250-65 of the ITAA 1997) is the x-year term of the lease, which exceeds 12 months.

Paragraph 250-15(c) of the ITAA 1997

Paragraph 250-15(c) of the ITAA 1997 will be satisfied as financial benefits, being rent payments, in relation to the tax preferred use of the assets will be provided to Entity A by a tax preferred end user (Entity B).

Paragraph 250-15(d) of the ITAA 1997

Paragraph 250-15(d) of the ITAA 1997 will be satisfied as, disregarding Division 250 of the ITAA 1997, Entity A will be entitled to capital allowances for expenditure in relation to the Building and a decline in value of the Division 40 of the ITAA 1997 depreciating assets that form part of the Property. Paragraph 250-15(d) of the ITAA 1997 will not be satisfied with respect to the unimproved land, as land is not an asset for which capital allowances can be claimed under Division 40 or Division 43 of the ITAA 1997.

Paragraph 250-15(e) of the ITAA 1997 - predominant economic interest

A taxpayer will lack a predominant economic interest in an asset at a particular time if it satisfies one of the tests listed in section 250-110 of the ITAA 1997.

Paragraph 250-15(e) of the ITAA 1997 will be satisfied as Entity A will lack a predominant economic interest in its share of the Building.

Specifically:

  • The limited recourse debt test in section 250-115 of the ITAA 1997 will not be satisfied as limited recourse debt has not been used by Entity A to acquire its interest in the Building.
  • The right to acquire asset test in section 250-120 of the ITAA 1997 will not be satisfied as the lessee (Entity B) will not have the right to acquire the Building at the end of the lease, or at any other time.
  • The effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 will not be satisfied in respect of the Building. Although the lease will constitute an 'effectively non-cancellable arrangement' as defined in section 250-130 of the ITAA 1997, section 250-125 of the ITAA 1997 states:

1)    You lack a predominant economic interest in an asset at a particular time if:

a.    any arrangement that relates to:

                              i.        the tax preferred use of the asset; or

                             ii.        the financial benefits to be provided by the members of the tax preferred sector in relation to the tax preferred use of the asset is effectively non-cancellable (see section 250-130); and

b.    the arrangement period for the tax preferred use of the asset is:

                              i.        greater than 30 years; or

                             ii.        if the arrangement is less than or equal to 30 years - 75% or more of that part of the asset's effective life that remains when the tax preferred use of the asset starts.

2)    Disregard section 40-102 in working out the asset's effective life for the purposes of subparagraph 1(b)(ii).

Section 250-65 of the ITAA 1997 states that the 'arrangement period' starts when the tax preferred use of the asset starts, and is taken to end when the tax preferred use of an asset is likely or has ended. Under paragraph 250-65(4)(b) of the ITAA 1997, in determining when a particular tax preferred use of an asset is likely to end, it must be assumed that any right that an entity has to renew or extend such an arrangement will not be exercised (unless it is reasonable to assume that the right will be exercised because of the commercial consequences for the entity of not exercising the right).

The arrangement period in this case would be X years, being the period of the lease. It has been assumed by the Commissioner that any right that Entity B has to renew the Lease will not be exercised as there are no commercial consequences for not doing so.

The Building (not being a depreciating asset) would not have an effective life. This means that it would be tested under subparagraph 250-125(1)(b)(i) of the ITAA 1997.

As the lease and the arrangement period is for X years, which is less than the 30 years in subparagraph 250-125(1)(b)(i) of the ITAA 1997, the test in section 250-125 of the ITAA 1997 is not satisfied for expenditure in relation to the Building.

  • The level of expected financial benefits test in subparagraph 250-135(2)(b)(ii) of the ITAA 1997 is satisfied in respect of Entity A's interest in the Building. Section 250-135 of the ITAA 1997 states:

1)    You lack a predominant economic interest in an asset at a particular time if the asset has a guaranteed residual value at that time.

2)            You also lack a predominant economic interest in an asset at a particular time if, at that time

a)    the arrangement under which the asset is put to the tax preferred use (either alone or together with any other arrangement in relation to the tax preferred use of the asset or the provision of financial benefits in relation to the tax preferred use of the asset) is a debt interest; or

b)    the sum of the present values of the expected financial benefits that members of the tax preferred sector have provided, or are reasonably likely to provide, to you (or a connected entity) in relation to the tax preferred use of the asset exceeds 70% of:

                              i.        the market value of the asset if subparagraph 250-15(d)(i) applies; or

                             ii.        so much of the market value of the asset as is attributable to the expenditure referred to subparagraph 250-15(d)(ii) if that subparagraph applies.

The discount rate to be used in calculating the present value of the expected financial benefits is determined under subsection 250-105(2) of the ITAA 1997, which states:

For the purposes of section 250-135 and Subdivisions 250-C and 250-D, the discount rate to be used in working out the present value of a future amount is a rate that reflects a constant period rate of return (worked out on a compounding basis) on the investment in

a)    the asset referred to in subparagraph 250-15(d)(i) if that subparagraph applies; or

b)    the expenditure referred to in paragraph 2501-5(d)(ii) if that subparagraph applies;

that is implicit in the arrangements under which the asset is put to a tax preferred use and financial benefits are provided in relation to that tax preferred use.

Section 250-135 of the ITAA 1997 is a point in time test, and the test is applied at the start of the tax preferred use, being the start of the lease. Section 250-140 provides the limited circumstances that a retest of the level of expected financial benefits may be required.

Based on the calculations provided by the taxpayer, the present value of the rent payments that Entity B is reasonably likely to provide to Entity A that will be attributable to its interest in the Building is only marginally greater than 70% of the market value of its interest in the Building at the start of the Lease. Therefore, the test in section 250-135 of the ITAA 1997 is satisfied for expenditure in relation to Entity A's interest in the Building.

As Entity A does lack a predominant economic interest in respect of its interest in the Building, paragraph 250-15(e) of the ITAA 1997 is satisfied.

Therefore, Division 250 of the ITAA 1997 will apply to Entity A and its interest in the Building.

Division 250 of the ITAA 1997 - exclusions

With respect to the exclusions in sections 250-20, 250-25, 250-30, and 250-40 of the ITAA 1997, none of these 4 exclusions apply. This is because:

  • Entity A is not a small business entity for the income year in which the arrangement period for the tax preferred use of the Property starts (section 250-20 of the ITAA 1997).
  • The financial benefits that can reasonably be expected to be provided to Entity A under the arrangement (the arrangement being the lease of the Property to Entity B) is in excess of $5 million (section 250-25 of the ITAA 1997).
  • The arrangement period for the tax preferred use of the Property is a lease of real property for longer than X years, the total value of the financial benefits expected to be received by Entity A from Entity B is in excess of $50 million, and the value of the Property being leased exceeds $40 million (section 250-30 of the ITAA 1997).
  • The Division 250 of the ITAA 1997 assessable amount with respect to Entity A's lease of the Property to Entity B is greater than the alternative assessable amount (section 250-40 of the ITAA 1997).

Division 250 of the ITAA 1997 - fifth exclusion - Commissioner's determination

Section 250-45 of the ITAA 1997 is the fifth and final exclusion to Division 250 applying.

Entity A has requested, as required under subsection 250-45(a) of the ITAA 1997, that the Commissioner exercise the discretion in section 250-45 of the ITAA 1997 to make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to it and its interest in the Building.

Entity A and its interest in the Building satisfies the level of expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997.

Factors supporting a conclusion that it would be unreasonable for Division 250 of the ITAA 1997 to apply to Entity A and its interest in the Building include:

  • The dominant purpose of the arrangement is to lease the Building to the lessee.
  • The sub-lessees under the Other Existing Sub-Leases may not be tax preferred entities. This means that the financial benefits with respect to the arrangement provided in relation to the tax preferred use of the asset may actually be substantially lower than the rental projections provided by the taxpayer in respect of their calculations for the level of expected financial benefits test in section 250-135 of the ITAA 1997.
  • When applying the test in subsection 250-135(2) of the ITAA 1997 to Entity A and its interest in the Building rather than its interest in the individual Division 40 assets that make up the Property, there is only a marginal breach of the 70% threshold.

Taking these factors into account, the Commissioner considers that Entity A's circumstances in relation to its interest in the Building are not in the nature of those arrangements to which Division 250 of the ITAA 1997 was intended to apply.

Therefore, the Commissioner would, under section 250-45 of the ITAA 1997, make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to Entity A and its interest in the Building that forms part of the Property that is leased to Entity B.

Question 2

Would the Commissioner make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 to apply to Entity A and its interest in Division 40 of the ITAA 1997 depreciating assets that form part of the Property leased to Entity B?

Summary

The Commissioner would make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 of the ITAA 1997 to apply to Entity A and its interest in the Division 40 assets that form part of the Property leased to Entity B.

Detailed reasoning

For the same reasons outlined in Question 1, the first 4 requirements of the general test in section 250-15 of the ITAA 1997 are satisfied with respect to Entity A and its interest in the Division 40 of the ITAA 1997 depreciating assets that form part of the Property that will be leased to Entity B.

Paragraph 250-15(e) of the ITAA 1997 will also be satisfied with respect to the Division 40 of the ITAA 1997 depreciating assets as Entity A will lack a predominant economic interest in respect of its interest in the Division 40 of the ITAA 1997 depreciating assets that form part of the Building. Specifically:

  • The limited recourse debt test in section 250-115 of the ITAA 1997 will not be satisfied as limited recourse debt has not been used by Entity A to acquire its interest in any of the Division 40 of the ITAA 1997 depreciating assets.
  • The right to acquire asset test in section 250-120 of the ITAA 1997 will not be satisfied as the lessee (Entity B) will not have the right to acquire the Division 40 of the ITAA 1997 depreciating assets that form part of the Building at the end of the lease, or at any other time.
  • The effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 will be satisfied in respect of the Division 40 of the ITAA 1997 depreciating assets where the remaining effective life of the relevant assets is less than X years at the time the X-year lease commenced.
  • The level of expected financial benefits test in subparagraph 250-135(2)(b)(ii) of the ITAA 1997 is satisfied with respect to Entity A's interest in the Division 40 of the ITAA 1997 depreciating assets when tested as a single class of assets. Based on the calculations and methodology used by the taxpayer, the present value of the financial benefits (rent) that Entity B is reasonably likely to provide to Entity A that are attributable to its interest in the Division 40 of the ITAA 1997 depreciating assets is greater than 70% of the market value of its interest in the Division 40 of the ITAA 1997 depreciating assets at the start of the lease.

As such, Entity A lacks a predominant economic interest in respect of its interest in the Division 40 of the ITAA 1997 depreciating assets that form part of the Building that will be leased to Entity B. In the absence of an exclusion applying, Division 250 of the ITAA 1997 will apply to Entity A and its interest in the Division 40 of the ITAA 1997 depreciating assets that form part of the Building.

Division 250 of the ITAA 1997 - exclusions

With respect to the exclusions in sections 250-20, 250-25, 250-30, and 250-40 of the ITAA 1997, none of these 4 exclusions apply. This is because:

  • Entity A is not a small business entity for the income year in which the arrangement period for the tax preferred use of the Property starts (section 250-20 of the ITAA 1997).
  • The financial benefits that can reasonably be expected to be provided to Entity A under the arrangement (the arrangement being the lease of the Property to Entity B) is in excess of $5 million (section 250-25 of the ITAA 1997).
  • The arrangement period for the tax preferred use of the Property is a lease of real property for longer than 5 years, the total value of the financial benefits expected to be received by Entity A from Entity B is in excess of $50 million, and the value of the Property being leased exceeds $40 million (section 250-30 of the ITAA 1997).
  • The Division 250 of the ITAA 1997 assessable amount with respect to Entity A's lease of the Property to Entity B is greater than the alternative assessable amount (section 250-40 of the ITAA 1997).

Division 250 of the ITAA 1997 - fifth exclusion - Commissioner's determination

Section 250-45 of the ITAA 1997 is the fifth and final exclusion to Division 250 applying.

Entity A has requested, as required under subsection 250-45(a) of the ITAA 1997, that the Commissioner exercise the discretion in section 250-45 of the ITAA 1997 to make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to its interest in the Division 40 of the ITAA 1997 depreciating assets that are part of the lease of the Property.

Entity A and its interest in the Division 40 depreciating assets satisfy the level of expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997. It is also likely that a significant portion of the Division 40 of the ITAA 1997 depreciating assets also satisfy the effectively non-cancellable arrangement test in subsection 250-125(1) of the ITAA 1997.

Factors supporting a conclusion that it would be unreasonable for Division 250 of the ITAA 1997 to apply to Entity A's interest in the Division 40 of the ITAA 1997 depreciating assets include:

  • The Division 40 of the ITAA 1997 depreciating assets constitute X% of the total value of the Property at the commencement of the lease. The leasing of Division 40 of the ITAA 1997 depreciating assets therefore consists of less than X% of the total value of the Property at the commencement of the lease.
  • The dominant purpose of the arrangement is to lease the Building to the lessee. It is not to lease the Division 40 of the ITAA 1997 depreciating assets that form an ordinary part of any building to the lessee. That is merely incidental to the overall lease arrangement.
  • The impact of Division 250 of the ITAA 1997 on the Division 40 of the ITAA 1997 assets is marginal in comparison to the tax consequences for the balance of, and the overall, arrangement. That is, Division 250 of the ITAA 1997 would impact only a minor portion of the assets and arrangement. For this reason, it should have no significant impact on the tax profile of the investment given the X-year duration of the intended tax preferred use of the Property.
  • If the Commissioner does not make a determination under section 250-45 of the ITAA 1997, Entity A would need to apply Division 250 of the ITAA 1997 to the income attributable to its interest in the Division 40 of the ITAA 1997 depreciating assets but not to the majority of the rental and other income attributable to its interest in the Building and the land component on which the Building sits. This would result in the taxpayer having to apply Division 250 of the ITAA 1997 on a minor portion of its total income with respect to the lease arrangement, which would be a significant compliance burden, as the deemed loan treatment prescribed under Division 250 of the ITAA 1997 would have to be applied on an asset-by-asset basis with respect to all depreciating assets on the fixed asset register. Financial benefits (being the rent payments for the Property) would have to be allocated to each individual asset, and new deemed loans would have to be created on the replacement of any assets over the lease term.
  • As stated above in Question 1, the Commissioner will make a determination in respect of Entity A and its interest in the Building.

Taking these factors into account, the Commissioner considers that Entity A's circumstances in relation to its interest in the Division 40 of the ITAA 1997 depreciating assets are not in the nature of those arrangements which Division 250 of the ITAA 1997 was intended to apply to.

Therefore, the Commissioner would, under section 250-45 of the ITAA 1997, make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to Entity A and its interest in the Division 40 of the ITAA 1997 depreciating assets that form part of the Property that will be leased to Entity B.


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