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 are:
- 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 original group.
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 currently 5.75%.
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 rules.
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 December 2011.
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.