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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

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Presentation Transcript
outline of session
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

Overview of provisions

Josh Cardwell, Director

overview of provisions5
Overview of provisions
  • 5 Gateways
  • 5 Exclusions
  • Asset vs arrangement
  • Expanded lease definition
gateways
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
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
Arrangement period > 12 months
  • Start Time
  • End time
  • Options
provision of financial benefits
Provision of financial benefits
  • Financial benefits
  • Provider of financial benefits:
    • Tax preferred end user
    • Tax preferred entity
    • Non-resident
capital allowance entitlement
Capital allowance entitlement
  • Division 40
  • Division 43
  • Other
lack of predominant economic interest pei
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 test
  • LRD - definition
  • Domestic end user – 80%
  • Non-resident end user – 55%
  • Exclusions
right to acquire test
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 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
Level of expected financial benefits test
  • Guaranteed residual value
  • Debt interest
  • PV of financial benefits > 70% of ‘depreciable’ base
exclusions
Exclusions
  • Small business
  • Minimum value
  • Alternate assessable amount
  • Commissioner’s discretion
exclusions17
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
Application
  • Notional loan : similar to Division 16D
  • Apportionment
  • Principal and interest: compounding accruals
transitional provisions

Transitional provisions

Chris Colley, Director

transitional provisions20
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
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 cont22
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?)
slide24

Tax Preferred End User

  • Exclusions
  • PEI
  • Calculation
tax preferred end user
Tax Preferred End User
  • Tax exempt (or a connected entity)
  • has or will have use or control of use
slide26

Tax or payfixed feefixed return

Financial control

Taxpayer

TPE

Day to day control

TPU
slide27

Lease

  • OR
  • use of specific asset
  • a right to control

Taxpayer

TPE

(excl. step in rights)

TPU
relevant exclusions
Relevant Exclusions
  • Lesser 250 amount
  • Commissioner’s discretion
slide29
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

LimitedRecourseDebt

90%

Tax Preferred Use wholly in Australia

Taxpayer

TPU neither lease nor hire arrangement

TPE

No TPE Financing of Asset

DepreciableAsset

Excl: TPE assists in financing

PEI: General LRD Test “Carve-Out”
slide31

Reversionary Interest

  • Hospital

30 yearGroundLease

Sublease

Taxpayer

TPE

TPE

Sale

Freehold

Lease

TPE

Taxpayer

Sale

TPE

PEI
financial benefits

Expenses

Staple

Services Agt

Company

Trust

TPE

Lease

Rent

Availability charge

Financial Benefits
financial benefits33

Expenses

Staple

Loan

Company

Trust

TPE

Interest

Availability charge

Financial Benefits
example
Example

EquityProviders

Equity $10m

Project Deed

Debt

ProjectBanks

CourtCo

StateGovt.

$90m

Availability Charges

Construction

Facilities Management Services

$80m

ServiceCo

ConstructCo

Div. 43 : $70m Div. 40 : $10m Other costs : $20m

implications for property

Implications for Property

Josh Cardwell, Director

tax preferred end user36
Tax preferred end user

LPT

Aus

Offshore

Lease

Non Resident

alternate structure
Alternate Structure

LPT

Aus Co

Aust

100%

Offshore

PE/Branch

Hold Co.

Lease

slide38
CFC

LPT

Aus

Offshore

100%

CFC

Lease

For Co

lrd test exclusion
LRD Test Exclusion

LRD

LPT

TPE Leases

Non TPE Leases

lrd test40
LRD Test

Land Co.

Loan for land and shares

Equity

Building Co.

Ground Lease

Lease

TPE

other examples
Other Examples
  • Options to extend
  • Floor leases vs Master lease
  • Put options and estimated value
introduction
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
Base structure

Public Investors

Unit Trust I

Unit Trust II

Company A

permitted restructure option 1
Permitted restructure – Option 1

Public Investors

Units

Newly interposed trust

Head Unit

Trust

Unit Trust I

Unit Trust II

Company A

permitted restructure option 2
Permitted restructure – Option 2

Public Investors

Units

Original trust - now the head trust

Unit Trust 1

Unit Trust II

Company A

comments
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
Division 6C amendment

Australian

LPT

Primarily investing in land

US REIT

Other subs

Taxable REIT subs

This may now be permissible

other comments
Other comments
  • Other issues to consider:
    • stamp duty
    • legal: meeting required
    • accounting?
  • Cross-holdings could be problematic
stamp duty issues

Stamp Duty issues

Matthew Stutsel, Partner

Freehills

stamp duty issues51
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 issues52
Stamp duty issues
  • Potential duty, especially land rich
  • Reconstruction relief
  • PCA lobbying