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Tax Laws Amendment (2007 Measures No. 5) Act 2007 (164 of 2007)

Schedule 1 Tax preferred entities (asset financing)

Part 1 Main amendments

Income Tax Assessment Act 1997

1 At the end of Part 3-10

Add:

Division 250 - Assets put to tax preferred use

Table of Subdivisions

Guide to Division 250

250-A Objects

250-B When this Division applies to you and an asset

250-C Denial of, or reduction in, capital allowance deductions

250-D Deemed loan treatment of financial benefits provided for tax preferred use

250-E Taxation of deemed loan

250-F Treatment of asset when Division ceases to apply to the asset

250-G Objections against determinations and decisions by the Commissioner

Guide to Division 250

250-1 What this Division is about

This Division denies or reduces certain capital allowance deductions that would otherwise be available to you in relation to an asset if the asset is put to a tax preferred use in certain circumstances.

If the capital allowance deductions are denied or reduced, certain financial benefits in relation to the tax preferred use of the asset are assessed only to the extent of a notional gain component. This component is worked out on the basis of treating the arrangements under which the asset is put to a tax preferred use, and financial benefits are provided in relation to that tax preferred use, as a loan. Subdivision 250-E then applies to determine the amounts that are to be assessed.

Subdivision 250-A - Objects

Table of sections

250-5 Main objects

250-5 Main objects

The main objects of this Division are:

(a) to deny or reduce your *capital allowance deductions in respect of an asset if the asset is put to a *tax preferred use and you have insufficient economic interest in the asset; and

(b) if your capital allowance deductions are denied or reduced, to treat the *arrangement for the tax preferred use of the asset as a loan that is taxed as a financial arrangement (on a compounding accruals basis).

Subdivision 250-B - When this Division applies to you and an asset

Table of sections

Overall test

250-10 When this Division applies to you and an asset

250-15 General test

250-20 First exclusion - small business entities

250-25 Second exclusion - financial benefits under minimum value limit

250-30 Third exclusion - certain short term or low value arrangements

250-35 Exceptions to section 250-30

250-40 Fourth exclusion - sum of present values of financial benefits less that amount otherwise assessable

250-45 Fifth exclusion - Commissioner determination

Tax preferred use of asset

250-50 End user of an asset

250-55 Tax preferred end user

250-60 Tax preferred use of an asset

250-65 Arrangement period for tax preferred use

250-70 New tax preferred use at end of arrangement period if tax preferred use continues

250-75 What constitutes a separate asset for the purposes of this Division

250-80 Treatment of particular arrangements in the same way as leases

Financial benefits in relation to tax preferred use

250-85 Financial benefits in relation to tax preferred use of an asset

250-90 Financial benefit provided directly or indirectly

250-95 Expected financial benefits in relation to an asset put to tax preferred use

250-100 Present value of financial benefit that has already been provided

Discount rate to be used in working out present values

250-105 Discount rate to be used in working out present values

Predominant economic interest

250-110 Predominant economic interest

250-115 Limited recourse debt test

250-120 Right to acquire asset test

250-125 Effectively non-cancellable, long term arrangement test

250-130 Meaning of effectively non-cancellable arrangement

250-135 Level of expected financial benefits test

250-140 When to retest predominant economic interest under section 250-135

Overall test

250-10 When this Division applies to you and an asset

This Division applies to you and an asset at a particular time if:

(a) the general test in section 250-15 is satisfied in relation to you and the asset; and

(b) none of the exclusions in sections 250-20, 250-25, 250-30, 250-40 and 250-45 apply.

250-15 General test

This Division applies to you 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 not an Australian 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.

250-20 First exclusion - small business entities

This Division does not apply to you and an asset if:

(a) you are a *small business entity for the income year in which the *arrangement period for the *tax preferred use of the asset starts; and

(b) you choose to deduct amounts under Subdivision 328-D for the asset for that income year.

250-25 Second exclusion - financial benefits under minimum value limit

(1) This Division does not apply to you and an asset that is being *put to a tax preferred use under a particular *arrangement if, at the start of the *arrangement period, the total of the nominal values of all the *financial benefits that have been, or will be or can reasonably be expected to be, provided to you (or a *connected entity):

(a) by *members of the tax preferred sector; and

(b) in relation to the *tax preferred use of the asset or any other asset that is being, or is to be, put to a tax preferred use under the arrangement;

does not exceed $5 million.

(2) The amount referred to in subsection (1) is indexed annually.

Note: Subdivision 960-M shows you how to index amounts.

250-30 Third exclusion - certain short term or low value arrangements

Certain short term or low value arrangements generally excluded

(1) This Division does not apply to you and an asset that is being *put to a tax preferred use under a particular *arrangement if:

(a) the *arrangement period for the *tax preferred use of the asset does not exceed:

(i) 5 years if the asset is real property and the tax preferred use of the asset is a lease; or

(ii) 3 years in any other case; or

(b) at the start of the arrangement period, the total of the nominal values of all the *financial benefits that have been, will be or can reasonably be expected to be, provided to you (or a *connected entity):

(i) by *members of the tax preferred sector; and

(ii) in relation to the tax preferred use of the asset or any other asset that is being, or is to be, put to a tax preferred use under the arrangement;

does not exceed:

(iii) $50 million if the asset is real property and the tax preferred use of the asset is a lease; or

(iv) $30 million in any other case; or

(c) at the start of the arrangement period, the total of the values of all the assets that are put to a tax preferred use under the arrangement does not exceed:

(i) $40 million if the asset is real property and the tax preferred use of the asset is a lease; or

(ii) $20 million in any other case.

This subsection has effect subject to section 250-35.

(2) The amounts referred to in paragraphs (1)(b) and (c) are indexed annually.

Note: Subdivision 960-M shows you how to index amounts.

250-35 Exceptions to section 250-30

Debt interests

(1) Section 250-30 does not apply if the *arrangement (either alone or together with any arrangement in relation to the *tax preferred use of the asset or the provision of *financial benefits in relation to the tax preferred use of the asset) is a *debt interest.

(2) In applying subsection (1), disregard subsection 974-130(4).

Member of tax preferred sector having certain rights in relation to the asset

(3) Section 250-30 does not apply if:

(a) a *member of the tax preferred sector has:

(i) a right, obligation or contingent obligation to purchase or acquire the asset or a legal or equitable interest in the asset; or

(ii) a right to require the transfer of the asset or a legal or equitable interest in the asset; or

(iii) a residual or reversionary interest in the asset that will arise or become exercisable at or after the end of the *arrangement period; and

(b) the consideration for the purchase, acquisition or transfer of the right, obligation or interest is not fixed as the *market value of the asset at the time of the purchase, acquisition or transfer.

To avoid doubt, this subsection does not apply to the asset merely because your interest in the asset is one that ceases to exist after the passage of a particular period of time.

Member of tax preferred sector providing financing

(4) Section 250-30 does not apply if a *member of the tax preferred sector provides financing, or support for financing, in relation to your interest in the asset (including by way of a loan, a guarantee, an indemnity, a security, hedging or undertaking to provide *financial benefits in the event of the termination of an *arrangement).

Finance leases, non-cancellable operating leases, service concessions and similar arrangements

(5) Section 250-30 does not apply if an *arrangement in relation to the *tax preferred use of the asset, or the provision of *financial benefits in relation to the tax preferred use of the asset, is or involves:

(a) a finance lease; or

(b) a non-cancellable operating lease; or

that generally accepted accounting principles, as in force at the start of the *arrangement period, require to be included as an asset or a liability in your balance sheet.

Financial benefits irregular, not based on comparable market-based rates or not reflecting value of tax preferred use of asset

(6) Section 250-30 does not apply if the *financial benefits that have been, or are to be provided, to you (or a *connected entity) by *members of the tax preferred sector in relation to the *tax preferred use of the asset:

(a) are not provided on a regular periodic basis (and at least annually); or

(b) are not based on comparable market-based rates; or

Special rules if tax preferred use is a lease or hire of the asset

(7) If the *tax preferred use of the asset is a lease or hire of the asset (or the use of the asset under a lease or hire arrangement), section 250-30 does not apply if:

(a) the asset is so specialised that the *end user could not carry out one or more of its functions effectively without the asset; and

(b) you would be unlikely to be able to re-lease, re-hire or resell the asset to another person who is not a *member of the tax preferred end user group.

Note: For particular arrangements that are treated as leases, see section 250-80.

Special rules if tax preferred use is not a lease or hire of the asset

(8) If the *tax preferred use of the asset is not the lease or hire of the asset (or the use of the asset under a lease or hire arrangement), section 250-30 does not apply if:

(a) a *member of the tax preferred sector has a right, if particular circumstances occur, to manage, or to assume control over, the asset (other than temporarily for the purpose of ensuring public health or safety, protecting the environment or continuing the supply of an essential service); or

(b) the asset is so specialised that it is unlikely that it could effectively be put to any use other than the tax preferred use; or

Note: For particular arrangements that are treated as leases, see section 250-80.

250-40 Fourth exclusion - sum of present values of financial benefits less than amount otherwise assessable

(1) This Division does not apply to you and an asset that is being *put to a tax preferred use under a particular *arrangement if, when that *tax preferred use of the asset starts, the Division 250 assessable amount is less than the alternative assessable amount.

(2) For the purposes of subsection (1), the Division 250 assessable amount is the sum of the present values of all the amounts that would be likely to be included in your assessable income under this Division in relation to the *tax preferred use of the asset if this Division applied to you and the asset.

(3) This is how to work out the alternative assessable amount for the purposes of subsection (1):

Method statement

Step 1. Add up the present values of the amounts that would be included in your assessable income in relation to the *financial benefits *provided in relation to the tax preferred use of the asset during the *arrangement period if this Division did not apply to you and the asset.

Step 2. Add up the present values of the amounts that you would be able to deduct in relation to the asset, or expenditure in relation to the asset, under Division 40 or Division 43 in relation to the *arrangement period if this Division did not apply to you and the asset.

Step 3. Deduct the amount obtained in Step 2 from the amount obtained in Step 1. The result is the alternative assessable amount .

(4) To avoid doubt, the amounts referred to in subsections (2) and (3) are all the amounts that would be likely to be included in your assessable income, or deducted, for all the income years during the whole, or a part, of which the asset is *put to the tax preferred use.

(5) The point in time to be used in determining, for the purposes of this section:

(a) the present value of an amount that is included in your assessable income for an income year; or

(b) the present value of an amount that you would be able to deduct for an income year;

is the end of the income year.

250-45 Fifth exclusion - Commissioner determination

This Division does not apply to you and an asset at a particular time if:

(a) you request the Commissioner to make a determination under this subsection; and

(b) the Commissioner determines that it is unreasonable that the Division should apply to you and the asset at that time, having regard to:

(i) the circumstances because of which this Division would apply to you and the asset; and

(ii) any other relevant circumstances.

Tax preferred use of asset

250-50 End user of an asset

(1) An entity (other than you) is an end user of an asset if the entity (or a *connected entity):

(a) uses, or effectively controls the use of, the asset; or

(b) will use, or effectively control the use of, the asset; or

(d) will be able to use, or effectively control the use of, the asset.

(2) The control referred to in subsection (1) may be direct or indirect.

(3) For the purposes of subsection (1), disregard any temporary control of the asset that is for the purpose of ensuring public health or safety, protecting the environment or continuing the supply of an essential service.

(4) To avoid doubt, an entity is taken to be an end user of an asset if the entity (or a *connected entity) holds rights as a lessee under a lease of the asset.

Note: For particular arrangements that are treated as leases, see section 250-80.

250-55 Tax preferred end user

An *end user of an asset is a tax preferred end user if:

(a) the end user (or a *connected entity) is a *tax preferred entity; or

(b) the end user is an entity that is not an Australian resident.

250-60 Tax preferred use of an asset

(1) An asset is put to a tax preferred use at a particular time if:

(a) an *end user (or a *connected entity) holds, at that time, rights as lessee under a lease of the asset; and

(b) either or both of the following subparagraphs is satisfied at that time:

(i) the asset is, or is to be, used by or on behalf of an end user who is a *tax preferred end user because of paragraph 250-55(a) (tax preferred entity);

(ii) the asset is, or is to be, used wholly or principally outside Australia and an end user of the asset is a tax preferred end user because of paragraph 250-55(b) (non-resident).

If this subsection applies, the tax preferred use of the asset is the lease referred to in paragraph (a).

Note: For particular arrangements that are treated as leases, see section 250-80.

(2) An asset is also put to a tax preferred use at a particular time if:

(a) at that time the asset is, or is to be, used (whether or not by you) wholly or partly in connection with:

(i) the production, supply, carriage, transmission or delivery of goods; or

(ii) the provision of services or facilities; and

(b) either or both of the following subparagraphs is satisfied at that time:

(i) some or all of the goods, services or facilities are, or are to be, produced for or supplied, carried, transmitted or delivered to or for an *end user who is a *tax preferred end user because of paragraph 250-55(a) (tax preferred entity) but is not an *exempt foreign government agency;

(ii) the asset is, or is to be, used wholly or principally outside Australia and an end user of the asset is a tax preferred end user because of paragraph 250-55(b) (non-resident).

If this subsection applies, the tax preferred use of the asset is the production, supply, carriage, transmission, delivery or provision referred to in paragraph (a).

(3) To avoid doubt, the facilities referred to in subsection (2) include:

(a) hospital or medical facilities; or

(b) prison facilities; or

(d) *land transport facilities; or

(e) other transport facilities; or

(f) the supply of water, gas or electricity; or

(g) housing or accommodation; or

(h) premises from which to operate a *business or other undertaking.

(4) If the asset is being *put to a tax preferred use:

(a) the members of the tax preferred end user group are:

(i) the *tax preferred end user; and

(ii) the *connected entities of the tax preferred end user; and

(b) the members of the tax preferred sector are:

(i) the tax preferred end user (and connected entities); and

(ii) any *tax preferred entity (or a connected entity); and

(iii) any entity that is not an Australian resident.

250-65 Arrangement period for tax preferred use

Start of the arrangement period

(1) The arrangement period for a particular *tax preferred use of an asset starts when that tax preferred use of the asset starts.

End of the arrangement period

(2) Subject to subsection (3), the arrangement period for a particular *tax preferred use of an asset is taken to end on the day that is the date on which the tax preferred use of the asset may reasonably be expected, or is likely, to end.

(3) The arrangement period for the *tax preferred use of the asset ends when this Division ceases to apply to you and the asset if that happens before the day referred to in subsection (2).

(4) In determining when a particular *tax preferred use of an asset is likely to end:

(a) regard must be had to:

(i) the terms of, and any other circumstances relating to, any *arrangement dealing with that tax preferred use of the asset; and

(ii) the terms of, and any other circumstances relating to, any arrangement dealing with the *provision of *financial benefits in relation to that tax preferred use of the asset; and

(b) it must be assumed that any right that an entity has to renew or extend such an arrangement will not be exercised (unless it is reasonable to assume that the right will be exercised because of the commercial consequences for the entity (or a *connected entity) of not exercising the right).

Tax preferred uses of asset by entity and connected entity

(5) For the purposes of this section:

(a) the *tax preferred use of an asset by an entity; and

(b) the tax preferred use of the asset by a *connected entity of that entity;

are taken to constitute a single tax preferred use of the asset.

250-70 New tax preferred use at end of arrangement period if tax preferred use continues

If:

(a) this Division applies to you and an asset because the asset is *put to a tax preferred use; and

(b) the *arrangement period for the *tax preferred use of the asset ends on a particular date (the termination date ); and

the tax preferred use of the asset after the termination date is taken to be a separate and distinct tax preferred use of the asset from the tax preferred use of the asset before the termination date.

Note: This means, among other things, that there is a new arrangement period for the tax preferred use after the termination date and that the arrangement is retested under section 250-15 against circumstances as they stand immediately after the termination date.

250-75 What constitutes a separate asset for the purposes of this Division

(1) This Division applies to:

(a) an improvement to land; or

(b) a fixture on land;

whether the improvement or fixture is removable or not, as if it were an asset separate from the land.

(2) Whether a particular composite item is itself an asset or whether its components are separate assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

Example 1: A car is made up of many separate components, but usually the car is an asset rather than each component.

Example 2: A floating restaurant consists of many separate components (like the ship itself, stoves, fridges, furniture, crockery and cutlery), but usually these components are treated as separate assets.

(3) This Division applies to a renewal or extension of an asset that is a right as if the renewal or extension were a continuation of the original right.

(4) This Division applies to an asset (the underlying asset ) in which:

(a) you have an interest; and

(b) one or more other entities also have an interest;

as if your interest in the underlying asset were itself the underlying asset.

250-80 Treatment of particular arrangements in the same way as leases

This Division applies to an *arrangement that:

(a) in substance or effect, depends on the use of a specific asset that is:

(i) real property; or

(ii) goods or a personal chattel (other than money or a money equivalent); and

(b) gives a right to control the use of the asset (other than temporarily for the purpose of ensuring public health or safety, protecting the environment or continuing the supply of an essential service); and

in the same way as it applies to a lease.

Note: Even if this section applies to treat an arrangement in relation to an asset as a lease, the requirements in section 250-50 still need to be satisfied before an entity can be an end user of the asset.

Financial benefits in relation to tax preferred use

250-85 Financial benefits in relation to tax preferred use of an asset

(1) For the purposes of this Division, the *financial benefits provided in relation to a tax preferred use of an asset include (but are not limited to):

(a) a financial benefit provided in relation to:

(i) bringing the asset into a state, condition or location in which it can be *put to the tax preferred use; or

(ii) the start of the *tax preferred use of the asset; and

(b) a financial benefit provided in relation to the end of the tax preferred use of the asset; and

(i) the tax preferred use of the asset; or

(ii) the provision of financial benefits in relation to the tax preferred use of the asset; and

(d) a financial benefit provided in relation to the purchase or acquisition of the asset by, or transfer of the asset to, the *tax preferred end user (or a *connected entity).

(2) Without limiting paragraph (1)(b), if the asset has a *guaranteed residual value:

(a) the amount of the guaranteed residual value is taken to be a *financial benefit provided in relation to the tax preferred use of the asset ; and

(b) that financial benefit is taken to be provided when the relevant payment is made in relation to the guaranteed residual value.

(3) The asset has a guaranteed residual value if there is an *arrangement that provides to the effect that if:

(a) on or after the end of the *arrangement period, you (or a *connected entity) sell or otherwise dispose of the asset to any person; and

(b) you (or a connected entity) receives in respect of the sale or disposal:

(i) no consideration; or

(ii) consideration that is less than an amount (the guaranteed amount ) specified in, or ascertainable under, the provision;

a *member of the tax preferred sector will pay to you (or a connected entity), or to someone else for your benefit (or for the benefit of a connected entity), an amount equal to:

(d) the amount by which the guaranteed amount exceeds the consideration if subparagraph (b)(ii) applies.

The amount of the guaranteed residual value is taken to be the guaranteed amount.

(4) If:

(a) an asset is *put to a tax preferred use; and

(b) an entity is an *end user of the asset because the entity manages the asset or the use to which the asset is put;

any *financial benefit that the entity (or a *connected entity) provides that is calculated by reference to the receipts, revenue or income generated by the use of the asset is also taken to be a financial benefit provided in relation to the tax preferred use of the asset .

(5) For the purposes of this Division (other than this subsection), a *financial benefit provided by a *member of the tax preferred sector is taken not to be provided in relation to the tax preferred use of an asset to the extent to which the financial benefit merely passes on, or represents:

(a) financial benefits provided in relation to the use of the asset; or

(b) something derived from the use of the asset;

by someone who is not a member of the tax preferred sector.

(6) For the purposes of this Division, disregard a *financial benefit *provided in relation to the tax preferred use of the asset to the extent to which it consists solely of routine maintenance of the asset.

(7) For the purposes of this Division, if a *financial benefit is provided in relation to the use of a number of assets, a separate financial benefit of an amount or value that is reasonably attributable to each asset is taken to be provided in relation to each asset.

(8) To avoid doubt, a *financial benefit may be provided in relation to a tax preferred use of an asset even though it is provided before the *tax preferred use of the asset starts.

(9) For the purposes of this Division:

(a) a *financial benefit that is not an amount:

(i) is taken to become due and payable when the entity providing the financial benefit becomes liable to provide the financial benefit; and

(ii) is taken to be paid when it is provided; and

(b) a financial benefit that is paid without becoming due and payable is taken to have become due and payable on the day on which it was paid.

250-90 Financial benefit provided directly or indirectly

For the purposes of this Division, a person (the provider ) is taken to provide a *financial benefit to a person (the recipient ) in relation to a *tax preferred use of an asset whether the financial benefit is provided to the recipient:

(a) directly; or

(b) indirectly (including indirectly through an entity that is not a *connected entity of the recipient and is not a connected entity of the provider).

250-95 Expected financial benefits in relation to an asset put to tax preferred use

For the purposes this Division, the expected financial benefits at a particular time in relation to an asset that is *put to a tax preferred use are the *financial benefits that, at that time:

(a) have been; or

(b) will, assuming normal operating conditions, be; or

*provided in relation to the tax preferred use of the asset by a *member of the tax preferred sector to someone who is not a member of the tax preferred sector.

Note: Paragraphs 250-85(1)(b), (c) and (d) provide for certain benefits provided in relation to the end of the tax preferred use of the asset or in relation to the purchase, disposal or transfer of the asset to be treated as financial benefits provided in relation to the tax preferred use of the asset.

250-100 Present value of financial benefit that has already been provided

For the purposes of this Division, the present value of a *financial benefit at a particular time is the nominal amount or value of the financial benefit if the financial benefit has been provided before that time.

Discount rate to be used in working out present values

250-105 Discount rate to be used in working out present values

(1) For the purposes of section 250-40, the discount rate to be used in working out the present value of a future amount is:

(a) the average, expressed as a decimal fraction, of the assessed secondary market yields in respect of 10-year non-rebate Treasury bonds published by the Reserve Bank during the *financial year in which the relevant *arrangement period starts; or

(b) if no assessed secondary market yield in respect of bonds of that kind was published by the Reserve Bank during the year - the decimal fraction determined by the Treasurer for the purposes of the definition of long-term bond rate in section 2 of the Petroleum Resource Rent Tax Assessment Act 1987 in relation to the financial year in which the relevant arrangement period starts.

(2) For the purposes of section 250-135 and Subdivisions 250-C and 250-D, the discount rate to be used in working out the present value of a future amount is a rate that reflects a constant periodic rate of return (worked out on a compounding basis) on the investment in:

(a) the asset referred to in subparagraph 250-15(d)(i) if that subparagraph applies; or

(b) the expenditure referred to in paragraph 250-15(d)(ii) if that subparagraph applies;

that is implicit in the *arrangements under which the asset is *put to a tax preferred use and *financial benefits are *provided in relation to that tax preferred use.

Predominant economic interest

250-110 Predominant economic interest

You lack a predominant economic interest in an asset at a particular time only if one or more of the following sections apply to you and the asset at that time:

(a) section 250-115 (limited recourse debt test);

(b) section 250-120 (right to acquire asset test);

(d) section 250-135 (level of expected financial benefits test).

250-115 Limited recourse debt test

(1) You lack a predominant economic interest in an asset at a particular time if more than the allowable percentage of the cost of your acquiring or constructing the asset is financed (directly or indirectly) by a *limited recourse debt or debts.

(2) For the purposes of subsection (1):

(a) the amount of a *limited recourse debt is to be reduced by the value of any * debt property (other than the *financed property) that is provided as security for the debt; and

(b) if the limited recourse debt finances the acquisition or construction of 2 or more assets, only the amount of the debt that is reasonably attributable to the asset referred to in subsection (1) is to be taken into account.

(3) For the purposes of subsection (1), the allowable percentage is:

(a) 80% if the asset is taken to be *put to a tax preferred use because of subparagraph 250-60(1)(b)(i) or (2)(b)(i) (end use by *tax preferred entities); or

(b) 55% if the asset is taken to be put to a tax preferred use because of subparagraph 250-60(1)(b)(ii) or (2)(b)(ii) (end use by non-residents).

(4) This section does not apply to the asset if:

(a) you are a *corporate tax entity; and

(b) the *tax preferred use of the asset is not the lease or hire of the asset (and is not the use of the asset under a lease or hire arrangement); and

(d) no *member of the tax preferred sector provides financing, or support for financing, in relation to your interest in the asset (including by way of a loan, a guarantee, an indemnity, a security, hedging or undertaking to provide *financial benefits in the event of the termination of an *arrangement).

(5) Paragraph (4)(b) does not apply if:

(a) the asset is real property (or an interest in real property); and

(b) the *tax preferred use of the asset is a lease; and

(c) the space within the property that is occupied by tenants who are *members of the tax preferred sector is less than half of the total space within the property that is either occupied by tenants or available to be occupied by tenants.

(6) This section also does not apply to the asset if:

(a) you hold the asset as a trustee; and

(b) the asset is real property (or an interest in real property); and

(d) the space within the property that is occupied by tenants who are *members of the tax preferred sector is less than half of the total space within the property that is either occupied by tenants or available to be occupied by tenants; and

(e) the asset is *put to the tax preferred use wholly or principally in Australia; and

(f) no member of the tax preferred sector provides financing, or support for financing, in relation to your interest in the asset (including by way of a loan, a guarantee, an indemnity, a security, hedging or undertaking to provide *financial benefits in the event of the termination of an *arrangement).

250-120 Right to acquire asset test

(1) You lack a predominant economic interest in an asset at a particular time if, at that time:

(a) the asset is to be transferred to a *member of the tax preferred sector after the end of the *arrangement period; and

(b) the consideration for the transfer is not fixed as the *market value of the asset at the time of the transfer.

(2) You also lack a predominant economic interest in an asset at a particular time if, at that time:

(a) a *member of the tax preferred end user group has, or will have:

(i) a right, obligation or contingent obligation to purchase or acquire the asset or a legal or equitable interest in the asset; or

(ii) a right to require the transfer of the asset or a legal or equitable interest in the asset; and

(b) the consideration for the purchase, acquisition or transfer is not fixed as the *market value of the asset at the time of the purchase, acquisition or transfer.

To avoid doubt, this section does not apply to the asset merely because your interest in the asset is one that ceases to exist after the passage of a particular period of time.

250-125 Effectively non-cancellable, long term arrangement test

(1) You lack a predominant economic interest in an asset at a particular time if:

(a) any *arrangement that relates to:

(i) the *tax preferred use of the asset; or

(ii) the *financial benefits to be *provided by the *members of the tax preferred sector in relation to the tax preferred use of the asset;

is *effectively non-cancellable (see section 250-130); and

(b) the *arrangement period for the tax preferred use of the asset is:

(i) greater than 30 years; or

(ii) if the arrangement period is less than or equal to 30 years - 75% or more of that part of the asset's *effective life that remains when the tax preferred use of the asset starts.

(2) Disregard section 40-102 in working out the asset's *effective life for the purposes of subparagraph (1)(b)(ii).

250-130 Meaning of effectively non-cancellable arrangement

(1) An *arrangement that relates to *financial benefits to be *provided by a *member of the tax preferred sector in relation to the tax preferred use of an asset is effectively non-cancellable if:

(a) the arrangement can be cancelled only with:

(i) your permission; or

(ii) the permission of a *connected entity of yours; or

(iii) an agent or entity acting on your behalf (or on behalf of a connected entity of yours); or

(b) the arrangement can be cancelled without the permission of an entity referred to in paragraph (a) but, if the arrangement were cancelled, the member of the tax preferred sector or another member of the tax preferred sector:

(i) would be required to enter into a new arrangement for the *provision of financial benefits in relation to the tax preferred use of the asset; or

(ii) would incur a penalty and the magnitude of the penalty would be such as to discourage cancellation.

(2) For these purposes, if a *member of the tax preferred sector defaults under an *arrangement and the arrangement is cancelled, the arrangement is to be taken to have been cancelled without the permission of an entity referred to in paragraph (1)(a).

250-135 Level of expected financial benefits test

Effective guarantee or indemnity for value of asset

(1) You lack a predominant economic interest in an asset at a particular time if the asset has a *guaranteed residual value at that time.

Likely financial benefits exceeding 70% limit

(2) You also lack a predominant economic interest in an asset at a particular time if, at that time:

(a) the *arrangement under which the asset is *put to the tax preferred use (either alone or together with any other arrangement in relation to the *tax preferred use of the asset or the *provision of *financial benefits in relation to the tax preferred use of the asset) is a *debt interest; or

(b) the sum of the present values of the *expected financial benefits that *members of the tax preferred sector have provided, or are or are reasonably likely to provide, to you (or a *connected entity) in relation to the tax preferred use of the asset exceeds 70% of:

(i) the *market value of the asset if subparagraph 250-15(d)(i) applies; or

(ii) so much of the market value of the asset as is attributable to the expenditure referred to subparagraph 250-15(d)(ii) if that subparagraph applies.

250-140 When to retest predominant economic interest under section 250-135

Purpose for applying section

(1) This section applies for the purposes of working out whether this Division applies to you and to an asset that is *put to a tax preferred use.

No need to keep retesting if section 250-135 does not apply at start of tax preferred use of asset

(2) If section 250-135 does not apply to you and the asset at the time when the *tax preferred use of the asset starts, that section is taken, subject to subsection (4), to continue not to apply to you and the asset.

Note: This subsection means that if section 250-135 does not apply to the arrangement when the tax preferred use of the asset starts, the arrangement does not need to be retested against section 250-135 until a change of the kind referred to in subsection (4) occurs.

No need to keep retesting if section 250-135 does not apply when you do something to increase value of expected financial benefits

(3) If:

(a) you (or a *connected entity), or a *member of the tax preferred sector, do something, or omit to do something, at a particular time that increases the value of the *expected financial benefits in relation to the *tax preferred use of the asset; and

(b) section 250-135 does not apply to the asset at that time;

that section is taken, subject to subsection (4), to continue not to apply to you and the asset.

Note: This subsection means that if the arrangement is retested against section 250-135 at a particular time and section 250-135 does not apply to the arrangement on that retesting, the arrangement does not need to be again retested against section 250-135 until a change of the kind referred to in subsection (4) occurs.

Retesting when you do something to increase the value of expected financial benefits

(4) Subsection (2) or (3) ceases to apply to you and the asset if you (or a *connected entity), or a *member of the tax preferred sector, do something, or omit to do something, that increases the value of the *expected financial benefits in relation to the *tax preferred use of the asset.

Certain financial benefits ignored when retesting

(5) For the purposes of reapplying section 250-135 to the asset, disregard *financial benefits provided before subsection (2) or (3) of this section ceased to apply to the asset.

Note: If:

(a) subsection (2) or (3) ceases to apply to the asset at a particular time under this subsection; and

(b) the asset is retested at that time against section 250-135; and

subsection (3) will start to apply to the asset again from that time because paragraph (3)(b) will have been satisfied.

Clarification that retesting only required if you do something to increase value of expected benefits

(6) To avoid doubt, subsection (2) or (3) does not cease to apply merely because the value of the *expected financial benefits in relation to the asset increase because of something other than action taken, or an omission made, by you (or a *connected entity) or a *member of the tax preferred sector.

Note: This subsection means that retesting under subsection (4) is not triggered by an increase in the value of expected financial benefits that happens because of external circumstances (circumstances external to activities and omissions of yours, your connected entities and members of the tax preferred sector).

Subdivision 250-C - Denial of, or reduction in, capital allowance deductions

Table of sections

250-145 Denial of capital allowance deductions

250-150 Apportionment rule

250-145 Denial of capital allowance deductions

(1) If this Division applies to you and an asset at a particular time, any condition that needs to be satisfied for you to be able to deduct an amount under a *capital allowance provision in relation to:

(a) a decline in the value of the asset; or

(b) expenditure in relation to the asset;

is taken not to be satisfied at that time.

(2) This section has effect subject to section 250-150.

250-150 Apportionment rule

(1) This section applies if:

(a) this Division applies to you and an asset that is *put to a tax preferred use; and

(b) it is reasonable to expect that, during the *arrangement period for the *tax preferred use of the asset, particular *financial benefits will be provided to you (or a *connected entity); and

(i) will be provided in relation to a use of the asset that is not that tax preferred use and is not a private use; or

(ii) will be *provided in relation to that tax preferred use of the asset but will not be attributable, directly or indirectly, to financial benefits that are provided by *members of the tax preferred sector; and

(d) the amount or value of those financial benefits is known or can reasonably be estimated; and

(e) you choose to have this section apply to the asset.

In applying paragraph (c), disregard financial benefits that are provided under an *arrangement that is a *debt interest.

(2) A choice under paragraph (1)(e) in relation to an asset:

(a) must be made before the due date for you to lodge your *income tax return for the income year in which the *arrangement period for the *tax preferred use of the asset starts; and

(b) must be made for the whole of the arrangement period for the tax preferred use of the asset; and

(c) must extend to all assets that are, or are to be, *put to a tax preferred use under the *arrangement under which the asset is put to that use; and

(d) is irrevocable.

The choice may extend to an asset referred to in paragraph (c) even if it is likely that paragraphs (1)(b) and (c) will not apply to that asset.

(3) If this section applies, section 250-145 applies to you and the asset only to the extent of the *disallowed capital allowance percentage.

(4) Subject to subsection (6), the disallowed capital allowance percentage is the following ratio (expressed as a percentage):

Sum of present values of financial benefits that are subject to deemed loan treatment / Market value of asset

(5) The Commissioner may, before the due date for you to lodge your *income tax return for the income year to which the *arrangement period for the *tax preferred use of the asset starts, approve an alternative method for working out the *disallowed capital allowance percentage for you and the asset.

(6) If the Commissioner approves an alternative method under subsection (5), the disallowed capital allowance percentage is the percentage worked out in accordance with that alternative method.

Subdivision 250-D - Deemed loan treatment of financial benefits provided for tax preferred use

Table of sections

250-155 Arrangement treated as loan

250-160 Financial benefits that are subject to deemed loan treatment

250-165 Financial arrangement

250-170 Financial arrangement (equity interest or right or obligation in relation to equity interest)

250-175 Rights, obligations and arrangements (grouping and disaggregation rules)

250-180 End value of asset

250-185 Financial benefits subject to deemed loan treatment not assessed

250-155 Arrangement treated as loan

Loan with characteristics provided for in this section taken to exist

(1) If this Division applies to you and an asset at a particular time in an income year, a *financial arrangement in the form of a loan (with the characteristics provided for in this section) is taken to exist at that time for the purposes of working out your taxable income for that income year.

Note: See Subdivision 250-E for the taxation treatment of the financial arrangement.

Lender

(2) You are taken to be the lender in relation to the loan.

Amount lent and unpaid at the start of the arrangement period

(3) The amount worked out under subsection (4) is taken to be the amount that you have lent, and that the borrower has not repaid, at the start of the *arrangement period.

(4) The amount is worked out by taking:

(a) the amount that, at the start of the *arrangement period, is:

(i) the *adjustable value of the asset if subparagraph 250-15(d)(i) applies; or

(ii) the amount worked out under subsection (5) if subparagraph 250-15(d)(ii) applies; or

(b) if section 250-150 applies - the amount that, at the start of the arrangement period, is the *disallowed capital allowance percentage of:

(i) the adjustable value of the asset if subparagraph 250-15(d)(i) applies; or

(ii) the amount worked out under subsection (5) if subparagraph 250-15(d)(ii) applies;

and deducting the sum of all *financial benefits that are *subject to deemed loan treatment and that have become due and payable before the start of the arrangement period.

(5) If subparagraph 250-15(d)(ii) applies, the amount worked out under this subsection for the purposes of subsection (4) is:

Item	If the expenditure referred to in that subparagraph is ...	the amount is ...
1	capital expenditure under Division 40	the amount of the capital expenditure in respect of which a deduction has not been allowed (disregarding this Division) under the relevant Subdivision of Division 40
2	capital expenditure under Division 43	the *undeducted construction expenditure in relation to the capital expenditure

Amounts paid to you by borrower under the loan

(6) Any *financial benefit that:

(a) a person provides; and

(b) is *subject to deemed loan treatment;

is taken to be an amount that the borrower pays you under the loan.

Note 1: Section 250-160 tells you which financial benefits are subject to the deemed loan treatment.

Note 2: These benefits may be ones that are provided either to you or to a connected entity.

Period of the loan

(7) The *arrangement period is taken to be the period of the loan.

Applying Subdivision 250-E to the loan

(8) For the purposes of applying Subdivision 250-E to the loan:

(a) you are taken to have an overall gain from the loan and that overall gain is taken to be sufficiently certain at the time when you start to have the loan; and

(b) the amount of that overall gain is taken to be the sum of the *financial benefits that are *subject to the deemed loan treatment less the amount worked out under subsection (4); and

(i) to start to have the loan at the start of the *arrangement period; and

(ii) to cease to have the loan at the end of the arrangement period; and

(d) any right that you (or a connected entity) have to a financial benefit that is subject to deemed loan treatment is taken to be a right that you have under the loan; and

(e) if a *connected entity transfers to another person a right to a financial benefit subject to deemed loan treatment:

(i) you are taken to transfer the right to that other person; and

(ii) any consideration that the connected entity receives in relation to the transfer is taken to be consideration that you receive in relation to the transfer; and

(f) if a right that a connected entity has to a financial benefit subject to deemed loan treatment ceases and the connected entity receives consideration in relation to that cessation - you are taken to receive that consideration in relation to the cessation; and

(g) you are taken to start to have the loan, or to cease to have the loan, as consideration for something if you start to have the rights to the financial benefits that are subject to deemed loan treatment, or cease to have those rights, as consideration for that thing; and

(h) in applying sections 250-265 to 250-275:

(i) the amount that you are taken, under subsections (3), (4) and (5), to have lent are the only financial benefits that you provide under the loan; and

(ii) the financial benefits you have received under the loan are taken to include financial benefits that are subject to deemed loan treatment that a person is, at the end of the arrangement period, liable to provide to you.

(9) If, under subsection 250-160(2), a particular percentage of a reasonable estimate of the *end value of the asset was taken to be a *financial benefit that is *subject to the deemed loan treatment, subsection 250-275(1) applies to the loan at the end of the *arrangement period as if you had received under the loan a financial benefit equal to the relevant percentage of the end value of the asset.

250-160 Financial benefits that are subject to deemed loan treatment

General rule

(1) Subject to subsections (3) and (4), a *financial benefit is subject to deemed loan treatment if:

(a) the financial benefit:

(i) has been; or

(ii) will, assuming normal operating conditions, be; or

(iii) can, assuming normal operating conditions, reasonably be expected to be;

provided to you (or a *connected entity); and

(b) the financial benefit has been, will be or can reasonably be expected to be *provided directly or indirectly by a *member of the tax preferred sector in relation to the *tax preferred use of the asset; and

(d) the financial benefit has not been, will not be or can be expected not to be provided by one of your connected entities.

Note: Paragraph (d) stops a financial benefit passing between you and any of your connected entities from being counted twice.

End value also taken to be financial benefit subject to deemed loan treatment

(2) The relevant percentage of a reasonable estimate of the *end value of the asset is also taken to be a *financial benefit that is subject to deemed loan treatment if:

(a) the asset is not to be purchased or acquired by, or transferred to, a *member of the tax preferred sector at the end of the *arrangement period under a legally enforceable *arrangement; or

(b) the asset:

(i) is, or is to become, a *privatised asset; or

(ii) would be, or would become, a privatised asset if it were a *depreciating asset; or

(iii) would be a privatised asset if the asset were a depreciating asset and paragraphs 58-5(2)(a) and 58-5(4)(a) were not limited to acquisitions of depreciating assets that occurred on or after 1 July 2001.

The relevant percentage is the *disallowed capital allowance percentage if section 250-150 applies. Otherwise it is 100%.

Note: See section 250-180 for how to work out the end value of the asset.

Financial benefits only subject to deemed loan treatment to the extent to which they represent a return on investment

(3) The *financial benefit is subject to deemed loan treatment only to the extent to which it reasonably represents a return of, or on, an investment in the asset (as distinct, for example, from representing consideration for the provision of services or the recovery of production costs), having regard to:

(a) the *market value of the asset; and

(b) the discount rate applicable under subsection 250-105(2); and

(d) any other relevant matter.

The regulations may provide rules to be applied in determining the extent to which a financial benefit reasonably represents a return of or on an investment in the asset.

Only financial benefits provided after Division starts applying to you and the asset

(4) If the *tax preferred use of the asset starts before this Division starts applying to you and the asset, only *financial benefits provided after this Division starts applying to you and the asset are subject to deemed loan treatment .

250-165 Financial arrangement

(1) You have a financial arrangement if you have, under an *arrangement:

(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

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.

(2) A right you have to receive, or an obligation you have to provide, a *financial benefit is cash settlable if, and only if:

(a) the benefit is money or a *money equivalent; or

(b) in the case of a right - you intend to satisfy or settle it by receiving money, or a money equivalent, or by starting to have, or ceasing to have, another *financial arrangement; or

(c) in the case of an obligation - you intend to satisfy or settle it by providing money, or a money equivalent, or by starting to have, or ceasing to have, another financial arrangement; or

(d) you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

(e) you deal with the right or obligation, or with 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

(f) none of paragraphs (a) to (e) applies but:

(i) the financial benefit is readily convertible into money or a money equivalent or there is a market for the financial benefit that has a high degree of liquidity; and

(ii) 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 benefit as part of your expected purchase, sale or usage requirements in the ordinary course of *business; or

(g) you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (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 in the ordinary course of business.

Note: The following are examples of dealing of the kind covered by paragraph (e):

(a) dealing with the right or obligation, or similar rights or obligations, on a frequent basis, a short term basis or frequent and short term basis;

(b) acquiring the right or obligation, or similar rights or obligations, and managing the resulting risk by entering into offsetting arrangements that provide a profit margin.

250-170 Financial arrangement (equity interest or right or obligation in relation to equity interest)

(1) You also have a financial arrangement if you have an *equity interest. The equity interest constitutes the financial arrangement.

(2) You also have a financial arrangement if:

(a) you have, under an *arrangement:

(i) a legal or equitable right to receive something that is a *financial arrangement under this section; or

(ii) a legal or equitable obligation to provide something that is a financial arrangement under this section; or

(iii) a combination of one or more such rights and/or obligations; and

(b) the right, obligation or combination does not constitute a financial arrangement under section 250-165.

The right, obligation or combination referred to in paragraph (a) constitutes the financial arrangement.

250-175 Rights, obligations and arrangements (grouping and disaggregation rules)

Single right or obligation or multiple rights or obligations?

(1) If you have a right to receive 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate right to receive each of those financial benefits.

(2) If you have an obligation to provide 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate obligation to provide each of those financial benefits.

(3) Subsections (1) and (2) apply for the avoidance of doubt.

Matters relevant to determining what rights and/or obligations comprise particular arrangements

(4) For the purposes of this Division, whether a number of rights and/or obligations are themselves an *arrangement or are 2 or more separate arrangements is a question of fact and degree that you determine having regard to the following:

(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 reasonably be seen as the purposes of one or more of the persons 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 as whole);

(f) the objects of this Division.

In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other.

Example 1: Your rights and obligations under a typical convertible note, including the right to convert the note into a share or shares, would comprise one arrangement.

Example 2: Your rights and obligations under a typical price-linked or index-linked bond with option or forward components would comprise one arrangement.

Note 1: If you raised funds by means of a contract that you would not have entered into without entering into another contract, and neither contract could be assigned to a third party without the other also being assigned, this would tend to indicate that your rights and obligations under the 2 contracts together comprise one arrangement.

Note 2: If the commercial effect of your individual rights and/or obligations in a group or series cannot be understood without reference to the group or series as a whole, this would tend to indicate that all of your rights and/or obligations in the group or series together comprise one arrangement.

250-180 End value of asset

(1) The end value of an asset is worked out in accordance with this section.

(2) If the asset has a *guaranteed residual value, the end value of the asset is:

(a) the amount of the guaranteed residual amount if subparagraph 250-15(d)(i) applies; or

(b) so much of the amount referred to in paragraph (a) as is attributable to the expenditure referred to in subparagraph 250-15(d)(ii) if that subparagraph applies.

(3) If the asset does not have a *guaranteed residual value and is a *depreciating asset, the end value of the asset is:

(a) if subparagraph 250-15(d)(i) applies - the amount that would have been the *adjustable value of the asset at the end of the *arrangement period if:

(i) this Division had not applied to you and the asset; and

(ii) the decline in the asset's value were worked out on the basis of the asset's *effective life and using the *prime cost method; or

(b) if subparagraph 250-15(d)(ii) applies - so much of the amount referred to in paragraph (a) as is attributable to the expenditure referred to in that subparagraph.

(4) Disregard section 40-102 in working out the asset's *effective life for the purposes of subparagraph (3)(a)(ii).

(5) If neither subsection (2) nor subsection (3) applies and an estimate of the value of the asset is recognised for accounting purposes, the end value of the asset is:

(a) the value of the relevant asset at the end of the *arrangement period that would be recognised for accounting purposes if subparagraph 250-15(d)(i) applies; or

(b) so much of the value of referred to in paragraph (a) as is attributable to the expenditure referred to subparagraph 250-15(d)(ii) if that subparagraph applies.

The end value must not, however, exceed the amount worked out under subsections 250-155(4) and (5) (amount taken to have been lent).

(6) If none of subsections (2), (3) and (5) apply to the asset, the end value of the asset is:

(a) a reasonable estimate of the *market value of the asset at the end of the *arrangement period if subparagraph 250-15(d)(i) applies; or

(b) so much of the estimate referred to in paragraph (a) as is attributable to the expenditure referred to in subparagraph 250-15(d)(ii) if that subparagraph applies.

The end value must not, however, exceed the amount worked out under subsections 250-155(4) and (5) (amount taken to have been lent).

250-185 Financial benefits subject to deemed loan treatment not assessed

A *financial benefit is not included in your assessable income if the financial benefit:

(a) is *provided to you in relation to the tax preferred use of the asset; and

(b) is provided directly or indirectly by a *member of the tax preferred sector; and

The financial benefit is not assessable income and is not *exempt income.

Subdivision 250-E - Taxation of deemed loan

Table of sections

Guide to Subdivision 250-E

250-190 What this Subdivision is about

Application and objects of Subdivision

250-195 Application of Subdivision

250-200 Objects of this Subdivision

Tax treatment of gains and losses from financial arrangements

250-205 Gains are assessable and losses deductible

250-210 Gain or loss to be taken into account only once under this Act

Method to be applied to take account of gain or loss

250-215 Methods for taking gain or loss into account

General rules

250-220 Consistency in working out gains or losses (integrity measure)

250-225 Rights and obligations include contingent rights and obligations

The accruals method

250-230 Application of accruals method

250-235 Overview of the accruals method

250-240 Applying accruals method to work out period over which gain or loss is to be spread

250-245 How gain or loss is spread

250-250 Allocating gain or loss to income years

250-255 When to re-estimate

250-260 Re-estimation if balancing adjustment on partial disposal

Balancing adjustment

250-265 When balancing adjustment made

250-270 Exception for subsidiary member leaving consolidated group

250-275 Balancing adjustment

Other provisions

250-280 Financial arrangement received or provided as consideration

Guide to Subdivision 250-E

250-190 What this Subdivision is about

This Subdivision is about the tax treatment of gains and losses from the financial arrangement that you are taken to have under section 250-155.

You recognise gains and losses from the financial arrangement, as appropriate, over the life of the financial arrangement and ignore distinctions between income and capital. You use a compounding accruals method to recognise the gain or loss.

A change in circumstances may cause a re-estimation of gains and losses that the accruals method is being applied to.

A balancing adjustment is made if you transfer particular rights or obligations or particular rights or obligations cease.

Application and objects of Subdivision

250-195 Application of Subdivision

This Subdivision applies for the purposes of working out the amount of the gain or loss that is to be included in your assessable income or allowed as a deduction in relation to the *financial arrangement that is taken to exist under section 250-155.

250-200 Objects of this Subdivision

The objects of this Subdivision are:

(a) to properly recognise gains and losses from the *financial arrangement by allocating them to appropriate periods of time; and

(b) to minimise tax deferral.

Tax treatment of gains and losses from financial arrangements

250-205 Gains are assessable and losses deductible

Gains

(1) Your assessable income includes a gain you make from the *financial arrangement.

Losses

(2) You can deduct a loss you make from the *financial arrangement, but only to the extent that:

(a) you make it in gaining or producing your assessable income; or

(b) you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

250-210 Gain or loss to be taken into account only once under this Act

Purpose of this section

(1) The purpose of this section is to ensure that your gains that are assessable under this Subdivision, and your losses that are deductible under this Subdivision, are taken into account only once under this Act in working out your taxable income.

Gain or loss

(2) If a gain or loss is, or is to be, included in your assessable income or allowable as a deduction to you for an income year under this Subdivision, the gain or loss is not to be (to any extent):

(a) included in your assessable income; or

(b) allowable as a deduction to you;

under any other provisions of this Act for the same or any other income year.

Associated financial benefits

(3) If the amount or value of a *financial benefit is taken into account in working out whether you make, or the amount of, a gain or loss that is, or is to be, included in your assessable income or allowable as a deduction for you for an income year under this Subdivision, the benefit is not to be (to any extent):

(a) included in your assessable income; or

(b) allowable as a deduction to you;

under any other provision of this Act for the same or any other income year.

Method to be applied to take account of gain or loss

250-215 Methods for taking gain or loss into account

The methods that can be applied to take account of a gain or loss you make from the *financial arrangement you have are:

(a) the accruals method provided for in sections 250-235 to 250-255; or

(b) a balancing adjustment provided for in sections 250-265 to 250-275.

A gain or loss is not taken into account under the method referred to in paragraph (a) to the extent to which the gain or loss is taken into account under sections 250-265 to 250-275.

General rules

250-220 Consistency in working out gains or losses (integrity measure)

Object of section

(1) The object of this section is to stop you obtaining an inappropriate tax benefit from not working out your gains and losses in a consistent manner.

Consistent treatment for particular financial arrangement

(2) If:

(a) this Subdivision provides that a particular method applies to gains or losses you make from the *financial arrangement; and

(b) that method allows you to choose the particular manner in which you apply that method;

you must use that manner consistently for the arrangement for all income years.

Consistent treatment for financial arrangements of essentially the same nature

(3) If:

(a) this Subdivision provides that a particular method applies to gains or losses you make from 2 or more *financial arrangements; and

(b) that method allows you to choose the particular manner in which you apply that method;

you must use that same manner consistently for all of those financial arrangements that are essentially of the same nature.

250-225 Rights and obligations include contingent rights and obligations

To avoid doubt:

(a) a right is treated as a right for the purposes of this Division even it is subject to a contingency; and

(b) an obligation is treated as an obligation for the purpose of this Division even if it is subject to a contingency.

The accruals method

250-230 Application of accruals method

The accruals method provided for in sections 250-235 to 250-255 applies to a gain or loss you make from the *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.

250-235 Overview of the accruals method

If the accruals method applies to a gain or loss you make from the *financial arrangement:

(a) you use section 250-240 to work out the period over which the gain or loss is to be spread; and

(b) you use section 250-245 to work out how to allocate the gain or loss to particular intervals within the period over which the gain or loss is to be spread; and

(c) if an interval to which part of the gain or loss is allocated straddles 2 income years, you use section 250-250 to work out how to allocate that part of the gain or loss allocated between those 2 income years.

250-240 Applying accruals method to work out period over which gain or loss is to be spread

If you have a sufficiently certain overall gain or loss from the *financial arrangement, the period over which the gain or loss is to be spread is the period that:

(a) starts when you start to have the arrangement; and

(b) ends when you will cease to have the arrangement.

In applying paragraph (b), you must assume that you will continue to have the arrangement for the rest of its life.

250-245 How gain or loss is spread

How to spread gain or loss

(1) This section tells you how to spread a gain or loss to which the accruals method applies.

Compounding accruals or approximation

(2) The gain or loss is to be spread using:

(a) compounding accruals (with the intervals to which parts of the gain or loss are allocated complying with subsection (3)); or

(b) a method whose results approximate those obtained using the method referred to in paragraph (a) (having regard to the length of the period over which the gain or loss is to be spread).

Intervals to which parts of gain or loss allocated

(3) The intervals to which parts of the gain or loss are allocated must:

(a) not exceed 12 months; and

(b) all be of the same length.

Paragraph (b) does not apply to the first and last intervals. These may be shorter than the other intervals.

Assumption of continuing hold arrangement for the rest of its life

(4) The gain or loss is to be spread assuming that you will continue to have the *financial arrangement for the rest of its life.

250-250 Allocating gain or loss to income years

(1) You are taken, for the purposes of section 250-205, to make, for an income year, a gain or loss equal to a part of a gain or loss if:

(a) that part of the gain or loss is allocated to an interval under section 250-245; and

(b) that interval falls wholly within that income year.

(2) If:

(a) a part of a gain or loss is allocated to an interval under section 250-245; and

(b) that interval straddles 2 income years;

you are taken, for purposes of section 250-205, to make a gain or loss equal to so much of that part of the gain or loss as is allocated between those income years on a reasonable basis.

(3) If:

(a) a *consolidated group or *MEC group has a *financial arrangement; and

(b) a subsidiary member of the group ceases to be a member of the group at a particular time (the exit time ); and

an income year of the group is taken, for the purposes of applying this section to the group and the financial arrangement, to end at the exit time.

250-255 When to re-estimate

When re-estimation necessary

(1) You re-estimate a gain or loss from the *financial arrangement under subsection (4) if circumstances arise that materially affect:

(a) the amount or value; or

(b) the timing;

of *financial benefits that were taken into account in working out the amount of the gain or loss. You must re-estimate the gain or loss as soon as reasonably practicable after you become aware of the circumstances referred to in paragraph (b).

(2) Without limiting subsection (1), the following are circumstances of the kind referred to in paragraph (1)(b):

(a) a material change in market conditions that are relevant to the amount or value of the *financial benefits to be received or provided under the *financial arrangement;

(b) cash flows that were previously estimated becoming known and the difference between the cash flows that become known and the cash flows that were previously estimated is not insignificant;

(3) You do not re-estimate a gain or loss from a *financial arrangement under subsection (4) merely because of any one or more of the following:

(a) a change in the credit rating, or the creditworthiness, of a party or parties to the financial arrangement;

(b) the impairment (within the meaning of the *accounting standards) of the arrangement or a debt that forms part of the arrangement.

Nature of re-estimation

(4) Making a re-estimation in relation to a gain or loss under this subsection involves:

(a) a fresh determination of the amount of the gain or loss; and

(b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of the redetermined gain or loss that has not already been allocated to intervals ending before the re-estimation is made to intervals ending after the re-estimation is made.

Basis for re-estimation

(5) You may make the fresh allocation of the gain or loss under subsection (4) on either of the following bases:

(a) by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return;

(b) adjusting the rate of return and maintaining the amount to which you apply the rate of return.

The object to be achieved by both bases is allow you to bring the remainder of the gain or loss based on the new estimates properly to account over the remainder of the period over which you spread the gain or loss.

(6) If you adopt a particular basis under subsection (5) for a gain or loss from the *financial arrangement, you must use the same basis for all the re-estimations you make under this section in relation to your gains and losses from all your financial arrangements.

Balancing adjustment if rate of return maintained

(7) If you make a fresh allocation of the gain or loss on the basis referred to in paragraph (5)(a), you must make the following balancing adjustment:

(a) if you re-estimate a gain and the amount to which you apply the rate of return increases - you make a gain from the *financial arrangement, for the income year in which you make the re-estimation, equal to the amount of the increase;

(b) if you re-estimate a gain and the amount to which you apply the rate of return decreases - you make a loss from the arrangement, for the income year in which you make the re-estimation, equal to the amount of the decrease;

(c) if you re-estimate a loss and the amount to which you apply the rate of return increases - you make a loss from the arrangement, for the income year in which you make the re-estimation, equal to the amount of the increase;

(d) if you re-estimate a loss and the amount to which you apply the rate of return decreases - you make a gain from the arrangement, the income year in which you make the re-estimation, equal to the amount of the decrease.

250-260 Re-estimation if balancing adjustment on partial disposal

Re-estimation if balancing adjustment on partial disposal

(1) You also re-estimate a gain or loss from a *financial arrangement under subsection (2) if a balancing adjustment is made in relation to the financial arrangement under sections 250-265 to 250-275 because you transfer to another person:

(a) a proportionate share of all of your rights and/or obligations under a *financial arrangement; or

(b) a right or obligation that you have under a financial arrangement to a specifically identified *financial benefit; or

(c) a proportionate share of a right or obligation that you have under a financial arrangement to a specifically identified financial benefit.

You must re-estimate the gain or loss as soon as reasonably practicable after the transfer occurs.

Nature of re-estimation

(2) Making a re-estimation in relation to a gain or loss under this subsection involves:

(a) a fresh determination of the amount of the gain or loss disregarding:

(i) *financial benefits; and

(ii) amounts of the gain or loss that have already been allocated to intervals ending before the re-estimation is made;

to the extent to which they are reasonably attributable to the proportionate share, or the right or obligation, referred to in paragraph (1)(b); and

(b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of that gain or loss that has not already been allocated to intervals ending before the re-estimation is made to intervals ending after the re-estimation is made.

Basis for re-estimation

(3) You make the fresh allocation of the gain or loss under subsection (2) by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return. The object to be achieved by the fresh allocation is allow you to bring the remainder of the redetermined gain or loss properly to account over the remainder of the period over which you spread the gain or loss.

Balancing adjustment

250-265 When balancing adjustment made

When balancing adjustment made

(1) A balancing adjustment is made under section 250-275 if:

(a) you transfer to another person all of your rights and/or obligations under the *financial arrangement; or

(b) all of your rights and/or obligations under the financial arrangement otherwise substantially cease; or

(i) a proportionate share of all of your rights and/or obligations under the financial arrangement; or

(ii) a right or obligation that you have under the financial arrangement to a specifically identified *financial benefit; or

(iii) a proportionate share of a right or obligation that you have under the financial arrangement to a specifically identified financial benefit.

Modifications for arrangements that are assets

(2) The following modifications are made if the *financial arrangement is an asset of yours at the time the event referred to in subsection (1) occurs:

(a) paragraphs (1)(a) and (c) do not apply unless the effect of the transfer is to transfer to the other person substantially all the risks and rewards of ownership of the interest transferred;

(b) for the purposes of applying section 250-275 to the arrangement, you are treated as transferring a right under the arrangement to another person if:

(i) you retain the right but assume a new obligation; and

(ii) your assumption of the new obligation has the same effect, in substance, as transferring the right to another person; and

(iii) the new obligation arises only to the extent to which the right to *financial benefits under the financial arrangement is satisfied; and

(iv) you cannot sell or pledge the right (other than as security in relation to the new obligation); and

(v) you must, under the new obligation, provide financial benefits you receive in relation to the right to the person to whom you owe the new obligation without delay.

250-270 Exception for subsidiary member leaving consolidated group

A balancing adjustment is not made under section 250-275 in relation to a subsidiary member of a*consolidated group or a *MEC group that has the *financial arrangement ceasing to be a member of the group.

250-275 Balancing adjustment

Complete cessation or transfer

(1) Use the following method statement to make the balancing adjustment if paragraph 250-265(1)(a) or (b) applies:

Method statement for balancing adjustment

Step 1. Add up the following:

(a) the total of all the *financial benefits provided to you under the *financial arrangement;

(b) the amount or value of any other consideration you receive in relation to the transfer or cessation referred to in subsection 250-265(1);

(c) the total of the amounts that have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement;

(d) the total of the other amounts that would have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement if all your losses from the arrangement were allowable as deductions.

Step 2. Add up the following:

(a) the total of all the *financial benefits you have provided under the *financial arrangement;

(b) the amount or value of any other consideration you provide in relation to the transfer or cessation referred to in subsection 250-265(1);

(c) the total of the amounts that have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement;

(d) the total of the other amounts that would have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement if all your gains from the arrangement were assessable.

Step 3. Compare the amount obtained under Step 1 (the Step 1 amount ) with the amount obtained under Step 2 (the Step 2 amount ). If the Step 1 amount exceeds the Step 2 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a gain you make from the *financial arrangement for the purposes of this Subdivision. If the Step 2 amount exceeds the Step 1 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a loss that you make from the arrangement. If the Step 1 amount and the Step 2 amount are equal, no balancing adjustment is made.

Proportionate transfer of all rights and/or obligations under financial arrangement

(2) If subparagraph 250-265(1)(c)(i) applies, you make the balancing adjustment by applying the method statement in subsection (1) but reduce:

(a) the amounts referred to in paragraphs (a), (c) and (d) in step 1; and

(b) the amounts referred to in paragraphs (a), (c) and (d) in step 2;

by applying the proportion referred to in subparagraph 250-265(1)(c)(i) to them.

Transfer of specifically identified right or obligation under financial arrangement

(3) If subparagraph 250-265(1)(c)(ii) applies, you make the balancing adjustment by applying the method statement in subsection (1) as if the references to:

(a) the amounts referred to in paragraphs (a), (c) and (d) in step 1; and

(b) the amounts referred to in paragraphs (a), (c) and (d) in step 2;

were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 250-265(1)(c)(ii).

Proportionate transfer of specifically identified right or obligation under financial arrangement

(4) If subparagraph 250-265(1)(c)(iii) applies, you make the balancing adjustment by applying the method statement:

(a) as if the references to:

(i) the amounts referred to in paragraphs (a), (c) and (d) in step 1; and

(ii) the amounts referred to in paragraphs (a), (c) and (d) in step 2;

were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 250-265(1)(c)(iii); and

(b) by reducing those amounts by applying the proportion referred to in subparagraph 250-265(1)(c)(iii) to them.

Attribution must reflect appropriate and commercially accepted valuation principles

(5) Any attribution made under subsection (3) or paragraph (4)(a) must reflect appropriate and commercially accepted valuation principles that properly take into account:

(a) the nature of the rights and obligations under the *financial arrangement; and

(b) the risks associated with each *financial benefit, right and obligation under the arrangement; and

Income year for which gain or loss is made

(6) The gain or loss you are taken to make under subsection (1), (2), (3) or (4) is a gain or loss for the income year in which the event referred to in subsection 250-265(1) occurs.

Other provisions

250-280 Financial arrangement received or provided as consideration

(1) If:

(a) this Subdivision applies in relation to your gains and losses from the *financial arrangement; and

(b) you start to have the financial arrangement (or a part of the financial arrangement) as consideration (or as part of the consideration) for:

(i) something (the thing provided ) that you provided, or are to provide, to someone else; or

(ii) something (the thing acquired ) that someone else has provided, or is to provide, to you; and

the amount of the benefit (or that part of the benefit) that you obtained for the thing provided, or gave for the thing acquired, is taken, for the purposes of applying this Act to you, to be the *market value of the financial arrangement (or that part of the financial arrangement) at the time when you start to have the financial arrangement.

Note 1: This amount may be relevant, for example, for the purposes of applying the provisions of this Act dealing with capital gains, capital allowances or trading stock to the thing provided or the thing acquired.

Note 2: The market value is to be used instead of the nominal value of the financial benefits to be provided under the financial arrangement.

(2) If subsection (1) applies, you are taken to have received, or provided, as consideration for starting to have the *financial arrangement (or the part of the financial arrangement), *financial benefits whose value is equal to the market value of the financial arrangement (or that part of the financial arrangement) at the time when you started to have the financial arrangement.

(3) If, but for this subsection:

(a) subsection (2) would apply to your starting to have a *financial arrangement; and

(b) subsection (1) or (4) would also apply to your starting to have the financial arrangement;

subsection (2) applies to your starting to have the financial arrangement and subsection (1) or (4) does not.

(4) If:

(a) this Subdivision applies in relation to your gains and losses from the *financial arrangement; and

(b) you cease to have the financial arrangement (or a part of the financial arrangement) as consideration (or as part of the consideration) for:

(i) something (the thing acquired ) that someone else provides, or is to provide, to you; or

(ii) something (the thing provided ) that you provided, or are to provide, to someone else; and

the amount of the benefit (or that part of the benefit) that you provided for the thing acquired, or obtained for the thing provided, is taken, for the purposes of applying this Act to you, to be the *market value of the financial arrangement (or that part of the financial arrangement) at the time when you cease to have the financial arrangement (or that part of the financial arrangement).

Note 2: The market value is to be used instead of the nominal value of the financial benefits to be provided under the financial arrangement.

(5) If subsection (4) applies, you are taken to have provided, or received, as consideration for ceasing to have the *financial arrangement (or the part of the financial arrangement), *financial benefits whose value is equal to the market value of the financial arrangement (or that part of the financial arrangement) at the time when you ceased to have the financial arrangement.

(6) If, but for this subsection:

(a) subsection (5) would apply to your ceasing to have a *financial arrangement; and

(b) subsection (1) or (4) would also apply to your ceasing to have the financial arrangement;

subsection (5) applies to your ceasing to have the financial arrangement and subsection (1) or (4) does not.

(7) Without limiting subsections (1) and (4), the thing provided, or the thing acquired, need not be a tangible thing and may take the form of services, conferring a right, incurring an obligation or extinguishing or varying a right or obligation.

Subdivision 250-F - Treatment of asset when Division ceases to apply to the asset

Table of sections

250-285 Treatment of asset after Division ceases to apply to the asset

250-290 Balancing adjustment under Subdivision 40-D in some circumstances

250-285 Treatment of asset after Division ceases to apply to the asset

(1) For the purposes of Division 40, if:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends at a particular time; and

(c) the asset would have had an *adjustable value at that time, for the purposes of Division 40, if this Division had never applied to the asset;

the adjustable value of the asset, immediately after the end of the arrangement period, is taken to be equal to the amount worked out using the following method statement:

Method statement

Step 1. Work out whether section 250-150 applies.

Step 2. If section 250-150 does not apply, the amount is the *end value of the asset at the end of the arrangement period.

Step 3. If section 250-150 does apply, the amount is worked out by:

(a) multiplying the *end value of the asset at the end of the *arrangement period by the *disallowed capital percentage; and

(b) then multiplying the adjustable value of the asset at the end of the arrangement period (worked out under section 40-85) by 100% minus the disallowed capital percentage); and

(2) If:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends; and

(c) a net amount is included in your assessable income in relation to the *financial benefits that are *subject to the deemed loan treatment (taking into account the adjustments under Subdivision 250-E in relation to the financial benefits that are subject to the deemed loan treatment);

the *cost base, and the *reduced cost base, of the asset are each taken to be reduced at the end of the arrangement period by an amount equal to the difference between:

(d) the total amounts or values of the financial benefits that were subject to deemed loan treatment; and

(e) the net amount referred to in paragraph (c).

Note: See subsection (6) in relation to the application of paragraph (d).

(3) If:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends; and

(c) a net amount is allowed to you as a deduction in relation to the *financial benefits that are *subject to the deemed loan treatment (taking into account the adjustments under Subdivision 250-E in relation to the financial benefits that are subject to the deemed loan treatment);

the *cost base, and the *reduced cost base, of the asset are each taken to be reduced at the end of the arrangement period by an amount equal to the sum of:

(d) the total amounts or values of the financial benefits that were subject to deemed loan treatment; and

(e) the net amount referred to in paragraph (c).

Note: See subsection (6) in relation to the application of paragraph (d).

(4) If:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends; and

then, in determining the profit or loss on the sale of the asset, a deduction equal to the difference between the following is taken to have been allowed for expenditure by you in connection with the asset:

(d) the total amounts or values of the financial benefits that were subject to deemed loan treatment; and

(e) the net amount referred to in paragraph (c).

Note: See subsection (6) in relation to the application of paragraph (d).

(5) If:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends; and

then, in determining the profit or loss on the sale of the asset, a deduction equal to the sum of the following is taken to have been allowed for expenditure by you in connection with the asset:

(d) the total amounts or values of the financial benefits that were subject to deemed loan treatment; and

(e) the net amount referred to in paragraph (c).

Note: See subsection (6) in relation to the application of paragraph (d).

(6) In applying paragraphs (2)(d), (3)(d), (4)(d) and (5)(d), disregard subsection 250-160(2) (reasonable estimate of end value treated as financial benefit subject to deemed loan treatment).

250-290 Balancing adjustment under Subdivision 40-D in some circumstances

(1) This section applies if:

(a) this Division applies to you and an asset; and

(b) the *arrangement period for the *tax preferred use of the asset ends because a particular event happens; and

(c) the event would have been a *balancing adjustment event for the asset for the purposes of Subdivision 40-D if this Division had not applied to you and the asset when the event happened.

(2) A balancing adjustment is made under Subdivision 40-D as if:

(a) the event were a *balancing adjustment event for the asset; and

(b) the *adjustable value of the asset, just before the event happened, were the adjustable value worked out under subsection 250-285(1); and

Subdivision 250-G - Objections against determinations and decisions by the Commissioner

Table of sections

250-295 Objections against determinations and decisions by the Commissioner

250-295 Objections against determinations and decisions by the Commissioner

(1) This section applies to a determination by the Commissioner under section 250-45.

(2) This section also applies to a decision by the Commissioner under subsection 250-150(5).

(3) A person who is dissatisfied with a determination or decision to which this section applies may object against the determination or decision in the manner set out in Part IVC of the Taxation Administration Act 1953.

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