Private ruling: Redemption of units and adjustment to the redemption price
Published: July 2012
Ruling period: The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 2 | If the answer to Question 1 is no, does another CGT event (e.g. CGT Event C2 or H2) occur upon receipt of such amount? | Answer | Yes, a separate CGT event C2 happens upon receipt of such amount. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed. | Question 3 | If Fund A receives an amount under the Deed entered into on or after 1 July 2010, will such an amount be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply? | Answer | Yes. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed entered into on or after 1 July 2010. | Question 4 | If Fund A is obligated to make a payment under the Deed, whether the capital proceeds received in respect of the CGT event involving the redemption of units will be reduced in accordance with the repaid rule in section 116-50 of the Income Tax Assessment Act 1997 (ITAA 1997). | Answer | No. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the fifth income year (starting from and including the income year in which the payment is incurred) from when payment of the Amount occurs in accordance with the Deed. | Question 5 | If the answer to Question 4 is no, is Fund A able to obtain a deduction in accordance with section 40-880 of the ITAA 1997 for any payment made under: | (a) the Deed entered into before 1 July 2010? | Answer | Yes. The amount of the payment would be eligible for deductibility over five years under subsection 40-880(2) of the ITAA 1997, subject to the potential limitations imposed by subsection 40-880(3) of the ITAA 1997 and paragraph 40-880(5)(j) of the ITAA 1997. | (b) the Deed entered into on or after 1 July 2010? | Answer | No. If Fund A is obligated to make a payment under the Deed entered into on or after 1 July 2010 the amount of the payment would not be eligible for deductibility under subsection 40-880(2) of the ITAA 1997. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the fifth income year (starting from and including the income year in which the payment is incurred) from when payment of the Amount occurs in accordance with the Deed. | Question 6 | If the answer to Question 5(b) is no, is Fund A able to obtain a tax deduction in accordance with subsection 230-15(2) of the ITAA 1997 for any payment under the Deed entered into on or after 1 July 2010? | Answer | Yes, Fund A will be able to claim a tax deduction for this payment under subsection 230-15(2) of the ITAA 1997. | This ruling applies for the following period | The years commencing with the income year ended 30 June 2010 and ending with the income year in which payment of the Amount occurs in accordance with the Deed.
Date scheme commenced: 1 July 2009

Ruling: Q1: If Fund A receives an amount from Fund B under a Deed, is such an amount additional capital proceeds received in respect of the CGT event involving the redemption of units? | A1: No.

Relevant facts and circumstances: Property Fund is an unlisted unit trust which invests indirectly in real estate assets located in various states and territories in Australia. The investments are made with a long-term objective of deriving and maximising rental yields and capital growth in relation to those investment assets. Property Fund is highly illiquid and in that respect the Trustee does not generally offer a liquidity or redemption facility. Property Fund's deed however provides that the Trustee is not obliged to, but may in its discretion, repurchase units or cause units to be redeemed out of the proceeds of a new issue or in such other circumstances as the Trustee permits. During early 2010, Fund A advised the Trustee that it wished to redeem a portion of its units in the Trust (a number of other unit holders had also advised the Trustee of their wish to redeem units in Property Fund). In considering a redemption request by a unit holder, the Trustee has to have regard to its fiduciary obligation to other unit holders. In this respect, the Trustee had regard to the available funds of the Property Fund and amounts that potential investors may decide to invest into the Fund. On 1 April 2010, Fund B subscribed for $XX of units (New Units) in Property Fund. Fund B subscribed for further additional units in Property Fund in July 2010 and December 2010. Each subscription for New Units in the Property Fund was governed by a separate Subscription Deed. The Trustee used the proceeds of each subscription to fund the partial redemption of the unit holdings of a number of existing investors including Fund A (Exiting Investors). Property Fund's deed provides that the price at which the Trustee repurchases units or causes units to be redeemed is a price agreed by the Trustee and the unit holder, and may provide for an exit fee and/or redemption provision. Trusts in which Property Fund has an interest have been involved in a legal dispute which currently remains unresolved. This dispute was in existence at the time Fund B sought to subscribe for the New Units. It was uncertain as to whether the outcome of the legal dispute would be in the Trustee's favour, such that it would receive payment as a result of the dispute, or whether the Trustee would be unsuccessful and therefore be required to make payments. Under both scenarios, it was anticipated that the outcome could have a material effect on the value of the assets of the Property Fund, and therefore the relevant Unit Value. The parties agreed that both the benefit of a successful outcome to the legal dispute and the detriment of an unsuccessful outcome was to be borne by the Exiting Investors, and that Fund B should not be financially exposed to the outcome of the dispute. Each Exiting Investor therefore entered into a separate Adjustment Deed with the Trustee and Fund B as part of each subscription for New Units. Completion of the Subscription Deed was conditional upon the Trustee and Fund B each receiving executed copies of the Adjustment Deeds from the Exiting Investors. It is noted that, although there were some differences, the Adjustment Deeds that were entered into by Fund A in April 2010, July 2010 and December 2010 were materially similar. In light of this, a reference in this Ruling to the Adjustment Deed is, unless otherwise specified, a reference to each of the three deeds which Fund A has entered into with Fund B and the Trustee.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 116-20 | Income Tax Assessment Act 1997 Section 116-25 | Income Tax Assessment Act 1997 Section 116-50 | Income Tax Assessment Act 1997 Section 118-27 | Income Tax Assessment Act 1997 Section 230-15 | Income Tax Assessment Act 1997 Section 230-45 | Income Tax Assessment Act 1997 Section 230-55 | Income Tax Assessment Act 1997 Section 230-70 | Income Tax Assessment Act 1997 Section 230-75 | Income Tax Assessment Act 1997 Section 230-100 | Income Tax Assessment Act 1997 Section 230-110 | Income Tax Assessment Act 1997 Section 230-115 | Income Tax Assessment Act 1997 Section 230-130 | Income Tax Assessment Act 1997 Section 230-135 | Income Tax Assessment Act 1997 Section 230-170 | Income Tax Assessment Act 1997 Section 230-460 | Income Tax Assessment Act 1997 Section 230-505 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: If Fund A receives an amount from Fund B under the Deed such an amount is not additional capital proceeds received in respect of the CGT event involving the redemption of units. | Detailed Reasoning - Redemption of units in Property Fund: Subsection 104-25(1) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a convertible interest - being converted The time of the event is when a taxpayer enters into the contract that results in the asset ending. If there is no contract, the time of the event is when the asset ends (subsection 104-25(2) of the ITAA 1997). A unit that Fund A held in Property Fund is an intangible CGT asset. CGT event C2 occurred when each of these units was redeemed by Property Fund. Subsection 104-25(3) of the ITAA 1997 provides that a capital gain or capital loss from CGT event C2 is determined by calculating the difference between the capital proceeds received or to be received on the happening of the CGT event and the cost base/reduced cost base of the CGT asset. Under subsection 116-20(1) of the ITAA 1997, the capital proceeds from a CGT event are the total of the money received (or entitled to be received) and the market value of property received (or entitled to be received) in respect of the event happening. | Detailed Reasoning - 'In respect of' the CGT event happening: If Fund A receives an amount from Fund B under the Deed, it is necessary to consider whether this amount may be considered additional capital proceeds 'in respect of' the original redemption of Property Fund units by Fund A and the associated occurrence of CGT event C2. Alternatively, such an amount may be considered to be more appropriately referrable to the rights created under the Deed and the happening of a separate CGT event upon the satisfaction of these rights. Taxation Ruling TR 2010/4 provides the following guidance on the meaning of the phrase 'in respect of', in the context of determining whether a dividend declared or paid by a company to a shareholder, who has disposed of shares, will constitute capital proceeds from the disposal of the shares, for the purposes of section 104-10 of the ITAA 1997: 53. The prepositional phrase 'in respect of' usually connotes a connection of the broadest kind. When used within a statutory provision, the words 'in respect of' are capable of having: the widest possible meaning of any expression intended to convey some connexion or relation between the two subject matters to which the words refer (per Taylor J of the High Court of Australia in State Government Insurance Office (Qld) v. Crittenden (1966) 117 CLR 412 at 416; a case concerning personal injury insurance and the associated legislation). 54. Legislative history throws further light on the question. Section 116-20 of the ITAA 1997 re-enacts former provisions in section 160ZD of the ITAA 1936 defining the previous equivalent of 'capital proceeds', namely, consideration. Section 160ZD of the ITAA 1936 had identified 'the consideration in respect of the disposal of an asset' as 'the sum of the amounts of money' or 'the market value of property' a taxpayer 'has received or is entitled to receive' ' as a result of or in respect of the disposal' (emphasis added). The expression 'as a result of' denotes a causal relationship; the addition of the words 'in respect of' had the effect of extending the possible connection between the receipt of money or property and a disposal still further. Consequently, under the former section 160ZD of the ITAA 1936, the connection between disposal and the receipt of money or property which might suffice to constitute the money or property consideration for the purposes of that Act was very broad indeed, including both causal connections and other connections. Section 1-3 of the ITAA 1997 states that, where a previous provision has been re-enacted in 'a different form of words in order to use a clearer or simpler style', the ideas expressed by the Acts are not taken to be different just because the words are different. This is such a case. Thus nothing in the legislative history of this provision suggests that 'capital proceeds' is an expression to be construed narrowly, and so confined to money and property received from the purchaser in the legal form of a price for the sale of shares. 55. Nevertheless, despite the apparent breadth of the connection between a dividend and a disposal of shares, the words 'in respect of' do not automatically embrace any connection between the two subject matters to which they refer; they take on a meaning shaped by the context in which they appear (Federal Commissioner of Taxation v. Scully (2000) 201 CLR 148 at 171)… It is also relevant in the current circumstances to note that consideration received or receivable from a 'third party' may constitute capital proceeds in respect of the CGT event, provided there is a sufficient nexus between the consideration received and the CGT event. Such a scenario is highlighted in ATO Interpretative Decision ATO ID 2001/308 in which it was concluded that the capital proceeds from the cancellation of shares and CGT event C2 included an amount received or receivable from a 'third party' (i.e. not from the company in which the shares were cancelled) as it was considered that the requisite connection was established by a Share Sale Agreement. Various approaches have been used to help determine whether consideration received or receivable is 'in respect of' a specific CGT event. The 'look-through' approach is one such approach, which as described in Taxation Ruling TR 95/35 which considers the treatment of compensation receipts, is the process of identifying the most relevant asset. In the context of TR 95/35 this requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. Draft Taxation Ruling TR 2007/D10, which considers the tax consequences of earnout arrangements, elaborates on the application of the 'look-through' approach as it explains in paragraphs 84 to 87: 84. The 'look-through approach' is informed in large part by the approach taken by the UK High Court of Justice in Zim Properties Ltd v. Proctor (Inspector of Taxes ) (1984) 129 Sol Jo 68; 58 TC 371 ( Zim Properties ). In that case, the taxpayer had contracted to sell certain property. However, the buyer was able to repudiate the contract because the taxpayer could not show good title to the property. The taxpayer then sued its solicitors for negligence and was awarded an amount of compensation for that negligence. It fell to the court to determine from which asset a settlement sum was derived, the underlying real property or the taxpayer's right to compensation. 85. Warner J considered that the choice of which was the most relevant asset depended on the 'reality of the matter'. While acknowledging the availability of a 'look-through approach' in appropriate circumstances, he concluded on the facts before him that the settlement amounts paid by the solicitors were not derived from the real estate but were derived from the right to sue, which was itself an asset. 86. In Taxation Ruling TR 95/35 the Commissioner stated that one of the principles underlying the interpretation of CGT law is the 'most relevant asset approach'. This approach is described as a process of analysing all the possible assets of a taxpayer to determine the asset to which the capital proceeds received (or entitled to be received) by that taxpayer most directly relates. 87. A further application of the general principle set out in TR 95/35 is the 'continuum of events approach' adopted by the Commissioner in Taxation Ruling TR 1999/19. In effect, this approach provides that it is only possible to relate capital proceeds to a CGT event happening to an underlying asset when they are received in the course of the same 'continuum of events' as that CGT event. Taxation Ruling TR 1999/19 explains the CGT implications of this approach to certain land transactions in which the vendor retains a forfeited deposit. It states that, depending on the circumstances, where a vendor of land retains a forfeited deposit, it may properly be regarded as part of the proceeds of a later, successful sale of that land, rather than from the disposal of contractual rights (or a right to compensation) under the original, failed contract of sale. It is evident from the above extracts that what constitutes capital proceeds in respect of a CGT event is a question of fact which takes into account, among other things, the features that the relevant provision prescribes as defining the CGT event. In the context of CGT event C2 in section 104-25 of the ITAA 1997, in the absence of a contract, this would include identifying what caused the asset to end and when. In this case, the intangible CGT asset, Fund A's units in Property Fund, end in accordance with the terms of Property Fund's trust deed, which provides that the units may be redeemed out of the proceeds of a new issue of units, the price of which is to be calculated by reference to the net value of Property Fund. Thus the CGT event C2 which happens as a result of the redemption of the units occurs according to the terms prescribed by Property Fund trust deed. In this case therefore determining what constitutes the capital proceeds from this occurrence of CGT event C2 comes down to establishing whether or not Fund A's rights under the Deed, and any payment received pursuant thereto, should be characterised as an integral aspect of the redemption process or more appropriately as part of an independent transaction. In the current circumstances, there is an evident, over-arching connection between the redemption of the units in Property Fund by Fund A and the execution of the Deed (and the rights and obligations arising from same) as the parties seek to 'adjust' the value/consideration that Fund A received from the redemption of its units in Property Fund (and correspondingly the subscription monies paid by Fund B) to take into account the outcome of the legal dispute. This connection is reinforced by the fact that the redemption of Fund A's units (which caused CGT event C2 to occur) was subject to and funded by the subscription of monies from Fund B which in turn was conditional on the execution of the Deed (and the rights therein). In contrast however, the following attributes suggest that the Deed (and its associated rights) is the 'most relevant asset' in relation to a payment received by Fund A from Fund B under the Deed. The following features indicate that the receipt of such a payment does not constitute capital proceeds received 'in respect of' the CGT event C2 that occurred as a result of the redemption of Property Fund units but is more appropriately referrable to an independent transaction: The Deed (and its associated rights including the right to payment) is a separate agreement primarily between Fund A and Fund B. The issue and redemption of Fund A's units in Property Fund occurred effectively independently of the Deed under the terms of the trust deed of Property Fund and at the sole discretion of the trustee; Whether a payment is to be made under the Deed is directly linked to the legal dispute, a litigation matter, and the future costs/receipts stemming from the same. The redemption of the units previously held by Fund A in Property Fund is merely a precursory factual matter instigating the creation of the Deed; and Although Property Fund was a party to the Deed, its responsibilities under this agreement are largely of an administrative nature, for example calculating the Amount. In addition, it is also considered that any payment received under the Deed would not be regarded as occurring in the same 'continuum of events' as the CGT event C2 resulting from the redemption of the units. This is because the potential 'gap' between such a payment under the Deed and the redemption of units does not relate to the original units in Property Fund and/or the prior occurrence of CGT event C2 associated with the redemption of these units. In contrast it stems from an outstanding litigation matter that is occurring separately and does not affect the redemption of units nor the prior CGT event. Overall, taking into consideration the above attributes, it is considered that, although a general link exists between a payment received under the Deed and the units redeemed by Fund A in Property Fund, the Deed (and its associated rights including the right to payment) is the 'most relevant asset' connected with this payment. It is considered that Fund A and Fund B have effectively entered into a financial arrangement that is largely independent of the redemption of units. The arrangement in this instance is primarily focussed on the outcome of the legal dispute. Although a payment made under the Deed is predicated on the redemption of Fund A's units in the Property Fund (and the consideration received from same), this link is not sufficient to look-through the rights created under the Deed and treat this payment as capital proceeds received or receivable in respect of the CGT event C2 that occurred as a result of the redemption of the units in Property Fund. | Summary: If Fund A receives an amount from Fund B under the Deed, a separate CGT event C2 happens upon receipt of such amount. | Detailed Reasoning - Detailed reasoning: Subsection 108-5(1) of the ITAA 1997 defines a CGT asset as: (a) any kind of property; or (b) a legal or equitable right that is not property. Note 1 to section 108-5 of the ITAA 1997 relevantly provides the following examples of CGT assets: · land and buildings; · shares in a company and units in a unit trust; · options; · debts owed to you; · a right to enforce a contractual obligation; · foreign currency. As an intangible asset, the right to a potential payment created in Fund A by the Deed is considered to be a CGT asset in the form of a contractual right (a right to enforce a contractual obligation). If Fund B is required to make a payment to Fund A under the Deed, this right to a potential payment will be satisfied and CGT event C2 will occur. | Summary: If Fund A receives an amount under the Deed entered into on or after 1 July 2010, such an amount will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply. | Detailed Reasoning - Detailed reasoning: Division 230 of the ITAA 1997 applies to income years commencing on or after 1 July 2010 (where no election for it to start one year earlier has been made). Division 230 of the ITAA 1997 brings to account gains and losses on financial arrangements. | Detailed Reasoning - Arrangement: In order to determine whether gains and losses arise under a financial arrangement, it is first necessary to identify the relevant 'arrangement'. An 'arrangement' is defined in subsection 995-1(1) of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.' The scope of the arrangement for the purposes of Division 230 of the ITAA 1997 is determined by subsection 230-55(4) of the ITAA 1997. Generally, under section 230-55 of the ITAA 1997, a contract will define the boundaries of an arrangement, especially where the form of the contract is consistent with its substance. Paragraph 2.47 of the Explanatory memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (EM) provides that: 2.47 The various rights and obligations subsisting under a contract will typically constitute the relevant arrangement for the purposes of Division 230. That is, the contract is typically viewed on a 'stand-alone' basis. In this context, the contract is neither aggregated with another contract (or contracts), nor disaggregated into component parts, when determining the relevant arrangement to be considered under Division 230. Fund A has submitted that the Deed entered into on or after 1 July 2010 should not be treated as separate from each arrangement to dispose of or redeem units in the Property Fund. However, since the rights and obligations under the Deed entered into on or after 1 July 2010 arise under a single contract, it will prima facie be viewed on a 'stand-alone' basis for the purposes of Division 230 of the ITAA 1997. Having regard to each of the factors listed in subsection 230-55(4) of the ITAA 1997, the Deed entered into on or after 1 July 2010 should be regarded on a stand-alone basis for the purposes of Division 230 of the ITAA 1997. It is considered that the following matters support this conclusion: · The Deed entered into on or after 1 July 2010 arises in a separate contract to the arrangement to dispose of or redeem units. · The parties to the Deed entered into on or after 1 July 2010 differ from those to the arrangement to dispose of or redeem units. · The Deed entered into on or after 1 July 2010 allows Fund A to assign any of its rights under the Deed with the express consent of the other party. This indicates that while the Deed and the arrangement to dispose of or redeem units are related in form, in substance they are treated as separate bundles of rights and obligations which be dealt with separately and without reference to the other. · The rights and obligations of Fund A under the Deed entered into on or after 1 July 2010 are commercially understood to be separate from those under the arrangement to dispose of or redeem units. | Detailed Reasoning - Financial arrangement: Since the only non-insignificant rights and obligations contained within the Deed entered into on or after 1 July 2010 are cash settlable, it will be a financial arrangement under section 230-45 of the ITAA 1997. | Detailed Reasoning - Exceptions: Division 230 of the ITAA 1997 does not apply to gains and losses from a financial arrangement to the extent that an entity's rights and obligations under the arrangement are the subject of an exception under section 230-460 of the ITAA 1997 (see subsection 230-460(1)). Subsection 230-460(8) of the ITAA 1997 provides that a right or obligation under a guarantee or indemnity is the subject of an exception unless, among other things, the guarantee or indemnity is given in relation to a financial arrangement. Even if the Deed entered into on or after 1 July 2010 is an indemnity according to the ordinary meaning of 'indemnity', it will still be an indemnity that is given in relation to a financial arrangement (i.e. the arrangement to dispose of or redeem the units or the units themselves) and so this exclusion will not apply. Further, the exception in subsection 230-460(13) of the ITAA 1997 which deals with proceeds from certain business sales will not apply because any obligation to make a payment under the Deed does not relevantly arise from the sale of a business or interests in a trust that operates a business. It follows that Division 230 of the ITAA 1997 will bring to account gains and losses from the Deed entered into on or after 1 July 2010. | Detailed Reasoning - Sufficiently certain particular gain: The accruals method will apply to a gain made from a financial arrangement if: · the gain arises from a financial benefit that the entity is to receive under the arrangement, and · the gain becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to receive the benefit (subsection 230-100(3) of the ITAA 1997). Fund A will have a sufficiently certain gain from a financial arrangement at a particular time if it is sufficiently certain at that time that Fund A will make a gain from the Deed entered into on or after 1 July 2010 of a particular amount when it receives a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997). Whether or not Fund A will make a gain from the arrangement of a particular amount when it receives a particular financial benefit depends upon whether there is any financial benefit provided, or to be provided, that is reasonably attributable to the receipt of the Amount under the Deed entered into on or after 1 July 2010 (section 230-75 of the ITAA 1997). Given that there is no financial benefit to be provided under this arrangement, if a financial benefit is received, it will be a gain in its entirety. | Detailed Reasoning - The time when the financial benefits are sufficiently certain: In deciding whether it is sufficiently certain at a particular time that Fund A will make a gain from a financial arrangement, only sufficiently certain financial benefits are to be considered. A financial benefit is treated as one that Fund A is sufficiently certain to receive only if: · it is reasonably expected that Fund A will receive the financial benefit (assuming that Fund A will continue to have the financial arrangement for the rest of the financial arrangement's life), and · at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997). The latest time at which the Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date. | Detailed Reasoning - Period over which the gain is to be spread: The period over which the gain is to be spread is the period to which the gain relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement. | Detailed Reasoning - How is the gain spread?: The gain will be spread using a method of the type described in 230-135(2) of the ITAA 1997. | Detailed Reasoning - Conclusion: An amount received by Fund A under the Deed entered into on or after 1 July 2010 will be a gain to which the accruals method under section 230-100 of the ITAA 1997 will apply. | Summary: If Fund A is obligated to make a payment under the Deed, such amount is not a repayment under section 116-50 of the ITAA 1997 of the capital proceeds received by Fund A when CGT event C2 happened upon the redemption of units in Property Fund. | Detailed Reasoning - Detailed reasoning: Section 116-50 of the ITAA 1997 headed the 'repaid rule: modification 4' contains a modification (number 4) to the general rules regarding 'capital proceeds' contained in section 116-20 of the ITAA 1997. It is noted that the modification mentioned above applies to capital proceeds received from CGT event C2 (as per the table in section 116-25 of the ITAA 1997). The terms 'repay' (paragraph 116-50(1)(a) and 'repayment' (paragraph 116-50(1)(b)) are not defined in the ITAA 1936 or ITAA 1997 and take their ordinary meaning. The Australian Oxford Dictionary , 2004, rev. 2 nd edn, Oxford University Press, Melbourne defines 'repay' as: · pay back (money); · return ( a blow, visit, etc); · make repayment to (a person); · make return for, requite (a service, action, etc.)( must repay their kindness; the book repays close study); · give in recompense. · make repayment. Repayment is the noun associated with the verb 'repay'. The term 'repay' contemplates a repayment or return to the original provider of the capital proceeds and in relation to the same event that generated the capital proceeds. The capital proceeds received by Fund A (from the redemption of its units in Property Fund and the related occurrence of CGT event C2) were the monies received from the Property Fund determined in accordance with the trust deed of the Property Fund. The Deed sets out the circumstances in which Fund A will be required to make a payment to Fund B. It is evident that the key variable that will determine whether Fund A is required to make a payment to Fund B is the losses incurred and amounts received by the Property Fund in connection with the legal dispute. It is highlighted that the ability for Fund A to satisfy its obligation under the Deed via the transfer of units in Property Fund will not automatically preclude the application of the repaid rule in section 116-50 of the ITAA 1997, as subsection 116-50(2) of the ITAA 1997 states that payment can include the giving of property. However, in the current circumstances it is considered that an amount paid under the Deed is not a repayment of the redemption proceeds nor compensation for such amounts and that therefore it cannot be regarded as a repayment of the capital proceeds received by Fund A from the redemption of units and the associated occurrence of CGT event C2. This is because a payment made under the Deed is made to discharge a separate and independent obligation which is primarily linked to the outcome of the legal dispute. This payment is not a repayment (directly or in compensatory form) of the monies received from the Property Fund from the redemption of the units. | Summary: (a) If Fund A is obligated to make a payment under the Deed entered into before 1 July 2010 (but after 30 June 2005) the amount of the payment would, subject to the potential limitations imposed by subsection 40-880(3) of the ITAA 1997 and paragraph 40-880(5)(j) of the ITAA 1997, be eligible for deductibility under subsection 40-880(2) of the ITAA 1997. (b) If Fund A is obligated to make a payment under the Deed entered into on or after 1 July 2010 the amount of the payment would not be eligible for deductibility under subsection 40-880(2) of the ITAA 1997. 5(a) Deed entered into before 1 July 2010 Section 40-880 of the ITAA 1997 potentially applies to a payment made under clause 5.2(a) of the Deed entered into before 1 July 2010 because the expenditure in question will be incurred after 30 June 2005: see section 3 and Schedule 2 Item 51(1) to the Tax Laws Amendment (2006 Measures No.1) Act 2006 . Subject to the limitations and exceptions, which are contained in subsections 40-880(3) to (9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) to liquidate or deregister a company of which you were a *member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business. On the facts of this case, there is no issue of a payment made under the Deed entered into before 1 July 2010 being expenditure incurred in relation to a business that used to be carried on (paragraph 40-880(2)(b) of the ITAA 1997) or a business proposed to be carried on (paragraph 40-880(2)(c) of the ITAA 1997). Further, there is no issue of paragraph 40-880(2)(d) of the ITAA 1997 applying on the facts. Accordingly, this part of the Ruling considers whether paragraph 40-880(2)(a) is satisfied. The key requirements of this provision and their application to a payment made by Fund A under the Deed entered into before 1 July 2010 are considered below: | Detailed Reasoning - Capital expenditure: Taxation Ruling TR 2011/6 sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880 of the ITAA 1997. Paragraphs 64 to 68 of TR 2011/6 set out general principles of what is 'capital expenditure': 64. The expression 'capital expenditure' is not a defined term. Whether expenditure is capital in nature is determined on the facts of each particular case having regard to the principles established by the case law. 66. The classic test for determining whether expenditure is of a capital or revenue nature is explained in the following passage from the judgment of Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938)1 AITR 403 ( Sun Newspapers ): There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay... 67. The character of the advantage sought provides important direction. It provides the best guidance as to the nature of the expenditure as it says the most about the essential character of the expenditure itself. This was emphasised in the decision of the High Court in G.P. International Pipecoaters v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1. 68. If expenditure produces some asset or advantage of a lasting character for the benefit of the business it will be considered to be capital expenditure. As stated in Sun Newspapers at 355 per Latham J, an enduring benefit does not require that the taxpayer obtain an actual asset, it may be a benefit which endures, in the way that fixed capital endures…. A payment made under the Deed entered into before 1 July 2010 will be on capital account for the following reasons: An amount paid by Fund A to Fund B will be made in satisfaction of an obligation under the Deed entered into before 1 July 2010 and will reflect a proportion of the losses in connection with resolution of the Dispute which in turn relates to the redemption by Fund A in 2010 of units in Property Fund held by Fund A on capital account; The intent behind the payment is to effect a permanent or enduring advantage by ensuring there is a true accounting of the value of Fund A's unit holdings in Property Fund which in turn accurately reflects each current and future member's interest in Fund A; The payment is once and for all, not a periodic payment. | Detailed Reasoning - Incurred: Paragraph 12 of TR 2011/6 sets out the meaning of 'incurred': 12. There is no statutory definition of the term 'incurred' however the principles established by case law regarding the meaning of the word 'incurred' in section 8-1 also apply to section 40-880. In other words, a taxpayer incurs expenditure at the time they owe a present money debt that they cannot avoid paying. Fund A will 'incur' the relevant expenditure if the Amount is negative and the relevant expenditure becomes payable under clause 5.2(a) of the Deed entered into before 1 July 2010. | Detailed Reasoning - In relation to your business: Paragraph 20 of TR 2011/6 explains that subsection 40-880(2) of the ITAA 1997 requires identification of the business in relation to which the relevant capital expenditure was incurred. The word 'business', as defined at subsection 995-1(1) of the ITAA 1997, is used throughout section 40-880. The nature and scope of a business for the purposes of the section is a question of fact in each case. Paragraph 10 makes it clear that if the expenditure relates to an existing business then the entity that incurs the expenditure is only entitled to a deduction if they are carrying on that business. Based on the facts of this case, it is considered that Fund A is carrying on a business and that there is a sufficient and relevant connection between Fund A's incurrence of the capital expenditure on a payment under the Deed entered into before 1 July 2010 and the business the taxpayer carries on. | Detailed Reasoning - Taxable purpose: Subsection 40-880(3) limits the availability of the deduction for the expenditure to the extent that it relates to the business being carried on for a 'taxable purpose'. The definition of 'taxable purpose' is provided by subsection 40-25(7) of the ITAA 1997 and covers various purposes, including the purpose of producing assessable income. The term 'purpose of producing assessable income' is further defined in subsection 995-1(1) of the ITAA 1997 as being something done: · for the purpose of gaining or producing assessable income; or · in carrying on a business for the purpose of gaining or producing assessable income. Paragraphs 159, 161 and 162 of TR 2011/6 further explain the application of the taxable purpose test as they state: 159. If, at the time the taxpayer incurs the expenditure, the business in relation to which the expenditure is incurred is carried on wholly for a taxable purpose and there are no proposals or plans for activities from which exempt income or non-assessable non-exempt income could be derived, then no apportionment will be required under subsection 40-880(3) or paragraph 40-880(4)(a). 161. The legislation does not prescribe a particular methodology to determine the extent of the taxable purpose of the business. The 2006 Explanatory Memorandum is also silent as to how an apportionment under subsection 40-880(3) and paragraph 40-880(4)(a) is made. In the absence of a prescribed method of apportionment the Commissioner will accept an apportionment made on a fair and reasonable basis. 162. As a general rule, the extent to which a business is, was or is proposed to be carried on for a taxable purpose is determined by comparing the amount of any exempt income and non-assessable non-exempt income the business has derived or will derive with total income (that is, assessable income plus exempt income plus non-assessable non-exempt income). This percentage is then applied to the amount of expenditure to reduce the deduction. In the current circumstance, taking into consideration the current nature of Fund A's business operations, the limitation imposed by subsection 40-880(3) of the ITAA 1997 could have application. Fund A will therefore need to determine, at the time that any payment is made under clause 5.2(a) of the Deed entered into before 1 July 2010, the extent to which the business is carried on for a taxable purpose by reference to all known and predictable facts in all years. If the business at the time the expense is incurred, is not carried on wholly for a 'taxable purpose', the amount that Fund A can deduct under section 40-880 of the ITAA 1997 will need to be adjusted accordingly. | Detailed Reasoning - Limitations and exceptions: Subsections 40-880(5) to 40-880(9) of the ITAA 1997 set out further limitations and exceptions to the amount that can be deducted under section 40-880 of the ITAA 1997. Paragraph 2.17 of the Explanatory memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill explains the function of subsection 40-880(5) to 40-880(9) of the ITAA 1997 as follows: There are a number of exceptions which require, in effect, that the expenditure must not be taken into account in some way elsewhere in the income tax law. This means that the expenditure would not already be deductible, capitalised, amortised or capped in some way under another provision. The expenditure must also not be denied a deduction, including by limiting or capping the deduction, elsewhere in the tax law. Accordingly, the purpose of subsections 40-880(5) to 40-880(9) of the ITAA 1997 is to prevent a deduction being allowed under section 40-880 for expenditure that is otherwise taken into account or specifically excluded from deduction under the income tax law. On the facts of this case, only paragraphs 40-880(5)(d), 40-880(5)(f) and 40-880(5)(j) of the ITAA 1997 need relevantly be considered. | Detailed Reasoning - Paragraph 40-880(5)(d) of the ITAA 1997: Paragraph 40-880(5)(d) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it is in relation to a lease or other legal or equitable right. Paragraph 47 of TR 2011/6 explains: 47. The existence of paragraphs 40-880(5)(a) and 40-880(5)(f) and section 25-110 mean that paragraph 40-880(5)(d) has limited practical application. It applies to expenditure incurred on or after 1 July 2005 that has a sufficient and relevant connection to a lease or right held by an entity other than the taxpayer. The 'rights' in question do not include all legal rights but only those similar to leases in that they give the taxpayer a right to exploit the asset with which the right is associated. In other words, the right is carved out of an asset but falls short of full ownership of the asset. Examples of such rights include profits à prendre, easements and other rights of access to land. The rights however are not limited to rights associated with land. Taking the above in consideration, the facts of this case and the nature of the payment pursuant to the Deed entered into before 1 July 2010, it is considered that the deductibility of such a payment would not be excluded by operation of this paragraph. | Detailed Reasoning - Paragraph 40-880(5)(f) of the ITAA 1997: Paragraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that it could be taken into account in working out the amount of capital gain or capital loss from a CGT event. Generally, two factors: capital proceeds and cost base (or reduced cost base) are taken into account in working out a capital gain or capital loss from a CGT event (section 100-40 of the ITAA 1997). In current circumstances, it is considered that a payment made under the Deed will not be taken into account in working out the amount of capital gain or capital loss from a CGT event that affects Fund A because: · as discussed above, any payment Fund A would be obligated to make under the Deed entered into before 1 July 2010 will not constitute a reduction or repayment of the capital proceeds under section 116-50 of the ITAA 1997 that were received when CGT event C2 happened upon redemption of the units; and · the obligation to make a payment under the Deed entered into before 1 July 2010 is not a CGT asset (as defined in subsection 108-5(1) of the ITAA 1997) of Fund A. Therefore, paragraph 40-880(5)(f) of the ITAA 1997 will not operate to exclude the expenditure from deduction under section 40-880 of the ITAA 1997. | Detailed Reasoning - Paragraph 40-880(5)(j) of the ITAA 1997: Paragraph 40-880(5)(j) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it is incurred in relation to gaining or producing *exempt income or *non-assessable non-exempt income. Paragraphs 294 and 295 of TR 2011/6 elaborate on the application of this exception as they state: 294. Where expenditure is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income and an apportionment is required under subsection 40-880(3) or 40-880(4) (because the relevant business or aspect of the business was not carried on wholly for a taxable purpose) this does not mean that the section 40-880 deduction is reduced twice. 295. The interaction of subsection 40-880(3) or 40-880(4) and paragraph 40-880(5)(j) results in only one reduction under these respective provisions to the amount that a taxpayer can deduct under section 40-880. As discussed above in relation to the application of subsection 40-880(3) of the ITAA 1997, Fund A will need to consider this attribute at the time that any payment is made under the Deed entered into before 1 July 2010 and, where necessary, adjust the amount that can be deducted under section 40-880 of the ITAA 1997 accordingly. | Detailed Reasoning - Conclusion: As the expenditure incurred under the Deed entered into before 1 July 2010 satisfies the conditions for eligibility for a deduction under section 40-880 of the ITAA 1997, any payment Fund A would be liable to make to Fund B under the Deed entered into before 1 July 2010 contingent upon the outcome of the Dispute would, subject to the potential limitations imposed by subsection 40-880(3) of the ITAA 1997 and paragraph 40-880(5)(j) of the ITAA, be eligible for deductibility over five years under subsection 40-880(2) of the ITAA 1997. 5(b) Deed entered into on or after 1 July 2010 | Detailed Reasoning - No deduction under section 40-880 of the ITAA 1997 if otherwise deductible: Paragraph 40-880(5)(b) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that you can deduct an amount for it under any other provision in the Act. The analysis in Question 6 provides that any payment under the Deed entered into on or after 1 July 2010 will be deductible under subsection 230-15(2) of the ITAA 1997. As a consequence paragraph 40-880(5)(b) of the ITAA 1997 will operate to deny a deduction under section 40-880 of the ITAA 1997 in respect of any payment Fund A makes under the Deed entered into on or after 1 July 2010. | Summary: If the answer to Question 5(b) is no, Fund A is able to obtain a tax deduction in accordance with subsection 230-15(2) of the ITAA 1997 for any payment under the Deed entered into on or after 1 July 2010. | Detailed Reasoning - Detailed reasoning: The relevant arrangement and financial arrangement for the purposes of Division 230 of the ITAA 1997, being the Deed entered into on or after 1 July 2010 was discussed in Question 3, and this reasoning remains relevant here. Division 230 of the ITAA 1997 will bring to account losses on the Deed entered into on or after 1 July 2010. | Detailed Reasoning - Sufficiently certain particular loss: The accruals method will apply to a loss made from a financial arrangement if: · the loss arises from a financial benefit that the entity is to provide under the arrangement, and · the loss becomes sufficiently certain after the time when the entity started to have the arrangement and before the entity is to provide the benefit (subsection 230-100(3) of the ITAA 1997). Fund A will have a sufficiently certain loss from a financial arrangement at a particular time if it is sufficiently certain at that time that it will make a loss from the arrangement of a particular amount when it provides a particular financial benefit under the arrangement (subsection 230-110(1) of the ITAA 1997). Whether or not Fund A will make a loss from the arrangement of a particular amount when it provides a particular financial benefit depends upon whether there is any financial benefit received, or to be received, that is reasonably attributable to the payment of the Amount under the Deed entered into on or after 1 July 2010 (section 230-70 of the ITAA 1997). Given that there is no financial benefit to be received under this arrangement, if a financial benefit is provided, it will be a loss in its entirety. Thus a payment of the Amount under the Deed entered into on or after 1 July 2010 will give rise to a loss for Fund A when the payment is provided. | Detailed Reasoning - Sufficiently certain financial benefits: However, in deciding whether it is sufficiently certain at a particular time that Fund A will make a loss from a financial arrangement, only sufficiently certain financial benefits are to be considered. A financial benefit is treated as one that Fund A is sufficiently certain to provide only if: · it is reasonably expected that Fund A will provide the financial benefit (assuming that Fund A will continue to have the financial arrangement for the rest of the financial arrangement's life), and · at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy (subsection 230-115(2) of the ITAA 1997). The latest time at which the Amount would become fixed or determinable with reasonable accuracy is on the Calculation Date. | Detailed Reasoning - Period over which the loss is to be spread: The period over which the loss is to be spread is the period to which the loss relates (subsection 230-130(3) of the ITAA 1997). In working this out, regard must be had to the pricing, terms and conditions of the arrangement. | Detailed Reasoning - How is the loss spread?: The loss will be spread as described above using a method of the type described in 230-135(2) of the ITAA 1997. | Detailed Reasoning - Conclusion: Any payment by Fund A under the Deed entered into on or after 1 July 2010 will be a loss eligible for a deduction under subsection 230-15(2) of the ITAA 1997.

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