division 250 and division 6c : a practical perspective tuesday 18 september 2007

Division 250 and Division 6C :

a practical perspective

Tuesday 18 September 2007

Outline of session

• Division 250 : Overview of provisions

• Division 250 : Transitional issues

• Implications for Infrastructure

• Implications for Property

• Restructures of stapled groups : Division 6C amendments

• Stamp duty issues

Overview of provisions

Josh Cardwell, Director

Overview of provisions

• 5 Gateways

• 5 Exclusions

• Asset vs arrangement

• Expanded lease definition

Gateways

• Asset put to tax preferred use

• Arrangement period > 12 months

• Provision of financial benefits

• Capital allowance entitlement

• Lack of predominant economic interest (“PEI”)

Asset put to tax preferred use

• End user– Control

• Tax preferred use– Lease:

• tax preferred entity• offshore use by non-resident

– Other use:• tax preferred entity• offshore use by non-resident

• Tax preferred entity– Government– Tax exempt

Arrangement period > 12 months

• Start Time

• End time

• Options

Provision of financial benefits

• Financial benefits

• Provider of financial benefits:– Tax preferred end user– Tax preferred entity– Non-resident

Capital allowance entitlement

• Division 40

• Division 43

• Other

Lack of predominant economic interest (“PEI”)

• LRD test

• Right to acquire test

• Effectively non-cancellable long term arrangement test

• Level of expected financial benefits test

LRD test

• LRD - definition

• Domestic end user – 80%

• Non-resident end user – 55%

• Exclusions

Right to acquire test

• Will transfer other than for market value

• Right/obligation to acquire other than for market value

Effectively non-cancellable long term arrangements test

• Effectively non-cancellable:– Non-cancellable– Discouragement

• Arrangement period:– Greater than 30 years– 75% of remaining effective life

Level of expected financial benefits test

• Guaranteed residual value

• Debt interest

• PV of financial benefits > 70% of ‘depreciable’ base

Exclusions

• Small business

• Minimum value

• Alternate assessable amount

• Commissioner’s discretion

Exclusions

• Short Term/Low Value

– Arrangement period:• Real property lease: 5 years or less• Other: 3 years or less

– Financial benefits:• Real property lease: $50m or less• Other: $30m or less

– Asset value:• Real property lease: $40m or less• Other: $20m or less

Application

• Notional loan : similar to Division 16D

• Apportionment

• Principal and interest: compounding accruals

Transitional provisions

Chris Colley, Director

Transitional provisions

• Generally, applies tax preferred use commencing on or after 1 July 2007.

• Legally enforceable arrangement prior to 1 July 2007, can elect into Div 250.

• Election can be made on an arrangement by arrangement basis.

Transitional provisions (cont.)

• Pre - 1 July 2007 arrangements subject to Div 250 where:– material variation after that date; and– variation would have caused 51AD / Div

16D to apply.

• Removing contingent equity is not a material variation.

Transitional provisions (cont.)

• 51AD switched off for:– pre 1 July 2007 arrangements– ‘tax preferred use’ started after 1 July

2003.

• Division 16D still applies.

• Does not apply to sale and leasebacks (unless also tax preferred use?)

Implications for Infrastructure

Paul King, Director

Tax Preferred End User

Exclusions

PEI

Calculation

Tax Preferred End User

• Tax exempt (or a connected entity)

• has or will have use or control of use

TPU

Taxpayer TPE

Financial control

Day to day control

Tax or payfixed feefixed return

TPU

Taxpayer TPE

Lease

(excl. step in rights)

OR

use of specific asset

a right to control

Relevant Exclusions

• Lesser 250 amount

• Commissioner’s discretion

PEI• LRD

• Right to acquire asset (not a reversion)

• non-cancellable long term arrangement

• level of expected benefits (pv)

• guaranteed residual

versus

• LRD (51AD)

• Finance Lease (Division 16D) – s.159GG(4)

PEI: General LRD Test “Carve-Out”

DepreciableAsset

Taxpayer TPE

90%

Tax Preferred Use wholly in Australia

TPU neither lease nor hire arrangement

No TPE Financing of Asset

LimitedRecourse

Debt

Excl: TPE assists in financing

PEI

TPETaxpayer

TPE

Lease

Sale

Sale

Freehold

TaxpayerTPE TPE

30 yearGroundLease

Reversionary Interest Hospital

Sublease

Financial Benefits

CompanyTrust TPE

Staple

Lease

Rent

Expenses

Services Agt

Availability charge

Financial Benefits

CompanyTrust TPE

Staple

Loan

Interest

Expenses

Availability charge

Example

ProjectBanks

Debt

Construction

Equity $10m

Project Deed

ConstructCo

ServiceCo

CourtCo

EquityProviders

StateGovt.Availability Charges$90m

$80mFacilities Management Services

Div. 43 : $70mDiv. 40 : $10m

Other costs : $20m

Implications for Property

Josh Cardwell, Director

Tax preferred end user

LPT

Non Resident

Lease

Aus

Offshore

Alternate Structure

LPT

LeasePE/Branch

Aus Co

Hold Co.

100%

Offshore

Aust

CFC LPT

For Co

Lease

Aus

Offshore100%

CFC

LRD Test Exclusion

LPT

TPE Leases

LRD

Non TPE Leases

LRD Test

Land Co.

Building Co.Ground Lease

TPE

Lease

Loan for land and shares

Equity

Other Examples

• Options to extend

• Floor leases vs Master lease

• Put options and estimated value

Restructures of stapled groups

Division 6C amendments

Andrew White, Director

Introduction

• Tax Laws Amendment (2007 Measures No. 5) Bill 2007 introduced that seeks to make:– CGT amendments to allow for stapled groups to

restructure to facilitate scrip offers– Consequential amendments to Division 6C– Further amendments to Division 6C in relation to

foreign entities / groups acquired by Australian LPTs

Base structure

Public Investors

Company AUnit Trust IIUnit Trust I

Permitted restructure – Option 1

Head Unit

Trust

Company AUnit Trust IIUnit Trust I

Public Investors

Newly interposed trust

Units

Permitted restructure – Option 2

Unit Trust 1

Company AUnit Trust II

Public Investors

Original trust - now the head trust

Units

Comments

• CGT roll-over relief for investors provided:– percentage ownership interest remains the same – the market value of the investors’ new securities

is the same as the existing securities

• Interposed trust to determine cost base of interests in the stapled entity acquired by reference to cost bases of the assets of stapled entity

• A sale facility can be put in place to deal with foreign holders that cannot participate in restructure

• Divisions 6B and 6C amended (narrow changes)

Division 6C amendment

US REIT

Taxable REIT subs

Other subs

Australian

LPT Primarily investing in land

This may now be permissible

Other comments

• Other issues to consider:– stamp duty– legal: meeting required– accounting?

• Cross-holdings could be problematic

Stamp Duty issues

Matthew Stutsel, Partner

Freehills

Stamp duty issues

• Potential duty, especially land rich– Underlying assets– Listed or unlisted– Company or trust– Interpose new trust or existing trust– Transfer or issue/redemption

Stamp duty issues

• Potential duty, especially land rich

• Reconstruction relief

• PCA lobbying

Q&A

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