P1258776939EeuFK

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Division 250 and Division 6C a practical
perspective

• Tuesday 18 September 2007

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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

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Overview of provisions

• Josh Cardwell, Director

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Overview of provisions

• 5 Gateways
• 5 Exclusions
• Asset vs arrangement
• Expanded lease definition

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Gateways

• Asset put to tax preferred use
• Arrangement period gt 12 months
• Provision of financial benefits
• Capital allowance entitlement
• Lack of predominant economic interest (PEI)

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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

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Arrangement period gt 12 months

• Start Time
• End time
• Options

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Provision of financial benefits

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

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Capital allowance entitlement

• Division 40
• Division 43
• Other

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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

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LRD test

• LRD - definition
• Domestic end user 80
• Non-resident end user 55
• Exclusions

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Right to acquire test

• Will transfer other than for market value
• Right/obligation to acquire other than for market
  value

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Effectively non-cancellable long term
arrangements test

• Effectively non-cancellable
• Non-cancellable
• Discouragement
• Arrangement period
• Greater than 30 years
• 75 of remaining effective life

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Level of expected financial benefits test

• Guaranteed residual value
• Debt interest
• PV of financial benefits gt 70 of depreciable
  base

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Exclusions

• Small business
• Minimum value
• Alternate assessable amount
• Commissioners discretion

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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

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Application

• Notional loan similar to Division 16D
• Apportionment
• Principal and interest compounding accruals

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Transitional provisions

• Chris Colley, Director

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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.

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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.

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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?)

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Implications for Infrastructure

• Paul King, Director

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• Tax Preferred End User
• Exclusions
• PEI
• Calculation

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Tax Preferred End User

• Tax exempt (or a connected entity)
• has or will have use or control of use

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TPU
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TPU
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Relevant Exclusions

• Lesser 250 amount
• Commissioners discretion

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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)

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PEI General LRD Test Carve-Out
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PEI
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Financial Benefits
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Financial Benefits
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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
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Implications for Property

• Josh Cardwell, Director

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Tax preferred end user
LPT
Aus
Offshore
Lease
Non Resident
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Alternate Structure
LPT
Aus Co
100
Aust
Offshore
PE/Branch
Hold Co.
Lease
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CFC
LPT
Aus
Offshore
100
CFC
Lease
For Co
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LRD Test Exclusion
LRD
LPT
TPE Leases
Non TPE Leases
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LRD Test
Land Co.
Loan for land and shares
Equity
Building Co.
Ground Lease
Lease
TPE
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Other Examples

• Options to extend
• Floor leases vs Master lease
• Put options and estimated value

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Restructures of stapled groupsDivision 6C
amendments

• Andrew White, Director

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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

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Base structure
Public Investors
Company A
Unit Trust II
Unit Trust I
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Permitted restructure Option 1
Public Investors
Units
Newly interposed trust
Head Unit Trust
Company A
Unit Trust II
Unit Trust I
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Permitted restructure Option 2
Public Investors
Units
Original trust - now the head trust
Unit Trust 1
Company A
Unit Trust II
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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)

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Division 6C amendment
Australian LPT
Primarily investing in land
US REIT
Taxable REIT subs
Other subs
This may now be permissible
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Other comments

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

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Stamp Duty issues

• Matthew Stutsel, Partner
• Freehills

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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

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Stamp duty issues

• Potential duty, especially land rich
• Reconstruction relief
• PCA lobbying

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QA
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