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Submission No. 265 Back to full list of submissions
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Review of Business Taxation –
Section 51AD and Division 16D
of the
Income Tax Assessment Act 1936

 

Submission to the

Review of Business Taxation ("RBT)

 

19 April 1999

 

1. Summary of Queensland's Supplementary Proposal

Of relevance to this supplementary submission, the Queensland Government's initial submission proposes that Section 51AD and Division 16D should be repealed or amended to:

  1. remove the restrictions that those provisions place on the development of public infrastructure by private sector proponents, and
  2. remove the anti-competitive effect that those provisions have on government trading enterprises ("GTEs").

Queensland submits that Section 51AD and Division 16D have outlived their usefulness and now are seriously impeding economic development and the finalisation of competition reform in Australia.

1.1 Private Participation in Public Infrastructure

Most states, territories and larger local governments have directly experienced that Section 51AD and Division 16D are serious impediments to the timely and cost-effective development of public infrastructure. The private sector can play a valuable role in the development, construction, operation, ownership and financing of public infrastructure. Because of the test of economic ownership of depreciable assets used in Section 51AD and Division 16D (based on end use and more importantly control of end use), any government involvement in such a project, even of a regulatory or passive nature, raises issues that require months and sometimes years of negotiation with the Tax Office to obtain rulings that these provisions do not imperil private sector claims for capital allowance deductions.

It has been widely observed that the two provisions merely serve to delay and add costs to genuine public/private infrastructure partnerships, rather than prevent them altogether. Thus, in the context of privately provided public infrastructure, the repeal of the provisions should have no revenue cost to the Commonwealth Government if they are replaced by legislation that contains a clear test of tax "ownership" (i.e. entitlement to claim capital allowances) based on whether the legal owner of an asset has passed the bulk of the risks of such ownership to an "unacceptable" person such as a pure tax exempt.

Recommendation 1: Section 51AD should be abolished and the "control of end-use" test in Division 16D should be replaced with one that looks at whether the private sector owner of an asset has transferred the predominance of risks in public infrastructure projects to a tax exempt, with the focus being on the whole project rather than just the assets in the project that attract the capital allowances. If the private sector owner has not so transferred the predominance of risks, then it should be able to deduct the capital allowances.

1.2 The Anti-competitive Effect of Section 51AD and Division 16D

Section 51AD and Division 16D impede National Competition Policy in two main respects:

  1. government trading enterprises are unable to access the same forms of financing as their private sector competitors, and
  2. government trading enterprises are less attractive as partners to private sector entities because the operation or joint ownership of facilities by a government trading enterprise will cause tax problems for the private sector partner, even though the government trading enterprise is not attempting, directly or indirectly, to obtain any tax benefit transfer at the expense of the Commonwealth revenue.

Queensland makes no specific submission on the general system of taxing wasting assets, matters that are being addressed by industry and professional bodies. Queensland's primary contention in this area is that GTEs, that are subject to full competition, should not be disadvantaged by being treated differently from their Commonwealth taxpaying competitors.

Recommendation 2: Section 51AD should be abolished and Division 16D should be substantially amended or replaced to allow government trading enterprises that are subject to State, Territory and Local Government Tax Equivalents Regimes ("TER") and fully subject to National Competition Policy, to participate in the same tax-effected financings from Commonwealth taxpayers as their private sector competitors. This proposal will largely be revenue neutral if it deals only with post 30 June 2000 assets for which the government trading enterprise had to competitively bid and which would have been provided by the private sector if the government trading enterprise had not. Further, in order to underline this revenue neutrality, tax benefit transfers from the TER systems to Commonwealth taxpayers, and between TER tax systems, should also be permitted. Thus, for example, Commonwealth taxpayers could, without loss of entitlement to claim capital allowances and interest deductions, enter into leases (or arrangements having similar effect) to TER taxpayers, as could TER taxpayers lease to Commonwealth taxpayers, and TER taxpayers in one TER system lease to TER taxpayers in another TER system

 

Recommendation 3: Section 51AD and Division 16D, if they are to remain in their present form (contrary to Recommendations 1 and 2 above), should be amended in the manner set out in Queensland's initial submission to remove their anti-competitive effect which makes government trading enterprises unattractive as operators or co-owners of facilities for or with the private sector. This recommendation is revenue neutral because affected government trading enterprises are not accessing the Commonwealth tax base.

1.3 Suggested Legislative Framework

An outline of a legislative framework to effect Recommendations 1 and 2 is set out in Part 3 below. The objectives of this draft framework are discussed in Part 2 below. For simplicity, the draft framework in Part 3 deals only with depreciation, but if implemented it should be expanded to deal with all capital allowances.

Taxpayers should continue to be able to obtain binding (and other) rulings on arrangements governed by the revised legislation, as they can at present.

1.4 RBT Objectives

Queensland's proposals demonstrably advance the stated objectives of the RBT, namely that the recommendations must be consistent with the aims of:

  • improving the competitiveness and efficiency of Australian business;
  • providing a secure source of revenue;
  • enhancing the stability of taxation arrangements;
  • improving simplicity and transparency, and
  • reducing the costs of compliance.

1.5 Revenue Neutrality

  • Recommendation 1 is revenue neutral because the aim is not to widen the scope of qualifying projects, but rather to speed up the delivery process by enabling self assessment of projects’ compliance with the tax law. (Refer to paragraph 2.3 below.)
  • Recommendation 2 is revenue neutral because it only allows tax benefit (or preference) transfer to a strictly defined class of GTEs that have had to compete for new (post 30 June 2000) assets or projects. Thus if the GTE had not won the project, a Commonwealth taxpayer is likely to have. (Refer to paragraphs 2.4 and 2.5 below.) Further, the number of GTEs likely to be attracted to leasing and similar arrangements will not be great, given the comparative unattractiveness of leasing because of low interest rates and if tax rates were lowered.
  • Recommendation 3 is revenue neutral because it remedies an unnecessarily broad effect of Section 51AD and Division 16D in circumstances where GTEs do not gain any direct or indirect benefit from the Commonwealth tax base. (Refer to the Queensland Government submission to the RBT.)

1.6 Transitional Arrangements

Queensland endorses the sentiments expressed in paragraphs 8.54 and 8.55 of the RBT’s February 1999 paper "A Platform for Consultation".

Transitional rules should preserve ("grandfather") pre-existing Section 51AD and Division 16D rulings and transactions on an "absolute no detriment" basis.

If existing transactions are restructured after 30 June 2000, the old Section 51AD or Division 16D rules should apply unless the participants elect to be subject to the new regime.

1.7 Consultative Process

The two main areas that will require extensive consultation in the implementation of the above proposals relate to:

  • the risk-based test of economic ownership, and
  • the commercial criteria that will have to be met by GTEs that are not to be treated as tax-exempts.

2. Broad Objectives of the Draft Legislative Framework

The broad objectives of the proposed provision to replace Section 51AD and Division 16D (see Part 3 below) are as follows.

2.1 Objective One: The legal owner of an asset may claim capital allowances under the relevant provisions unless the deduction is otherwise disqualified.

The proposed legislative framework allows capital allowance deductions to be claimed by the legal owner of an asset, subject to specific exceptions, such as hire purchase, and where the asset is leased to a non-resident. In practice, most legal owners now are entitled to claim depreciation under the present system, and cases where they cannot do so are the exception. It would unnecessarily complicate the tax system, for the majority of taxpayers, to use an economic (rather than legal) ownership test at the initial stage. It is better, as a matter of design, to use less certain (but necessary) economic ownership tests to allocate capital allowance entitlements in the comparatively small number of cases where policy requires the use of a test other than legal ownership.

2.2 Objective Two: The means whereby an owner finances the acquisition or holding of an asset will, of itself, be irrelevant to the question of the deductibility of capital allowances.

In the limited range of cases where economic ownership tests will determine the entitlement to claim capital allowances (e.g. leasing to non-GTE tax exempts - see objective 3 below), the extent to which the economic ownership of an asset is affected by the way in which its acquisition or holding is financed would be taken into account in the context of the overall contractual risk framework relating to the asset. This risk framework would be considered in the manner proposed in Part 3 below, but the financing would be only one of the many contractual elements that would have to be considered.

The RBT's concerns over the misuse or abuse of nonrecourse debt can be addressed in a specific legislative provision (for example the proposed Division 243, suitably amended). The RBT's concern over structured nonpayment of nonrecourse debt could also be addressed by an amendment to the proposed Division 243, or within the existing or proposed legislation available for dealing with asset stripping (for example the Crimes Taxation Offences Act) and debt forgiveness.

Special financing arrangements (such as hire purchase, or tax benefit transfer leasing, if it is to continue) can be dealt with by a specific provision (for example the proposed Division 240 in the case of hire purchase) and/or by a system of rulings (as is currently the case with tax benefit transfer leasing).

2.3 Objective Three: Capital allowances will not be deductible to the legal owner of an asset where:

  • the asset is subject to a hire purchase arrangement;
  • the asset is a fixture on the legal owner's land and another person has a right to sever and remove the asset;
  • the asset is not used in Australia;
  • the asset is used by a non-taxpayer (other than a qualifying GTE) in circumstances where no assessable income will be produced by the user of the asset, unless the legal owner has not transferred the predominant risks of ownership to the non-taxpayer;
  • the asset is used by a GTE, and was owned, pre-1 July 2000, by a GTE, unless the legal owner has not transferred the predominant risks of ownership to the GTE.

The commentary on objective 5 (below) deals with the scope of the term "GTE". The principal innovation proposed in the draft legislative framework is the use of a risk-based test for determining economic ownership of assets, where economic ownership is relevant (e.g. in the case of a lease to a tax-exempt non-GTE lessee).

The use of a risk-based approach reflects the negotiation process that take place at the start of a transaction or project, where the commercial documentation allocates risks to the participants. It is thus simple and transparent and draws on the existing commercial negotiations, thus reducing compliance costs.

The consideration of potential benefits is not considered to be a useful guide because (i) participants focus more on risk of loss than on the sharing of profits, and (ii) the likelihood of profits is embraced in any consideration of project risks. For example, market risk (e.g. the likelihood that a project's output can be sold) is a major determinant of whether a profit may be made. The risk of loss (often reflecting spent or predictable capital and operating costs) is capable of more concrete initial assessment than benefits or profits, because the latter will involve a higher degree of speculation about the appropriate assumptions in making benefit projections.

The proposed risk-based system should not, generally speaking, prevent the types of transactions that could have been effected under 51AD/16D.

The aim of the risk-based system is, by drawing on existing commercial dealings, to create greater certainty and shorten the processing time in the compliance assessment stage. Ideally the risk-based approach should be capable of self-assessment by proponents.

Scope should exist for tests currently used by the Tax Office to be incorporated in the risk-based approach, if those tests can be defined with sufficient particularity.

A consultative process is required to settle the risk-based methodology if that methodology is recommended by the RBT. This should result in the development of a Risk Transfer Evaluation Model acceptable to the Tax Office, governments, and the infrastructure industry.

The risk assessment should consider all aspects of transactions, rather than just the risk factors associated with the asset with which the capital allowance is associated.

The range of risk factors to be considered should be sourced from the standard works on project risk assessment. Guidance may also be obtained from other sources such as the work done in relation to the Private Finance Initiative managed by a UK Treasury Taskforce.

The risk assessment process should follow best practice principles established in the assessment of project risks. A considerable body of published knowledge exists to provide guidance on this subject. This allows the development of a completely transparent risk assessment procedure.

The weighting of the various risk factors and the degree of risk transfer necessary to tip the balance against the legal owner of an asset claiming capital allowances should be settled during the consultation process. The degree of risk transfer should be significantly greater than 50%, a factor implicitly recognised in the ratios contained in the existing Division 16D.

Those risks not capable of quantification, e.g. force majeure, would not be counted in the risk-based assessment process.

The risk assessments (carried out by way of a Risk Transfer Evaluation Model) could be outsourced by the Tax Office (e.g. to a panel of accredited actuaries or accounting firms) or could be undertaken by a suitably resourced statutory agency acting in a manner similar to the Research and Development Board or the Development Allowance Authority. Proponents should be able to consult with the panel or agency at an early stage of projects to gain a preliminary understanding of the assessment approach likely to be adopted.

After an initial establishment period, a body of knowledge should develop that allows proponents of projects to anticipate with a high degree of certainty the outcome of the independent risk-based assessment process, facilitating the self assessment process.

2.4 Objective Four: Use of a post-1 July 2000 asset by a qualifying GTE (e.g. under a lease or similar arrangement) will not disqualify the legal owner from claiming capital allowance deductions.

The comments made under objective 3 apply equally to this objective.

The significance of the 1 July 2000 date is that assets owned by GTEs before that date would be treated as if they were owned/used by a tax-exempt body. Thus a GTE could not sell and lease back a previously owned asset, ensuring the revenue neutrality of the proposal. (See comments under Objective 5 below for further argument in favour of such revenue neutrality.)

2.5 Objective Five: A qualifying GTE is a body that is a state or territory body or a local government body that is (i) subject to a tax equivalents regime ("TER") and/or (ii) satisfies published commerciality tests. The Treasurer may also deem a body that complies with National Competition Policy principles to be a GTE.

Queensland accepts that not all GTEs may qualify for the above treatment. The types of GTEs that National Competition Policy dictates should be treated in the same way as Commonwealth taxpayers are those that are fully compliant with competitive neutrality principles. These requirements include subjection to a tax equivalents regime ("TER"), governance by an independent board, well-defined commercial objectives, and access to funding only at a cost related to the entity's standalone credit rating, i.e. not reflecting the sovereign shareholder's credit standing.

A precedent for recognising GTEs in the Commonwealth tax system exists in the "commerciality tests" used in the infrastructure bond rules under Section 93I(4) of the Development Allowance Authority Act 1993. The commerciality tests include:

  • The entity must have the objective of making profits and returns to shareholders;
  • The entity must be incorporated as a public company or conform within published government business enterprise guidelines;
  • The entity must specify transparently its Community Service Obligations and have an objective to meet these at minimum cost;
  • Any dealing that the entity has, whether directly or indirectly, with a government body must be on arm’s length terms;
  • The entity must not be subject to more that a minimum of government direction of a kind to which comparable private sector bodies are not subject (other than a legitimate exercise of shareholder rights);
  • There must be no explicit government guarantee for the body, or from some other entity that is raising funds for the entity; and
  • The entity must operate within a commercial risk-return environment.

The infrastructure borrowing legislation recognised the fact that GTEs function in the commercial world, and should not be ruled out of consideration because of their prima facie attraction of Section 51AD or Division 16D. After the final RBT report is presented, Queensland would encourage consultation on the appropriate scope of the GTEs that would qualify for the proposed treatment.

Under Queensland's proposal, qualifying GTEs would be able to compete on an equal basis with private sector entities as they will be able to have access to the same types of funding arrangements as their private sector counterparts. Further, the presence of a commercially-oriented public sector operator will not cause adverse tax consequences for private sector partners in projects by virtue of the public sector operator being deemed to be an end-user (a fatal result under the current Section 51AD and Division 16D).

The risk to the Commonwealth revenue of allowing certain GTEs to be outside the scope of the replacement for Section 51AD and Division 16D would be minimal if the suggested safeguards (e.g. disqualification of pre-1 July 2000 assets) are in place.

Many GTEs do or will actually pay TER taxation (i.e. they do not have any or significant TER losses to be carried forward), and because of this they would not be interested in leasing or similar arrangements. This is because of the material cost premium associated with tax benefit transfer leasing. Lessors' tax capacity is a scarce resource for which lessees have to compete and pay a premium to secure access to the resource. As a rule of thumb lessees would need to have more than seven years of unrecouped tax losses to begin considering leasing as a cost-effective alternative to borrowing. The loss period would be much longer if only the tax benefit of accelerated depreciation can be transferred (as contemplated in the RBT's February 1999 Discussion Paper 2), or if accelerated depreciation is eliminated and the corporate tax rate is reduced to 30%.

Low depreciation rates, low tax rates and low interest rates make tax-indemnified leasing unattractive. The current low interest rates seem to be likely to last for some time and the proposal to reduce the corporate rate as a tradeoff for loss of accelerated depreciation would make leasing unattractive to GTEs on three counts. Consequently even those GTEs that are in TER tax loss will not automatically be attracted to tax based finance. Thus the real possibility of tax benefit transfer also flowing from the TER systems to Commonwealth taxpayers, should produce a revenue neutral outcome from this proposal while still honouring the as yet unmet imperative of full National Competition Policy implementation.

As set out in objective 4 above, only assets acquired by GTEs after 1 July 2000 would qualify for the competitively neutral treatment. Thus GTEs will have had to compete to provide the goods and services to be produced by the new asset. If the GTE lost the bid, and did not provide the asset, it is highly likely that a Commonwealth tax paying competitor would have "filled the gap" by providing an asset to fill the relevant market need. Thus the proposal should be revenue neutral. In fact it is arguable that the Commonwealth revenue is currently gaining an unintended advantage (i.e. it is being supported by the state shareholders) out of GTEs successfully competing against the private sector for the right to provide new assets that produce goods and services. If the GTE had not provided the new asset, a private sector party would have, and it would have been able to claim the associated capital allowances and interest deductions that often exceed the income from new projects for many years.

TER entities cannot obtain group loss relief against other "group" entities within their TER system, other than between subsidiaries of a particular GTE. Thus there is no scope for artificially increasing the number of GTEs that may be attracted to leasing and similar arrangements by transferring losses to otherwise profitable entities. This means that GTEs will only be attracted to leasing if their own business is likely to be in loss for many years.

Tax Office concern over the quality and consistency of administration of TER systems is likely to be remedied when the Tax Office takes over this function. This currently is scheduled to occur on 1 July 2000.

The RBT expressed concern about the potential for higher rate taxpayers (e.g. syndicates of individuals) owning equipment leased or provided to lower rate taxpayers (e.g. corporates). The issue of differential tax rate exploitation (referred to in paragraphs 8.15, 8.17 and 9.63 of the RBT’s February 1999 Platform for Consultation) is one on which Queensland is neutral, and that Queensland regards as unrelated to its proposals. This topic could be the subject of specific legislation or rulings under the new tax system. It is already covered by the existing ruling system (IT 2051), and for this reason leasing syndicates composed of individuals are almost unknown. It is also a separate issue from (and thus, should not be confused with) that of the structuring rental payments also referred to in paragraphs 8.15 and 8.17 of the February paper.

The scope for potential abuse in the form of GTEs artificially being loaded with assets could be prevented by ensuring that (i) assets owned by GTEs prior to 1 July 2000 could not qualify for the special treatment proposed in this submission, (ii) assets placed in GTEs as a means of accessing Commonwealth tax benefits, and (iii) financings entered into as a result of a shareholding Minister's direction (rather than a board decision based purely on the benefit to the GTE), will not qualify for the proposed tax treatment.

The GTE concept should extend to commercialised business units within departments and local governments if they qualify under the above tests. Thus it would not be necessary for them to be a separate legal entity from their parent department or local government, as long as they meet the established tests of commercial behaviour.

2.6 Objective Six: Neither (i) the user's responsibility for effecting insurance, (ii) minimum usage charges applying to user(s), (iii) contemplated changes in the ownership of land on which the asset is situated, (iv) the user's responsibility for repairs nor (v) government in extremis step-in rights (exercisable in the public interest), will affect a legal owner's right to claim capital allowances.

All these factors affect the risk assessment process referred to in objective 3. They should not, of themselves, automatically result in the legal owner's ability to depreciate an asset.

2.7 Objective Seven: The question of whether a legal owner has transferred the predominance of risks in an asset is assessed at the commencement of the arrangement, and when there is a material variation to that arrangement, but not otherwise.

A change of participant (e.g. by way of an arm's length sale of an investment to another party) in an arrangement should not automatically be treated as a material variation.

2.7 Objective Eight: The basis for depreciation for a non-disqualified legal owner will be calculated by reference to normal depreciation principles (e.g. useful life and historical cost of acquisition by the original owner) unless section 42-90 or Division 58 produce a different result.

2.9 Objective nine: A legal owner whose capital allowance deductions have been disqualified (under one of the points raised in Objective 3 above) will be assessed on only the notional interest component of the arrangement payments.

The statutory interest formula contained in proposed Division 240 (dealing with hire purchase) has been proposed to replace the similar Division 16D mechanism.

The recommendation of an interest-deeming mechanism should not be taken to imply that all affected arrangements are overt or disguised financings. Nor should the recommendation be taken to suggest that redrafted provisions only apply to financings. The use of an interest-deeming mechanism has been suggested because it is the one used in the current Division 16D.

It is only the statutory formula that is proposed to be used from Division 240. None of the other deeming provisions from that Division are relevant. The fact that Division 240 will deal with hire purchase is irrelevant - it is only the statutory formula that is relevant.

The proposed income recharacterisation must be carried out on all the income arising from the broader arrangement of which the relevant asset forms a part. Although not currently applied in this way, there is scope for the Division 16D definition of "arrangement payment" to apply to part only of the income earned by the legal owner from a transaction. This means that Division 16D can unintentionally have as broad and devastating an effect as Section 51AD, and this defect should not be carried over into any new provision.

2.10 Objective Ten: Deductions will be clawed back where Division 243, as appropriately modified, applies.

Refer to comments under Objective 2 above.

3. Draft Legislative Framework

Deductions for Depreciation

Schedule 1
Amendments to the Income Tax Assessment Act 1936.

  1. Repeal section 51AD
  2. Repeal Division 16D of Part III

Schedule 2
Amendments to the Income Tax Assessment Act 1997.

  1. Amend section 42-15 by replacing "owner" with "*owner".
  2. Include a new section 42-16 as follows:

    (1) You will be an *owner if:
    (a) You are the legal owner of the asset unless:

(i) the asset is subject to an *arrangement which is governed by Division 240;
(ii) the asset is a fixture on your land and another person has a right to sever and remove that fixture;
(iii) (A) the asset is subject to an *affected arrangement with or in respect of a *prescribed person;
(B) the asset is an *eligible asset; and
(C) the entry into and performance of the *affected arrangement has *transferred the risks of ownership of the *asset to the *prescribed person; or

(iv) (A) the asset is subject to an *affected arrangement with or in respect of a *GTE;
(B) the asset is a *ineligible asset; and
(C) the entry into and performance of the *arrangement has *transferred the risks of ownership of the *asset to the *GTE.

    (b) paragraph (a) does not apply and either:

(i) another person is the *notional buyer under an *arrangement which is governed by Division 240; or
(ii) a person, who is not the owner of the land on which an *asset is a fixture, has a right to sever and remove that fixture.

(2) A *disqualified owner is a person who is:
(a) the legal owner of an *eligible asset the subject of an *affected arrangement with or in respect of a *prescribed person which *affected arrangement has *transferred the risks of ownership of the *asset to the *prescribed person;
(b) the legal owner of an *ineligible asset the subject of an *affected arrangement with or in respect of a *GTE which has *transferred the risks of ownership of the *asset to the *GTE;

  1. Amend section 10-5 by adding notional rent. section 15-50
  2. Include a new section 15-50 as follows:

A *disqualified owner shall only include in their assessable income so much of an *affected arrangement payment as would be included in the assessable income as if the *affected arrangement were governed by Division 240 and the *disqualified owner were the *notional buyer.

  1. Include a new section 42-17 as follows:

(1) Transfer of risk of ownership
(a) means the risks of ownership (see section 42-17(2)), vesting predominantly (see section 42-17(4)) in a person other than the legal owner as a result of the arrangement;
(b) shall be measured at the time the *affected arrangement commences and whenever a material variation of that arrangement occurs.

    (2) Risks of ownership means, in connection with an *affected arrangement, the financial burden of the following:

    [A suitable list of risks is to be inserted here after completion of a consultative process. An example of the types of risks that may be considered is included in Part 4 below.]

    (3) A risk of ownership shall not be taken to be transferred because:
    (a) the legal owner, lessee, bailee or other user of the *asset has, or is required to, effect insurance against the loss or destruction of the asset;
    (b) a minimum usage charge is sought by the legal owner from the lessee, bailee or other user;

    (c) the acquisition of the *asset is financed by *limited recourse debt [as described in section 243-20],
    (d) there is a change contemplated in the ownership of the land upon which the asset is situated during the period of the ownership of the asset.

    (4) The risks of ownership will be taken to have vested predominantly in another person, if it would be concluded that:

    (i) at least [75]% by number of the elements listed in the definition of risks of ownership would vest in the other person; or
    (ii) if it were possible to quantify the financial burden associated with the risks identified, at least [75]% of the aggregate financial burden associated with those risks would be borne by that other person.

  1. Amend section 995-1(1) by including the following definitions:
    affected arrangement means:

(a) a lease of an asset;
(b) a bailment of an asset;
(c) an *arrangement where a person other than the *owner exercises or is authorised to exercise rights in relation to the asset wholly or partly in connection with the production, supply, carriage, transmission or delivery of goods or the provision of services;
(d) any extensions to the items described in paragraphs (a) to (c) above;

    disqualified owner has the meaning given by section 42-16(2);

    eligible asset means an asset which is located in Australia and was not owned by a GTE at any time before 1 July 2000;

    exempt entity means:

(a) the Commonwealth, a State or a Territory; or
(b) an STB (within the meaning of Division 1AB of the Income Tax Assessment Act 1936) the income of which is wholly exempt from tax; or
(c) a municipal corporation or other local governing body, the income of which is wholly exempt from tax; or
(d) is a public authority:

    (i) that is constituted by or under a law of the Commonwealth, a State or Territory; and
    (ii) the income of which is wholly exempt from tax,

    other than a *GTE;
    GTE means:

(a) where paragraph (b) is not satisfied – a body that the Treasurer considers should be a GTE having regard to national competition policy principles, and in respect of which body a notice is published in the Gazette;
(b) a body that is:

    (i) (1) an STB as described in sections 24AO to 24AS inclusive at any time during an income year; or
    (2) subject to section 50-25 at any time during an income year; and
    (ii) (1) subject to a Tax Equivalents Regime imposed by a State or Territory; or
    (2) in accordance with criteria published in the Gazette by the Treasurer for the purpose of this section, a body that operates on a commercial basis;

    ineligible asset means an asset which is not an *eligible asset;
    owner has the meaning given by section 42-16;
    prescribed person means a *non-resident of Australia [as defined in section 6(1) of the Income Tax Assessment Act 1936] or an *exempt entity; and
    transferred the risks of ownership has the meaning given by section 42-17.

4. List of Risks (for consideration in relation to section 5(2) of schedule 2 in Part 3 above)

    (a) initial and ongoing capital costs associated with the delivery of the services under the *affected arrangement;

    (b) the loss, destruction, compulsory acquisition, expropriation or substantial diminution in value of the particular asset, and other assets used in the arrangement (referred to as associated assets);

(a) liabilities incurred to third parties (including governments and governmental agencies) as a result of the operation, malfunction, loss or destruction of the particular asset, and associated assets;

(b) any loss attributable to the cessation or significant interruption of the business activity in which the asset is used, whether by force majeure or otherwise.

(c) initial and ongoing capital costs associated with the initial delivery, redelivery, deployment or redeployment of the *asset, (either by itself or with associated assets) at the commencement of the *affected arrangement, including costs incurred to ensure that the *asset (and the associated assets) is able to perform the functions for which it was acquired or constructed;

(d) the availability of all productive inputs (including statutory permissions to operate) necessary to use the *asset for the purposes for which it was designed;

(e) the ability to obtain, store and deliver the output from the *asset;

(f) meeting any restrictions on the entry to markets and to compete in markets for the output of the asset;

(g) losses arising from the passing off of product, or the dumping of product similar to that produced by the *asset;

(h) initial and on-going capital costs associated with the acquisition, construction or delivery of the *asset (either by itself or with associated assets) which is the subject of the *arrangement, including the costs of establishing or defending title to the *asset;

(i) the costs of dismantling, removing, scrapping and disposing of the *asset (either by itself or with associated assets) at the end of a particular arrangement or at the end of the useful life of the asset;

(j) the costs of restoring the site, location or environment in which the *asset (either by itself or with associated assets) has been used.