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