Submission No. 33 Back to full list of submissions
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A Better Design

to the
Business Income Tax Review Committee
transurban city link limited



Transurban submits that the fundamental design of Australiaís business tax system should allow individual investors to directly access all facets of the tax profile of their investment by an appropriate election mechanism, irrespective of the nature of the entity through which the investment is made.

This design approach would provide a simple but effective solution to the key problem with the current system of business taxation identified in the Discussion Paper, namely, the differential tax treatment of different business entities. Elimination of such differential treatment would ensure that investorsí decisions to invest in a venture would be made on the fundamental attractiveness of the investment and would not be clouded by considerations of the corporate structure which produces the optimum after-tax return.

Transurbanís proposal would also eliminate the constraints which the present design of the business taxation system imposes on economic activities which, while profitable over their full life, often incur losses in their early years. Economic activities with this characteristic include mining and petroleum exploration, venture capital, research and development and infrastructure. These are all activities which are vital to the future economic prosperity of Australia.

Transurban fully supports the objectives and principles of business taxation reform and considers that, notwithstanding its simplicity, our proposed design change is consistent with those objectives and principles. In particular, the design change has been tested for consistency with the following principles identified in the Discussion Paper as critical to the efficiency effects of the business tax system and hence, the achievement of the economic growth objective:

    • investment neutrality;
    • risk neutrality;
    • balanced taxation of international investment; and
    • consistency of approach to tax incentives.

These tests have found the proposed design change to be fully consistent.

Transurbanís proposal could be implemented by allowing intermediate entities a "once-only" election to be transparent entities. If the election was made, the entity would thereafter be treated as a "flow through" entity in relation to the project. Investors in such an entity would be able to directly access the tax profile of the activities in which the flow through entity was the nominal investor. Effectively, the tax treatment for an investor in a flow through entity would be that applicable to a direct investment by the investor in the activities in which the flow through entity was the nominal investor.

There are international precedents for the design feature proposed by Transurban. The "check-the-box" and "S corporation" provisions of United Statesí taxation law and the concept of "flow through" shares which, under Canadian taxation law, are permitted to be issued by certain entities, provide both conceptual justification for Transurbanís proposal and models for the detail of its implementation.


This submission on the Discussion Paper is presented to the Review in four parts:

Part 1 - Contains a detailed analysis of the submission, its objective tested against the policy design principles, and a proposed method of implementation.

Part 2 - Describes Transurban and the Melbourne City Link project.

Part 3 - Documents the need for private investment in infrastructure projects in Australia, and their impact on economic growth, in order to provide empirical support for the reform objective.

Part 4 - Summarises taxation incentives previously granted to private sector investment in infrastructure in Australia.

Part 1: Submission

Transurban submits that the fundamental design of Australiaís business tax system should allow individual investors to directly access all facets of the tax profile of their investment by an appropriate election mechanism, irrespective of the nature of the entity through which the investment is made.

This submission embraces the critical issues raised in the Discussion Paper.

In the Discussion Paper and the Reviewís terms of reference, three key problem areas of the business income tax system are identified:

    • the differential treatment of different business entities;
    • the lack of a coherent framework for taxing investment income; and
    • the need to reform the framework and processes applying to the design of business tax policy, legislation and administration to provide greater certainty to taxpayers and to reduce compliance and administration costs.

The design approach proposed by Transurban above would provide a simple but effective means of addressing each of these key problem areas.

In addition to identifying key problem areas in relation to business taxation, in building a strong foundation for business taxation, the Review proposes a reform strategy which involves a suggested design framework of national objectives and supporting principles. The Discussion Paper proposes that:

"Clearly identifying and articulating business taxation principles would foster both national debate on and better design of the business tax system."

Transurban supports the approach of the Review in developing commonly supported national objectives and design principles for the business taxation system. In its submission, Transurban has had regard to the national objectives and design principles proposed by the Review.

In Transurbanís view, its proposal meets the three national objectives of business taxation reform identified in the Discussion Paper namely, optimising economic growth; ensuring equity; and facilitating simplification. The proposal provides a mechanism within the Income Tax Assessment Act for the removal of the structural impediment recognised in the Discussion Paper as a barrier to the achievement of those objectives.

Eliminating Differential Tax Treatment

Transurbanís proposal will eliminate the key problem with the current system of business taxation identified in the Discussion Paper - the differential tax treatment of different business entities.

At present, from an investorís perspective, the nature of the entity that undertakes a project will determine the taxation of the return that is to be received from the investment. In the Discussion Paper, the problem of the differential taxation of different business entities is summarised as follows:

"There are many instances in the current tax law where the tax treatment of income from a particular transaction depends on the nature of the entity undertaking the transaction. This violates the tax principle that taxpayers in similar positions should be treated similarly. Taxpayers are also encouraged to adopt ownership structures that maximise their tax advantages rather than the structure best suited to their business circumstances."

From an investorís perspective, the different taxation consequences that apply to different entities directly impacts the quantum and the nature of the return that may be received from an investment and therefore will affect the pricing of an investment.

Take, for example, an investment in an infrastructure project. Infrastructure projects typically require large investments of capital to fund the project - as set out in Part 2, the Melbourne City Link project alone requires an investment of approximately $2.2 billion. Typically, from an economic and tax perspective, an infrastructure project will generate substantial losses in its preliminary stages of the investment due to the long construction timeframes, and thereafter, because of the time required for revenue generated to absorb the amortisation of the substantial capital investment. Over the life of a project, however, it would be expected that the project produces a positive return (for why else would rational investors invest?), and therefore, both for Treasury and investors, the changing profile of income should be seen only as a timing difference. But, from an investorís perspective, any inability created by the business tax system to directly access the losses associated with an infrastructure project in the preliminary stages unbalances the investment equation, and hence will be an important determinant in the investment decision. Under the current tax system, the ability to directly access the tax profile of an investment will depend on the nature of the entity through which the investment is undertaken.

The above example may be generalised to any activity which, although profitable over its full life incurs losses in its early years. Activities with this characteristic include not only infrastructure provision but mining and petroleum exploration, the provision of venture capital and research and development. These are all activities which are vital to the future economic prosperity of Australia.

To highlight the distortion referred to above, some of the issues involved and the likely taxation consequences for different entities under the current system of business taxation are summarised below:


A corporate entity is a taxpayer, because the entity is a separate legal entity from its stakeholders. Taxation is applied at the company level. Although a company will distribute its profits to shareholders (in the form of dividends) and the tax system distributes its income tax to shareholders (in the form of imputation credits and refunds), losses of the company cannot be distributed to shareholders, unless the shareholder owns 100% of the company. Thus, the investor that owns less than 100% does not have the ability to directly access the underlying tax profile immediately. For a project with a number of shareholders in the company that undertakes the investment, taxation losses generated in the initial years of the project that remain in the company diminish the immediate returns to investors (unless other means are found to make distributions to shareholders). Investors may eventually receive their return by way of dividends paid by the company, but if the company has a capacity to pay dividends in the preliminary years of the project, those dividends are likely to be unfranked (which is a further taxation disincentive).


The basic tax principle is that a partnership is not a separate taxable entity. Therefore, if the entity that undertakes the investment consists of a partnership of investors, losses incurred by the partnership may be utilised by the partners as such losses occur and are not trapped within the partnership. From an investorís perspective, in relation to partnership losses, the investor has an ability to directly access the tax profile of the investment.

It is worth noting that the transparency of a partnership is determined at the entity level: for example, the general position is that elections that impact the taxation treatment of income and deductions in a partnership must be made by the partnership rather than the individual partners.

The important distinction between a partnership and a company, which is particularly relevant to the selection of an investment vehicle, relates to the number and liability of equity participants in the entity. The general position is that the numbers of partners in a partnership may be limited by partnership laws, and partners in a partnership have unlimited liability for partnership losses. By contrast, the numbers of shareholders in a company is not so constrained, and the liability of shareholders in a company is limited to the amount of contributed capital. The fact that partners have unlimited liability in relation to the partnership makes a partnership an unattractive vehicle for many types of investment entities. This is particularly true of large scale, long term investments.


Until the announced changes to entity taxation become effective from 1 July 2000, either the trustee or the beneficiary is treated as the relevant taxpayer, depending on the trust deed and trustee discretions. Generally however, the tax rules that apply to trusts seek to impose tax at the beneficiary level rather than the trustee level. The trustee is generally only taxed in special circumstances.

Like a company, a trust is not a transparent entity in relation to losses. The general position is that a loss incurred by a trust estate is not distributed to the beneficiaries of the trust estate. The loss may be carried forward by the trust estate to offset future yearsí trust income. A trust may be contrasted to a partnership in this respect. But, certainly for trusts created after 19 September 1985, the apparent benefit of receipt of trust income which is untaxed (because it is sheltered by trust losses), is only temporary, because the cost base of the beneficiaryís investment in the trust is correspondingly reduced, with a consequent increase in capital gain realised upon disposal.


Joint venture

In some respects, the taxation of a joint venture is similar to the taxation of a partnership. A joint venture is not a separate taxable entity. Rather, the joint venturerís share in the product of the joint venture. Joint venturers can directly access losses associated with the project and have more flexibility regarding elections that can impact the taxation treatment of their investment.

In Transurbanís view, the existence of a mechanism in the Income Tax Assessment Act that permitted an election for investors to access the tax profile of their underlying investment, irrespective of the legal form of investment vehicle, would eliminate the distortions highlighted above. Taxpayers could no longer complain of structural impediment, because there would be an ability to elect to avoid it.

It is not a sufficient answer to the distortion issue to suggest that investors must pay the taxation penalty for limited liability Ė we believe that affirmative action should be taken to redesign the business taxation system to remove the distortions.

Objectives of Submission Tested Against Policy Design Principles

In Transurbanís submission, its proposal supports the policy design principles identified in the Discussion Paper as relevant to a new business tax system.

The policy design principles which this submission most fundamentally adopts are those that are grouped together under the general heading "affecting economic growth". These are crucial design principles of the business taxation system, particularly in relation to the provision of infrastructure in Australia. The provision of infrastructure has an obvious connection with economic growth and, for the reasons set out in Part 3, increasingly, the provision of infrastructure projects in Australia is being undertaken by the private sector. The business taxation system directly impacts investment decisions that are made in relation to infrastructure projects. Correspondingly, there is a flow on effect in relation to the impact of the business taxation system on economic growth.

In the Discussion Paper the Review succinctly captures the impact of the business taxation system on economic growth:

"Grouped here are principles - related to investment neutrality, risk neutrality, international neutrality and tax incentives - all of which bear centrally on the efficiency effects of the business tax system and thus on the achievement of the economic growth objective."

The four principles grouped under the heading "affecting economic growth" are considered in turn.

Investment Neutrality

"Income taxation drives a wedge between the before-tax return earned by an entity and the after-tax return obtained by the individual investor. Where that proportional wedge is the same across all types of investments, whether held directly by the investor or indirectly through different types of entity, the pattern of investment and hence the allocation of scarce economic resources will be unaffected by income taxation.

Where that proportional wedge varies with the type of investment, the type of entity, the choice of financing adopted by an entity or an entityís distribution policy, investment neutrality will be absent. In general, the more skewed and uneven the pattern of tax wedges is, the larger are the likely costs of resource misallocation: with tax-favoured sectors or investments over-expanded relative to other sectors or investments."

Adopting Transurbanís proposal to allow all investors direct access to the tax profile of the investment, regardless of whether that investment is made through an interposed entity or not, would achieve complete investment neutrality. The tax consequences for the investor would be based on the investment itself and would not be distorted by the choice of entity involved.

In Transurbanís view, the setting of an arbitrary level at which that transparency can be achieved is not desirable. Currently, the level is 100% ownership Ė already recognised by Treasury as unjustifiable. At the other end of the spectrum, a level of 1% may be equally unjustifiable - most Australian "mum and dad" investors, directly exposed to the risk of their investment, would not own 1% of the companies in which they have invested.

As with the current treatment of partnerships, the election would most appropriately be made at the entity level.

We do not see such a fundamental change to the taxation of business income as beyond the scope of the Reviewís terms of reference, or constrained by policy recognised as immutable in the Discussion Paper. Equally, we acknowledge that there may be fiscal and other policy reasons to adopt a more limited approach to the election, by limiting it to particular industries or segments. But there is no doubt in our submission that investment neutrality regardless of the choice of investment entity would assist in increasing investment in those investment sectors identified above which are important to the economic prosperity of Australia.

Risk Neutrality

"Under a comprehensive income tax base, where risk affects investments undertaken by individuals either directly or through entities, income would continue to be measured comprehensively whatever risks eventuated. The business tax system would have the generally desirable property of risk neutrality. It would not distort the pattern of risk either assumed or transferred by investors, thereby facilitating the efficient reallocation of undiversifiable risk amongst investors."

In Transurbanís submission, a completely transparent business taxation system whereby investors could directly access the tax profile of their investment, would automatically satisfy the principle of risk neutrality.

Balanced Taxation of International Investment

Transparency election is designed to be of maximum benefit for Australian investors. It does not alter the incidence of taxation for non-resident investors.

Tax Incentives

"The provision of tax incentives designed to encourage particular activities typically influences the ability of the tax system to meet its various objectives. There can be little doubt that some major tax incentives - such as R&D and infrastructure borrowings - initially proved to be inadequately designed to achieve their intended effect. To a significant degree, those design deficiencies stemmed from an inadequate process of review and consultation proceeding their introduction, as well as from inadequate integration of the policy, legislative and administrative processes used to complement the policy."

In reviewing the application of tax incentives to infrastructure projects, it is relevant to consider the range of concessions previously offered in relation to such projects. Set out in Part 4 is an outline of the various tax concessions offered in recent years. The outline illustrates the lack of coherent policy direction that has applied in relation to tax incentives in the past, as noted by the Review.

An election for tax transparency eliminates the need for industry or sector specific concessions, unless warranted by other policy considerations.

That is not to deny that significant non-tax benefits can enure from the provision of specific concessionary regimes. For example, a significant feature of the previous infrastructure borrowing regime was the cash savings made by borrowers not having to fund the income tax component of interest paid to/ received by lenders. Taking tax out of the equation for both borrower and lender (assuming neutrality for Treasury, ie matching tax rates) generated cash savings which, in a number of cases, was a critical factor in project viability.

Transurban acknowledges that the previous infrastructure borrowing regime suffered from a number of design and implementation inadequacies. However, what is clear is that without some form of tax reform (be it in the form of transparency or concessions), the significant investment in infrastructure projects that is required in Australia at present is unlikely to be funded by the private sector.

The discussion that now follows demonstrates that Transurbanís proposal is supported by international models.

Method of Suggested Implementation

The basic premise of Transurbanís submission to the Review is that entities which are investment vehicles should be transparent, so that investors can have the ability to immediately access the tax profile of the investment.

Transurban submits that its proposal could be implemented by allowing intermediate entities to make a "once only"election to be transparent entities.

Under this proposal, an election would be available whereby the entity would effectively be treated as a "flow through" entity in relation to the project. The result would be to allow an investor to directly access the tax profile of the investment. Effectively, the tax treatment would be similar to that that would apply to a direct investment by the investor.

The availability of a simple election to make an investment vehicle a flow through entity would assist in achieving the objectives identified above. In particular, the election would remove the need to consider any different taxation consequences that would ordinarily depend on the nature of the entity that is used to invest in the project.

In a number of respects, this proposal is similar to the so-called "check-the-box" provisions in the US income tax law. The check-the-box system allows US taxpayers, in certain circumstances, to treat certain non-US entities as either partnerships or companies for tax purposes. The check-the-box rules were introduced in the USA to reduce the work that the Inland Revenue Service was required to undertake in determining the appropriate classification of an entity. Determining the appropriate classification was difficult in some cases where the entity exhibited both partnership and corporate characteristics. This would include, for example, some joint ventures.

The "check the box" provisions allow certain entities to elect to be treated as partnerships or companies. This effectively allows an entity that elects to be treated as a partnership to be a flow through entity in relation to an investment. Effectively, such an entity does not constitute another layer at which taxation is applied in a group structure.

Another example from the US income tax law is the treatment of "S Corporations" for US tax purposes. The S Corporation is a special form of corporation that exhibits characteristics of both a partnership and company. Unlike other corporations, S Corporations are not taxed on their income. Instead, the S Corporation is treated as a pass through entity and income, deductions etc are passed through to the shareholders and reported in the shareholderís income tax return. The tax treatment of an S Corporation is therefore similar to a partnership. However, unlike a partnership, the liability of investors in an S Corporation is limited.

There are strict requirements that apply in determining whether a corporation can make an election to be taxed as an S Corporation. Broadly, the corporation must be a "small business corporation". A small business corporation is a US corporation that does not have more than one class of shares or more than 75 shareholders. In addition, the shareholders must be individuals or certain qualifying trusts. The tax attributes of an S Corporation are allocated to each shareholder on a per share basis and the rules do not permit the corporation to allocate items of income and deductions on some other basis. The reference to small business corporation does not involve a restriction on the amount of income, capital or employees that the corporation can have.

A further example of the transparent treatment of entities for taxation purposes is provided by the treatment of "flow-through shares" in Canada. In Canada, it is possible for certain companies involved in the oil, gas and mining sectors to pass certain tax deductions associated with specified types of activities to investors who purchase special types of shares (referred to as "flow-through shares").

The issue of flow-through shares in Canada is limited to risky expenditure such as exploration and development costs that are incurred by public companies involved in the oil, gas and mining industries. Broadly, when a "flow-through share" is issued, the relevant company may renounce certain deductions that would be otherwise available to it and allow the shareholder to claim the deduction instead. The flow-through shares rules in Canada aim to promote investment in risky exploration and development activities for which there are deferred and uncertain income flows for investors (and in this regard, which are not dis-similar to infrastructure).

The concept of election for transparency of tax treatment could be broadly or narrowly applied.

If narrowly applied, it could be limited to a borrower/ lender type election, based for example, on the principles underlying the previous infrastructure borrowing regime.

The infrastructure borrowings regime was introduced to encourage private investment in the construction of certain publicly accessible infrastructure projects. Under the infrastructure borrowings regime, companies borrowing to finance the construction of such infrastructure projects had an ability to effectively transfer the interest deductions incurred on those borrowings to the providers of the finance (ie. the ultimate investors in the project).

The policy behind the infrastructure borrowing regime is summarised by the following statement from the Explanatory Memorandum to the Taxation Laws Amendment (Infrastructure Borrowings) Act 1994:

"In order to encourage private investment in the construction of certain publicly accessible infrastructure projects, the Government decided to allow companies borrowing to finance the construction of such infrastructure projects to effectively transfer the interest deductions incurred on those borrowings to the providers of the finance."

Allowing investors to access the interest deductions incurred in relation to infrastructure projects provides a very limited form of a transparent business taxation system, which is the principal objective of Transurbanís submission to the Review. The infrastructure borrowing regime recognised transparency at least in relation to deductions for interest, which are usually the most significant deductions associated with a high cost infrastructure project.

Part 2: Description of Transurban and the Melbourne City Link Project

Transurban is listed on the Australian Stock Exchange. A large group of equity institutions and a banking syndicate of 23 banks, including the four major Australian banks, support Transurban. Transurban has about 5000 shareholders and is one of the largest 100 Australian companies by market capitalisation. Transurbanís market capitalisation is approximately $1.5 billion.

Transurban is the developer of the Melbourne City Link project. Transurbanís concession is for a period of 34 years (although it may end earlier in certain circumstances), after which time the project will revert to the State of Victoria.

At a cost of $2.2 billion, the Melbourne City Link represents one of the largest single investments in road construction by the private sector anywhere in the world. The project involves the development of a state of the art 22 kilometre expressway connecting three major freeways in Melbourne - the South Eastern, Tullamarine and Westgate. These freeways currently terminate on the fringe of the inner city.

The Melbourne City Link is a very large construction project involving upgrades to two freeways, 4.5 kilometres of new elevated roadway along the western edge of the city, a new 360 metre bridge across the Yarra River, and two tunnels beneath the city.

A unique feature of the project is its use of a fully electronic system for the collection of all tolls. The system, which is supplied by Combitech Traffic Systems (a subsidiary of SAAB of Sweden), is capable of operating over multiple lanes at freeway speeds and eliminates the performance constraints associated with conventional tolling.

Transurbanís most recent Annual Report is attached.

Part 3: The need for private sector involvement in infrastructure projects

The approach to provision of infrastructure in Australia in recent years has undergone significant change. In particular, private sector involvement in the financing and development of infrastructure projects has increased significantly.

There are a number of reasons behind the increasing use of a public/ private partnerships to deliver infrastructure projects. These include:

  • The public sectorís traditional role in providing fully operational and integrated infrastructure projects is no longer necessarily applicable. Today, in relation to the provision of at least some infrastructure services, the public sectorís focus is not necessarily on owning and operating all aspects of the service. An example is in relation to the electricity, water and transport industries where mechanisms have been employed to introduce private investment without necessarily compromising other government objectives.
  • Infrastructure projects usually involve significant capital investment. Given the increasing restraints on government expenditure, the involvement of the private sector in an infrastructure project can bring forward the delivery of infrastructure services. With expanding populations, community demand for infrastructure projects is increasing, but government resources to meet these demands are becoming increasingly scarce.

The need for ongoing expenditure in relation to road infrastructure in Australia provides an illustration of the difficulties faced by the public sector in continuing to provide infrastructure services.

The most recent work carried out by Tasman Asia Pacific in September 1998 estimates that the total cost of bringing Australiaís rural and urban primary road networks up to current standards in the USA would be about $21 billion - an increase in road expenditures of $2.1 billion per annum over a 10 year period. Each of the Federal and State public sectors in Australia is unable to finance ongoing expenditure of this magnitude.

PART 4: Summary of previous Taxation Investment Incentives for Infrastructure

1. Investment allowance

The investment allowance was a special tax deduction that applied where a taxpayer incurred capital expenditure of $500 or more in acquiring or constructing a new unit of eligible property. eligible property broadly referred to property acquired or constructed for use by the taxpayer wholly and exclusively in Australia for the purpose of producing assessable income. The former investment allowance was available in respect of a unit of property acquired under a contract or commenced to be constructed on or after 1 January 1976 and before 1 July 1985.

The deduction was based on a percentage of the eligible expenditure. The percentage depended on the time in which the eligible expenditure was incurred. Deductions were generally available at the rate of 20% or 40%.

2. General Investment Allowance

The general investment allowance was a tax incentive that applied to capital expenditure on the acquisition or construction of new depreciable plant. In summary, the general investment allowance was only available:

  • where the capital expenditure exceeded $3000; and
  • the property was acquired under a contract entered into after 8 February 1993 and before 1 July 1994; or
  • the property was constructed by the taxpayer and the construction concerned after 8 February 1993 and before 1 July 1994; and
  • the property was first used or installed ready for use before 1 July 1995.

The general investment allowance provided a deduction at the rate of 10% of the relevant capital expenditure and was generally in addition to any depreciation deductions that may have been claimed in respect of the property.

3. Development Allowance

The Development Allowance is a once-off deduction of 10% of the cost of acquisition of qualifying plant or articles (within the meaning of the depreciation provisions) in the year in which plant or articles are first used to produce assessable income, or installed ready for such use, provided the first use occurs before 1 July 2002.

In order to claim the Development Allowance, it is necessary that the plant expenditure be registered in the name of an entity and for that entity to apply to the Development Allowance Authority ("DAA") for a pre-qualifying certificate in relation to the expenditure. There are a number of conditions that apply in respect of the Development Allowance. These include:

  • The DAA must be satisfied that the relevant activity does not benefit from a nominal or effective rate of industry assistance exceeding 10% as calculated by the Industry Commission;
  • the applicant is required to satisfy the DAA that a substantial commitment to completion of the project is reasonably likely to occur before 1 July 1996;
  • the sum of gross capital expenditure incurred in carrying out the project have already, or be reasonably likely to, exceed $50 million.
  • The DAA must be satisfied that it is reasonably likely that the applicant will complete the carrying out of the project, taking into account, in particular, the applicantís financial capacity.

4. Infrastructure Borrowings

Concessions applied to "infrastructure borrowings" on or after 1 July 1992. The concessions were abolished in 1997 other than in relation to IBs certificates issued before 14 February 1997.

The concessions relating to infrastructure borrowing ("IBs") were introduced in 1992 in Taxation Laws Amendment Act (No.3) 1992. The Explanatory Memorandum to Taxation Laws Amendment Act (No.3) 1992 stated the following regarding the rationale behind the tax concessions offered for IBs:

"The tax benefits provided by this measure will facilitate private sector investment in the construction, ownership and operation of infrastructure that in the past was normally undertaken by the public sector.

Infrastructure projects of the type specified typically have a long construction period and do not produce revenue for some years. This can mean that companies borrowing to develop such projects will not be able to obtain a deduction for interest costs in the year in which they are incurred. The measure will assist the financing of the projects by effectively allowing the borrowing company to transfer the benefit of its interest deduction to investors. Such a transfer reduces the financing cost to the borrower."

A summary of the previous concessions offered in relation to IBs is as follows:

  • interest received by investors in IBs was either non-assessable or rebateable at 36%;
  • interest paid on IBs was non-deductible to the borrower;
  • any profit of a revenue or capital nature on disposal or the IB was tax exempt (and similarly, any loss of a trading or capital nature was non-deductible); and
  • investors were entitled to tax deductions in respect of expenditure incurred in borrowing to invest in an IB.

There were three categories of IBs:

  • direct IBs - borrowings by a company or a unit rust to spend on constructing an infrastructure facility that it intends to own, use and control for the purpose of direct assessable income for a period of at least 25 years;
  • indirect IBs - borrowings by a company to lend to another person for whom the borrowing will be a direct IB; and
  • refinancing IBs - borrowings to refinance a direct or indirect IB.

Infrastructure borrowings could only be used to finance the construction of the following infrastructure facilities:

            1. land transport
            2. air transport
            3. seaport
            4. electricity generation, transmission or distribution
            5. gas pipeline
            6. water supply
            7. sewerage or waste water

Under the IB regime, the above facilities must have been operated for public use at a charge. In addition to the above, expenditure on certain related facilities is also included. (ie a facility in Australia which is reasonably necessary for the infrastructure facility to be able to operate in the intended manner). Each of the above types of facilities was defined in further detail in the income tax legislation. The definitions include specific exclusions and inclusions.

5. Tax Offset - Land Transport Facilities Borrowings

The concession in relation to IBs were replaced by a more limited tax offset that applies to interest derived by lenders to approved public road and rail infrastructure projects. Division 396 of the Income Tax Assessment Act 1997 provides for a tax offset to be allowed to resident lenders in the first time years of borrowings by the project borrower. The offset is calculated by applying the general company tax rate to the interest that a lender includes in assessable income. The offset may be subject to maximum limit. Where the lender is entitled to a tax offset, the Project Borrower is denied a deduction in respect of a comparable amount of the interests.

The tax offset is only available in relation to a land transport facility. A land transport facility is a broadly, a road or railway line in Australia that is for the transport of the public or their goods for a charge. Related facilities (eg. plant and equipment reasonably necessary for the central facility to operate) are also included.

However, as a transitional measure, the tax offset is also available to facilities which qualified as an infrastructure facility under the previous tax concession for IBs. This is provided an application had been made to the DAA or on before 14 February 1998 or a certificate was issued by the DAA in respect of the project or the project is an extension of one for which a certificate under the previous regime is in force.