Infrastructure needs more than tax incentives

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28 October 2011 | By Rhys Jewell (Partner)

In the 2011 Federal Budget, the Government promised new incentives to encourage investment in infrastructure. These incentives are the subject of a Treasury discussion paper which provides further detail on the announced measures for access to, and preserving, early stage tax losses in mature infrastructure projects. While further clarity on the incentives is welcome, this alone will not fix the nation’s infrastructure investment woes.

Other, more pivotal, challenges remain.  In particular, structural issues within the superannuation industry and stamp duty continue to restrict equity investment in infrastructure.

The tax incentives

One of the obstacles to investment in a brownfield project is the potential impact of a change in ownership on the ability to continue to access early stage tax losses incurred by the special purpose vehicles.  Further, even if those early stage tax losses remain available, their “value” diminishes in real dollars each year.

The new Treasury discussion paper, “Tax loss incentive for designated infrastructure projects” sets out further detail of a two pronged response in respect of “designated infrastructure projects”.

Designated infrastructure projects are broadly those projects identified on Infrastructure Australia’s National Priority List as “Ready to Proceed” or “Threshold” (ie. requiring some project development). 

As at July 2011, the priority list included $86 billion worth of projects, of which $19.2 billion are categorised as “Ready to Proceed” and a further $13 billion are “Threshold”.

Loss testing

The incentive’s first element is intended to give greater certainty to equity investors in brownfield projects in respect of the continued availability of early stage tax losses.

The measure will exempt losses associated with designated infrastructure projects from the current tests for determining the ability to utilise early stage tax losses, namely the continuity of ownership test and the same business test.  This is particularly important for projects utilising unlisted trusts, which can encounter difficulties in accessing tax losses following a change of control.

Uplifting project losses

The second element recognises the long lead time between the incurring of deductible expenditure giving rise to early stage tax losses and the establishment of the income stream from the project.  This gap represents an erosion of the real value of the early stage tax losses.

The Government’s response is to “uplift” project losses associated with designated infrastructure projects by applying the 10 year government bond rate.  The current bond rate is 5.75%.  This is consistent with the approach being taken with losses under the MRRT.

Design elements

The incentive will only be available to an entity (whether a trust or a company) where the relevant designated infrastructure project comprises the sole business of the entity.  Subject to the discussion below, entities or tax consolidated groups that carry on activities unrelated to the designated project will not be eligible for the incentive.  The incentive will cease to apply to entities or groups that initially qualify and subsequently commence unrelated activities.

Interestingly, the Treasury discussion paper suggests that a head company of a tax consolidated group that carries on activities other than the designated infrastructure project will be permitted to quarantine that project within a stand alone entity or a separate tax consolidated group. 

Issues that remain to be resolved

It is refreshing that the Government has acknowledged there are certain impediments to preserving value in the delivery of large projects based on the differing profiles of investors during a project’s evolution.  Clarity on the ability to access early stage tax losses following a change in ownership should enable initial equity investors to better assess their exit options, and potentially reduce the cost of equity.

There are however remaining issues that will need to be resolved during the next stages of the consultation process before the release of exposure draft legislation:

  • The Treasury paper does not provide any detail in relation to when a project may be approved as a designated infrastructure project.  For the incentive to be most effective in encouraging appropriate pricing of projects, we consider that such approval will need to be forthcoming early in the project lifecycle (ie. before fully committed funding).
  • The ability to elect for entities carrying on designated infrastructure projects to sit outside a tax consolidated group is a departure from the ordinary “one-in-all-in” consolidation rules.  How this is going to work within the context of the consolidation rules will need to be monitored to ensure there are no unintended consequences for eligible tax consolidated groups. 
  • The spotlight remains firmly on stamp duty as a significant impediment to investment in brownfield projects.  Corrs has been actively involved in the development of submissions to State and Territory Governments for relief in this area, which ought to be favourably received given that it is those governments that sponsor the projects and whose communities stand to benefit most directly from the infrastructure provided.

Outside of the incentive, there appears to be wide recognition of the need to engage with the superannuation industry in order to bridge the significant infrastructure funding gap with a view to reducing Australia’s infrastructure backlog.  Although the proposed tax loss incentive may assist at the margins, we expect that a further structural shift is required to make investment in large scale infrastructure projects an attractive asset class for investment by superannuation funds.




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Rhys Jewell

Partner. Melbourne
+61 3 9672 3455

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