Edited version of private advice

Authorisation Number: 1052393949638

Date of advice: 02 June 2025

Ruling

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

Question 1

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 Income Tax Assessment Act 1997 (ITAA 1997) apply to the Entity and the X Assets?

Answer 1

Yes

This ruling applies for the following periods:

XXXX to XXXX

The scheme commenced on:

XX XX

Relevant facts and circumstances

Entity X is an Australian resident.

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.

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

The X Assets have a Step 3 alternative assessable amount.

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

Assumptions

The only financial benefit subject to deemed loan treatment under Division 250 of the ITAA 1997 is the end value of the Assets, and the present value of this end value is less than the opening adjustable value of the Assets due to the Assets being a depreciating asset with no guaranteed residual value. Accordingly, the Division 250 assessable amount will be nil.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

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 subdivision 250-105

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 section 974-160

Does 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 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

Question

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

Summary

The arrangement will be excluded from Division 250 under section 250-40 (The Fourth Exclusion) because the conditions in subsection 250-40(1) will be satisfied. That is the Division 250 assessable income will be less than the alternative assessable amount for the Trust at the start of the arrangement.

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 periodif 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, Example 1.22 of the EM illustrates the application of subsection 250-160(3):

Example 1.22

Under a long term arrangement that falls within the scope of Division 250, Co receives monthly payments from a state government. Forty five per cent of the monthly payments represent consideration for services provided by Co in connection with the arrangement for the tax preferred uses of the asset. The remaining X per cent of the monthly payments represent financial benefits that are subject to the notional loan treatment.

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 Periodical Payments are not referrable to the cost of the Assets. While the Periodical Payments are 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 the Assets in this case is therefore nil.

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. Subsections 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.

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:

•                     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

•                     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.

The arrangement period will start on XXXX and therefore the relevant financial year for the determination of the discount rate to be used is the income year ending 30 June XXXX.

You have calculated the indicative alternative assessable amount using the method statement in subsection 250-40(3) for each asset and aggregated them. Each individual asset has a Step 3 alternative assessable amount greater than nil.

Based on your calculations (which we have not validated), the alternative assessable amount for each of the Assets will be greater than the Division 250 assessable amount for Entity X at the start of the arrangement.

Accordingly, on the assumption that the alternative assessable amount will be greater than then Division 250 assessable amount, the fourth exclusion will apply to the arrangement such that Division 250 will not apply to Entity X or the Assets.