Private ruling: Application of Special Purpose Entity exemption in section 820-39 to Finance Entity Securitisation Arrangement
Published: November 2011
Date scheme commenced: The Finance Entity and the Construction Entity are part of a group of entities which has been engaged by Party A to construct and operate a Facility over a number of years and to finance the cost of construction to Party A including Progress Payments.

Ruling: Q1: To confirm that the thin capitalisation provisions in Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) will not apply to the Finance Entity due to Entity falling within the special purpose entity exemption in section 820-39. | A1: Yes, the Finance Entity falls within the special purpose entity exemption in section 820-39 of the ITAA 1997.

Relevant facts and circumstances: The Finance Entity and the Construction Entity are part of a group of entities which has been engaged by Party A to construct and operate a Facility over a number of years and to finance the cost of construction to Party A including Progress Payments. Finance Entity will borrow from Lenders pursuant to a Facility Document . Finance Entity will use the borrowed funds to make a loan and to make instalments of a Purchase Price to Party A during the Construction Phase. The instalments will purchase certain right of access fees payable by the Construction Entity to Party A during the Operations Phase ('the Securitisation'). Finance Entity was established solely for the purpose of securitising assets and facilitating the financing for the construction and operation of the Facility. Finance Entity will be restricted through terms of the engagement and other contractual requirements to activities necessary to perform the role of facilitating finance. Finance Entity will not engage in any business or activity other than that which is necessary for, or incidental to, its role. Finance Entity will at all times be funded predominantly (that is, more then 50 per cent) by debt. Assumption Finance Entity will at all times during the course of the construction and operations phases be an insolvency-remote special purpose entity according to criteria of one or more internationally recognised rating agency standards that are applicable to Finance Entity's circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 820-39 | Income Tax Assessment Act 1997 Subsection 820-39(3) | Income Tax Assessment Act 1997 Paragraph 820-39(3)(a) | Income Tax Assessment Act 1997 Paragraph 820-39(3)(b) | Income Tax Assessment Act 1997 Paragraph 820-39(3)(c)

Reasons for decision: Summary: Section 820-39 of the ITAA 1997 provides an exemption from the thin capitalisation provisions in Division 820 for special purpose entities that satisfy the conditions set out in subsection 820-39(3) of the ITAA 1997. Subsection 820-39(3) states the conditions for exemption throughout an income year are: '(a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and (b) the total value of debt interests in the entity is at least 50% of the total value of the entity's assets; and (c) the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances.' Subsection 820-39(4) further states that: 'The condition in paragraph (3)(c) can be met without the rating agency determining that the entity meets those criteria.' Applying subsection 820-39(3) to the Relevant facts and circumstances Finance Entity meets the requirements of paragraph 820-39(3)(a) as it was established solely for the purpose of securitising assets and facilitating the financing for the construction and operation of the Facility, will be restricted to this role and will not engage in any business or activity other than that which is necessary for, or incidental to, its role. Finance Entity meets the requirements of paragraph 820-39(3)(b) as it will at all relevant times be predominantly (that is, more than 50 per cent funded by Debt. Finance Entity also meets the requirements of paragraph 820-39(3)(c) as Finance Entity will, in accordance with the Assumption , at all times during the course of the construction and operations phases be an insolvency-remote special purpose entity according to criteria of one or more internationally recognised rating agency standards that are applicable to Finance Entity's circumstances. | Detailed Reasoning - Conclusion: As each of the conditions in subsection 820-39(3) is met, Finance Entity falls within the special purpose entity exemption in section 820-39 of the ITAA 1997

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