22 Dec 2011

Proposed changes to enhance loss utilisation for particular infrastructure projects – update

by Robyn Schofield

More details of how the Government's proposed tax incentive for private investment in infrastructure projects would work have been released.

The Commonwealth Government, as part of its 2011‑12 Budget, announced its intention to "introduce a new tax incentive designed to remove impediments in the tax system that discourage private investment in infrastructure projects." In short, the incentive aims to increase the benefit of tax losses arising in connection with "designated infrastructure projects" (project losses). The Budget announcement outlined three main elements of the proposed incentive, namely:

  • the incentive will apply to projects given "designated infrastructure project" status and listed on Infrastructure Australia's national priority list;
  • project losses will be "uplifted" at the Government bond rate from the time incurred to the time they are applied; and
  • project losses will be exempt from the continuity of ownership test (COT) and the same business test (SBT).

Discussion paper

The Budget announcement did not contain details of the proposed measures as these are subject to further consultation. On 26October 2011, the Government released a Discussion Paper containing its preliminary views on the design of the incentive and the appropriate approach for implementing the incentive. Submissions on the issues outlined in the Discussion Paper were due by 9 December 2011.

Proposed measures

As noted, details regarding the operation of the incentive remained unclear at the time the Budget announcement was made. The Discussion Paper contains additional information on the following five elements of the incentive.

First, in determining whether a project should be awarded "designated infrastructure project" status, the decision-maker will rank projects based on the following criteria:

  • the ratio of economic benefit to economic costs;
  • the corporate governance arrangements in place;
  • the availability of the project to multiple users; and
  • the benefit to the broader community.

Secondly, the incentive will only be available to entities or consolidated groups whose sole business consists of a designated infrastructure project. As entities within a consolidated group may carry on a range of activities, an exception to the "one in, all in" operation of consolidation will be introduced. Specifically, the head company of a consolidated group will be able to elect for a wholly-owned entity, or group of entities, carrying on a designated infrastructure project to remain outside the main consolidated group.

Where a wholly-owned sub-group remains outside the main consolidated group and each entity in that sub-group carries on the same designated infrastructure project, the sub-group may form its own consolidated group (project consolidated group). As such, a separate project consolidated group must be formed for each group of entities carrying on a designated infrastructure project.

Thirdly, an entity or project consolidated group will determine its project losses according to the current rules. However, project losses will only be available to offset assessable income from the relevant project and may not be used more broadly. Where a designated infrastructure project is sold the accumulated project losses may be transferred to the purchaser of the project (provided the purchaser's sole business consists of that designated infrastructure project). That is, unlike tax losses more generally, project losses may effectively "attach" to the project (rather than being a tax attribute entity carrying on the designated infrastructure project).

Fourthly, an entity or project consolidated group carrying on a designated infrastructure project will not be subject to the COT, SBT or rules relating to the recoupment of trust losses. This will be effected by way of exceptions to the main operative provisions relating to the recoupment of tax losses rather than modifications to the relevant divisions more broadly. In addition, where an entity joins a consolidated group the COT, SBT and other control tests will not apply to the transfer of project losses to the head company of the consolidated group.

Fifthly, where a designated infrastructure project ceases or is cancelled but the entity continues to exist the normal loss recoupment rules (including the specific anti-avoidance rules) will start to apply. The incentive will also cease to apply where an entity or project consolidated group carries on activities that are unrelated to the designated infrastructure project. In these circumstances, where the entity or project consolidated group would otherwise be part of a main consolidated group, it will "rejoin" that consolidated group (certain rules will apply to determine the tax attributes of those entities).


One of the reasons project losses have limited value to investors is that those project losses are generally quarantined at the project entity level and cannot be "distributed" to investors or otherwise "grouped" by investors to offset other income.

While the proposed incentive aims to increase the benefit of project losses, it only does so at the project level. That is, the proposed incentive does not allow investors to directly access project losses, does not allow project losses to be used to offset other non-project income and does not even allow project losses arising from one infrastructure project to be used to offset income from another infrastructure project carried on by the same entity or group.

That being the case, for the reasons discussed previously, there may only be some limited circumstances in which the incentive actually provides any real benefit. In particular, as infrastructure projects tend to only become tax positive at the very end of the project, if at all, where project losses are quarantined (not only at the project entity level but to the individual project), additional benefits in relation to project losses may simply result in the quantum of the project losses which will expire unutilised at the end of an infrastructure project being increased. Moreover, the new measures may also increase compliance costs for groups which will need to administer one or more project consolidated groups and monitor the activities of each project consolidated group to ensure activities do not cross over into "unrelated activities".

As evidenced by the specific measures relating to consolidated groups and the "sole business" requirement, this is clearly a design feature of the incentive rather than an unintended consequence of the measures as currently proposed. Given this, it may be that the proposed incentive will not be effective in achieving its intended goal of encouraging private investment in infrastructure projects and it will be interesting to see how this issue is addressed in submissions.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.