Australia: Tax Incentives for Infrastructure Projects


On 18 April 2013 the Treasury issued exposure draft legislation which seeks to encourage private sector investment in nationally significant infrastructure projects by offering tax incentives. The release of the exposure draft follows the May 2011 Federal Budget announcement foreshadowing these proposals as well as the release of a Treasury Discussion Paper in October 2011 (see Promoting Infrastructure Projects by Tax Incentives).

Issues to be Addressed

Infrastructure projects typically experience long lead times between incurring substantial expenditure in the construction phase and when the project becomes operational and starts to generate income. The result is that tax losses arise and need to be carried forward until such time as they can utilised against income earned in the operational phase. The carrying forward of tax losses gives rise to 2 issues which are sought to be addressed by the proposed tax reforms:

  1. the real value of the tax losses is eroded over time; and
  2. in order that carry forward losses be utilised, entities are generally required to show that the majority of their beneficial owners have not changed since the loss arose (referred to as the "continuity of ownership test") or, otherwise, that the same business is being carried on (referred to as the "same business test"). These tests can result in carry forward losses incurred in the construction phase being lost if there are changes in the ownership of the entity by the time the project becomes operational.

Uplift of Tax Losses

The first issue is sought to be addressed by allowing a company or fixed trust that is a "designated infrastructure project entity" (as described further below) to uplift its unutilised losses by the long term bond rate for the relevant year. The unutilised losses can continue to be uplifted for ensuing years until they are fully utilised or the entity otherwise ceases to be a designated infrastructure project entity. In order for the uplift to be available, the entity will need to notify the Australian Taxation Office that it is a designated infrastructure project by the specified date, which will typically be when a tax return is lodged which indicates that the loss is to be uplifted.

Modification of Tests for Utilising Past Losses

The second issue is to be addressed by removing the requirement, with effect from the 2012-13 and later income years, for companies that are designated infrastructure project entities, relating to satisfaction of the "continuity of ownership" test in order to deduct tax losses. However, the test will apply in respect of a period in which the entity ceased to be a designated infrastructure project entity. Notwithstanding failure of the continuity of ownership test, prior year tax losses may qualify for deduction if the same business test is passed. The test period for application of the same business test only relates to when the entity has ceased to be a designated infrastructure project entity.

The tests that normally apply to trusts in order to utilise prior year losses (and which relate to ownership and control and abnormal trading in units) will not apply to those trusts that are designated infrastructure projects. However, the tests will apply in a modified manner if the trust ceases to be a designated infrastructure project.

There are also provisions specifying modified rules for bad debt deductions claimed by companies and trusts that are designated infrastructure projects.

Limit on Tax benefits Available

As a means of limiting the cost to revenue of providing the proposed tax benefits outlined above, a cap of $25 billion has been set. Projects eligible for the incentives will be selected based on rules that may be set or otherwise determined on a first come-first served basis.

Central to the application of the proposed new rules is that the entity be a "designated infrastructure project entity" and that there be a "designated infrastructure project".

Designated Infrastructure Entities

A "designated infrastructure project entity" is proposed to be defined as a company or fixed trust that is not a member of a consolidated group and which carries on an infrastructure project that is, or later becomes, a designated infrastructure project. Importantly, the only activities in which the entity can engage are for the purpose of the designated infrastructure project. The carrying on of other activities can result in the entity ceasing to be a "designated infrastructure project entity".

Designated Infrastructure Project

A "designated infrastructure project" is one which has been so designated by the Infrastructure Coordinator (appointed under the Infrastructure Australia Act 2008) upon consideration of an application to have a project so designated. There are proposed infrastructure project designation rules that will set down the requirements for dealing with applications.

In line with the capital expenditure cap referred to above, an application will need to include an estimate of the project's capital expenditure. Because the cap is limited to private investment expenditure, this estimate will not include amounts contributed by an Australian government agency. Designation will not be available if the total estimate capital expenditure on all projects would cause the cap to be exceeded.

The designation process involves:

  • provisional designation - which will be available if the Infrastructure Coordinator accepts the capital expenditure estimate provided and is satisfied that the project is of "national significance" (which is defined in the Infrastructure Australia Act as including transport, energy, communications and water infrastructure in which investment will materially improve national productivity). At this stage, if the project is provisionally designated, potential financial participants are able to be advised that the project will obtain the available tax benefits if the necessary finance is forthcoming; and
  • final designation – will occur if a project satisfies the conditions set for provisional designation as well as any additional conditions that may be prescribed and the Infrastructure Coordinator is satisfied that the funds required for the project will be available. If final designation is refused (or is revoked) recourse may be had to the Administrative Appeals Tribunal for a review of that decision.

These proposals set out in the exposure draft legislation will be important to those investors, sponsors and financiers involved in infrastructure projects and merit careful review. A short time was set for consideration of the exposure draft legislation and the closing date for submissions was 30 April 2013.

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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