The Treasury has, in late October 2011, released a Discussion
Paper outlining proposed tax incentives for significant
infrastructure projects. These incentives had previously been
foreshadowed in the May 2011 Federal Budget.
Large infrastructure projects typically give rise to substantial
tax losses in the early years of the project. Very often the
ability to carry these losses forward is imperiled by
Australia's loss recoupment tax rules. Due to long lead times
in these projects, by the time the project becomes operational
there may be questions whether tax losses that were incurred in the
project in the construction phase may be used to offset income
later earned in the operational phase. In particular, if ownership
of the project entity that has incurred the losses changes, the
ability to carry forward tax losses from the construction phase may
be in doubt.
New Tax Loss Rules
The proposed incentives for "Designated Infrastructure
Projects" will introduce new rules for tax losses arising
under those projects so that:
those losses are exempt from the tax loss recoupment rules. In
the case of a corporate entity, these rules are the continuity of
ownership test and the same business test; and
the value of losses carried forward will be uplifted by the 10
year Government bond rate.
These rules will take effect from the date of Royal Assent of
the enabling legislation.
What is a Designated Infrastructure Project?
This is a project on Infrastructure Australia's National
Priority List of projects, that is considered to be "Ready to
Proceed" or "Threshold" and is approved by a
decision maker. Projects will be included on this list if they
above a capital expenditure threshold of $100m; or
a Regional Infrastructure Fund project, a flagship project or a
project that demonstrates unique national interest qualities.
In order to manage the potential cost to revenue of providing
this tax incentive, the Government has set a global capital
expenditure cap of $25 billion from the date of assent of the
legislation that introduces this incentive to 30 June 2017.
Projects will be ranked using specified criteria and, if suitable,
will be approved on a first come basis. Once the cap has been
reached, no further projects will be approved.
Sole Business Requirement
The new tax loss rules for these projects will apply to an
entity or consolidated group whose sole business consists of a
designated infrastructure project. For consolidated groups,
entities in that group can be established to carry on a designated
infrastructure project and, if entities in that group carry on a
range of activities, elect that this entity remain outside the
While a tax loss arising in respect of a designated
infrastructure project will be ascertained in the ordinary way,
under the new rules the tax loss attributable to such projects will
only be able to be applied to reduce future assessable income
arising from the project. If the project is sold, the accumulated
tax losses can be transferred to the acquiring entity or
consolidated group as long as the sole business requirement is
satisfied. Apportionment rules will be specified where only part of
the project is transferred.
Uplift of Tax Losses Carried Forward
Tax losses to be carried forward by a designated infrastructure
project for use in a future year will be able to be increased (or
uplifted) by reference to the 10 year Government bond rate at the
end of each later income year. The 10 year Government bond rate is
Reactivation of Tax Loss Recoupment Rules
While the rules applicable to the carry forward of tax losses in
companies and trusts will not apply where that entity undertakes a
designated infrastructure project, if:
the project is cancelled or ceases; or
if the entity or consolidated group carries on activities
unrelated to the project,
the tax loss recoupment rules will be reactivated. Consequently,
the carrying forward of those losses needs to comply with those
If the project entity is wound up, any tax losses that have not
be used will be lost.
The closing date for submissions on the Discussion Paper is 9
Please contact any of the partners listed on the right hand side
should you have any questions concerning the proposed tax
incentives for infrastructure projects.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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