Private ruling: Validity of partnership and income tax deductions
Published: August 2013
Date scheme commenced: The date the ruling is made.

Ruling: Q1: Will the arrangement be considered to be a partnership (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) pursuant to Division 5 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the sub-lease granted by the Partnership be re-characterised as a notional sale and loan agreement under Division 240 of the ITAA 1997? | A2: No | Q3: Will the partners hold the depreciating assets subject to the head lease for the purposes of determining deductions for their decline in value pursuant to the following items in the table in section 40-40 of the ITAA 1997? · Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease. · Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease). | A3: Yes | Q4: Will Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 apply to determine the first element of the cost for the depreciating assets held by each of the partners? | A4: Yes | Q5: Will the partners be entitled to a deduction for capital works pursuant to the head lease under Division 43 of the ITAA 1997? | A5: Yes | Q6: Will there be or can it reasonably be expected or has there been, financial benefits in relation to any tax preferred use of the asset, provided to the partners (or a connected entity) such that section 250-15(c) of the ITAA 1997 is satisfied? | A6: No | Q7: Will the non-commercial loss rules in Division 35 of the ITAA 1997 apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10? | A7: No | Q8: Will the interest on borrowing by the partners individually to fund the capital contributions be deductible under section 8-1 of the ITAA 1997? | A8: Yes | Q9: To the extent that stamp duty is payable on the assignment of the head lease, will an immediate deduction be available under subsection 25-20(1) of the ITAA 1997 to the individual partner for the income year which the assignment occurs? | A9: Yes | Q10: Will Part IVA of the ITAA 1936 apply to the proposed acquisition or part thereof such that the Commissioner will determine that all or part of a deduction shall not be allowable? | A10: No

Relevant facts and circumstances: · The partners are seriously contemplating an investment in a real estate asset. The asset is currently owned by the vendor, who constructed the asset on leased land, subject to a long term lease from a tax exempt government body. The improvements to the land include capital works and depreciating assets. · The partners will each acquire by assignment a direct proportional interest in the head lease. They will jointly sub-lease it to a management company which is unrelated to the partners ("OpCo"). OpCo will have all day to day operating control of the asset, but title to the land or the fixtures or chattels will not pass to OpCo. · Each partner will obtain funding partly from non-recourse loans from financiers, and partly from their own funds, which may include borrowing from their own bank on a full recourse basis. Partner details The partners investing in the leased asset will comprise companies, trusts and individuals.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Section 177CB | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1936 Section 318 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(1) | Income Tax Assessment Act 1997 Subsection 8-1(2) | Income Tax Assessment Act 1997 Subsection 25-20(1) | Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Section 35-10 | Income Tax Assessment Act 1997 Subsection 35-10(1) | Income Tax Assessment Act 1997 Subsection 40-25(1) | Income Tax Assessment Act 1997 Subsection 40-35(1) | Income Tax Assessment Act 1997 Subsection 40-35(2) | Income Tax Assessment Act 1997 Section 40-40 | Income Tax Assessment Act 1997 Subsection 40-180(1) | Income Tax Assessment Act 1997 Subsection 40-180(2) | Income Tax Assessment Act 1997 Section 40-185 | Income Tax Assessment Act 1997 Paragraph 40-185(1)(b) | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Subsection 43-10(1) | Income Tax Assessment Act 1997 Subsection 43-10(2) | Income Tax Assessment Act 1997 Subsection 43-70(1) | Income Tax Assessment Act 1997 Subsection 43-75(1) | Income Tax Assessment Act 1997 Subsection 43-85(1) | Income Tax Assessment Act 1997 Subsection 43-120(2) | Income Tax Assessment Act 1997 Subsection 43-140(1) | Income Tax Assessment Act 1997 Table 43-140 | Income Tax Assessment Act 1997 Division 50 | Income Tax Assessment Act 1997 Division 240 | Income Tax Assessment Act 1997 Section 240-10 | Income Tax Assessment Act 1997 Division 250 | Income Tax Assessment Act 1997 Section 250-15 | Income Tax Assessment Act 1997 Paragraph 250-15(c) | Income Tax Assessment Act 1997 Section 250-50 | Income Tax Assessment Act 1997 Section 250-55 | Income Tax Assessment Act 1997 Section 250-60 | Income Tax Assessment Act 1997 Subsection 250-85(1) | Income Tax Assessment Act 1997 Subsection 250-85(8) | Income Tax Assessment Act 1997 Section 974-160 | Income Tax Assessment Act 1997 Subsection 995-1(1) Issue 1 | Question 1 | Summary | The Commissioner is of the view that the Partnership will be a tax law partnership, and not a general law partnership, for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | Detailed reasoning | The term 'partnership' is relevantly defined in paragraph 995-1(1)(a) of the ITAA 1997 as an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly. | Therefore there are two limbs within this partnership definition, being: | 1. An association of persons carrying on a business as partners which is referred to as a general law partnership. | 2. An association of persons being in receipt of ordinary income or statutory income jointly, which is referred to as a tax law partnership. | 1. General law partnership | The Partnership will be considered to be a general law partnership if the partners' investment in the asset is considered to be the carrying on of a business as partners. | The term 'business' is defined by subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The Commissioner, as per paragraph 10 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production , considers that this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law. | Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant: | · Whether the activity has a significant commercial purpose or character. | · Whether the taxpayer has more than just an intention to engage in business. | · Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity. | · Whether there is repetition or regularity of the activity. | · Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business. | · Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit. | · The size, scale and permanency of the activity. | · Whether the activity is better described as a hobby, a form of recreation or a sporting hobby. | However as per the facts provided, the Partnership will not operate the asset. Instead OpCo will be appointed by the Partnership, via the grant of a sub-lease, to run and manage the day to day operations.. | On that basis, the Commissioner accepts that it will be OpCo that will be carrying on the business of operating the asset, and not the Partnership. | In conclusion, the Commissioner is therefore of the view that the Partnership will not be a general law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | 2. Tax law partnership | The arrangement will be considered to be a tax law partnership if the partners' investment is considered to be the receipt of ordinary income or statutory income jointly. | The Commissioner, at paragraph 11 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property , provides the following view on what he considers to be a tax law partnership: | 11. Tax law partnerships exist only for tax purposes. General law does not recognize tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of such profits from the use of such property result in a partnership. The receipt of income of income jointly from investments without carrying on business is outside the definition of a partnership under general law. | As per the facts provided, the partners will be in joint receipt of ordinary income from OpCo via the sub-lease pursuant to their respective part ownership asset via the head lease. | In conclusion, the Commissioner is of the view that the Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | Question 2 | Summary | The sub-lease granted by the Partnership to OpCo will not be characterised as a notional sale and loan arrangement under Division 240 of the ITAA 1997. | Detailed reasoning | Section 240-10 of the ITAA 1997, when read in conjunction with paragraph 2.15 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 1999 provides that an arrangement will be treated as a notional sale and notional loan for the purposes of Division 240 of the ITAA 1997 if: | (a) the arrangement is a hire purchase agreement as defined in subsection 995-1(1) of the ITAA 1997 | (b) the arrangement relates to any goods, and | (c) the special conditions applicable to hire purchase agreements contained in Subdivision 240-I of the ITAA 1997 are satisfied. | As stated before, the term 'hire purchase agreement' is defined in subsection 995-1(1) of the ITAA 1997 as: | (a) a contract for the hire of goods where: | (i) the hirer has the right, obligation or contingent obligation to buy the goods | (ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods, and | (iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised, or | (b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid | As per the facts provided, the sub-lease granted by the Partnership to OpCo is expected to contain the following provisions: | · Opco will not have an obligation, right or contingent right to remove or acquire the assets subject to the sub-lease (or OpCo Lease). | · The legal title to the leased assets will not pass to OpCo at any time. | On that basis, the sub-lease will not satisfy neither paragraph (a) or (b) of the hire purchase agreement definition in subsection 995-1(1) of the ITAA 1997. | In conclusion, as the sub-lease is not a hire purchase agreement, the Commissioner is of the view that it will not be characterised as a notional sale and loan arrangement. | Question 3 | Summary | The partners will hold the depreciating assets subject to the head lease for the purposes of determining deductions for their decline in value pursuant to the following items in the able in section 40-40 of the ITAA 1997: | · Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease. | · Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease). | Detailed reasoning | Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under Division 40 of the ITAA 1997) of a depreciating asset that you held for any time during the year. (emphasis added) | The definition of the term 'held' in subsection 995-1(1) of the ITAA 1997 refers directly to the term 'hold' within the same provision, which in the context of holding a depreciating asset is defined to have the meaning given by section 40-40 of the ITAA 1997. | In other words, to be a holder of a depreciating asset, one of the 10 items in the table in section 40-40 of the ITAA 1997 must apply. In addition, the affect of subsections 40-35(1) and 40-35(2) of the ITAA 1997 provides that where there is more than one holder of a depreciating asset (the underlying asset), it is the value of each entity's interest in the underlying asset that is subject to the decline in value, not the underlying asset itself. | The first nine items of the table in section 40-40 of the ITAA 1997 apply to specific kinds of depreciating assets, whereas Item 10 applies to any depreciating asset. Because the specific items apply in preference to the general item, Item 10 applies as the default rule. That is, Item 10 may apply if none of the other nine items apply. | When considering which of the first nine items will or will not apply, it is noted that the partners have not been able to provide precise details of the head lease, such as: | · whether the legal owner, as the lessor, has rights to recover any of the depreciating assets subject to the head lease, or | · whether any of the depreciating assets are fixed to the land. | Furthermore, the Commissioner has been specifically requested to consider whether the partners will be the holder of depreciating assets subject to the head lease under the following items of the table in section 40-40 of the ITAA 1997: | · Item 2: To the extent that the partners each have a right to remove depreciating assets fixed to land under the head lease. | · Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the head lease). | However, before considering these items, it is first necessary to consider whether Item 7 of the table in section 40-40 of the ITAA 1997 will apply in the event that such depreciating assets are deemed to be assets of the Partnership and not of its partners. Item 7 provides that a depreciating asset that is a partnership asset is held by the partnership and not any particular partners. Via ATO Interpretative Decision ATO ID 2009/135 Income Tax Capital Allowances: hold - tax law partnership , the Commissioner is of the view that the Partnership as a tax law partnership will not hold the depreciating assets under this item. In other words, Item 7 only applies to general law partnerships. | Having determined that Item 7 of the table in section 40-40 of the ITAA 1997 will not apply, the Commissioner will now consider the application of both Item 2 and Item 10 in that table as specifically requested. | Item 2 | A depreciating asset that is fixed to land that is subject to a quasi-ownership right is held by the owner of that right if they have the right to remove the asset. A 'quasi-ownership right' over land is defined by subsection 995-1(1) of the ITAA 1997 to include a lease of the land such as the head lease. | In conclusion, to the extent that the partners have a right to remove depreciating assets fixed to land under the head lease, the Commissioner will view the partners as the holder of those assets. | Item 10 | Where Items 1 to 9 do not apply, any depreciating asset that is owned by both a legal owner and equitable owner will be held by the legal owner. | In conclusion, to the extent that the partners each acquire legal title to depreciating assets of which Item 1 to 9 do not apply (being assets formerly owned by the vendor or otherwise as provided under the head lease), the Commissioner will view the partners as the holder of those assets. | Question 4 | Summary | Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will apply to determine the first element of the cost for the depreciating assets held by each of the partners. | Detailed reasoning | Subsection 40-180(1) of the ITAA 1997 provides that the first element of the cost of a depreciating asset the partners hold is: | (a) if an item in the table in subsection 40-180(2) of the ITAA 1997 below applies, the amount specified in that item, or | (b) otherwise, the amount the partners are taken to have paid to hold the asset under section 40-185. | Paragraph 40-180(1)(a) | Of the items of the table in subsection 40-180(2) of the ITAA 1997, it is evident that only Item 5 is needed to be considered. As per the response to Question 3, the Commissioner is of the view that a tax law partnership such as the Partnership does not hold depreciating assets, and concluded that the partners will each hold the depreciating assets. | In conclusion, the Commissioner is of the view that Item 5 does not apply, and in turn paragraph 40-180(1)(a) of the ITAA 1997 does not apply. | Paragraph 40-180(1)(b) | With paragraph 40-180(1)(a) of the ITAA 1997 not applying to the depreciating assets held by the partners, it is now necessary to consider whether paragraph 40-180(1)(b) of the ITAA 1997 applies. | To that end, paragraph 40-185(1)(b) relevantly provides that the amount you are taken to have paid to hold a depreciating asset, is the sum of the applicable amounts set out in the table in relation to holding the asset. | As per the facts provided, the partners will pay a lease premium for the assignment of the head lease. | On that basis, Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will relevant, which provides that the amount the partners are taken to have paid to hold a depreciating asset is the amount they have paid for it. | In conclusion, the Commissioner is of the view that the amount the partners will be taken to have paid to hold their depreciating assets (and therefore the first element of the cost of these assets as per paragraph 40-180(1)(b) of the ITAA 1997) is the part of the lease premium paid by the partners that specifically relates to these assets as per Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997. | Question 5 | Summary | The partners will be entitled to a deduction for capital works subject to the head lease under Division 43 of the ITAA 1997. | Detailed reasoning | Subsection 43-10(1) of the ITAA 1997 provides that the partners can deduct an amount for capital works for an income year, and subsection 43-10(2) of the ITAA 1997 then provides that the partners can only deduct the amount if: | (a) the capital works have a construction expenditure area | (b) there is a pool of construction expenditure for that area, and | (c) you use your area in the income year in the way set out in Table 43-140 (Current year use). | As per the facts provided, there is capital works expenditure relating to the asset. Therefore, for the purposes of considering paragraphs 43-10(1)(a) to 43-10(1)(c) of the ITAA 1997, this capital works expenditure meets the definition of construction expenditure under subsection 43-70(1) of the ITAA 1997. | (a) the capital works have a construction expenditure area | For capital works commenced after 30 June 1997, subsection 43-75(1) of the ITAA 1997 provides that the construction expenditure area is the part of the capital works on which the construction expenditure was incurred that, at the time when it was incurred by an entity: | · was to be owned by the entity | · was to be leased by the entity (such as the head lease), or | · was to be held by the entity under a quasi-ownership right over land (as stated in the response to Question 3 above, is defined by subsection 995-1(1) of the ITAA 1997 to include a lease of the land such as the head lease) granted by an exempt Australian government agency (collectively defined by subsection 995-1(1) of the ITAA 1997 and Division 50 of the ITAA 1997 to include the vendor). | As the vendor incurred the construction expenditure pursuant to the previous head lease (i.e. via being leased to the vendor or held under a quasi-ownership right by the vendor, but not owned by the vendor), the Commissioner is of the view that the capital works subject to the head lease will have a construction expenditure area. | (b) there is a pool of construction expenditure for that area | Subsection 43-85(1) of the ITAA 1997 provides that a pool of construction expenditure is so much of the construction expenditure incurred by the entity on capital works as is attributable to the construction expenditure area. | As the vendor incurred the construction expenditure pursuant to the previous head lease, the Commissioner is of the view that there will be a pool of construction expenditure attributable to the construction expenditure area. | (c) you use your area in the income year in the way set out in Table 43-140 (Current year use) | The term 'your area' is relevantly defined in subsection 43-120(2) of the ITAA 1997 as the part of the construction expenditure area that the partners lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency, and that: | (a) is attributable to a pool of construction expenditure incurred by another lessee or holder of a quasi-ownership right over land, and | (b) has been continuously leased or held since the construction was completed by the lessee or holder who incurred the expenditure. | With respect to determining whose part of the construction expenditure area it will be for the purposes of determining if subsection 43-120(2) of the ITAA 1997 applies, the Commissioner has relied upon the view expressed in ATO Interpretative Decision ATO ID 2009/134 Income Tax Capital Works: your area - tax law partnership , and is of the view: | · that it is not the Partnership, as a tax law partnership, who will lease or hold the part of the construction expenditure area, and | · that it is its' partners who will each lease or hold a part of the construction expenditure area relative to their share. | Having now determined whose part of the construction expenditure it is, the Commissioner is the view that subsection 43-120(2) of the ITAA 1997 applies in that each partner's part of the construction expenditure area relative to their share: | (a) will be attributable to the construction expenditure incurred by the vendor pursuant to the previous head lease, and | (b) will be continuously leased or held since the construction was completed by the vendor, as the head lease will be assigned from the vendor to the Partnership. | Subsection 43-140(1) of the ITAA 1997 provides that Table 43-140 sets out the way in which you must use your area in an income year for a capital works deduction to be allowed. | As per the facts provided, the partners will sub-lease land to OpCo in return for the receipt of ordinary income. | As the lease will include each partner's part of the construction expenditure area relative to their share, the Commissioner is of the view that each of the partners will use their area for the purpose of producing assessable income. | Question 6 | Summary | Financial benefits have not, will not and cannot reasonably be expected to be provided to the partners (or a connected entity) in relation to any tax preferred use of the asset such that paragraph 250-15(c) of the ITAA 1997 is not satisfied. | Detailed reasoning | Division 250 of the ITAA 1997 may apply to deny or reduce capital allowance deductions where an asset is put to a tax preferred use and the partners have an insufficient economic interest in the asset. For Division 250 to apply to the partners, the general test under section 250-15 of the ITAA 1997 must be met, that being: | This Division applies to the partners 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 the partners (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, the partners 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) the partners lack a *predominant economic interest in the asset at that time. | Tax preferred use | Under section 250-60 of the ITAA 1997 an asset is being put to a 'tax preferred use' if a tax preferred end user (or a connected entity) directly or indirectly uses, or effectively controls the use of the asset. | End user of an asset | Under section 250-50 an entity is an end user of an asset if the entity (or a connected entity) holds rights as a lessee under a lease of the asset. | Tax preferred end user | Under section 250-55 of the ITAA 1997: | An *end user of an asset is a tax preferred end user if: | (a) the end-user (or a *connected entity) is a *tax preferred entity; or | (b) the end user is an entity that is a foreign resident. | Connected entity | A connected entity is an associate in accordance with section 318 of the ITAA 1936 or another member of the same wholly owned group if the entity is a company and is a member of such a group. | Financial benefits | Under section 974-160 of the ITAA 1997, for the purposes of the act, a financial benefit is: | · anything of economic value and | · includes property and services and | · includes anything specified in the regulations to be a financial benefit for the purposes of the ITAA 1997. | In relation to any tax preferred use of the asset, including prior to any tax preferred use: | · there will be no financial benefits provided to the partners directly or indirectly by any tax preferred entity (or a connected entity) to enter into the proposed arrangement, | · there will be no financial benefits provided to the partners directly or indirectly by any tax preferred entity (or a connected entity) at the upon any termination or expiration of the arrangement, including, the asset has no guaranteed residual value | · the investment will be operated solely by the private sector | · the risks and rewards of the operations will be assumed by OpCo | Therefore, the financial benefits provided by the public to OpCo and by OpCo to the partners over the course of the project will not be in relation to the tax preferred use of the asset. | In conclusion, financial benefits in relation to the tax preferred use of the asset have not, will not and cannot reasonably be expected to be provided to the partners (or a connected entity) such that section 250-15(c) of the ITAA 1997 is not satisfied. | Question 7 | Summary | The non-commercial loss rules in Division 35 of the ITAA 1997 will not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10? | Detailed reasoning | Division 35 of the ITAA 1997 prevents losses of individual taxpayers carrying on a business activity either alone or in partnership from being offset against other assessable income in the year the loss is incurred. | As stated in the note to section 35-10(1) of the ITAA 1997, the 'section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly…'. | The Explanatory Memorandum to the New Business Tax System (Integrity Measure) Bill 2000 states that the 'new rules do not change the general law tests that determine whether an individual is carrying on a business activity; or … and the new rules do not apply to: | … the receipt of passive investment income from activities which do not constitute the carrying on of a business. These activities include the receipt of rent from a negatively geared investment property, dividends from shares or interest on financial investments such as infrastructure bonds. | As determined in question 1 above, the partners will not be carrying on a business, but will be in joint receipt of ordinary income from OpCo. The Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(a) of the ITAA 1997. | In conclusion, the Commissioner's view is that Division 35 of the ITAA 1997 does not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10. | Question 8 | Summary | The interest incurred on borrowings by an individual partner to fund the capital contributions will be deductible under section 8-1 of the ITAA 1997. | Detailed reasoning | Subsection 8-1(1) of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that: | a) it is incurred in gaining or producing the your assessable income; or | b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. The partners expect that the money borrowed to invest in the proposed asset would result in rental income being received. | The interest on the borrowed amounts relating to the servicing of a loan by a partner which will fund the acquisition of the income producing asset as outlined above would be deductible under section 8-1 of the ITAA 1997. | Question 9 | Summary | To the extent that stamp duty is payable on the assignment of the head lease, an immediate deduction will be available to the individual partner for the income year which the assignment occurs as per subsection 25-20(1) of the ITAA 1997. | Detailed reasoning | Subsection 25-20(1) of the ITAA 1997 states that the partners can deduct expenditure the partners incur for preparing, registering or stamping: | (a) a lease of property, or | (b) an assignment or surrender of a lease of property, | if the partners have used or will use the property solely for the purpose of producing assessable income. | The term assignment is explained in ATO Interpretative Decision ATO ID 2012/4 Income Tax Capital Works: your area - assignee of that lessee's lease which references LexisNexis Butterworths, Halsbury's Laws of Australia ,Volume 16 (at 11 November 2011) explains an assignment at paragraph 245-1530: | An assignment is the transfer by agreement of the interest held by one person (the assignor) to another person (the assignee) and includes another party taking over the residue of the term of a lease, or where possession is given up for the remainder of the term...An assignment does not constitute the creation of a new lease. | ATO ID 2012/4 further states that the essential feature distinguishing novation from assignment, as observed by the High Court in Olsson v. Dyson (1969) 120 CLR 365, is that in the case of novation the parties to the contract mutually agree to discharge that contract and a new contract is formed in substitution for the old contract. | The partners will use the head lease solely to produce assessable income in the form of rent derived from the sub-lease and OpCo Lease. | Therefore, any expenditure incurred by way of stamp duty when assigning the head lease from the vendor to the partners for the purpose of producing assessable income, will entitle the partners to a deduction in accordance with subsection 25-20(1) of the ITAA 1997. | Question 10 | Summary | Part IVA of the ITAA 1936 will not apply to the proposed acquisition or part thereof such that the Commissioner will determine that all or part of a deduction shall not be allowable. | Detailed reasoning | Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. | It must be noted from the outset that a private binding ruling only determines whether Part IVA applies. Specifically, a private binding ruling is not a Part IVA determination and cannot lead to the necessary action to give effect to the determination as required under subsection 177F(1) of the ITAA 1936. | In broad terms, Part IVA will apply where the following requirements are satisfied: | · there is a scheme (see section 177A of the ITAA 1936); | · a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C); and | · the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (section 177D of the ITAA 1936). | The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. | Scheme | A scheme is defined in subsection 177A(1) of the ITAA 1936 as: | (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and | (b) any scheme, plan, proposal, action, course of action or course of conduct. | Each investor will acquire a direct proportional interest in the underlying asset commensurate to the capital invested. | The scheme should include all the transaction steps to fund and acquire the relevant interest in the leased asset. | Given the breadth of the definition of a scheme, part or all of the arrangement may constitute a scheme to which Part VIA may apply. However, it should not be determinative as to whether Part IVA applies. | Based on the above information, the Commissioner concludes that the above scenario would satisfy the definition of scheme pursuant to subsection 177A(1) of the ITAA 1936. | Tax benefit | Paragraph 62 of PS LA 2005/24 states: | Part IVA will not apply unless a taxpayer obtained, or would obtain, a tax benefit in connection with a scheme. | Subsection 177C(1) of the ITAA 1936 relevantly states: | …the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: | … | (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or | … | Paragraph 64 of PS LA 2005/24 states: | There are two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out…In relation to determining what 'might reasonably be expected' to have happened… | Paragraph 69 of PS LA 2005/24 states: | The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D. | The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 inserted subsections 177CB(2) and 177CB(3) of the ITAA 1936 to operate from 16 November 2012. Paragraphs 1.69 to 1.70 of the Bill state: | 1.69 The amendments target deficiencies in section 177C, and the way it interacts with other elements of Part IVA, particularly section 177D, as revealed by recent decisions of the Full Federal Court. | 1.70 The amendments are not intended to change the operation of Part IVA in any other respect. | 1.71 Consistent with the policy underlying Part IVA, the amendments are intended to have the following effects: | · to put it beyond doubt that the 'would have' and 'might reasonably be expected to have' limbs of each of the subsection 177C(1) paragraphs represent alternative bases upon which the existence of a tax benefit can be demonstrated; | · to ensure that, when obtaining a tax benefit depends on the 'would have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based solely on a postulate that comprises all of the events or circumstances that actually happened or existed other than those forming part of the scheme; | · to ensure that, when obtaining a tax benefit depends on the 'might reasonably be expected to have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based on a postulate that is a reasonable alternative to the scheme, having particular regard to the substance of the scheme and its effect for the taxpayer, but disregarding any potential tax costs; and | · to require the application of Part IVA to start with a consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for the taxpayer a particular tax benefit in connection with the scheme; and so emphasising the dominant purpose test in section 177D as the 'fulcrum' or 'pivot' around which Part IVA operates. | Conclusion | What the partners are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in subsection 177D(2) of the ITAA 1936, these factors indicate that the dominant purpose of the proposed investment is not to obtain a tax benefit. Therefore, Part IVA will not apply to this arrangement.


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