27 June 2007
Key Points:
Changes announced in the Commonwealth Government Budget concerning the tax treatment of carry forward losses to make investment in and financing of infrastructure projects more attractive.
Amongst the revenue measures announced on May 8 2007 in the Commonwealth Government Budget was a little-reported item on company loss recoupment rules. The change is particularly significant for companies in the energy and resources sector, where high upfront project costs and long development lead times often generate significant carry forward losses.
When can a company carry forward losses?
Currently, a company can carry forward a tax loss to offset future assessable income if it meets
The COT was introduced to prevent trafficking in loss companies, and requires that shares carrying more than 50 percent of all voting, dividend and capital rights be beneficially owned by the same persons at all times during the ownership test period.
The SBT was introduced as a saving provision in relation to mergers and takeovers that did not involve trafficking in loss companies. A company satisfies the SBT if it carries on the same business in the claim year as it carried on immediately before the change of ownership. Under amendments enacted in 2005, however, the SBT test is available only to companies with total income not exceeding $100 million.
Abolishing the $100 million cap
In a significant concession to all companies investing in long-life infrastructure projects, the Government announced it would abolish the $100 million cap, retrospectively from 1 July 2005.
Typically, long-life infrastructure projects will incur significant losses in the construction and start-up phase under the impact of interest costs and depreciation. The income cap has served to disadvantage larger companies, as they have not been able to claim carry-forward losses if they fail the COT. Consequently, the infrastructure and mining industry lobbies have criticised the cap as a barrier to investment in mining and infrastructure.
The Commonwealth's original rationale for introducing the cap was fear of litigation, according to evidence given to the Senate Economics Legislation Committee in 2005 by Treasury officials (Provisions of the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005, November 2005). Treasury said the SBT was a very difficult test to satisfy, particularly for large companies.
The introduction of the cap in 2005 was accompanied by a relaxation of the compliance requirements under the COT. The Government's intention was to make it easier for large firms to seek carry-forward tax losses through the COT provisions at the expense of the SBT route. This trade-off was generally not welcomed by industry.
Why abolishing the cap is a good idea
In evidence given to the Senate Economics Legislation Committee, several industry organisations and companies explained that the lifecycle of the majority of infrastructure projects involves, at some stage, the transfer of ownership from the developers to long term investors. For example, it is common for superannuation funds to purchase their equity after the completion of construction. Such a sell down, however, would almost certainly result in a breach of the COT, leaving the new owners with only the SBT route for claiming prior year losses. The $100 million income cap closed off the SBT option for all infrastructure projects of any significance.
The cap also hampered the financing of new infrastructure. Project finance lenders typically size and price their loans on the assumption that carry forward losses are available to protect income from tax. They also commonly take security over the shares in the company so that in case of default, they can sell the company as a going concern with the benefit of its tax losses.
The Government's decision to abolish the SBT cap is a welcome reform that will remove a significant impediment to infrastructure investment and financing.
For further information, please contact Linda Evans.
