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CONTENTS
Taxation Laws Amendment (Infrastructure Borrowings) Bill
1997
Date Introduced: 26 March 1997
House: House of Representatives
Portfolio: Treasury
Commencement: Royal Assent. However, certain
amendments will have effect from the date they were announced.
To provide that no new applications for concessional tax
treatment may be made under the current infrastructure borrowings
scheme. The Bill also contains transitional provisions which
require certain requests for a variation of an issued approval to
be exmined for their revenue impact.
The Development Allowance Authority Act 1992 (the
Principal Act) establishes a scheme, known as Develop Australia
Bonds (DAB), that provides a tax incentive to encourage private
investment in large infrastructure projects. Such projects are
normally unattractive to private enterprise as there is generally
no return for a number of years and so no deductions can be claimed
for borrowing costs until income is earned from the project. The
deductions can be accumulated as losses and carried forward for
future years, but this does not help the investor in the shorter
term. The basis of the DAB scheme is that the lender receives the
deductions that would otherwise be available to the borrower, so
that the lender may claim a rebate on the amount that would
otherwise be used by the borrower as a deduction. This reduces the
interest rate that the borrower needs to pay as the total return to
the lender will include the tax rebate which means that the lender
can receive the same return at a reduced interest rate. The DAA has
reported that 'Borrowers are now able to borrow funds at rates as
low as 60% of normal commercial rates.'(1)
During 1995-96, DABs involving investment of approximately $3
billion were approved for 9 projects. As at 30 June 1996, the DAA
had applications for seven projects involving investment of over $3
billion. Projects already approved include the Melbourne City Link,
the M2 Motorway in NSW, the Ultimo to Pyrmont Light Rail, and a
natural gas electricity and steam supply plant in South Australia.
A relatively recent feature of the DAB scheme has been the offering
by financial institutions of investments covered by the scheme to
retail investors, so that the benefits are now available to small,
as well as large, investors.
There are three categories of DABs that are subject to the
treatment referred to above, providing other eligibility criteria
are satisfied. These are:
- direct infrastructure borrowings (DIB) - where the lender
provides funds directly to the entity engaged in an eligible
project;
- indirect infrastructure borrowings (IIB) - where the borrower,
which must be a company, lends the funds to another who is engaged
in a DIB; and
- refinancing infrastructure borrowing - where funds are borrowed
to repay a DIB or IIB.
In late 1995, problems with the relationship between DIBs and
IIBs were discovered that resulted in the DAB scheme being used to
increase tax concessions without increasing the amount of
infrastructure expenditure. The schemes involve the holder of an
IIB selling the rights to a project to another taxpayer while
retaining the IIB status. As a result, the original lender may gain
the tax advantages as a holder of an IIB and the taxpayer to whom
the rights to the project were sold will also be eligible for the
advantages as a holder of a DIB. Problems were also identified with
the use of such schemes by non-residents, where the result was that
they would not be subject to Australian withholding tax. The
problems were identified in a Press Release by the then Treasurer
dated 30 October 1995, which announced that legislation to correct
the problem would be introduced to apply from the date of the Press
Release. It was announced in the 1996-97 Budget that the government
would proceed with the legislation proposed by the former
government and that it would apply from the date of the original
announcement (ie. 30 October 1995). The amendments were contained
in Taxation Laws Amendment Act (No. 3) 1996.
The attraction of DABs to investors however has remained very
strong. The Principal Act provides that regulations may be made to
limit themaximum amount of revenue that may be forgone in relation
to DABs. The regulations have set this amount at $150 million for
1996-97 and $200 million for 1997-98. In a Press Release dated 10
September 1996, the Treasurer announced that the total value of
applications in relation to DABs that had not yet been dealt with
was approximately $26.5 billion and that, if approved, the cost to
revenue of DABs would exceed the maximum cost as established by the
regulations. The Treasurer therefore announced on 10 September 1996
that applications would be frozen and that no further applications
would be accepted from that date until 30 June 1997. The Treasurer
estimated that if the projects for which applications were made
proceeded, the cost to revenue would be approximately $4 billion
over 3 years, an amount greatly in excess of the amount allowed to
be spent under the regulations in respect of DABs.(2)
In a Press Release dated 14 February 1997 the Treasurer
announced that the DAA had examined existing applications, and
particularly those lodged close to the announcement of the 1996-97
Budget (between 1 July 1996 and 20 August 1996, 71 applications
valued at $21.6 billion were lodged) and that the DAA had concluded
that the schemes were being used for tax minimilisation, were part
of financial packaging schemes and that the benefits were being
received by high marginal income tax payers (such schemes were in
addition to those addressed by previous legislation). An example of
such a scheme is one where a loan is taken out to fund the purchase
of part of a DAB by a taxpayer. The taxpayer then claims the
interest payment on the loan as an up-front deduction (ie. the
taxpayer pays the full amount of interest on the loan in the year
that the loan is taken out) and management fees are also claimed as
a deduction. After claiming the deductions, the taxpayer then sells
their interest in the DAB back to the original seller for the same
value as the loan, effectively allowing a deduction for little
expense to the taxpayer. The Treasurer estimated that under one
such scheme that for a cost of $36 000 a taxpayer could claim $85
000 worth of deductions. As the Treasurer notes, there is nothing
to prevent the purchase being very close to the end of one
financial year and the sale being soon after the start of the new
financial year (this would generally be the case as it is the most
efficient way of running the scheme) and for the process to be
repeated in later financial years.(3)
In the Press Release dated 14 February 1997, the Treasurer
announced the effective closing of the scheme to new applications,
with the following being prevented from that date:
- the lodging of new applications;
- the issue of further certificates, other than those where an
undertaking has been given; and
- changes to existing schemes that would result in greater tax
benefits.
It was announced in the 1997-98 Budget that the DAB scheme would
be replaced by a rebate for certain infrastructure borrowings. The
rebate will be available in respect of private land transport
infrastructure projects; certain projects that had been applied for
prior to 14 February 1997; and extension of projects that are
subject to the DAB scheme. The scheme will be similar to DAB in
that the financier will be allowed to off-set interest payments
made by the borrower and the rebate will be the lower of the
financier's marginal tax rate and 36%. The rebate will be available
for 5 years, will not be tradeable and will only be available in
respect of the year in which the interest is included in assessable
income. If the loan is refinanced or fully transferred the rebate
will be available to the new financier for the remainder of the
five year period. If the interest income is assigned, no rebate
will be available.
Under the proposed scheme, there will be two phases before
approval. Phase 1 will see projects examined to see if the project
falls within the allowable categories, involves new private
infrastructure and to determine if a cost-benefit analysis has been
undertaken. If phase 1 is satisfied, then under phase 2 the project
will be assessed to see:
- if the project is commercially viable;
- if the project would proceed without the rebate;
- the extent to which the tax benefits flow to the proponent of
the scheme;
- the cost to revenue compared to the cost of the scheme;
- the economic and social benefits and costs;
- consistency with Commonwealth and State policy and planning
objectives; and
- the degree of public consultation involved in the project.
Applications for the rebate will be determined by the
Commissioner for Taxation.(4)
The maximum cost of the rebate will be $75 million for each year
from 1997-98 to 2000-2001.(5) This is considerably less than the
amount that had been determined by the regulations as available
under the previous scheme where, as noted above, $200 million was
allocated for 1997-98.
The proposed rebate has been reported as being critised by those
involved in the provision of private infrastructure. It has been
reported that industry representatives claim that the rebate will
faciliatate at best $2 billion woth of transport infrastructure
each year. A representative of Coopers and Lybrand is reported as
stating that the entire budget amount could be absorbed by a single
infrastructure development, such as a Sydney to Canberra fast
train.The same representative is reported as stating that the new
criteria for the rebate would 'make it difficult for smaller
projects to qualify'. It is also reported that the chief executive
of the Australian Council for Infrastructure Development stated
that the new scheme would 'shut down' private sector investment in
regional Australia and do nothing to meet national infrastructure
needs.(6)
Amendments to the Development Allowance Authority Act
1992
A major amendment to the Principal Act relates to the
termination of the DAB scheme administered under the Act. Item 5 of
Schedule 1 provides that an application under this Act is not to be
made after the Bill comes into force and that an application made
between 12 pm on 14 February 1997 and the commencement of this Bill
will have no effect. Similarly, Item 9 provides that the issue of a
certificate between these two times will have no effect unless the
DAA had advised, before 12 pm on 14 February 1997, that it would
grant a certificate.
Part 2 of Schedule 1 deals with restrictions on variations on
existing certificates. Section 93T of the Principal Act currently
provides that if the DAA is satisfied that if the variations had
been in the original application the certificate would still have
been granted, and it is reasonable to vary the certificate, the DAA
must vary the certificate. Item 12 will make section 93T subject to
proposed section 93TA.
Proposed section 93TA provides that if, after the commencement
of this Bill, an application far a variation is made, and the DAA
is satisfied that it should act under section 93T, the matter is to
be referred to the Commissioner of Taxation. The Commission is then
to determine whether, if the variation is granted, there would be a
reduction in the tax payable by those affected by the variation.
The Commissioner is then to advise the DAA of the finding and if
the advice is that there is likely to be a reduction in revenue,
the DAA is not to vary the conditions of the certificate. The
applicant may object to the Commissioner's determination under
normal tax administration rules.
If, between 12 pm on 14 February 1997 and the commencement of
this Bill, the DAA has varied a certificate, the DAA is to, as soon
as practicable after commencement of this Bill, refer the variation
to the Commissioner who is to judge the revenue effects of the
variation as described above. If the Commissioner determines that
the variation would have a negative effect on revenue, the
variation is to have no effect and be taken never to have had any
effect. (Note: This may result in some retrospective effect for the
Bill that was not previously announced. If the DAA has varied a
certificate between the 14 February 1997 announcement and the
introduction of this Bill and the certificate holder has relied on
this variation to take certain action after the variation, the
effect of the variation being deemed never to have had effect may
result in the certificate holder facing losses as the previous
action taken on the variation will need to be reversed.)
- Development Allowance Authority, 1995-96 Annual Report, p.
7.
- Treasurer, Media Conference, 14 February 1997.
- Ibid.
- 1997-98, Budget Paper No. 2, pp. 179 - 181.
- Ibid.
- The Australian Financial Review, 15 May 1997.
Chris Field
6 June 1997
Bills Digest Service
Information and Research Services
This Digest does not have any official legal status. Other
sources should be consulted to determine whether the Bill has been
enacted and, if so, whether the subsequent Act reflects further
amendments.
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with Senators and Members and their staff but not with members of
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ISSN 1328-8091
© Commonwealth of Australia 1997
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Published by the Department of the Parliamentary Library,
1997.
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Last updated: 12 June 1997
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