is hard to pull this apart based on the released information.
The following is just a guess.
When BBI (Prime Life Infrastructure) acquired the port, it did so under a 99 year lease (i.e. 50 years plus 49 year option). The structure was the Management company (DBCT Management Pty Limited) along with the associated trust which held the lease asset.
While a complex area I think the below is a simple interpretation.
BBI would have tried to claim a tax deduction for all lease payments. Not unlike renting a commercial property to run a retail business out of.
However, the ATO would have seen the lease in their review as, at least in part, of one in which BBI acquired capital assets (tangiable and intangiable) as part of the lease. While the acquisition of plant and equipment would not negate the deductablity of the lease, certain fixtures (e.g. buildings, constructuions) and goodwill would seen to be by the ATO as being on capital account.
If effective control of these later assets passed to BBI the ATO would argue that they are assets not being able to be deductible under lease. The ATO holds a view (rightly or wrongly) that certain assets form part of the land or are inherently confined in the asset, that they exist beyond the lease terms and are capital in nature.
So the question as I see it, is whether the lease of BBI is an economic rent for use of the facility or whether there is a capital component in the lease fee. I tried to search for further information but could not find any, so as to the specifics or apportionment I cannot comment.
Now here is where I see the real issue. The tax liability in my view does not depend on the tax situation of the head stock. BBI at asset level operates through a maze of trusts and corporations, with excess cash flows and distributions passed into the headstock.
The DBCT trust would pass through its income based on the specific deed under which it operates. The Trustee of that trust would determine the accounting and tax income to be passed through each year in accordance with trust law and its deed.
The DBCT Trust would have made its resolutions based on the accounting and tax records it generated in the years under dispute. If the ATO wins the Trustee (unless it elected an overall resolution to pass 100% of taxable profits to the headstock)would be assessable on the tax at the top marginal tax rate for those years, as they are unable to ammend previous resolutions. In short the tax will be payable at DBCT Trust level if this was the scenario. A tax credit may be passed on to the headstock (however there is only a 4 year ammendment period IMO).
If the Trustee of the DBCT Trust had elected to pass 100% of taxable income through then the ammendment (if it occurs) at DBCT Trust level will flow through to the headstock. As we know BBI always paid tax deferred distributions, as the depreciation and capital write-off deductions exceeded the cash compnent of the distributions received from asset level, after deducting corporate overhead and interest.
If the level of taxable distribution from DBCT increased through the disallowed deductions, it means (by issue of the ammended assessment) that taxable income exceeded the level of the depreciation and capital allowances etc.
As the BBI Trust has already made its resolutions as to the distribution of previous years, the Trustee of the BBI Trust would be asessable on the taxable componet of the income. A tax credit would be available for distribution to ord holders (within the 4 year ammendment period).
Now I do not know from the information at hand at which level the taxing event occurred or specifics as to the case, so the above is just a wild guess. Naturally the disallowed deductions would add to the cost base of the asset.
Happy for any comments.
Cheers
BBI Price at posting:
6.9¢ Sentiment: Hold Disclosure: Held
