The Australian Government has announced a new infrastructure tax incentive as part of the 2011/12 Federal Budget to address some of the tax difficulties faced by private sector infrastructure projects.
Tax Difficulties With Infrastructure Projects
Due principally to the size of the projects, major economic and social infrastructure projects in Australia are usually undertaken by a consortium of investors through a special purpose project vehicle(s). Greenfields infrastructure projects typically generate 'up front' tax losses from various costs and capital allowances associated with the construction/development of the project. Early stage taxation losses are usually 'trapped' in the project vehicle (eg trust, company or stapled vehicles) and cannot be readily utilised by the consortium members; as compared to some other jurisdictions which allow tax losses to 'flow through' to investors.
It may be many years before the project generates taxable income, diminishing the real value of the tax losses.
Under the current tax loss carry forward/utilisation rules, changes in the ownership of project vehicles can cause the 'continuity of ownership' test to be failed. Further, project companies or trusts may not be able to rely on satisfying the 'same business test'; particularly non-widely held trusts. As a consequence, all the losses associated with the project may potentially be forfeited due to a significant change in consortium members.
The Proposed Tax Incentive: The purpose of the tax incentive is to promote private and superannuation sector investment in infrastructure by allowing tax losses to be carried forward and uplifted at the Government bond rate. Any such uplifted losses will be exempt from the continuity of ownership test and the same business test. Certain infrastructure projects designated to be of national significance will be eligible for the tax incentive.
While further consultation will be undertaken on the details of the incentive, it will be operative from the time of Royal Assent of the enabling legislation through to 30 June 2017.
A decision maker (to be determined) will select certain designated infrastructure projects based on a range of criteria (to be agreed) up to a capital cost cap of $25 billion over the incentive period. Infrastructure Australia and industry participants will be further consulted on the details of the incentive.
Conclusion
If this incentive is enacted as planned, we will likely witness a 'beauty parade' of infrastructure projects vying for 'designated' status. For those successful and designated infrastructure projects, this incentive will allow greater and more reliable value to be captured/realised for these early stage tax losses for both existing and successor owners of each infrastructure project. We consider the incentive to be a move in the right direction to alleviate in part some of the tax difficulties faced by major infrastructure projects.
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