New Business Tax System (Tax Preferred Entities

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Slide 1: 2002-2003 The Parliament of the Commonwealth of Australia HOUSE OF REPRESENTATIVES Presented and read a first time EXPOSURE DRAFT If you have any comments on this exposure draft, they should be sent to tofa&leasing@treasury.gov.au or to: The Manager Taxation of Financial Arrangements and Leasing The Treasury Langton Crescent Parkes ACT 2600 by Tuesday 15 July 2003. New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. (Treasury) , 2003 A Bill for an Act to amend the law relating to taxation, and for related purposes EXPOSURE DRAFT Slide 3: Contents 1 2 3 Short title ...........................................................................................1 Commencement.................................................................................1 Schedule(s) ........................................................................................2 3 3 3 51 51 52 54 61 Schedule 1—Tax preferred entities (asset financing) Part 1—Main amendments Income Tax Assessment Act 1997 Part 2—Consequential amendments Development Allowance Authority Act 1992 Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Part 3—Application i New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 2003 No. , EXPOSURE DRAFT Slide 5: 1 2 A Bill for an Act to amend the law relating to taxation, and for related purposes The Parliament of Australia enacts: 1 Short title This Act may be cited as the New Business Tax System (Tax Preferred Entities—Asset Financing) Act 2003. 3 4 5 6 7 8 9 2 Commencement This Act commences on the day on which it receives the Royal Assent. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 1 EXPOSURE DRAFT Slide 6: 1 2 3 4 5 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. 2 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 , 2003 No. EXPOSURE DRAFT Slide 7: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 Schedule 1—Tax preferred entities (asset financing) Part 1—Main amendments Income Tax Assessment Act 1997 1 Section 243-75 (link note) Repeal the link note, substitute: [The next Division is Division 250.] 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Division 250—Assets put to tax preferred use Table of Subdivisions Guide to Division 250 250-A 250-B 250-C 250-D 250-E 250-F 250-G Objects When this Division applies to you and an asset Denial of, or reduction in, capital allowance deductions Notional loan treatment for financial benefits provided for tax preferred use Adjustments when arrangement period ends Treatment of asset after Division ceases to apply to the asset 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. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 3 24 25 26 27 EXPOSURE DRAFT Slide 8: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 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 interest component. An adjustment is made at the end of the relevant arrangement to take account of any discrepancy between the projected level of financial benefits used to calculate the notional interest component and the financial benefits actually provided. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Subdivision 250-A—Objects Table of sections 250-5 Objects 250-5 Objects (1) An object of this Division is to deny or reduce certain capital allowance deductions in respect of an asset that is put to a tax preferred use if: (a) sufficient risk in relation to the asset has not been allocated to, or assumed by, entities outside the tax preferred sector; or (b) the taxpayer otherwise entitled to the deductions does not have sufficient risk in relation to the asset. arrangement under which the asset is put to a tax preferred The use may be one involving the provision of goods, services or facilities. (2) Another object of this Division is to ensure that, in a case in which capital allowance deductions are denied or reduced, there is, for tax purposes, an appropriate alteration of the timing of the recognition of: (a) the cost of the asset; and (b) the financial benefits that are provided in relation to the tax preferred use of the asset. (3) This is done by notionally reconstructing the arrangement under which the asset is put to that use so that: (a) those financial benefits are assessed only to the extent of a notional interest component (worked out on an accruals basis 4 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 , 2003 No. EXPOSURE DRAFT Slide 9: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 and subject to certain adjustments to reflect the amount and level of risk of the financial benefits actually provided); and (b) a component attributable to the cost for tax purposes of the asset for the period of the arrangement is not assessed. (4) Any component of a financial benefit that is not provided in relation to that use of the asset is to be treated, for tax purposes, as if it was provided separately (for example, as consideration for services rendered). Subdivision 250-B—When this Division applies to you and an asset Table of sections Overall test 250-10 250-15 When this Division applies to you and an asset Election to have Division apply 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Tax preferred use of asset 250-20 250-25 250-30 250-35 250-40 What constitutes a separate asset for the purposes of this Division Asset put to a tax preferred use End user, and tax preferred use, of the asset Arrangement period for tax preferred use New tax preferred use at end of arrangement period if tax preferred use continues Financial benefits in relation to tax preferred use 250-45 250-50 Financial benefits in relation to tax preferred use of an asset Present value of financial benefit Predominant economic interest 250-55 250-60 250-65 250-70 250-75 250-80 250-85 250-90 Predominant economic interest in an asset Level of assumed risk in relation to asset (test 1) Assumed risk in relation to asset Level of expected low risk returns or alternative risk test (test 2) Expected low risk returns Effectively non-cancellable, long term arrangement (test 3) Meaning of effectively non-cancellable arrangement Right to acquire asset (test 4) No. , 2003 5 New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 EXPOSURE DRAFT Slide 10: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 250-95 250-100 250-105 Prior ownership by a member of the tax preferred end user group (test 5) Retesting of predominant economic interest against sections 250-60 and 250-70 Compound rates of interest and compound discount rates Overall test 250-10 When this Division applies to you and an asset (1) This Division applies to you and an asset at a particular time if: (a) the asset is being put to a tax preferred use at that time; 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, or are to be, provided to you (or a connected entity) by: (i) the 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) at the start of the arrangement period for the tax preferred use of the asset, the present value of those financial benefits exceeds 10% of the market value of the asset; and (e) those financial benefits include one or more low risk financial benefits; and (f) disregarding this Division, you would be entitled to: (i) a deduction under Subdivision 40-B in relation to a decline in value of the asset; or (ii) a deduction under Subdivision 40-F, Subdivision 40-G, Subdivision 40-H, Subdivision 40-I, section 40-880 or section 43-10 of this Act or section 73B or 73BA of the Income Tax Assessment Act 1936 in relation to capital expenditure in relation to the asset; and (g) either: (i) you do not have a predominant economic interest in the asset at that time; or (ii) you elect to have this Division apply to the asset at that time. This subsection has effect subject to subsections (3) and (4). 6 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 , 2003 No. EXPOSURE DRAFT Slide 11: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 (2) The financial benefits referred to in paragraph (1)(c) may be ones that have been, or are to be, provided to you (or the connected entity) either: (a) directly; or (b) indirectly (including indirectly through an entity that is not a connected entity of yours or of the other entities referred to in paragraph (1)(c)). (3) 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. (4) This Division does not apply to you and an asset if: (a) you are eligible to be an STS taxpayer for the income year in which the arrangement period for the tax preferred use of the asset starts; and (b) you could deduct amounts under Subdivision 328-D for the asset if you were an STS taxpayer for that income year. (5) If this Division applies to you and the asset: (a) the asset referred to in subparagraph (1)(f)(i) is the relevant asset if this Division applies because of that subparagraph; and (b) the capital expenditure referred to in subparagraph (1)(f)(ii) is the relevant capital expenditure if this Division applies because of that subparagraph. 250-15 Election to have Division apply An election under subparagraph 250-10(1)(g)(ii) in relation to an asset that is put to a tax preferred use: (a) must be made for the whole of the arrangement period for the tax preferred use of the asset; and New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 7 EXPOSURE DRAFT Slide 12: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 (b) 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 (c) is irrevocable. Tax preferred use of asset 250-20 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. 8 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 , 2003 No. EXPOSURE DRAFT Slide 13: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 250-25 Asset put to a tax preferred use End use by tax preferred entities etc. (1) An asset is being put to a tax preferred use at a particular time if an end user of the asset at that time is: (a) a tax preferred entity; or (b) a connected entity of a tax preferred entity. The tax preferred use of the asset need not be the sole or dominant use to which the asset is being put at that time. End use by non-residents etc. (2) An asset is also put to a tax preferred use at a particular time if: (a) an end user of the asset at that time is: (i) an entity that is not an Australian resident; or (ii) a connected entity of an entity that is not an Australian resident; and (b) at that time, the asset is: (i) used, or installed ready for use, wholly or principally outside Australia; and (ii) used, or installed ready for use, otherwise than wholly and exclusively for the purpose of producing assessable income. tax preferred use of the asset need not be the sole or dominant The use to which the asset is being put at that time. Tax preferred end user (3) The end user in subsection (1) or (2) is referred to as the tax preferred end user. Members of the tax preferred end user group and tax preferred sector (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: New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 9 EXPOSURE DRAFT Slide 14: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 (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. 250-30 End user, and tax preferred use, of the asset End user (1) An entity is an end user of an asset at a particular time if an item in the following table applies to the entity at that time: End user and tax preferred use Item 1 This item applies to an entity if… the entity leases the asset or takes the asset on hire (even if the entity subleases the asset, or on-hires the asset, to another entity) the entity manages the asset or the use to which the asset is put (otherwise than in the exercise of regulatory powers given to the entity under legislation designed to protect public health and safety or to ensure the continued supply of essential services to the public) the entity uses the asset, or installs the asset ready for use, in any other way the asset is used, or installed ready for use, by someone to provide goods, services or facilities: (a) to the entity; or (b) directly or indirectly for the benefit of the entity; or (c) to, or for the benefit of, other entities directly or indirectly on behalf of the entity The tax preferred use is… (a) the lease or hire of the asset by the end user; or (b) the use of the asset by the end user under the lease or hire arrangement (a) the management of the asset; or (b) the use to which the asset is put 2 3 4 (a) the use of the asset by the end user; or (b) the installation of the asset ready for use by the end user (a) the use of the asset, or the installation of the asset ready for use, to provide those goods, services or facilities; or (b) the provision of those goods, services or facilities 10 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 15: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 End user and tax preferred use Item 5 This item applies to an entity if… the asset is used, or installed ready for use, by someone to produce goods: (a) for use by, or for supply to, the entity; or (b) directly or indirectly for the benefit of the entity; or (c) for use by, for supply to, or for the benefit of, other entities directly or indirectly on behalf of the entity The tax preferred use is… (a) the use of the asset, or the installation of the asset ready for use, to produce those goods; or (b) the production of those goods; or (c) the supply of those goods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Tax preferred use (2) If the asset is being put to a tax preferred use because a particular item in the table in subsection (1) applies to the entity, each use of the asset specified in the table in relation to that item is a tax preferred use of the asset. Note: This means, for example, that a financial benefit provided in relation to any of those uses will be taken to be provided in relation to the tax preferred use of the asset. Facilities (3) To avoid doubt, the facilities referred to in item 4 of the table in subsection (1) include: (a) hospital or medical facilities; or (b) prison facilities; or (c) educational 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. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 11 EXPOSURE DRAFT Slide 16: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 250-35 Arrangement period for tax preferred use Start of the arrangement period (1) Subject to subsection (2), the arrangement period for a particular tax preferred use of an asset starts when that tax preferred use of the asset starts. (2) If subsection 250-100(2) or (3) ceases to apply to the asset because you (or a connected entity), or a member of the tax preferred sector, do something, or omit to do something, that: (a) reduces your assumed risk in relation to the asset; or (b) if regulations are not in force under paragraph 250-70(2)(b)—increases your expected low risk returns from the asset; or (c) if regulations are in force under paragraph 250-70(2)(b)— gives rise to circumstances that those regulations specify as ones that will trigger a retesting against section 250-70; the arrangement period for the tax preferred use of the asset starts immediately after subsection 250-100(2) or (3) cease to apply to the asset. End of the arrangement period (3) Subject to subsection (4), the arrangement period for a particular tax preferred use of an asset is taken to end on the day determined by the Commissioner as the date on which the tax preferred use of the asset may reasonably be expected, or is likely, to end. (4) 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 (3). (5) In determining when a particular tax preferred use of an asset is likely to end, the Commissioner must: (a) have regard to: (i) the terms of any arrangement dealing with that tax preferred use of the asset; and (ii) the terms of any arrangement dealing with the provision of financial benefits in relation to that tax preferred use of the asset; and 12 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 17: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 (b) assume 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 (6) 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. 250-40 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 (c) the asset continues to be put to the tax preferred use after the termination date; 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 250-10 against circumstances as they stand immediately after the termination date. Financial benefits in relation to tax preferred use 250-45 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: New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 13 EXPOSURE DRAFT Slide 18: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 (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 (c) a financial benefit provided in relation to the termination or expiration of an arrangement that deals with: (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) 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. (3) 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. (4) 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. 14 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 19: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 (5) 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. (6) If: (a) a financial benefit consists of a number of components; and (b) at a particular time: (i) the amount or value of one or more of those components is certain; and (ii) the amount or value of one or more of those components is not certain; each of those components is taken to constitute a separate financial benefit at that time for the purposes of this Division. Note: This means that a financial benefit that consists, for example, of a fixed amount plus an indexation amount will be treated as consisting of one financial benefit whose amount is fixed and another financial benefit whose amount is not fixed. (7) 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. 250-50 Present value of financial benefit Present value of financial benefit (1) The present value of a financial benefit at a particular time is: (a) if the financial benefit has been provided before that time— the nominal amount or value of the financial benefit; or (b) if the financial benefit is to be, or is expected to be, provided after that time—the nominal amount or value of the financial benefit discounted: (i) by the discount rate applicable under subsection (2); and New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 15 EXPOSURE DRAFT Slide 20: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 (ii) for the period that starts at that time and ends when the financial benefit is to be, or is expected to be, provided. Discount rate (2) The discount rate that is applicable under this subsection is worked out using the following table: Discount rate Item 1 In these circumstances... (a) the total value of all financial benefits provided, or to be provided, to you (or a connected entity) by anyone in relation to any use of the asset during the arrangement period is known or can reasonably be estimated; and (b) it is possible to calculate the pre-tax weighted average cost of capital for the asset the discount rate is equal to... (a) the rate of compound interest which, if it were applied to the nominal amounts or values of those financial benefits to work out their present values, would yield present values the total of which would equal the market value of the asset; or (b) the rate of compound interest that is the pre-tax weighted average cost of capital for the asset if that rate is less than the rate referred to in paragraph (a) the rate of compound interest that is the pre-tax weighted average cost of capital for the asset the rate of compound interest that is determined by the Commissioner as reasonably reflecting the pre-tax weighted average cost of capital for the asset 2 (a) it is possible to calculate the pre-tax weighted average cost of capital for the asset; but (b) item 1 does not apply. neither item 1 nor item 2 applies 3 7 8 9 10 11 12 13 14 Note: Paragraph (a) of item 1 in the table is intended to capture your total returns in relation to any use of the asset during the arrangement period. This includes: (a) financial benefits provided by the tax preferred end user (and connected entities) in relation to the tax preferred use of the asset; and (b) financial benefits provided by other people in relation to the tax preferred use of the asset; and 16 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 21: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 (c) financial benefits provided by anyone in relation to uses of the asset other than the tax preferred use. (3) In determining the rate under item 3 of the table in subsection (2), the Commissioner must have regard to: (a) the nature of the use to which the asset is to be put (including the nature of any project in which the asset is to be used); and (b) 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; and (c) any other relevant matter. (4) If: (a) an asset is used in a project; and (b) a pre-tax weighted average cost of capital has been determined for the project; the pre-tax weighted average cost of capital for the asset is taken to be the pre-tax weighted average cost of capital determined for the project. Compounding period (5) Any compounding period (not exceeding 12 months) may be used to work out the discount rate under subsection (2). The same compounding period must, however, also be used in applying the discount rate to financial benefits under paragraph (1)(b). (6) If: (a) the rate of compound interest specified in an item of the table in subsection (2) is based on a particular compounding period; and (b) the discount rate is being worked out using a different compounding period; the rate specified in that item is to be converted into an equivalent rate for the compounding period being used to work out the discount rate. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 17 EXPOSURE DRAFT Slide 22: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Regulations (7) The regulations may: (a) specify the method to be used in working out the pre-tax weighted average cost of capital for an asset for the purposes of subsection (2); and (b) make provision in relation to the determination of a rate under item 3 of the table in subsection (2). Predominant economic interest 250-55 Predominant economic interest in an asset You do not have a predominant economic interest in an asset at a particular time if section 250-60, 250-70, 250-80, 250-90 or 250-95 applies to the asset at that time. If none of those sections apply to the asset at that time, you have a predominant economic interest in the asset at that time. 250-60 Level of assumed risk in relation to asset (test 1) This section applies to the asset if at that time your assumed risk in relation to the asset is less than: (a) 20% of the market value of the asset if the asset is taken to be put to a tax preferred use because of subsection 250-25(1) (end use by tax preferred entities etc.); and (b) 50% of the market value of the asset if the asset is taken to be put to a tax preferred use because of subsection 250-25(2) (end use by non-residents etc.). 250-65 Assumed risk in relation to asset Assumed risk in relation to asset (1) Your assumed risk in relation to an asset at a particular time is the amount that represents the loss you would bear if the asset were to continue in existence, but lose all its value, at that time. Criteria (2) In applying subsection (1), have regard to: 18 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 23: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 (a) whether there are any guarantees, arrangements or other factors that would have the effect of reducing or eliminating your loss or the loss of a connected entity (for example, an arrangement under which another entity agrees to buy the asset at a particular time for a fixed price); and (b) any limitations or restrictions on the remedies available to your creditors or the creditors of a connected entity (particularly in relation to borrowings in relation to the asset); and (c) whether you or a connected entity are in a position to effectively access the value of your investment or the connected entity’s investment in the asset (for example, by withdrawing capital from a venture); and (d) any other relevant matters. This subsection has effect subject to subsections (3) and (4). (3) In applying subsection (1) disregard: (a) any right you have to compensation or indemnity in respect of physical damage to the asset under a contract of insurance entered into in the ordinary course of business; and (b) any right you have to compensation or damages in relation to the physical quality or physical condition of the asset under a contract of sale or a lease entered into in the ordinary course of business. Partnership assets (4) In applying this section to an asset that is a partnership asset, a nil value is to be attributed to any loss that would be borne by a partner who is a tax preferred entity (or a connected entity of a tax preferred entity). Regulations (5) The regulations may make provision for the application and operation of this section. Without limiting this, the regulations may: (a) prescribe rules for determining the amount of the loss an entity would bear if an asset were to continue in existence, but lose all its value, at a particular time; and New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 19 EXPOSURE DRAFT Slide 24: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 (b) specify rights or interests that are to be taken into account, or disregarded, for the purposes of subsection (1). 250-70 Level of expected low risk returns or alternative risk test (test 2) (1) Subject to subsection (3), this section applies to the asset if at that time the expected low risk returns from the tax preferred use of the asset exceeds 50% of the market value of the asset. (2) The regulations may: (a) specify the circumstances in which this section applies to an asset; and (b) specify the circumstances that will trigger a retesting against this section. (3) If regulations for the purposes of paragraph (2)(a) are in force at a particular time: (a) this section applies to an asset at that time only in the circumstances specified in the regulations; and (b) subsection (1) does not apply at that time. (4) Regulations made for the purposes of paragraph (2)(a) may apply, adopt or incorporate (with or without modifications) matter contained in any of the accounting standards or in any international standard that deals with accounting matters: (a) as in force or existing at a particular time; or (b) as in force or existing from time to time. 250-75 Expected low risk returns Expected low risk returns (1) The expected low risk returns in relation to an asset at a particular time is the sum of the present values of the low risk financial benefits that at that time: (a) have been; or (b) will, assuming normal operating conditions, be; or (c) can, assuming normal operating conditions, reasonably be expected to be; 20 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 25: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 provided member in relation to the tax preferred use of the asset by a of the tax preferred sector to someone who is not a member of the tax preferred sector. Low risk financial benefits (2) A financial benefit is low risk at a particular time if the financial benefit: (a) has been provided before that time; or (b) is provided at that time; or (c) is to be provided after that time and both the amount or value and the timing of the financial benefit are certain at that time. This subsection has effect subject to the regulations made for the purposes of subsection (7). (3) A financial benefit is also low risk at a particular time if: (a) the financial benefit is to be provided after that time; and (b) either the amount or value or the timing, or both the amount or value and the timing, of the financial benefit are not certain at that time; and (c) the financial benefit satisfies subsection (4), (5) or (6). This subsection has effect subject to the regulations made for the purposes of subsection (7). (4) The financial benefit satisfies this subsection if the amount or value of the financial benefit will not be materially reduced or otherwise affected by the financial benefits that entities (other than the members of the tax preferred sector) would, in a competitive market, be willing to provide from time to time for: (a) the use of the asset; or (b) goods, services or facilities provided by or produced by the use of the asset. (5) The financial benefit satisfies this subsection if: (a) the financial benefit is to be 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); and (b) the amount or value of the financial benefit is not fixed by reference to the market value of the asset at the time of purchase, acquisition or transfer. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 21 EXPOSURE DRAFT Slide 26: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 (6) The financial benefit satisfies this subsection if: (a) the level of usage of the asset by, or to provide services to, entities (other than the members of the tax preferred sector) from time to time will not be materially affected by the amount or value of the financial benefit; or (b) the amount or value of the financial benefit will not be materially affected by the level of usage of the asset by entities (other than the members of the tax preferred sector) from time to time. Note: Paragraph (a)—The level of usage by those entities may, for example, be unaffected because they do not have to pay anything for the use of the asset. Regulations (7) The regulations may provide that a financial benefit is, or is not, low risk at a particular time. (8) The regulations may: (a) specify a method to be used in working out the amount or value of a financial benefit for the purposes of this section; and (b) make provision for the application and operation of subsections (4), (5) and (6). (9) Regulations made for the purposes of subsection (7) may apply, adopt or incorporate (with or without modifications) matter contained in any of the accounting standards or in an international standard that deals with accounting matters: (a) as in force or existing at a particular time; or (b) as in force or existing from time to time. 250-80 Effectively non-cancellable, long term arrangement (test 3) This section applies to the asset 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; 22 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 27: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 is effectively non-cancellable (see section 250-85); and (b) the arrangement period for the tax preferred use of the asset is equal to or greater than: (i) 50% of the period that is, in the Commissioner’s opinion, the remaining expected life of the asset when the tax preferred use starts if the asset is real property; or (ii) 75% of the period that is, in the Commissioner’s opinion, the remaining expected life of the asset when the tax preferred use starts if the asset is not real property. 250-85 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). 250-90 Right to acquire asset (test 4) This section applies to the asset if: New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 23 EXPOSURE DRAFT Slide 28: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 (a) a member of the tax preferred end user group has, or will have: (i) a right, or an obligation, to purchase or acquire the asset; or (ii) a right to require the transfer of 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 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. 250-95 Prior ownership by a member of the tax preferred end user group (test 5) (1) Subject to subsections (2), (3) and (4), this section applies to the asset if a member of the tax preferred end user group owned the asset, and used or held the asset for use, before you acquired it. (2) Subsection (1) does not apply to the asset if: (a) the asset was first used or held for use by a member of the tax preferred end user group within 6 months before you acquired it; and (b) at that time there was in existence an arrangement that: (i) the asset would be sold or transferred to another entity; and (ii) that entity would enter into an arrangement for the tax preferred use of the asset by a member of the tax preferred end user group. (3) Subsection (1) does not apply to the asset if the asset: (a) is a privatised asset; or (b) would be a privatised asset if it were a depreciating asset. (4) Subsection (1) does not apply to the asset if: (a) the asset is put to a tax preferred use because of subsection 250-25(2) (end use by non-residents etc.); and (b) the asset is used wholly or principally for a purpose other than leasing or hiring the asset. 24 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 29: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 250-100 Retesting of predominant economic interest against sections 250-60 and 250-70 (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. (2) If neither section 250-60 nor section 250-70 applies to the asset at the time when the tax preferred use of the asset starts, both of those sections are taken to continue not to apply to the asset. (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: (i) reduces your assumed risk in relation to the asset; or (ii) if regulations are not in force under paragraph 250-70(2)(b)—increases your expected low risk returns from the asset; or (iii) if regulations are in force under paragraph 250-70(2)(b)—gives rise to circumstances that those regulations specify as ones that will trigger a retesting against section 250-70; and (b) neither section 250-60 nor section 250-70 applies to the asset at that time; both of those sections are taken to continue not to apply to the asset. (4) Subsection (2) or (3) ceases to apply to the asset if you (or a connected entity), or a member of the tax preferred sector, do something, or omit to do something, that: (a) reduces your assumed risk in relation to the asset; or (b) if regulations are not in force under paragraph 250-70(2)(b)—increases your expected low risk returns from the asset; or (c) if regulations are in force under paragraph 250-70(2)(b)— gives rise to circumstances that those regulations specify as ones that will trigger a retesting against section 250-70. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 25 EXPOSURE DRAFT Slide 30: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 For the purposes of reapplying section 250-70 to the asset, disregard financial benefits provided before subsection (2) or (3) of this section ceased to apply to the asset. (5) To avoid doubt, subsection (2) or (3) does not cease to apply merely because: (a) your assumed risk in relation to the asset is reduced; or (b) your expected low risk returns from the asset increases; 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. 250-105 Compound rates of interest and compound discount rates For the purposes of this Division, a rate of compound interest or a discount rate consists of both: (a) a percentage interest rate or percentage discount rate; and (b) the compounding period to be used in applying the rate. Subdivision 250-C—Denial of, or reduction in, capital allowance deductions Table of sections 250-110 250-115 Denial of capital allowance deductions Apportionment rule 250-110 Denial of capital allowance deductions Subject to section 250-115, the following table sets out consequences that follow if this Division applies to you and an asset at a particular time: Denial of capital allowance deductions Item 1 2 For the purposes of... Subdivision 40-B of this Act Subdivision 40-F of this Act Consequences... you are taken not to be using the asset for taxable purposes at that time the applicable condition in section 40-525 is taken not to be satisfied for the asset at that time 26 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 31: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 Denial of capital allowance deductions Item 3 For the purposes of... Subdivision 40-G of this Act Consequences... if the asset is land—you are taken to be using the land at that time otherwise than for the purpose of carrying on: (a) a primary production business; or (b) a business for the purposes of producing assessable income from the use of rural land (except a business of mining operations) 4 5 Subdivision 40-H of this Act Subdivision 40-I of this Act section 40-880 of this Act section 43-140 of this Act you cannot deduct expenditure you incur in relation to the asset at that time you are taken not to be using the asset for taxable purposes at that time you cannot deduct an amount for capital expenditure you incur in relation to the asset at that time you are taken not to be using the asset at that time for the purposes of: (a) producing assessable income; or (b) carrying on research and development activities 8 section 73B of the Income Tax Assessment Act 1936 section 73BC of the Income Tax Assessment Act 1936 you are taken not to have qualifying expenditure at that time in relation to the use of the asset the asset is taken not to be being used, or installed ready for use, for the purposes of the carrying on, by or on behalf of an eligible company, of research and development activities 6 7 9 1 2 3 4 5 6 7 250-115 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 New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 27 EXPOSURE DRAFT Slide 32: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 (c) it is reasonable to expect that those financial benefits: (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 are known or can reasonably be estimated; and (e) you elect to have this section apply to the asset. (2) An election under paragraph (1)(e) in relation to an asset: (a) must be made for the whole of the arrangement period for thetax preferred use of the asset; and (b) is irrevocable. (3) If this section applies, the Commissioner may make a determination of a kind set out in the following table: Reduction in capital allowance deductions Item 1 For the purposes of... Subdivision 40-B of this Act Subdivision 40-F of this Act the Commissioner may determine that... at that time, you are to be taken to be using the asset for taxable purposes to the extent (expressed as a percentage) specified in the determination at that time, the applicable condition in section 40-525 is taken to be satisfied for the asset to the extent (expressed as a percentage) specified in the determination if the asset is land—at that time you are taken to be using the land for the purpose of carrying on: (a) a primary production business; or (b) a business for the purposes of producing assessable income from the use of rural land (except a business of mining operations); to the extent (expressed as a percentage) specified in the determination 4 Subdivision 40-H of this Act you can deduct expenditure you incur in relation to the asset at that time to the extent (expressed as a percentage) specified in the determination No. 2 3 Subdivision 40-G of this Act 28 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 EXPOSURE DRAFT Slide 33: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 Reduction in capital allowance deductions Item 5 For the purposes of... Subdivision 40-I of this Act section 40-880 of this Act the Commissioner may determine that... at that time, you are to be taken to be using the asset for taxable purposes to the extent (expressed as a percentage) specified in the determination you can deduct an amount for capital expenditure you incur in relation to the asset at that time to the extent (expressed as a percentage) specified in the determination you are taken to be using the asset at that time for the purposes of: (a) producing assessable income; or (b) carrying on research and development activities; to the extent (expressed as a percentage) specified in the determination 8 section 73B of the Income Tax Assessment Act 1936 section 73BC of the Income Tax Assessment Act 1936 you are taken to have qualifying expenditure at that time in relation to the use of the asset to the extent (expressed as a percentage) specified in the determination at that time, the asset is taken to be being used, or installed ready for use, for the purposes of the carrying on, by or on behalf of an eligible company, of research and development activities to the extent (expressed as a percentage) specified in the determination 6 7 section 43-140 of this Act 9 1 2 3 4 5 6 7 8 9 10 (4) The percentage specified in the determination is the allowable percentage. The difference between 100% and the allowable percentage is the disallowed percentage. (5) The allowable percentage must not exceed 50%. (6) In making a determination under subsection (3), the Commissioner must have regard to: (a) the relationship between: (i) the sum of the present values of the financial benefits provided, or to be provided, by the members of the tax New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 29 EXPOSURE DRAFT Slide 34: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 preferred sector in relation to the tax preferred use of the asset; and (ii) the market value of the asset; if the values referred to in subparagraph (i) are known or can be reasonably estimated; and (b) any other relevant matter. Subdivision 250-D—Notional loan treatment for financial benefits provided for tax preferred use Table of sections 250-120 250-125 250-130 250-135 250-140 250-145 250-150 Assessment of notional interest when accrual event occurs Financial benefits subject to notional loan treatment Accrual event and accrual period Calculation of notional interest amount for accrual period Calculation of the notional compound interest rate What happens when the balance of the notional loan principal reaches zero or estimated end value Negative or positive adjustment for an income year 250-120 Assessment of notional interest when accrual event occurs Notional interest amount assessed (1) If: (a) this Division applies to you and an asset at a particular time in an income year; and (b) an accrual event for the asset occurs at that time; an amount equal to the notional interest amount for the accrual period for that accrual event is included in your assessable income for that income year. Note: The notional interest amount is worked out under section 250-135. Multiple capital allowance deductions denied or reduced (2) If more than one item in the table in section 250-110 or in subsection 250-115(3) applies to the asset: (a) there is a separate notional interest amount for each of those items for each accrual event that occurs; and 30 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 35: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 (b) there is a separate balance of the notional loan principal for each of those items; and (c) a separate component of each financial benefit that: (i) is subject to the notional loan treatment; and (ii) becomes due and payable; is to be allocated to each of those items. 250-125 Financial benefits subject to notional loan treatment Financial benefits subject to notional loan treatment not assessed (1) Subject to section 250-145, 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 (c) is subject to notional loan treatment. Financial benefits subject to notional loan treatment (2) Subject to subsections (4) and (5), a financial benefit is subject to notional 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 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 (c) 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 (c) stops a financial benefit passing between you and any of your connected entities from being counted twice. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 31 EXPOSURE DRAFT Slide 36: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 (3) A reasonable estimate of the end value of the asset is also taken to be a financial benefit that is subject to notional loan treatment if: (a) the asset is not to be purchased or acquired by, or transferred to, the tax preferred end user (or a connected entity) 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 (c) you elected to have this Division apply to the asset under subparagraph 250-10(1)(g)(ii). (4) The financial benefit is subject to notional loan treatment only to the extent to which it reasonably represents a return of or on an investment in the asset (as distinct from representing consideration for the provision of services), having regard to: (a) the market value of the asset; and (b) the discount rate applicable under subsection 250-50(2); and (c) your debt funding in respect of the asset; 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. (5) 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 notional loan treatment. 250-130 Accrual event and accrual period (1) An accrual event for the asset occurs if: (a) a financial benefit that is subject to notional loan treatment becomes due and payable (whether or not it is paid); or (b) an income year ends. (2) The accrual period for the accrual event is the period between the accrual event and: (a) the most recent earlier accrual event for the asset; or 32 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 37: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 (b) the start of the arrangement period for the tax preferred use of the asset if the accrual event is the first accrual event for the asset. (3) There are no accrual periods after the balance of the notional loan principal reaches: (a) nil for a relevant asset that is a depreciating asset; or (b) the estimate of the end value of the asset made for the purposes of subsection 250-125(3) in any other case. Note: Once this happens the financial benefits are assessed under section 250-145. 250-135 Calculation of notional interest amount for accrual period (1) The notional interest amount for the accrual period is worked out by applying the notional compound interest rate to the balance of the notional loan principal at the beginning of the accrual period. The rate is applied to that balance for the duration of the accrual period. The notional compound interest rate is to be applied on a proportional compounding basis. (2) The balance of the notional loan principal at a particular time is worked out using subsections (3) and (4). (3) The opening balance of the notional loan principal at the beginning of the first accrual period for the asset is: (a) the undeducted tax cost for the relevant asset or relevant capital expenditure at that time; or (b) the disallowed percentage of the undeducted tax cost for the relevant asset or relevant capital expenditure at that time if the Commissioner has made a determination in relation to the asset or expenditure under subsection 250-115(3); less the sum of all financial benefits that are subject to notional loan treatment and that have become due and payable before the start of that accrual period. (4) This is how to work out the balance of the notional loan principal at the beginning of an accrual period (the reference accrual period) for the asset after the first accrual period for the asset: Method statement New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 33 34 EXPOSURE DRAFT Slide 38: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Step 1. Add: (a) the opening balance of the notional loan principal at the beginning of the first accrual period for the asset; and the sum of all the notional interest amounts for accrual periods before the reference accrual period. (b) Step 2. Add all financial benefits that are subject to notional loan treatment and that have become due and payable before the beginning of the reference accrual period. Deduct the amount obtained in step 2 from the amount obtained in step 1. Step 3. (5) The undeducted tax cost of the relevant asset or relevant capital expenditure is worked out using the following table: Undeducted tax cost Item 1 2 Relevant asset or relevant capital expenditure relevant Undeducted tax cost the adjustable value of the asset 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 the undeducted construction expenditure in relation to the capital expenditure asset is a depreciating asset capital expenditure under Division 40 relevant 3 capital expenditure under Division 43 relevant 15 34 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 39: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 250-140 Calculation of the notional compound interest rate (1) The notional compound interest rate is the compound discount rate which, if it were applied to the nominal amounts or values of all the financial benefits that: (a) are subject to notional loan treatment; and (b) whose amounts or values are known or can reasonably be estimated; to work out their present values, would yield present values the total of which would equal the opening balance of the notional loan principal at the beginning of the first accrual period for the asset. (2) If the nominal amounts or values of all the financial benefits that are subject to notional loan treatment are not known or cannot reasonably be estimated, the Commissioner may determine the nominal amounts or values of those financial benefits. (3) In making a determination under subsection (2), the Commissioner must have regard to: (a) the nature of the use to which the asset is to be put (including the nature of any project in which the asset is to be used); and (b) 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; and (c) any other relevant matter. (4) The regulations may specify a method to be used in working out the amount or value of a financial benefit for the purposes of this section. 250-145 What happens when the balance of the notional loan principal reaches zero or estimated end value Once the balance of the notional loan principal reaches: (a) nil for a relevant asset that is a depreciating asset; or (b) the estimate of the end value of the asset made for the purposes of subsection 250-125(3) in any other case; New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 35 EXPOSURE DRAFT Slide 40: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 all financial benefits that are subject to notional loan treatment and that subsequently become due and payable are wholly included in your assessable income. 250-150 Negative or positive adjustment for an income year (1) This is how to work out whether you have a negative or positive adjustment for an income year (the reference income year): Method statement Step 1. Add up all the following: (a) the notional interest amounts included in your assessable income under subsection 250-120(1), in relation to the relevant asset or relevant capital expenditure, for the reference income year and any earlier income years; the amounts (if any) included in your assessable income under section 250-145, in relation to the relevant asset or relevant capital expenditure, for any income year earlier than the reference income year; the amounts (if any) included in your assessable income under subsection (3) of this section, in relation to the relevant asset or relevant capital expenditure, for any income year earlier than the reference income year. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 (b) (c) Step 2. Add up all the following: (a) the amounts of the financial benefits that are to notional loan treatment and have become due and payable at any time before the end of the reference income year; subject (b) the amount of the deductions (if any) under subsection (2) of this section, in relation to the relevant asset or relevant capital expenditure, for No. 36 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 EXPOSURE DRAFT Slide 41: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 any income year earlier than the reference income year. Step 3. If the amount obtained in step 1 exceeds the amount obtained in step 2, you have a negative adjustment for the reference income year and the amount of the excess is the amount of the negative adjustment. If the amount obtained in step 2 exceeds the amount obtained in step 1, you have a positive adjustment for the reference income year and the amount of the excess is the amount of the positive adjustment. Step 4. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 When negative adjustment gives rise to deduction (2) If you have a negative adjustment for the reference income year under subsection (1), you are entitled to a deduction for that income year equal to the lesser of: (a) the amount of the negative adjustment; and (b) the sum of the financial benefits that: (i) are subject to notional loan treatment; and (ii) have become due and payable at any time before the end of the reference income year; and (iii) are not financial benefits of a kind that were taken into account as low risk financial benefits at the beginning of the arrangement period for the tax preferred use of the asset. When adjustments result in amount being included in your assessable income (3) If you have a positive adjustment for the reference income year under subsection (1), this is how to work out whether your assessable income for the reference income year includes an amount under this subsection and the amount to be included: Method statement 30 New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 37 EXPOSURE DRAFT Slide 42: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Step 1. Add up all the amounts (if any) you have deducted in earlier income years in relation to the relevant asset or relevant capital expenditure under subsection (2). Add up all amounts (if any) you have included, under this subsection, in your assessable income for earlier income years in relation to the relevant asset or capital expenditure. If the amount obtained in step 1 exceeds the amount obtained in step 2, your assessable income for the reference income year includes an amount under this subsection. The amount included in your assessable income is the lesser of: (a) (b) the excess obtained in step 3; and the amount of the positive adjustment for the reference income year. Step 2. Step 3. Step 4. 17 18 19 20 21 22 23 24 25 26 27 28 29 Subdivision 250-E—Adjustments when arrangement period ends Table of sections 250-155 250-160 Recalculation of interest and principal components at the end of the tax preferred use of an asset End value of asset 250-155 Recalculation of interest and principal components at the end of the tax preferred use of an asset When a recalculation of interest and principal must be done (1) If: (a) this Division applies to you and an asset; and (b) the arrangement period for the tax preferred use of the asset ends; 38 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 43: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 the difference between the amount worked out under subsection (4) and the amount worked out under subsection (6) is to be calculated. Balancing assessable amount or deduction (2) If the amount worked out under subsection (4) exceeds the amount worked out under subsection (6), the excess is included in your assessable income for the income year in which the arrangement period ends. (3) If the amount worked out under subsection (6) exceeds the amount worked out under subsection (4), you can deduct the excess from your assessable income for the income year in which the arrangement period ends. Working out the amounts referred to in subsection (1) (4) This is how to work out the amount under this subsection: Method statement Step 1. Add up the amounts or values of all the financial benefits that were subject to notional loan treatment and that have become due and payable. Deduct from the amount obtained in step 1 the opening balance of the notional loan principal at the beginning of the first accrual period for the asset. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Step 2. (5) If the asset is not to be purchased or acquired by, or transferred to, the tax preferred end user (or a connected entity) at the end of the arrangement period for the tax preferred use under a legally enforceable arrangement, an amount equal to the end value of the asset is taken, for the purposes of step 1 of the method statement in subsection (4), to be a financial benefit that: (a) is subject to notional loan treatment; and (b) became due and payable on the last day of the arrangement period. (6) This is how to work out the amount under this subsection: New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 39 EXPOSURE DRAFT Slide 44: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Method statement Step 1. Add up all of the following: (a) the notional interest amounts included in your assessable income under subsection 250-120(1) in relation to the relevant asset or relevant capital expenditure; the amounts (if any) included in your assessable income under section 250-145, in relation to the relevant asset or relevant capital expenditure; the amounts (if any) included in your assessable income under subsection 250-150(3) in relation to the relevant asset or relevant capital expenditure. (b) (c) Step 2. Add up all the amounts deducted (if any) from your assessable income under subsection 250-150(2) in relation to the relevant asset or relevant capital expenditure. Deduct the amount obtained in step 2 from the amount obtained in step 1. Step 3. 19 20 21 250-160 End value of asset (1) The end value of an asset is worked out using the following table: 40 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 45: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 End value for asset Item 1 If this item applies..... the relevant asset: (a) is purchased or acquired by, or transferred to, the tax preferred end user (or a connected entity) before the end of the income year in which the arrangement period for the tax preferred use of the asset ends; and (b) would have had a termination value at the time of the purchase, acquisition or transfer if this Division had never applied to the asset 2 the relevant asset: (a) is purchased or acquired by, or transferred to, the tax preferred end user (or a connected entity) before the end of the income year in which the arrangement period for the tax preferred use of the asset ends; and (b) is not one to which item 1 applies the capital proceeds for the disposal of the asset worked out under Division 116 the end value is..... the amount that would have been the termination value of the asset at the time of the purchase, acquisition or transfer if this Division had never applied to the asset New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 41 EXPOSURE DRAFT Slide 46: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments End value for asset Item 3 If this item applies..... the relevant asset: (a) is not purchased or acquired by, or transferred to, the tax preferred end user (or a connected entity) before the end of the income year in which the arrangement period for the tax preferred use of the asset ends; and (b) would have had a termination value if: (i) this Division had never applied to the asset; and (ii) the end of the arrangement period for the tax preferred use of the asset were a balancing adjustment event 4 the relevant asset: (a) is not purchased or acquired by or transferred to the tax preferred end user (or a connected entity) before the end of the income year in which the arrangement period for the tax preferred use of the asset ends; and (b) is not one to which item 3 applies the relevant capital expenditure is expenditure that, apart from this Division, would have attracted a capital allowance deduction under Division 40 the amount that would have been the adjustable value of the asset at the time when the arrangement period ended if this Division had never applied to the asset the end value is..... the amount that would have been the termination value of the asset if: (a) this Division had never applied to the asset; and (b) the end of the arrangement period for the tax preferred use of the asset were a balancing adjustment event 5 the amount of the capital expenditure less the capital allowance deductions that would have been allowable under Division 40 in relation to the expenditure if this Division had never applied to the asset 42 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 47: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 End value for asset Item 6 If this item applies..... the relevant capital expenditure is expenditure that, apart from this Division, would have attracted a capital allowance deduction under Division 43 the end value is..... the amount that would have been the undeducted construction expenditure in relation to the asset for the purpose of section 43-15 at the end of the arrangement period for the tax preferred use of the asset if this Division had never applied to the asset 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 (2) If more than 1 item in the table in subsection (1) applies to a particular asset, the end value for the asset is the sum of the end values specified for each of those items. Subdivision 250-F—Treatment of asset after Division ceases to apply to the asset Table of sections 250-165 Treatment of asset after Division ceases to apply to the asset 250-165 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 end value of the asset. (2) For the purposes of Division 43, 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 New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 43 EXPOSURE DRAFT Slide 48: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 (c) there would have been an undeducted construction expenditure in relation to the asset at that time, for the purposes of Division 43, if this Division had never applied to the asset; the undeducted construction expenditure in relation to the asset, immediately after the end of the arrangement period, is taken to be equal to the end value of the asset. (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; cost base, and the reduced cost base, of the asset are each the taken to be reduced at the end of the arrangement period by an amount equal to the difference between: (c) the total amounts or values of the financial benefits that were subject to notional loan treatment; and (d) the net amount included in your assessable income under this Division in relation to the tax preferred use of the asset (taking into account deductions, and amounts included in your assessable income, under section 250-150). Subdivision 250-G—Objections against determinations and decisions by the Commissioner Table of sections 250-170 Objections against determinations and decisions by the Commissioner 250-170 Objections against determinations and decisions by the Commissioner (1) This section applies to a determination by the Commissioner under any of the following provisions: (a) subsection 250-10(3); (b) subsection 250-35(3); (c) item 3 of the table in subsection 250-50(2); (d) subsection 250-115(3); (e) subsection 250-140(2). 44 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 49: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 (2) This section also applies to a decision by the Commissioner under section 250-80. (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. [The next Part is Part 3-35.] 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 Subsection 995-1(1) Insert: accrual event for an asset has the meaning given by subsection 250-130(1). 3 Subsection 995-1(1) Insert: accrual period for an accrual event has the meaning given by subsection 250-130(2). 4 Subsection 995-1(1) Insert: arrangement period for a tax preferred use of an asset has the meaning given by section 250-35. 5 Subsection 995-1(1) Insert: assumed risk, in relation to an asset, has the meaning given by section 250-65. 6 Subsection 995-1(1) Insert: balance of the notional loan principal has the meaning given by subsection 250-135(2). 7 Subsection 995-1(1) New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 45 EXPOSURE DRAFT Slide 50: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Insert: disallowed percentage has the meaning given by subsection 250-115(4). 8 Subsection 995-1(1) Insert: effectively non-cancellable has the meaning given by section 250-85. 9 Subsection 995-1(1) Insert: end user of an asset has the meaning given by subsection 250-30(1). 10 Subsection 995-1(1) Insert: end value of an asset has the meaning given by section 250-160. 11 Subsection 995-1(1) Insert: excluded STB has the same meaning as in section 24AT of the Income Tax Assessment Act 1936. 12 Subsection 995-1(1) Insert: expected low risk returns, in relation to an asset, has the meaning given by section 250-75. 13 Subsection 995-1(1) Insert: low risk, in relation to a financial benefit, has a meaning affected by section 250-75. 14 Subsection 995-1(1) 46 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 51: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Insert: member of the tax preferred end user group has the meaning given by paragraph 250-25(4)(a). 15 Subsection 995-1(1) Insert: member of the tax preferred sector has the meaning given by paragraph 250-25(4)(b). 16 Subsection 995-1(1) Insert: negative adjustment for an income year has the meaning given by subsection 250-150(1). 17 Subsection 995-1(1) Insert: notional compound interest rate has the meaning given by section 250-140. 18 Subsection 995-1(1) Insert: notional interest amount has the meaning given by subsection 250-135(1). 19 Subsection 995-1(1) Insert: positive adjustment for an income year has the meaning given by subsection 250-150(1). 20 Subsection 995-1(1) Insert: predominant economic interest in an asset has the meaning given by section 250-55. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 47 EXPOSURE DRAFT Slide 52: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 Subsection 995-1(1) Insert: prescribed excluded STB means an excluded STB that is prescribed by the regulations for the purposes of Division 1AB of Part III of the Income Tax Assessment Act 1936. 22 Subsection 995-1(1) Insert: present value of a financial benefit has the meaning given by subsection 250-50(1). 23 Subsection 995-1(1) Insert: provided in relation to a tax preferred use of an asset, in relation to a financial benefit, has a meaning affected by section 250-45. 24 Subsection 995-1(1) Insert: put to a tax preferred use, in relation to an asset, has the meaning given by section 250-25. 25 Subsection 995-1(1) Insert: relevant asset has the meaning given by paragraph 250-10(5)(a). 26 Subsection 995-1(1) Insert: relevant capital expenditure has the meaning given by paragraph 250-10(5)(b). 27 Subsection 995-1(1) Insert: remaining expected life of an asset at a particular time means the period after that time for which the asset could be used by any 48 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 53: Tax preferred entities (asset financing) Schedule 1 Main amendments Part 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 exempt entity for a taxable purpose or for the purpose of producing income: (a) assuming it will be subject to wear and tear at a rate that is reasonable for the Commissioner to assume; and (b) assuming it will be maintained in reasonably good order and condition; and (c) having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned. 28 Subsection 995-1(1) Insert: subject to notional loan treatment, in relation to a financial benefit, has the meaning given by section 250-125. 29 Subsection 995-1(1) Insert: tax preferred end user has the meaning given by subsection 250-25(3). 30 Subsection 995-1(1) Insert: tax preferred entity means: (a) an exempt entity; or (b) an exempt Australian government agency; or (c) an associated government entity of an exempt Australian government agency; or (d) a prescribed excluded STB; or (e) an exempt foreign government agency. 31 Subsection 995-1(1) Insert: tax preferred use of an asset has the meaning given by subsection 250-30(2). 32 Subsection 995-1(1) New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 49 EXPOSURE DRAFT Slide 54: Schedule 1 Tax preferred entities (asset financing) Part 1 Main amendments 1 2 3 Insert: undeducted tax cost of a relevant asset or relevant capital expenditure has the meaning given by subsection 250-135(5). 50 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 55: Tax preferred entities (asset financing) Schedule 1 Consequential amendments Part 2 1 2 Part 2—Consequential amendments Development Allowance Authority Act 1992 33 Paragraph 93K(2)(c) Repeal the paragraph, substitute: (c) it will not do anything that: (i) will cause section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned; or (ii) would have caused section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned if the amendments made by Part 2 of Schedule 1 to the New Business Tax System (Tax Preferred Asset Financing) Act 2003 had not been made. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 34 Paragraph 93K(4)(c) Repeal the paragraph, substitute: (c) it will not do anything during the period before the transfer that: (i) will cause section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of those facilities; or (ii) would have caused section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of those facilities if the amendments made by Part 2 of Schedule 1 to the New Business Tax System (Tax Preferred Asset Financing) Act 2003 had not been made. 35 Subparagraph 93R(b)(v) Repeal the subparagraph, substitute: (v) if the certificate applies to a direct infrastructure borrowing—not do anything that: New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 51 EXPOSURE DRAFT Slide 56: Schedule 1 Tax preferred entities (asset financing) Part 2 Consequential amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 (A) will cause section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned; or (B) would have caused section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned if the amendments made by Part 2 of Schedule 1 to the New Business Tax System (Tax Preferred Asset Financing) Act 2003 had not been made; and 36 Subparagraph 93R(c)(ii) Repeal the subparagraph, substitute: (ii) not do anything that: (A) will cause section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned; or (B) would have caused section 51AD of the Tax Act or Division 16D of Part III of that Act to apply to any of the facilities concerned if the amendments made by Part 2 of Schedule 1 to the New Business Tax System (Tax Preferred Asset Financing) Act 2003 had not been made; and 24 25 26 27 28 29 30 31 32 33 34 35 Income Tax Assessment Act 1936 37 After subsection 51AD(1) Insert: (1A) This section does not apply to property that is put to a tax preferred use (within the meaning of the Income Tax Assessment Act 1997) if the tax preferred use: (a) starts on or after 1 July 2003; and (b) does not occur under a legally enforceable arrangement entered into before 1 July 2003. (1B) This section does not apply to property on or after 1 July 2003 if: (a) Division 16D applied to the property immediately before 1 July 2003; or 52 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 57: Tax preferred entities (asset financing) Schedule 1 Consequential amendments Part 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 (b) this section did not apply to the property immediately before 1 July 2003 and Division 16D would apply to the property on or after 1 July 2003 but for subsection 159GH(2). (1C) Subparagraph (4)(a)(iii) and sub-subparagraph (4)(b)(ii)(D) do not apply to property acquired or constructed by a taxpayer if: (a) the property is acquired by the taxpayer on or after 1 July 2003; and (b) the property is not acquired under a legally enforceable arrangement entered into before 1 July 2003. 38 Subsection 51AD(4) Omit “subsection (8)”, substitute “subsections (1A), (1B), (1C) and (8)”. 39 At the end of subsection 73B(15AA) Add: Note: (a) If Division 250 of the Income Tax Assessment Act 1997 applies to you and an asset: if section 250-115 of that Act applies—you are taken to have qualifying expenditure in relation to the use of the asset to the extent specified in a determination made under subsection 250-115(3) of that Act; or otherwise—you are taken not to have such expenditure. (b) 40 Subsection 73BC(2) (note) Omit “Note”, substitute “Note 1”. 41 At the end of subsection 73BC(2) Add: Note 2: (a) If Division 250 of the Income Tax Assessment Act 1997 applies to you and an asset: if section 250-115 of that Act applies—the asset is taken to be used, or installed ready for use, for the purpose of carrying on, by or on behalf of an eligible company, of research or development activities to the extent specified in a determination made under subsection 250-115(3) of that Act; or otherwise—the asset is taken not to be used, or installed ready for use, for such a purpose. (b) New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 53 EXPOSURE DRAFT Slide 58: Schedule 1 Tax preferred entities (asset financing) Part 2 Consequential amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 42 Before subsection 159GH(1) Insert: (1A) This Division does not apply in relation to the item of eligible property that is put to a tax preferred use (within the meaning of the Income Tax Assessment Act 1997) if the tax preferred use: (a) starts on or after 1 July 2003; and (b) does not occur under a legally enforceable arrangement entered into before 1 July 2003. 43 Subsection 159GH(1) Omit “subsection (2)”, substitute “subsections (1A) and (2)”. 44 Subsection 170(10AA) (after table item 170) Insert: 175 Division 250 Asset is put to a tax preferred use by a tax preferred end user 14 15 16 17 18 Income Tax Assessment Act 1997 45 Section 12-5 (table item headed “capital allowances”) After: trading ships, special depreciation...................................... 57AM 19 20 21 insert: tax preferred use of asset .................................................... Division 250 22 23 24 25 46 Section 12-5 (table item headed “leases”) After: 54 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 59: Tax preferred entities (asset financing) Schedule 1 Consequential amendments Part 2 improvements on leased land and premiums, leases assigned or surrendered before 23 October 1964 and for mining leases assigned or surrendered before 10 May 1968..... 1 2 3 83 to 89, 88A(3) insert: leases of assets being put to tax preferred use .................... Division 250 4 5 6 7 8 9 10 11 47 Section 12-5 (table item headed “notional sales and loans”) After “240-50”, insert “, 250-120”. 48 Section 12-5 (table item headed “notional sales and loans”) Before: payments to acquire property, no deduction for ................. 240-85 12 13 14 insert: notional loan treatment for financial benefits provided for tax preferred use of asset............................................... Subdivision 250-C 15 16 17 18 49 Section 12-5 (table item headed “property”) After: arrangements relating to use of property if end user an exempt public body or use outside Australia to produce exempt income........................................................................... 159GE to 159GO 19 20 21 insert: arrangements relating to assets being put to tax preferred use ...................................................................................... Division 250 New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 55 EXPOSURE DRAFT Slide 60: Schedule 1 Tax preferred entities (asset financing) Part 2 Consequential amendments 1 2 3 4 50 Section 12-5 (after table item headed “tax losses”) Insert: Tax preferred asset financing generally ............................................................................. denial of capital allowance deductions in relation to asset being put to tax preferred use........................................ reduction in capital allowance deductions in relation to asset being put to tax preferred use............................... deduction relating to the notional loan treatment for asset being put to a tax preferred use..................................... balancing deduction at the end of arrangement period for the tax preferred use of asset......................................... Division 250 250-110 250-115 250-150 250-155 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 51 Subsection 40-25(7) Omit “A taxable purpose”, substitute “Subject to subsection (8), a taxable purpose”. 52 At the end of section 40-25 Add: (8) If Division 250 applies to you and an asset that is a depreciating asset: (a) if section 250-115 applies—you are taken to be using the asset for a taxable purpose to the extent specified in a determination made under subsection 250-115(3); or (b) otherwise—you are taken not to be using the asset for such a purpose. 53 At the end of subsection 40-525(1) Add: Note: (a) If Division 250 applies to you and an asset that is a water facility: if section 250-115 applies—the condition in this subsection is taken to be satisfied for the facility to the extent specified in a determination made under subsection 250-115(3); or 56 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 61: Tax preferred entities (asset financing) Schedule 1 Consequential amendments Part 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 (b) otherwise—the condition in this subsection is taken not to be satisfied for the facility. 54 At the end of subsection 40-525(2) Add: Note: (a) If Division 250 applies to you and an asset that is a horticultural plant: if section 250-115 applies—a condition in this subsection is taken to be satisfied for the plant to the extent specified in a determination made under subsection 250-115(3); or otherwise—the conditions in this subsection are taken not to be satisfied for the horticultural plant. (b) 55 At the end of subsection 40-525(3) Add: Note: (a) If Division 250 applies to you and an asset that is a grapevine: if section 250-115 applies—the condition in this subsection is taken to be satisfied for the grapevine to the extent specified in a determination made under subsection 250-115(3); or otherwise—the condition in this subsection is taken not to be satisfied for the grapevine. (b) 56 At the end of subsection 40-630(1) Add: Note: (a) If Division 250 applies to you and an asset that is land: if section 250-115 applies—you are taken to be using the land for the purpose of carrying on a primary production business, or a business for the purposes of producing assessable income from the use of rural land (except a business of mining operations), to the extent specified in a determination made under subsection 250-115(3); or otherwise—you are taken not to be using the land for such a purpose. (b) 57 At the end of subsection 40-730(1) Add: Note: (a) If Division 250 applies to you and an asset that is land: if section 250-115 applies—you can deduct expenditure you incur in relation to the land to the extent specified in a determination made under subsection 250-115(3); or otherwise—you cannot deduct such expenditure. (b) New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 57 EXPOSURE DRAFT Slide 62: Schedule 1 Tax preferred entities (asset financing) Part 2 Consequential amendments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 58 Subsection 40-735(1) (note) Omit “Note”, substitute “Note 1”. 59 At the end of subsection 40-735(1) Add: Note 2: (a) If Division 250 applies to you and an asset that is land: if section 250-115 applies—you can deduct expenditure you incur in relation to the land to the extent specified in a determination made under subsection 250-115(3); or otherwise—you cannot deduct such expenditure. (b) 60 Subsection 40-750(1) (note) Omit “Note”, substitute “Note 1”. 61 At the end of subsection 40-750(1) Add: Note 2: (a) If Division 250 applies to you and an asset: if section 250-115 applies—you can deduct expenditure you incur in relation to the asset to the extent specified in a determination made under subsection 250-115(3); or otherwise—you cannot deduct such expenditure. (b) 62 At the end of subsection 40-755(1) Add: Note: (a) If Division 250 applies to you and an asset that is land: if section 250-115 applies—you can deduct expenditure you incur in relation to the land to the extent specified in a determination made under subsection 250-115(3); or otherwise—you cannot deduct such expenditure. (b) 63 At the end of section 40-835 Add: Note: (a) If Division 250 applies to you and an asset: if section 250-115 applies—you are taken to be using the asset for taxable purposes to the extent specified in a determination made under subsection 250-115(3); or otherwise—you are taken not to be using the asset for such purposes. (b) 58 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 63: Tax preferred entities (asset financing) Schedule 1 Consequential amendments Part 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 64 At the end of subsection 40-880(1) Add: Note: (a) If Division 250 applies to you and an asset: if section 250-115 applies—you can deduct an amount for capital expenditure you incur in relation to the asset to the extent specified in a determination made under subsection 250-115(3); or otherwise—you cannot deduct an amount for such expenditure. (b) 65 Subsection 43-140(1) (note) Omit “Note”, substitute “Note 1”. 66 At the end of subsection 43-140(1) Add: Note 2: (a) If Division 250 applies to you and an asset that is a capital work: if section 250-115 applies—you are taken to be using the capital work for the purpose of producing assessable income, or for the purpose of carrying on research and development activities, to the extent specified in a determination made under subsection 250-115(3); or otherwise—you are taken not to be using the capital work for such a purpose. (b) 67 Section 112-97 (after table item 24) Insert: 24A The arrangement period for the tax preferred use of an asset ends The total cost base and reduced cost base Subsection 250-165(3) 24 25 26 27 28 29 30 31 68 Subsection 396-75(2) (example) Repeal the example, substitute: Example: The Commissioner may advise the Minster that: • a lender is not an Australian resident; or • section 51AD of the Income Tax Assessment Act 1936 may apply to the project; or • Division 250 may apply in relation to the land transport facilities. New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 No. , 2003 59 EXPOSURE DRAFT Slide 64: Schedule 1 Tax preferred entities (asset financing) Part 2 Consequential amendments 1 2 3 4 5 6 7 8 9 10 11 12 69 Paragraph 396-85(1)(c) Repeal the paragraph, substitute: (c) that the borrower will not do anything that will cause the following provisions to apply to any of the facilities concerned: (i) section 51AD of the Income Tax Assessment Act 1936; (ii) Division 16D of Part III of that Act; (iii) Division 250 of this Act; 70 At the end of paragraph 974-130(4)(a) Add: (vi) the asset leased or bailed is not an asset to which Division 250 of this Act applies; 60 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT Slide 65: Tax preferred entities (asset financing) Schedule 1 Application Part 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Part 3—Application 71 Application (1) Subject to subitems (3) and (5), Division 250 applies in relation to a tax preferred use of an asset if and only if the tax preferred use: (a) starts on or after 1 July 2003; and (b) does not occur under a legally enforceable arrangement that was entered into before 1 July 2003. This subitem applies to an asset that is put to a tax preferred use if: (a) the tax preferred use starts on or after 1 July 2003; and (b) the tax preferred use occurs under a legally enforceable arrangement that was entered into before 1 July 2003; and (c) immediately before 1 July 2003: (i) section 51AD did not apply to the asset in relation to a taxpayer; and (ii) Division 16D did not apply to the asset; and (d) the arrangement referred to in paragraph (b) is altered on or after 1 July 2003; and (e) but for this subitem and subitem (3): (i) section 51AD would apply to the asset in relation to a taxpayer immediately after the alteration; or (ii) Division 16D would apply to the asset immediately after the alteration. For the purposes of applying paragraph (c), assume that the asset was in existence and was being put to the tax preferred use immediately before 1 July 2003. (3) If subitem (2) applies: (a) section 51AD or Division 16D does not apply to the asset; and (b) Division 250 applies to the tax preferred use of the asset after the alteration instead. This subitem applies to an asset that is put to a tax preferred use if: (a) the tax preferred use started before 1 July 2003; and (b) immediately before 1 July 2003: No. , 2003 61 (2) (4) New Business Tax System (Tax Preferred Entities— Asset Financing) Bill 2003 EXPOSURE DRAFT Slide 66*: Schedule 1 Tax preferred entities (asset financing) Part 3 Application 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 (i) section 51AD did not apply to the asset in relation to a taxpayer; and (ii) Division 16D did not apply to the asset; and (c) the arrangement under which the tax preferred use of the asset occurs is altered on or after 1 July 2003; and (d) but for this subitem and subitem (5): (i) section 51AD would apply to the asset in relation to a taxpayer immediately after the alteration; or (ii) Division 16D would apply to the asset immediately after the alteration. (5) If subitem (4) applies: (a) section 51AD does not apply to the asset; and (b) Division 250 applies to the tax preferred use of the asset after the alteration instead. For the purposes of applying subparagraphs (2)(c)(ii) and (e)(ii) and (4)(b)(ii) and (d)(ii), disregard the operation of section 159GL of the Income Tax Assessment Act 1936. For the purposes of applying Division 250 to the tax preferred use of an asset in accordance with subitem (3) or (5), the arrangement period for the tax preferred use of the asset is taken to start on the day on which the alteration referred to in paragraph (2)(d) or (4)(c) occurs. In this item: arrangement has the same meaning as in the Income Tax Assessment Act 1997. Division 16D means Division 16D of Part III of the Income Tax Assessment Act 1936. Division 250 means Division 250 of the Income Tax Assessment Act 1997. section 51AD means section 51AD of the Income Tax Assessment Act 1936. tax preferred use has the same meaning as in the Income Tax Assessment Act 1997. (6) (7) (8) 62 , 2003 New Business Tax System (Tax Preferred Entities—Asset Financing) Bill 2003 No. EXPOSURE DRAFT