Private ruling: Tax cost setting and deductibility of fee
Date of advice: 27 April 2026
Published: 13 July 2026
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ended 30 June 20XX | The scheme commence on: | XX XXX 20XX
Date scheme commenced: XX XXX 20XX

Ruling: Q3: Question 3.1 If the answer to Question 2.1 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? Answer 3.1 Yes. Question 3.2 If the answer to Question 2.2 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? Answer 3.2 Yes. Question 3.3 If the answer to Question 2.3 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? Answer 3.3 Yes. Question 3.4 If the answer to Question 2.4 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? Answer 3.4 Yes. Question 3.5 If the answer to Question 2.5 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? | A1: Yes. Question 3.6 If the answer to Question 2.6 is 'Yes', will ACo be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the WIP amount asset pursuant to the service contract? Answer 3.6 Yes.

Relevant facts and circumstances: ACo Group 1. ACo is the head company of the ACo income tax consolidated group (ACo TCG). 2. The ACo TCG is a global alternative asset. The Group lends to X sectors and provides corporate advice. BCo group 3. Prior to the acquisition: • BCo Seller owned X% of BCo. • BCo held X% of the shares in CCo • CCo Sellers held the remaining X% of CCo. 4. The BCo group carries on a management business, with its principal activities including the provision of services to a number of third parties (including Entity 1 through Entity 6, collectively the Entities). Service agreements 5. Service agreements were executed between CCo and the Entities under which CCo was appointed as the Contractor to provide management and other services to each third party (Management Functions). 6. In consideration of performing the Management Functions the Entities shall be authorised and obliged to pay to the Contractor: • a X fee • a X fee • other fees. Acquisition of BCo group 7. BCo Buyer, a wholly owned subsidiary of ACo, ACo and the BCo Seller entered into the Share Sale Agreement (SPA1), under which the BCo Buyer acquired a X% shareholding in BCo. 8. BCo, ACo and the CCo Sellers entered into the Share Sale Agreement (SPA2), under which BCo acquired the remaining shares in CCo which it did not hold. 9. Under SPA1 and SPA2 the Buyer and ACo are required to pay the Purchase Price to BCo Seller and CCo Sellers. Amongst other things, the Purchase Price includes any X Fee. 10. At the joining time, the transaction was completed and BCo and CCo joined the ACo TCG. Management Functions performed prior to joining time 11. As at the joining time, CCo had entered a number of service agreements at various times prior to the joining time which had terms of X to X years, and CCo had performed Management Functions under the terms of those service agreements. X fee valuation 12. A valuation obtained by ACo for taxation purpose provided that a number of the service agreements are expected to have X fees payable to BCo 13. The valuer relied on the forecasts in the financial model which included amongst other things historical and forecast cash flows, forecast IRR calculations, and the forecast Fees. 14. The valuation adopted a Discount Cash Flow (DCF) approach to calculate the market value of the right to receive a fee at the joining time (X Fee Right) under the relevant service agreements (referred to as Fee agreements), with total value being $X. 15. The valuer has not undertaken a detailed model review/audit and accordingly did not provide any assurance in relation the integrity or mathematical accuracy of the financial model or the forecast, except where explicitly stated. The forecasts and projections as supplied to the valuer were based upon assumptions about events and circumstances which have not yet transpired. 16. The valuer considered ACo's valuation and the financial model as at joining time and provided an opinion in relation to the following: • the appropriateness of the valuation methodology adopted in ACo's valuation for income tax purposes (which requires an estimate of the market value of the Fees). • the application of the valuation methodology in deriving ACo's valuation. This included an assessment of the appropriateness of procedures followed in determining the relevant values. • confirmed that key assumptions adopted in deriving ACo's valuation are appropriately sourced to supporting information.

Relevant legislative provisions: Income Tax Assessment Act 1997 25-95 | Income Tax Assessment Act 1997 25-95(1) | Income Tax Assessment Act 1997 25-95(2) | Income Tax Assessment Act 1997 25-95(3) | Income Tax Assessment Act 1997 25-95(3)(a) | Income Tax Assessment Act 1997 25-95(3)(b) | Income Tax Assessment Act 1997 108-5(1) | Income Tax Assessment Act 1997 108 5(1)(b) | Income Tax Assessment Act 1997 108-5(2) | Income Tax Assessment Act 1997 Div 230 | Income Tax Assessment Act 1997 230-45(1) | Income Tax Assessment Act 1997 230-45(2) | Income Tax Assessment Act 1997 Subdiv 230-J | Income Tax Assessment Act 1997 230-50 | Income Tax Assessment Act 1997 Pt 3-90 | Income Tax Assessment Act 1997 Div 701 | Income Tax Assessment Act 1997 701-1 | Income Tax Assessment Act 1997 701-10 | Income Tax Assessment Act 1997 701-55 | Income Tax Assessment Act 1997 701-55(5C) | Income Tax Assessment Act 1997 701-63 | Income Tax Assessment Act 1997 701-63(5) | Income Tax Assessment Act 1997 701-63(5)(c) | Income Tax Assessment Act 1997 701-63(5)(d) | Income Tax Assessment Act 1997 701-63(6) | Income Tax Assessment Act 1997 701-67 | Income Tax Assessment Act 1997 701-67(a) | Income Tax Assessment Act 1997 Div 705 | Income Tax Assessment Act 1997 Subdiv 705-A | Income Tax Assessment Act 1997 705-25(5)(d) | Income Tax Assessment Act 1997 705-25(4B) | Income Tax Assessment Act 1997 705-30(1) | Income Tax Assessment Act 1997 705-35(1)

Reasons for decision: Summary: All legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated. | Detailed Reasoning - Application of the single entity rule in section 701-1: The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1, the subsidiary members of an income tax consolidated group are taken to be parts of the head company. The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 . As a consequence of the SER, the actions and transactions of the subsidiary members of the ACo TCG are treated, for income tax purposes, as having been undertaken by ACo, as the head company of the ACo TCG. | Summary: The rights under each service contract, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5). | Detailed Reasoning - Detailed reasoning: Section 701-55 states what is meant by the expression the asset's 'tax cost is set' for certain assets. Paragraph 705-25(5)(d) provides that ' a right to future income (other than a WIP amount asset) ' is a retained cost base asset. Section 701-67 limits the application of the consolidation rules affecting tax consolidated groups (TCG) to an asset if the asset is one or more of the following: • a CGT asset • a revenue asset • a depreciating asset • trading stock, or • a thing that is or is part of a Division 230 financial arrangement. The effect of section 701-67 is that assets of a joining entity that are not ordinarily recognised for taxation purposes will be disregarded or excluded from the tax cost setting process. They will not have a tax cost allocated to them from the group's ACA for the joining entity. A CGT asset as defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property. For avoidance of doubt, subsection 108-5(2) states that the following are CGT assets: (a) part of, or an interest in, property or a legal or equitable right that is not property; (b) goodwill or an interest in it; (c) an interest in an asset of a partnership, and (d) an interest in a partnership that is not covered by (c). The word 'property' in the definition of a CGT asset conveys either an object of proprietary rights (e.g. pieces of land, domesticated animals and machines), or the proprietary right itself. Proprietary rights may exist in relation to physical objects or to intangible things such as debts or patent rights (Jordan CJ in McCaughey v Commr of SD (1945) 46 SR (NSW) 192 at p 201). According to Lord Wilberforce in National Provincial Bank Ltd v Ainsworth ( 1965) AC 1175, before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be 'definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability'. Although assignability is not an essential characteristic of a right of property in all circumstances, it is generally correct to say that a proprietary right must be capable in its nature of assumption by third parties (Mason J in R v Toohey & Anor; ex parte Meneling Station Pty Ltd & Ors (1982) 158 CLR 327). Partially performed or mutually unperformed contracts are capable of being treated as assets of an entity joining a consolidated group where it can be established they are separately identifiable from the other assets of the joining entity and their market value, that does not attribute any of the value of the joining entities other assets, can be reliably determined. Commercial or business practice guides the extent to which different components are treated as part of a single asset. Each of the service contracts represent a kind of property, as the rights and obligations under the contracts continue until the winding up of the relevant Entity and are capable of being assigned or transferred to a third party in accordance with the terms of the agreement. Each of the contracts represent an agreement under which CCo agrees to provide certain services and the Entities agree to pay fees as consideration for the provision of services by CCo. The service contracts are CGT assets, as the contracts create certain valuable rights in CCo that are recognised and enforceable by law. Some of the rights created in CCo include: • the right to receive an annual management fee as consideration for providing services under the contract • the right to receive a fee on winding up of each of the Entities. As a consequence of entering into the service contracts, the third parties agreed to vest in CCo certain valuable rights that are legally enforceable under law. The service contracts fall within the definition of a CGT asset, as any kind of property, in paragraph 108-5(1)(b) and therefore within the tax consolidation rules under paragraph 701-67(a). | Detailed Reasoning - Rights to future income: Section 701-63 states: 701-63 Right to future income and WIP amount asset ... (5) A right to future income is a valuable right (including a contingent right) to receive an amount if: (a) the valuable right forms part of a contract or agreement; and (b) the X market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil; and (c) the valuable right is neither a X Division 230 financial arrangement nor a part of a Division 230 financial arrangement; and (d) it is reasonable to expect that an amount attributable to the right will be included in the assessable income of any entity at a later time. (6) WIP amount asset means an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25-95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. Under subsection 701-55(5C) the reset tax cost base for rights to future income that are WIP amount assets are deductible. However, under paragraph 705-25(5)(d), ' a right to future income (other than a WIP amount asset) ' will be a retained cost base asset. The definition of a 'WIP amount asset' in subsection 701-63(6) is similar to the definition of a work in progress amount in subsection 25-95(3) (as discussed and reproduced below). Although subsection 701-63(6) (and the subsection 701-63(5) definition of a right to future income (RTFI)) are located in the Division 701 core rules, both definitions apply (via subsections 705-25(5)(d) and 705-25(4B)) for Division 705 purposes. The subsection 701-63(5) RTFI definition is intended to apply to each executory or partly performed contract (held by an entity at the joining time) that contains (or provides the entity with) a right (including contingent right) to receive future (assessable) income (that is not a Division 230 financial arrangement in the joining entity's hands). The role of subsection 701-63(5) is to ensure the contract receives a nil tax cost setting amount (TCSA) which it does by treating it (pursuant to subsection 705-25(5)(d)) as a retained cost base asset with a tax cost equal to its terminating value (cost base) at the joining time (which in most cases is nil). The role of the subsection 701-63(6) WIP amount asset definition is to provide an exception to this RTFI retained cost base asset (nil TCSA) treatment or to allow reset cost base asset treatment for that part (if any) of the market value of the RTFI contract (or right to receive an amount) that is attributable to work (labour) already performed at the joining time (but not to a stage where a recoverable debt has yet arisen). If there is such an amount (or part of the RTFI contract) then a TCSA may be worked out (under subsection 705-30(1)) on the basis of the market value (of this part or amount) at the joining time. Once a TCSA has been worked out (under Division 705) for the subsection 701-63(6) WIP amount asset, subsection 701-55(5C) will apply (via section 701-10) to deem this TCSA to be a work in progress amount (as defined in subsection 25-95(3)) paid by the head company (at the joining time). This allows the head company to claim the TCSA in accordance with subsections 25-95(1) and (2). The effect of the tax cost setting rules is that subsection 701-55(5C) is not activated until such time as there is a subsection 701-63(6) WIP amount asset at a particular time. However, under paragraph 705-25(5)(d), a right to future income other than a WIP amount asset will be a retained cost base asset. Under each service contract, the contractor is obligated to provide certain management services to the Entity for which each contract confers upon it the right to receive a number of fees that are payable by the Entity. Under clause X of each contract and clause X of each Entity document, the contractor is entitled to receive, amongst other fees, management fees and fees. The head company may be entitled to a deduction under section 25-95 for the TCSA of subsection 701-63(6) 'WIP amount asset' (as worked out under Division 705) where this TCSA is set (for the head company's income tax purposes) by subsection 701-55(5C). | Detailed Reasoning - Valuable right and market value greater than nil: Under the service contracts, CCo is obligated to provide certain management services to the Entities for which the agreement confers upon it the right to receive other fees by each Entity and a fee X, if the Entity meets the IRR hurdle. The right to receive fees is set out in clause x of each service contract. Under the Entity documents, amongst other things: • the fee is payable upon X • the rights to receive other fees are contingent on CCo providing the services listed in clause X of each other service contract. The contractor's right to receive a fee is independent from the right to the payment of other fees, payable on X. Each service contract is intended to operate for a period of X from X, with fees payable upon X if the payment condition is met. The contracts represent a future economic benefit to CCo in the form of expected income from fees, including X, fees, and where applicable, other fees, amongst other things. An independent review of a valuation made by ACo for tax purposes recognised CCo's right to receive fees in respect of the service contracts as assets of CCo and valued those rights as having a total market value of $X. CCo's entitlement to the fee under each of the service contracts represents a future economic benefit to CCo in the form of expected income on X. The right to receive fees under each of the service contracts meets the definition of a right to future income in subsection 701-63(5) as it is a valuable right to receive an amount that arises under or forms part of a contract or agreement, it has a market value of greater than nil, being a total value of $X as at xx xx xxxx for taxation purposes as part of ACo's acquisition of the BCo Group. Therefore, the service contracts satisfy the conditions in both paragraph (a) and (b) of the definition of a RTFI. | Detailed Reasoning - Division 230 financial arrangement: Subsection 230-45(1) states: You have a financial arrangement if you have, under an agreement: (a) a cash settlable legal or equitable right to receive a financial benefit; or (b) a cash settlable legal or equitable obligation to provide a financial benefit; or (c) a combination of one or more such rights and/or one or more such obligations Under subsection 230-45(2), a right to receive or obligation to provide a financial benefit is cash settleable if: • the benefit is money or a money equivalent, or • for rights - you intend to satisfy or settle a right by receiving money, or a money equivalent, or by starting to have, or ceasing to have, another financial arrangement, or • for obligations - you intend to satisfy or settle the obligation by providing money or a money equivalent, or by starting to have, or ceasing to have, another financial arrangement, or • you have a practice of satisfying or settling similar rights or obligations in the manner mentioned in the second and third dot points above (whether or not the taxpayer intends to satisfy or settle the right or obligation in that way), or • you deal with the right or obligation, or similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer's margin, or from both, or • none of the above applies but: ­ the financial benefit is readily convertible into money or a money equivalent and there is a market for the financial benefit that has a high degree of liquidity, and ­ the financial benefit is not subject to a substantial risk of substantial decrease in value, or ­ you entered into the arrangement in order to raise or provide finance, or, you do not have, as one of your purposes for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the benefit as part of your expected purchase, sale or usage requirements, or • you are able to settle the right or obligation as mentioned in the second and third dot points above (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements. Under the service contracts, CCo has cash settlable rights to receive financial benefits, that is, the right to receive certain amounts from the Entities. However, CCo also has ongoing obligations to provide management services to the Entities which are not cash settlable or insignificant when compared to CCo's cash settlable rights to receive financial benefits under the contracts. Accordingly, the contracts would not be regarded as a financial arrangement under subsection 230-45(1). Furthermore, the service contracts do not give rise to an equity interest (or rights or obligations in relation to an equity interest) under section 230-50. It is also not a contract of a kind included in Subdivision 230-J. It follows that the service contracts are neither a Division 230 financial arrangement nor a part of a Division 230 financial arrangement. Therefore, the condition in paragraph 701-63(5)(c) is satisfied. | Detailed Reasoning - Reasonable to expect that an amount attributable to the right will be included in assessable income of any entity: The expression 'reasonable to expect' is not defined for the purposes of the income tax acts nor explained in any explanatory materials. Judicial guidance is usually referred to the joint judgement of Bowen CJ and Beaumont J in Attorney-General's Department v Cockcroft (1986) 64 ALR 97 where the term ' could reasonably be expected to prejudice the future supply of information to the Commonwealth ', as used in section 43(1)(c)(ii) of the Freedom of Information Act 1982 , was said to require: a judgement to be made by the decision-maker as to whether it is reasonable, as distinct from something that is irrational, absurd or ridiculous" and that "it is undesirable to consider the operation of the provision in terms of probabilities or possibilities or the like. To construe s 43(1)(c)(ii) as depending in its application upon the occurrence of certain events in terms of any specific degree of likelihood or probability is, in our view, to place an unwarranted gloss upon the relatively plain words of the Act. It is preferable to confine the inquiry to whether the expectation claimed was reasonably based (see Kioa v Minister for Immigration & Ethnic Affairs (1985) 62 ALR 321 per Gibbs CJ and Mason J. In reference to capital allowances provisions, paragraph 28 in Taxation Ruling TR 2005/20 I ncome tax: the interaction of deemed ownership under Division 240 of the Income Tax Assessment Act 1997 with the 'holding' rules in Division 40 states for it to be 'reasonable to expect' something to occur requires a sufficiently reliable prediction that it will occur, or at least an expectation or prediction based on reasonable grounds. The ruling refers to a number of court decisions, including the judgment in Peabody v Commissioner of Taxation 181 CLR 359 at 385; 94 ATC 4663 at 4671; (1994) 28 ATR 344 at 353,where Hill J considered the meaning of reasonable expectation in the context of a determination under paragraph 177C(1)(a) of the Income Tax Assessment Act 1936 . Hill J found that in the context, expectation is not used in the sense of prediction as to the future but rather in the sense of a supposition or hypothesis. But what is clear is that the expectation must be one which is reasonable and not one which is unreasonable, irrational or absurd. Hill J stated: The meaning of words such as 'reasonable expectation' depends upon the context in which they appear. Nevertheless, in the present context, as in Cockcroft , the words were intended to receive, and should receive, their ordinary meaning. So too, as in Cockcroft , the word "reasonable" is used in contradistinction to that which is "irrational, absurd or ridiculous". The word "expectation" requires that the hypothesis be one which proceeds beyond the level of a mere possibility to become that which is the expected outcome. If it were necessary to substitute one ordinary English phrase for another, it might be said that it requires consideration of the question whether the hypothesised outcome is a reasonable probability. Woolcombers (WA) Pty Ltd v FC of T 93 ATC 4342, at 4349 states: The result of the contractual provisions was the imposition of a clear liability on the taxpayer to pay for the woolgrower's woolclip. Although it may be said that the effective time for payment did not arise until the wool had been shorn and the quantum or payment decided by the weight of wool shorn, neither circumstance made the obligation a mere 'theoretical contingent liability'. The liability of the woolgrower to indemnify the taxpayer upon formation of the contract made it clear that it was intended that a correlative liability be imposed upon the taxpayer at the same time to pay the woolgrower for the woolclip. There was an accrued obligation or present liability imposed on the taxpayer by a definite contractual commitment. The 'reasonable to expect' test in paragraph 701-63(5)(d) is applied at the joining time, as this is the time when the tax cost setting amount for an asset whose tax cost is set under Subdivision 705-A. The right to be paid fees will arise on X. At the joining time, the rights to receive a fee under the service contracts each represents a future economic benefit to CCo through the expectation of future income arising from the services that CCo continues to provide to those Entities in accordance with the agreed terms. The future income and economic benefits were recognised in the independent review of the market value of the rights to receive fees prepared by ACo. The assessment of market value is also based on the CCo's forecast of fees which it will receive through the contracts. Based on the above factors, it is considered reasonable to expect that, on X an amount attributable to the fees will give rise to section 6-5 assessable income in CCo's (or ACo's (as head company)) hands. Therefore, the final condition in paragraph 701-63(5)(d) is satisfied. The right to receive fees under the service contracts are rights to future income as defined in subsection 701-63(5) as they are valuable rights to receive an amount that arises under and forms part of the service contracts, they each have a market value of greater than nil. | Detailed Reasoning - Conclusion: As all of the conditions in subsection 701-63(5) have been satisfied, it is considered that the service contracts are each a RTFI for the purpose of tax cost setting rules. | Summary: A part of the X Fee Rights under each service contract, attributable to the period from the commencement of each investment by each Entity to the joining time will meet the definition of a WIP amount asset in subsection 70-63(6). | Detailed Reasoning - Detailed reasoning: Under the consolidation tax costing setting rules the 'tax cost is set' at the time an entity becomes a subsidiary member of a consolidated group for each asset of the entity that would be an asset of the entity at that time if the single entity rule did not apply (section 701-10). Section 701-55 states what is meant by the expression the asset's 'tax cost is set' for certain assets. Where the asset is a WIP amount asset, subsection 701-55(5C) states: If: (a) the asset's tax cost is set because an entity becomes a subsidiary member of a consolidated group at the particular time; and (b) the asset is a *WIP amount asset; the expression means that section 25-95 applies as if the head company had paid a work in progress amount for the income year in which the particular time occurs equal to the tax cost setting amount of the asset. Subsection 701-63(6) states [emphasis added]: WIP amount asset means an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25-95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. The recipient is the joining entity, and the third entity is the other party (customer) to the contract with the joining entity. The effect of the modification to the tax cost setting rules is that subsection 701-55(5C) is not activated until such time as there is a subsection 701-63(6) WIP amount asset at a particular time. Subsection 25-95(1) allows a deduction in respect of 'work in progress amount' to the extent that a recoverable debt has arisen or is expected to arise in respect of the partial completion of work to which the amount relates. Subsection 25-95(3) defines an amount as a work in progress amount to the extent that [emphasis added]: (a) an entity agrees to pay the amount to another entity (the recipient); and (b) the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. The combined effect of section 25-95, subsection 701-55(5C) and subsection 701-63(6) is that on consolidation the tax cost setting amount of any asset of a subsidiary in respect of work (but not goods) that has been partially performed is deductible to the head company: • in the income year in which the joining time occurs, to the extent that the taxpayer reasonably expects that a recoverable debt will arise in respect of the completion or partial completion of the work within the period of 12 months after the joining time • the remainder, if any, in the following income year. | Detailed Reasoning - The meaning of 'Work (but not goods)': In considering whether an asset is a WIP amount asset, it is necessary to determine what is the meaning of 'work' for the purposes of subsection 701-63(6). As the definition of WIP amount asset in subsection 701-63(6) is similar to that in subsection 25-95(3), consideration of the term 'work' and other elements of the definition will be referenced to guidance provided in the Explanatory Memorandum to Taxation Laws Amendment Bill (No 5) 2002 (the EM) that introduced section 25-95. Section 25-95 was introduced in order to allow a deduction for a professional service partnership where a partner exits the partnership and is paid an amount in respect of work on hand at that time. This suggests 'work' is used in its ordinary sense of referring to exertion, labour or toil by natural persons. The ordinary meaning of the term 'work' was described by the Full Federal Court in Minister for Immigration, Local Government and Ethnic Affairs v Montero (1991) 31 FCR 50 at 58 as follows: work in its ordinary sense describes exertion directed to produce or accomplish something, labour or toil. ... It is a term which frequently connotes activity of the mind or body undertaken in exchange for monetary reward and may aptly be used to describe a person's occupation or employment, which again will usually be pursued by that person for monetary reward. Pursuant to the EM, to qualify as 'work' in terms of 'WIP amount' under subsection 25-95(3) (and thus a WIP amount asset under subsection 701-63(6)), the (asset) must be in respect of work performed by one (or more) natural person(s) for a third entity (or customer) but not yet completed to a stage where a recoverable debt has arisen. The amount must have arisen (accrued) as a result of the mental and/or physical activities/exertion of one (or more) natural person(s) who, in the case of subsection 701-63(6) will (generally) have performed this work (for the customer) as an employee, contractor or subcontractor of a company (the recipient mentioned in paragraph 25-95(3)(a) and the joining entity). However, the term 'work' in the context of 'work in progress amount' under subsection 25-95(3) and a WIP amount asset under subsection 701-63(6) does not cover work in progress that is goods, e.g. the work in progress of a manufacturer which is normally trading stock. In this regard, the intention of the '(but not goods)' exclusion pursuant to paragraph 2.14 of the EM is to ensure amounts subject to (and dealt with by) the Division 70 trading stock provisions are excluded from the definition of a 'work in progress' amount in subsection 25-95(3). This does not mean that a variety of accounting accrued (unbilled) income amounts (assets) may access section 25-95 (or subsection 701-63(6)) treatment simply because the non-labour content of the asset is not subject to the Division 70 trading stock provisions. Similarly, certain goods in progress will often have a component reflecting exertion, but the exclusion of goods means that an amount attributable to such exertion may mean the asset is excluded. For example, the expression 'in respect of work (but not goods) performed ... ' clearly exclude accrued (unbilled) income of an energy retailer or wholesaler for the supply of gas and electricity (such as that in FCT v Australian Gas Light Company & Anor (1983) 15 ATR 105) or the accrued (unbilled) income in respect of a chattel lease (held by a lessor) or wet lease (for the provision of aircraft plus pilot and crew) or time charter arrangement (for the provision of vessel plus captain and crew) from being work in progress for section 25-95 (or a WIP amount asset for subsection 701-63(6)) purposes. In relation to the term 'goods', case law generally establishes that the term refers to tangible things. However, the word can have a much wider interpretation, and its meaning can be taken from the context in which it is used. Nonetheless, the courts have tended to interpret the term in a manner which is consistent with sale of goods cases. In the recent decision of Australian Competition and Consumer Commission v Valve Corp (No 3) (2016) 337 ALR 647, 674 at [128], Edelman J explained why this would be the case, highlighting an important aspect of the meaning of 'goods': That aspect is sometimes described in theoretical studies as 'thinghood'...[t]he legal meaning of 'goods' can be analogised to the strict definition of 'property' which is 'a description of a legal relationship with a thing': Yanner v Eaton [1999] HCA53; (1999) 201 CLR 351, 365-366 [17] (Gleeson CJ, Gaudron, Kirby, and Hayne JJ describing the word 'property'). This explains why a chose in action, such as a debt, is not a "good". A chose in action is a right against a person. It is not a right in relation to a thing. This suggests that for the purpose of subsection 701-63(6), goods are limited to tangible things or at least concern property (rather than personal rights) in the case of intangibles. | Detailed Reasoning - To the extent that: You contend that for all future fee amounts, it is abundantly clear that any Fee entitlement is reflective of the partial completion of the services listed in X Matrix and therefore satisfies the conditions to be a WIP amount asset, citing paragraph 2.20 of the EM which states: 2.20 Parties may also agree to make payments in respect of work in progress at future points in time based on a formula. In this case, no amount is specified, rather, a method of calculating the quantum of each payment is provided. When each amount is quantified it will still be an amount in respect of work in progress if the original formula is intended to provide for an amount or amounts in respect of work in progress. You contend that this example is consistent with the conclusion that all amounts that may become payable under the contract after the joining time relate to the management services over the entirety of the contract and do not relate only to future works to be undertake. That is, the different fees are merely calculation and timing rules for consideration in respect of a bundle of services provided over time and that it is abundantly clear that any fee entitlement is reflective of the partial completion of the services listed in the X Matrix and therefore satisfies the conditions to be a WIP amount asset. In practical terms, there are mixed assets where an amount may reflect an entitlement for work which has already been performed, goods, and possibly other things. In this regard, the words 'to the extent that' as they appear in section 25-95 means that although a larger lump sum amount may be paid in some situations, it must be apportioned between that part of the amount that is a work in progress amount and that part that is not. The subsection 701-63(6) definition of 'WIP amount asset' does not contain the words 'to the extent that'. Rather, it speaks of 'an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25-95(3)(b)'. However, the appearance of the phrase is not necessary where part of a work in progress asset can be attributed to something specific to be provided under a contract and that part can be identified from the remainder to evaluate whether it is in respect of work. In the context of 'work in progress amount' under subsection 25-95(3) (and thus a WIP amount asset under subsection 701-63(6)), the test is whether work which has been partially performed, as discussed above, was the dominant element with the exclusion of goods or other things performing no function. A subsection 701-63(6) WIP amount asset is a part (or subset) of a subsection 701-63(5) right to future income (RTFI) (subsection 701-63(5)), a RFTI being (essentially) a contract under which the joining entity has a contingent right (contingent on both and billing)to future (assessable) income (that is not a Division 230 financial arrangement (asset) in the joining entity's hands). That part of the market value of the RTFI contract (if any) that is in respect of work (but not goods) that has been ... performed ... but not to the stage where a recoverable debt has arisen and qualifies as subsection 701-63(6) WIP amount asset is treated as a reset cost base asset for Division 705 purposes. The rest of the market value of the RTFI contract (for the work/services yet to be performed or goods yet to be provided (or things yet to be done) and any non-labour WIP component) is treated as a subsection 705-25(5)(d) retained cost base asset for Division 705 purposes with subsection 705-25(4B) ascribing a TCSA equal to its terminating value at the joining time (of nil). It is clear from the section 701-67 definition of an asset (section 701-67 definition (for Part 3-90 (Division 705) purposes)), the paragraph 705-25(5)(d) retained cost base treatment of a right to future income other than a WIP amount asset and the statements in the Explanatory Memorandum to Taxation Laws Amendment (2012 Measures No 2) Bill 2012 at paragraphs 3.89, 3.102 and 3.105 that refer to rights to future income that are WIP amount assets that subsection 701-63(5) and subsection 701-63(6) do not operate as two separate and independent assets definitions for Part 3-90 (Division 705) purposes. For part of a RTFI contract to qualify as a subsection 701-63(6) WIP amount asset part or all of the market value of the RTFI contract (at the joining time) must consist or be in respect of work (but not goods) that has been ... performed by the joining entity (company or trust) for the third entity, but not to the stage a recoverable debt has arisen. | Detailed Reasoning - Application to CCo's X Fee Rights: The first relevant question is whether the substance of what a X Fee Right relates to is work and exertion, goods, or something else. The fees are once-off amounts which may be paid on X. For the X Fee Rights held by CCo under the service contracts, to qualify as a work in progress amount under subsection 25-95(3) and a WIP amount asset under subsection 701-63(6), the amount (asset) must have arisen (accrued) as a result of the mental or physical activities or exertion of one (or more) natural persons who, in the case of subsection 701-63(6) will (generally) have performed this work (for the customer) as an employee, contractor or subcontractor of a company (the recipient) (this company being the joining entity). The fee under each of the service contracts is contingent on the achievement of specific result under the service contracts at a future point in time. The overall rate of return will be the product of a combination of factors including, amongst other things, work to be performed after the joining time market forces and economic conditions, as well as work which was performed before the joining time. The services that CCo is required to provide under the service contracts are specified in a number of clauses and can be broadly described as in the nature of business, accounting and asset management services. The services under the contract are largely provided through CCo's personnel and are directly attributable to labour cost. It is through the provision of services and undertaking of specific tasks which are performed from the commencement of the Entities until x that the entitlement to fees under the service contract will arise. Although the fee payable under each contract is not an amount payable for specific work or tasks, it does provide a mechanism by which the contractor is provided with a further reward for services and tasks undertaken by CCo, during the term of the service contracts, which will contribute to the overall return made by the Entities. Therefore, there will be a connection between specific work performed by CCo over the term and the payment of a fee under the service contracts. The next question is whether, just before the joining time CCo had performed work for the Entities that is not yet completed to a stage where a recoverable debt had arisen. Under the terms of the service contract, CCo is entitled to receive a fee on realisation of each investment. At the joining time (date of the Acquisition), CCo had not yet provided services to each of the Entities for the following periods in accordance with the contracts: • X, being X after the joining time • X, being X after the joining time • X, being X after the joining time • X, being X after the joining time • X, being X after the joining time • X, being X after the joining time. Pursuant to clause X of each of the Entity documents, CCo can only raise a recoverable debt on X. Accordingly, the services provided by CCo up until the joining time are not at a stage where a recoverable debt had arisen. At the joining time, the total value of the X fee rights which may be paid by the Entities to the contractor on X was $X. The valuation provides a total value for X Fee Rights, with the DCF approach adopted to calculate the market value of fees expected to be received from each Entity. The valuation was arrived at by applying the DCF to internal forecasts. As noted above, section 25-95 was introduced in order to allow a deduction for a professional service partnership where a partner exits the partnership and is paid an amount in respect of work on hand at that time. It is a requirement of section 25-95 that the work has been partially performed for a third entity. A work in progress amount is defined in terms of work which has been performed, but not to a stage where a legal entitlement to payment has arisen. CCo's financial statements do not disclose any amount in respect of work in progress attributable to fees. The valuation, which provides for a total amount of $X at the joining time, is calculated based on the total forecast value of the X Fee Right on X. For a RTFI to be a WIP amount asset, it is necessary to be able to identify an amount in respect to work that has been performed up until the joining time. An analysis of the proportion of remaining term during which services may be provided in proportion of the time over which services have been provide to each Entity up until the joining time under each relevant service contract shows that it is reasonable to conclude a portion of each of the X Fee Rights relates to costs incurred by CCo during this period which is related to labour expenses. In addition to the value of fees which relate to work performed prior to the joining time the valuation includes the value of fees which relate to work which is yet to be performed over the remaining term. That is the valuation provided does not distinguish between the value of the work which had already been performed by CCo during the time which BCo and CCo sellers held an interest in CCo and the forecast value of the fees expected to accrue as a result of future work to be undertaken by CCo and potentially other things which may contribute to the value of the fees after CCo joined the ACo TCG. As such, the assets which have been valued are not just the rights to receive renumeration for work on hand that has been partially performed by the contractor for the relevant Entity as at the joining time, it includes the forecast value of the fees which CCo expects to earn for services yet to be provided and for which it has not incurred any expenditure, amongst other things. Therefore, the value attributed to the relevant X fee rights includes consideration for services not yet provided, that is, services which are to be provided by the contractor in the future, amongst other things. That is, in addition to an amount which may be attributable to periods which have passed before the joining time, it represents the value of services which have not yet been provided and other things which will be attributable to a period after the joining time to X. That is it represents work which is not identifiable as it has not yet been completed. A subsection 701-63(6) WIP amount asset applies to only the portion of the X Fees Rights receivable under the service contracts as the entire value attributed to those assets is not in respect of any identifiable work or services (labour) performed by one or more natural persons for a third entity (customer) that has not yet been performed (completed) to a stage where a recoverable debt has arisen. | Detailed Reasoning - Conclusion: The definition of a WIP amount asset under subsection 701-63(6) limits the asset to one where work has already been performed by a recipient. Therefore, as stated above, the amount representing the unbilled income for services provided up to the joining time must be apportioned to identity that part of the amount that is work for the purpose of section 25-95 and subsection 701 63(6) and that part which is not. The part of each X Fee Right under each service contract, attributable to the period from the commencement to the joining time will meet the definition of a WIP amount asset in subsection 70-63(6). The remaining value is attributable to the period after the joining time during which time it is forecast that CCo will continue to provide services under the contract until X at which time CCo may be entitled to receive a fee. | Summary: ACo will be entitled to a tax deduction in accordance with section 25-95 of the ITAA 1997 equal to the tax cost setting amount of the of the WIP amount asset pursuant to the each of the service contracts. | Detailed Reasoning - Detailed reasoning: In reference to the expression 'tax cost is set', subsection 701-55(5C) states that in relation to a WIP amount asset of a subsidiary becoming a member of a TCG, the expression means that section 25-95 applies as if the head company had paid a work in progress amount for the income year in which the particular time occurs equal to the tax cost setting amount of the asset. This means that where the asset is a WIP amount asset, the head company may be able to claim a deduction equal to it reset tax cost base under section 25-95. It was determined in Questions 2.1 to 2.6 above that a portion of each of the X Fee Rights of CCo attributable to the period from commencement to the joining time meet the definition of a WIP amount asset in subsection 701-63(6), whereas the portion which is attributable to the period after the joining time do not meet the definition of a WIP amount asset. A WIP amount asset is a type of RTFI. However, it is treated as a reset cost base asset as paragraph 705-25(5)(d) specifically excludes it from being a retained cost base asset. Therefore, the WIP amount assets of CCo as at the joining time will be allocated a tax cost setting amount in accordance with section 705-35. Subsection 705-35(1) states that: For each asset of the joining entity (a reset cost base asset) that is not a retained cost base asset, the asset's tax cost setting amount is worked out by: (a) first working out the joined group's allocable cost amount for the joining entity in accordance with section 705-60; and (b) then reducing that amount by the total of the tax cost setting amounts for each retained cost base asset (but not below zero); and (c) finally, allocating the result to each of the joining entity's reset cost base assets in proportion to their market values. As at the date of this private ruling application, the tax cost setting amounts of each of CCo's WIP amount assets have not yet been calculated. However, as previously determined, a portion of each of the X Fee Rights does meet the definition of a WIP amount asset under subsection 701-63(6), therefore, the requirements in subsection 701-55(5C) are satisfied in respect to that portion of the X Fee Rights. Accordingly, ACo being the head company of the TCG, would be treated as if it had paid for a work in progress amount. Consequently, in accordance with subsection 25-95(1) and 25-95(2), ACo will be entitled to deduct: (a) in the income year in which CCo joined the TCG, the portion of the tax cost setting amount (once calculated) of each of the WIP amount assets that, as at the end of the income year, a recoverable debt has arisen or is reasonably expected to arise within 12 months after the amount was paid (b) the remainder of the WIP amount asset tax cost setting amount in the following income year.

Issue 1: Tax cost setting of X Fee Rights | Question 1.1: Do the rights under the service contract for Entity 1, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 1.2: Do the rights under the service contract for Entity 2, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the ITAA 1997? | Question 1.3: Do the rights under the service contract for Entity 3, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the ITAA 1997? | Question 1.4: Do the rights under the service contract for Entity 4, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the ITAA 1997? | Question 1.5: Do the rights under the service contract for Entity 5, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the ITAA 1997? | Question 1.6: Do the rights under the service contract for Entity 6, at the joining time, meet the definition of 'right to future income' in subsection 701-63(5) of the ITAA 1997? | On the basis that the answer to Question 1.1 is 'Yes', does any part of the market value of the right to receive a fee held by CCo at the joining time (X Fee Right) under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | On the basis that the answer to Question 1.2 is 'Yes', does any part of the X Fee Right under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | On the basis that the answer to Question 1.3 is 'Yes', does any part of the X Fee Right under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | On the basis that the answer to Question 1.4 is 'Yes', does any part of the X Fee Right under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | On the basis that the answer to Question 1.5 is 'Yes', does any part of the X Fee Right under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | On the basis that the answer to Question 1.6 is 'Yes', does any part of the X Fee Right under the service contract meet the definition of a WIP amount asset in subsection 701-63(6) of the ITAA 1997? | Issue 2: Deductibility of X Fee Rights | Does Part IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar.