Private ruling: Division 250
Date of advice: 3 April 2020
Published: May 2020
Ruling period: 1 July 20XX - 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: If the X Assets are being put to a tax preferred use under the arrangement, does the Fourth Exclusion in section 250 - 40 of the ITAA 1997 apply to you and the X Assets? | A1: Yes

Relevant facts and circumstances: Entity X is an Australian resident. Entity X purchased X assets from Entity B. Entity X is the legal owner and holder of X Assets for the purpose of Division 40 of the ITAA 1997. Under the Arrangement, Entity B (as Buyer) will purchase output generated by the Entity X (as Seller), and make Periodical Payments in respect of the output. Entity X recovers its production costs from the Periodical Payment revenues it receives from Entity B. The financial benefits are in relation to tax preferred use of assets. X Assets are depreciable assets with no guaranteed residual value. The calculations of the alternative assessable amount for the X Assets using the method statement in subsection 250-40(3) are detailed in the table below: Step 1 Present Value of financial benefits Step 2 Present Value of deductions Step 3 Alternative assessable amount X Assets $XX,XXX.XX ($XX,XXX.XX) $XX,XXX.XX The X Assets have a Step 3 alternative assessable amount. The discount rate used for determining the present values above is X.XX%.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 43 | Income Tax Assessment Act 1997 Section 58-5 | Income Tax Assessment Act 1997 Section 250-15 | Income Tax Assessment Act 1997 Section 250-40 | Income Tax Assessment Act 1997 Subsection 250-55 | Income Tax Assessment Act 1997 Subsection 250-40(1) | Income Tax Assessment Act 1997 Subsection 250-40(3) | Income Tax Assessment Act 1997 Subdivision 250-D | Income Tax Assessment Act 1997 Subsection 250-155(8) | Income Tax Assessment Act 1997 Subsection 250-160(1) | Income Tax Assessment Act 1997 Subsection 250-160(2) | Income Tax Assessment Act 1997 Subsection 250-160(3) | Income Tax Assessment Act 1997 Section 250-180 | Income Tax Assessment Act 1997 Paragraph 250-180(3)(a) | Income Tax Assessment Act 1997 Subdivision 250-E | Income Tax Assessment Act 1997 Section 974-160 | Petroleum Resource Rent Tax Assessment Act 1989 Anti-avoidance rules | Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtain a tax benefit or imputation benefit in connection with an arrangement. | If Part IVA applies the tax benefit or imputation benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision: Summary: All references refer to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. The arrangement will be excluded from Division 250 under section 250-40 (The Fourth Exclusion) because the conditions in subsection 250-40(1) are satisfied. That is the Division 250 assessable income is less than the alternative assessable amount. | Detailed Reasoning - Detailed reasoning: The requirements for Division 250 to apply to an arrangement are outlined in section 250-15 and state that this Division applies to you and an asset at a particular time if: · the asset is being put to a tax asset use; and · the arrangement for tax preferred use is greater than 12 months; and · the financial benefits in relation to the tax preferred use of the asset flow from a tax preferred end user, entity or foreign resident; and · apart from this division there would be an entitlement to capital allowances in relation to the decline in value or expenditure in relation to the asset. An arrangement subject to division 250 may be excluded pending the application of the exclusionary provisions provided for under section 250-20 to 250-45. According to the facts, the arrangement satisfies the tests provided under section 250-15 and as such Division 250 applies, unless subject to the exclusionary provisions. The fourth exclusion is contained in section 250-40 and states that Division 250 will not apply if at the time the asset is put to a tax preferred use the Division 250 assessable amount is less than the alternative assessable amount. Section 250-40 requires a comparison of the present value of the Division 250 assessable amount with the present value of assessable income and allowable deductions during the arrangement periodif Division 250 did not apply. | Detailed Reasoning - Division 250 Assessable Amount: The Division 250 assessable amount is defined in subsection 250-40(2) as the sum of the present values of all amounts that would be likely to be included in assessable income under Division 250 in relation to the tax preferred use of an asset. Under Subdivision 250-D, an amount will be included in assessable income under Division 250 if it is subject to deemed loan treatment Subsection 250-160(3) works to limit financial benefits subject to deemed loan treatment to those which reasonably represent a return of, or on, an investment in the asset (as distinct, for example, from representing consideration for the provision of services or the recovery of production costs). Under the arrangement, Entity B (as Buyer) will purchase the output generated by the Entity X (as Seller), and make Periodical Payments in respect of the output. Entity X recovers its production costs from the Periodical Payment revenues it receives from Entity B. The financial benefits that Entity B makes to Entity X under the arrangement would not be referrable to the cost of the assets and would therefore not be payments that would represent a return on an investment for the purposes of subsection 250-160(3). Financial benefits would only be subject to deemed loan treatment under Division 250 to the extent to which they represent a return on investment. Accordingly, the financial benefits provided in relation to the arrangement by Entity B to Entity X are not subject to deemed loan treatment under subsection 250-160(3) such that the Division 250 assessable amount is $XX. | Detailed Reasoning - Alternative assessable amount: Subsection 250-40(3) provides that the alternative assessable amount is calculated as follows: The term financial benefit for the purpose of subsection 250-40(3) is defined in section 974-160 to mean, broadly, anything of economic value. | Detailed Reasoning - Conclusion: Based on your calculations, the alternative assessable amount of $XX,XXX.XX is greater than the Division 250 assessable amount of $XX for Entity X at the start of the arrangement. Accordingly, the fourth exclusion applies to the arrangement such that Division 250 does not apply to Entity X or the X Assets.

Qualifications: The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. | total of the present values of the amounts that would be included in assessable income in relation to the financial benefits provided with regards to the tax preferred use of the asset during the period of the arrangement had Division 250 not applied, less | total of the present values of the amounts that would be deductible in relation to the asset, or expenditure in relation to the asset, under Divisions 40 or 43 in relation to the period of the arrangement had Division 250 not applied.