F.1.1  Division 250 capture

Subject to the Division 250 ("Div 250") thresholds (exemptions for small business taxpayers, carve-outs for smaller transactions e.g. nominal sum of contract payments <$5m etc.) and discretional relief provided by the Commissioner, Div 250 applies where (if all five tests are met):

1  There is tax-preferred asset use.  Div 250 adopts a "lease, use or control of use" of the asset test:

a)  Tax-exempt end user is the lessee of the asset; or

b)  Someone other than the taxpayer uses, or effectively controls the use of, the asset:

I.  and the asset is not committed to the production of tax assessable income;

II.  control can be direct or indirect; and

III.  control can be physical or financial.

2  Arrangement period > 12 months.

3  Financial benefits provided to the taxpayer in respect of the asset use by a tax-exempt.  The tax-exempt party provides financial benefits to the taxpayer for the tax-preferred use of the asset. The term "financial benefits" is defined in the debt / equity tax legislation and includes up-front contributions and payments at the back end of the deal;

4  If not for Div 250, the taxpayer would be entitled to claim capital allowances on the asset:

a)  plant and equipment;

b)  Div 40 depreciation allowances;

c)  structures; and

d)  Div 43 amortisations.

5  The taxpayer does not have the predominant economic interest (PEI) in the asset.  For most projects, PEI will be the decider for Div 250 capture.

There are a handful of subtests - if any one of these PEI subtests is failed then the fifth test is failed:

PEI One - limited recourse debt limit.  The Div 250 threshold generally allows up to 80% of the cost of the asset to be so funded;

PEI Two - right to acquire.  Div 250 only allows the tax-exempt to acquire at market value. Simple reversion to tax-exempt at the end of the contract is also permitted;

PEI Three - Effectively non-cancellable long-term arrangements.  Captures deals where:

•  the arrangement period > 30 years or 75 per cent of the remaining effective life; and

•  the deal is cancellable only with the permission of the taxpayer or the deal is cancellable without taxpayer permission but a replacement deal is required or the penalty for cancellation is such as to discourage cancellation.

PEI Four - Level of expected financial benefits test.  The taxpayer:

•  lacks a PEI if the asset has a guaranteed residual value under the contract; or

•  the sum of the financial benefits (now in PV terms) provided in relation to the asset use by the tax-exempt party exceeds 70 per cent of the market value of the asset.