Private ruling: Tax implications of a proposed investment
Date of advice: 9 November 2015
Published: January 2016
Ruling period: Income years ending 30 June 2016 to 30 June 2021 inclusive
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the arrangement be considered to be a partnership subject to Division 5 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the Lease granted by the Partnership be re-characterised as a notional sale and loan arrangement? | A2: No | Q3: Will the Partners "hold" the asset for the purposes of determining deductions for the decline in value of the asset under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes | Q4: Will section 40-185 of the ITAA 1997 apply to determine the first element of cost of the asset held respectively by each of the Partners? | A4: Yes | Q5: Is there any tax preferred use of the asset in accordance with Division 250 of the ITAA 1997? | A5: No | Q6: Will the non-commercial loss rules in Division 35 of the ITAA 1997 apply to the Partners such that any losses are deferred until income is generated from the investment in later income years pursuant to section 35-10? | A6: No | Q7: Will the interest on borrowing by the Partners individually to fund the capital contributions be deductible? | A7: Yes | Q8: Will Part IVA apply to the proposed arrangements, or part thereof, such that the Commissioner will determine that all or part of a deduction shall not be allowable? | A8: No

Relevant facts and circumstances: The Partners are seriously contemplating an investment in a commercial asset (the asset). Broadly, the Partners will jointly invest in the proposed investment by purchasing the asset from a third party vendor. A number of draft transaction documents have been provided with the application. Transaction structure Due to the commercial requirements of the transaction, the Partners desire to obtain a direct interest in the asset. As such, each investor will have a direct legal and beneficial interest in the asset (i.e.; as tenants in common) corresponding to the proportion that the relevant investor's investment bears to the total investment of all investors. A company will be established to act as the manager for the proposed investment and also act as the agent of each partner. A finance company will obtain external debt finance for the purposes of the proposed investment from third party financial institutions. The Lenders will provide debt of up to an aggregate of 80% of the purchase price for the asset. The remaining "equity" portion of the purchase price will be funded independently by the investors using their own means (e.g. through external debt, cash etc.). It is expected that the asset will be leased to an Australian company that is not exempt from Australian income tax. Transaction implementation Investment The Manager will be responsible for bringing together investors to invest in the asset. The investors that decide to proceed with the proposed investment will enter into an agreement with all of the investors. The agreement will set out the terms on which each investor will invest its proportion and receive proceeds from its investment. Investment management Each investor and the Manager will enter into an agreement, appointing the Manager as manager of the proposed investment and setting out the services to be provided by the Manager. Broadly, these terms will include: • Services to be provided, including regular reporting, distribution of notices and information, to the investors; • Calculation, receipt and distribution of income; • Co-ordination of meetings, voting and decision making by investors; The investors will pay the Manager fees for the services as well as agreed costs incurred in connection with the services. The investors will indemnify the Manager against all claims, liabilities and losses incurred by the Manager in connection with its role, subject to the usual exceptions like negligence, fraud and wilful misconduct. Servicer The Manager will enter into an agreement appointing a servicer in relation to the asset and the lease, and setting out the services to be provided by the Servicer. The Manager will pay the Servicer fees for the services as well as agreed costs incurred in connection with the services. Agent To simplify administration of the proposed investment, each investor will appoint the Manager as its Agent, authorising it to execute the transaction documents as its agent. Each investor will appoint the Agent: • With the power to hold and deal with the asset as if it were the legal owner; and • To execute as an agent appointed by the investor, the transaction documents to which the Agent is expressed to be a party. The power and authority of the agent includes (but is not limited to): • To execute the purchase agreement of the asset as agent for the investor; • To execute the agreement to lease the asset as agent for the investor; • To execute the Loan Agreement. The appointment as Agent is intended to be as agent only and creates no relationship of trust between the investors and the Agent. It is important to note that it will be a legal agent at law. All rights, titles and interest of each investor will be held by that investor legally and beneficially, albeit that the Agent will execute documents for and in the name of the investors and handle other administrative duties. Debt Funding The finance company and the Lender(s) will enter into a limited recourse loan agreement under which the Lender(s) will loan the finance company an amount approximately 80% (or less) of the purchase price of the asset. The remaining portion of the purchase price will be funded independently by the investors using their own means (e.g. through external debt or cash). Purchase of Asset As an agent for each investor, the Agent will execute a purchase agreement to purchase the asset from the vendors. The purchase agreement, bill of sale and associated documents will be in the name of all investors jointly as legal and beneficial owners of the asset, however will be executed in their name by the Agent as discussed above. The investors will own the asset as tenants in common, taking an interest in the whole equal to their respective proportion. Leasing The investors will lease the asset to an Australian entity. The Agent will execute the lease as agent of each investor. The lease will be structured as an operating lease for tax and accounting purposes. That is: • The term of the lease will be approximately 5 years; • At the end of the term of the lease, the company will not have a right/option, obligation or contingent obligation to purchase the asset, nor will it have input in the manner in which the asset should be dealt with by the investors; and • At the end of the term of the lease, legal title to the asset will not pass to the company. If the asset is sold to the company, the sale process will be undertaken independently, and in particular, the sale price and terms will be negotiated on arm's length terms.

Relevant legislative provisions: Section 6-5 of the ITAA 1997 | Section 8-1 of the ITAA 1997 | Section 35-5 of the ITAA 1997 | Section 35-10 of the ITAA 1997 | Section 35-40 of the ITAA 1997 | Section 35-55 of the ITAA 1997 | Section 40-25 of the ITAA 1997 | Section 40-35 of the ITAA 1997 | Section 40-40 of the ITAA 1997 | Section 40-175 of the ITAA 1997 | Section 40-180 of the ITAA 1997 | Section 40-185 of the ITAA 1997 | Section 106-5 of the ITAA 1997 | Section 110-45 of the ITAA 1997 | Section 240-10 of the ITAA 1997 | Section 250-15 of the ITAA 1997 | Section 250-50 of the ITAA 1997 | Section 250-55 of the ITAA 1997 | Section 250-60 of the ITAA 1997 | Section 250-90 of the ITAA 1997 | Section 995-1 of the ITAA 1997 | Section 177A of the ITAA 1936 | Section 177C of the ITAA 1936 | Section 177CB of the ITAA 1936 | Section 177D of the ITAA 1936 | Section 318 of the ITAA 1936 | Section 336 of the ITAA 1936 | Section 337 of the ITAA 1936

Reasons for decision: Summary: The Commissioner is of the view that the Partnership will be a tax law partnership, and not a general law partnership, for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The term 'partnership' is relevantly defined in paragraph 995-1(1)(a) of the ITAA 1997 as an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly. Therefore there are two limbs within this partnership definition, being: 1. An association of persons carrying on a business as partners which is referred to as a general law partnership. 2. An association of persons being in receipt of ordinary income or statutory income jointly, which is referred to as a tax law partnership. | Detailed Reasoning - 1. General law partnership: The Partnership will be considered to be a general law partnership if the partners' investment in the Asset is considered to be the carrying on of a business as partners. The term 'business' is defined by subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The Commissioner, as per paragraph 10 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production , considers that this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law. Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant: • Whether the activity has a significant commercial purpose or character. • Whether the taxpayer has more than just an intention to engage in business. • Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity. • Whether there is repetition or regularity of the activity. • Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business. • Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit. • The size, scale and permanency of the activity. • Whether the activity is better described as a hobby, a form of recreation or a sporting hobby. However as per the facts provided, the Partnership will not operate the Asset. Instead the investors will lease the asset to a company. The Agent will execute the lease as the agent for each investor. The Agent and a Servicer will be appointed by the Partnership jointly to run and manage the day to day operations of the Asset. The servicer will have operating control and responsibility over the asset on a day to day basis including operation, management and all other maintenance and administration of the Asset. On that basis, the Commissioner accepts that it will be the Servicer, jointly with the Agent, that will be carrying on the business of operating the Asset, and not the Partnership. In conclusion, the Commissioner is therefore of the view that the Partnership will not be a general law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | Detailed Reasoning - 2. Tax law partnership: The Partnership will be considered to be a tax law partnership if the Partners' investment in the Asset is considered to be the receipt of ordinary income or statutory income jointly. The Commissioner, at paragraph 11 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property , provides the following view on what he considers to be a tax law partnership: 11. Tax law partnerships exist only for tax purposes. General law does not recognize tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of such profits from the use of such property result in a partnership. The receipt of income of income jointly from investments without carrying on business is outside the definition of a partnership under general law. As per the facts provided, the Partners will be in joint receipt of ordinary income from the lease pursuant to their respective part ownership of the Asset. In conclusion, the Commissioner is of the view that the Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(1)(a) of the ITAA 1997. | Summary: The Lease granted by the Partnership will not be characterised as a notional sale and loan arrangement under Division 240 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 240-10 of the ITAA 1997, when read in conjunction with paragraph 2.15 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 1999 provides that an arrangement will be treated as a notional sale and notional loan for the purposes of Division 240 of the ITAA 1997 if: (a) the arrangement is a hire purchase agreement as defined in subsection 995-1(1) of the ITAA 1997 (b) the arrangement relates to any goods, and (c) the special conditions applicable to hire purchase agreements contained in Subdivision 240-I of the ITAA 1997 are satisfied. As stated before, the term 'hire purchase agreement' is defined in subsection 995-1(1) of the ITAA 1997 as: (a) a contract for the hire of goods where: (i) the hirer has the right, obligation or contingent obligation to buy the goods (ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods, and (iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised, or (b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid. As per the facts provided, the lease granted by the Partnership is expected to contain the following provisions: • the company will not have an obligation, right or contingent obligation to purchase the asset. • The legal title to the leased asset will not pass to the company at any time. On that basis, the lease will not satisfy either paragraph (a) or (b) of the hire purchase agreement definition in subsection 995-1(1) of the ITAA 1997. In conclusion, as the lease is not a hire purchase agreement, the Commissioner is of the view that it will not be characterised as a notional sale and loan arrangement. | Summary: The Partners will hold the depreciating assets subject to the lease for the purposes of determining deductions for their decline in value pursuant to the following items in the table in section 40-40 of the ITAA 1997: • Item 5: To the extent that the partners each have a right that an entity owns but which another entity (the economic owner) exercises or has a right to exercise immediately. • Item 10: To the extent that the partners each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the lease). | Detailed Reasoning - Detailed reasoning: Subsection 40-25(1) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year (as worked out under Division 40 of the ITAA 1997) of a depreciating asset that you held for any time during the year. (emphasis added) The definition of the term 'held' in subsection 995-1(1) of the ITAA 1997 refers directly to the term 'hold' within the same provision, which in the context of holding a depreciating asset is defined to have the meaning given by section 40-40 of the ITAA 1997. In other words, to be a holder of a depreciating asset, one of the 10 items in the table in section 40-40 of the ITAA 1997 reproduced below must apply. In addition, the effect of subsections 40-35(1) and 40-35(2) of the ITAA 1997 provides that where there is more than one holder of a depreciating asset (the underlying asset), it is the value of each entity's interest in the underlying asset that is subject to the decline in value, not the underlying asset itself. | Detailed Reasoning - Is held by this entity:: 1 A *car in respect of which a lease has been granted that was a *luxury car when the lessor first leased it The lessee (while the lessee has the *right to use the car) and not the lessor ........... 2 A *depreciating asset that is fixed to land subject to a *quasi-ownership right (including any extension or renewal of such a right) where the owner of the right has a right to remove the asset The owner of the quasi-ownership right (while the right to remove exists) ........... 3 An improvement to land (whether a fixture or not) subject to a *quasi-ownership right (including any extension or renewal of such a right) made, or itself improved, by any owner of the right for the owner's own use where the owner of the right has no right to remove the asset The owner of the quasi-ownership right (while it exists) ........... 4 A *depreciating asset that is subject to a lease where the asset is fixed to land and the lessor has the right to recover the asset The lessor (while the right to recover exists) ........... 5 A right that an entity legally owns but which another entity (the economic owner ) exercises or has a right to exercise immediately, where the economic owner has a right to become its legal owner and it is reasonable to expect that: The economic owner and not the legal owner (a) the economic owner will become its legal owner; or (b) it will be disposed of at the direction and for the benefit of the economic owner ........... 6 A *depreciating asset that an entity (the former holder ) would, apart from this item, hold under this table (including by another application of this item) where a second entity (also the economic owner ): The economic owner and not the former holder (a) possesses the asset, or has a right as against the former holder to possess the asset immediately; and (b) has a right as against the former holder the exercise of which would make the economic owner the holder under any item of this table; and it is reasonable to expect that the economic owner will become its holder by exercising the right, or that the asset will be disposed of at the direction and for the benefit of the economic owner ........... 7 A *depreciating asset that is a partnership asset The partnership and not any particular partner ........... 8 *Mining, quarrying or prospecting information that an entity has and that is relevant to: The entity (a) *mining and quarrying operations carried on, or proposed to be carried on by the entity; or (b) a *business carried on by the entity that includes *exploration or prospecting for *minerals or quarry materials obtainable by such operations; whether or not it is generally available ........... 9 Other *mining quarrying or prospecting information that an entity has and that is not generally available The entity ........... 10 Any *depreciating asset The owner, or the legal owner if there is both a legal and equitable owner The first nine items of the table in section 40-40 of the ITAA 1997 apply to specific kinds of depreciating assets, whereas Item 10 applies to any depreciating asset. Because the specific items apply in preference to the general item, Item 10 applies as the default rule. That is, Item 10 may apply if none of the other nine items apply. Furthermore, the Commissioner has been specifically requested to consider whether the partners will be the holder of depreciating assets subject to the lease under the following items of the table in section 40-40 of the ITAA 1997: • Item 5: To the extent that the investors were not the legal owner of the asset; • Item 7: To the extent that the investors are not a legal partnership; • Item 10: To the extent that the investors each acquire legal title to depreciating assets (being assets formerly owned by the vendor or otherwise as provided under the lease). Firstly we will consider whether Item 7 of the table in section 40-40 of the ITAA 1997 will apply in the event that such depreciating assets are deemed to be assets of the Partnership and not of its partners. Item 7 provides that a depreciating asset that is a partnership asset is held by the partnership and not any particular partners. Via ATO Interpretative Decision ATO ID 2009/135 Income Tax Capital Allowances: hold - tax law partnership , the Commissioner is of the view that the Partnership as a tax law partnership will not hold the depreciating assets under this item. In other words, Item 7 only applies to general law partnerships. Having determined that Item 7 of the table in section 40-40 of the ITAA 1997 will not apply, the Commissioner will now consider the application of both Item 5 and Item 10 in that table as specifically requested. | Detailed Reasoning - Item 5: A right that an entity legally owns, but that another entity (the economic owner) exercises or has the right to exercise immediately, is held by the economic owner if the economic owner has a right to becomes its legal owner and it is reasonable to expect: (i) that the economic owner will become the legal owner; or (ii) that the right will be disposed of at the direction and for the benefit of the economic owner. Such an asset is not held by the legal owner. An economic owner may lack legal title because the asset is subject to a legal mortgage, a hire purchase agreement, a product financing agreement, a reservation of title arrangement, or a bare trust. It is noted in the Agreement that the investors acquire joint legal title to the asset as part of the purchase of the asset. Therefore, they will hold the asset as legal owners under item 10. | Detailed Reasoning - Item 10: Where Items 1 to 9 do not apply, any depreciating asset that is owned by both a legal owner and equitable owner will be held by the legal owner. In conclusion, to the extent that the partners each acquire legal title to a depreciating asset of which Items 1 to 9 do not apply; the Commissioner will view the partners as the holder of those assets. | Summary: Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will apply to determine the first element of the cost for the depreciating assets held by each of the partners. | Detailed Reasoning - Detailed reasoning: In accordance with Section 40-175 of the ITAA 1997, the cost of a depreciating asset held by the taxpayer consists of two elements. The first element is worked out when the taxpayer begins to hold the depreciating asset, and is either the amount specified in the table in section 40-180(2) of the ITAA 1997 or, if none of the items in the table apply, the amount the taxpayer is taken to have paid under section 40-185 of the ITAA 1997. This section contains the general rule for working out the amount the taxpayer is taken to have paid either: (1) initially, in relation to holding an asset (the first element of cost), or (2) later, in relation to bringing the asset to its then present condition or location (the second element of cost). Section 40-185(1) of the ITAA 1997 provides that the amount that a taxpayer is taken to have paid (in relation to holding the asset initially or bringing it to its present condition or location) is the greater of the following amounts: 1. the amounts included in assessable income, being the sum of the amounts included in assessable income because a taxpayer started to hold the depreciating asset or gave something to start holding it and any amount that would have been included in assessable income if the amount of any consideration given by the taxpayer were ignored; and 2. the consideration given by the taxpayer, being: the sum of money paid or non-cash benefits provided; a liability to pay money or provide non-cash benefits; and a reduction in a right to receive money or non-cash benefits. These kinds of consideration and the relevant amounts are listed in the table at the end of section 40-185(1) of the ITAA 1997 (as reproduced below). | Detailed Reasoning - The amount is:: 1 You pay an amount The amount ........... 2 You incur or increase a liability to pay an amount The amount of the liability or increase when you incurred or increased it ........... 3 All or part of a liability to pay an amount owed to you by another entity is terminated The amount of the liability or part when it is terminated ........... 4 You provide a *non-cash benefit The *market value of the non-cash benefit when it is provided ........... 5 You incur or increase a liability to provide a *non-cash benefit The *market value of the non-cash benefit or the increase when you incurred or increased the liability ........... 6 All or part of a liability to provide a *non-cash benefit (except the *depreciating asset) owed to you by another entity is terminated The *market value of the non-cash benefit when the liability is terminated | Detailed Reasoning - Note 1:: Item 1 includes not only amounts actually paid but also amounts taken to have been paid. Examples include the price of the notional purchase made when trading stock is converted to a depreciating asset under section 70-110, the cost of an asset held under a hire purchase arrangement under section 240-25 and a lessor's deemed purchase price when a luxury car lease ends under subsection 242-90(3). | Detailed Reasoning - Note 2:: Section 230-505 provides special rules for working out the amount of consideration for an asset if the asset is a Division 230 financial arrangement or a Division 230 financial arrangement is involved in that consideration. The table above lists six amounts which the taxpayer is taken to have paid in particular circumstances in relation to holding a depreciating asset (the first element of cost of the asset) or receiving a benefit for the asset (the second element of cost of the asset). | Detailed Reasoning - Item 1: The taxpayer pays an amount: Where the taxpayer pays an amount, the taxpayer is taken to have paid that amount to hold the depreciating asset or to receive a benefit. This would include both amounts to purchase an asset (i.e. the purchase price) as well as amounts paid to create an asset (such as the cost of labour and materials). The explanatory memorandum points out that it would also cover costs incidental to starting to hold the asset, for example stamp duty and prepayments. Item 1 includes not only amounts actually paid but also amounts taken to have been paid such as: (1) the price of the notional purchase made when trading stock is converted to a depreciating asset under section 70-110 of the ITAA 1997. It is not relevant that the taxpayer had actually been using one of the other methods of valuing trading stock under section 70-45, i.e. market selling value or replacement price. (2) the cost of an asset held under a hire purchase arrangement under section 240-25 of the ITAA 1997 and (3) a lessor's deemed purchase price when a luxury car lease is terminated under section 242-90(3) of the ITAA 1997. Under Division 242, leases of luxury cars, other than genuine short-term hire arrangements, are treated as loan transactions, with the lessee (and not the lessor) being treated as the owner of the car. If the asset is purchased in foreign currency, the amount paid by the taxpayer for the purpose of calculating deductions allowable is the amount ascertained by translating the purchase price at the rate of exchange that was current when the asset was acquired. Any associated realised gains and losses arising from exchange rate fluctuations occurring between the time of acquisition of, and the time of payment for, the unit of property will be assessable/deductible in accordance with ITAA 1936 Pt III Division 3B ( Taxation Ruling IT 2498). As per the facts provided, the partners of the Partnership will pay a set amount for the purchase of the asset and this will be the sole consideration for the asset. On that basis, Item 1 of the table in paragraph 40-185(1)(b) of the ITAA 1997 will be relevant, which provides that the amount the partners are taken to have paid to hold a depreciating asset is the amount they have paid for it. | Summary: There is no tax preferred use of the Asset and therefore Division 250 will not apply. | Detailed Reasoning - Detailed reasoning: Division 250 of the ITAA 1997 may apply to deny or reduce capital allowance deductions where an asset is put to a tax preferred use and the partners have an insufficient economic interest in the asset. For Division 250 to apply to the partners, the general test under section 250-15 of the ITAA 1997 must be met, that being: This Division applies to the partners 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 the partners (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, the partners would be entitled to a *capital allowance in relation to: (i ) a decline in the value of the asset; or (ii) expenditure in relation to the asset; and (e) the partners lack a *predominant economic interest in the asset at that time. | Detailed Reasoning - Tax preferred use: Under section 250-60 of the ITAA 1997 an asset is being put to a 'tax preferred use' if a tax preferred end user (or a connected entity) directly or indirectly uses, or effectively controls the use of the asset. | Detailed Reasoning - End user of an asset: Under section 250-50of the ITAA 1997 an entity is an end user of an asset if the entity (or a connected entity) holds rights as a lessee under a lease of the asset. Section 250-50 explains the relationship that must exist between an entity and an asset for the entity to be the end user of the asset. However, Division 250 will apply to a taxpayer in respect of an asset only if, in a practical sense, a tax preferred end user has, or will have, the control or use of the asset during the arrangement period. To determine whether an entity effectively controls the use of an asset, it is necessary to examine the whole commercial arrangement, including the financial arrangements, surrounding the ownership and operation of the asset. This question ultimately turns on the facts and circumstances of each particular case. One key factor that is relevant in determining the question is the day-to-day operations surrounding the ownership and operation of the asset (including staffing arrangements). For example, if the tax preferred entity, rather than the taxpayer, has responsibility for the day-to-day operations of the arrangement (including the power to employ and direct staff), that would be factor that would indicate that the tax preferred entity effectively controls the use of an asset. A second key factor that is relevant in determining the question is the financial arrangements relating to the acquisition of the asset, the output generated by the asset and the purchase of inputs needed to operate the asset. In this regard, particular arrangements that may be encountered that might suggest that a tax preferred entity, rather than the taxpayer, effectively controls the use of an asset include: • fixed return charges whereby the tax preferred entity agrees to buy the output of the taxpayer's asset on a fixed return basis; • fixed fee arrangements whereby the tax preferred entity agrees to pay a minimum or maximum regular fixed amount to the taxpayer regardless of the amount of output actually supplied; • an agreement to transfer ownership of the asset to the tax preferred entity after a specified number of years, or an option for the tax preferred entity to acquire the asset at a future time; and • contracts for the supply of inputs by the tax preferred entity to the taxpayer that does not reflect arm's length prices and a relatively long supply period. While any of these factors may be present in any particular arrangement, no one factor will necessarily be decisive of the question of control. | Detailed Reasoning - Tax preferred end user: Under section 250-55 of the ITAA 1997: An *end user of an asset is a tax preferred end user if: (a) the end-user (or a *connected entity) is a *tax preferred entity; or (b) the end user is an entity that is a foreign resident. Further, section 995-1(1) of the ITAA 1997 defines a tax preferred entity as: (a) an exempt entity; or (b) an exempt Australian Government Agency; or (c) an associated Government entity of an exempt Australian Government Agency; or (d) a prescribed excluded STB; or (e) an exempt foreign Government Agency. As part of the Proposed Investment, the asset will be leased to an Australian company which is not exempt from Australian income tax or is deemed to be a tax exempt entity under the Australian tax legislation. At the end of the lease, the company will not have the right, option, obligation or contingent obligation to purchase the asset nor will it have input in the manner in which the asset will be dealt with by the Investors. At the end of the lease the legal title will not pass to the company. It would be fair to say, that the company will effectively control the use of the asset, as it will have the responsibility of the every-day use and management of it. The company will be regulated by a Government body but that body will not control the asset. Further, the Government body will not be providing investors with any financial benefits. The financial arrangements proposed provide that the investors receive regular rent payments for the use of the asset. There are no provisions in the agreements that allow the asset to be transferred to the company at the end of the lease agreement. When we consider the facts in their entirety, the Commissioner concludes that the company will be the end user of the Asset. The company is not considered to be a tax preferred end user of the asset and Division 250 will not apply. | Summary: The non-commercial loss rules in Division 35 of the ITAA 1997 will not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10. | Detailed Reasoning - Detailed reasoning: Division 35 of the ITAA 1997 prevents losses of individual taxpayers carrying on a business activity either alone or in partnership from being offset against other assessable income in the year the loss is incurred. As stated in the note to section 35-10(1) of the ITAA 1997, the 'section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly…'. The Explanatory Memorandum to the New Business Tax System (Integrity Measure) Bill 2000 states that the 'new rules do not change the general law tests that determine whether an individual is carrying on a business activity; or … and the new rules do not apply to: … the receipt of passive investment income from activities which do not constitute the carrying on of a business. These activities include the receipt of rent from a negatively geared investment property, dividends from shares or interest on financial investments such as infrastructure bonds. As determined in question 1 above, the partners will not be carrying on a business, but will be in joint receipt of ordinary income from the rental income from the asset. The Partnership will be a tax law partnership for the purposes of the partnership definition in paragraph 995-1(a) of the ITAA 1997. In conclusion, the Commissioner's view is that Division 35 of the ITAA 1997 does not apply to the partners such that any losses are deferred till income is generated from the investment in later income years pursuant to section 35-10. | Summary: The interest incurred on borrowings by an individual partner to fund the capital contributions will be deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing the your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 states that the partners cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income; or (d) a provision of this Act prevents the partners from deducting it. In order for the expenditure to be deductible under section 8-1 of the ITAA 1997 it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney v. FCT (1958) 100 CLR 478). There must be a sufficient nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FCT (1949) 78 CLR 47). The expenditure must not be capital, private or domestic in nature. The deductibility of interest is determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put ( Fletcher & Ors v. FC of T 91 ATC 4950, FC of T v . Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52; Kidston Goldmines Limited v. FC of T 91 ATC 4538 at 4545; (1991) 22 ATR 168 at 176). However, a rigid tracing of funds will not always be necessary or appropriate ( FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380 at 4388; (1992) 23 ATR 494 at 504). It is not necessary, that the expenditure in question should produce assessable income in the same year in which the expenditure is incurred. Taxation Ruling TR 2004/4 in considering the decision of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 (Steele's Case) concludes that interest incurred in a period prior to the derivation of relevant assessable income will be incurred in gaining or producing the assessable income in the following circumstances: • The interest is not incurred 'too soon', is not preliminary to the income earning activities and is not a prelude to those activities, • The interest is not private or domestic, • The period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost, • The interest is incurred with one end in view, the gaining or producing of assessable income, and • Continuing efforts are undertaken in pursuit of that end. The partners state that they will obtain funding for their capital contribution independently and this may include personal equity/cash or debt from external lenders. The partners expect that the money borrowed to invest in the proposed Asset would result in rental income being received from the Partnership. In conclusion, the interest on the borrowed amounts relating to the servicing of a loan by a partner which will fund the acquisition of the income producing Asset as outlined above would be deductible under section 8-1 of the ITAA 1997. | Summary: Part IVA of the ITAA 1936 will not apply to the proposed acquisition or part thereof such that the Commissioner will determine that all or part of a deduction shall not be allowable. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. It must be noted from the outset that a private binding ruling only determines whether Part IVA applies. Specifically, a private binding ruling is not a Part IVA determination and cannot lead to the necessary action to give effect to the determination as required under subsection 177F(1) of the ITAA 1936. In broad terms, Part IVA will apply where the following requirements are satisfied: • there is a scheme (section 177A of the ITAA 1936); • a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C of the ITAA 1936); and • the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (section 177D of the ITAA 1936). The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. | Detailed Reasoning - Scheme: A scheme is defined in subsection 177A(1) of the ITAA 1936 as: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. The partners have expressed an interest to invest in an Asset. The partners are largely unrelated and have indicated a preference to own a direct economic interest in the Asset that is proportionate to their investment. The proposed investment will be structured such that each investor will acquire a direct proportional interest in the underlying asset commensurate to the capital injected. The partners state that the scheme should include all the transaction steps to fund and acquire the relevant interest in the Asset. The Asset will be leased under a Lease Agreement to third party Australian company. The partners state given the breadth of the definition of a scheme, part or all of the arrangement may constitute a scheme to which Part VIA may apply. However, it should not be determinative as to whether Part IVA applies. Based on the above information, the Commissioner concludes that the above scenario would satisfy the definition of scheme pursuant to subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: Paragraph 62 of Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules states: Part IVA will not apply unless a taxpayer obtained, or would obtain, a tax benefit in connection with a scheme. Subsection 177C(1) of the ITAA 1936 relevantly states: …the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or … Paragraph 64 of PS LA 2005/24 states: There are two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out…In relation to determining what 'might reasonably be expected' to have happened… Paragraph 69 of PS LA 2005/24 states: The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D. The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 inserted subsections 177CB(2) and 177CB(3) of the ITAA 1936 to operate from 16 November 2012. Paragraphs 1.69 to 1.70 of the Bill state: 1.69 The amendments target deficiencies in section 177C, and the way it interacts with other elements of Part IVA, particularly section 177D, as revealed by recent decisions of the Full Federal Court. 1.70 The amendments are not intended to change the operation of Part IVA in any other respect. 1.71 Consistent with the policy underlying Part IVA, the amendments are intended to have the following effects: · to put it beyond doubt that the 'would have' and 'might reasonably be expected to have' limbs of each of the subsection 177C(1) paragraphs represent alternative bases upon which the existence of a tax benefit can be demonstrated; · to ensure that, when obtaining a tax benefit depends on the 'would have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based solely on a postulate that comprises all of the events or circumstances that actually happened or existed other than those forming part of the scheme; · to ensure that, when obtaining a tax benefit depends on the 'might reasonably be expected to have' limb of one of the paragraphs in subsection 177C(1), that conclusion must be based on a postulate that is a reasonable alternative to the scheme, having particular regard to the substance of the scheme and its effect for the taxpayer, but disregarding any potential tax costs; and · to require the application of Part IVA to start with a consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for the taxpayer a particular tax benefit in connection with the scheme; and so emphasising the dominant purpose test in section 177D as the 'fulcrum' or 'pivot' around which Part IVA operates. 1. Annihilation approach Therefore subsection 177CB(2) of the ITAA 1936 makes it clear that the 'would have' limb of paragraph 177C(1)(b) of the ITAA 1936 is to operate on the basis that the partners did not enter into the proposed scheme at all. If the partners did not enter into the proposed scheme at all, they would not be able to deduct any amounts under Division 40 of the ITAA 1997. The partners would also not be able to deduct any amounts under section 8-1 for interest expenses for funding their contribution into the Asset. However, the partners would also not incur the expense of funding the capital amount for the share of the purchase nor be eligible to receive any distributions from the income generated by the Asset or the possibility of the likely capital gain or loss after the period when the forward lease expires. 2. Reconstruction approach Therefore subsection 177CB(3) of the ITAA 1936 makes it clear that the 'might reasonably be expected to have' limb of paragraph 177C(1)(b) of the ITAA 1936 is to operate on the basis of the partners entering into reasonable alternatives to the scheme. A reasonable alternative put forward by the partners, is the partners being in a general law partnership as opposed to a tax law partnership. The partners have acknowledged that the tax benefit in the proposed transaction may be the capital allowance deductions (Division 40 of the ITAA 1997) which are allowable to the partners as a result of the scheme. Each of the deductions may ultimately be used to offset a partner's share of the net income of the partnership. Given the tax law definition of partnership broadly incorporates the general law definition, the income or deduction position of partners would not be altered as a result of the acquisition via a general law or tax law partnership as both are taxed in accordance with Division 5 of the ITAA 1936. As a result, there would not be additional deductions or reduced income as a result of the proposed investment such that no tax benefit arises, and if there were such a tax benefit it would be merely incidental to the scheme and would not be the dominant purpose for entering into the scheme. However, the partners state the commercial objectives and anticipated outcomes of the proposed investment include the following: · From a commercial perspective, a majority of partners expressed a desire to obtain a direct (as opposed to an investment via a general law partnership) investment into the asset. The partners wish to be economically exposed to all the risks and rewards of owning a part of the proposed Asset. · Given the risk associated with such ownership, partners were not willing to enter into the transaction should they be jointly and severally liable. The partners expressed a desire not to be jointly and severally liable for the conduct of the partners in a general law partnership over the term of the asset ownership. · The partners indicated a desire to set certain contractual parameters in relation to other partners conduct during the period of ownership of the Asset. Given the relevant flexibility of the terms, an Agreement could effectively dictate the terms and timing of the disposal / transfer of Interest in the asset, the terms of the ultimate disposal and other issues such as further investments and issues surrounding the financing of the Asset. The partners contend that the proposed acquisition structure involves each partner acquiring a direct economic interest in the Asset with the execution of an Agreement to dictate certain terms and conditions in relation to the conduct of partners. There are no interposed entities or other mediums involved in the transaction. It is the partners' view, that it is not possible to posit an alternative transaction which satisfies the commercial objectives. The partners would only enter into this investment structure to obtain a direct investment in the Asset. A reasonable alternative put forward by the Commissioner is if the partners bought units in stapled securities listed on the Australian Securities Exchange. Whilst stapled securities would be a more liquid asset, they would not have the direct exposure that a partner of a tax law partnership will provide and they would have inherent market risk. | Detailed Reasoning - Purpose of the scheme: Section 177D of Part IVA of the ITAA 1936 states: | Detailed Reasoning - 177D(1): a) enabling a taxpayer (a relevant taxpayer ) to obtain a tax benefit in connection with the scheme; or (b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme; whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers. | Detailed Reasoning - 177D(2): For the purpose of subsection (1), have regard to the following matters: (a) the manner in which the scheme was entered into or carried out; (b) the form and substance of the scheme; (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). The eight factors listed in subsection 177D(2) of the ITAA 1936 (formerly paragraph 177D(b) of the ITAA 1936) make up the core test for distinguishing schemes where the dominant purpose of carrying out the scheme is to obtain a tax benefit. The application of the eight factors is therefore dependent upon there being a scheme and a tax benefit obtained in connection with that scheme. Paragraph 79 of PS LA 2005/24 states that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. Paragraph 85 of PS LA 2005/24 states: The consideration of purpose or dominant purpose under paragraph 177D(b) requires an objective conclusion to be drawn. The conclusion required by section 177D is not about a person's actual, i.e. subjective, dominant purpose or motive. Section 177D requires an objective conclusion as to purpose to be reached having regard to objective facts. The actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion under section 177D. | Detailed Reasoning - (a) manner in which the scheme was entered into or carried out: Paragraph 93 of PS LA 2005/25 states: The first factor…enables contrivance and artificiality to be identified by comparing the manner in which the scheme was entered into or carried out with the manner in which the counterfactual would have been implemented, for example, by the presence of a step or steps in a relevant transaction or arrangement that would not be expected to be present in a more straightforward or ordinary method of achieving the outcome of the transaction or arrangement. The partners contend that the transaction has been executed in the most straightforward method being an investment by the partners in the Asset. There has been no unnecessary interposition of entities or the flowing of funds through unnecessary mediums or jurisdictions. The transaction is consistent with commercial rationale and in a manner which is the most simple and commercially expedient. Based on the available information, the steps outlined to acquire the Asset do not suggest contrivance or artificiality. This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. | Detailed Reasoning - (b) the form and substance of the scheme: Paragraph 95 of PS LA 2005/24 states: The second factor…requires that substance, rather than form, be the subject of inquiry. Put simply the factor directs attention to whether there is a discrepancy between the form of the scheme and its substance, meaning its commercial and economic substance. A discrepancy…may well indicate the scheme has been implemented in a particular form as the means to obtain a tax benefit if the substance of the scheme may be achieved…by some other more straightforward or commercial transaction or dealing. The partners contend that the acquisition is a result of the partners wishing to obtain, inter alia, a direct interest in an asset and to be governed by an Agreement to dictate the terms of certain dealings. The ownership of such an asset provides the partners an opportunity to generate a commercially attractive return on investment and the partners are fully exposed to business and financial risk associated with the acquisition of the Asset. The Partners further state the form of this transaction will be congruent with the substance of the transaction. Similarly, the legal form and the legal rights and obligations of each partner are consistent with the commercial and economic substance of the scheme. There is no divergence between the legal form of the scheme and its substance. The manner of the proposed investment does not point to a purpose to obtain a tax benefit but the partners wishing to obtain a direct interest in the Asset to generate a return as well as being exposed to business and financial risks. Any disparity between the form and the substance would therefore be attributable to the desire of the partners to own a direct interest in the Asset being exposed to business and financial risk rather than avoid income tax. This factor is neutral in determining whether the requisite purpose exists. | Detailed Reasoning - (c) the timing at which the scheme was entered into and the length of the period during which the scheme was carried out: Paragraph 101 of PS LA 2005/24 states: This factor will enable consideration of the extent to which the timing and duration of the scheme go towards delivering the relevant tax benefit or are related to commercial opportunities or requirements. The partners state that the scheme at hand will ultimately be determined by successfully negotiating the purchase of the Asset and leasing it to the Third Party. The terms and conditions, and timing of this process will not be a factor which the partners may manipulate or determine. The partners contend that the acquisition of the Asset is ultimately a 5 year investment in an Asset. This is the term of the Lease from which the only source of revenue (other than the ultimate Sale of the Asset) is derived. The partners may exit prior to this time (if a buyer is found), the Scheme only terminates at the end of the prescribed investment term. This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. | Detailed Reasoning - (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme: As stated in paragraph 105 of PS LA 2005/24: The fourth factor expressly focuses on the tax benefit and any other tax consequence resulting from the scheme. The partners state that the acquisition of the Asset affords business opportunity and risk such as the credit risk of the Third Party or the risk that the Asset will be damaged or destroyed. Whilst there will be Division 40 deductions as a result of the scheme, there is also assessable income which will be derived by the partners. The partners contend that they will not enter into the transaction for the dominant purpose of obtaining depreciation deductions. These deductions are an incident of commercial outcome of obtaining an interest in the Asset and the exposure to its value. Based on the available information, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme The fifth factor involves identifying changes in financial position of the taxpayer that may reasonably be expected to result from the scheme, not just the changes that have resulted or will result (paragraph 227 of PS LA 2005/24). The partners state that in the transaction at hand, from a financial and legal perspective, they obtain a direct interest in the Asset. Thus, the change in financial position and the business and commercial risks, are consistent with the commercial purpose of the transaction. Furthermore, the partners contend that all negotiations and transaction steps to execute the transaction will be the result of arm's length dealings between the parties. Therefore, the change in financial position of any person is solely a result of a commercial transaction. Under the proposed investment, the partners would include in their assessable income any amount distributed from the partnership. Based on the available information, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme The sixth factor involves identifying changes in financial position of any person who has or has had a connection with the relevant taxpayer that may be reasonably expected to result from the scheme, not just the changes that have resulted or will result (paragraph 227 of PS LA 2005/24). Based on the information provided, there does not appear to be any change in the financial position of any person that has resulted, will result or may reasonably be expected to result from the scheme. This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out Based on the information provided, there does not appear to be any consequences for the relevant taxpayer or any other person for the scheme having been entered into or carried out. This factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. (h) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f) Paragraph 110 of PS LA 2005/24 states that: The eighth factor inquires into the nature of the connection between the taxpayer and any other person whose financial position is reasonably expected to change as a result of the scheme or for whom there are any other consequences from the scheme. The existence of any connection between the taxpayer and these other persons is relevant to the identification of the other factors, such as the manner of the scheme, the form and substance of the scheme, and the tax, financial and other consequences of the scheme. This factor requires the circumstance that parties are not dealing with each other at arm's length in connection with the scheme to be taken into account. Paragraph 111 of PS LA 2005/24 states: This factor requires attention to be paid to the existence of any family relationship between the taxpayer and the persons who are affected in any way by the scheme. This could assist a taxpayer in some cases. Many dealings which would be decidedly odd between strangers may be entirely explicable between family members. For example, a businessman who gives assets to strangers for less than they are worth may be subject to suspicion but a gift to his family could stand in a different light. Of course, it would be a different matter again if the family members do not benefit in substance from the arrangement. The partners contend that the transaction will be concluded between arm's length parties and a variety of unrelated partners who are seeking to invest in the Asset. There is nothing to suggest the above criteria points to a dominant purpose of a tax benefit. The proposed transaction is in no way 'blatant, artificial or contrived'. The Investment process and acquisition structure are clear. They involve various unrelated parties and legal effect of the entire transaction is reflective of the commercial and economic effect. All things considered, this factor is neutral in determining whether the requisite purpose of obtaining a tax benefit exists. | Detailed Reasoning - Conclusion: What the partners are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in subsection 177D(2) of the ITAA 1936, these factors indicate that the dominant purpose of the proposed investment is not to obtain a tax benefit. Therefore, Part IVA will not apply to this arrangement.