After a decade of inter-jurisdictional consultation, Division 250 of the Income Tax Assessment Act 1997 was enacted to replace the draconian application of section 51AD and Division 16D of the Income Tax Assessment Act 1936.
Section 51AD was introduced in the early 1980s to combat an anticipated decrease in Commonwealth tax revenue, due to public infrastructure assets being sold to, and then leased backed from, the private sector. These transactions saw the private sector becoming eligible for capital deductions, which did not exist under State ownership. Section 51AD had the effect of denying these capital allowances when the end user of the asset was a tax preferred entity, whilst all revenues were assessable income in the hands of the taxpayer.
The NSW submission to the 1999 Ralph Review of Business Taxation called for an amendment to remove disincentives for private ownership of public infrastructure. The submission noted that section 51AD, and Division 16D - a similar regime for non-leveraged leases - were framed before PPPs became a major initiative, with their application now impeding private sector participation in public infrastructure.
Division 250 removes the threat of section 51AD applying. The Division applies an array of tests to determine the party which "effectively controls", and therefore has the "predominant economic interest" in, the asset. Division 250 is summarised in the Act as follows:
This Division denies or reduces certain capital allowance deductions that would otherwise be available to you ("the taxpayer") in relation to an asset if the asset is put to a tax preferred use in certain circumstances. |
Division 250 will apply where Government "effectively controls" the use of an asset that is leased, with the asset producing goods, services or facilities that are paid for by Government. If deductions are denied, the operative provisions re-characterise the arrangement as a sale and associated loan.
The development of Division 250 is a further area of policy that has changed recently to accommodate the existence of PPPs.