Australia: Australian Infrastructure Investment And Privatisation Update: Federal Taxation On The Agenda

 At the end of January 2017, the Australian Taxation Office ("ATO") updated its draft of the Privatisation and Infrastructure—Australian Federal Tax Framework ("Framework") and issued a Taxpayer Alert TA 2017/1 on stapled ownership structures ("Alert"). Together, the Framework and the Alert consolidate the ATO's current thinking on major federal taxation topics in the context of infrastructure investment and utility privatisation. If the thrust of the ATO's thinking on many of the issues dealt with in the Alert and the Framework is pursued, we are entering a period of resistance from the Commonwealth government to risks to its revenue base in the infrastructure and privatisation areas and, ultimately, may see some the most active Commonwealth taxation review of the sector since the period that lead to the introduction of Division 250 of the Income Tax Assessment Act (Cth) ("ITAA") a decade ago.

This White Paper refers to some of the projects that may now require careful consideration and adaptation to the ATO's views. In short, the ATO is signalling in the Framework and the Alert that it will increase scrutiny and compliance action on often-used deal structures in the context of infrastructure investment and privatisation and that it will contest the incorporation of those structures into proposed investment or acquisition ownership structures. In turn, we deal with:

  • The ATO's issues with "fragmentation of integrated trading businesses" described in the Alert and typified by certain stapled ownership structures—in respect to which the Alert states that "Taxpayers and advisors who implement these types of arrangements will be subject to increased scrutiny [and the ATO]...discourages taxpayers from entering into arrangements of these types"; and
  • The principal topics addressed in the Framework—in Chapter 1, the "securitised licence" structure used in social Private Public Partnerships ("PPPs"); in Chapter 2, privatisation of land rich government businesses into stapled structures; and in Chapter 3, other common infrastructure-related issues. Helpfully, in Chapter 4, the ATO sets out the matters it is focusing on in its compliance tasks in all these areas and clarifies features of the various structures that are likely to be unacceptable to it.

PROJECT PIPELINE

Rail Projects

Substantial investment in, and recycling of, infrastructure assets continues apace. Highlights of the rail project pipeline on Australia's East Coast include Sydney's new rail metro, a A$12.5bn seven station addition to the existing network, connecting Chatswood and Bankstown via the CBD. The Expression of Interest request for the Central Station Main Works packages was released this month, and during this year, procurement is also expected on the Southwest Station and Corridor Works package followed by packages for stations, mechanical and electrical works, and some linewide packages. The New South Wales State Government also indicated in that project's October 2016 business case that it may pursue "value capture" opportunities from development along rail corridors such as these, and the State of Victoria released earlier this year its own value creation and capture framework document. Other New South Wales rail projects to commence later this year include construction of the two-way 12km Parramatta Light Rail estimated at A$3.5bn.

In Melbourne, the Victorian government's bid process for the Melbourne Metro Public Private Partnership A$11bn twin tunnel and stations extension to the Melbourne rail network is progressing well with three consortia already shortlisted. A program of early works has already been awarded, rail systems tenderers have been shortlisted, and rail infrastructure packages will also be issued to market this year.

In Queensland, the Brisbane City Council has announced a business case to be completed by May on the expansion of the Brisbane Metro Subway System. The expansion consists of 3 new and 18 upgraded stations including two that will connect to the state government's proposed Cross River Rail project.

The Commonwealth government is also actively engaged in rail projects and is currently completing a market testing process with industry to finance and build the Inland Rail, a new A$10bn freight rail line connecting Melbourne and Brisbane.

Road and Other Transport Projects

Highlights regarding road and other transport projects include the upcoming privatisation by the New South Wales State Government of the WestConnex motorway, presently under construction. The government has appointed scoping study advisors to this project with the study report due early this year. Although it is not yet clear how the sale will be packaged, one possibility is a sequential majority sale of components of the motorway timed so that revenue performance becomes known to bidders, followed by a sale of the remaining state interest.

The Western Distributor Project in Victoria is being led by the Victorian Government and Transurban with some construction components still to be tendered. In Queensland, the Brisbane City Council has just announced an arrangement to allow Transurban to fund the upgrade of, and then maintain, the Inner City Bypass. In exchange, Transurban will be allowed to increase the tolls on its existing Brisbane toll roads.

The results of the March 11 election in Western Australia suggest the Perth Freight Link road project, the planned privatisations of two ports, as well as of Western Power (the state transmission and distribution network owner), and of some Horizon Power assets are all unlikely to proceed. Nevertheless, the new Labour administration has proposed a new passenger rail project for Perth, indicated its plan to establish an independent advisory body to progress state infrastructure strategy, and will also join all other Australian states and territories who have already developed their own unsolicited proposal guidelines for infrastructure (Western Australia has unsolicited bid guidelines for state-owned land only).

Finally, no pipeline update could omit the Commonwealth's announcement of the development of Western Sydney Airport, a second major passenger airport for Sydney at Badgerys Creek. Sydney Airport Group, the listed operator of Sydney (Kingsford Smith) Airport, has a right of first refusal to undertake the project, but must decide whether to exercise this right later this year. If Sydney Airport Group does not exercise its right the project is likely to go to open tender.

THE ALERT

Many existing infrastructure ownership transactions use combinations of trusts and companies (or public trading trusts) to separate the "active" (i.e., toll revenue-earning) and "passive" (i.e., real estate lease) components of a business. A trust which does not carry on "trading business" is a flow-through trust under Division 6 of Part III of the ITAA, and the income that a unitholder receives is taxed at the unitholder level and at a much lower rate than the 30 percent corporate tax rate. Foreign capital providers can be particular beneficiaries of these structures through the managed investment trust ("MIT") tax rules that allow nonresident unitholders to receive net rental income at concessional withholding tax rates (often 15 percent).

The Alert works through four types of stapled arrangements—royalty, finance, synthetic equity, and rental—which have been developed over the years. The rental staple, depicted in the Alert (below), is perhaps the most commonly used staple in the infrastructure space.

In a rental staple, the asset trust's business is principally as lessor to, and recipient of rent from, an operating entity. However, the division of the overall business into asset and operating sides is not one "that third parties acting at arm's length would usually enter into, and it is often also the case that the business is not one capable of division in any commercially meaningful way".

The Alert flags the application of the general anti-avoidance provisions of Part IVA of the ITAA to staples with which the ATO is concerned—those that, in its terms, "attempt to fragment integrated trading businesses in order to re-characterise trading income into more favourably taxed passive income... The income that might be expected to be subject to company tax is artificially diverted into a trust where, on distribution from the trust, that income is ultimately subject to no tax or a lesser rate than the corporate rate of tax". The ATO's concern only increases if the operating entity in the staple also claims large deductions for the interest costs in loans made to it from the nontrading trust (because the taxable income at operating entity level is then insignificant).

The ATO emphasises that the concerns dealt with in the Alert do not relate to Australian real estate investment trusts ("REITs") that do not typically involve stapled structures or, if they do involve staples, do not incorporate material cross-staple dealings outside the REIT's core operating business, which is the receipt of rentals from third party tenants. Nor does the Alert apply to the privatisation of land rich government businesses.

THE FRAMEWORK

Securitised Licences for Social PPPs

Chapter 1 of the Framework details the ATO's views on the "securitised licence" structure which has been in use in the Australian social PPP market for some years. The ATO updates and expands its previous October 2015 concerns and targets the development in recent years of "non-vanilla" tweaks on the early structures. It expresses disagreement in particular with:

  • Stapled structures which result in "a single PPP is divided in a contrived way into separate businesses...[so that the] income that might be expected to be subject to company tax is artificially diverted into a related trust" and (including in conjunction with MITs) achieves concessional withholding tax rates for nonresident owners;
  • Availability/licence payment profiles and associated arrangements heavily structured to (i) defer taxable income to the back end of a concession term; (ii) bring deductions forward; and/or (iii) disguise capital losses as deductible licence payments; and
  • The use of interposed charitable trusts, effectively as debt finance vehicles for the purposes of the Section 318 associate test, to fit within the Section 128F withholding tax exemption.

Privatisations of Land Businesses into Stapled Structures

The privatisation of land rich government businesses into stapled structures, not of the vanilla type described in Chapter 2 of the Framework, will be reviewed closely. Of particular note:

  • The ATO characterises this type of business as a "single unified business" despite the separation that the stapled structure presents into an asset trust and an operating trust (and respective holding vehicles). The ATO considers that because any debt financiers would take security over the entire structure, the privatisation is a single transaction, and the expectation is that the asset and operating interests would be traded together; and
  • The purchase price allocation between the asset and operating trusts is acknowledged to be difficult because the value of the trusts together will be substantially higher (that is, the business as an integrated whole) than if the trusts were valued separately. The ATO Framework sets out some factors it will consider in determining whether a specific purchase price split is low risk.

Other Infrastructure Issues

Finally, in Chapter 3, the ATO deals with a "grab bag" of other topics common in infrastructure deals, including government grants and control for the purposes of Division 6C (especially a negative veto power in the context of the carrying on of a trading business). The comments that grants are assessable seems inconsistent with the previous general position that grants received before or during construction are not in relation to the carrying on of business (because the business has not yet commenced) and may drive further social PPP deals to request more government contributions in the form of contractual commitments by governments to procure the construction of, and pay for, specific parts of project works. The ATO's position on negative control still seems inconsistent with industry's view that the correct legal position is that a veto right does not constitute control.

KEY TAKEAWAYS

We emphasise that we have not dealt with all the topics which the ATO discusses in the Framework and the Alert. In short, our perspective is that the ATO is looking to scrutinise and apply compliance resources to:

  • Existing infrastructure investment and government recycling transactions with ownership and financing features which move the structures beyond the relatively vanilla forms originally developed for those transactions; and
  • In particular, the use of staples and/or MITs, and the development in recent years of inappropriate features in, or contrived uses of, these structures.


The ATO is also signalling to potential bidding consortia and financiers and their advisors that well before settling on their ownership and financing arrangements, including in the types of projects referred to in our pipeline above, the ATO should be approached for its views. The ATO would like to create a level playing field so that all bidders for major infrastructure projects can bid with the same degree of awareness of tax compliance risks. Going forward, there is likely to be resistance against the incorporation of features the ATO flagged for concern in the Alert and Framework.

The Alert was published, but the Framework is not yet on the ATO's website.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions