ATO ID 2004/179: Fixed maximum fee as a factor in determining control under section 51AD
Date of decision: 6 February 2004
Year of income: Year ended 31 March 2003
Business line: Public Groups and International

Issue
Will a payment still be a 'fixed maximum fee' for the purpose of paragraph 19 of Taxation Ruling IT 2602 in determining whether there is control of the use of property by an end-user under subparagraph 51AD(4)(b)(ii) of the Income Tax Assessment Act 1936 (ITAA 1936), where payments are made on a 'take or pay' basis and the contract provides for a reduction in the payments where the contracted capacity is unavailable?

Decision
Yes. A payment will still be a 'fixed maximum fee' for the purpose of paragraph 19 of IT 2602 in determining whether there is control of the use of property by an end-user, where payments are made on a 'take or pay' basis and the contract provides for a reduction in the payments where the contracted capacity is unavailable.

Facts
The arrangement involved property owned and used by the taxpayer in the provision of a service of conveying energy for a tax exempt entity ('the end-user'). The end-user determined whether or not it wished the energy to be conveyed. Payments from the end-user to the taxpayer for the service were made on a take or pay basis as they were not based on whether the energy was actually conveyed but on the capacity of the property at any time to carry the volume of contracted energy. The arrangement imposed a reduction on the payments from the end-user to the taxpayer where the contracted capacity was not met. All of the capacity of the property to convey energy was allocated for the use of the end-user and the taxpayer was unable to use the property to convey energy for any entity other than the end-user.

Reasons for decision
Summary: Subparagraph 51AD(4)(b)(ii) of the ITAA 1936 operates in relation to property acquired or constructed by a taxpayer that is used wholly or partly in the carriage, transmission or delivery of goods, or in the provision of services where a body whose income is exempt from tax ('the end-user') has effective control of the use of the property. Taxation Ruling IT 2602 provides that the question of control may require an examination of the whole commercial arrangement, including the financial arrangements, surrounding the ownership and operation of the property. Paragraph 19 of IT 2602 states that an arrangement for the payment of a fixed maximum fee would effectively limit the commercial benefits which can flow from the operation of the property by the taxpayer and might suggest the end-user rather than the taxpayer would seek to control the day-to-day operation of the property. Payments that are made on a take or pay basis where the payments from the end-user provide the required return to the taxpayer from the use of the property, without recourse to material income from third parties, will constitute a fixed maximum fee for the purpose of paragraph 19 of IT 2602. The fact that payments from the end-user under the arrangement were dependent upon the contracted service being provided, and that the payments would be reduced if the contracted capacity was not provided, was not a factor in determining whether the payments constituted a fixed maximum fee within the context of paragraph 19 of IT 2602.

Legislative references: Income Tax Assessment Act 1936 paragraph 51AD(4)(b) subparagraph 51AD(4)(b)(ii)
Related public rulings and determinations: Taxation Ruling IT 2602 | Taxation Ruling TR 96/22
Related ATO interpretative decisions: ATO ID 2002/932
Subject references: Ownership, interests, control & rights Non recourse loans