Division 250 and Division 6C : a practical perspective

2. Division 250 and Division 6C : a practical perspective Tuesday 18 September 2007

3. 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

4. Overview of provisions Josh Cardwell, Director

5. Overview of provisions • 5 Gateways • 5 Exclusions • Asset vs arrangement • Expanded lease definition

6. Gateways • Asset put to tax preferred use • Arrangement period > 12 months • Provision of financial benefits • Capital allowance entitlement • Lack of predominant economic interest (“PEI”)

7. 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

8. Arrangement period > 12 months • Start Time • End time • Options

9. Provision of financial benefits • Financial benefits • Provider of financial benefits: • Tax preferred end user • Tax preferred entity • Non-resident

10. Capital allowance entitlement • Division 40 • Division 43 • Other

11. 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

12. LRD test • LRD - definition • Domestic end user – 80% • Non-resident end user – 55% • Exclusions

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

14. Effectively non-cancellable long term arrangements test • Effectively non-cancellable: • Non-cancellable • Discouragement • Arrangement period: • Greater than 30 years • 75% of remaining effective life

15. Level of expected financial benefits test • Guaranteed residual value • Debt interest • PV of financial benefits > 70% of ‘depreciable’ base

16. Exclusions • Small business • Minimum value • Alternate assessable amount • Commissioner’s discretion

17. 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

18. Application • Notional loan : similar to Division 16D • Apportionment • Principal and interest: compounding accruals

19. Transitional provisions Chris Colley, Director

20. 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.

21. 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.

22. 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?)

23. Implications for Infrastructure Paul King, Director

24. Tax Preferred End User • Exclusions • PEI • Calculation

25. Tax Preferred End User • Tax exempt (or a connected entity) • has or will have use or control of use

26. Tax or payfixed feefixed return Financial control Taxpayer TPE Day to day control TPU

27. Lease • OR • use of specific asset • a right to control Taxpayer TPE (excl. step in rights) TPU

28. Relevant Exclusions • Lesser 250 amount • Commissioner’s discretion

29. 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)

30. LimitedRecourseDebt 90% Tax Preferred Use wholly in Australia Taxpayer TPU neither lease nor hire arrangement TPE No TPE Financing of Asset DepreciableAsset Excl: TPE assists in financing PEI: General LRD Test “Carve-Out”

31. Reversionary Interest • Hospital 30 yearGroundLease Sublease Taxpayer TPE TPE Sale Freehold Lease TPE Taxpayer Sale TPE PEI

32. Expenses Staple Services Agt Company Trust TPE Lease Rent Availability charge Financial Benefits

33. Expenses Staple Loan Company Trust TPE Interest Availability charge Financial Benefits

34. 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

35. Implications for Property Josh Cardwell, Director

36. Tax preferred end user LPT Aus Offshore Lease Non Resident

37. Alternate Structure LPT Aus Co Aust 100% Offshore PE/Branch Hold Co. Lease

38. CFC LPT Aus Offshore 100% CFC Lease For Co

39. LRD Test Exclusion LRD LPT TPE Leases Non TPE Leases

40. LRD Test Land Co. Loan for land and shares Equity Building Co. Ground Lease Lease TPE

41. Other Examples • Options to extend • Floor leases vs Master lease • Put options and estimated value

42. Restructures of stapled groupsDivision 6C amendments Andrew White, Director

43. 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

44. Base structure Public Investors Unit Trust I Unit Trust II Company A

45. Permitted restructure – Option 1 Public Investors Units Newly interposed trust Head Unit Trust Unit Trust I Unit Trust II Company A

46. Permitted restructure – Option 2 Public Investors Units Original trust - now the head trust Unit Trust 1 Unit Trust II Company A

47. 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)

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

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

50. Stamp Duty issues Matthew Stutsel, Partner Freehills