Private ruling: Aircraft Leasing
Published: July 2012

Ruling: Q1: Is the applicant's 'cost of acquisition' of the Aircraft for the purposes of subsection 240-35(2) the market value of the Aircraft? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936, section 51 | Income Tax Assessment Act 1936, subsection 128A(1AB) | Income Tax Assessment Act 1936, Division 11A | Income Tax Assessment Act 1936, Part IVA | Income Tax Assessment Act 1936, section 177CA | Income Tax Assessment Act 1936, section 177D(b) | Taxation Administration Act 1953, Schedule 1 section 12-245 | Income Tax Administration Act 1997, section 8-1 | Income Tax Administration Act 1997, Division 40 | Income Tax Administration Act 1997, section 40-85 | Income Tax Administration Act 1997, Subdivision 40-D | Income Tax Administration Act 1997, section 40-285 | Income Tax Administration Act 1997, subsection 40-295(1) | Income Tax Administration Act 1997, paragraph 40-295(1)(a) | Income Tax Administration Act 1997, section 40-300 | Income Tax Administration Act 1997, subsection 40-300(1) | Income Tax Administration Act 1997, subsection 40-300(2) | Income Tax Administration Act 1997, section 40-305 | Income Tax Administration Act 1997, section 104-40 | Income Tax Administration Act 1997, subsection 104-40(3) | Income Tax Administration Act 1997, subsection 104-40(5) | Income Tax Administration Act 1997, Division 230 | Income Tax Administration Act 1997, Subdivision 230-A | Income Tax Administration Act 1997, subsection 230-15(2) | Income Tax Administration Act 1997, paragraph 230-15(2)(a) | Income Tax Administration Act 1997, section 230-45 | Income Tax Administration Act 1997, subsection 230-45(1) | Income Tax Administration Act 1997, section 230-45(1)(d) | Income Tax Administration Act 1997, section 230-45(1)(e) | Income Tax Administration Act 1997, section 230-45(1)(f) | Income Tax Administration Act 1997, subsection 230-55(4) | Income Tax Administration Act 1997, paragraph 230-55(4)(a) | Income Tax Administration Act 1997, paragraph 230-55(4)(b) | Income Tax Administration Act 1997, paragraph 230-55(4)(c) | Income Tax Administration Act 1997, paragraph 230-55(4)(d) | Income Tax Administration Act 1997, paragraph 230-55(4)(e) | Income Tax Administration Act 1997, paragraph 230-55(4)(f) | Income Tax Administration Act 1997, section 230-60 | Income Tax Administration Act 1997, section 230-60(1) | Income Tax Administration Act 1997, section 230-60(2) | Income Tax Administration Act 1997, section 230-65 | Income Tax Administration Act 1997, section 230-70 | Income Tax Administration Act 1997, section 230-80 | Income Tax Administration Act 1997, Subdivision 230-B | Income Tax Administration Act 1997, subsection 230-100(2) | Income Tax Administration Act 1997, subsection 230-105(1) | Income Tax Administration Act 1997, subsection 230-115 | Income Tax Administration Act 1997, subsection 230-115(1) | Income Tax Administration Act 1997, subsection 230-115(2) | Income Tax Administration Act 1997, paragraph 230-115(2)(a) | Income Tax Administration Act 1997, paragraph 230-115(2)(b) | Income Tax Administration Act 1997, subsection 230-115(3) | Income Tax Administration Act 1997, section 230-115 | Income Tax Administration Act 1997, section 230-125 | Income Tax Administration Act 1997, section 230-130 | Income Tax Administration Act 1997, subsection 230-130(1) | Income Tax Administration Act 1997, section 230-135 | Income Tax Administration Act 1997, subsection 230-135(2) | Income Tax Administration Act 1997, section 230-170 | Income Tax Administration Act 1997, section 230-180 | Income Tax Administration Act 1997, section 230-185 | Income Tax Administration Act 1997, Subdivision 230-F | Income Tax Administration Act 1997, subsection 230-395(1) | Income Tax Administration Act 1997, paragraph 230-410(1)(e) | Income Tax Administration Act 1997, subsection 230-410(7) | Income Tax Administration Act 1997, paragraph 230-435(1)(b) | Income Tax Administration Act 1997, section 230-445 | Income Tax Administration Act 1997, subsection 230-445(1) | Income Tax Administration Act 1997, Subdivision 230-H | Income Tax Administration Act 1997, section 230-505 | Income Tax Administration Act 1997, subsection 230-505(1) | Income Tax Administration Act 1997, subsection 230-505(2) | Income Tax Administration Act 1997, subsection 230-505(3) | Income Tax Administration Act 1997, subsection 230-505(4) | Income Tax Administration Act 1997, subsection 230-505(7) | Income Tax Administration Act 1997, subsection 230-505(8) | Income Tax Administration Act 1997, Subdivision 230-G | Income Tax Administration Act 1997, section 230-435 | Income Tax Administration Act 1997, paragraph 230-435(1)(b) | Income Tax Administration Act 1997, section 230-445 | Income Tax Administration Act 1997, subsection 230-445(1) | Income Tax Administration Act 1997, Division 240 | Income Tax Administration Act 1997, subsection 240-17(1) | Income Tax Administration Act 1997, subsection 240-17(2) | Income Tax Administration Act 1997, subsection 240-20(1) | Income Tax Administration Act 1997, subsection 240-25(1) | Income Tax Administration Act 1997, subsection 240-25(2) | Income Tax Administration Act 1997, subsection 240-25(3) | Income Tax Administration Act 1997, subsection 240-25(5) | Income Tax Administration Act 1997, Subdivision 240-C | Income Tax Administration Act 1997, section 240-30 | Income Tax Administration Act 1997, section 240-35 | Income Tax Administration Act 1997, subsection 240-35(1) | Income Tax Administration Act 1997, subsection 240-35(2) | Income Tax Administration Act 1997, section 240-40 | Income Tax Administration Act 1997, subsection 240-40(1) | Income Tax Administration Act 1997, subsection 240-40(2) | Income Tax Administration Act 1997, subsection 240-40(3) | Income Tax Administration Act 1997, section 240-60 | Income Tax Administration Act 1997, subsection 240-60(1) | Income Tax Administration Act 1997, section 240-65 | Income Tax Administration Act 1997, section 240-75 | Income Tax Administration Act 1997, subsection 240-75(1) | Income Tax Administration Act 1997, subsection 240-75(4) | Income Tax Administration Act 1997, section 240-75 | Income Tax Administration Act 1997, section 240-85 | Income Tax Administration Act 1997, section 240-90 | Income Tax Administration Act 1997, subsection 240-90(1) | Income Tax Administration Act 1997, subsection 240-90(2) | Income Tax Administration Act 1997, Subdivision 240-G | Income Tax Administration Act 1997, section 240-105 | Income Tax Administration Act 1997, Division 995 | Income Tax Administration Act 1997, section 995-1 | Income Tax Administration Act 1997, paragraph 995-1(a)(i) | Income Tax Administration Act 1997, paragraph 995-1(a)(ii) | Income Tax Administration Act 1997, paragraph 995-1(a)(iii) | Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Other references (non ATO view) | ATC 4383, ATR 444 | Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344

Reasons for decision: Summary: Division 240 Division 240 of the ITAA 1997 deals with arrangements, such as hire purchase agreements, which are recharacterised as the sales of property, funded by loans from the notional seller to the notional buyer, as follows: | Detailed Reasoning - Operative provisions: SECTION 240-17 Who is the notional seller and the notional buyer? 240-17(1) An entity is the notional seller if it is a party to the *arrangement and: (a) actually owns the property; or (b) is the owner of the property because of a previous operation of this Division. 240-17(2) An entity is the notional buyer if it is a party to the *arrangement and, under the arrangement, has the *right to use the property. | Detailed Reasoning - Example:: If the arrangement is a hire purchase agreement, the finance provider will be the notional seller and the hirer will be the notional buyer. These provisions provide part of the legislative framework applicable to the financial arrangement between the applicant and AUS. | Detailed Reasoning - Division 230: Division 230 of the ITAA 1997 is about the tax treatment of gains and losses from financial arrangements. A 'financial arrangement' is the core unit of taxation upon which a tax liability is determined under Division 230. Section 230-505 applies where an entity starts or ceases to have a 'financial arrangement' as consideration for providing or acquiring a thing (subsection 230-505(1)). Subsection 230-505(2) states: Work out the *market value of the thing at the time at which you (in fact) provide or acquire it. For the purposes of applying this Act to you, treat the amount: (a) you obtain for providing the thing; or (b) you provide for acquiring the thing; as being that market value. However, subsection 230-505(2) doesn't apply if subsection 230-505(3) does and: (a) you start or cease to have the *financial arrangement as mentioned in subsection (1) under an arrangement (the starting or ceasing arrangement); and (b) the thing itself is a *Division 230 financial arrangement; and (c) the starting or ceasing arrangement is not itself a Division 230 financial arrangement. Subsection 230-505(4) then states that, for the purposes of section 230-505: (a) treat yourself as providing a thing to another entity if: (i) you have provided, or are to provide, the thing to the other entity; or (ii) you cease to have, have ceased to have or are to cease to have, the thing: or (iii) the other entity starts to have, has started having or is to start to have, the thing; and treat yourself as acquiring a thing if: · another entity has provided, or is to provide, the thing to you; or · another entity ceases to have, has ceased to have or is to cease to have, the thing; or · you start to have, have started to have or are to start to have, the thing. Subsection 230-505(7) states that to avoid doubt, this section applies even if your starting or ceasing to have the financial arrangement is only part of the consideration for the provision or acquisition of the thing. | Detailed Reasoning - Application to the facts: Subsection 230-505(1) will apply in the present circumstances as the applicant started to have a Division 230 financial arrangement as consideration for the acquisition of each Aircraft. The financial arrangement is the applicant's obligation to pay OE the Second Instalment. The applicant will be treated as having acquired the Aircraft as another entity (OE) provided the Aircraft to the applicant (paragraph 230-505(4)(b)). The obligation to pay the Second Instalment is a term of the PA and a fundamental precondition to the applicant's acquisition of legal title in the Aircraft. Furthermore, subsection 230-505(8) states that the taxpayer should treat the starting of a financial arrangement as consideration for the acquisition of a thing where: … starting or ceasing is, in substance or effect, done for the provision or acquisition of the thing. Further, the exclusion in subsection 230-505(3) will not apply. This is on the basis that the 'thing', being the Aircraft, is not itself a 'financial arrangement'. Therefore, the conditions for section 230-505 to apply to the transaction are satisfied and the applicant is taken to have provided the market value of the Aircraft in order to acquire it. As subsection 230-505(2) is to be applied for the purposes of the Act, the 'cost of acquisition' of the Aircraft under subsection 240-35(2) is also taken to be the market value of the Aircraft. | Detailed Reasoning - (a): Is the Lease an arrangement that is treated as a notional sale and a notional loan under section 240-10? | Detailed Reasoning - Reasons for decision: For income tax purposes, Division 240 of the ITAA 1997 treats some arrangements such as hire purchase agreements as sales of the relevant property to the hirer (notional buyer) combined with a loan from the supplier (notional seller) to the notional buyer, to finance the purchase price. Division 240 treats the notional buyer as the owner of the property for certain purposes and treats as interest the payments made by the notional buyer (including amounts payable on termination of the agreement), to the extent they exceed the notional loan principal. Section 995-1 of the ITAA 1997 defines 'hire purchase agreement' as: (a) a contract for the hire of goods where: (i) the hirer has the right, obligation or contingent obligation to buy the goods; and Note: An example of a contingent obligation is a put option. (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. The lease agreement between the applicant and AUS meets the definition of 'hire purchase agreement' in section 995(1) as it is a contract for the hire of the Aircraft, where: · AUS has the right to purchase them (paragraph 995-1(a)(i)); · the sum of the lease payments, together with the Option Price, exceed the price of the Aircraft (paragraph 995-1(a)(ii)); and · the title of the Aircraft will not pass to AUS until the Option is exercised (paragraph 995-1(a)(iii)). Therefore, section 240-10 will apply to treat the Lease agreement as a notional sale of the Aircraft to AUS with a notional loan from the applicant to AUS. The applicant, as owner and lessor of the Aircraft under the hire purchase agreement (lease) will be the 'notional seller' (subsection 240-17(1) of the ITAA 1997) and AUS will be the 'notional buyer' per subsection 240-17(2). Furthermore, the applicant, as notional seller, will provide a loan to the notional buyer, AUS, to finance the purchase price, pursuant to the following legislation: · 240-20(1) The *notional seller is taken to have disposed of the property by way of sale to the *notional buyer, and the notional buyer is taken to have acquired it, at the start of the *arrangement. · 240-25(1) On entering into the *arrangement, the *notional seller is taken to have made a loan (the notional loan ) to the *notional buyer. | Detailed Reasoning - (b): Does subsection 240-35(2) apply to the consideration for the sale of the Aircraft by the applicant? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Subsection 240-35(2) of the ITAA 1997 deals with profit on a notional sale and states: If the property is not *trading stock of the *notional seller and the consideration for the notional sale of the property exceeds the cost of the acquisition of the property by the notional seller, the excess is included in the notional seller's assessable income of the income year of the sale. As explained in the answer to Question 1, the cost of the acquisition of the Aircraft to the applicant, for the purposes of subsection 240-35(2), is the market value as determined under section 230-505. Where the consideration for the sale of the property exceeds this cost of acquisition there will be an assessable amount arising from the Notional Sale under subsection 240-35(2). As subsection 240-35(2) is only applicable where the consideration for the sale exceeds the cost of acquisition, losses are not captured under this subsection. Subsection 240-25(5) determines that the amount taken to be the consideration for the sale of the property is either: · in an arm's length arrangement, the cost or value of the property for the purposes of the arrangement if so stated; or · otherwise the amount that could reasonably be expected to have been paid by the notional buyer at the start of the arrangement if it had been an actual sale at arm's length. Therefore, unless an amount other than market value is stated to be the cost or value of the property for the purposes of the arrangement, the consideration for the sale of the property is taken to be the market value of the aircraft at the start of the arrangement. Consequently, where the applicant's consideration for the sale and their cost of acquisition are both equal to market value, no gain or loss will arise under subsection 240-35(2) of the ITAA 1997 on the Notional Sale of the Aircraft. | Detailed Reasoning - (c): Is the applicant required to include in its assessable income under subsection 240-35(1) the notional interest for the arrangement payment periods, or parts thereof, in the relevant income year, calculated pursuant to subsection 240-60(1) over the period of the Notional Loan? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Section 240-35 of the ITAA 1997 specifies the amounts that are included in a notional seller's assessable income in respect of an arrangement to which Division 240 of the ITAA 1997 applies. Subsection 240-35(1) states: · The *notional seller's assessable income of an income year includes the *notional interest for *arrangement payment periods, and parts of arrangement payment periods, in the income year. | Detailed Reasoning - (d): Is the total notional interest that will be assessable to the applicant under subsection 240-35(1) over the period of the Notional Loan equal to the difference between the total amounts payable under the Lease (including the Option price) and the Notional Loan principal (being an amount equal to the consideration for the Notional Sale of the Aircraft)? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Subsection 240-60(1) of the ITAA 1997 provides the method for calculating notional interest for an arrangement payment period as follows: · Step 1. Add the *notional interest from previous *arrangement payment periods to the notional loan principal. · Step 2. Subtract any *arrangement payments that have already been made or that are due but that have not been made. The result is the outstanding notional loan principal as at the start of the *arrangement payment period. · Step 3. Work out the implicit interest rate for the *arrangement payment period, taking into account the *arrangement payments payable by the *notional buyer under the *arrangement and any *termination amounts. · Step 4. Multiply the outstanding notional loan principal by the implicit interest rate. The result is the notional interest for the *arrangement payment period. | Detailed Reasoning - (e): Pursuant to subsection 240-25(2) does the period of the notional loan start at the time the applicant becomes party to the lease as a result of the novation and end on the day the Lease expires and the Option is exercisable? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: An arrangement payment is defined in section 240-65 of the ITAA 1997 as an amount that the notional buyer is required to pay under the arrangement to which Division 240 applies - for example, the regular hire purchase payments made throughout the term of a hire purchase agreement. Subsection 240-25(2) says the notional loan is for a period which starts at the start of the arrangement and ends on the day the arrangement ceases to have effect. Pursuant to the provisions cited above, the applicant will be required to include in its assessable income the notional interest for each of the arrangement periods and parts of arrangement periods, in each income year over the term of the arrangement. The notional interest will be calculated in accordance with section 240-60. The term of the loan starts at the time of the novation of the lease to the applicant and ends on the lease end date, when the Option is exercisable. | Detailed Reasoning - (f): Pursuant to subsection 240-40(1), is the applicant required to include in its assessable income the lease payments and Option Price payable under the Lease and the Option? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Subdivision 240-C of the ITAA 1997 deals with what is to be included (and excluded) in a notional seller's assessable income (in this instance, the applicant's) resulting from a notional sale and loan arrangement. SECTION 240-40 Arrangement payments not to be included in notional seller's assessable income 240-40(1) The *arrangement payments that the *notional seller receives, or is entitled to receive, under the *arrangement: (a) are not to be included in the *notional seller's assessable income of any income year; but (b) are not taken to be *exempt income of the notional seller. 240-40(2) However, those *arrangement payments are taken into account in calculating *notional interest that is included in the *notional seller's assessable income under section 240-35. 240-40(3) A loss or outgoing incurred by the *notional seller in deriving any such *arrangement payments is not taken to be a loss or outgoing incurred by the notional seller in relation to gaining or producing *exempt income. Subsection 240-40(1) of the ITAA 1997 provides that 'arrangement payments' received by a notional seller, under an arrangement are not included in its assessable income. Section 240-85 provides that: If, at or after the end of the *arrangement, an amount is paid to the *notional seller by, or on behalf of, the *notional buyer to acquire the property, the following provisions have effect: (a) the amount paid is not included in the notional seller's assessable income; (b) the notional buyer cannot deduct the payment; (c) the notional buyer is taken to continue to be the owner of the property; (d) the transfer to the notional buyer of the legal title to the property is not taken to be a disposal of the property by the notional seller. In view of the above, the applicant will not be required to include in its assessable income, the lease payments made by AUS nor the amount paid by AUS, if the latter exercises the Option to acquire the Aircraft, at the end of the arrangement. | Detailed Reasoning - (a): Is the applicant's obligation to pay the Second Instalment to OE a financial arrangement (Second Instalment Financial Arrangement) under section 230-45 at the time the Aircraft is transferred by OE to the applicant (Purchase Time)? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Division 230: A 'financial arrangement' is the core unit of taxation upon which a tax liability is determined under Division 230 of the ITAA 1997. Subdivision 230-A sets out the relevant tests to be applied for determining whether an 'arrangement', is a 'financial arrangement' for the purposes of the Division. | Detailed Reasoning - Subsection 230-55(4): The relevant 'arrangement' consists of all the rights and obligations (including contingent rights or obligations), that are appropriately considered to be part of the same 'arrangement' under subsection 230-55(4). The term 'arrangement' is defined very broadly in subsection 995-1(1) to include an arrangement, agreement, understanding, promise or undertaking. Subsection 230-55(4) modifies this broad notion of an arrangement. It identifies whether a number of rights and/or obligations constitute a single arrangement or two or more separate arrangements. Whether a number of rights and/or obligations are themselves an 'arrangement' or are '2 or more separate arrangements' is a question of fact and degree, that is determined having regard to the matters referred to in paragraphs 230-55(4)(a) to (f) (inclusive), both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other. Having regard to each of the relevant factors in subsection 230-55(4), it is concluded that the various cash settlable rights and obligations under each Purchase Agreement (each agreement for the purpose of the relevant Aircraft constituted by the terms of the PA and the relevant Purchase Schedule) should be grouped to form their own separate agreement for the purposes of the Division. Similarly, the various rights and obligations under each Lease should be grouped as separate and distinct arrangements for the purposes of the Division. | Detailed Reasoning - Financial Arrangement: The identified arrangements (each Purchase Agreement and each Lease) must meet the definition of a 'financial arrangement' before they will be subject to Division 230. Subdivision 230-A contains the tests for determining whether the identified arrangement is a financial arrangement for the purposes of the Division. Broadly speaking, an arrangement will be a financial arrangement if it satisfies the primary definition under section 230-45, dealing with cash settlable rights and obligations to receive or provide financial benefits, or the secondary definition (not presently relevant), dealing with equity interests and rights and obligations to equity interests. | Detailed Reasoning - The Lease Agreements: The Lease arrangements comprise not insignificant rights and obligations to receive and provide non-cash settlable financial benefits (the applicant's contingent obligation to dispose of the relevant Aircraft to AUS in the event the Option is exercised and the applicant's obligation to allow, and to be deprived of, the use of the leased property during the term of the lease) which continue to subsist after the Effective Time until expiry of the relevant Lease. The Lease arrangements therefore are not financial arrangements by virtue of the exclusions in paragraphs (d), (e) and (f) of subsection 230-45(1) and Division 230 has no application in relation to the rights and obligations arising under those arrangements. | Detailed Reasoning - The Purchase Agreements: Under each Purchase Agreement, the applicant has the following legal rights and obligations: · The right to immediately receive title to each relevant Aircraft against payment of the First Instalment at the Effective Time; · The obligation to pay the First Instalment at the Effective Time; and · The contingent obligation to pay the Second Instalment on the Second Instalment Date (the date immediately following transfer of title of an Aircraft to AUS pursuant to the Option). From the time immediately after the Aircraft is transferred by OE to the applicant, the latter will have a financial arrangement under each Purchase Agreement consisting of its cash settlable contingent legal obligation to provide the Second Instalment at the Second Instalment Date (the Second Instalment Financial Arrangements). None of the exceptions provided in Subdivision 230-H apply to exclude the Second Instalment Financial Arrangements from Division 230. | Detailed Reasoning - (b): Is the TOFA 'loss' on the Second Instalment Financial Arrangement under subsection 230-15(2) equal to the difference between the present value of the Second Instalment at the Purchase Time and the nominal amount of the Second Instalment? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: The terms 'gain' and 'loss' are not defined under Division 230. However, as a general rule a gain or loss from a financial arrangement is calculated as follows: · Step 1- calculate the money received from a financial arrangement including that received at maturity or disposal. · Step 2 - calculate the cost of the financial arrangement including those expenses at maturity or upon disposal. · Step 3 - deduct the amount at step 2 from the amount at step 1. There will be a gain from a financial arrangement if the amount at Step 3 is positive and a loss if the amount at step 3 is negative. The cost of, and proceeds from, the financial arrangement naturally include financial benefits provided and/or received in satisfaction of the obligations and/or rights that comprise the relevant financial arrangements. In this case, this will be the obligation to provide the Second Instalment under each Second Instalment Financial Arrangement. However, the cost of, and proceeds from, the financial arrangement also include financial benefits in addition to those financial benefits provided or received under the financial arrangement. Specifically, the costs of, and proceeds from the financial arrangement will also include other financial benefits received or provided (or those which the taxpayer is entitled to receive or obliged to provide) that play an integral role in determining whether the taxpayer will make a gain or loss from the financial arrangement. Broadly speaking, a financial benefit received or provided will be integral to determining whether the taxpayer will make a gain or loss from a financial arrangement if it is an essential part of determining whether you make a gain or loss from the arrangement or the amount of such a gain or loss (see section 230-60). In this case, the applicant has three separate Second Instalment Financial Arrangements which each consist of an obligation to pay the Second Instalment in respect of each Aircraft on the Second Instalment Date. The applicant started to have the financial arrangements after it paid the First Instalment and took delivery of the relevant Aircraft. The proceeds that the applicant received (the Aircraft under the relevant Purchase Agreement) for starting to have the Second Instalment obligation under each Second Instalment Financial Arrangement are integral to the calculation of the gain or loss that is made from each of those financial arrangements. Similarly, the amount the applicant has already paid in relation to each Second Instalment Financial Arrangement (the First Instalment) is also integral to the calculation of the gain or loss on those arrangements. Under subsection 230-60(2) and section 230-65, it is also necessary to factor in so much of the Establishment Fees (if any) received by the applicant under a clause of the PA which are otherwise not dealt with under Division 230 and that are integral to the calculation of the gain or loss under each Purchase Agreement. | Detailed Reasoning - TOFA 'gain' or 'loss' from each Second Instalment Financial Arrangement: In accordance with the above, the TOFA 'gain' or 'loss' from each Second Instalment Financial Arrangement can be determined by comparing the financial benefits received, or to be received, as consideration for (or that are integral to) assuming the cash settlable obligation to provide the Second Instalment, with the financial benefits provided, or to be provided, in consideration for (or that are integral to) the satisfaction or other cessation of that obligation. If what is received exceeds what is provided, there will be an overall gain from the financial arrangement. If what is provided exceeds what is received, there will be a loss. In the present case, this comparison will yield a TOFA loss which is equal to the difference between the sum of the First and Second Instalments (in nominal terms) and the value of the relevant Aircraft at the time it is received, plus any Establishment Fees received by the applicant which are integral to the calculation of the gain or loss under each Second Instalment Financial Arrangement (the TOFA Loss). In a practical sense (leaving to one side any Establishment Fees and assuming that the sum of the nominal amount of the First Instalment and the present value of the Second Instalment at the Purchase Time are equal to the market value of the relevant Aircraft at the Purchase Time), the TOFA loss in respect of each Second Instalment Financial Arrangement should be equal to the difference between the present value of the Second Instalment at the Purchase Time and the nominal amount of the Second Instalment. | Detailed Reasoning - (c): Is the TOFA 'loss' on the Second Instalment Financial Arrangement, deductible under subsection 230-15(2) on a compounding accruals basis? Under section 230-135 should the loss be spread over the period commencing on transfer of the Aircraft to the applicant and ending when the Second Instalment is paid to OE? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - The accruals method or the financial reports method?: Division 230 of the ITAA 1997 provides for a number of methods that can be applied to determine when gains and losses from a financial arrangement should be brought to account for tax purposes. Broadly speaking, the so-called 'elective' tax timing methods prevail over the 'default' accruals and realisation treatment provided for in Subdivision 230-B in relation to financial arrangements to which those elective methods apply. Although the applicant has made an election under subsection 230-395(1) to apply the financial reports method in Subdivision 230-F to its financial arrangements, the financial reports method will not apply to each Second Instalment Financial Arrangement. This is because the election to rely on the financial reports method only applies to those financial arrangements where, over the life of the arrangement, it is reasonably expected that the same overall gain or loss is recognised for tax purposes under the financial reports method as would have been recognised if Subdivision 230-F did not apply, but the other relevant methods under Division 230 (including, where appropriate, other elective methods and/or default methods) had been chosen and had applied instead (refer to paragraph 230-410(1)(e)). In this case (and in accordance with subsection 230-410(7)), the relevant comparison is between the accruals and retranslation methods and the financial reports method. Due to the fact that gains and losses from the Second Instalment Financial Arrangements are not recognised in the applicant's profit or loss account, whereas under the accruals method in Subdivision 230-B any relevant gains or losses will be recognised on a compounding accruals basis over the life of the arrangement, it is reasonable to expect that the overall gain or loss from each Second Instalment Financial Arrangement as determined in accordance with the financial reports method will not be the same as the overall gain or loss under the combined operation of the accruals and retranslation methods. Accordingly, paragraph 230-410(1)(e) is not satisfied in relation to those financial arrangements and the applicant's election to rely on financial reports will not apply in relation to them. As such the applicant's election to rely on financial reports will not apply in relation to each Second Instalment Financial Arrangement. This being the case, the tax timing of gains and losses from the Second Instalment Financial Arrangements will be determined under the provisions of Subdivision 230-B. | Detailed Reasoning - Subdivision 230-B: Under Subdivision 230-B, a taxpayer must apply the compounding accruals tax-timing method to a gain, or loss, from a financial arrangement where there is sufficient certainty that such a gain, or loss will occur. The gain or loss may either be a gain or loss from the entire financial arrangement (a 'sufficiently certain overall gain or loss) or a gain or loss made in respect of particular financial benefits (a sufficiently certain particular gain or loss). | Detailed Reasoning - Sufficiently certain gains and losses: Under subsection 230-105(1), a taxpayer has a sufficiently certain overall gain or loss from a financial arrangement at the time it starts to have the arrangement only if it is sufficiently certain at that time that it will make an overall gain or loss from the arrangement of a particular amount or at least a particular amount. In deciding whether the applicant will make an overall gain or loss from each Second instalment Financial Arrangement, regard must be had only to the financial benefits that the applicant is sufficiently certain to receive or provide (subsection 230-115(1)). Subsection 230-115(2) states that a financial benefit to be received or provided will be sufficiently certain only if (a) it is reasonably expected that the taxpayer will receive or provide the financial benefit (assuming it will continue to have the financial arrangement for the rest of its life), and (b) the amount or value of the financial benefit is, at the time of deciding whether it is sufficiently certain you will make an overall gain or loss from the arrangement, fixed or determinable with reasonable accuracy. | Detailed Reasoning - Second Instalment payments - sufficiently certain?: In the present case, it is concluded that the applicant's separate obligations to provide each Second Instalment under the relevant Second Instalment Financial Arrangements are financial benefits that the applicant is sufficiently certain to provide. Accordingly, these benefits can be taken into account in deciding for the purposes of Subdivision 230-B whether it is sufficiently certain at a particular time that the applicant will make a gain or loss from each Second Instalment Financial Arrangement (see section 230-115). | Detailed Reasoning - Is there a sufficiently certain overall gain or loss?: Under subsection 230-105(1), you have a sufficiently certain overall gain or loss from a financial arrangement at the time you start to have the arrangement only if it is sufficiently certain at that time that you will make an overall gain or loss from the arrangement of a particular amount or at least a particular amount. In this case, it is sufficiently certain, at the time the applicant starts to have each Second Instalment Financial Arrangement, that it will make an overall loss from each of those arrangements equal to the amount of the TOFA Loss referred to above. | Detailed Reasoning - Tax timing method to apply: In accordance with subsection 230-100(2), the accruals method provided for in Subdivision 230-B applies in relation to the sufficiently certain overall losses (the TOFA Losses) arising under each Second Instalment Financial Arrangement. Pursuant to section 230-125, the applicant must use section 230-130 to work out the period over which the gain or loss is to be spread, and section 230-135 (in conjunction with section 230-170, where appropriate) to work out how to allocate the gain or loss to particular intervals within that period. | Detailed Reasoning - Section 230-130 - period over which the gain or loss is to be spread: If it is established, as it is in this case, that there is a sufficiently certain overall gain or loss from a financial arrangement, subsection 230-130(1) provides that the gain or loss is to be spread (recognised) over a period that starts when the taxpayer starts to have the arrangement and ends when the taxpayer ceases to have the arrangement, assuming that the arrangement will be held for the rest of its life. In the present case, this means that the applicant will spread the TOFA loss in respect of each Second Instalment Financial Arrangement over the period commencing on transfer of each relevant Aircraft to the applicant and ending when the Second Instalment under each relevant arrangement is paid to OE. In accordance with the terms and conditions of the relevant Transaction Documents, this will be the date immediately following the transfer of title of an Aircraft to AUS pursuant to the Option. | Detailed Reasoning - Section 230-135 - How gain or loss is spread: Pursuant to subsection 230-135(2), the TOFA Loss in respect of each Second Instalment Financial Arrangement is to be spread over the relevant period (see above) using the compounding accruals method or a method whose results approximate those obtained using the compounding accruals method. | Detailed Reasoning - Nexus with assessable income producing process: Pursuant to subsection 230-15(2), losses you make from a financial arrangement are only deductible to the extent they are made 'in gaining or producing' assessable income or are necessarily made in 'carrying on a business for the purpose of gaining or producing' assessable income. The words 'in gaining or producing' in paragraph 230-15(2)(a) should be construed to reflect the same nexus enquiry laid down under the first positive limb of section 8-1, and its predecessor section 51 of the Income Tax Assessment Act 1936. Those words require an examination of the connection or nexus between the relevant loss and an income producing activity. Whether a sufficient nexus exists will depend on the nature of the loss and its degree of connection with the activities by which the taxpayer more directly gains or produces the relevant assessable income (see Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344). On the facts of this case, losses made from the relevant Second Instalment Financial Arrangements are made in the course of, and primarily for the purpose of acquiring the Aircraft and entering into the relevant Leases with AUS in order to derive assessable income under the Transaction Documents, including the relevant Leases. As such, losses made from the relevant Second Instalment Financial Arrangements will have a sufficient connection to the gaining or producing of assessable income such that the first positive limb under subsection 230-15(2) is satisfied in relation to them. | Detailed Reasoning - (d): Is the applicant required to deduct withholding tax under section 12-245 of Schedule 1 to the TAA in relation to either the First or Second Instalment? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Section 12-245 of Schedule 1 to the TAA 1953 states: 12-245 An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ) it pays to an entity, or to entities jointly, if: (a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the interest relates; or (b) the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else). In the context of this case the only 'recipient' that falls within the provisions of section 12-245 is OE. In Division 11A of Part III of the ITAA 1936, 'interest' is defined in subsection 128A(1AB) of the ITAA 1936 and includes an amount: · that is in the nature of interest; or · to the extent that it could reasonably be regarded as having been converted into a form that is in substitution for interest; or · to the extent that it could reasonably be regarded as having been received in exchange for interest in connection with a washing arrangement; or · that is a dividend paid in respect of a non-equity share; or · if regulations under the ITAA 1997 are made having the effect that instruments known as upper tier 2 capital instruments, or a class of instruments of that kind, are debt interests - that is paid on such a debt interest and is not a return of an investment; · but does not include an amount to the extent to which it is a return on an equity interest in a company. In this case, the applicant assumes two significant obligations in return for the right to receive each Aircraft from OE under the relevant Purchase Agreements. The first is the obligation to pay the First Instalment and the second is the obligation (albeit contingent) to pay the Second Instalment in the event that AUS exercises the Option and purchases the Aircraft after the expiry of the relevant Lease. The consideration is whether either of the payments in some way comprises 'interest' as defined in subsection 128A(1AB) of the ITAA 1936. The Court in (ATC 4383, ATR 444) characterised 'interest' as: · the return, consideration or compensation for the use or retention by one person of a sum of money belonging to, or owed to, another, and that interest must be referable to a principal. The applicant was approached to act as lessor and fund the purchase of aircraft by lending OE money, conditional on AUS's preparedness to pay leases equivalent to those it paid to the original lessor. The applicant has stated that the economic effect of the transaction from its point of view, irrespective of whether AUS exercises its Option, is that it is making a loan to AUS of an amount equal to the First Instalment (paid to OE) and receiving principal and interest payments in respect of the 'loan' through the lease payments for the aircraft (an entirely separate arrangement to the payments to OE). For accounting purposes the applicant will recognise the Transaction as a loan to AUS for an amount equal to the First Instalment. This Transaction is the sole arrangement that entails interest and is payable between resident Australian companies. In the circumstances of the financial arrangements it is difficult to construe the First Instalment to be interest, as there was no debt owed by the applicant to OE in regard to this transaction. Furthermore, in regard to the Second Instalment, the applicant has stated in its application: · the deferral of the Second Instalment payment was made to ensure that the applicant is not taking any residual value risk in relation to the Aircraft (hence they have entered into a Purchase Agreement with the Second Instalment being contingently payable and [also entailing] the Put and Call Option Arrangement). The arrangements for the Second Instalment clearly establish that there was no debt owed by the applicant to OE in this instance. In sum, neither the First nor the Second Instalment has the character of a payment of interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ), namely to an entity with an address outside Australia or at a place outside Australia. | Detailed Reasoning - Conclusion: As neither the First nor the Second Instalment comprises any component of interest for the purposes of Division 11A; the applicant will not be liable to withhold any amount in relation to those payments pursuant to section 12-245 of Schedule 1 to the TAA 1953. | Detailed Reasoning - Question 4:: On granting the Call Option, does the applicant have a capital gain under subsection 104-40(3) equal to the nominal cash amount received in relation to the granting of the Call Option? Is this capital gain disregarded under subsection 104-40(5) where the Call Option is exercised? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Granting an option: CGT event D2 happens when you grant an option (section 104-40 of the ITAA 1997). You make a capital gain if the capital proceeds you receive from granting the option are more than the expenditure you incurred to do so. The capital gain is included in your assessable income in the year in which you grant the option. | Detailed Reasoning - CGT event D2 exception where option is exercised: Subsection 104-40(5) provides an exception in that a capital gain you make from the grant, renewal or extension is disregarded if the option is exercised. | Detailed Reasoning - (a) (i): Where AUS exercises the Option, does the Division 240 arrangement end under section 240-75? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Section 240-75 of the ITAA 1997 provides the rules for working out if and when, an arrangement to which Division 240 of the ITAA 1997 applies is taken to have ended. In summary, an arrangement ends at any one of the following times, applicable to the circumstances of this case: · the earlier of the time at which the terms of the arrangement state that it will end or the time at which the arrangement ceases to have effect, whether because it is terminated or for any other reason (subsection 240-75(1)); and · the time at which, having regard to the terms and conditions of the arrangement, it is reasonable to conclude that the arrangement has ceased to have effect (subsection 240-75(4)). When AUS exercises the Option and the Option Price is paid to the applicant, the legal title to the Aircraft is transferred from the applicant to AUS and the lease arrangement ends. Division 240 of the ITAA 1997 ceases to apply at that time. | Detailed Reasoning - (a) (ii): Is the applicant required to include any amounts in its assessable income or be entitled to deduct any amounts under section 240-105 as a result of such exercise or the transfer of title of the Aircraft? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Subdivision 240-G of the ITAA 1997 provides that where an arrangement comes to an end, the notional seller must compare the amounts actually received or receivable from the notional buyer during the terms of the arrangement (including termination amounts) with the amount of the notional loan principal and assessed notional interest. Where the amounts received by the notional seller exceed the notional loan principal and assessed notional interest, the excess should be included in the notional seller's assessable income in the income year in which the arrangement ends. Where the notional loan principal and assessed notional interest amounts exceed the amounts received by the notional seller, the notional seller should be entitled to deduct the excess in the income year in which the arrangement ends. In the present case, the applicant as the notional seller must make the above comparison of the amounts received from AUS as the notional buyer. Provided that the exercise price of the Option remains the same during the Lease arrangement, there will be no difference between the amounts actually received (including termination amounts) and the amount of the notional loan principal and total notional interest that is included in the applicant's assessable income. As such, the applicant will not be required to include any amounts in its assessable income or be entitled to deduct any amounts under section 240-105 at the end of the Lease arrangement. | Detailed Reasoning - (b) (i): If the Second Instalment is paid by the applicant to OE, does a balancing adjustment occur under section 230-445? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Under paragraph 230-435(1)(b) of the ITAA 1997, the general rule is that a balancing adjustment is made under Subdivision 230-G if all of your rights and/or obligations under a financial arrangement cease (otherwise than by the transfer of those rights and/or obligations). A cessation of the relevant rights and/or obligations can occur in different ways, for example, through their discharge or satisfaction, expiry, close out, forfeiture or maturity. While Subdivision 230-G provides for a number of special rules and exceptions to the general rule outlined above, none of these special rules or exceptions are relevant in the present case. Thus, when the applicant discharges its contingent obligation to pay the Second Instalment under each Second Instalment Financial Arrangement, all its rights and obligations under each arrangement will come to an end and a balancing adjustment will be triggered for each arrangement under Subdivision 230-G pursuant to paragraph 230-445(1)(b). | Detailed Reasoning - (b) (ii): Is the applicant required to include any amount in its assessable income as a result of the balancing adjustment under section 230-445? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Once a balancing adjustment is triggered under Subdivision 230-G of the ITAA 1997, the applicant is required to follow the method statement in subsection 230-445(1) to calculate the amount of any balancing adjustment gain or loss. Broadly speaking, the balancing adjustment gain or loss (if any) in respect of each Second Instalment Financial Arrangement is calculated by netting the financial benefits received and provided under each relevant arrangement and any amounts that have been brought to account for income tax purposes from the arrangement until the cessation or transfer. The method statement for balancing adjustments is provided in subsection 230-445(1) of the ITAA 1997. It is expected that in respect of each Second Instalment Financial Arrangement, the amount obtained under Step 2 of the method statement in subsection 230-445(1) will exceed the amount obtained under Step 1. That being the case, it is not expected that the applicant will be required to include any amount in its assessable income as a result of the balancing adjustment on ceasing to have each relevant Second Instalment Financial Arrangement (refer to Step 3 of the method statement). | Detailed Reasoning - (b) (iii): Is the applicant entitled to any deduction, as a result of the adjustment under section 230-445? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: As mentioned above, it is expected that in respect of each Second Instalment Financial Arrangement, the amount obtained under Step 2 of the method statement in subsection 230-445(1) of the ITAA 1997 will exceed the amount obtained under Step 1. The applicant is required to follow the method statement in subsection 230-445(1) to determine the precise quantum of that excess. Broadly speaking, the excess should be equal to so much of the TOFA Loss identified above, which has not already been allowed as a deduction in income years ending prior to the cessation of the relevant financial arrangement. | Detailed Reasoning - (a) (i): If AUS does not exercise the Option, does the Division 240 arrangement end under section 240-75? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Subsection 240-75(1) of the ITAA 1997 states: If the arrangement is stated to cease to have effect at a particular time, it is taken for the purposes of this Division to end (even if it is extended or renewed) at the earlier of: · that time; or · the time at which the arrangement ceases to have effect (whether because the arrangement is terminated or for any other reason). Note: Section 240-80 deals with extensions and renewals. Pursuant to subsection 240-75(1) of the ITAA 1997 the Lease would end if AUS does not exercise the Option. | Detailed Reasoning - (a) (ii): Is the applicant taken to have acquired the Aircraft at the market value at that time and be required to perform an adjustment calculation under section 240-105? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Section 240-90 of the ITAA 1997 applies where the notional buyer under the Division 240 arrangement ceases to have the right to use the relevant property at the end of the arrangement because it is not extended or renewed or no amount is paid by or on behalf of the notional buyer to notional seller to acquire the property. Subsection 230-90(3) states: The consideration for the sale of the property by the *notional buyer, and the cost of the acquisition of the property by the *notional seller, are each taken to be equal to the *market value of the property at the end of the *arrangement. Provided that the Lease arrangement is not extended or renewed and no amount is paid to the applicant by AUS to acquire the Aircraft which are not lost or destroyed, the Aircraft will be taken to have been disposed of by AUS by way of sale back to the notional seller (i.e. the applicant) at that time (see subsections 240-90(1) and (2)). | Detailed Reasoning - (b) (i): Under section 240-105 of the ITAA 1997, where the sum of the notional loan principal and the total notional interest that is included in the applicant's assessable income under subsection 240-35(1) exceeds the sum of the amounts actually received or receivable from AUS, is the applicant entitled to a deduction for the difference between these amounts in the income year in which the Division 240 arrangement ends? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - (b) (ii): Alternatively, if the sum of the amounts actually received or receivable from AUS exceeds the amount of the notional loan principal and the total notional interest that is included in the applicant's assessable income under subsection 240-35(1), is the applicant required to include the difference between these amounts in its assessable income in that income year? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: At the end of the arrangement, the applicant will be required to determine whether an adjustment should be made pursuant to section 240-105 of the ITAA 1997, as follows: SECTION 240-105 Adjustments for notional seller 240-105(1) This section applies at the end of the *arrangement. 240-105(2) If the sum of: (a) all amounts (other than *termination amounts) that were paid or payable to the *notional seller under the *arrangement; and (b) any termination amounts paid or payable to the notional seller; exceeds the amount worked out using the formula in subsection (4), the excess is included in the notional seller's assessable income of the income year in which the arrangement ends. Note: Subsection 240-80(5) provides that the amount of a notional loan that is taken to be made by an extended or renewed arrangement is a termination amount paid under the previous arrangement. 240-105(3) If the amount worked out using the formula in subsection (4) exceeds: (a) all amounts (other than *termination amounts) that were paid or payable to the *notional seller under the *arrangement; and (b) any termination amounts paid or payable to the notional seller; the notional seller is entitled to deduct the excess in the income year in which the arrangement ends. Note: Subsection 240-80(5) provides that the amount of a notional loan that is taken to be made by an extended or renewed arrangement is a termination amount paid under the previous arrangement. 240-105(4) The formula for the purposes of subsections (2) and (3) is: Notional loan principal + Assessed notional interest | Detailed Reasoning - where:: assessed notional interest means the *notional interest that has been or is to be included in the *notional seller's assessable income of any income year. In sum, application of the formula, incorporating assessable income under subsection 240-35(1) of the ITAA 1997, for the purposes of subsections (2) and (3) will determine whether the notional seller, the applicant, is entitled to a deduction or required to include an excess in its assessable income. | Detailed Reasoning - (c) (i): On the sale of the Aircraft to OE on exercise of either the Put or Call Option, does a balancing adjustment occur under paragraph 40-295(1)(a) in relation to the Aircraft? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Subsection 40-295(1) of the ITAA 1997 states, in part: A balancing adjustment event occurs for a *depreciating asset if: (a) you stop *holding the asset; or … . On exercise of either the Put or Call Option, the applicant will stop holding the Aircraft and a balancing adjustment will occur under paragraph 40-295(1)(a). | Detailed Reasoning - (c) (ii): Is the applicant entitled to a deduction under section 40-285 to the extent the Aircraft's adjustable value exceeds the Aircraft's termination value in the income year in which the balancing adjustment event occurred? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: As the Guide to Subdivision 40-D of the ITAA 1997, Balancing Adjustments, sets out: · You may have to make an adjustment to your taxable income if you stop holding a depreciating asset. · The adjustment is generally based on the difference between the actual value of the asset when you stop holding it and its adjustable value. The operative provision is section 40-285 and it is broadly as follows: if the asset's termination value is more than its adjustable value just before the adjustment event occurred, the excess is assessable. If the termination value is less than the adjustable value the shortfall is deductible. The relevant amount is included for the income year in which the balancing adjustment event occurred. | Detailed Reasoning - (c) (iii): Is the termination value of the Aircraft under section 40-300 equal to the Option Price and is the Aircraft's adjustable value under section 40-85 equal to the market value of the Aircraft at the end of the Division 240 arrangement? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Subsection 40-300(1) of the ITAA 1997 states: The termination value of a *depreciating asset is worked out as at the time when the *balancing adjustment event occurs. It is: (a) if an item in the table in subsection (2) applies - the amount specified in that item; or (b) otherwise - the amount you are taken to have received under section 40-305 for the asset. On the sale of the Aircraft to OE, the applicant will receive the Option Price under the Put and Call as the sale price of the Aircraft to OE. The applicant will stop holding the Aircraft and a balancing adjustment occurs under paragraph 40-295(1)(a) in relation to the Aircraft. None of the items in the table under Subsection 40-300(2) of the ITAA 1997 applies therefore the termination value is the amount the applicant is taken to have received under Section 40-305 of the ITAA 1997. The applicant will be entitled to a deduction if the termination value is less then the adjustable value. | Detailed Reasoning - (d) (i): At the time the applicant's obligation to pay the Second Instalment to OE is no longer sufficiently certain under section 230-115, is the applicant required to perform a reassessment under section 230-185 in relation to the Second Instalment Financial Arrangement? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: In the event that the Option under a Lease is not exercised, then under the terms of the PA, the applicant is not obliged to pay the relevant Second Instalment to OE. In these circumstances, the applicant's previously existing contingent obligation to pay the Second Instalment does not become a contingent obligation which is no longer sufficiently certain. Rather, the relevant obligation ceases to exist. On the cessation of the applicant's obligation to pay the Second Instalment under the relevant Second Instalment Financial Arrangement, all the applicant's rights and obligations under that arrangement come to an end and paragraph 230-435(1)(b) of the ITAA 1997 applies to trigger a balancing adjustment in respect of it. Thus, upon expiry of the relevant Lease, where the Option is not exercised and therefore the applicant is not required to pay the Second Instalment to OE and where, up until the expiration of the Lease, the applicant's obligation to pay the Second Instalment was otherwise sufficiently certain, the applicant is not required to perform a reassessment under section 230-185. | Detailed Reasoning - (d) (ii): As a result of the reassessment, does the accruals method in Subdivision 230-B no longer apply and does the realisation method in section 230-180 apply to the Second Instalment Financial Arrangement instead? | Detailed Reasoning - Answer:: not applicable. | Detailed Reasoning - Reasons for decision: As set out above, in the event that an Option under a Lease is not exercised, the applicant's previously existing contingent obligation to pay the Second Instalment under the relevant Second Instalment Financial Arrangement ceases to exist and paragraph 230-435(1)(b) of the ITAA 1997 applies to trigger a balancing adjustment in respect of the financial arrangement. | Detailed Reasoning - (e) (i): At the termination of the Lease, where the Option is not exercised and therefore the applicant is not required to pay the Second Instalment to OE, does the Second Instalment Financial Arrangement cease to be a financial arrangement under Division 230? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: In the event that the Option under a Lease is not exercised, the applicant's previously existing contingent obligation to pay the Second Instalment under the relevant Second Instalment Financial Arrangement ceases to exist and paragraph 230-435(1)(b) of the ITAA 1997 applies to trigger a balancing adjustment in respect of the relevant financial arrangement. In a broad sense, the relevant arrangement would cease to be a financial arrangement under Division 230 as the arrangement itself has ceased. | Detailed Reasoning - (e) (ii): Accordingly, will the applicant be required to calculate a balancing adjustment under section 230-445 in relation to the Second Instalment Financial Arrangement? | Detailed Reasoning - Answer:: Yes. | Detailed Reasoning - Reasons for decision: Under paragraph 230-435(1)(b) of the ITAA 1997, the general rule is that a balancing adjustment is made under Subdivision 230-G if all of your rights and/or obligations under a financial arrangement cease (otherwise than by the transfer of those rights and/or obligations). As set out in paragraphs above, in the event that the Option under a Lease is not exercised, the applicant's previously existing contingent obligation to pay the Second Instalment under the relevant Second Instalment Financial Arrangement ceases to exist and paragraph 230-435(1)(b) applies to trigger a balancing adjustment in respect of the relevant financial arrangement. | Detailed Reasoning - Question 6: (e) (iii) Is the amount that will be included in the applicant's assessable income as a result of the balancing adjustment under section 230-445 be equal to the total deductions claimed by the applicant under subsection 230-15(2) in relation to the Second Instalment Financial Arrangement? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Once a balancing adjustment is triggered under Subdivision 230-G of the ITAA 1997, the applicant is required to follow the method statement in subsection 230-445(1) to calculate the amount of any balancing adjustment gain or loss. Broadly speaking, the balancing adjustment gain or loss (if any) in respect of each Second Instalment Financial Arrangement is calculated by netting the financial benefits received and provided under each relevant arrangement and any amounts that have been brought to account for income tax purposes from the arrangement until the cessation or transfer. The method statement for balancing adjustments is provided in subsection 230-445(1) of the ITAA 1997. In the event the Option is not exercised, the total Step 1 amount under the relevant financial arrangement should be equal to the sum of: All the financial benefits received under the relevant arrangement. That is, the market value of the relevant Aircraft received plus any Establishment Fees which are taken to have been received under the relevant arrangement (see paragraph (a) of Step 1 of the method statement for balancing adjustments provided in subsection 230-445(1) of the ITAA 1997); and The total of the amounts that have been allowed to the applicant as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the financial arrangement. That is, the amount of the TOFA Loss referred above but only to the extent that the loss has already been allowed as a deduction in income years ending prior to the cessation of the relevant Second Instalment Financial Arrangement (paragraph (b) of Step 1 of the method statement). The total Step 2 amount under each Second Instalment Financial Arrangement should be equal to the First Instalment (paragraph (a) of Step 2 of the method statement). Thus, it is expected that in respect of the relevant Second Instalment Financial Arrangement in circumstances whereby the Option is not exercised, the amount obtained under Step 1 of the method statement in subsection 230-445(1) will exceed the amount obtained under Step 2. Broadly speaking, the excess is expected to be equal to so much of the TOFA Loss identified above, which has not already been allowed as a deduction in income years ending prior to the cessation of the relevant financial arrangement plus the excess of the market value of the relevant Aircraft over the First Instalment. | Detailed Reasoning - Question 7:: Will section 177CA of the Tax Act apply in relation to the transaction? | Detailed Reasoning - Answer:: No. | Detailed Reasoning - Reasons for decision: Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme. Section 177CA is a provision that applies to withholding tax avoidance. The circumstances and relevant facts of the Lease and its commercial objectives are described in the ruling application. The relevant facts establish that the role of the applicant, in the financing of the Lease and in the purchase arrangements generally, is consistent with the pursuit of its commercial objectives. Furthermore, in view of the consideration of the arrangements (as set out in the answers to the other questions asked by the applicant) and the conclusions reached about the tax benefits of the arrangements, it is unnecessary to separately consider the eight factors in paragraph 177D(b) of the ITAA 1936. Instead, analysis of the available evidence against the eight factors, as a whole, indicates that the applicant did not enter into the scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme. Part IVA does not apply, as an objective consideration of the relevant circumstances concluded that the applicant did not enter into or carry out the scheme for the dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1936, section 51 Income Tax Assessment Act 1936, subsection 128A(1AB) Income Tax Assessment Act 1936, Division 11A Income Tax Assessment Act 1936, Part IVA Income Tax Assessment Act 1936, section 177CA Income Tax Assessment Act 1936, section 177D(b) Taxation Administration Act 1953, Schedule 1 section 12-245 Income Tax Administration Act 1997, section 8-1 Income Tax Administration Act 1997, Division 40 Income Tax Administration Act 1997, section 40-85 Income Tax Administration Act 1997, Subdivision 40-D Income Tax Administration Act 1997, section 40-285 Income Tax Administration Act 1997, subsection 40-295(1) Income Tax Administration Act 1997, paragraph 40-295(1)(a) Income Tax Administration Act 1997, section 40-300 Income Tax Administration Act 1997, subsection 40-300(1) Income Tax Administration Act 1997, subsection 40-300(2) Income Tax Administration Act 1997, section 40-305 Income Tax Administration Act 1997, section 104-40 Income Tax Administration Act 1997, subsection 104-40(3) Income Tax Administration Act 1997, subsection 104-40(5) Income Tax Administration Act 1997, Division 230 Income Tax Administration Act 1997, Subdivision 230-A Income Tax Administration Act 1997, subsection 230-15(2) Income Tax Administration Act 1997, paragraph 230-15(2)(a) Income Tax Administration Act 1997, section 230-45 Income Tax Administration Act 1997, subsection 230-45(1) Income Tax Administration Act 1997, section 230-45(1)(d) Income Tax Administration Act 1997, section 230-45(1)(e) Income Tax Administration Act 1997, section 230-45(1)(f) Income Tax Administration Act 1997, subsection 230-55(4) Income Tax Administration Act 1997, paragraph 230-55(4)(a) Income Tax Administration Act 1997, paragraph 230-55(4)(b) Income Tax Administration Act 1997, paragraph 230-55(4)(c) Income Tax Administration Act 1997, paragraph 230-55(4)(d) Income Tax Administration Act 1997, paragraph 230-55(4)(e) Income Tax Administration Act 1997, paragraph 230-55(4)(f) Income Tax Administration Act 1997, section 230-60 Income Tax Administration Act 1997, section 230-60(1) Income Tax Administration Act 1997, section 230-60(2) Income Tax Administration Act 1997, section 230-65 Income Tax Administration Act 1997, section 230-70 Income Tax Administration Act 1997, section 230-80 Income Tax Administration Act 1997, Subdivision 230-B Income Tax Administration Act 1997, subsection 230-100(2) Income Tax Administration Act 1997, subsection 230-105(1) Income Tax Administration Act 1997, subsection 230-115 Income Tax Administration Act 1997, subsection 230-115(1) Income Tax Administration Act 1997, subsection 230-115(2) Income Tax Administration Act 1997, paragraph 230-115(2)(a) Income Tax Administration Act 1997, paragraph 230-115(2)(b) Income Tax Administration Act 1997, subsection 230-115(3) Income Tax Administration Act 1997, section 230-115 Income Tax Administration Act 1997, section 230-125 Income Tax Administration Act 1997, section 230-130 Income Tax Administration Act 1997, subsection 230-130(1) Income Tax Administration Act 1997, section 230-135 Income Tax Administration Act 1997, subsection 230-135(2) Income Tax Administration Act 1997, section 230-170 Income Tax Administration Act 1997, section 230-180 Income Tax Administration Act 1997, section 230-185 Income Tax Administration Act 1997, Subdivision 230-F Income Tax Administration Act 1997, subsection 230-395(1) Income Tax Administration Act 1997, paragraph 230-410(1)(e) Income Tax Administration Act 1997, subsection 230-410(7) Income Tax Administration Act 1997, paragraph 230-435(1)(b) Income Tax Administration Act 1997, section 230-445 Income Tax Administration Act 1997, subsection 230-445(1) Income Tax Administration Act 1997, Subdivision 230-H Income Tax Administration Act 1997, section 230-505 Income Tax Administration Act 1997, subsection 230-505(1) Income Tax Administration Act 1997, subsection 230-505(2) Income Tax Administration Act 1997, subsection 230-505(3) Income Tax Administration Act 1997, subsection 230-505(4) Income Tax Administration Act 1997, subsection 230-505(7) Income Tax Administration Act 1997, subsection 230-505(8) Income Tax Administration Act 1997, Subdivision 230-G Income Tax Administration Act 1997, section 230-435 Income Tax Administration Act 1997, paragraph 230-435(1)(b) Income Tax Administration Act 1997, section 230-445 Income Tax Administration Act 1997, subsection 230-445(1) Income Tax Administration Act 1997, Division 240 Income Tax Administration Act 1997, subsection 240-17(1) Income Tax Administration Act 1997, subsection 240-17(2) Income Tax Administration Act 1997, subsection 240-20(1) Income Tax Administration Act 1997, subsection 240-25(1) Income Tax Administration Act 1997, subsection 240-25(2) Income Tax Administration Act 1997, subsection 240-25(3) Income Tax Administration Act 1997, subsection 240-25(5) Income Tax Administration Act 1997, Subdivision 240-C Income Tax Administration Act 1997, section 240-30 Income Tax Administration Act 1997, section 240-35 Income Tax Administration Act 1997, subsection 240-35(1) Income Tax Administration Act 1997, subsection 240-35(2) Income Tax Administration Act 1997, section 240-40 Income Tax Administration Act 1997, subsection 240-40(1) Income Tax Administration Act 1997, subsection 240-40(2) Income Tax Administration Act 1997, subsection 240-40(3) Income Tax Administration Act 1997, section 240-60 Income Tax Administration Act 1997, subsection 240-60(1) Income Tax Administration Act 1997, section 240-65 Income Tax Administration Act 1997, section 240-75 Income Tax Administration Act 1997, subsection 240-75(1) Income Tax Administration Act 1997, subsection 240-75(4) Income Tax Administration Act 1997, section 240-75 Income Tax Administration Act 1997, section 240-85 Income Tax Administration Act 1997, section 240-90 Income Tax Administration Act 1997, subsection 240-90(1) Income Tax Administration Act 1997, subsection 240-90(2) Income Tax Administration Act 1997, Subdivision 240-G Income Tax Administration Act 1997, section 240-105 Income Tax Administration Act 1997, Division 995 Income Tax Administration Act 1997, section 995-1 Income Tax Administration Act 1997, paragraph 995-1(a)(i) Income Tax Administration Act 1997, paragraph 995-1(a)(ii) Income Tax Administration Act 1997, paragraph 995-1(a)(iii) Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Other references (non ATO view) ATC 4383, ATR 444 Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Another overseas entity (OE) wished to become the lessor of the aircraft.: In order to participate in the Leases, OE approached the applicant to provide funding for its acquisition of the Aircraft from the original owner and to act as lessor of the Aircraft. | With the AUS's approval, the leases were amended and novated directly to the applicant, on and with effect from 30 June 2011. | The Leases included an option for AUS to purchase the Aircraft on expiry of the Leases (Option). | To effect the novation of the Leases the titles of the relevant Aircraft were transferred (sold) to OE under a separate sale agreement. OE then sold the relevant Aircraft to the applicant under the Purchase Agreement (PA). | Under the PA, the Purchase Price for each Aircraft is payable in two instalments. The First Instalment was payable by the applicant to the OE on delivery and the Second Instalment is payable on expiry of the Lease in the event the Option is exercised. | OE funded the acquisition of the Aircraft from the original owner (in part) with the First Instalment it received from the applicant under the subject transaction. | The applicant and OE granted put and call options, the effect of which allow the applicant to put and OE to call the Aircraft at the end of the Leases, in circumstances where AUS does not exercise the Option. | If the Option is exercised, and the Option Price is paid to the applicant, the legal title in the Aircraft will be transferred to AUS. | The Second Instalment will be payable by the applicant to OE, on the exercise of the Option and the payment of the Option Price to the applicant. | Irrespective of whether AUS exercises its Option, the applicant is making a loan to AUS of an amount equal to the First Instalment and receiving principal and interest payments in respect of this 'loan' through the rental payments made by AUS. | On the basis that all rental payments are made by AUS, on expiry of the Lease all principal and interest obligations in respect of this 'loan' will be met.