Private ruling: Application of Division 250
Date of advice: 25 September 2015
Published: November 2015

Ruling: Q1: Will Division 250 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to Entity N in relation to its interest in the Project? | A1: No

Relevant facts and circumstances: Entity N entered into an Agreement to design, construct and provide services in respect of a facility asset for Entity D (the Project). The Project comprises of a design and construction phase followed by a services phase. Entity D will grant Entity N a licence to access the areas necessary for the construction of the facility asset and to provide the services for the duration of the Project. Entity N will pay licence fees to Entity D over the services phase for the non-exclusive rights to enter the facility asset in order to provide the contracted services. Entity D will make certain payments to Entity N over the construction phase to cover the costs incurred by Entity N. Entity D will also make payments to Entity N during the services phase to provide the contracted services. Entity N will subcontract the design and construction of the facility asset and the provision of the services. At the conclusion of the Project, Entity N's rights to access the facility under the Agreement will come to an end. The terms of the Agreement are such that Entity N will have no underlying proprietary right in the facility asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 250 | Income Tax Assessment Act 1997 section 250-15 | Income Tax Assessment Act 1997 paragraph 250-15(a) | Income Tax Assessment Act 1997 paragraph 250-15(b) | Income Tax Assessment Act 1997 paragraph 250-15(c) | Income Tax Assessment Act 1997 paragraph 250-15(d) | Income Tax Assessment Act 1997 paragraph 250-15(e) | Income Tax Assessment Act 1997 subparagraph 250-15(d)(i) | Income Tax Assessment Act 1997 subparagraph 250-15(d)(ii) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: All legislative references are to provisions of the Income Tax Assessment Act 1997 unless otherwise stated. Division 250 will not apply to Entity N as this entity is not entitled to a deduction for capital allowances for the decline in value of an asset, nor for capital expenditure in relation to an asset in respect of the Project. | Detailed Reasoning - Detailed reasoning: Division 250 denies or reduces capital allowance deductions that would otherwise be available in relation to an asset if the asset is put to a tax preferred use and the taxpayer has insufficient economic interest in the asset. The general test for application of Division 250 is set out in section 250-15 which provides that the Division will apply to a taxpayer and an asset at a particular time if: (a) the asset is being *put to a tax preferred use; and (b) the *arrangement period for the *tax preferred use of the asset is greater than 12 months; and (c) *financial benefits in relation to the tax preferred use of the asset have been, will be or can reasonably be expected to be, *provided to you (or a *connected entity) by: (i) a *tax preferred end user (or a connected entity); or (ii) any *tax preferred entity (or a connected entity); or (iii) any entity that is a foreign resident; and (d) disregarding this Division, you would be entitled to a *capital allowance in relation to: (i) a decline in the value of the asset; or (ii) expenditure in relation to the asset; and (e) you lack a *predominant economic interest in the asset at that time. Each of the conjunctive requirements in paragraphs 250-15(a)-(e) must be present for the general test to be satisfied. If one of the paragraph requirements is not present, it is sufficient to conclude that the general test is not satisfied and, accordingly, that Division 250 does not apply. The terms of the Agreement are such that Entity N will have no underlying proprietary right in the facility asset. Entity N will undertake the business required under the contracted services of ensuring the construction of the facility and the provision of contracted services. It will conduct this business by subcontracting the services. The income it receives from Entity D is incidental and relevant to its activities of providing the contracted services and will be included in its assessable income. The payments Entity N makes to the subcontractors under the relevant agreements are made in the ordinary course of its business. These payments are not capital, or of a capital nature. Entity N is reimbursed for its costs. In order for Division 250 to apply, Entity N must, among other things, be entitled to deductions for capital allowances pursuant to Division 40 or for expenditure on project works pursuant to Division 43. On the basis that the payments incurred by Entity N are deductible under section 8-1, the payments are not capital or of a capital nature and it is therefore not necessary to consider if Entity N is, or will be, entitled to claim a deduction for capital allowances under Division 40 or for expenditure on project works pursuant to Division 43. Therefore, as section 8-1 applies to all expenditure incurred by Entity N, Division 250 does not apply to Entity N, and thus Entity N is not entitled to a deduction for capital allowances, as required by paragraph 250-15(d). As Entity N does not satisfy one of the conjunctive requirements for Division 250 to apply, in this circumstance the paragraph 250-15(d) requirement, Division 250 does not apply.