Private ruling: Capital Allowances
Date of advice: 14 September 2017
Published: February 2018

Ruling: Q1: Will section 51AD and Division 16D of the Income Tax Assessment Act 1936 ( ITAA 1936 ) apply to Entity B in relation to deductions for capital allowances deductions for the period of the ruling? | A1: No | Q2: Will the amendments to the Agreements cause Division 250 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) to apply to Entity B in relation to the assets constituting the Asset? | A2: No | Q3: Will Entity B continually hold a ‘quasi-ownership right’ (as defined in subsection 995-1(1) of the ITAA 1997) such that capital works deductions under Division 43 of the ITAA 1997 will continue to be available to Entity B in respect of the Asset after amendments to the Agreements? | A3: Yes

Relevant facts and circumstances: Entity B entered into various Agreements a number of years ago with Entity C, a related entity, and an unrelated party to construct an asset. Under the Agreements, a lease was granted by the unrelated party to Entity B over the Asset which allows Entity B to derive income. Entity B has entered into a new contract with Entity C and the unrelated party to construct a new asset which will be leased to Entity B. Each of Entity B, Entity C and the unrelated party will make separate payments towards the construction of the new asset. The Agreements will be amended to enable the term of the existing lease to be extended for a number of years.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 51AD | Income Tax Assessment Act 1936 Division 16D | Income Tax Assessment Act 1936 subsection 51AD(4) | Income Tax Assessment Act 1997 section 43-30 | Income Tax Assessment Act 1997 section 43-120 | Income Tax Assessment Act 1997 Division 250 | Income Tax Assessment Act 1997 s ection 250-5 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Section 51AD and Division 16D of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to Entity B in relation to deductions for capital allowances. | Detailed Reasoning - Detailed reasoning: The Agreements were or will be amended for the new asset which was or will be leased to Entity B. None of the amendments will result in any additional rights being granted to the unrelated party that will enable the unrelated party to subsequently control the use of the Asset. Such control is the prerequisite to the application of section 51AD and Division 16D (see subparagraph 51AD(4)(b)(ii) of the ITAA 1936 and subsection 159GG(1) of the ITAA 1936). Therefore, section 51AD and Division 16D of the ITAA 1936 will not apply to Entity B in respect of the Asset after amendments to the Agreements (subsections 51AD(1B) and 159GH(1A) of the ITAA 1936). | Summary: The amendments to the Agreements will not cause Division 250 to apply to Entity B in relation to the assets constituting the Asset. | Detailed Reasoning - Detailed reasoning: In general terms, Division 250 will only apply in circumstances where: ● the tax preferred use of an asset commences on or after 1 July 2007, and ● the taxpayer has insufficient economic interest in the asset; section 250-5. In certain circumstances where section 51AD or Division 16D would apply, a taxpayer may instead choose that Division 250 applies (sub-item 71(1) of Schedule 1 to the Tax Laws Amendment (2007 Measures No. 5) Act 2007 ). Division 250 will not apply to Entity B on the basis that section 51AD and Division 16D (as referred to in the Detailed reasoning for Question 1 above), will not otherwise apply as a consequence of the amendments to the Agreements. Therefore, the amendments to the Agreements will not cause Division 250 to apply to Entity B and any of the assets constituting the Asset. | Summary: Entity B will continually hold a ‘quasi-ownership right’ (as defined in subsection 995-1(1)) such that capital works deductions under Division 43 will continue to be available to Entity B in respect of the Asset after the amendments to the Agreements. | Detailed Reasoning - Detailed reasoning: Entity B is entitled to claim deductions for the relevant capital works because, as required by sections 43-75 and 43-120, it will hold a ‘quasi-ownership right’ over land (being a lease of the land, on which the Asset is built. Therefore, Entity B will continue to be entitled to deductions for capital works under Division 43 in respect of the Asset after the amendments to the Agreements.

Reasons for decision: All legislation references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless specified otherwise.