Private ruling: Application of Division 250 of the Income Tax Assessment Act 1997 to leasing of building and depreciating assets
Published: May 2014
Ruling period: 01 July 2013 to 30 June 2014 | 01 July 2013 to 30 June 2015 | 01 July 2013 to 30 June 2016 | 01 July 2013 to 30 June 2017 | 01 July 2013 to 30 June 2018 | 01 July 2013 to 30 June 2019 | 01 July 2013 to 30 June 2020 | 01 July 2013 to 30 June 2021 | 01 July 2013 to 30 June 2022 | 01 July 2013 to 30 June 2023 | 01 July 2013 to 30 June 2024 | 01 July 2013 to 30 June 2025
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Trust be subject to Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the leasing of the building? | A1: No | Q2: Will the Trust be subject to Division 250 of the ITAA 1997 in relation to the leasing of depreciating assets? | A2: Yes

Relevant facts and circumstances: 1. The Trust is an Australian resident unit trust. 2. The Trust entered into a Contract of Sale with the vendor to acquire land, buildings, plant and equipment, tenancies and service agreements in respect of a property (Property). 3. The Property consists of a commercial office building complex and a car park. 4. The Property was subject to a number of leases with private sector tenants and a long term lease agreement (Lease) and a Car Park Agreement with a tax preferred entity. 5. The Trust acquired the Property for the purposes of long term investment and the derivation of rental income. 6. The Trust became the lessor under the Lease and Car Park Agreement following acquisition of the Property. 7. The market value of the Property for the purpose of this ruling is taken to be the purchase price excluding stamp duty and other acquisition costs. 8. The purchase price and incidental acquisition costs were funded by loans, contributions from unit holders and the Trust's net cash flow. 9. The Trust would be entitled to a capital allowance in relation to expenditure in relation to the building under Division 43 of the ITAA 1997. 10. The Trust would be entitled to deduct amount equal to the decline in value of deprecating assets under Division 40 of the ITAA 1997. 11. The tax preferred entity does not have a right or obligation to acquire the building pursuant to the Lease or under any other agreement. 12. The tax preferred entity does not have a right to require the transfer of the assets or a legal or equitable interest in the assets, nor a residual or revisionary interest in the assets at the end of the lease. 13. The tax preferred entity has not and will not provide any form of a guarantee to the Trust in relation to the disposal of the building. 14. The Lease with the tax preferred entity is a genuine operating lease and not a debt interest.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 250

Reasons for decision: Summary: Division 250 of the ITAA 1997 will apply to the leasing of the building if all of the following five conditions under section 205-15 of the ITAA 1997 are met (unless one of the exclusions is available). | Detailed Reasoning - 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 not an Australian 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. In relation to the above test it is considered that: a) Paragraph 250-15(a) of the ITAA 1997 applies because the Trust leased part of the Property to a tax exempt entity. The asset is being put to a tax preferred use. b) Paragraph 250-15(b) of the ITAA 1997 applies because the term of the Lease when the Property was acquired was more than 12 months. c) Paragraph 250-15(c) of the ITAA 1997 applies because under section 250-85 of the ITAA 1997 financial benefits are defined broadly to include anything of economic value and this includes the rent paid under the Lease. d) Subparagraph 250-15(d)(i)of the ITAA 1997 applies because the Trust should otherwise be prima facie entitled to capital allowance deductions in respect of the building. e) The predominant economic interest test contained in paragraph 250-15(e) is discussed below. If this test applies, the leasing of the building will be subject to Division 250. | Detailed Reasoning - Predominant economic interest test: The Trust will lack a predominant economic interest in the building if any one of the following four tests is satisfied: 1. Limited recourse debt test (section 250-115), 2. Right to acquire asset test (section 250-120), 3. Effectively non-cancellable long term arrangement test (section 250-125), 4. Level of expected financial benefits test (section 250-135). Based on the facts provided in the ruling application the Trust will not satisfy any of the above tests. The Trust will not be subject to Division 250 of the ITAA 1997 in relation to the leasing of the building to the tax preferred entity. | Detailed Reasoning - Question 2: The Trust will satisfy paragraphs 250-15(a), (b) and (c) of the ITAA 1997 for similar reasons as stated under Question 1. Subparagraph 250-15(d)(ii) applies because the Trust would otherwise be prima facie entitled to deduct an amount equal to the decline in value of deprecating assets under Division 40 of the ITAA 1997 (Division 40 assets). If the predominant economic interest test contained in subsection 250-15(e) applies, the leasing of the depreciating assets will be subject to Division 250. The Trust will lack a predominant economic interest in the depreciating assets if any one of the following four tests is satisfied: 1. Limited recourse debt test (section 250-115), 2. Right to acquire asset test (section 250-120), 3. Effectively non-cancellable long term arrangement test (section 250-125), 4. Level of expected financial benefits test (section 250-135). The Trust will not satisfy the Limited recourse debt test and the Right to acquire asset for similar reasons as stated in Question 1. Based on the facts provided in the ruling application the Trust will satisfy the effectively non-cancellable long term arrangement test under section 250-125 of the ITAA 1997 for individual depreciating asset items that have an effective life of less than 75% of the remaining term of the lease. The Trust will also satisfy the Level of expected financial benefits test under subsection 250-135 of the ITAA 1997 with respect to the depreciating assets because the sum of the present values of the expected financial benefits provided by the tax preferred entity in relation to the leasing of depreciating assets exceeds 70% of the market value of the depreciating assets that is attributable to the capital expenditure in relation to these assets. The Trust will be subject to Division 250 of the ITAA 1997 in relation to the leasing of the depreciating assets to the tax preferred entity.