Private ruling: Assets put to tax preferred use
Date of advice: 24 September 2019
Published: November 2019
Ruling period: X July 20XX to XX December 20XX
Date scheme commenced: X July 20XX

Ruling: Q1: Does Division 250 apply to the building? | A1: Yes | Q2: If the answer to Question 1 is yes, will the Commissioner make a determination under paragraph 250-45(a) that it would be unreasonable for Division 250 to apply to the Trust in relation to the building? | A2: Yes

Relevant facts and circumstances: 1. On XX/XX/XX, the Trust purchased a building for $X. 2. At the time of purchase, approximately X% of the building was leased to the Commonwealth. (a) The lease to the Commonwealth was entered by the previous owner of the building, which remains effective after the purchase of the building by the Trust. (b) The lease commenced on XX/XX/XX. (c) The lease does not provide the Commonwealth with a right or option to purchase the building at any time. 3. The original allocation of the purchase price to depreciating assets, the building and land is as follows: (a) The allocation to the depreciating assets is based on the market value of those assets determined by Consultants. (b) The allocation to the land is based on market value of the land determined by a valuer. (c) The allocation to the building is the residual of the purchase price. 4. The undeducted construction expenditure for the building at the time it was acquired by the Trust was $X. The undeducted construction expenditure was based on the estimated cost to construct the building. 5. The Trust has undertaken and continues to undertake improvements to the building and property plant. The actual spend on the building over the period to XX/XX/XX is $X. The Trust estimates a further $X will be spent on the building over the period to XX June 20XX. 6. The Trust was funded via the issuance of ordinary units, preference units and a bank loan. 7. The ordinary units and the preference units in the Trust have been held proportionately by the same unitholders. 8. The Trust has two classes of units - ordinary units and the preference units. There are two unitholders. 9. The mix of ordinary units and preference units is driven by Company A (a subsidiary of the Group). The mix is required for the Group capital adequacy ratios. The Group has always ensured that the current split between ordinary and preference units respectively, is maintained. 10. The terms of the preference units in the Trust are set out in Schedule X of the Trust Deed for the Trust. 11. The preference units are considered not to be debt interests under Subdivision 974-B. 12. On XX/XX/XX the Trust entered into an agreement for lease with a body corporate incorporated pursuant to the authority of the Public Works Act 1902 . (a) The lease to the body corporate commenced on XX/XX/XX. (b) The lease does not provide the body corporate with a right or option to purchase the building at any time. (c) The lease states that the body corporate cannot cancel the lease without the Trusts permission. 13. On XX/XX/XX the Trust entered into a binding agreement for lease with the Commonwealth. (a) The commencement date of the lease is X/XX/XXX for a term of X years expiring on XX/XX/XX. (b) The lease provided was still to be signed however it was noted that the parties are bound even if the final lease is never executed. (c) The lease states that the Commonwealth may terminate the Lease if permitted to do so subject to the Landlord's failure to rectify in the event of an Unfit for Purpose Event occurring. 14. The value of the forecast rental payments attributable to the building was less than XX% of the market value of the building at the time it was acquired by the Trust. As per advice from the agent the financial modelling has not been updated for the lease to the Commonwealth.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 250 | Income Tax Assessment Act 1997 section 250-5 | Income Tax Assessment Act 1997 section 250-10 | Income Tax Assessment Act 1997 section 250-15 | Income Tax Assessment Act 1997 section 250-20 | Income Tax Assessment Act 1997 section 250-25 | Income Tax Assessment Act 1997 section 250-30 | Income Tax Assessment Act 1997 section 250-35 | Income Tax Assessment Act 1997 subsection 250-35(1) | Income Tax Assessment Act 1997 subsection 250-35(2) | Income Tax Assessment Act 1997 subsection 250-35(3) | Income Tax Assessment Act 1997 subsection 250-35(4) | Income Tax Assessment Act 1997 subsection 250-35(5) | Income Tax Assessment Act 1997 subsection 250-35(6) | Income Tax Assessment Act 1997 subsection 250-35(7) | Income Tax Assessment Act 1997 subsection 250-35(8) | Income Tax Assessment Act 1997 section 250-35 | Income Tax Assessment Act 1997 section 250-40 | Income Tax Assessment Act 1997 section 250-45 | Income Tax Assessment Act 1997 subsection 250-45(b) | Income Tax Assessment Act 1997 paragraph 250-110 | Income Tax Assessment Act 1997 subparagraph 250-115 | Income Tax Assessment Act 1997 subsection 250-120 | Income Tax Assessment Act 1997 subsection 250-125 Question 1 | Does Division 250 apply to the building? | Summary | Yes. Division 250 applies to the building.

Reasons for decision: Summary: 1. Division 250 operates to deny or reduce certain capital allowance deductions that would otherwise be available to you in relation to an asset if the asset is put to a tax preferred use in certain circumstances. 2. Section 250-10 provides that Division 250 applies to a taxpayer and an asset at a particular time if: (a) the general test in section 250-15 is satisfied in relation to you and the asset, and (b) none of the exclusions in sections 250-20, 250-25, 250-30, 250-40 and 250-45 apply. 3. All five requirements of the general test in section 250-15 must be satisfied in relation to the asset for Division 250 to apply. The asset being tested in this case is the building. | Detailed Reasoning - Section 250-15 General Test: This Division applies to you and an asset at a particular time if: (a) the asset is being *put to a tax preferred use; and (b) the *arrangement period for the *tax preferred use of the asset is greater than 12 months; and (c) *financial benefits in relation to the tax preferred use of the asset have been, will be or can reasonably be expected to be, *provided to you (or a *connected entity) by: (i) a *tax preferred end user (or a connected entity); or (ii) any *tax preferred entity (or a connected entity); or (iii) any entity that is a foreign resident; and (d) disregarding this Division, you would be entitled to a *capital allowance in relation to: (i) a decline in the value of the asset; or (ii) expenditure in relation to the asset; and (e) you lack a *predominant economic interest in the asset at that time. 4. Whether an asset is being put to a tax preferred use is set out in section 250-60. As the building is being leased to, and being used by, a 'tax preferred entity', the requirement in paragraph 250-15(a) is satisfied. 5. The arrangement period for the tax preferred use of the asset is the period that the Trust leases the asset to the Commonwealth. In relation to the Trust, the arrangement starts from the time of the acquisition of the asset and the arrangement ends when the lease ends on XX/XX/XX and XX/XX/XX in relation to the leases to the Commonwealth and XX/XX/XX in relation to the lease to the body corporate. As the period of the arrangements is greater than 12 months, the requirement in paragraph 250-15(b) is satisfied. 6. Paragraph 250-15(c) is satisfied as financial benefits are provided (being the rent payments) by the tax preferred end user for the tax preferred use of the building. 7. The Trust would, in the absence of Division 250 applying, be entitled to capital allowance deductions in relation to the asset. Therefore, the requirement inp Paragraph 250-15(d) is satisfied. 8. In order to determine whether there is a lack of predominant economic interest for the purpose of paragraph 250-15(e), four tests need to be considered: (a) section 250-115 (limited recourse debt test) (b) section 250-120 (right to acquire asset test) (c) section 250-125 (effectively non-cancellable, long term arrangement test), and (d) section 250-135 (level of expected financial benefits test). 9. The Trust will lack a predominant economic interest in an asset at a particular time if one or more of the above tests apply to the Trust and the asset at that time. 10. Each of these tests and their application in relation to the Trust and the building is set out below. Section 250-115: The limited recourse debt test 11. The limited recourse debt test is provided for in section 250-115 and is relevant in determining whether a taxpayer lacks a predominant economic interest in an asset. 12. Broadly, this test states that a taxpayer lacks a predominant economic interest in an asset at a particular time if, for assets that are put to a tax preferred use, because the end user is a tax preferred entity, 80% of the cost of acquiring the asset is financed by limited recourse debt. 13. The effect of the limited recourse debt test is that for the duration of the arrangement, the taxpayer must hold sufficient equity or investment effectively at risk in an asset to be treated as having the predominant economic interest in the asset. 14. Subsections 250-115(1), (2), (3) and (6) relevantly state: (1) You lack a predominant economic interest in an asset at a particular time if more than the allowable percentage of the cost of your acquiring or constructing the asset is financed (directly or indirectly) by a *limited recourse debt or debts. (2) For the purposes of subsection (1): (a) the amount of a *limited recourse debt is to be reduced by the value of any *debt property (other than the *financed property) that is provided as security for the debt; and (b) if the limited recourse debt finances the acquisition or construction of 2 or more assets, only the amount of the debt that is reasonably attributable to the asset referred to in subsection (1) is to be taken into account. (3) For the purposes of subsection (1), the allowable percentage is: (a) 80% if the asset is taken to be *put to a tax preferred use because of subparagraph 250-60(1)(b)(i) or (2)(b)(i) (end use by *tax preferred entities); or ... (6) This section also does not apply to the asset if: (a) you hold the asset as a trustee; and (b) the asset is real property (or an interest in real property); and (c) the *tax preferred use of the asset is a lease; and (d) the space within the property that is occupied by the tenants who are *members of the tax preferred sector is less than half of the total space within the property that is either occupied by tenants or available to be occupied by tenants; and (e) the asset is *put to the tax preferred use wholly or principally in Australia; and (f) no member of the tax preferred sector provides financing, or support for financing, in relation to your interest in the asset (including by way of a loan, a guarantee, an indemnity, a security, hedging or undertaking to provide *financial benefits in the event of the termination of an *arrangement). 15. Limited recourse debt is broadly defined in section 243-20 as an obligation where the rights of the creditor as against the debtor in the event of default are limited to rights in relation to the debt property, or to goods or services provided by means of the debt property. 16. Subsection 243-20(1) states: A limited recourse debt is an obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) where the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to any or all of the following: (a) rights (including the right to money payable) in relation to any or all of the following: (i) the *debt property or the use of the debt property; (ii) goods produced, supplied, carried, transmitted or delivered, or services provided, by means of the debt property; (iii) the loss or disposal of the whole or a part of the debt property or of the debtor's interest in the debt property; (b) rights in respect of a mortgage or other security over the debt property or other property; (c) rights that arise out of any *arrangement relating to the financial obligations of an end-user of the *financed property towards the debtor, and are financial obligations in relation to the financed property. 17. Subsection 243-20(2) states: An obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) is also a limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest: (a) are capable of being limited in the way mentioned in subsection (1); or (b) are in substance or effect limited wholly or predominantly to rights (including the right to money payable) in relation to any or all of the following: (i) the *debt property or the use of the debt property; (ii) goods produced, supplied, carried, transmitted or delivered, or services provided, by means of the debt property; (iii) the loss or disposal of the whole or a part of the debt property or of the debtor's interest in the debt property. 18. The definition of limited recourse debt covers situations where a creditor's rights as against the taxpayer in the event of default are limited to actual legal rights against or in relation to the property, or to income or goods and services generated by the property. That is, the creditor would not have access to the taxpayer's general assets. 19. The limitation on the rights of the creditor would not appear to require contractual limitation. A practical limitation on the availability of assets would appear sufficient, such as where the debtor enters into an arrangement to protect the property. A debtor's other assets should also be considered to determine whether there is a practical limitation on the creditor's rights. 20. In a situation where a debtor only has one asset which was financed by the debt (e.g. a special purpose vehicle was set up), but there are no contractual limitations on the creditor's rights in the event of default, the debt could still be a 'limited recourse debt'. 21. The exception to the limited recourse debt test in subsection 250-115(6) will not apply in relation to the building leased to the Commonwealth and body corporate. This is because the area of the building that is leased to the Commonwealth and the body corporate is more than half of the area that is available to be occupied by tenants. 22. Whether the limited recourse debt test is satisfied depends on whether the preference units constitute limited recourse debt. For the reasons set out below it is considered that the preference units constitute limited recourse debt. Consequently, the limited recourse debt test is satisfied. 23. The redeemable preference units, being a legal form preference unit in the Trust, constitute an obligation imposed by the Trust Deed on the Trustee to the preference unit holders to pay an amount (namely the Redemption Amount). 24. Schedule X to the Trust Deed of the Trust contains the terms of issue of the preference units and provides: The Trustee must compulsorily redeem all of the preference units in a class of preference units on the Maturity Date for the relevant class. 25. The preference units are considered to be debt for the purposes of section 243-20 as they must be compulsorily redeemed on their maturity date. 26. This is consistent with the common law meaning of 'debt'. It was held by Lord Davey in the decision of the House of Lords in Ogdens Ltd v Weinberg (1906) 95 LT 567 at 567: ... the word 'debts', no doubt, means something recoverable by an action for debt, and nothing can be recovered in an action for debt except what is ascertained or can be ascertained. A claim for an amount which is uncertain, and cannot be justified in an account, cannot, I think, be justly called a 'debt'. 27. In Director of Public Prosecutions v Turner [1973] 3 All ER 124 at 126, Lord Reid (with whom the other members of the House of Lords agreed) stated, in the context of a criminal statute that referred to 'debt': Debt normally has one or other of two meanings: it can mean an obligation to pay money or it can mean a sum of money owed. 28. Under subsection 243-20(1), the rights of the holders of preference units as against the Trustee are not limited in any express way in either Schedule X of the Trust Deed or any other part of the Trust Deed. Therefore, the first requirement of subsection 243-20(1) is satisfied: an obligation imposed by law on an entity (the debtor) [the Trustee] to pay an amount to another entity (the creditor) [the holders of preference units]. 29. While the Trustee's obligations in respect of the preference units do not legally limit recourse to the debt property, as under the Trust Deed recourse is allowed to 'Assets', which are defined as property, rights and income of the trust, it is unreasonable to form an argument that the rights against the creditor in event of default are not in substance limited to the financed property, within subparagraph 243-20(2)(b)(i). This conclusion follows from the following: (a) The obligation to make payments in respect of the preference units is not wholly contingent. (b) The assets of the trust are made up wholly or predominantly of the debt property. 30. In respect of the first proposition, while distributions are contingent on the trustee's determination, the repayment of the application price is not, as set out in the Trust Deed. 31. The Trust Deed provides that preference unitholders are entitled to distributable income. 32. The Trust Deed provides the circumstances of income distributions. The Schedule of the Trust Deed makes payment of distributions contingent on the trustee's discretion, but also provides that the trustee must compulsorily redeem all preference units on the maturity date, which is X years after the date of issue and for a price which will be at least, the application price. 33. For the purposes of subsection 243-20(1), the meaning of 'predominantly' in 'wholly or predominantly' requires dominance over other matters; depending on context this might mean over 50%. 34. A special purpose vehicle was set up intentionally to raise finance and acquire the building. The special purpose vehicle held no other assets except the debt property. The Trust financed the purchase of the building with bank debt, subscriptions for preference units and subscriptions for ordinary units. On the basis that the preference units are debt, the total debt funding exceeds 80% of the cost of acquiring the property. 35. Therefore, the limited recourse debt test in section 250-115 and the requirement in paragraph 250-15(e) is satisfied. Section 250-120 - The right to acquire asset test 36. The 'right to acquire asset test' is set out in section 250-120 and will be satisfied in relation to an asset if a tax preferred end user has a right, obligation or contingent obligation to acquire the asset at the end of the arrangement period for consideration that does not reflect the market value of the asset at that time. 37. The right to acquire test is not satisfied in relation to the building leased to the Commonwealth and body corporate as the lease does not provide: (a) for the building to be transferred to any member of the tax preferred sector at the end of the lease; or (b) any member of the tax preferred sector with a right, obligation or contingent obligation to acquire a legal or equitable interest in the building, or to require the transfer of it, or a legal or equitable interest in it. Section 250-125 - The effectively non-cancellable, long term arrangement test 38. The 'effectively non-cancellable, long term arrangement test' is set out in subsection 39. 250-125(1) and will be satisfied in relation to an asset if: (a) the arrangement is effectively non-cancellable; and (b) the arrangement period exceeds the lesser of 30 years or 75% of the remaining effective life of the asset. Lease to the Commonwealth 40. Applying the test in section 250-125, the Trust lacks a predominant economic interest in the asset if the arrangement, being the lease of the asset, is effectively non-cancellable. The arrangement is effectively non-cancellable if it can only be cancelled with the Trust's permission. The taxpayer has stated that the lease of the building to the Commonwealth is an effectively non-cancellable arrangement as the Commonwealth cannot cancel the lease without the Trust's permission under the Lease. The arrangement must also be for a period of greater than 30 years, or if less than 30 years the arrangement must have 75% or more of the effective life of the asset remaining when the tax preferred use of the asset starts. The 'arrangement period' is X years (from the date on which the Trust acquired the asset, to the expiration of the lease), therefore the 75% test must be applied. 41. Subparagraph 250-125(1)(b)(ii) requires an analysis of the effective life of the asset. The Commissioner has not provided a determination of effective life for buildings and structural works under Division 40. The taxpayer has performed an analysis of the asset to self-determine the effective life of the building under Division 40. The taxpayer has concluded that the building, at the time it was acquired by the Trust, had an effective life in excess of XX years. 42. As the arrangement period is X years, the arrangement period is less than 75% of the effective life of the building which has been assessed by the taxpayer as being in excess of XX years, the effectively non-cancellable, long term arrangement test in section 250-125 is not satisfied in relation to the building. Lease to the body corporate 43. The body corporate can only terminate the lease if the premises are unfit for use and the Trust, as the landlord, has not rectified this position, pursuant to the Lease. 44. Therefore the lease of the building to the body corporate is an effectively non-cancellable arrangement as, subject to the above, the body corporate cannot cancel the lease without the Trust's permission. 45. The lease has a term of XX years. Accordingly, the effectively non-cancellable, long term arrangement test in section 250-125 will be satisfied if the building has an effective life of XX years or less. 46. On the basis that the building had an effective life, at the time the Trust entered the arrangement with the body corporate, in excess of XX years, the effectively non-cancellable, long term arrangement test in section 250-125 is not satisfied in relation to the building. Lease to the Commonwealth 47. The Commonwealth can only terminate the lease if the premises are unfit for use and the Trust, as the landlord, has not rectified this position, pursuant to the Lease. 48. Therefore the lease of the building to the Commonwealth is an effectively non-cancellable arrangement as, subject to the above, the Commonwealth cannot cancel the lease without the Trust's permission. 49. The lease has a term of X years. Accordingly, the effectively non-cancellable, long term arrangement test will be satisfied if the building has an effective life of XX years or less. 50. On the basis that the building had an effective life, at the time the Trust entered the arrangement with the Commonwealth, in excess of XX years, the effectively non-cancellable, long term arrangement test in section 250-125 is not satisfied in relation to the building. Section 250-135: The level of expected financial benefits test 51. The level of expected benefits test in section 250-135 will be satisfied in relation to an asset if any of the following are satisfied: (a) the asset has a guaranteed residual value (b) the arrangement under which the asset is put to the tax preferred use is a debt interest, or (c) the sum of the present values of the expected financial benefits that members of the tax preferred sector have provided, or are reasonably likely to provide in relation to the tax preferred use of the asset exceeds 70% of: (i) the market value of the asset if subparagraph 250-15(d)(i) applies, or (ii) so much of the market value of the asset as is attributable to the expenditure referred to in subparagraph 250-15(d)(ii) if that subparagraph applies. 52. The level of the expected financial benefits test in section 250-135 is not satisfied in relation to the building as: (a) the building does not have a guaranteed residual value; (b) the lease of the building to the Commonwealth and body corporate is not a debt interest; and (c) the present value of the forecast rental payments attributable to the building, as previously stated by the taxpayer, was less than 70% of the market value of the building at the time it was acquired by the Trust. The financial modelling has not been updated for the lease to the Commonwealth. | Detailed Reasoning - Conclusion in relation to the general test: 53. The Trust lacks a predominant economic interest in the building as the preference units and the bank loan are considered to be limited recourse debt for the purposes of section 250-115. Since the remaining conditions under the general test in section 250-15 are satisfied Division 250 will apply to the Trust and the building. 54. As the general test in Division 250 will apply, the next step is to consider if any of the exclusions to Division 250 are satisfied. | Detailed Reasoning - The exclusions to Division 250: 55. Paragraph 250-10(b) states that Division 250 will not apply to the Trust and the building if one of the following exclusions apply: (a) Small business entities (section 250-20) (b) Financial benefits under minimum value limit (section 250-25) (c) Certain short term or low value arrangements (section 250-30) (d) Sum of present value of financial benefits less than amount otherwise assessable (section 250-40), and (e) Commissioner's determination to not apply Division 250 (section 250-45). Exclusion 1 Lease to the Commonwealth 56. The first exclusion (section 250-20) is not satisfied in relation to the lease of the building to the Commonwealth as the Trust is not regarded as a small business entity because its income for the year ended 30 June 20XX (being the income year in which the Trust started to lease the building to the Commonwealth) exceeded $2 million. Lease to the body corporate 57. The first exclusion is not satisfied in relation to lease of the building to the body corporate as the Trust's income for the year ended 30 June 20XX (being the income year in which the Trust started to lease the building to the body corporate) will exceed $10 million. Lease to the Commonwealth 58. The first exclusion is not satisfied in relation to lease of the building to the Commonwealth as the Trust's income for the year ended 30 June 20XX (being the income year in which the Trust started to lease the building to the Commonwealth) is likely to exceed $10 million. Exclusion 2 Lease to the Commonwealth 59. The second exclusion (section 250-25) is not satisfied as the total financial benefits expected to be received by the Trust for the lease of the building to the Commonwealth is $X, which exceeds the limit of $5 million total nominal values of all the financial benefits in subsection 250-25(1). Lease to the body corporate 60. The second exclusion is not satisfied in relation to the lease of the building and the depreciating assets to the body corporate as the nominal value of the rental payments that are attributable to the building and the depreciating assets leased to the body corporate exceeds $5 million. Lease to the Commonwealth 61. The second exclusion is not satisfied in relation to the lease of the building and the depreciating assets to the Commonwealth as the nominal value of the rental payments that are attributable to the building and the depreciating assets leased to the Commonwealth exceeds $5 million. Exclusion 3 Lease to the Commonwealth 62. For the purposes of the third exclusion (section 250-30), the arrangement period exceeds five years, the total financial benefit is expected to exceed $50 million and the total values of the assets being put to a tax preferred use exceeds $40 million including indexation. 63. The third exclusion is not satisfied in relation to the lease of the building to the Commonwealth as: (a) the lease is for X years (b) the nominal value of all rental payments over the term of the lease and that are attributable to the building leased to the Commonwealth is $X, and (c) the total market value of the building that is leased to the Commonwealth at the time it was acquired is $X. 64. As the threshold requirement for the third exclusion is not satisfied, it is not necessary to consider the exceptions to the third exclusion. Lease to the body corporate 65. The third exclusion is satisfied in relation to the lease of the building to the Commonwealth as: (a) the lease is for XX years which exceeds the arrangement period of five years for real property leased. (b) the total market value of the building and the depreciating assets that are leased to the body corporate at the time the building was acquired was $X. The asset was acquired in XX/XX and the arrangement with the body corporate starts in XX/XX. We consider it is reasonable to assume that their total market value exceeds the $40 million threshold at the start of the arrangement period with body corporate. (c) the nominal value of all rental payments over the term of the lease and that are attributable to the building and the depreciating assets leased to the body corporate is $X. This does exceed the limit of $50 million threshold under subparagraph 250-30(1)(b)(iii) for real property that is leased. Lease to the Commonwealth 66. For the purposes of the third exclusion (section 250-30), the arrangement period does not exceed five years, the total financial benefit is expected to exceed $50 million and the total values of the assets being put to a tax preferred use exceeds $40 million including indexation. 67. The third exclusion is not satisfied in relation to the lease of the building to the Commonwealth as: (a) the lease is for X years (b) the nominal value of all rental payments over the term of the lease and that are attributable to the building leased to the Commonwealth is $X, and (c) the total market value of the building that is leased to the Commonwealth at the time it was acquired is $X. 68. As the threshold requirement for the third exclusion is not satisfied, it is not necessary to consider the exceptions to the third exclusion. Exclusion 4 Lease to the Commonwealth 69. The fourth exclusion (section 250-40) was previously not satisfied in relation to the lease of the building to the Commonwealth as the present value of the assessable amounts under Division 250 exceeded the present value of the alternative assessable amounts. At the request of the agent it is to be assumed that exclusion 4 continues to not apply. Lease to the body corporate 70. The fourth exclusion was previously not satisfied in relation to the lease of the building to the body corporate as the present value of the assessable amounts under Division 250 exceeded the present value of the alternative assessable amounts at the time the lease started. As no present value calculations have been provided, the fourth exclusion is not satisfied. Lease to the Commonwealth 71. The fourth exclusion is not satisfied in relation to the lease of the building to the Commonwealth as no updated figures are available. As no present value calculations have been provided, the fourth exclusion is not satisfied. 72. In absence of the Commissioner's determination under section 250-45, Division 250 will apply to the Trust and the building. | Detailed Reasoning - Question 2: If the answer to Question 1 is yes, will the Commissioner make a determination under subsection 250-45(a) that it would be unreasonable for Division 250 to apply to the Trust in relation to the building? | Summary: The Commissioner makes a determination under subsection 250-45(a) that it would be unreasonable for Division 250 to apply to the Trust in relation to the building. | Detailed Reasoning - Detailed reasoning: 73. Section 250-45 provides that Division 250 does not apply to a taxpayer and an asset at a particular time if: (a) the taxpayer requests that the Commissioner makes a determination under subsection 250-45; and (b) the Commissioner determines that it is unreasonable that Division 250 should apply to the taxpayer and the asset at that time, having regard to: (i) the circumstances because of which this Division would apply to you and the asset; and (ii) any other relevant circumstances. 74. Division 250 was introduced to capture arrangements under which the risks and benefits associated with ownership of an asset was transferred to the 'real' or 'end' user of that asset which typically was a tax exempt entity, while the taxpayer would retain capital allowance deductions that should only be available to the 'real' or 'end' user of the assets. 75. The building had already been leased to a tax exempt entity (the Commonwealth) before the Trust acquired the property. The Trust did not structure the arrangement but simply continued on the lease that existed upon acquisition. 76. The Commissioner is satisfied the arrangement entered into by the Trust was not for the purposes of transferring the risk and benefits of ownership of the building to the Commonwealth and the body corporate. 77. The Trust submits that it is unreasonable for Division 250 to apply to the building because: (a) the Trust would only lack a predominant interest in the building due to breaching only one (the limited recourse debt test) of four tests; (b) the outcomes under Division 250 are inconsistent with the stated object of minimising tax; (c) the mischief that Division 250 seeks to overcome is not applicable in relation to the lease to the Commonwealth and the body corporate; and (d) the ordinary unitholders in the Trust have a sufficient economic interest in the building. 78. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2007 Measures No 5) Act 2007 provides guidance as to the circumstances which the Commissioner should consider in applying the discretion. Paragraph 1.136 of the EM provides that in making a determination to exercise the discretion, the Commissioner should give consideration to the objects of Division 250 as set out in section 250-5. The main objects of Division 250, as set out in section 250-5, are: (a) to deny or reduce capital allowance deductions in respect of an asset if the asset is put to a tax preferred use and the taxpayer has an insufficient economic interest in the asset; and (b) if the taxpayer's capital allowance deductions are denied or reduced, to treat the arrangement for the tax preferred use of the asset as a loan that is taxed as a financial arrangement on a compounding accruals basis. 79. Paragraph 1.137 of the EM provides a general example of the general considerations the Commissioner should have regard to in applying the discretion. Paragraph 1.137 of the EM provides that: It is expected that the Commissioner would consider applying the discretion, for example, to prevent an arrangement from coming within the scope of Division 250 due to: · an unintended or marginal breach of one of the safe harbour tests [lack of predominant economic interest tests]; or · an unintended or marginal breach of one of the tests that need to be satisfied to qualify for the specific exclusion for certain operating and service arrangements. 80. As stated in the EM, it is expected that the Commissioner would consider applying the discretion to prevent an arrangement coming within the scope of Division 250 due to an unintended or marginal breach of one of the safe harbour tests. 81. The Commissioner may have regard to any other circumstances of the taxpayer and the asset and any other relevant circumstances in arriving at a decision to make a determination that Division 250 should not apply. 82. In considering if a determination should be made the factors considered include whether a predominant economic interest is held in the asset and any other relevant circumstances specific to the facts. 83. The principal reason for the application of Division 250 to the Trust and the building is because the 'limited recourse debt test' in section 250-115 was satisfied. If the test was not satisfied the Trust would not have met any of the remaining tests that determine whether there is a lack of predominant economic interest in the asset. The test was satisfied as approximately 32% of the asset was financed by preference unit subscriptions (limited recourse debt under section 250-115) in addition to bank debt financing of 57%. 84. The ordinary unitholders of the Trust also hold the preference units in the proportion of three preference units to one ordinary unit, therefore, while they hold both the ordinary and preference units they are at risk for the amounts subscribed for both the ordinary units and the preference units. 85. The Commissioner considers that while the ordinary unit holders also hold preference units in the Trust proportionately to their ordinary unit holdings and the total investment is less than 80% of the cost of acquiring the building, the ordinary unit holders are effectively at risk in relation to the expenditure to acquire the building. 86. Having regard to these circumstances the Commissioner has determined that it is appropriate to exercise the discretion pursuant to section 250-45 to make a determination that it is unreasonable that Division 250 apply to the Trust and the building for the relevant income years.

Subject: Assets put to tax preferred use: All legislative references are made to the Income Tax Assessment Act 1997 unless otherwise stated.