Issue
Does an exempt authority 'control' for the purposes of Division 16D of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) the use of property, where that exempt authority would not be considered by the Commissioner to control the use of the property under section 51AD of the ITAA 1936?
Decision
No, an exempt authority will not control for the purposes of Division 16D of the ITAA 1936 the use of property, where that exempt authority would not also control the use of that property under section 51AD of the ITAA 1936.
Facts
Arrangement entailed the taxpayer and a company owned by a state authority that was an 'exempt public body' as defined under subsection 159GE(1) of the ITAA 1936, being involved in a commercial venture.
The facts of the arrangement did not establish that the exempt public body controlled the use of the property for the purposes of section 51AD of the ITAA 1936.
Reasons for Decision
The control test in Division 16D of the ITAA 1936 was not satisfied by any exempt entity.
An arrangement will constitute a 'qualifying arrangement' under subsection 159GG(1) of the ITAA 1936 where a person (referred to as an 'end-user') either uses, or controls the use of property owned by another person, and where any of the tests in subsection 159GG(1) are satisfied. Subsection 159GE(1) defines 'control' as meaning effectively control.
Where an arrangement is found to be a 'qualifying arrangement' and the end-user is an 'exempt public body' as defined under subsection 159GE(1) of the ITAA 1936, then the arrangement will be treated as if it were a loan by the taxpayer to enable the end-user to acquire the leased property. Effectively this means those tax deductions for the cost of or capital expenditure incurred on, the leased property (other than interest payments on funds borrowed to fund the acquisition) will not be deductible to the taxpayer.
Taxation Ruling IT 2602 addresses control of the use of a privately owned power station by exempt state electricity authorities for the purposes of subparagraph 51AD(4)(b)(ii) of the ITAA 1936. Paragraph 6 of that Ruling notes that 'control' is defined in subsection 51AD(1) of the ITAA 1936 as meaning effectively control.
The arrangement did not indicate that the exempt entity would effectively control the use of the property for the purposes of section 51AD of the ITAA 1936. As effective control by an exempt entity of the use of the property was not established for the purposes of section 51AD, effective control of the use of the property by the exempt entity was not established for the purposes of Division 16D of the ITAA 1936 either.