Private ruling: Income Tax Assessment Act 1997 Division 250
Date of advice: 20 October 2025
Published: 8 December 2025
Ruling period: 1 January 20XX to 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Does Income Tax Assessment Act 1997 (ITAA 1997) Division 250 apply to ABC Pty Ltd as trustee for ABC Trust (ABC Trust) and its interest in the Division 43 of the ITAA 1997 assets, being the DEF (Building), that form part of the land at XX (the Property) leased to XYZ? | A1: No. | Q2: Would the Commissioner make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 of the ITAA 1997 to apply to ABC Trust and the Division 40 of the ITAA 1997 depreciating assets (Division 40 Assets) that form part of the Property leased to XYZ? | A2: Yes.

Relevant facts and circumstances: The following agreements form part of and are to be read in conjunction with the below facts and circumstances, being the subject of this Ruling: • Lease between ABC Trust as lessor and Old Lessee Pty Ltd (Old Lessee) as lessee for the Property (Old Lease), and • Deed of Assignment, Variation of Lease and Consent between ABC Trust as lessor, Old Lessee as lessee and XYZ as new lessee guarantor for the Property dated XX XXX 20XX (New Lease). Background ABC Trust is an Australian based trust. ABC Trust is not a small business entity for Australian income tax purposes. A reference to the Property refers to the land, the Building and all its components, including the Division 40 Assets. A reference to the Building refers only to the physical structure of the building and not to the Division 40 Assets or the land on which it sits. The Property has been held by ABC Trust for approximately XX years. At 30 June 20XX, the Property was independently valued at approximately $X million. The Property is financed by a loan to ABC Trust from Australia Bank, the current balance of which is $X million. The security for the loan includes a mortgage over the Property, General Security over the assets of ABC Trust and the units and shares held by the owners of ABC Trust. Given the current valuation of the Property, this represents a gearing ratio of approximately XX%. Under the Old Lease, the previous major tenant of the Property was Old Lessee, a for-profit and taxpaying entity. The Property is now leased to XYZ as the primary tenant under the New Lease. XYZ is an 'exempt entity' for the purposes of the ITAA 1997. Leases On XX date, ABC Trust entered into the Old Lease with Old Lessee. The Old Lease had a commencement date of XX date and expiry date of YY date. On ZZ date, ABC Trust entered into the New Lease with XYZ. Under the New Lease, Old Lessee transferred its interests as lessee of the Property under the Old Lease to XYZ. ABC Trust and XYZ are unrelated parties. Subject to a number of variations, the New Lease maintained the key terms of the Old Lease. Old Lease Key terms of the Old Lease are summarised below: • Old Lessee will lease the Property for a XX year term commencing from XX date. • Rent is $YY (plus GST) per annum. The rent payable increases over the lease term, with annual increases on each anniversary of the commencing date by the lower of CPI x 2 or a fixed percentage increase of X%. • Old Lessee is permitted to use the Property for the permitted use. • Old Lessee has the option to extend the lease for X further terms of X years each. • Old Lessee must equip the Property with all fittings, equipment, floor coverings, lighting and facilities which are not already installed but are necessary for the permitted use. • Old Lessee is responsible for the routine maintenance of building services and for replacement of building services in circumstances arising from Old Lessee's use of the Property or any damage caused to the Property due to Old Lessee's negligence or default and which is not otherwise ABC Trust's responsibility. • ABC Trust is otherwise responsible for repairing or replacing any major capital items as required and under the circumstances specified in the lease. • Events of default by Old Lessee include non-payment of rent, breach of an essential term, repudiation and non-compliance with obligations under the lease. ABC Trust is entitled to damages if Old Lessee defaults under the lease, which includes rent due until the termination date or upon termination. • If ABC Trust decides to sell the Property, Old Lessee has the right of first refusal to acquire the Property for market value consideration. • At the end of the lease term, Old Lessee has no right, option or power to acquire the Property from ABC Trust. • There is no guaranteed residual value in respect of the Property at the end of the lease. • Old Lessee has no make-good obligations at the end of the lease. New Lease The Recitals to the New Lease state: A. The Lessee leases the Premises from the Lessor under the Leases. B. The Lessee wants to transfer its interest under the Leases and in the Premises to the New Lessee on the terms in this document. C. The parties have agreed to vary the Leases on the terms in this document. D. The Lessor agrees to consent to the transfer and variation of the Leases, subject to the terms in this document. The key terms of the New Lease are fundamentally consistent with the Old Lease, accordingly: • The lease has a termination date of YY date. • Rent payments due under the lease will increase over the term of the lease on each anniversary of the commencing date by the lower of CPI x 2 or a fixed percentage increase of X%. • XYZ has the option to extend the lease for X further terms of X years each. • XYZ must equip the Property with all fittings, equipment, floor coverings, lighting and facilities which are not already installed but are necessary for the permitted use. • XYZ is responsible for the routine maintenance of building services and for replacement of building services in circumstances arising from XYZ's use of the Property or any damage caused to the Property due to XYZ's negligence or default and which is not otherwise ABC Trust's responsibility. • ABC Trust is otherwise responsible for repairing or replacing any major capital items as required. • Events of default by XYZ include non-payment of rent, breach of an essential term, repudiation and non-compliance with obligations under the lease. ABC Trust is entitled to damages if XYZ defaults under the lease, which includes rent due until the termination date. • If ABC Trust decides to sell the Property, XYZ has the right of first refusal to acquire the Property for market value consideration. • At the end of the lease term, XYZ has no right, option or power to acquire the Property from ABC Trust. • There is no guaranteed residual value in respect of the Property at the end of the lease. • XYZ has no make-good obligations at the end of the lease. Tenants XYZ is not the only tenant of the Property. Other tenants of the Property include other for-profit and taxpaying entities. The New Lease with XYZ generates approximately X% of the rental income derived by ABC Trust from the Property, with the remaining X% derived from non-tax preferred entities. The New Lease with XYZ (as with its predecessor, the Old Lease) is also subject to subleases for part of the leased area. Calculations for Division 250 of the ITAA 1997 The market value of ABC Trust's interest in the Property at the commencement of the New Lease has been apportioned by ABC Trust to determine the cost of different classes of assets for the purposes of determining the application of Division 250 of the ITAA 1997. The analysis provided is based on the value attributed to the Property in ABC Trust's balance sheet as at SS date and a review of the Property undertaken by a Quantity Surveyor. The value attributed to the Building and the Division 40 Assets is based on the respective closing written down values as at QQ date. The land value was determined on a residual basis. Table 1: Asset type and value Asset Type Value (%) Land X% Building X% Division 40 of the ITAA 1997 assets - remaining effective life 19.5 years or less (Short Term Depreciating Assets) X% Division 40 of the ITAA 1997 assets - remaining effective life greater than 19.5 years (Long Term Depreciating Assets) X% Total 100% Of the Division 40 Assets, X% are Short Term Depreciating Assets and X% are Long Term Depreciating Assets. The present value of the rental payments that will be received over the course of the New Lease that are attributable to the Building is less than X% of the market value attributable to the Building at the commencement of the New Lease. The present value of the rental payments that will be received over the course of the New Lease that are attributable to the Division 40 Assets is greater than X% of the market value attributable to the Division 40 Assets at the commencement of the New Lease. Disregarding the operation of Division 250 of the ITAA 1997, ABC Trust (as owner of the Building and Division 40 Assets) will be entitled to capital allowances under Division 43 of the ITAA 1997 in relation to expenditure on the Building and Division 40 of the ITAA 1997 in relation to the decline in value of the Division 40 Assets. Assumptions The debt applied to fund the acquisition and/or construction of the Property held within ABC Trust represented less than 80% of the cost of acquisition/construction of the Property. The fourth exclusion in section 250-40 of the ITAA 1997 does not apply in relation to the Property and the ABC Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 250-45

Reasons for decision: Summary: Division 250 of the ITAA 1997 does not apply to ABC Trust's interest in the Building that forms part of the Property that is leased to XYZ. | Detailed Reasoning - Detailed reasoning: The main object of Division 250 of the ITAA 1997 is outlined in section 250-5 of the ITAA 1997, which states: The main objects of this Division are: (a) to deny or reduce your capital allowance deductions in respect of an asset if the asset is put to a tax preferred use and you have insufficient economic interest in the asset; and (b) if your capital allowance deductions are denied or reduced, to treat the arrangement for the tax preferred use of the asset as a loan that is taxed as a financial arrangement (on a compounding accruals basis). Section 250-10 of the ITAA 1997 outlines when Division 250 of the ITAA 1997 applies and states: This Division applies to you and an asset at a particular time if: (a) the general test in section 250-15 is satisfied in relation to you and the asset; and (b) none of the exclusions in sections 250-20, 250-25, 250-30, 250-40 and 250-45 apply. | Detailed Reasoning - The General Test: Section 250-15 of the ITAA 1997 states: This Division applies to you and an asset at a particular time if: (a) the asset is being put to a tax preferred use; and (b) the arrangement period for the tax preferred use of the asset is greater than 12 months; and (c) financial benefits in relation to the tax preferred use of the asset have been, will be or can reasonably be expected to be, provided to you (or a connected entity) by: (i) a tax preferred end user (or a connected entity); or (ii) any tax preferred entity (or a connected entity); or (iii) any entity that is a foreign resident; and (d) disregarding this Division, you would be entitled to a capital allowance in relation to: (i) a decline in value of the asset; or (ii) expenditure in relation to the asset; and (e) you lack a predominant economic interest in the asset at that time. Division 250 of the ITAA 1997 applies on an asset-by-asset basis, and only to assets for which capital allowance deductions can be claimed. As such, the first step is to identify the relevant assets that form the Property being leased. The Property is a composite asset. Composite assets may either themselves be an asset, or their separate components may be separate assets. Section 250-75 of the ITAA 1997 outlines what constitutes a separate asset for the purposes of Division 250 of the ITAA 1997. In relation to composite assets, subsection 250-75(2) of the ITAA 1997 states: Whether a particular composite item is itself an asset or whether its components are separate assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case. | Detailed Reasoning - Example 1:: A car is made up of many separate components, but usually the car is an asset rather than each component. | Detailed Reasoning - Example 2:: A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate assets. Similar to Example 2 in subsection 250-75(2) of the ITAA 1997, the Property is a composite asset that has a number of clearly separable components. It consists of a number of separate assets, primarily the land, the building (the Division 43 of the ITAA 1997 asset), and the Division 40 of the ITAA 1997 assets in the building, such as carpet, fans, air-conditioning etc. Each of these is a separate asset for the purposes of the Division 250 of the ITAA 1997. The Building is a separate asset to the land by virtue of subsection 250-75(1) of the ITAA 1997 and is the relevant asset for the purpose of this question. The requirements of the General Test are considered below with respect to the Building. | Detailed Reasoning - Paragraph 250-15(a) of the ITAA 1997: Subsection 250-60(1) of the ITAA 1997 states that an asset is 'put to a tax preferred use' at a particular time if: (a) an end user (or a connected entity) holds, at that time, rights as lessee under a lease of the asset; and (b) either or both of the following subparagraphs is satisfied at that time: (i) the asset is, or is to be, used by or on behalf of an end user who is a tax preferred end user because of paragraph 250-55(1) (tax preferred entity); (ii) the asset is, or is to be, used wholly or principally outside Australia and an end user of the asset is a tax preferred end use because of paragraph 250-55(b) (foreign resident or business). If this subsection applies, the tax preferred use of the asset is the lease referred to in paragraph (a). Note: For particular arrangements that are treated as leases, see section 250-80. Paragraph 250-55(a) of the ITAA 1997 provides that an 'end user' of an asset is a 'tax preferred end user' if the end user is a 'tax preferred entity'. Subsection 995-1(1) of the ITAA 1997 defines a 'tax preferred entity' to include an 'exempt entity'. An 'exempt entity' is defined in subsection 995-1(1) of the ITAA 1997 as an entity all of whose ordinary income and statutory income is exempt from income tax because of the Income Tax Assessment Act 1936 , ITAA 1997 or another Commonwealth law. Subsection 250-50(1) of the ITAA 1997 provides that an entity is an 'end user' of an asset if the entity uses, or effectively controls the use of, the asset. Subsection 250-50(4) of the ITAA 1997 provides that an entity is taken to be an end user of an asset if the entity holds rights as a lessee under a lease of the asset. Paragraph 250-15(a) of the ITAA 1997 is satisfied as XYZ (being an 'exempt entity') is a 'tax preferred end user' and leases the Property, which includes the Building. Accordingly, the Building is 'put to a tax preferred use'. | Detailed Reasoning - Paragraph 250-15(b) of the ITAA 1997: Section 250-65 of the ITAA 1997 outlines what constitutes an 'arrangement period' for the purposes of Division 250 of the ITAA 1997 and states: | Detailed Reasoning - Start of the arrangement period: (1) The arrangement period for a particular tax preferred use of an asset starts when that tax preferred use of the asset starts. | Detailed Reasoning - End of the arrangement period: (2) Subject to subsection (3), the arrangement period for a particular tax preferred use of an asset is taken to end on the day that is the date on which the tax preferred use of the asset may reasonably be expected, or is likely, to end. (3) The arrangement period for the tax preferred use of the asset ends when this Division ceases to apply to you and the asset if that happens before the day referred to in subsection (2). (4) In determining when a particular tax preferred use of an asset is likely to end: (a) regard must be had to: (i) the terms of, and any other circumstances relating to, any arrangement dealing with that tax preferred use of the asset; and (ii) the terms of, and any other circumstances relating to, any arrangement dealing with the provision of financial benefits in relation to that tax preferred use of the asset; and (b) it must be assumed that any right that an entity has to renew or extend such an arrangement will not be exercised (unless it is reasonable to assume that the right will be exercised because of the commercial consequences for the entity (or a connected entity) of not exercising the right). ... Paragraph 250-15(b) of the ITAA 1997 is satisfied as the 'arrangement period' for the Building is the remaining term of the New Lease, which exceeds 12 months. | Detailed Reasoning - Paragraph 250-15(c) of the ITAA 1997: Subsection 995-1(1) of the ITAA 1997 provides that 'financial benefits' has the meaning given by section 974-160 of the ITAA 1997, with paragraph 974-160(1)(a) of the ITAA 1997 stating it 'means anything of economic value...'. Paragraph 250-15(c) of the ITAA 1997 is satisfied as financial benefits, being rent payments, in relation to the tax preferred use of the Building are provided to ABC Trust by a tax preferred end user (XYZ). | Detailed Reasoning - Paragraph 250-15(d) of the ITAA 1997: Subsection 995-1(1) of the ITAA 1997 defines 'capital allowance' as meaning ' a deduction under: (a) Division 40 (capital allowances) of this Act; or (ab) Division 43 (capital works) of this Act; or...'. Paragraph 250-15(d) of the ITAA 1997 is satisfied as, disregarding Division 250 of the ITAA 1997, ABC Trust is entitled to capital allowances for expenditure in relation to the Building under subparagraph 250-15(d)(ii) of the ITAA 1997. | Detailed Reasoning - Paragraph 250-15(e) of the ITAA 1997 - predominant economic interest: A taxpayer will lack a predominant economic interest in an asset at a particular time if it satisfies one of the tests listed in section 250-110 of the ITAA 1997, which states: You lack a predominant economic interest in an asset at a particular time only if one or more of the following sections apply to you and the asset at that time: (a) section 250-115 (limited recourse debt test); (b) section 250-120 (right to acquire asset test); (c) section 250-125 (effectively non-cancellable, long term arrangement test); (d) section 250-135 (level of expected financial benefits test). The above tests are considered below. Limited recourse debt test Section 250-115 of the ITAA 1997 states: (1) You lack a predominant economic interest in an asset at a particular time if more than the allowable percentage of the cost of your acquiring or constructing the asset is financed (directly or indirectly) by a limited recourse debt or debts. (2) For the purpose of subsection (1): (a) the amount of a limited recourse debt is to be reduced by the value of any debt property (other than the financed property) that is provided as security for the debt; and (b) if the limited recourse debt finances the acquisition or construction of 2 or more assets, only the amount of the debt that is reasonably attributable to the asset referred to in subsection (1) is to be taken into account. (3) For the purposes of subsection (1), the allowable percentage is: (a) 80% if the asset is taken to be put to a tax preferred use because of subparagraph 250-60(1)(b)(i) or (2)(b)(i) (end use by tax preferred entities); or (b) 55% if the asset is taken to be put to a tax preferred use because of subparagraph 250-60(1)(b)(ii) or (2)(b)(ii). ... The limited recourse debt test is not satisfied as the debt used to acquire the Building did not exceed the 80% allowable percentage specified in paragraph 250-115(3)(a) of the ITAA 1997. | Detailed Reasoning - Right to acquire asset test: Section 250-120 of the ITAA 1997 contains the 'right to acquire test' and states: (1) You lack a predominant economic interest in an asset at a particular time if, at that time: (a) the asset is to be transferred to a member of the tax preferred sector after the end of the arrangement period; and (b) the consideration for the transfer is not fixed as the market value of the asset at the time of the transfer. (2) You also lack a predominant economic interest in an asset at a particular time if, at that time: (a) a member of the tax preferred end user group has, or will have: (i) a right, obligation or contingent obligation to purchase or acquire the asset or a legal or equitable interest in the asset; or (ii) a right to require the transfer of the asset or a legal or equitable interest in the asset; and (b) the consideration for the purchase, acquisition or transfer is not fixed as the market value of the asset at the time of the purchase, acquisition or transfer. To avoid doubt, this section does not apply to the asset merely because your interest in the asset is one that ceases to exist after the passage of a particular time. The right to acquire test is not satisfied as the Property, which includes the Building, will not be transferred to XYZ at the end of the lease, or any other time. Further, whilst XYZ does have the right of first refusal to purchase the Property should ABC Trust sell the Property, it is a standard commercial lease term and, in the event XYZ exercises that right, market value consideration would be payable. Therefore, the right to acquire asset test is not satisfied in respect of the Building. | Detailed Reasoning - Effectively non-cancellable, long term arrangement test: Section 250-125 of the ITAA 1997 states: (1) You lack a predominant economic interest in an asset at a particular time if: (a) any arrangement that relates to: (i) the tax preferred use of the asset; or (ii) the financial benefits to be provided by the members of the tax preferred sector in relation to the tax preferred use of the asset; is effectively non-cancellable (see section 250-130); and (b) the arrangement period for the tax preferred use of the asset is: (i) greater than 30 years; or (ii) if the arrangement period is less than or equal to 30 years - 75% or more of that part of the asset's effective life that remains when the tax preferred use of the asset starts. (2) Disregard section 40-102 in working out the asset's effective life for the purposes of subparagraph (1)(b)(ii). For section 250-125 of the ITAA 1997 to apply, paragraphs 250-125(1)(a) and (b) of the ITAA 1997 both need to be satisfied and are considered below. | Detailed Reasoning - Paragraph 250-125(1)(a) of the ITAA 1997: Section 250-130 of the ITAA 1997 outlines the meaning of 'effectively non-cancellable arrangement' and states: (1) An arrangement that relates to financial benefits to be provided by a member of the tax preferred sector in relation to the tax preferred use of an asset is effectively non-cancellable if: (a) the arrangement can be cancelled only with: (i) your permission; or (ii) the permission of a connected entity of yours; or (iii) an agent or entity acting on your behalf (or on behalf of a connected entity of yours); or (b) the arrangement can be cancelled without the permission of an entity referred to in paragraph (a) but, if the arrangement were cancelled, the member of the tax preferred sector or another member of the tax preferred sector: (i) would be required to enter into a new arrangement for the provision of financial benefits in relation to the tax preferred use of the asset; or (ii) would incur a penalty and the magnitude of the penalty would be such as to discourage cancellation. (2) For these purposes, if a member of the tax preferred sector defaults under an arrangement and the arrangement is cancelled, the arrangement is to be taken to have been cancelled without the permission of an entity referred in paragraph (1)(a). The terms of the New Lease do not provide XYZ with the ability to terminate the lease and the lease will only terminate on the occurrence of an event of default. If XYZ defaults under the New Lease, XYZ would incur penalties in the form of damages payable to ABC Trust which includes the remainder of rent owing up until the termination date. Accordingly, the New Lease is effectively non-cancellable for the purposes of paragraph 250-125(1)(a) of the ITAA 1997 and it is necessary to consider paragraph 250-125(1)(b) of the ITAA 1997. | Detailed Reasoning - Paragraph 250-125(1)(b) of the ITAA 1997: In considering paragraph 250-125(1)(b) of the ITAA 1997, it is first necessary to determine the 'arrangement period' for the tax preferred use of the asset and whether subparagraphs 250-125(1)(b)(i) or (ii) of the ITAA 1997 has application. Section 250-65 of the ITAA 1997 states that the 'arrangement period' starts when the tax preferred use of the asset starts, and is taken to end when the tax preferred use of an asset is likely or has ended. Under paragraph 250-65(4)(b) of the ITAA 1997, in determining when a particular tax preferred use of an asset is likely to end, it must be assumed that any right that an entity has to renew or extend such an arrangement will not be exercised (unless it is reasonable to assume that the right will be exercised because of the commercial consequences for the entity of not exercising the right). The arrangement period in this instance is X years, being the period of the New Lease (ZZ date to YY date). The X options to renew are not included as part of the arrangement period because, for the purposes of subsection 250-65(4) of the ITAA 1997, it cannot be concluded that the options to renew are likely to be exercised given the absence of any commercial consequences for XYZ of non-exercise (other than the normal inconvenience and disruption of moving premises on the expiry of a lease). Therefore, the 'arrangement period' is less than X years. As subparagraph 250-125(1)(b)(i) of the ITAA 1997 is not satisfied, it is necessary to consider subparagraph 250-125(1)(b)(ii) of the ITAA 1997. The concept of 'effective life' is relevant to determining 'that part of the asset's effective life that remains when the tax preferred use of the asset starts', and is usually worked out under Division 40 of the ITAA 1997. The Building (not being a depreciating asset) does not have an effective life. This means that it would be tested under subparagraph 250-125(1)(b)(i) of the ITAA 1997. As the lease and the arrangement period is for X years, which is less than the X years in subparagraph 250-125(1)(b)(i) of the ITAA 1997, the test in section 250-125 of the ITAA 1997 is not satisfied for expenditure in relation to the Building. Therefore, the effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 is not satisfied. | Detailed Reasoning - Level of expected financial benefits test: Section 250-135 of the ITAA 1997 states: | Detailed Reasoning - Effective guarantee or indemnity for value of asset: (1) You lack a predominant economic interest in an asset at a particular time if the asset has a guaranteed residual value at that time. | Detailed Reasoning - Likely financial benefits exceeding 70% limit: (2) You also lack a predominant economic interest in an asset at a particular time if, at that time: (a) the arrangement under which the asset is put to the tax preferred use (either alone or together with any other arrangement in relation to the tax preferred use of the asset or the provision of financial benefits in relation to the tax preferred use of the asset) is a debt interest; or (b) the sum of the present values of the expected financial benefits that members of the tax preferred sector have provided, or are reasonably likely to provide, to you (or a connected entity) in relation to the tax preferred use of the asset exceeds 70% of: (i) the market value of the asset if subparagraph 250-15(d)(i) applies; or (ii) so much of the market value of the asset as is attributable to the expenditure referred to subparagraph 250-15(d)(ii) if that subparagraph applies. Accordingly, there is a lack of predominant economic interest in an asset under section 250-135 of the ITAA 1997 if one of the following is satisfied: • the asset has a guaranteed residual value at that time in accordance with subsection 250-135(1) of the ITAA 1997 • the arrangement under which the asset is put to a tax preferred use is a debt interest in accordance with paragraph 250-135(2)(a) of the ITAA 1997, or • the sum of the present values of the financial benefits provided in relation to the tax preferred use of the asset exceeds 70% of the market value of the asset if subparagraph 250-15(d)(i) of the ITAA 1997 applies, or so much of the market value of the asset as is attributable to the expenditure referred to in subparagraph 250-15(d)(ii) of the ITAA 1997 if that subparagraph applies. | Detailed Reasoning - Guaranteed residual value: The concept of 'guaranteed residual value' is outlined in subsection 250-85(3) of the ITAA 1997, which states: The asset has a guaranteed residual value if there is an arrangement that provides to the effect that if: (a) on or after the end of the arrangement period, you (or a connected entity) sell or otherwise dispose of the asset to any person; and (b) you (or a connected entity) receives in respect of the sale or disposal: (i) no consideration; or (ii) consideration that is less than an amount (the guaranteed amount ) specified in, or ascertainable under, the provision; a member of the tax preferred sector will pay to you (or a connected entity), or to someone else for your benefit (or for the benefit of a connected entity), in an amount equal to: (c) the guaranteed amount if subparagraph (b)(i) applies; or (d) the amount by which the guaranteed amount exceeds the consideration if subparagraph (b)(ii) applies. The amount of the guaranteed residual value is taken to be the guaranteed amount. Under the New Lease, there is no guaranteed residual value of the Property upon termination. Accordingly, subsection 250-135(1) of the ITAA 1997 has not been satisfied. | Detailed Reasoning - Debt interest: The New Lease is not a debt interest. Therefore, paragraph 250-135(2)(a) of the ITAA 1997 is not satisfied. | Detailed Reasoning - Present value: As outlined above, subparagraph 250-15(d)(ii) of the ITAA 1997 applies with respect to the Building. Accordingly, it is necessary to consider whether subparagraph 250-135(2)(b)(ii) of the ITAA 1997 has application. The discount rate to be used in calculating the present value of the expected financial benefits is determined under subsection 250-105(2) of the ITAA 1997, which states: For the purposes of section 250-135 and Subdivisions 250-C and 250-D, the discount rate to be used in working out the present value of a future amount is a rate that reflects a constant periodic rate of return (worked out on a compounding basis) on the investment in: (a) the asset referred to in subparagraph 250-15(d)(i) if that subparagraph applies; or (b) the expenditure referred to in paragraph 250-15(d)(ii) if that subparagraph applies; that is implicit in the arrangements under which the asset is put to a tax preferred use and financial benefits are provided in relation to that tax preferred use. Section 250-135 of the ITAA 1997 is a point in time test, and the test is applied at the start of the tax preferred use, being the start of the New Lease. Section 250-140 of the ITAA 1997 provides the limited circumstances that a retest of the level of expected financial benefits may be required. Section 250-95 of the ITAA 1997 outlines the concept of 'expected financial benefits' and states: For the purposes of this Division, the expected financial benefits at a particular time in relation to an asset that is put to a tax preferred use are the financial benefits that, at that time: (a) have been, or (b) will, assuming normal operating conditions, be; or (c) can, assuming normal operating conditions, reasonably be expected to be; provided in relation to the tax preferred use of the asset by a member of the tax preferred sector to someone who is not a member of the tax preferred sector. Where a financial benefit is provided in relation to the use of a number of assets, subsection 250-85(7) of the ITAA 1997 states: For the purposes of this Division, if a financial benefit is provided in relation to the use of a number of assets, a separate financial benefit of an amount of value that is reasonably attributable to each asset is taken to be provided in relation to each asset. The present value of the rent payments that XYZ is reasonably likely to provide to ABC Trust that will be attributable to the Building is less than 70% of the market value of the Building at the start of the lease. Therefore, the test in section 250-135 of the ITAA 1997 is not satisfied for expenditure in relation to the Building. Accordingly, ABC Trust does not lack a predominant economic interest in the Building and paragraph 250-15(e) of the ITAA 1997 is not satisfied. Therefore, Division 250 of the ITAA 1997 will not apply to ABC Trust's interest in the Building that forms part of the Property that is leased to XYZ. | Summary: The Commissioner would make a determination under section 250-45 of the ITAA 1997 that it would be unreasonable for Division 250 of the ITAA 1997 to apply to ABC Trust and the Division 40 Assets that form part of the Property leased to XYZ. | Detailed Reasoning - Detailed reasoning: As outlined above under Question 1 of this Ruling, Division 250 of the ITAA 1997 applies where the general test in section 250-15 of the ITAA 1997 is satisfied and none of the exclusions in sections 250-20, 250-25, 250-30, 250-40 or 250-45 of the ITAA 1997 apply. The general test in section 250-15 of the ITAA 1997 is satisfied with respect to an asset at particular time if: • the asset is being put to a tax preferred use • the arrangement period for the tax preferred use of the asset is greater than 12 months • financial benefits in relation to the tax preferred use of the asset have been, will be or can reasonably be expected to be, provided to you by a tax preferred end user • disregarding Division 250 of the ITAA 1997, you would be entitled to a capital allowance in relation to a decline in value of the asset or expenditure in relation to the asset, and • you lack a predominant economic interest in the asset at that time. As outlined under Question 1 of this Ruling, Division 250 of the ITAA 1997 applies on an asset-by-asset basis, and only to assets for which capital allowance deductions can be claimed. As such, the first step is to identify the relevant assets that form the Property being leased. The Division 40 Assets as a class are a separate asset to the Building and land by virtue of subsection 250-75(1) of the ITAA 1997 and are the relevant assets for the purpose of this question. For the same reasons outlined in Question 1 of this Ruling, the first three requirements of the general test in section 250-15 of the ITAA 1997 are satisfied with respect to the Division 40 Assets that form part of the Property leased to XYZ. The fourth requirement is also satisfied as, disregarding Division 250 of the ITAA 1997, ABC Trust is entitled to capital allowances for the decline in value of the Division 40 Assets that form part of the Property leased to XYZ under subparagraph 250-15(d)(i) of the ITAA 1997. The fifth requirement, being whether there is a lack of predominant economic interest in the Division 40 Assets, is considered below. | Detailed Reasoning - Lack of predominant economic interest: As outlined above under Question 1 of this Ruling, you lack a predominant economic interest in an asset at a particular time if one or more of the following tests listed in paragraph 250-125(e) of the ITAA 1997 are satisfied: • the limited recourse debt test • the right to acquire asset test • the effectively non-cancellable, long-term arrangement test, and • the level of expected financial benefits test. The above tests are considered below. | Detailed Reasoning - Limited recourse debt test.: For the same reasons outlined under Question 1 of this Ruling, the limited recourse debt test in section 250-115 of the ITAA 1997 is not satisfised with respect to the Division 40 Assets because the debt used to acquire the Division 40 Assets did not exceed the 80% allowable percentage specified in paragraph 250-115(3)(a) of the ITAA 1997. | Detailed Reasoning - Right to acquire asset test: For the same reasons outlined under Question 1 of this Ruling, the right to acquire asset test in section 250-120 of the ITAA 1997 is not satisfied with respect to the Division 40 Assets as the Property, which includes the Division 40 Assets, will not be transferred to XYZ at the end of the lease, or any other time. Further, whilst XYZ does have the right of first refusal to purchase the Property should ABC Trust sell the Property, it is a standard commercial lease term and, in the event XYZ exercises that right, market value consideration would be payable. | Detailed Reasoning - Effectively non-cancellable, long term arrangement test: As outlined above under Question 1 of this Ruling, the effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 applies where paragraphs 250-125(1)(a) and (b) of the ITAA 1997 are both satisfied. For the same reasons outlined above under Question 1 of this Ruling, the New Lease is effectively non-cancellable for the purposes of paragraph 250-125(1)(a) of the ITAA 1997. In considering paragraph 250-125(1)(b) of the ITAA 1997, it is first necessary to determine the 'arrangement period' for the tax preferred use of the asset and whether subparagraphs 250-125(1)(b)(i) or (ii) of the ITAA 1997 has application. As outlined above under Question 1 of this Ruling, the arrangement period in this instance is 14.67 years (being the period of the New Lease from ZZ date to YY date). The X options to renew the New Lease are not included as part of the 'arrangement period'. Therefore, the 'arrangement period' is less than 30 years and subparagraph 250-125(1)(b)(i) of the ITAA 1997 is not satisfied. Subparagraph 250-125(1)(b)(ii) of the ITAA 1997 applies where the 'arrangement period' is less than or equal to 30 years and 75% or more of the asset's effective life remains when the tax preferred use of the asset starts. The concept of 'effective life' is relevant to determining 'that part of the asset's effective life that remains when the tax preferred use of the asset starts', and is usually worked out under Division 40 of the ITAA 1997. The Division 40 Assets are depreciating assets with the effective life of each of the Division 40 Assets worked out under Division 40 of the ITAA 1997. As the 'arrangement period' is for 14.67 years, any of the Division 40 Assets with an effective life of 19.5 years or less will not fall within subparagraph 250-125(1)(b)(ii) of the ITAA 1997. Conversely, any of the Division 40 Assets with an effective life of more than 19.5 years will satisfy subparagraph 250-125(1)(b)(ii) of the ITAA 1997. The Division 40 Assets leased to XYZ under the New Lease comprise both the Short Term Depreciating Assets and Long Term Depreciating Assets. The Short Term Depreciating Assets represent 60% of the Division 40 Assets and have an effective life remaining of 19.5 years or less. The Long Term Depreciating Assets have an effective life remaining of greater than 19.5 years and represent 40% of the Division 40 Assets. The Short Term Depreciating Assets fall within subparagraph 250-125(1)(b)(ii) of the ITAA 1997. Accordingly, ABC Trust lacks a predominant economic interest with respect to the Division 40 Assets that are the Short Term Depreciating Assets by virtue of both paragraphs 250-125(1)(a) and (b) of the ITAA 1997 being satisfied. The Long Term Depreciating Assets do not satisfy subparagraph 250-125(1)(b)(ii) of the ITAA 1997. Therefore, ABC Trust does not lack a predominant economic interest in respect of those assets. As the Short Term Depreciating Assets represent 60% of the Division 40 Assets, ABC Trust therefore lacks a predominant economic interest in 60% of the Division 40 Assets as section 250-125 of the ITAA 1997 applies to 60% of the Division 40 Assets. | Detailed Reasoning - Level of expected financial benefits test: You lack a predominant economic interest in an asset under section 250-135 of the ITAA 1997 if the asset has a guaranteed residual value, is a debt interest or the sum of the present values of the financial benefits provided in relation to the tax preferred use of the asset exceeds 70% of the market value of the asset if subparagraph 250-15(d)(i) of the ITAA 1997 applies, or so much of the market value of the asset as is attributable to the expenditure referred to in subparagraph 250-15(d)(ii) of the ITAA 1997 if that subparagraph applies. For the same reasons outlined above under Question 1 of this Ruling, there is no guaranteed residual value for the Division 40 Assets under the New Lease and the New Lease is not a debt interest. Therefore, neither subsection 250-135(1) of the ITAA 1997 or paragraph 250-135(2)(a) of the ITAA 1997 applies to the Division 40 Assets. In relation to paragraph 250-135(2)(b) of the ITAA 1997, as subparagraph 250-15(d)(i) of the ITAA 1997 applies with respect to the Division 40 Assets, subparagraph 250-135(2)(b)(i) is the relevant subparagraph in this instance. The present value of the rental payments that XYZ is reasonably likely to provide to ABC Trust over the course of the New Lease that are attributable to the Division 40 Assets is reasonably likely to be greater than 70% of the market value attributable to the Division 40 Assets at the commencement of the New Lease. Therefore, the level of expected financial benefits test in subparagraph 250-135(2)(b)(i) of the ITAA 1997 is satisfied and ABC Trust lacks a predominant economic interest in the Division 40 Assets as a class (including both the Short Term Depreciating Assets and the Long Term Depreciating Assets) under section 250-135 of the ITAA 1997. | Detailed Reasoning - Conclusion: ABC Trust lacks a predominant economic interest in the Division 40 Assets that form part of the Building that is leased to XYZ. Specifically: • the Short Term Depreciating Assets satisfy two tests for lacking a predominant economic interest, being the effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 and the level of expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997, and • the Long Term Depreciating Assets satisfy one test for lacking a predominant economic interest, being the expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997. In the absence of an exclusion applying, Division 250 of the ITAA 1997 will apply to ABC Trust and the Division 40 Assets that form part of the Building. The exclusions are considered below. | Detailed Reasoning - Exclusions: Division 250 of the ITAA 1997 does not apply if one of the following applies: • 'First exclusion - small business entities' in section 250-20 of the ITAA 1997 • 'Second exclusion - financial benefits under minimum value limit' in section 250-25 of the ITAA 1997 • 'Third exclusion - certain short term or low value arrangements' in section 250-30 of the ITAA 1997 • 'Fourth exclusion - sum of present values of financial benefits less than amount otherwise assessable' in section 250-40 of the ITAA 1997, or • 'Fifth exclusion - Commissioner determination' in section 250-45 of the ITAA 1997. The first four exclusions are considered below. | Detailed Reasoning - First exclusion - small business entities: Section 250-20 of the ITAA 1997 states: This Division does not apply to you and an asset if: (a) you are a small business entity for the income year in which the arrangement period for the tax preferred use of the asset starts; and (b) you choose to deduct amounts under Subdivision 328-D for the asset for that income year. Subsection 995-1(1) of the ITAA 1997 states ' small business entity has the meaning given by section 328-110'. ABC Trust is not a small business entity within the meaning of section 320-110 of the ITAA 1997. Accordingly, this exclusion does not apply. | Detailed Reasoning - Second exclusion - financial benefits under minimum value limit: Section 250-25 of the ITAA 1997 states: (1) This Division does not apply to you and an asset that is being put to a tax preferred use under a particular arrangement if, at the start of the arrangement period, the total of the nominal values of all the financial benefits that have been, or will be or can reasonably be expected to be, provided to you (or a connected entity): (a) by members of the tax preferred sector; and (b) in relation to the tax preferred use of the asset or any other asset that is being, or is to be, put to a tax preferred use under the arrangement; does not exceed $5 million. (2) The amount referred in in subsection (1) is indexed annually. The financial benefits that can reasonably be expected to be provided to ABC Trust under the arrangement (the arrangement being the lease of the Property to XYZ under the New Lease) is in excess of $5 million. Accordingly, this exclusion does not apply. | Detailed Reasoning - Third exclusion - certain short term or low value arrangements: Section 250-30 of the ITAA 1997 states: (1) This Division does not apply to you and an asset that is being put to a tax preferred use under a particular arrangement if: (a) the arrangement period for the tax preferred use of the asset does not exceed: (i) 5 years if the asset is real property and the tax preferred used of the asset is a lease; or (ii) 3 years in any other case; or (b) at the start of the arrangement period, the total of the nominal values of all the financial benefits have been, will be or can reasonably be expected to be, provided to you (or a connected entity): (i) by members of the tax preferred sector; and (ii) in relation to the tax preferred use of the asset or any other asset that is being, or is to be, put to a tax preferred use under the arrangement; does not exceed: (iii) $50 million if the asset is real property and the tax preferred use of the asset is a lease; or (iv) $30 million in any other case; or (c) at the start of the arrangement period, the total of the values of all the assets that are put to a tax preferred use under the arrangement does not exceed: (i) $40 million if the asset is real property and the tax preferred use of the asset is a lease; or (ii) $20 million in any other case. This subsection has effect subject to section 250-35. (2) The amounts referred to in paragraphs (1)(b) and (c) are indexed annually. The arrangement period for the tax preferred use of the Property is a lease of real property for longer than 5 years, the total value of the financial benefits expected to be received by ABC Trust from XYZ is in excess of $50 million, and the value of the Property being leased exceeds $40 million. Accordingly, this exclusion does not apply. | Detailed Reasoning - Fourth exclusion - sum of present values of financial benefits less than amount otherwise assessable: Section 250-40 of the ITAA 1997 states: (1) This Division does not apply to you and an asset that is being put to a tax preferred use under a particular arrangement if, when that tax preferred use of the asset starts, the Division 250 assessable amount is less than the alternative assessable amount. (2) For the purposes of subsection (1) the Division 250 assessable amount is the sum of the present values of all the amounts that would be likely to be included in your assessable income under this Division in relation to the tax preferred use of the asset if this Division applied to you and the asset. (3) This is how to work out the alternative assessable amount for the purposes of subsection (1): | Detailed Reasoning - Step 1.: Add up the present values of the amounts that would be included in your assessable income in relation to the financial benefits provided in relation to the tax preferred use of the asset during the arrangement period if this Division did not apply to you and the asset. | Detailed Reasoning - Step 2.: Add up the present values of the amounts that you would be able to deduct in relation to the asset, or expenditure in relation to the asset, under Division 40 or Division 43 in relation to the arrangement period if this Division did not apply to you and the asset. | Detailed Reasoning - Step 3.: Deduct the amount obtained in Step 2 from the amount in Step 1. The result is the alternative assessable amount . (4) To avoid doubt, the amounts referred in subsections (2) and (3) are all the amounts that would be likely to be included in your assessable income, or deducted, for all the income years during the whole, or a part, of which the asset is put to the tax preferred use. (5) The point in time to be used in determining, for the purposes of this section: (a) the present value of an amount that is included in your assessable income for an income year, or (b) the present value of an amount that you would be able to deduct for an income year; is the end of the income year. For the purposes of this Ruling, the Commissioner has assumed the fourth exclusion does not apply with respect to ABC Trust's lease of the Property to XYZ. | Detailed Reasoning - Fifth exclusion - Commissioner determination: Section 250-45 of the ITAA 1997 is the fifth and final exclusion to Division 250 of the ITAA 1997. Section 250-45 of the ITAA 1997 states: This Division does not apply to you and an asset at a particular time if: (a) you request the Commissioner to make a determination under this subsection; and (b) the Commissioner determines that it is unreasonable that the Division should apply to you and the asset at that time, having regard to: (i) the circumstances because of which this Division would apply to you and the asset; and (ii) any other relevant circumstances. The Revised Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 provides limited guidance with respect to when the Commissioner should make a determination and states at paragraphs 1.136 and 1.137: 1.136 In making the determination, the Commissioner should give consideration to the objects of the Division set out in section 250-5. 1.137 It is expected that the Commissioner would consider applying the discretion, for example, to prevent an arrangement from coming within the scope of Division 250 due to: • an unintended or marginal breach of one of the safe harbour tests; or • an unintended or marginal breach of one of the tests that need to be satisfied to qualify for the specific exclusion for certain operating and service arrangements. | Detailed Reasoning - Example 1.17: BF Co owns a 30 storey office building. Ten floors of the building are leased by BF Co to a Australian government department. Another four floors are leased to a state government public authority. The Australian government department temporarily enters into a short term lease for an additional two floors of the building. The building is financed by limited recourse debt. If the limited recourse debt test in section 250-115 did not apply, the lease arrangement would be outside the scope of Division 250. Even though the members of the tax preferred sector occupy as tenants more than half of the area within the building that is occupied or available to be occupied by tenants, the Commissioner may exercise his discretion not to apply the limited recourse debt test because of the temporary nature of the short term lease for an additional two floors of the building. | Detailed Reasoning - Example 1.18: RP Co, a cleaning contractor, enters into an arrangement with a local government council to provide office cleaning services. Under the contract, the total financial benefits expected to be payable to RP Co are $5.1 million. The arrangement does not qualify for the exclusion under section 250-25 because the total financial benefits expected to be payable under the arrangement marginally exceed the $5 million threshold. However, bearing in mind the compliance cost implications of applying Division 250 to the arrangement and that the threshold for the exclusion in section 250-25 was only marginally exceeded, the Commissioner may exercise his discretion to exclude the arrangement from the scope of Division 250. ABC Trust has requested, as required under paragraph 250-45(a) of the ITAA 1997, that the Commissioner exercise the discretion in section 250-45 of the ITAA 1997 to make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to the Division 40 Assets that are part of the lease of the Property. The Short Term Depreciating Assets satisfy two tests for lacking a predominant economic interest, being the effectively non-cancellable, long term arrangement test in section 250-125 of the ITAA 1997 and the level of expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997. The Long Term Depreciating Assets satisfy the level of expected financial benefits test in paragraph 250-135(2)(b) of the ITAA 1997. Factors supporting a conclusion that it would be unreasonable for Division 250 of the ITAA 1997 to apply to the Division 40 of the ITAA 1997 depreciating assets include: • The New Lease is an ordinary commercial operating lease that was negotiated at arm's length. This is confirmed by the fact that the New Lease effectively assigned the rights of Old Lessee as lessee under the Old Lease, which was a lease between ABC Trust and Old Lessee, to XYZ. Old Lessee is a for-profit entity that is a member of the tax-paying sector and the terms of the Old Lease therefore constitute an arms' length arrangement. The terms of the New Lease are largely consistent with the Old Lease such that it is reasonable to conclude the New Lease is an arm's length lease. Accordingly, the rent payable under the New Lease was negotiated by the parties to the Old Lease and is therefore considered to be an arm's length commercial rate. • The Short Term Depreciating Assets constitute approximately X% of the total value of the Property, and the Long Term Depreciating Assets constituted approximately X% of the total value of the Property, at the commencement of the New Lease. The leasing of the Division 40 Assets therefore comprised approximately X% of the total value of the Property at the commencement of the New Lease. It is therefore evident that the dominant purpose of the arrangement is to lease the Building, and not the Division 40 Assets which form an ordinary part of any building and are merely incidental to the overall lease arrangement. • The impact of Division 250 of the ITAA 1997 on the Division 40 Assets is marginal in comparison to the tax consequences for the balance of, and the overall, arrangement. That is, Division 250 of the ITAA 1997 would impact only a minor portion of the assets and arrangement. For this reason, it should have no significant impact on the tax profile of the investment given the X year duration of the intended tax preferred use of the Property. • The New Lease with XYZ generates approximately X% of the rental income derived by ABC Trust from the Property, with the remaining X% derived from non-tax preferred entities. The Property is also subject to the subleases. • If the Commissioner does not make a determination under section 250-45 of the ITAA 1997, ABC Trust would need to apply Division 250 of the ITAA 1997 to the income attributable to the Division 40 Assets but not to the majority of the rental and other income attributable to the Building and the land component on which the Building sits. This would result in ABC Trust having to apply Division 250 of the ITAA 1997 to a minority portion of its total income with respect to the lease arrangement, which would be a significant compliance burden, as the deemed loan treatment prescribed under Division 250 of the ITAA 1997 would have to be applied on an asset by asset basis with respect to all depreciating assets on the fixed asset register. Financial benefits (being the rent payments for the Property) would have to be allocated to each individual asset, and new deemed loans would have to be created on the replacement of any assets over the lease term. Taking these factors into account, the Commissioner considers that ABC Trust's circumstances in relation to the Division 40 Assets are not in the nature of those arrangements of which Division 250 of the ITAA 1997 was intended to apply. | Detailed Reasoning - Conclusion: Therefore, the Commissioner would, under section 250-45 of the ITAA 1997, make a determination that it would be unreasonable for Division 250 of the ITAA 1997 to apply to ABC Trust and the Division 40 Assets that form part of the Property that is leased to XYZ.