Private ruling: Redemption of units and adjustment to the redemption price
Published: July 2012
Ruling period: The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 2 | If the answer to Question 1 is no, is Fund A able to obtain a tax deduction in accordance with section 40-880 of the ITAA 1997 for any payment made under: | (a) the Deed entered into before 1 April 2010? | Answer | Yes | (b) the Deeds entered into after 1 July 2010? | Answer | No | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the fifth income year (starting from and including the income year in which the payment is incurred) from when the payment of the Amount occurs in accordance with the Deed. | Question 3 | If the answer to Question 2(b) is no, is Fund A able to obtain a tax deduction in accordance with subsection 230-15(2) of the ITAA 1997 for any payment under the Deeds entered into on or after 1 July 2010? | Answer | Yes | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 4 | If Fund A receives an amount under the Deed, should such an amount reduce the CGT cost base of the units pursuant to subsection 110-45(3) of the ITAA 1997? | Answer | No | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 5 | If the answer to Question 4 is no, does another CGT event (e.g. CGT event C2 or H2) occur upon receipt of such amount? | Answer | Yes. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 6 | If Fund A receives an amount under the Deeds entered into on or after 1 July 2010, will such an amount be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply? | Answer | Yes. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed entered into on or after 1 July 2010.
Date scheme commenced: 1 April 2010

Ruling: Q1: If Fund A is obligated to make a payment under clause 5.1(a) of the Deed, can such a payment be included in the capital gains tax (CGT) cost base of the units under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: Property Fund is an unlisted unit trust which invests indirectly in real estate assets located in various states and territories in Australia. The investments are made with a long-term objective of deriving and maximising rental yields and capital growth in relation to those investment assets. Property Fund is highly illiquid and in that respect the Trustee does not generally offer a liquidity or redemption facility. Property Fund's Deed however provides that the Trustee is not obliged to, but may in its discretion, repurchase units or cause units to be redeemed out of the proceeds of a new issue or in such other circumstances as the Trustee permits. During early 2010, Fund A advised the Trustee that it wished to redeem a portion of its units in the Trust (a number of other unit holders had also advised the Trustee of their wish to redeem units in Property Fund). In considering a redemption request by a unit holder, the Trustee has to have regard to its fiduciary obligation to other unit holders. In this respect, the Trustee had regard to the available funds of the Property Fund and amounts that potential investors may decide to invest into the Fund. On or after 1 April 2010, the Fund B subscribed for $XXX of units (New Units) in Property Fund. On or after 1 July 2010, the Fund B subscribed for an additional $XXX of New Units in Property Fund. On or after 1 December 2010, the Fund B subscribed for an additional $XXX of New Units in Property Fund. Each subscription for New Units in the Property Fund was governed by a separate Subscription Deed. The Trustee used the proceeds of each subscription to fund the partial redemption of the unit holdings of a number of existing investors (Exiting Investors). The trust deed of Property Fund provides that the price at which the Trustee repurchases units or causes units to be redeemed is a price agreed by the Trustee and the unit holder, and may provide for an exit fee and/or redemption provision. Trusts in which Property Fund has an interest have been involved in a legal dispute which currently remains unresolved. This dispute was in existence at the time Fund B sought to subscribe for the New Units. It was uncertain as to whether the outcome of the legal dispute would be in the Trustee's favour, such that it would receive payment as a result of the legal dispute, or whether the Trustee would be unsuccessful and therefore be required to make a payment. Under both scenarios, it was anticipated that the outcome could have a material effect on the value of the assets of the Property Fund, and therefore the relevant unit value. The parties agreed that both the benefit of a successful outcome to the legal dispute and the detriment of an unsuccessful outcome was to be borne by the Exiting Investors, and that Fund B should not be financially exposed to the outcome of the dispute. Each Exiting Investor therefore entered into a separate Deed with the Trustee and the Fund as part of each subscription for New Units. It is noted that, although there were some differences, the Deeds that were entered into by Fund B, the Trustee and the Exiting Investors were materially similar. In light of this, a reference in this Ruling to the Deed is, unless otherwise specified, a reference to each of the deeds which the Fund has entered into with the Trustee and the Exiting Investors. Completion of the Subscription Deeds was conditional upon the Trustee and Fund B each receiving executed copies of the Deeds from the Exiting Investors. Fund B has not made an election under sub-item 103(2) of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 .

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-25 | Income Tax Assessment Act 1997 section 116-50 | Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subsection 110-45(3) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 230-15 | Income Tax Assessment Act 1997 section 230-45 | Income Tax Assessment Act 1997 section 230-55 | Income Tax Assessment Act 1997 section 230-70 | Income Tax Assessment Act 1997 section 230-75 | Income Tax Assessment Act 1997 section 230-100 | Income Tax Assessment Act 1997 section 230-110 | Income Tax Assessment Act 1997 section 230-115 | Income Tax Assessment Act 1997 section 230-130 | Income Tax Assessment Act 1997 section 230-135 | Income Tax Assessment Act 1997 section 230-170 | Income Tax Assessment Act 1997 section 230-460 | Income Tax Assessment Act 1997 section 230-505 | Income Tax Assessment Act 1997 section 295-85.

Reasons for decision: Summary: If Fund B is obligated to make a payment under the Deed, this payment will not be included in the CGT cost base of the units under section 110-25 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The cost base and reduced cost base of a CGT asset each consist of five elements (subsection 110-25(1) of the ITAA 1997 and subsection 110-55(1) of the ITAA 1997 respectively). Relevantly, the first of these elements (as per subsection 110-25(2) of the ITAA 1997) is the total of: (a) the money you paid, or are required to pay, in respect of *acquiring it; and (b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). If Fund B is required to make a payment under the Deed, it is necessary to consider whether this payment may constitute money paid 'in respect of' the acquisition of their units in Property Fund. Paragraphs 101 and 102 of Taxation Ruling TR 95/35 (which considers the treatment of compensation receipts) provide guidance of the meaning of the phrase 'in respect of' the acquisition of the asset as it applied to subsection 160ZH(4) of the Income Tax Assessment Act 1936 (which was the predecessor to subsection 110-25(2) of the ITAA 1997). These paragraphs specifically state: 101. Broadly speaking, money, property, or money and property come within the cost base and are regarded as paid or given in respect of the acquisition of the asset in terms of paragraph 160ZH(4)(a), (b) or (c) if there is some direct and substantial link between the money or property and the acquisition of the asset. In determining whether there is a direct and substantial link, we believe it is appropriate to consider the following indicators: · the necessity for the payment of money or the giving of property; · the degree of temporal relationship between the payment of money or the giving of property and the acquisition of the asset; · the purpose (objective and subjective) of the payment of money or the giving of property; · the nature of the asset; · the circumstances of the acquisition of the asset including: parties (e.g., whether money paid or property given to a third party); terms of the contract or agreement; and arising from a wrong or by a lack of consent; the extent of causation; whether money paid or property given is in proportion to the value of the asset; and whether the degree of connection is diminished if money is paid or property is given for multiple benefits rather than solely to acquire the asset (e.g., for services). 102. The question whether a connection or link exists is a question of fact and degree. In the current circumstances, there is an evident, over-arching connection between the subscription for units in Property Fund by the Fund B and the execution of the Deed (and the rights and obligations arising from same) as the parties seek to 'adjust' the consideration paid by the Fund B for their units in Property Fund (and correspondingly the consideration received by an Exiting Investor from the redemption of their units) to take into account the outcome of the legal dispute. This connection is reinforced by the fact that the subscription for units by the Fund was conditional on the execution of the Deed (and the rights therein). The fact that the Fund, the trustee of Property Fund and the Exiting Investor were parties to the Deed and that the redemption of the units and entry into the Subscription Deed and the Deed occurred contemporaneously also support this link. In contrast however, the following attributes suggest that an amount paid by the Fund under the Deed to an Exiting Investor is not money paid 'in respect of' the acquisition of the units in Property Fund but money paid to discharge a separate and independent liability: The Deed (and its associated rights including the right to payment) is a separate agreement primarily between the Fund and the Exiting Investor. The issue of units in Property Fund to the Fund occurred effectively independent of the Deed under the terms of the trust deed of Property Fund and at the sole discretion of the trustee; Whether a payment is required to be made under the Deed is directly linked to the legal dispute, and the future costs/receipts stemming from the same. The issue of units in Property Fund to the Fund is merely a precursory factual matter instigating the creation of the Deed; and Although the trustee for Property Fund was a party to the Deed, its responsibilities under this agreement are largely of an administrative nature, for example calculating the adjustment amount in accordance with the Deed. Overall, taking into consideration the above attributes, it is considered that, although a general link exists between a payment made under the Deed and the units issued in Property Fund to the Fund, such a payment is not money paid by the Fund 'in respect of' the acquisition of the units in Property Fund but money paid to discharge a separate and independent liability. It is considered that the Fund and the Exiting Investor have effectively entered into a financial arrangement that is largely independent of the issue of units. The arrangement in this instance is focussed on the outcome of the legal dispute. Although a payment made under the Deed is predicated on the issue of units in the Property Fund to the Fund (and the consideration paid for same), this link is not sufficient to treat this payment as money paid 'in respect of' the acquisition of the units in Property Fund. For completeness, it is also noted that a payment made under the Deed by the Fund will not come within the other cost base elements as such a payment: · for the purposes of the second element, does not fall within the category of 'incidental costs', which is the subject of a strict definition in subsection 110-35(1) of the ITAA 1997; · is not considered to be a cost of owning the asset for the purposes of the third element (subsection 110-25(4) of the ITAA 1997); · for the purposes of the fourth element, is not incurred for the purpose or expected effect of increasing or preserving the original asset's value, and nor does it relate to installing or moving the original asset (subsection 110-25(5) of the ITAA 1997); and · cannot be considered to have been incurred to 'establish, preserve or defend' the taxpayer's title to, or a right over, the asset for the purposes of the fifth element (subsection 110-25(6) of the ITAA 1997). | Summary: (a) If Fund B is obligated to make a payment under the Deed entered into on or after 1 April 2010, the amount of payment would, subject to the potential limitations imposed by subsection 40-880(3) of the ITAA 1997 and paragraph 40-880(j) of the ITAA 1997, be eligible for deductibility under subsection 40-880(2) of the ITAA 1997. (b) If the Fund is obligated to make a payment under the Deeds entered into on or after 1 July 2010, the amount of the payment would not be eligible for deductibility under subsection 40-880(2) of the ITAA 1997. | Detailed Reasoning - 2(a) Deed entered into on or after 1 April 2010: Section 40-880 of the ITAA 1997 potentially applies to a payment made under the Deed because the expenditure in question will be incurred after 30 June 2005: see section 3 and Schedule 2 Item 51(1) to the Tax Laws Amendment (2006 Measures No.1) Act 2006 . Subject to the limitations and exceptions contained in subsections 40-880(3) to (9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) to liquidate or deregister a company of which you were a *member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business. On the facts of this case, there is no issue of a payment made under the Deed entered into on or after 1 April 2010 being expenditure incurred in relation to a business that used to be carried on (paragraph 40-880(2)(b) of the ITAA 1997) or a business proposed to be carried on (paragraph 40-880(2)(c) of the ITAA 1997). Further, there is no issue of paragraph 40-880(2)(d) of the ITAA 1997 applying on the facts. Accordingly, this Ruling considers whether paragraph 40-880(2)(a) of the ITAA 1997 is satisfied. The key requirements of this provision and their application to a payment made by the Fund under the Deed entered into on or after 1 April 2010 are considered below: | Detailed Reasoning - Capital expenditure: Taxation Ruling TR 2011/6 sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880 of the ITAA 1997. Paragraphs 64 to 68 of TR 2011/6 set out general principles of what is 'capital expenditure': 64. The expression 'capital expenditure' is not a defined term. Whether expenditure is capital in nature is determined on the facts of each particular case having regard to the principles established by the case law. 66. The classic test for determining whether expenditure is of a capital or revenue nature is explained in the following passage from the judgment of Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938)1 AITR 403 ( Sun Newspapers ): There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay... 67. The character of the advantage sought provides important direction. It provides the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself. This was emphasised in the decision of the High Court in G.P. International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1. 68. If expenditure produces some asset or advantage of a lasting character for the benefit of the business it will be considered to be capital expenditure. As stated in Sun Newspapers at 355 per Latham J, an enduring benefit does not require that the taxpayer obtain an actual asset, it may be a benefit which endures, in the way that fixed capital endures…. A payment made under the Deed entered into on or after 1 April 2010 will be on capital account for the following reasons: An amount paid by the Fund to an Exiting Investor will be made in satisfaction of an obligation under the Deed entered into on 1 April 2010 and will reflect a proportion of the losses in connection with resolution of the legal dispute which in turn relates to the units in Property Fund acquired by the Fund which are held on capital account; The intent behind the payment is to effect a permanent or enduring advantage by ensuring there is a true accounting of the value of the Fund's unit holdings in Property Fund which in turn accurately reflects each current and future member's interest in the Fund; and The payment is once and for all, not a periodic payment. | Detailed Reasoning - Incurred: Paragraph 12 of TR 2011/6 sets out the meaning of 'incurred': 12. There is no statutory definition of the term 'incurred' however the principles established by case law regarding the meaning of the word 'incurred' in section 8-1 also apply to section 40-880. In other words, a taxpayer incurs expenditure at the time they owe a present money debt that they cannot avoid paying. The Fund will 'incur' the relevant expenditure if the adjustment amount is negative and the relevant expenditure becomes payable under the Deed. | Detailed Reasoning - In relation to your business: Paragraph 20 of TR 2011/6 explains that subsection 40-880(2) of the ITAA 1997 requires identification of the business in relation to which the relevant capital expenditure was incurred. The word 'business', as defined at subsection 995-1(1) of the ITAA 1997, is used throughout section 40-880 of the ITAA 1997. The nature and scope of a business for the purposes of the section is a question of fact in each case. Paragraph 10 of TR 2011/6 makes it clear that if the expenditure relates to an existing business then the entity that incurs the expenditure is only entitled to a deduction if they are carrying on that business. Based on the facts of this case, it is considered that the Fund is carrying on a business and that there is a sufficient and relevant connection between the Fund's incurrence of the capital expenditure on a payment under the Deed entered into on 1 April 2010 and the business the taxpayer carries on. | Detailed Reasoning - Taxable purpose: Subsection 40-880(3) of the ITAA 1997 limits the availability of the deduction for the expenditure to the extent that it relates to the business being carried on for a 'taxable purpose'. The definition of 'taxable purpose' is provided by subsection 40-25(7) of the ITAA 1997 and covers various purposes, including the purpose of producing assessable income. The term 'purpose of producing assessable income' is further defined in subsection 995-1(1) of the ITAA 1997 as being something done: · for the purpose of gaining or producing assessable income; or · in carrying on a business for the purpose of gaining or producing assessable income. Paragraphs 159, 161 and 162 of TR 2011/6 further explain the application of the taxable purpose test as they state: 159. If, at the time the taxpayer incurs the expenditure, the business in relation to which the expenditure is incurred is carried on wholly for a taxable purpose and there are no proposals or plans for activities from which exempt income or non-assessable non-exempt income could be derived, then no apportionment will be required under subsection 40-880(3) or paragraph 40-880(4)(a). 161. The legislation does not prescribe a particular methodology to determine the extent of the taxable purpose of the business. The 2006 Explanatory Memorandum is also silent as to how an apportionment under subsection 40-880(3) and paragraph 40-880(4)(a) is made. In the absence of a prescribed method of apportionment the Commissioner will accept an apportionment made on a fair and reasonable basis. 162. As a general rule, the extent to which a business is, was or is proposed to be carried on for a taxable purpose is determined by comparing the amount of any exempt income and non-assessable non-exempt income the business has derived or will derive with total income (that is, assessable income plus exempt income plus non-assessable non-exempt income). This percentage is then applied to the amount of expenditure to reduce the deduction. In the current circumstance, taking into consideration the current nature of the Fund's business operations, the limitation imposed by subsection 40-880(3) of the ITAA 1997 could have application. The Fund will therefore need to determine, at the time that any payment is made under the Deed entered into on or after 1 April 2010, the extent to which the business is carried on for a taxable purpose by reference to all known and predictable facts in all years. If the business at the time the expense is incurred, is not carried on wholly for a 'taxable purpose', the amount that the Fund can deduct under section 40-880 of the ITAA 1997 will need to be adjusted accordingly. | Detailed Reasoning - Limitations and exceptions: Subsections 40-880(5) to 40-880(9) of the ITAA 1997 set out further limitations and exceptions to the amount that can be deducted under section 40-880 of the ITAA 1997. Paragraph 2.17 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill explains the function of subsection 40-880(5) to 40-880(9) of the ITAA 1997 as follows: There are a number of exceptions which require, in effect, that the expenditure must not be taken into account in some way elsewhere in the income tax law. This means that the expenditure would not already be deductible, capitalised, amortised or capped in some way under another provision. The expenditure must also not be denied a deduction, including by limiting or capping the deduction, elsewhere in the tax law. Accordingly, the purpose of subsections 40-880(5) to 40-880(9) of the ITAA 1997 is to prevent a deduction being allowed under section 40-880 of the ITAA 1997 for expenditure that is otherwise taken into account or specifically excluded from deduction under the income tax law. On the facts of this case, only paragraphs 40-880(5)(d), 40-880(5)(f) and 40-880(5)(j) of the ITAA 1997 need relevantly be considered. | Detailed Reasoning - Paragraph 40-880(5)(d) of the ITAA 1997: Paragraph 40-880(5)(d) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it is in relation to a lease or other legal or equitable right. Paragraph 47 of TR 2011/6 elaborates on the application of this exception as it states: 47. The existence of paragraphs 40-880(5)(a) and 40-880(5)(f) and section 25-110 mean that paragraph 40-880(5)(d) has limited practical application. It applies to expenditure incurred on or after 1 July 2005 that has a sufficient and relevant connection to a lease or right held by an entity other than the taxpayer. The 'rights' in question do not include all legal rights but only those similar to leases in that they give the taxpayer a right to exploit the asset with which the right is associated. In other words, the right is carved out of an asset but falls short of full ownership of the asset. Examples of such rights include profits à prendre, easements and other rights of access to land. The rights however are not limited to rights associated with land. Taking the above in consideration, the facts of this case and the nature of the payment pursuant to the Deed entered into on or after 1 April 2010, it is considered that the deductibility of such a payment would not be excluded by operation of this paragraph. | Detailed Reasoning - Paragraph 40-880(5)(f) of the ITAA 1997: Paragraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it could be taken into account in working out the amount of capital gain or capital loss from a CGT event. Generally, two factors: capital proceeds and cost base (or reduced cost base) are taken into account in working out a capital gain or capital loss from a CGT event (section 100-40 of the ITAA 1997). In current circumstances, it is considered that a payment made under the Deed entered into on or after 1 April 2010 will not be taken into account in working out the amount of capital gain or capital loss from a CGT event that affects the Fund because: · as discussed above, any payment the Fund would be obligated to make under the Deed entered into on 1 April 2010 will not be included in the CGT cost base of the Property Fund units; and · the obligation to make a payment under the Deed entered into on 1 April 2010 is not a CGT asset (as defined in subsection 108-5(1) of the ITAA 1997) of the Fund. Therefore, paragraph 40-880(5)(f) of the ITAA 1997 will not operate to exclude the expenditure from deduction under section 40-880 of the ITAA 1997. | Detailed Reasoning - Paragraph 40-880(5)(j) of the ITAA 1997: Paragraph 40-880(5)(j) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it is incurred in relation to gaining or producing *exempt income or *non-assessable non-exempt income. Paragraphs 294 and 295 of TR 2011/6 elaborate on the application of this exception as they state: 294. Where expenditure is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income and an apportionment is required under subsection 40-880(3) or 40-880(4) (because the relevant business or aspect of the business was not carried on wholly for a taxable purpose) this does not mean that the section 40-880 deduction is reduced twice. 295. The interaction of subsection 40-880(3) or 40-880(4) and paragraph 40-880(5)(j) results in only one reduction under these respective provisions to the amount that a taxpayer can deduct under section 40-880. As discussed above in relation to the application of subsection 40-880(3) of the ITAA 1997, the Fund will need to consider this attribute at the time that any payment is made under the Deed entered into on or after 1 April 2010 and, where necessary, adjust the amount that can be deducted under section 40-880 of the ITAA 1997 accordingly. | Detailed Reasoning - Conclusion: As the expenditure incurred under the Deed entered into on 1 April 2010 satisfies the conditions for eligibility for a deduction section 40-880 of the ITAA 1997, any payment the Fund would be liable to make to an Exiting Investor under the Deed entered into on or after 1 April 2010 would, subject to the potential limitations imposed by subsection 40-880(3) of the ITAA 1997 and paragraph 40-880(5)(j) of the ITAA 1997, be eligible for deductibility over five years under subsection 40-880(2) of the ITAA 1997. | Detailed Reasoning - (b) The Deeds entered into on or after 1 July 2010: Paragraph 40-880(5)(b) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that you can deduct an amount for it under any other provision in the Act. The analysis in Question 3 provides that any payment under the Deeds entered into on or after 1 July 2010 will be deductible under subsection 230-15(2) of the ITAA 1997. As a consequence paragraph 40-880(5)(b) of the ITAA 1997 will operate to deny a deduction under section 40-880 of the ITAA 1997 in respect of any payment the Fund makes under the Deeds entered into on or after 1July 2010. | Summary: If the answer to Question 2(b) is no, Fund B is able to obtain a tax deduction in accordance with subsection 230-15(2) of the ITAA 1997 for any payment under the Deeds entered into on or after 1 July 2010. | Detailed Reasoning - Detailed reasoning: Division 230 of the ITAA 1997 applies to income years commencing on or after 1 July 2010 (where no election for it to start one year earlier has been made). Division 230 of the ITAA 1997 brings to account gains and losses on financial arrangements. | Detailed Reasoning - Arrangement: In order to determine whether gains and losses arise under a financial arrangement, it is first necessary to identify the relevant 'arrangement'. An 'arrangement' is defined in subsection 995-1(1) of the ITAA 1997 as '…any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.' The scope of the arrangement for the purposes of Division 230 of the ITAA 1997 is determined by subsection 230-55(4) of the ITAA 1997. Generally, under section 230-55 of the ITAA 1997, a contract will define the boundaries of an arrangement, especially where the form of the contract is consistent with its substance. Paragraph 2.47 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (EM) provides that: 2.47 The various rights and obligations subsisting under a contract will typically constitute the relevant arrangement for the purposes of Division 230. That is, the contract is typically viewed on a 'stand-alone' basis. In this context, the contract is neither aggregated with another contract (or contracts), nor disaggregated into component parts, when determining the relevant arrangement to be considered under Division 230. The Fund has submitted that each Deed entered into on or after 1 July 2010 should not be treated as separate from each arrangement to subscribe for units in the Property Fund contained in the Subscription Deed. However, since the rights and obligations under the Deed entered into on or after 1 July 2010 arise under a single contract, it will prima facie be viewed on a 'stand-alone' basis for the purposes of Division 230 of the ITAA 1997. Having regard to each of the factors listed in subsection 230-55(4) of the ITAA 1997, each Deed entered into on or after 1 July 2010 should still be regarded on a stand-alone basis for the purposes of Division 230 of the ITAA 1997. It is considered that the following matters support this conclusion: Each Deed entered into on or after 1 July 2010 arises in a separate contract to the arrangement to subscribe for units which is reflected in the Subscription Deeds. The parties to the Deeds entered into on or after 1 July 2010 differ from those to the Subscription Deeds. The Deeds entered into on or after 1 July 2010 allow the Fund to assign any of its rights under the Deed entered into on or after 1 July 2010 with the express consent of the other party. This indicates that while a Deed entered into on or after 1 July 2010 and the arrangement to subscribe for units are related in form, in substance they are treated as separate bundles of rights and obligations which be dealt with separately and without reference to the other. Although the fact that each Subscription Deed is conditional upon the Fund providing an executed copy of the Deed entered into on or after 1 July 2010 to the Trustee and the Fund receiving executed copies from the other parties to it demonstrates that the two are related, the rights and obligations of the Fund under each Deed entered into on or after 1 July 2010 are commercially understood to be separate from those under the Subscription Deeds. | Detailed Reasoning - Financial arrangement: Since the only non-insignificant rights and obligations contained within the Deed entered into on or after 1 July 2010 are cash settable, each of the Deeds entered into on or after 1 July 2010 will be a financial arrangement under section 230-45 of the ITAA 1997. | Detailed Reasoning - Exceptions: Division 230 of the ITAA 1997 does not apply to gains and losses from a financial arrangement to the extent that an entity's rights and obligations under the arrangement are the subject of an exception under section 230-460 of the ITAA 1997 (see subsection 230-460(1) of the ITAA 1997). Subsection 230-460(8) of the ITAA 1997 provides that a right or obligation under a guarantee or indemnity is the subject of an exception unless, among other things, the guarantee or indemnity is given in relation to a financial arrangement. Even if the Deed entered into on or after 1 July 2010 is an indemnity according to the ordinary meaning of 'indemnity', it will still be an indemnity that is given in relation to a financial arrangement (i.e. the arrangement to acquire the units or the units themselves) and so this exclusion will not apply. Further, the exception in subsection 230-460(13) of the ITAA 1997 which deals with proceeds from certain business sales will not apply because any obligation to make a payment under the Deed entered into on or after 1 July 2010 does not relevantly arise from the sale of a business or interests in a trust that operates a business. It follows that Division 230 of the ITAA 1997 will bring to account gains and losses from the Deed. | Detailed Reasoning - Sufficiently certain particular loss: The accruals method will apply to a loss made from a financial arrangement if: · the loss arises from a financial benefit that the entity is to provide under the arrangement, and · the loss becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to provide the benefit (subsection 230-100(3) of the ITAA 1997). The Fund will have a sufficiently certain loss from a financial arrangement at a particular time if it is sufficiently certain at that time that it will make a loss from the arrangement of a particular amount when it provides a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997). Whether or not the Fund will make a loss from the arrangement of a particular amount when it provides a particular financial benefit depends upon whether there is any financial benefit received, or to be received, that is reasonably attributable to the payment of the Adjustment Amount under the Deeds entered into on or after 1 July 2010 (section 230-70 of the ITAA 1997). Given that there is no financial benefit to be received under this arrangement, if a financial benefit is provided, it will be a loss in its entirety. Thus a payment of the Adjustment Amount under the Deeds entered into on or after 1 July 2010 will give rise to a loss for the Fund when the payment is provided. | Detailed Reasoning - Sufficiently certain financial benefits: However, in deciding whether it is sufficiently certain at a particular time that the Fund will make a loss from a financial arrangement, only sufficiently certain financial benefits are to be considered. A financial benefit is treated as one that the Fund is sufficiently certain to provide only if: · it is reasonably expected that the Fund will provide the financial benefit (assuming that the Fund will continue to have the financial arrangement for the rest of the financial arrangement's life), and · at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997). The latest time at which the Adjustment Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date. As a consequence, the time when it becomes sufficiently certain that the Fund will provide a financial benefit will therefore be the time that the Fund will have a sufficiently certain loss for the purposes of subsection 230-110(1) of the ITAA 1997. | Detailed Reasoning - Period over which the loss is to be spread: The period over which the loss is to be spread is the period to which the loss relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement. The Deeds entered into on or after 1 July 2010 provides that the Adjustment Amount must be paid "as soon as practicable" after the Auditor has audited the Trustee's calculation of the Adjustment Amount on the Calculation Date. This means that the period over which the loss from the financial arrangements consisting of a Deed entered into on or after 1 July 2010 is to be spread would start when it became sufficiently certain that the Fund would provide a financial benefit, and would end when the Fund actually provided the financial benefit. | Detailed Reasoning - How is the loss spread?: The loss from the financial arrangements consisting of the Deeds entered into on or after 1 July 2010 will be spread over the period described above using a method of the type described in 230-135(2) of the ITAA 1997. | Detailed Reasoning - Conclusion: Any payment by Fund B under the Deed entered into on or after 1 July 2010 will be a loss eligible for a tax deduction under subsection 230-135(2) of the ITAA 1997. | Summary: If Fund B receives an amount under the Deed, such an amount will not reduce the CGT cost base of the units pursuant to subsection 110-45(3) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 110-45(3) of the ITAA 1997 provides that expenditure does not form part of any element of the cost base to the extent of any amount you have received as recoupment of it, except so far as the amount is included in your assessable income. Under subsection 995-1(1) of the ITAA 1997, 'recoupment' has the meaning given by section 20-25 of the ITAA 1997. Subsection 20-25(1) of the ITAA 1997 states that a recoupment of a loss or outgoing includes: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. In the current circumstances, the cost base of the New Units acquired by the Fund in the Property Fund is, under the first cost base element, primarily made up of the money paid by the Fund to the Trustee in exchange for the issued units. As noted above, it is considered that the Fund and each Exiting Investor have effectively entered into a financial arrangement through the execution of the Deed that is largely independent of the issue of units. This arrangement is focussed on the outcome of the legal dispute. The Deed sets-out the circumstances in which an Exiting Investor will be required to make a payment to the Fund. It is evident from this clause (and its associated defined terms) that the key variable that will determine whether an Exiting Investor is required to make a payment to the Fund are the losses incurred and amounts received by the trustee of Property Fund in connection with the legal dispute. Although a payment made under the Deed is predicated on the issue of units in Property Fund to the Fund (and the consideration paid for same), it is considered that the receipt of such a payment is not a recoupment of the monies that were paid by the Fund to the Trustee in exchange for their units in Property Fund. In contrast, such a payment is considered to be an amount paid by the Exiting Investor to the Fund to discharge an independent obligation created by the Deed. It is therefore not a recoupment of expenditure which forms part of the first element (nor any other element) of the cost base of the new units in Property Fund acquired by the Fund. Consequently the receipt by the Fund of a payment made under the Deed will not reduce the CGT cost base of these units pursuant to subsection 110-45(3) of the ITAA 1997. | Summary: If Fund B receives an amount under the Deed, a separate CGT event C2 happens upon receipt of such amount. | Detailed Reasoning - Detailed reasoning: In accordance with subsection 104-25(1) of the ITAA 1997, CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted. Subsection 108-5(1) of the ITAA 1997 defines a CGT asset as: (a) any kind of property; or (b) a legal or equitable right that is not property. Note 1 to section 108-5 of the ITAA 1997 relevantly provides the following examples of CGT assets: · land and buildings; · shares in a company and units in a unit trust; · options; · debts owed to you; · a right to enforce a contractual obligation; · foreign currency. As an intangible asset, the right to a potential payment created by the Deed is considered to be a CGT asset in the form of a contractual right (a right to enforce a contractual obligation). If the Fund receives a payment from an Exiting Investor (under the Deed), this right to a potential payment will be satisfied and CGT event C2 will occur. However, see the discussion regarding ordering and anti-overlap provisions in Issue 2 Question 3 below. | Summary: If Fund B receives an amount under the Deeds entered into on or after 1 July 2010, such an amount will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply. | Detailed Reasoning - Detailed reasoning: The relevant arrangement and financial arrangement for the purposes of Division 230 of the ITAA 1997, being each Deed was discussed in Question 3, and this reasoning remains relevant here. It follows that Division 230 of the ITAA 1997 will bring to account gains on the Deeds entered into on or after 1 July 2010. | Detailed Reasoning - Sufficiently certain particular gain: The accruals method will apply to a gain made from a financial arrangement if: · the gain arises from a financial benefit that the entity is to receive under the arrangement, and · the gain becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to receive the benefit (subsection 230-100(3) of the ITAA 1997). The Fund will have a sufficiently certain gain from a financial arrangement at a particular time if it is sufficiently certain at that time that the Fund will make a gain from the Deeds entered into on or after 1 July 2010 of a particular amount when it receives a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997). Whether or not the Fund will make a gain from the arrangement of a particular amount when it receives a particular financial benefit depends upon whether there is any financial benefit provided, or to be provided, that is reasonably attributable to the receipt of the Adjustment Amount under the Deeds entered into on or after 1 July 2010 (section 230-75 of the ITAA 1997). Given that there is no financial benefit to be provided under this arrangement, if a financial benefit is received, it will be a gain in its entirety. | Detailed Reasoning - The time when the financial benefits are sufficiently certain: In deciding whether it is sufficiently certain at a particular time that the Fund will make a gain from a financial arrangement, only sufficiently certain financial benefits are to be considered. A financial benefit is treated as one that the Fund is sufficiently certain to receive only if: · it is reasonably expected that the Fund will receive the financial benefit (assuming that the Fund will continue to have the financial arrangement for the rest of the financial arrangement's life), and · at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997). The latest time at which the Adjustment Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date. | Detailed Reasoning - Period over which the gain is to be spread: The period over which the gain is to be spread is the period to which the gain relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement. | Detailed Reasoning - How is the gain spread?: The gain will be spread using a method of the type described in 230-135(2) of the ITAA 1997. | Detailed Reasoning - Conclusion: An amount received by Fund B under the Deeds entered into on or after 1 July 2010 will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply.

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