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 per cent 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.