Private ruling: Division 16D
Date of advice: 30 June 2017
Published: November 2017
Ruling period: Income tax year ended 31 December 2017 | Income tax year ended 31 December 2018 | Income tax year ended 31 December 2019 | Income tax year ended 31 December 2020 | Income tax year ended 31 December 2021
Date scheme commenced: 01 July 2017

Ruling: Q1: Will the arrangement relating to the new Assets (the Arrangement) be taken to be a 'qualifying arrangement’ pursuant to section 159GG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 159GG(4) of the ITAA 1936 such that the Arrangement will not be taken to be a 'qualifying arrangement’ for the purposes of Division 16D of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: Company B is a member of a tax consolidated group, of which Company A (the Taxpayer) is the head entity. In 20XX, Company B entered into the Contract for particular services (the Contract) with an Australian government body (Australian government). Under the Contract, Company B is obligated to provide the particular services to the Australian government. In the same year, Company B entered into a related contract with Company C for the construction of specific assets to be used by Company B in meeting its obligations to the Australian government under the Contract. The cost of the assets was approximately $XXm. In accordance with the Contract, the assets have been and continue to be used by Company B exclusively to provide the particular service to the Australian government. For the purpose of Division 16D, the Contract has been taken to be a 'qualifying arrangement’ in relation to the Assets with the consequence that the Taxpayer (in its capacity as head company of the tax consolidated group) has not been allowed depreciation deductions for the assets pursuant to section 159GJ of the ITAA 1936 and has returned assessable income in relation to the assets in accordance with section 159GK of the ITAA 1936. While the use of some of the Assets under the Contract commenced on or after 1 July 2007, the Taxpayer did not elect under subitem 71(2) of Schedule 1 to the Tax Laws Amendment (2007 Measures No.5) Act 2007 (TLAA No.5 2007) to apply Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) to those assets instead of Division 16D of the ITAA 1936. The Taxpayer sought and obtained a private ruling from the Commissioner in which the Commissioner expresses the view that section 51AD does not apply to the Assets. This private ruling applies for the period 31 December 2006 to 31 December 2021. Company B proposes to contract with a third party for the development, manufacture and acquisition of new Assets to replace the existing Assets for use under the Contract. Some of the existing Assets will be held as spare and the remainder will continue to be used under the Contract. The purpose for acquiring the new Assets is to address an obsolescence risk in relation to the existing Assets. Under the Contract, Company B is responsible for managing and funding the obsolescence risk for property it uses to perform the particular services. Company B will be compelled to notify Australian government prior to using the new Assets to perform the particular services. Where used in connection with the performance of the particular service, the new Assets will be subject to the Contract in its entirety. Company B will not be entitled to any additional payments from the Australian government for the use of the new Assets under the Contract. The estimated capital cost of the new Assets is about $Xm and they will have an estimated useful life equal to the remaining term of the Contract. The Contract will expire in 20YY. Company B has no certainty of being issued an extension or new contract with the Australian government on the expiration or termination of the Contract. The Taxpayer provided an extract of the Contract.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 16D | Income Tax Assessment Act 1936 Section 51AD | Income Tax Assessment Act 1936 Section 159GE | Income Tax Assessment Act 1936 Section 159GG | Income Tax Assessment Act 1936 Section 159GJ | Income Tax Assessment Act 1936 Section 159GK

Reasons for decision: Detailed Reasoning - Detailed reasoning: All references below are to the Income Tax Assessment Act 1936 unless otherwise stated. Division 16D was introduced to treat certain non-leveraged finance leases or similar arrangements as loan arrangements. Division 16D can apply if the circumstances set out in section 159GH are not met. In this case, the Taxpayer does not meet any of the circumstances set out in section 159GH, namely: a) The new Assets are used to provide particular service to an end user that is an exempt Australian government agency (the Australian government) on or after 1 July 2007 under a legally enforceable arrangement entered into before 1 July 2007 (subsection 159GH(1A)); b) The Taxpayer did not make an election under subitem 71(2) of Schedule 1 to the Tax Laws Amendment (2007 Measures No 5) Act 2007 for Division 250 to apply to the assets under the Contract between Company B and Australian government (subsection 159GH(1B)); and c) Section 51AD does not apply to the Assets according to the previous private ruling obtained by the Taxpayer. The same reasons that exclude section 51AD from applying to the Assets will equally apply to the new Assets. For Division 16D to apply to an arrangement, it must be taken to be a 'qualifying arrangement’ under section 159GG. For the purposes of Division 16D, an arrangement that relates to the use (or control of the use) by a person (the end-user) of property owned by another person (who is a party to the arrangement) and which also satisfies one of the tests outlined in subsection 159GG(1) will be taken to be a 'qualifying arrangement’. Company B is obligated to use particular Assets to provide particular service to Australian government under the Contract. The new Assets will form part of the particular Assets to be used exclusively to provide particular services under the Contract. The Australian government has effective control of the new Assets based on the Contract. Therefore, the Contract is in relation to the control by the Australian government of the use of the Assets owned by Company B. Based on the facts of the arrangement, subparagraph 159GG(1)(a)(iii) will be satisfied for the new Assets as the Australian government has or will have some form of right to purchase the arrangement property which includes the new Assets. Accordingly, this arrangement will be a qualifying arrangement within the meaning of subsection 159GG(1). | Detailed Reasoning - Detailed reasoning: Subsection 159GG(4) provides the Commissioner with a discretion in certain circumstances to treat an otherwise 'qualifying arrangement’ as if Division 16D does not apply. Subsection 159GG(4) states: Where, but for this subsection, an arrangement would be a qualifying arrangement in relation to an item of eligible property at a particular time (in this subsection referred to as the relevant time) and the Commissioner, having regard to: (a) the circumstances by reason of which the arrangement is a qualifying arrangement in relation to that item of eligible property; and (b) any other relevant circumstances, considers it unreasonable that the arrangement should be a qualifying arrangement at the relevant time in relation to the item of eligible property, the arrangement shall be taken not to be a qualifying arrangement at the relevant time in relation to the item of eligible property. The tests in section 159GG are essentially whether the owner of the property is, under the arrangement, transferring ownership risks and benefits to the end-user who uses or controls the use of the eligible property that is the subject of the arrangement. In the present case, given all the facts and circumstances, the Arrangement may give rise to potentially unreasonable outcomes if treated as a 'qualifying arrangement’. It is therefore considered reasonable, pursuant to the discretion in subsection 159GG(4), that the Arrangement in relation to the new assets be taken not to be a 'qualifying arrangement’ for the purposes of Division 16D.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company A. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.