Private ruling: Application of Division 230 of the Income Tax Assessment Act 1997
Date of advice: 30 July 2018
Published: September 2018
Ruling period: The relevant income years
Date scheme commenced: The relevant income year

Ruling: Q1: Will the Project Trust’s ‘Payments Swap’ arrangement constitute a financial arrangement under Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Do the amendments to the Project and the Project Agreement require the Project Trust to make a reassessment of whether the accruals method continues to apply to the losses or gains that arise as a result of their ‘Payments Swap’ arrangement under subsection 230-185(1) of the ITAA 1997? | A2: No | Q3: If the answer to question 2 is no, do the amendments to the Project and the Project Agreement require the Project Trust to re-estimate the losses or gains that arise as a result of their ‘Payments Swap’ arrangement under subsection 230-190(1) of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: Existing Project A large public entity (the Entity) and Project Trust entered into a 30 year agreement ( The Existing Agreement ), under which Project Trust committed to pay the upfront payment ( Upfront concession Fee ) and periodic payments ( Ongoing Concession Fees ) to the Entity on Financial Close. These are paid in consideration for the right to receive monthly payments from the Entity.( The Payments Swap ). The Existing Agreement also required Project Trust to deliver the Hard FM Services in relation to the Infrastructure included in the Original Transaction and assume the Asset Risk associated with the Hard FM Elements for consideration ( Hard FM Service Payments ), referred to herein as the Hard FM Services Arrangement . In the event that the Entity undertook any future New Development, the Existing Agreement granted Project Trust a first right of refusal to include any New Development within the Existing Project. Amended Project Overview The Entity and Project Trust entered into the Deed of Amendment to amend and restate the Existing Agreement ( the Amended Agreement ). The Entity is currently undertaking a New Development. The Amended Agreement is a result of Project Trust exercising its first right of refusal under the Existing Agreement to include the New Development within scope of the Existing Project. Therefore, the Amended Agreement expands the Existing Project to also include the New Development. The Amended Agreement provides for a 35 year agreement between the Entity and Project Trust in respect of the New Development. The ‘Payments Swap’ has been amended such that Project Trust will commit to pay an additional upfront payment and increased Ongoing Concession Fees to the Entity on Financial Close of the Deed of Amendment (‘Payments Swap Amendments’). The Amended Agreement also requires the Project Trust to deliver the Hard FM Services in relation to the New Development and assume the Asset Risk for the Hard FM Elements of the New Development in consideration for an increase in the Hard FM Services Payments received ( the New Development Hard FM Services Arrangements Amendments ). Ultimately, the effect of the Amended Agreement is to give effect to the Project now comprising of the New Development, the ‘Payments Swap Amendments’ and the New Development Hard FM Services Arrangement Amendments, referred collectively the Amendments . Transaction and Ownership Structure The Holding Trust is a unit trust that has been established to act as the holding entity of Project Trust. Project Trust is a unit trust. The trustees of Holding Trust and Project Trust are each companies incorporated in Australia. Units in Project Trust are wholly owned by Holding Trust. The terms of the trust deed for each of Holding Trust and Project Trust: a. contain provisions which ensure their respective beneficiaries are presently entitled to all of the income of each as at the end of each income year; b. contain provisions which restrict the transfer or registration of units in the trust where this would result in the trust becoming a “public unit trust” for the purposes of Division 6C of ITAA 1936; and c. have been drafted with the intention that Project Trust and Holding Trust will be fixed trusts for the purposes of section 272-65 in Schedule 2F to the ITAA 1936. Charitable Trust, HoldCo and FinCo The Charitable Trust has been established to act as the holding entity of HoldCo. The beneficiaries of the Charitable Trust will be charitable institutions in Australia. HoldCo is a company incorporated in Australia for the sole purpose of acting as the holding entity of FinCo. FinCo is a company incorporated in Australia for the sole purpose of raising senior debt from external financiers ( Syndicated Facility ), entering into the intercompany loan with Project Trust ( Intercompany Loan ), entering into related hedging arrangements and the agreement pursuant to which the Entity will assign the right to receive the quarterly Ongoing Concession Fees ( Initial Receivables ) to FinCo in exchange for the Upfront Receivables Purchase Payment payable by FinCo ( Receivables Purchase Agreement ). FinCo and HoldCo’s share capital comprises solely of ordinary shares that are wholly held by HoldCo and the trustee of the Charitable Trust respectively. FinCo’s constitution provides that the board of FinCo must comprise of at least one independent non-executive director. The directors of FinCo provide that the board of FinCo must comprise of at least one independent non-executive director. The directors of FinCo will at all times act independently of the Equity Investors, and pursuant to FinCo’s constitution, questions arising at a meeting of directors are to be decided by a unanimous decision of the directors present and voting. Pursuant to FinCo’s constitution, notwithstanding the initial directors of the company are the persons who have consented to act as directors, the company may be resolution passed in a general meeting, removed any director and appoint another person in the director’s place. Funding Holding Trust has called for committed equity from the Equity Investors pursuant to an equity subscription agreement ( Shareholders and Unitholders Deed ). The Equity Investors have subscribed for all the units in Holding Trust pursuant to the Shareholders and Unitholders Deed. Holding Trust raised debt from Equity Investors ( Unitholder Loan ). The Syndicated Facility, Unitholder Loan and Intercompany Loan have been and will continue to, at all times, be a debt interest for Australian income tax purposes and satisfy the definition of a debt interest as defined in section 974-15(1) of the ITAA 1997. The value of the Sydnicated Facility has been and will continue to be at least 50% of FinCo’s assets at all times. The Syndicated Facility obtained by FinCo has borne and continues to bear interest at a variable rate. The Intercompany Loan has and continues to represent a cash advance facility (herein referred to as the On-Loan ) provided by FinCo to Project Trust. The Intercompany Loan also allows for a cash advance facility provided by FinCo to Project Trust when FinCo has a cash shortfall, in order for it to meet its debt service obligations under the place for the majority of the Project term. The interest rate on the Intercompany Loan will be equal to the rate specified in the Financial Model. To fund the Project entities’ obligations under the Deed of Amendment, additional debt and equity will be obtained by Project Trust and FinCo. The additional debt and equity funding will be obtained on substantially the same terms as the existing funding arrangements. The Syndicated Facility will be amended and restated to include an additional facility ( Facility B ), which will be used by FinCo to pay the New Development Receivables Purchase Payment. Funds from Facility B will also be used by FinCo to pay transaction costs and fees associated with the New Development Amendment. As with the Original Transaction, a portion of the funds obtained by FinCo from Facility B will be provided to Project Trust via an amended Intercompany Loan. The On-Loan and Liquidity Loan will similarly be amended to accommodate the increased funding amount. The Unitholder Loan will be amended for additional debt that will be obtained from the Equity Investors. An additional Shareholder and Unitholders Deed will also be entered into by the Equity Investors in respect of additional equity commitments required. Interest Rate Hedging Arrangements On Financial Close of the Original Transaction, FinCo entered into interest rate swaps with third party financiers (the External Swap ). Under the External Swap, FinCo is required to make regular fixed-rate payments based on an amortising notional principle to the swap providers, as specified in a schedule of payments. In return, the swap providers are required to pay swap payments to FinCo referenced to a floating rate basis for each settlement period. Only the net amount payable for each period is paid or received by FinCo under the External Swap. On Financial Close of the Original Transaction, FinCo and Project Trust also entered into the Equalisation Swap under which; a. If the actual financing costs on the Syndicated Facility and the Intercompany Loan are greater than the modelled financing costs in the Financial Model, Project Trust is required to pay the difference to FinCo; and b. If the actual financial costs on which interest on the Syndicated Facility and the Intercompany Loan are less than the modelled financing amounts in the Financial Model, FinCo is required to pay the difference to Project Trust. As part of the revised funding arrangements, incremental External Swaps will be entered into with the same third party financiers. Minor consequential changes will also be made to the Equalisation Swap documentation and again both arrangements will be on substantially the same terms as those described above entered into on Financial Close of the Original Transaction. Key Project Terms Under the Amended Agreement, the term of the New Development Amendments component of the Project is a period of 35 years beginning from the Commencement Date of the New Development. Therefore, the New Development Amendments component of the Project will end later than the Existing Agreement, unless terminated earlier. The Hard FM Services Arrangement Hard FM Services Project Trust is the entity with the primary obligation of carrying out the Hard FM Services under the Amended Agreement. A KPI regime continues to apply to the performance of the Hard FM Services under the Amended Agreement. If Project Trust fails to comply with those KPIs within agreed periods of time, the Entity may notify Project Trust and require rectification. If Project Trust fails to rectify the non-compliance, pursuant to the Amended Agreement, the Entity may retain amounts worked out in accordance with the Amended Agreement from the Hard FM Services Payments ( Hard FM Retention Amounts ). In the unlikely event that the Hard FM Retention Amounts were to exceed the amount of the monthly Hard FM Services Payments, the Entity would be able to retain the excess amount from other payments due and payable by it under the Transaction Documents. The Hard FM Retention Amounts will be paid to Project Trust once it is again complying with the relevant KPI. Step in Rights In addition to the KPI regime and pursuant to Amended Agreement, the Entity will have step-in rights ( Step-In Rights ) if an emergency or public safety incident occurs. Compensation Events Pursuant to the Amended Agreement, Project Trust will be entitled to apply for relief from its obligations and/or claim compensation to the extent that an event ( Compensation Event ) occurs. Asset Risk for Hard FM Elements Pursuant to the Amended Agreement, Project Trust acknowledges and agrees that it is wholly and solely responsible for all liability, loss and claims arising out of or in connection with all Asset Risk, however such Asset Risk arises or is caused from time to time during the term of the Project. Project Trust may obtain insurance against certain insurable risks assumed or pass those risks to the Hard FM Service subcontractor under the subcontract ( Hard FM Services Subcontract ). Any other assumed risks will remain with the Project Trust. In this regard, Project Trust has engaged an independent third party services contractor ( Third Party Contractor ) under the Hard FM Services Subcontract. Hard FM Services Payments The amount of the Hard FM Services Payments will not be contingent upon the amount of funds received by the Entity. Hard FM Sinking Fund Project Trust will be required to maintain a Hard FM Sinking Fund Account. The Funds in the Hard FM Sinking Fund Account must be used for the purposes of undertaking certain lifecycle works forming part of the Hard FM Services in respect of the Residences in accordance with an agreed lifecycle and maintenance plan. Relevantly, the Amended Agreement provides that, to the extent that there are any excess funds in the Hard FM Sinking Fund Account as against the balance that is required to be maintained at such time, such funds may be withdrawn by Project Trust from the Hard FM Sinking Fund Account. Access during Project Term At all relevant times during the Project term, the Entity will remain the legal owner of the Infrastructure. Project Trust will not get any proprietary interests in the Infrastructure through the payment of the Concession Fees. Consistent with standard Hard FM Services arrangements, access will be provided under a non-exclusive licence ( Hard FM Licence ). Relevantly, pursuant to the Amended Agreement, the Entity will grant the Hard FM Licence to Project Trust to access the area to which Project Trust will require access in order to carry out the Hard FM Services ( Licenced Area ). Third Party Contractor Hard FM Subcontract Project Trust has subcontracted responsibility for the delivery of the Hard FM Services to Third Party Contractor under the Hard FM Services Subcontract. The terms of the Hard FM Services Subcontract are broadly back to back terms with Project Trust’s rights and obligations under the Hard FM Services arrangement within the Amended Agreement. In particular, the scheduled Hard FM Services payments to be received by Project Trust under the Amended Agreement will continue to be broadly back to back with the scheduled payments to Third Party Contractor under the Hard FM Services Subcontract except for a profit margin that is intended to cover the cost of insurances to be taken out by Project Trust to cover risks that cannot be passed to Third Party Contractor under the Hard FM Services Subcontract. Under the Amended Agreement, Project Trust continues to be liable to pay the Entity an amount of Liquidated Damages being an amount equivalent to a portion of unavailable Infrastructure, which is to be paid by the Hard FM Services Contractor to Project Trust under the Hard FM Services Contract. Payments Swap Concession Fees Pursuant to the Existing Agreement, Project Trust paid the Upfront Concession Fee and has been paying Ongoing Concession Fees (collectively the Concession Fees ) to the Entity solely in consideration of the Relevant Revenue Amounts Receivable from the Entity. As a result of the New Development Amendments and pursuant to the Amended Agreement, Project Trust will pay the New Development Upfront Concession Fee and an increased amount of ongoing Concession Fees attributable to the New Development solely in consideration for the right to receive an increased Relevant Revenue Amount Receivable attributable to the New Development. This will provide the Entity with a fixed, certain and assignable stream of payments that enhances the commercial ability of the Entity to effectively securitise its future cash flow by way of the Receivables Purchase Agreement. Monthly Net Revenue Amount The Monthly Net Revenue Amount will continue to comprise of a monthly payment in arrears being an amount calculated in accordance with the Amended Agreement. To the extent applicable in each month, the calculation of each component from the Monthly Net Revenue Amount will now include amounts referrable to the New Development. In addition, the Entity must, in the case of decreased revenue incurred or likely to be incurred by the Project Trust as a result of a Compensation Event, pay the Estimated Cost Effect in accordance with the Amended Agreement via an adjustment to the Monthly Net Revenue Amounts. Retention and Set-Off Under the Amended Agreement, the Entity has a general right to retain and offset amounts due and payable under any Transaction Document. Additionally, any liquidated damages payable or receivable by Project Trust or the Entity must be set off. Pursuant to the Amended Agreement, it is intended that negative Monthly Net Revenue Amounts must be offset against the Hard FM Services Payment payable to Project Trust for that month (provided that there is a monthly Hard FM Services Payment which exceeds Hard FM Retention Amount for that period). Receivables Purchase Agreement At the time of the Original Transaction, FinCo entered into the Receivables Purchase Agreement and paid an upfront Receivables Purchase Payment to the Entity in consideration for the Ongoing Concession Fees Receivable. A Payment Directions Deed was entered into between the Entity, FinCo and project Trust. Under the Payment Directions Deed, the Entity directed that the Ongoing Concession Fees payable by Project Trust to the Entity to be paid directly to FinCo. FinCo applies the Ongoing Concession Fees towards repayment of principal and payment of interest on the Senior Debt Facility. Ongoing Concession Fees (in excess of the amount required to repay principal and interest on the Senior Debt Facility) will be lent to Project Trust under the Intercompany Loan. FinCo and the Entity will amend the Receivables Purchase Agreement to include the New Development Receivables on substantially the same terms as the existing Receivables purchase Agreement. In addition, the Amended Agreement states that in the event that the New Development became Excluded Infrastructure and the Entity had an obligation to pay the withdrawal amount (New Development Withdrawal Amount), this amount will be structured as a partial refund of the Receivables Purchase Payment to FinCo ( Receivables Purchase Payments New Development Refund Amount) and the New Development Upfront Concession Fee to Project Trust (under the Payments Swap). In addition, upon payment of the New Development Withdrawal Amount there would be a reduction to the Ongoing Concession Fees payable by Project Trust under the Payments Swap. Termination of the Project Clauses of the Amended Agreement provide for termination of the agreement after Financial Close in certain circumstances ( Termination Event ) In a Termination Event, the component of the Termination Payment paid by the Entity to FinCo and/or Project Trust will be a full or partial refund of the Receivables Purchase Payments and Upfront Concession Fees ( Termination Payment ) respectively. Other information Project Trust has, and will continue to have, an aggregate turnover greater than A$100 million and/or financial assets of greater than A$100 million and/or total assets of greater than A$300 million for the purposes of section 230-455 of the ITAA 1997. Project Trust will not make tax timing method elections to apply any of the methods for taking gains/losses into account referred to in subsections 230-40(1)(b)-(e) of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 – section 8-1 | Income Tax Assessment Act 1997 – subsection 230-5(2) | Income Tax Assessment Act 1997 – section 230-40 | Income Tax Assessment Act 1997 – section 230-45 | Income Tax Assessment Act 1997 – subsection 230-45(2) | Income Tax Assessment Act 1997 – subsection 230-45(3) | Income Tax Assessment Act 1997 – subsection 230-55(4) | Income Tax Assessment Act 1997 – section 230-100 | Income Tax Assessment Act 1997 – section 230-115 | Income Tax Assessment Act 1997 – section 230-185 | Income Tax Assessment Act 1997 – section 230-190 | Income Tax Assessment Act 1997 – section 230-200 | Income Tax Assessment Act 1997 – section 230-455 | Income Tax Assessment Act 1997 – section 995-1

Reasons for decision: Summary: On balance, when applying the factors contained in subsection 230-55(4) of the ITAA 1997, Project Trust’s obligation to pay the Concession Fees in consideration for the right to receive the Monthly Net Revenue Amounts (and other amounts) constitutes a separate arrangement from the Hard FM Services arrangement and the other rights and obligations conferred under the Amended Agreement. As the Concession Fees, MNRAs, Annual NRAS Amount, Upfront Concession Fee New Development Refund Payment, Upfront Concession Fee New Development Refund Payment and Termination Payment are benefits which are money or money equivalent, Project Trust’s rights and obligations in respect of the Payments Swap arrangement are cash settlable as required by subsection 230-45(1) of the ITAA 1997. Therefore, the Payment Swap arrangement (including the New Development Payments Swap Amendments) constitutes a Division 230 financial arrangement. | Detailed Reasoning - Detailed reasoning: The Taxation of Financial Arrangements ( TOFA ) rules under Division 230 provides a comprehensive framework for taxing financial arrangements that certain taxpayers start to have in an income year commencing on or after 1 July 2010 unless the entity is: a. an individual, or b. a superannuation entity, managed investment scheme or an entity substantially similar to a managed investment scheme under foreign law with assets of less than $100 million, or c. an ADI, a securitisation vehicle or other financial sector entity with an aggregated turnover of less than $20 million, or d. another entity with an aggregated turnover of less than $100 million, financial assets of less than $100 million and assets of less than $300 million. However an entity may, notwithstanding that Division 230 does not apply to them based on the above thresholds, irrevocably elect under subsection 230-455(7) to have Division 230 apply to financial arrangements that it has entered into after the beginning of the income year in which the election is made. | Detailed Reasoning - Financial Arrangement: Under the TOFA rules, it is necessary to first identify a “financial arrangement” of an entity for the purposes of Division 230. Under subsection 230-45(1), an arrangement is a ‘financial arrangement’ if under that arrangement there is: (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; unless: (d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and (e) for one or more of the rights and/or obligations covered by paragraph (d): (i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or (ii) the right or obligation is not cash settlable; and (f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c). The right obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement. * denotes a term defined in subsection 995-1(1). Arrangement An ‘arrangement’ is defined broadly in section 995-1 of the ITAA 1997 to mean “any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings”. Cash settlable Pursuant to subsections 230-45(2) to (3) of the ITAA 1997, a right to receive or obligation to provide a financial benefit will be “cash settlable” if: a. the financial benefit is money or a money equivalent; or b. the financial benefit is non-monetary but the relevant right or obligation is, in substance or effect, expected to be dealt with in a manner which involves a monetary benefit or equivalent. Grouping and disaggregation rules The grouping and disaggregation rules must be considered where there are a number of rights or obligations to provide or receive financial benefits. The following factors under subsection 230-55(4) of the ITAA 1997 must be considered in determining whether the rights or obligations themselves are an arrangement or two or more separate arrangements: a. The nature of the rights and/or obligations; b. Their terms and conditions (including those relating to any payment or other consideration for them); c. The circumstances surrounding their creation and their proposed exercise or performance (including what can be reasonably be seen as the purpose of one or more of the entities involved); d. Whether they can be dealt with separately or must be dealt with together; e. Normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole); and f. The objects of Division 230 of the ITAA 1997, namely to minimise the extent to which the tax treatment of gains and losses from financial arrangements creates distortions and compliance costs, and to align more closely the tax and commercial recognition of gains and losses from financial arrangements. | Detailed Reasoning - Application of the TOFA rules under Division 230: As Project Trust will have an aggregate turnover greater than A$100 million and/or total assets of greater than A$300 million and/or financial assets of greater than A$100 million at Financial Close, Division 230 can apply to the Project Trust pursuant to subsection 230-5(2). The Payments Swap involves the Project Trust with a right to receive more than one financial benefit. A threshold question is whether the rights and obligations in respect of the Payments Swap constitute a separate arrangement for Division 230 purposes, or whether these rights and obligations form part of the broader arrangement under the Amended Agreement. | Detailed Reasoning - The “arrangement” for the purposes of Division 230: The rights and obligations created by the Existing Agreement from the perspective of the Trust include, amongst other things: a. the obligation to pay the Concession Fees (comprising of the Upfront Concession Fee, and the Ongoing Concession Fees); b. the contingent right to receive the Termination Payment as a full or partial refund of the Upfront Concession Fee in the event that the requirements for receipt of the Termination Payment are satisfied under the Amended Agreement; c. the right to receive payments in the event of a Compensation Event; d. the obligation to provide the Hard FM Services; e. the right to receive the Hard FM Services Payments; f. the obligation to pay and the right to receive Liquidated Damages; g. the assumption of Asset Risk; and h. a first right of refusal to include any New Development in the Existing Project. All the rights and obligations created by the Existing Agreement continue to exist in the Amended Agreement. However, additional rights and obligations have been created from the perspective of the Project Trust which relevantly include: a. the right to receive the Monthly Net Revenue Amounts in respect of the New Development as they fall due and payable; b. the obligation to pay the New Development Upfront Concession Fee and the Ongoing Concession Fees in respect of the New Development; c. the contingent right to receive the New Development Withdrawal Amount as a partial refund of the Upfront Concession Fee in the event that the requirements for receipt of the New Development Withdrawal Amount are satisfied; d. the contingent right to receive the New Development Termination Payment as a full or partial refund of the New Development Upfront Concession Fee in the event that the requirements for receipt of the New Development Termination Payment are satisfied; e. the right to receive payments in the event of a Compensation Event in respect of the New Development; f. the obligation to provide the New Development Hard FM Services; g. the right to receive the Hard FM Services Payment attributable to the New Development; h. the obligation to pay and the right to receive Liquidated Damages in respect of the New Development; and i. the assumption of Asset Risk in respect of the New Development. Taxation Ruling TR 2012/4 ( TR 2012/4 ) sets out the Commissioner’s view on this matter and states at paragraphs 6 and 133 that an “arrangement” will often be the rights and obligations under a particular contract, unless the form differs from the economic or commercial substance of the arrangement. This analysis is consistent with that contained in the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 ( EM ). Paragraph 138 of the TR 2012/4 provides that regard must always be had to each of the factors in subsection 230-55(4), however, in a particular fact pattern it may be that one or more criteria are more significant than others. The nature of the rights and obligations At paragraph 15, the Commissioner states that this factor includes a consideration of the substance of the rights and/or obligations. Project Trust will not obtain any proprietary interest in the Infrastructure through the payment of the Concession Fees. Consistent with typical Hard FM Service arrangements, access will be provided under the Hard FM Licence for nominal consideration. Nor will Project Trust carry out or control the operation of the Infrastructure. The day to day operation of the Infrastructure will continue to be carried out by the Entity. Rather, Project Trust will obtain a discrete set of rights and obligations under the Amended Agreement that can be characterised respectively as a Payments Swap and a Hard FM Services arrangement. Additionally, Project Trust will continue to have the first right of refusal to include any New Development within the Project established by the Existing Agreement. Under the Payments Swap, the Concession Fees are paid solely for the right to receive the Net Revenue Amounts. The outgoing of the Concession Fees is made to gain exposure to the revenues related to the Infrastructure net of certain operational and maintenance costs incurred by the Entity to provide a commercial return on equity invested in Project Trust. Under the New Development Payments Swap Amendments, the New Development Upfront Concession Fee and increase in Ongoing Concession Fees under the Payments Swap is paid solely for the right to receive increased Net Revenue Amounts under the Payments Swap. Under the Hard FM Services Arrangement, Project Trust fulfils its obligations through the Hard FM Services Subcontract under which substantially all the risks and rewards of the delivery of those services are passed to Third Party Contractor, an independent third party subcontractor. The existing Hard FM Services Subcontract has been amended to incorporate the New Development Hard FM Services. A margin made by Project Trust on the delivery of those services is intended to cover the costs of insurance of risks that cannot be passed on to Third Party Contractor under the Hard FM Services Subcontract. The Payments Swap will continue to be treated as a financial asset separate to the Hard FM Services Arrangement for accounting purposes. The New Development Payments Swap Amendments will also be treated as a financial asset separate to the Hard FM Services Arrangement. These factors point towards the Payments Swap (inclusive of the New Development Payment Swap Amendments) as an arrangement separate from all the other rights and obligations under the Amended Agreement, namely the Hard FM Services arrangement for these purposes. Their terms and conditions (including those relating to any payment or other consideration for them) At paragraph 16 of TR 2012/4 the Commissioner states that where one amount is calculated and paid as consideration for a number of rights it will tend to suggest an aggregation of rights. Alternatively, where the consideration is calculated and paid separately for different rights, it will tend to suggest such rights are separate. The Upfront Concession Fee and Ongoing Concession Fees are scheduled payment obligations that are to be paid by the Equity Investors. They are payments solely in consideration of the Monthly Net Revenue Amounts that are calculated as set out in the Amended Agreement. In addition to these existing scheduled payment obligations, the New Development Upfront Concession Fee and Ongoing Concession Fees attributable to the New Development will become scheduled payment obligations. These fees are paid solely in consideration for an increase in the value of the Monthly Net Revenue Amounts attributable to the New Development that are calculated as set out in the Amended Agreement. Consistent with the right of Project Trust to include the New Development as an additional part of the Existing Project, the New Development Upfront Concession Fee and increase in Ongoing Concession Fees attributable to the New Development have been considered together with the existing Upfront Concession Fee and Outgoing Concession Fees within the Financial Model Output Schedule that are to be paid. The increase in the value of Monthly Net Revenue Amounts attributable to the New Development is also calculated together with the Monthly Net Revenue Amounts attributable to the other Residences under the Amended Agreement. The Hard FM Services Payments payable in consideration solely for the delivery of the Hard FM Services will be structured on broadly back to back terms with the Hard FM Services Subcontract with Third Part Contractor. Similarly, any increase in the Hard FM Services Payments payable in consideration for the delivery of the New Development Hard FM Services will also be broadly back to back terms with the Hard FM Services Subcontract with Third Party Contractor. Specifically, the Hard FM Services Payments are not calculated by reference to the quantum of funds received by the Entity, the amount of any resulting Monthly Net Revenue Amounts, or other amounts. As outlined the Amended Agreement, the Hard FM Services Payments are set out in the Hard FM Services Payments Schedule, Project Trust’s right to receive the Hard FM Services Payments set out in that schedule is dependent on the satisfactory performance of the Hard FM Services. The failure to meet KPI’s in the provision of the Hard FM Services may result in the retention of some or all of the Hard FM Services Payments by the Entity. Should the Hard FM Services Retention Amount exceed the Hard FM Services Payment for a period, the terms provide that it may be retained out of other payments made by the Entity. The payment of Liquidated Damages by Project Trust to the Entity is directly attributable to failures in the delivery of the Hard FM Services and is back to back with a payment required to be paid by Third Party Contractor to Project Trust under the Hard FM Services contract. Accordingly, the payment of the Liquidated Damages by Project Trust should be considered part of the Hard FM Services arrangement and not part of the Payments Swap. This factor does not conclusively indicate whether for the purposes of Division 230 the rights and obligations in respect of the Payments Swap give rise to an arrangement separate to the other rights and obligations under the Amended Agreement. The circumstances surrounding their creation and their proposed exercise or performance At paragraphs 17 and 18 of TR 2012/4, the Commissioner states that this factor includes a consideration of the context surrounding the life cycle of the rights and/or obligations from creation to what is proposed as exercise or performance. It requires an objective assessment of the purposes of the entities involved, where evidence of the subjective purpose may be relevant though not determinative. The structuring of the arrangement that gives rise the relevant rights and obligations arises from a single bid process run by the Entity. Project Trust submits that if it subcontracts to a separate entity to provide Hard FM Services, that separate entity would be a member of the successful bidder consortium and a party to the same Agreement. Consistent with the proposed structure, the structure proposed by the Entity that a separate Hard FM Services Payment may be paid for the delivery of the Hard FM Services. Additionally, if the Entity were to construct any New Development, it would first offer the single preferred bidding consortium the offer to include the New Development within the Original Transaction and the Existing Project. The Existing and Amended Agreements have been agreed on this basis. Third Party Contractor has undertaken the performance of the Hard FM Services on broadly back to back terms with the Hard FM Services Arrangement. Third Party Contractor will not obtain any interest or upside in any profits or losses made by Project Trust under the Payments Swap. Third Party Contractor will continue to be the Hard FM Services provider in respect of the New Development. The above indicates that the Hard FM Services arrangement (and the Hard FM Subcontract) should be considered as capable of performance separate from the Payments Swap. This factor supports the position that the Payments Swap is a separate arrangement to the Hard FM Services arrangement. Additionally, it also supports the position that the New Development Payments Swap Amendments form part of the Payments Swap financial arrangement. Whether they can be dealt with or must be dealt with together At paragraph 19 of TR 2012/4, the Commissioner states that this factor includes consideration of whether the rights and/or obligations can be dealt with separately or must be dealt with together in accordance with the terms and conditions of the arrangement. Under the Amended Agreement, a termination event would trigger a termination of the Project as a whole, including but not limited to the termination of third party arrangements, financing arrangements and the securitisation arrangement. The Original and Amended Agreements provide that Project Trust cannot assign its rights or interests without the Entity’s consent. The Original and Amended Agreements provide Project Trust the first right to include any New Development within the Existing Project. As a result of this right, Project Trust entered into the Deed of Amendment and has accepted its right to include the New Development as part of the Existing Project. Therefore, the New Development Payments Swap Amendments form part of the Payments Swap financial arrangement. However, given that a termination event would trigger a termination of the Project as a whole and that Project Trust cannot assign its rights or interests under the agreement without the Entity’s consent, this factor indicates that the rights and obligations in respect of the Payments Swap do not give rise to an arrangement separate from the Hard FM Services arrangement. Normal commercial understandings and practices in relation to them At paragraph 20 of TR 2012/4, the Commissioner states that this factor includes consideration of normal commercial understandings and practices in relation to rights and/or obligations (including whether they are regarded commercially as separate things or as a group or series that forms a whole). The Payments Swap allows the Entity to transfer the risk around the demand for student accommodation, the risk of non-receipt of the Student Rents net of Soft FM and Hard FM costs to Project Trust. Such an arrangement is explicable on its own terms without reference to the Hard FM Services arrangement. The Hard FM Services Subcontract which will be on broadly back to back terms with the Hard FM Services arrangement evidences the fact that such arrangements are common in the industry as standalone arrangements. Including the New Development within the scope of the Existing Project allows the Entity to manage interface risk as it ensures that the parties to, and terms of, the Project remain consistent across the majority of its existing and any New Development. From an accounting perspective, the Payments Swap (including the New Development Payments Swap Amendments) is treated as a financial arrangement separate from the Hard FM Services arrangement. The New Development Payments Swap Amendments will be recognised as a separate financial asset for accounting purposes on the basis that the term of the existing Payments Swap is expected to end before the term of the New Development Payments Swap Amendments, unless terminated earlier. As such, any profit arising on the Payments Swap will be brought to account according to accounting principles appropriate to financial arrangements of this kind. This supports the treatment of the Payments Swap (inclusive of the New Development Payments Swap Amendments) as an arrangement separate from the Hard FM Services arrangement for these purposes. The objects of Division 230 At paragraph 21 of TR 2012/4, the Commissioner states that, very broadly, the objectives of Division 230 are: a. To minimise tax distortions on commercial decision making by, for gains and losses from financial arrangements, aligning tax recognition of such gains and losses with the reality of what gains and losses occur and when they occur; b. To align tax and commercial recognition of gains and losses from financial arrangements by ensuring that the time of recognition of those gains and losses is reasonable, and by generally recognising such gains and losses on revenue account; and c. To appropriately take account of, and minimise, compliance costs. This may involve considering the taxation implications that would arise if the arrangements were aggregated compared to if they were not. Commercially, the gains and losses that arise from the Payments Swap and the New Development Payments Swap Amendments under the Amended Agreement are considered as one. Treating all of Project Trust’s rights and obligations under the Amended Agreement as a single arrangement for Division 230 purposes, instead of as two or more separate arrangements, means that ultimately the arrangement will not be a ‘financial arrangement’ under subsection 230-45(1) (as there would be non-insignificant non-cash settlable rights and obligations in respect of the Hard FM Services and the licence). In that instance, any gains or losses would be assessed under the general income tax provisions rather than Division 230. This factor indicates that the rights and obligations in respect of the Payments Swap give rise to a separate arrangement for the purposes of Division 230. Conclusion Applying the factors under subsection 230-55(4) of the ITAA 1997, on balance, Project Trust’s obligation to pay the Concession Fees in consideration for the right to receive the Monthly Net Revenue Amounts, the Annual NRAS Amount (and other amounts) constitutes a separate arrangement from the Hard FM Services arrangement and the other rights and obligations conferred under the Amended Agreement. As such, the Payment Swap arrangement (including the New Development Payments Swap Amendments) constitutes a Division 230 financial arrangement. | Summary: There is no material change to the terms and conditions of the arrangement or the circumstances that affect the arrangement because the New Development Payments Swap Amendments have been made in a manner consistent with the terms of the Existing Agreement that gave effect to the Payments Swap arrangement. Also, the amendments have been made as a result of the exercise of Project Trust’s New Development rights that were established under the Existing Agreement Therefore, the amendments to the Project and the Amended Agreement do not require Project Trust to make a reassessment of whether the accruals method continues to apply to losses that arise of a result of their payment of Concession Fees or the gains that arise as a result of their receipt of the Monthly Net Revenue Amounts (and other amounts). | Detailed Reasoning - Detailed reasoning: Subsection 230-185(1) of the ITAA 1997 states – | Detailed Reasoning - 230-185(1): You must make a fresh assessment of which gains and losses from a *financial arrangement the accruals method should apply to, and which gains and losses from that arrangement the realisation method should apply to, if: (a) the accruals method, or the realisation method, provided for in this Subdivision applies to gains and losses from the arrangement; and (b) there is a material change to: (i) the terms and conditions of the arrangement; or (ii) circumstances that affect the arrangement. Therefore, it is necessary to consider whether Project Trust is required to make a fresh reassessment of whether the accruals method continues to apply to the gains and losses that arise under Payments Swap as a result of the SA7 Payments Swap Amendments. The Accruals method or the realisation method applies to the gains and losses from the arrangement As Project Trust has not and will not make any of the tax timing method elections to apply any of the methods for taking into account gains or losses of the Payments Swap financial arrangement referred to in paragraphs 230-40(1)(b)-(e) of the ITAA 1997, one of the default methods (being either the accruals method or the realisation method) will apply to the gains and losses from the Payments Swap financial arrangement, satisfying the first element of the reassessment test under paragraph 230-185(1)(a) of the ITAA 1997. Section 230-100 of the ITAA 1997 applies to determine when to apply the accruals method and when to apply the realisation method. Subsection 230-100(2) states – | Detailed Reasoning - 230-100(2): The accruals method provided for in this Subdivision applies to a gain or loss you have from a *financial arrangement if: (a) the gain or loss is an overall gain or loss from the arrangement; and (b) the gain or loss is sufficiently certain at the time when you start to have the arrangement; and (c) you choose to apply the accruals method to the gain or loss, or subsection (4) applies to the gain or loss. Subsection 230-100(3A) states – | Detailed Reasoning - 230-100(3A): The accruals method provided for in this Subdivision also applies to a gain or loss you have from a *financial arrangement if: (a) the gain or loss arises from a *financial benefit that you are to receive or are to provide under the arrangement; and (b) the gain or loss becomes sufficiently certain at the time you receive or provide the benefit; and (c) at least part of the period over which the gain or loss would be spread under that method (assuming that method applied) occurs after the time you receive or provide the benefit. Therefore, where an overall or particular gain or loss meets criteria around being “sufficiently certain”, depending on when the criteria is met, that gain or loss will be recognised for income tax purposes on an accruals basis. However, if the tests around sufficient certainty are not met, then the realisation basis becomes the default method for recognising the gain or loss for tax purposes. Sufficiently certain Subsections 230-115(1) and (2) of the ITAA 1997 provide a two-element test which requires a determination of whether, and to the extent that, it is ‘reasonably expected’ that Project Trust will receive and provide the financial benefits under the arrangement and whether the amount or value of the financial benefit is, at that time, ‘fixed or determinable with reasonable accuracy’. The terms of the Existing Agreement and the Amended Agreement show that Project Trust has – (a) a particular loss at the start of the arrangement equal to the Upfront Concession Fee paid on the Financial Close by Project Trust to the Entity; (b) a particular loss each month equal to the Ongoing Concession Fees payable monthly by Project Trust to the Entity; (c) a particular gain at the end of every month when the Monthly Net Revenue Amounts are determined in arrears. Therefore, Project Trust has ‘sufficiently certain’ particular gains and losses under the Payments Swap and should bring to account its gains and losses under the Payments Swap on an accruals basis under paragraph 230-190(1)(a) of the ITAA 1997. A material change to the terms or conditions of the arrangement The only changes to the terms or conditions of the arrangement are those changes incorporated within the Amended Agreement to give effect to the New Development Payments Swap Amendments. The New Development Payments Swap Amendments have been made in a manner consistent with the terms of the agreement (being the Existing Agreement) that gave effect to the Payments Swap arrangement. Additionally, the amendments have also been made as a result of the exercise of Project Trust’s New Development rights that were established under the Existing Agreement. The New Development Payments Swap Amendments do not alter the material terms and conditions of the arrangement other than to give effect to the New Development Payments Swap Amendments and therefore do not constitute a material change. A material change to the circumstances that affect the arrangement The only change to the terms or conditions of the arrangement involves additions to give effect to the New Development Payments Swap Amendments. That is, the relevant circumstances that affect the arrangement remains unchanged other than to be expanded to encompass the New Development Payments Swap Amendments. Therefore, there is no material change to the circumstances that affect the arrangement. Conclusion The amendments to the Project and the Existing Agreement do not require Project Trust to make a reassessment of whether the accruals method continues to apply to losses that arise of a result of their payment of Concession Fees or the gains that arise as a result of their receipt of the Monthly Net Revenue Amounts (and other amounts). This is because there is no material change to the terms and conditions of the arrangement or the circumstances that affect the arrangement. | Summary: The factors contained in subsection 230-190(1) of the ITAA 1997 indicate that the amendments to the Project and the Amended Agreement require Project Trust to make a re-estimation of the losses that arise as a result of their payment of Concession Fees or the gains that arise as a result of their receipt of the Monthly Net Revenue Amounts (and other amounts). | Detailed Reasoning - Detailed reasoning: Subsection 230-190(1) of the ITAA 1997 states – | Detailed Reasoning - 230-190(1): You re-estimate a gain or loss from a *financial arrangement under subsection (5) if: (a) the accruals method applies to the gain or loss; and (b) circumstances arise that materially affect: (i) the amount or value; or (ii) the timing; of financial benefits that were taken into account in working out the amount of the gain or loss; and (c) the circumstances do not give rise to a re-estimation under section 230-200. The accruals method applies to the gain or loss As Project Trust has not and will not make any of the tax timing method elections to apply any of the methods for taking into account gains or losses of the Payments Swap financial arrangement referred to in paragraphs 230-40(1)(b)-(e) of the ITAA 1997, one of the default methods, that is either the accruals method or the realisation method) will apply to the gains and losses that arise from the Payments Swap function arrangement. For the reasons outlined in Question 2 above, the accruals method applies to the gain or loss. Circumstances arise that materially affect the amount or value or timing of the financial benefits that were taken into account in working out the amount of the gain or loss When considering the circumstances that materially affect the amount or value or timing of the financial benefits that were taken into account in working out the amount of the gain or loss, paragraph 4.177 of the EM states – A taxpayer is not required to re-estimate the amount of the gain or loss if the change in the value or amount of the financial benefit or the timing of the financial benefit is not significant. The requirement is that a change to those circumstances affecting a financial benefit is a material change. Whether there has been a material change is a question of fact which depends on the relevant circumstances of each situation. An example is where there is a change to circumstances such that a cash flow which was previously estimated becomes known, but where the difference between the estimated value of the cash flow and the actual value of the cash flow is small or negligible in nominal terms. In such an instance, the change would not be material. Hence, a re-estimation is not required in such a situation and the taxpayer will continue to accrue the originally calculated sufficiently certain gain or loss. The New Development Payments Swap Amendments are likely to be changes that materially affect the value of the financial benefits that were taken into account in working out the amount of the gain or loss before the New Development Payments Swap Amendments were introduced. The New Development Payments Swap Amendments will change the amount of the various elements forming the Payments Swap, being the amounts payable upfront by Project Trust (that is, the Upfront Concession Fee, which will now include the New Development Upfront Concession Fee) and the amounts receivable by Project Trust. Additionally, the New Development Expiration Date is expected to be after the end of the Existing Project. This will materially affect the timing of the financial benefits to be taken into account in working out the amount of the gain or loss. This is on the basis that the Ongoing Concession Fees will be payable over a longer term than previously expected under the Existing Agreement. Therefore, it is clear that the New Development Payments Swap Amendments materially affect the amount and timing of financial benefits that are taken into account when working out the amount of the gain or loss under the Payments Swap and the requirement under paragraph 230-190(1)(b) of the ITAA 1997 is satisfied. The circumstances do not give rise to a re-estimation under section 230-200 of the ITAA 1997 Subsection 230-200(1) of the ITAA 1997 states – | Detailed Reasoning - 230-200(1): You also re-estimate a gain or loss from a financial arrangement under subsection (2) if: (a) the accruals method applies to the gain or loss; and (b) a balancing adjustment is made in relation to the arrangement under Subdivision 230-G because you transfer to another entity: (i) a proportionate share of all of your rights and/or obligations under the arrangement; or (ii) a right or obligation that you have under the arrangement to a specifically identified financial benefit; or (iii) a proportionate share of a right or obligation that you have under the arrangement to a specifically identified financial benefit. You must re-estimate the gain or loss as soon as reasonably practicable after the transfer occurs. Paragraph 230-200(1)(a) of the ITAA 1997 is satisfied as the accruals method will apply to the gains and losses under the Payments Swap. However, paragraph 230-200(1)(b) of the ITAA 1997 is not satisfied as there is no balancing adjustment of the kind contained in that paragraph due to the New Development Payments Swap Amendments. Notably, no rights and/or obligations under the Payments Swap are transferred to another entity as a result of the New Development Payments Swap Amendments. Accordingly, as the New Development Payments Swap Amendments do not give rise to a re-estimation under section 230-200 of the ITAA 1997, the requirement under paragraph 230-190(1)(c) is satisfied. Conclusion The factors contained in subsection 230-190(1) of the ITAA 1997 indicate that the amendments to the Project and the Amended Agreement require Project Trust to make a re-estimation of the losses that arise as a result of their payment of Concession Fees or the gains that arise as a result of their receipt of the Monthly Net Revenue Amounts (and other amounts).