Bills Digest 146 1996-97 Taxation Laws Amendment (Infrastructure Borrowings) Bill 1997

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This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.


Passage History

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)

Main Provisions

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.)


  1. Development Allowance Authority, 1995-96 Annual Report, p. 7.
  2. Treasurer, Media Conference, 14 February 1997.
  3. Ibid.
  4. 1997-98, Budget Paper No. 2, pp. 179 - 181.
  5. Ibid.
  6. The Australian Financial Review, 15 May 1997.

Contact Officer and Copyright Details

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.

IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1997

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Published by the Department of the Parliamentary Library, 1997.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 12 June 1997

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