Private ruling: Temporary full expensing
Date of advice: 5 October 2022
Published: December 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: For the purpose of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), is the decline in value of the XX% interest to be acquired by Company X in a depreciating asset the amount worked out under section 40-160(3) of the Income Tax Transitional Provisions Act 1997 (ITTPA)? | A1: Yes | Q2: Will Company X's start time for the XX% interest in a depreciating asset for the purpose of section 40-160(3) of the ITTPA occur in the year ending 30 June 20XX? | A2: Yes | Q3: Is the sum of the First Instalment and each other Instalments, being the amount of $X the cost of the XX% interest in a depreciating asset for Company X for the purpose of section 40-160(3) of the ITTPA? | A3: Yes

Relevant facts and circumstances: Company X Company X was incorporated in an Australian State on DD MM 20XX to enter into a joint venture with Company Y Company X is wholly owned by Company Z. Company Z provides services in an industry distinct to the services of Company X. Company X has been provided with a draft Sale and Purchase Agreement (SPA), to acquire a XX% interest in a depreciating asset (the Sale Interest) from Company Y. Company X was incorporated as a special purpose vehicle to purchase the interest in the Asset. Company X's source of funding for the acquisition of the Sale Interest will be from a loan from Company Z. The funds Company Z will use to provide the loan are from the retained profits of Company Z. That is Company Z from its retained profits will loan the total of the funds to its' 100% owned subsidiary Company X to acquire the Sale Interest. The director of Company X has a background in the industry related to the use of the Asset and worked as a consultant in a reputable firm within that industry. The director's view is that while the initial capital contribution to acquire the Sale Interest is not insignificant, the potential economic benefit could be very significant in the future. This knowledge of the potential financial gains together with personal interest in the industry, have informed the decision to enter into the arrangement with Company Y. Company X and Company Y do not have common directors or shareholders. Company Y Company Y carries on a business in an industry related to the Asset. In operating their business, Company Y obtains the Asset in accordance with the relevant legislation. The present ruling application is in relation to the acquisition of an interest in the Asset. At present, Company Y is undertaking preliminary activities of utilising the Asset to generate potential future profit. No further activities have commenced beyond the preliminary steps at this time. The potential SPA and Joint Operating Agreement (JOA) eventuated when the director of Company Y approached the director of Company X and informed him of the potential joint venture opportunity. The two directors have a long-term friendship and association. Because of this approach from Company Y the Commissioner has requested further information from Company Y to understand the arrangement. Company Y confirmed that there is no understanding or agreement between Company X and Company Y that Company X will sell its XX% sale interest back to Company Y or to a related entity of Company Y. Company Y confirmed that it is not eligible to claim a temporary full expensing deduction for the Asset. Company Y confirmed that the arrangement it is looking to enter with Company X is a typical way that a company of its size within the relevant industry sources funding to run its business. Company Y also advised how it intends to fund future business activities in relation to the use of the Asset. The Arrangement The arrangement is outlined and established in three documents. While in draft form, the terms of the three agreements have been agreed to by all relevant parties. Company X will execute the SPA and the JOA on or before 30 June 20XX. It is intended that Company Z will enter the loan agreement at the same time. A copy of the draft SPA has been provided. Under the SPA, the payments are to be made in instalments. In relation to instalment payments under the SPA, the amounts specified are payable regardless, on the earlier of each of the dates/conditions set out. As such, the latest that the amounts could be paid are the dates specified for each instalment. The Instalments are secured by way of loan granted by Company Z over the Sale Interest, in favour of Company Y. A copy of the draft loan agreement has been provided. Upon Completion as provided in the SPA, Company X and Company Y will execute the JOA. A copy of the draft JOA has been provided. Company X will enter into the JOA with Company Y to conduct the business activities in relation to the Asset on and from Completion of the SPA. Under the JOA, the parties agree to commit their separate and several interests in the Asset to a Joint Venture (JV) operation. Company X and Company Y appoint Company Y to conduct the activities in relation to the Asset. Technical Reports Company X has access to and inspected the technical reports and other information concerning the business prospects and economic potential of Company Y's business activities. This includes independent reports from industry experts. These reports are: • Report A; and • Report B. These two reports consider the economic potential of business activities utilising the Asset. It is Company X's view that based on the reports that there is potential economic benefits in the future. Other Details You have confirmed:

Relevant legislative provisions: Division 40 of the Income Tax Assessment Act 1997 | Section 40-30 of the Income Tax Assessment Act 1997 | Section 40-40 of the Income Tax Assessment Act 1997 | Section 40-45 of the Income Tax Assessment Act 1997 | Section 40-175 of the Income Tax Assessment Act 1997 | Section 40-180 of the Income Tax Assessment Act 1997 | Section 40-185 of the Income Tax Assessment Act 1997 | Subdivision 40-E of the Income Tax Assessment Act 1997 | Subdivision 40-F of the Income Tax Assessment Act 1997 | Subdivision 328-C of the Income Tax Assessment Act 1997 | Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 Section 40-150 of the Income Tax (Transitional Provisions) Act 1997 | Section 40-155 of the Income Tax (Transitional Provisions) Act 1997 | Subsection 40-160(1) of the Income Tax (Transitional Provisions) Act 1997 | Subsection 40-160(3) of the Income Tax (Transitional Provisions) Act 1997 | Section 40-190 of the Income Tax (Transitional Provisions) Act 1997

Reasons for decision: Summary: The decline in value of the Sale Interest to be acquired by Company X in the asset is the amount worked out under section 40-160(3) of the ITTPA. | Detailed Reasoning - Temporary Full Expensing Measures: The government has introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing (TFE) measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between 7:30pm AEDT on 6 October 2020 (2020 Budget Time) and 30 June 2023. The temporary full expensing provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No. 6) Act 2020. For entities other than small business entities using simplified depreciation, TFE is accessed through Subdivision 40-BB. This Subdivision provides for full expensing of eligible depreciating assets that eligible entities start to hold at or after the 2020 Budget Time. For all entities, full expensing is only temporary. An eligible entity will need to start holding the depreciating asset and start to use the asset, or have it installed ready for use, for a taxable purpose on or before 30 June 2023. | Detailed Reasoning - Eligible Entities: An entity will be eligible for TFE if it: | Detailed Reasoning - Eligible entity test: Under the eligible entity test, an entity must satisfy the definition of 'small business entity' in Subdivision 328-C of the ITAA 1997 to be eligible for TFE for an income year, or satisfy it on the basis that each reference to $10 million in Subdivision 328-C of the ITAA 1997 (about aggregated turnover) was instead a reference to $5 billion. This requirement means that an entity will need to carry on business in the income year and determine that its aggregated turnover is under the $5 billion threshold in accordance with the provisions of Subdivision 328-C of the Income Tax Assessment Act 1997 (ITAA 1997). Carrying on a business Whether the conduct of an entity amounts to carrying on a business depends on facts and circumstances. The indicators of whether an entity or persons are carrying on a business are well-established and outlined in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? For companies, the ATO has published guidance in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? In line with that guidance, companies ordinarily will be considered to carry on business if they are established and maintained to make a profit for shareholders and invest assets in gainful activities that have both a purpose and prospect of profit. This will be so even if activities are relatively limited and consist of the passive receipt of returns on investments for distribution to shareholders. The absence of a purpose of profit-making for the benefit of shareholders will ordinarily count against a conclusion that a non-profit company is carrying on business. However, there may be circumstances in which such a company conducts substantial commercial activities for the purpose of profit-making to fund charitable or other objectives of the company. Depending on the nature and scale of the activities, this may amount to carrying on a business. Company X is a company that was incorporated to enter into the Joint Operating Agreement (JOA) and Sale and Purchase Agreement (SPA) with Company Y. In relation to considering if Company X is carrying on a business the nature of the employees and their expertise as well as the commerciality of the venture have also been considered. Company X has a Director who has the relevant industry experience, through the examination of independent reports, decided to enter into the agreement. These reports are: • Report A; and • Report B. The venture being entered if able to move to certain phases would result in an interest in an active joint venture. As such the payment by Company X is characterised more towards a business investment rather than a passive and speculative investment. Given that there is a prospect of profit, on the basis that Company X will receive XX% of the joint venture product, Company X has carried on a business in accordance with the principles set out in TR 2019/1. Aggregated turnover An entity that carries on business will be eligible for TFE if its aggregated turnover, worked out under Subdivision 328-C of the ITAA 1997, is under the $5 billion threshold. To satisfy this condition for an income year (current year), the aggregated turnover must be less than $5 billion for the previous year or likely to be less than the threshold for the current year. In working out likely aggregated turnover for the current year, the determination is made at the commencement of the current year or at the date the entity first carried on business during the current year. If the condition would be satisfied on this basis only, it is taken not to be satisfied if the aggregated turnover for the two previous years exceeds the threshold. However, the condition may still be met for the current year if aggregated turnover, worked out as at the end of the current year, is under the threshold. For the income year ending 30 June 20XX, Company X's aggregated turnover, including the annual turnovers of the entities connected with and affiliates of Company X is below $50 million. Conclusion on eligible entity test Company X satisfies the eligible entity test for the purposes of TFE as it carries on a business and has an aggregated turnover of less than $5 billion for the income year ending 30 June 20XX. Company X is an entity that is eligible for TFE. | Detailed Reasoning - Meaning of hold a depreciating asset: What is a depreciating asset Section 40-30 of the Income Tax Assessment Act (ITAA 1997) outlines what is a depreciating asset, it states: 40-30(1) A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except: (a) land; or (b) an item of trading stock; or (c) an intangible asset, unless it is mentioned in subsection (2). The Asset is a depreciating asset that will be held to allow Company X to participate in the JOA. Holding the depreciating asset In order for Division 40 of the ITAA 1997 to apply to a depreciating asset, section 40-35 of the ITAA 1997 provides that you must 'hold' the depreciating asset. For the purpose of TFE, paragraph 40-160(1)(a) provides that you must 'hold' the asset at or after the 2020 budget time. Paragraph 40-150(1)(a) also provides that you must start to 'hold' the asset for an asset to qualify for full expensing. Section 40-35 of the ITAA 1997 also provides that an interest in an underlying asset is taken to be the underlying asset itself. Therefore, Company X owning the XX% interest in the Asset will be considered to be the depreciating asset itself both for the application of the Div 40 provisions in the ITAA 1997 and the application of Div 40 transitional provisions (paragraph 40-35(3)(b)) of the ITAA 1997. It is important to understand the point at which Company X will begin to hold the relevant depreciating asset such that the right income year is identified for the potential TFE deduction. In this case the SPA provides that the legal ownership will pass to Company X when completion occurs. For the purposes of providing this advice the applicant has confirmed that all three agreements will be signed contemporaneously at a date before 30 June 20XX. Upon Completion, Company X will hold the interest at the Completion Date. The Commissioner accepts that if the three agreements are signed at a time before the 30 June 20XX than it is reasonable to expect that the Completion date will also occur before 30 June 20XX. If this is the case Company X will 'hold' the depreciating asset being the Sale Interest for the purposes of section 40-35 of the ITAA 1997. Further, that for the purposes of TFE, that Company X will start to hold the Sale Interest pursuant to paragraph 40-150(1)(a) after budget time, and before TFE ends on 30 June 2023. Joint Venture or Partnership Whether the arrangement that Company X will enter into, upon the execution of SPA and JOA, is a partnership or a joint venture is important because as per the note to subsection 40-35(1) of the ITAA 1997, partners do not 'hold' partnership assets. As such, whether Company X entering the SPA and the JOA is entering a partnership or a joint venture will now be considered. A joint venture is not defined in subsection 6(1) of the ITAA 1936, or subsection 995-1(1) of the ITAA 1997. Whether or not a business structure is as joint venture is a matter of fact. As generally understood, a joint venture is akin to a partnership. However, there is an important distinction between the two business arrangements for tax purposes. Partners in a partnership derive income jointly, whereas in a joint venture each venturer derives its income separately and, instead, share the product resulting from the joint venture. Common law partnerships are usually evidenced by parties carrying on a business in common with a view to making a profit to be shared between them. Tax law partnerships involve entities in joint receipt of income. In contrast, joint ventures are entered into for a limited period for a specific project after which they are wound up. The joint venture's most important feature, and the one that sets it aside from a partnership, is that in return for their contributions to the venture each participant receives an agreed share of the product or output from the joint venture to their own account. The benefit is in kind rather than a share of jointly earned profit or income. The Commissioner considers what a joint venture is in GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes? (GSTR 2004/2). Paragraph 12 of GSTR 2004/2 says the term joint venture is not defined in the GST Act. Accordingly, it takes its ordinary meaning having regards to the context in which it appears in the GST Act. Many concepts the Commissioner uses to identify a joint venture using its ordinary meaning are the same for income tax. Often a joint venture is characterised by the following features (GSTR 2004/2 from paragraph 11, paragraphs 30 to 41 elaborate on these features): - Obtaining individual benefits for the parties in the form of a share of output of the arrangement rather than joint or collective profits for all the parties. Sharing product or output is the most important distinguishing feature of a joint venture. Other features are indicative. This element was referred to in the High Court United Dominions case ( United Dominions Corporation Ltd v. Brian Pty Ltd (1985) 60 ALR 741 at 750; (1985) 157 CLR 1 at 15-16) where Dawson J stated (repeated at GSTR 2004/2 para 19): • "Perhaps, in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants. ... the feature which is most likely to distinguish them from partnerships is the sharing of product rather than profit." - GSTR 2004/2 indicates at paragraph 20 the term joint venture does not expressly exclude arrangements for mutual profit that do not necessarily involve the sharing of product or output (for purposes other than GST as discussed at paragraphs 21 and following). - GSTR 2004/2 paragraph 33 explains participants may agree that product is to be sold collectively by one of the participants on behalf of each of the others. This does not mean participants are sharing proceeds of the sale or that there is a joint profit to share. Rather the entity sells each participant's share of product on behalf of that participant. - Each of the parties agrees to the formation of the joint venture. - Although not determinative joint venture agreements usually declare that participants associate themselves in a business undertaking for a stated purpose, for example to mine a mineral deposit. The agreements also usually disclaim other legal relationships between the participants, for example, a partnership relationship (GSTR 2004/2 paragraph 35). - However, the fact that an arrangement is referred to as a joint venture does not by itself make it a joint venture (GSTR 2004/2 paragraph 30). - Joint control by participants is a feature of joint ventures. Responsibility for the day to day management of the venture may rest with a manager/operator appointed by the participants. The manager/operator may be one of the participants or a third party (GSTR 2004/2 paragraph 38). - The association is usually for the participation in a single project rather than a continuing business. - As noted in the United Dominions case, joint ventures are undertaken for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour. Commonly a joint venture is for a specific project such as building a dam or exploring for and extracting hydrocarbons. These projects ordinarily have a finite life (such as the life of a mine) and when the project is completed the joint venture ends. It is not essential that the end date of the undertaking be specified, or able to be determined when entering into the joint venture agreement (GSTR 2004/2 paragraph 40). - Each participant is liable only for its own debts and own costs. Unlike a partnership there is no statutory basis to be jointly and severally liable for debts incurred by the other participants (GSTR 2004/2 paragraph 41). The following table is indicative of the common features of a partnership and joint venture to assist in distinguishing between them (GSTR 2004/2 paragraph 51). Partnership Joint Venture Joint entitlement to profit or income Sharing of product or output in defined portions A continuing business Specific economic project One partner's actions may bind all of the partners Joint control of the venture Partners have indirect undivided interests in the partnership assets (a partner can individually deal with its interest in the partnership but not the underlying partnership assets.) Well-defined separation of interests, rather than a joint undivided interest, in assets contributed to the venture Partners in a partnership are agents of the other partners and are ordinarily jointly and severally liable for the expenses of the partnership Joint venture participants are usually liable for their own debts which they incur individually as principals The JOA outlines the rights and obligations of Participants, being Company X and Company Y. It provides: Considering the above from the draft JOA, upon execution of the draft SPA and JOA, Company X will be a participant in the joint venture arrangement with Company Y rather than a partnership. We have taken this view as: • each participant is entitled to their share of the product rather than a share in the profits. • it is not possible for one party to bind other parties, but rather their control is proportionate to their interest. • the venture relates to specific economic activities. • debts incurred are in relation to the proportion of their interest. | Detailed Reasoning - Conclusion: Accordingly, under section 40-35 of the ITAA 1997, Company X will hold an interest in a depreciating asset being the Asset, which is taken to be the underlying asset itself. For the purposes of subsection 40-150(1) and 40-160(1), section 40-40 of the ITAA 1997 identifies who is taken to 'hold' a depreciating asset by focusing on the nature of the ownership interest. Item 10 of the table in section 40-40 of the ITAA 1997 provides that the owner (or the legal owner if there is both a legal and equitable owner) of a depreciating asset holds the asset. For this case, Company X will be the legal owner of the Sale Interest in accordance with the JOA and SPA which is a XX% percentage share in the Asset. The depreciating asset will be held on Completion. Company X will 'hold' the Sale Interest before 30 June 20XX, and the Sale Interest is the depreciating asset to which Division 40 of the ITAA 1997 applies. | Detailed Reasoning - Eligible assets: TFE applies to depreciating assets, but not all depreciating assets are eligible. Subsection 40-160(1) provides: For the purposes of Division 40 of the ITAA 1997, the decline in value of a depreciating asset you hold for an income year (the current year) is the amount worked out under subsection (3) if: (a) you start to hold the asset at or after the 2020 budget time; and (b) you start to use the asset, or have it installed ready for use, for a taxable purpose in the current year; and (c) you are covered by section 40-150 for the asset; and (d) you are covered for the current year by any of the following: (i) section 40-155 (about businesses with turnover under $5 billion); (ii) section 40-157 (about corporate tax entities with income under $5 billion); and (e) no balancing adjustment event happens to the asset in the current year; and (f) you have not made a choice under section 40-190 in relation to the current year. Time of first holding and first use for a taxable purpose To claim TFE for an asset in respect of its first element of cost, and entity must first hold the asset at or after 2020 Budget Time and by no later than 30 June 20XX. Assets first held by the entity before 2020 Budget Time will not be eligible for TFE in respect of their first element costs. However, the assets may be eligible for other write-off incentives depending on when they were first held and used for a taxable purpose, and their cost. For assets first held by an entity before 2020 Budget Time, TFE may be claimed by the entity for second element costs (such as the cost of improvements to the assets) incurred from 2020 Budget Time until 30 June 20XX. In any case, to claim TFE in respect of first or second elements of cost, the asset must also commence use, or be installed ready for use, for a taxable purpose by no later than 30 June 20XX. For the purposes of this ruling, Company X requested that the Commissioner make an assumption that the Completion Date as specified in the draft SPA will occur prior to 30 June 20XX. The Commissioner has made this assumption. Upon Completion as provided in the SPA, Company X and Company Y will execute the JOA. Upon execution of both the draft SPA and JOA, Company X will hold the depreciating asset of Company X Interest and either commence to use or have it installed ready for use for a taxable purpose. Therefore, upon execution of both the draft SPA and JOA, Company X will first hold the depreciating asset of Company X Interest after 2020 Budget Time and no later than 30 June 20XX. Company X will also either commence to use or have it installed ready for use within the relevant time period. Exclusions under section 40-150 Even if the time of first holding and first use requirements are met, there are specific exclusions (in respect of both first and second element costs) under section 40-150 for assets: Assets covered by section 40-45 of the ITAA 1997 Assets to which the general capital allowance rules of Division 40 of the ITAA 1997 do not apply because of section 40-45 are also excluded for the purposes of TFE. Broadly described, these assets are: The Sale Interest is not covered by section 40-45 of the ITAA 1997. Assets without relevant connection to Australia and carrying on a business An asset that might otherwise be eligible for TFE is also excluded if, at the time the entity first uses the asset, or has it installed ready for use, for a taxable purpose: The Asset and the Company X Interest are to be used principally in Australia for the principal purpose of carrying on a business. The Asset and the Sale Interest are located in Australia and will be an asset with a relevant connection to Australia and carrying on a business. Assets covered by Subdivision 40-E and 40-F of the ITAA 1997 Assets covered by Subdivision 40-E of the ITAA 1997 are low-cost (less than $1,000) assets whose decline in value is worked out through a low-value pool. Subdivision 40-F of the ITAA 1997 applies to a depreciating asset that is a water facility, horticultural plant, fodder storage asset or a fencing asset. The Sale Interest is not an asset which decline in value is calculated in accordance with Division 40-E and 40-F of the ITAA 1997. Conclusion Therefore, the exclusions under section 40-150 will not apply to the Company X Interest as it is not an: Exclusions for entities with an aggregated turnover of $50 million or more Additional exclusions from TFE apply if an eligible entity would not have satisfied the eligible entity test if the reference to $5 billion in that test were instead a reference to $50 million. For the income year ending 30 June 20XX, Company X's aggregated turnover, including the annual turnovers of the entities connected with and affiliates of Company X is below $50 million. Therefore, exclusions for entities with an aggregated turnover of $50 million or more does not apply to Company X. Exclusions for entities using the alternative income test for eligibility Company X is an entity eligible for TFE as it satisfies a test based on aggregated turnover. Exclusions for entities using the alternative income test for eligibility does not apply to Company X. Balancing adjustment events If a balancing adjustment event happens to an asset in the same income year that TFE would otherwise apply to first or second elements of the asset's cost, then TFE does not apply. Company X does not expect a balancing adjustment event to happen in the year that it acquires the Company X Interest. For the purpose of this ruling, as requested the Commissioner has taken it to be a fact that no balancing adjustment event will happen to Company X Interest in the year ending 30 June 20XX. Choice not to apply temporary full expensing If Subdivision 40-BB applies to work out the decline in value of a depreciating asset, then no other provision of the ITTPA or the ITAA 1997 applies for that purpose. However, under section 40-190 an entity may choose that the decline in value of an asset for an income year is not to be worked out under Subdivision 40-BB. Company X will not make a choice under section 40-190 in relation to the Sale Interest. Therefore, this exclusion will not apply. | Detailed Reasoning - Conclusion: Company X is an entity eligible for TFE that satisfies a test based on aggregated turnover under section 40-155. The relevant depreciating asset for this case is the Sale Interest (Company X Interest) which Company X will hold upon execution and completion of the SPA and this will commit the entity to the JOA. Under subsection 40-160(1), for the purposes of Division 40 of the ITAA 1997, the decline in value of the Sale Interest for the income year ending 30 June 20XX is the amount worked out under subsection 40-160(3) as: | Summary: Company X's start time for the XX% interest in the Asset for the purpose of section 40-160(3) of the ITTPA will occur in the year ending 30 June 20XX. | Detailed Reasoning - Detailed reasoning: To apply TFE measures under Subdivision 40-BB, for an asset in respect of its first element of cost, an entity must first hold the asset at or after the 2020 Budget Time and by no later than 30 June 20XX. To claim TFE measures, the asset must also commence use, or be installed ready for use, for a taxable purpose by no later than 30 June 20XX. You have advised that the Completion Date as specified in the draft SPA will occur prior to 30 June 20XX. You have also advised that the JOA is entered into prior to 30 June 20XX. Please refer to the content for question one under the heading ' Holding the depreciating asset'. Company X's start time will occur in the income year ending 30 June 20XX. | Summary: The cost of the XX% interest in the Asset for Company X for the purpose of section 40-160(3) of the ITTPA is the sum of the First Instalment and each other Instalments. | Detailed Reasoning - Detailed reasoning: Subsection 40-160(3) provides: "The decline in value for the current year is: (a) if the asset's start time occurs in the current year - the asset's cost as at the end of the current year, disregarding any amount included in the asset's cost after 30 June 20XX; or (b) if the asset's start time occurred in an earlier year - the sum of its opening adjustable value for the current year and any amount included in the second element of its cost for the current year, disregarding any amount included in the asset's cost after 30 June 20XX." As per question 1 and 2 of this ruling, the Company X's start time for the Company X Interest will occur in the income year ending 30 June 20XX. Therefore, the amount of the decline in value for the Company X Interest under the TFE provisions will be the asset's cost at the end of the income year as outlined under subsection 40-160(3). Section 40-175 of the ITAA 1997 provides that the cost of a depreciating asset consists of two elements. Section 40-180 of the ITAA 1997 provides that the first element is worked out as at the time when you began to hold the depreciating asset and under paragraph 40-180(1)(b) of the ITAA 1997 will be the amount you are taken to have paid to hold the asset under section 40-185 of the ITAA 1997. Section 40-185 of the ITAA 1997 sets out the amount you are taken to have paid to hold a depreciating asset. In item 2 of the table in section 40-185 of the ITAA 1997, it provides that in a case when you incur or increase a liability to pay an amount, the amount you are taken to have paid to hold a depreciating asset or to receive a benefit is the amount of the liability or increase when your incurred or increased it. Under the SPA, the purchase price for the Company X Interest is to be paid in four instalments. The amounts specified for instalments under the SPA are payable regardless on the earlier of each of the dates/conditions set out. As such, the latest that the amounts could be paid are the dates specified for each instalment. Upon Completion of the SPA, Company X will pay the First Instalment and will become definitively committed (or completely subjected) to paying the remaining instalment/s. The full amount will be a presently existing liability, even though the time for payment for the whole amount will not yet have arrived. Therefore, Company X will incur $XX for the Company X Interest at the time that Completion of the SPA occurs.

that no benefit will be given to Company X, or a related party of Company X for entering into this arrangement, other than the benefit you obtain as a participant in the Joint Venture. | that there is no understanding or agreement between Company X and Company Y that you will sell your Sale Interest back to Company Y or to a related entity of Company Y. | that the Taxation of Financial Arrangements rules do not apply to Company X for the year ending 30 June 20XX and 30 June 20XX. | Company X will not have a balancing adjustment event to happen in the year that it acquires the Company X Interest, and | Company X will not make a choice under section 40-190 of the ITTPA in relation to the Company X Interest. | Reasons for decision: All references refer to Income Tax (Transitional Provisions) Act 1997 (ITTPA) unless otherwise stated. | satisfies a test based on aggregated turnover under section 40-155 (eligible entity test); or | is a corporate tax entity and satisfies a test based on total income under section 40-157 (alternative income test). | Sharing of product or output, rather than sale proceeds or profits; | A contractual agreement between the participants; | A specific economic project; | Sharing of product or output in defined portions - The Participants are entitled to a share of the product | Specific economic project - list of activities which are the objects of the Joint Venture are provided. There is a clear specific economic project. | Joint control of the venture - JOA provides that nothing in the agreement is to be construed as making any Participant an agent for other Participants. They cannot bind each other. Further the rights, duties, obligations and liabilities of the Participants arising out of this agreement are several in proportion to their respective Percentage Shares and are neither joint nor joint and several. | Well-defined separation of interests, rather than a joint undivided interest, in assets contributed to the venture - Participants have a defined interest proportionate to their percentage shares. | Joint venture participants are usually liable for their own debts which they incur individually as principals - participants are severally liable. | without the relevant connection to Australia and carrying on business | whose decline in value is worked out under Subdivision 40-E or 40-F of the ITAA 1997. | certain work-related items for purposes of fringe benefits tax law where the relevant benefit provided by the employer is an expense payment benefit or a property benefit | capital works for which amounts can be deducted under Division 43 of the ITAA 1997 (or would be deductible but for timing of expenditure or use of capital works) | depreciating assets for which deductions were available under former provisions of the income tax law relating to Australian films. | it is not reasonable to conclude that the entity will use the asset principally in Australia for the principal purpose of carrying on a business, or | it is reasonable to conclude that the asset will never be located in Australia. | asset covered by section 40-45 of the ITAA 1997; | asset without the relevant connection to Australia and carrying on a business; and | asset covered by Subdivision 40-E and 40-F of the ITAA 1997. | Company X will hold the Sale Interest at or after the 2020 budget time; and | Company X will start to use the asset, or have it installed ready for use, for a taxable purpose in the income year ending 30 June 20XX; and | Company X is covered by section 40-150 for the asset; and | Company X is covered for the income year ending 30 June 20XX under section 40-155; and | no balancing adjustment event will happen to the asset in the income year ending 30 June 20XX; and | Company X will not make a choice under section 40-190 in relation to the income year ending 30 June 20XX.