For those operating in the energy and resources sector, the new Division 250 of the Tax Act has important implications for both existing and new contracts.
Division 250, which came into effect on 25 September 2007, takes the place of Division 16D and section 51AD in relation to tax exempt asset financing and long-term supply deals with tax exempt entities such as state governments or with non-residents.
In relation to existing deals, the important questions that need to be considered are: does Division 16D or Division 250 apply and can contingent equity deeds be removed?
For new deals, only Division 250, and not Division 16D or section 51AD, will be relevant.
What does Division 250 replace?
Division 16D and section 51AD were primarily relevant to leases to tax exempt entities, and treated long term leases as though they were sales with an associated loan.
The net result of Division 16D, if it applied, was effectively to defer the benefit of deductions associated with assets, while section 51AD, where it applied, would deny the deductions entirely.
Section 51AD applied where there was non-recourse financing, meaning that parties often entered into "contingent equity" arrangements. These arrangements may now be able to be terminated in some cases.
What does the new Division 250 do?
Division 250 is similar to Division 16D in many ways, and also has the effect of deferring the benefit of deductions.
Unlike section 51AD, Division 250 does not deny deductions entirely. The calculations under Division 250 may, in some circumstances, produce a better outcome for taxpayers because it assumes that the taxpayer will eventually get the benefit of all the capital allowance deductions relating to an asset, even if they were not to hold the asset long enough to write it off completely.
If Division 250 would produce a better outcome, then it does not apply – essentially, there is a 'no advantage' rule.
In what circumstances does Division 250 apply?
Division 250 applies in similar circumstances to those where Division 16D previously applied, although much of the detail has changed.
There are five gateway tests into Division 250. If the answer to any of these questions is no, then Division 250 does not apply:
- Does a tax preferred end user (eg, governments, other
tax-exempt entities or non-residents) have the use or control
of an asset leased to them, or which is used to supply goods
or services to them? (This test is intended to operate in the
same manner as the 'use or control' test in
Division 16D and section 51AD.)
- Is the duration of the arrangement for longer than 12
months?
- Is the tax preferred end user providing financial
benefits?
- Is the taxpayer entitled to claim capital allowances in
relation to the asset?
- Does the tax preferred end user have the predominant economic interest in the asset. (This is determined by a series of specific tests, which are probably rather easier to satisfy than the tests provided for in the 2003 Exposure Draft of Division 250.)
Assuming you are caught by the gateway tests, there are exceptions for certain types of short term or low value arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
