Construction of social infrastructure using the 'securitised licence' PPP model

This chapter sets out how the income tax law and the Goods and Services Tax (GST) apply to a ‘social’ PPP.

This chapter is structured as follows:

• Background on social PPPs.
• The structure of a social PPP.
• The income tax treatment of the social PPP.
• A variation on the social PPP structure where the government provides a contribution to the PPP and the tax implications.
• A further variation involving a ‘progressive securitisation’ social PPP, and its tax implications.
• The GST treatment of the social PPP.

Background

A social PPP involves a consortium and a government agreeing that:

• the consortium will construct and maintain some public infrastructure
• the consortium will obtain the financing for that infrastructure
• the government will obtain title to, and repay the consortium for the infrastructure, plus interest, over a certain period.

Examples of the type of infrastructure that may be subject to this arrangement include schools, hospitals, prisons, roads and public utilities.

These are different to ‘economic’ PPPs which involve user fees being used to repay the consortium’s cost of construction and financing (rather than payments from the Government).

How are social PPPs structured?

This part is about:

• The substance of the commercial relations between the parties involved in a social PPP.
• The transactions actually undertaken between the parties.
• How the flow of funds operates between the parties.

The substance of the commercial relations

The substance of the commercial relations between the parties involved in a social PPP is as follows.

1. An infrastructure asset is built for the government by a private sector consortium. Depending on the terms of the PPP, the risks associated with the construction of this asset may be partially or completely borne by the private sector. The period of this construction is called the ‘design and construction’ phase.
   
   The private sector also finances the cost of construction during this phase.
2. Once the design and construction phase is complete, the government  
   1. owns the asset
   2. starts paying for the cost of construction, plus interest. It progressively pays down principal and interest over a defined term (like an amortising loan).
    
3. During the term of the repayment, the private sector consortium also operates and maintains the infrastructure. The risks relating to this phase of the operation are also partially or completely borne by the private sector (depending upon the terms of the PPP).This phase is called the ‘operations and maintenance’ phase. The consortium is compensated for providing this service by the government.
4. The consortium may make profits in two ways  
   1. The amount it receives from the government for the cost of construction is more than its actual cost of construction (plus the interest incurred while the construction happened).
   2. The amount it receives from the government to operate and maintain the infrastructure is more than its actual costs for these activities.
    

The transactions actually undertaken

The transactions actually undertaken between the parties are as follows.

1. Two special purpose project entities are established. These are  
   2. Project trust – whose role it is to carry out the design, construction, operation and maintenance of the infrastructure asset. Project trust is usually owned by the private sector consortium’s members, and it is Project trust that makes most of the profits from the project.
   3. Finance co – whose role it is to obtain senior debt for the project. Finance co may be held by the consortium’s members or by a charitable trust. Finance co generally does not make profits from the project.
    
2. Finance co raises external debt in the form of loans or facility agreements for the design and construction phase of the project. This external debt is repaid at the end of the design and construction phase.
3. Finance co on-lends these funds to Project trust (the D&C loan), which procures the design and construction of the asset.
4. In terms of Project trust itself, a project deed is entered into, which sets out Project trust’s obligations to procure the design and construction of the asset and then to operate and maintain the asset.
5. Project trust obtains consideration for entering into the project deed. Specifically  
   8. It obtains the construction payment from the government at the end of the design and construction phase.
   9. It obtains availability payments from the government during the term of the operations and maintenance phase.
    
6. At the end of the design and construction phase, Finance co raises long-term debt that will last for the operations and maintenance phase (the O&M loan). This is usually with a consortium of banks.
7. Finance co enters into the securitisation agreement with the government under which  
   12. It has assigned to it the licence payments Project trust pays to the government (see step 11(a)).
   13. Finance co pays the receivables purchase payment (financed from the long-term debt raised at step 6).
    
8. The government finances the construction payment to Project trust (described at step 5(a)) from the receivables purchase payment it receives from Finance co.
9. Project trust uses the construction payment to repay the D&C loan, and Finance co in turn uses these funds to repay the D&C financiers. In some circumstances, the D&C loan and the O&M loan could be the same loan, and in some cases in may be a different loan with different financiers.
10. The government makes the availability payments (referred to in step 5(b)) out of consolidated revenue. These payments are the mechanism by which the government pays the consortium for the infrastructure asset, plus interest, over the life of the operations and maintenance phase. These payments also compensate the consortium for actually operating and maintaining the infrastructure, and provide the consortium a return on equity.
11. However, because it is Finance co that actually raised the senior debt, and not Project trust, a significant portion of the payments the government made to Project trust need to find their way back to Finance co. This is done in two steps  
    18. The Project trust enters into a licence agreement with the government that gives Project trust the right to access the Crown land the project is to be undertaken on. The licence payments are ostensibly the consideration for the licence agreement, but in reality are calculated to be sufficient for Finance co to repay the debt it incurred to its external financiers.
    19. These licence payments are then immediately paid on to Finance co under the securitisation agreement (see step 7(a)). In legal terms, the licence payments are securitised by the government to Finance co.
     
12. The securitisation agreement is important for another reason. It is the mechanism by which the government originally financed the construction payments to Finance co (see step 5). The financing was done by Finance co providing the 'receivables purchase payment' to the government. Legally, this is a consideration for the securitised licence payments Finance co pays to the government. However, the substance of the securitisation agreement is similar to  
    21. Finance co lending money to the government to have the infrastructure asset designed and constructed. This is the role played by the receivables purchase payment.
    22. Once construction is complete, the government repaying Finance co for the cost of design and construction, plus interest, over the life of the operations and maintenance phase. This is the role of the securitised licence payments.
     
13. An equalisation swap confirmation is entered into between Project trust and Finance co (under the auspices of an ISDA master agreement), under which  
    24. Finance co’s financing costs as modelled at the outset of the agreement are paid to Project trust.
    25. Finance co’s actual financing costs, taking into account any increased or decreased costs of financing as a result of the refinancing of the debt are paid by Project trust to Finance co.
     

The payments under (a) and (b) are netted off against each other.

The design and construction stage

1. Finance co borrows money from the external D&C financiers in the form of loans or facility agreements. The money may be borrowed entirely up front, or in stages (such as through a facility arrangement).
2. Finance co uses that money to fund the D&C loan to Project trust. The interest payments on this loan are capitalised.
3. Project trust uses that money to fund the design and construction of the infrastructure asset, including payments to the D&C subcontractors.

End of design and construction

Upon the completion of design and construction, the ownership of the infrastructure asset passes to the government, the existing financing unwound, and new long-term financing put in place. The cash-flows to give effect to this are:

4. Long-term loans or facility agreements are entered into with the O&M financiers.
5. That financing is used to purchase the securitised licence payments from the government. The receivables purchase payment is paid in exchange for this. That payment is financed from the borrowing with the O&M financiers.
6. The government uses the receivables purchase payment to finance the construction payment to Project trust.
7. Project trust uses the construction payment to repay the D&C loan with Finance co (plus interest).
8. Finance co uses the repayment of the D&C loan to repay the D&C financiers.

Operations and maintenance stage

9. The government pays availability payments (also known as service payments or quarterly service payments) to Project trust over the life of the operations and maintenance phase. The amount of these payments are calculated to be sufficient to  
   10. cover Project trust’s cost of construction
   11. cover the interest payments incurred by Finance co to the external financiers
   12. pay subcontractors to operate and maintain the infrastructure during the operations and maintenance phase
   13. provide a return on equity to the consortium members.
    
10. Project trust pays some of the money received from the availability payments to subcontractors to operate and maintain the infrastructure and also to fund a return on equity.
11. An amount is paid to the government in the form of licence payments, calculated by reference to the government’s obligations under the receivables purchase agreement.
12. The licence payments are securitised by the government and passed straight through to Finance co by way of a securitisation agreement.
13. Finance co uses the securitised licence payments to fund the repayment of principal and interest to the O&M financiers.
14. Cash-flows under the equalisation swap produce the result that any increase in Finance co’s cost of financing is paid by Project trust to Finance co. Any decrease in Finance co’s cost of financing is paid by Finance co to Project trust.

Income tax treatment

In summary, the tax treatment is as follows.

• The loans or facility agreements between the D&C and O&M financiers and Finance co are financial arrangements to which Taxation of financial arrangements (TOFA) will apply. This means the any loss made by Finance co from these agreements would generally be deductible on an accruals basis.
• TOFA will also apply to the D&C loan with Project trust and the securitisation agreement with the government. This means the agreements will be treated similar to the loans with the external financiers, and any gain made by Finance co would generally be assessable on an accruals basis.
• The construction payment and the availability payments will be assessable to Project trust.
• The licence payments, and the payments made to both the D&C and O&M subcontractors are fully deductible to Project trust.
• TOFA will apply to the D&C loan but not apply to any of Project trust’s other transactions.
• Thin capitalisation will not apply to Finance co – even if the consortium members are non-residents.
• Project trust will not be entitled to capital allowances.
• The payments under the equalisation swap will be assessable and deductible to Finance co and Project trust.
• Subject to the provisos set out below, Part IVA of the Income Tax Assessment Act 1936 would be expected to not apply.

Agreement between the D&C and O&M financiers and Finance co

TOFA applies to the loan or facility agreements with the D&C and O&M financiers because those agreements will be financial arrangements as set out in section 230–45. There will be a loss from those arrangements under TOFA, to the extent that the payments made to the financiers reflect a return on those financiers’ investment.

Unless the Finance co makes an election under Division 230, the accruals or realisation method in Subdivision 230–B will apply to the loss.

Except in unusual circumstances (such as the project’s viability being unclear, or the Government potentially defaulting on its obligations), the accruals method would apply to that loss.

We will generally accept that the TOFA accruals method could be satisfied by Finance co relying on the outcome that the effective interest method set out in AASB 139 would provide for, provided this is applied consistently by Finance co across its financial arrangements.

The D&C loan

TOFA will apply to the D&C loan between Finance co and Project trust. There will be a gain for Finance co from that arrangement under TOFA, to the extent that the payments made to Finance co reflect a return on its investment.

Unless the Finance co makes an election under Division 230, the accruals or realisation method in Subdivision 230–B will apply to the loss.

Except in unusual circumstances (such as the project’s viability being unclear, or the government potentially defaulting on its obligations), the accruals method would apply to that gain.

We will generally accept that the TOFA accruals method could be satisfied by Finance co relying on the outcome that the effective interest method set out in AASB 139 would provide for, provided this is applied consistently by Finance co across its financial arrangements.

Securitisation agreement between Finance co and government

We accept that TOFA will apply to the securitisation agreement. It will apply as though:

• the receivables purchase payments were the equivalent of a principal investments
• the securitised licence payment was the equivalent of the repayment of that principal with interest.

This means that there should be a gain to which the accruals method under TOFA will apply (unless the circumstances mentioned above arise).

As with the above, we generally accept that the TOFA accruals method could be satisfied by Finance co relying on the outcome that the effective interest method set out in AASB 139 would provide for as if the agreement were treated a loan under that standard, provided this is applied consistently by Finance co consistently across its financial arrangements.

Construction payment

The construction payment made by the government to Project trust constitutes income according to ordinary concepts. It is not capital in nature.

As a result, it is assessable income under section 6–5.

TOFA will not apply to it either (because it involves the obligation to procure the design and construction of the infrastructure).

In determining the timing of the assessability of income, consistent with the ideas and principles set out in IT 2450, a method of accounting which has the effect of allocating, on a reasonable basis, the ultimate profit or loss made by Project trust in relation to the construction over the years taken to complete the construction will be acceptable. However, the conditions and provisos around the reasonability and consistency of the method chosen as set out in IT 2450 would similarly apply in this situation.

To avoid doubt, the profit on the construction (if any) should emerge over the construction phase, not over the term of the overall project.

Availability payments

Similarly, the availability payments made by the government to Project trust constitute income according to ordinary concepts. They are not capital in nature.

As a result, they are assessable income under section 6–5.

TOFA will not apply to them either.

Payments to the D&C and O&M subcontractors

The payments to the subcontractors are made for Project trust to fulfil its contractual obligations to build the infrastructure assets, and thus earn the assessable income referred to above. Therefore, the expenditure falls within the first limb of section 8–1.

Additionally, the incurring of the construction costs will not result in any tangible asset or enduring benefit for the Project trust because they are not the legal owner of the infrastructure asset (legally the State owns the relevant asset).

Therefore, the expenditure does not fall within the capital-related negative limb of section 8–1.

The determination of the timing of any deduction to the D&C contractor would need to be done consistently with the timing of the derivation of income as set out in the Construction payment section.

Licence payments

The licence payments are purportedly made periodically to secure Project trust’s ongoing right to access the land. Notwithstanding, the payments will be set at a level able to be sold by the state to fund the construction cost, in the context of a social PPP which structures its tax affairs consistently with the overall intent of this paper, we will not seek to challenge the contractual characterisation. Project trust requires access to fulfil its contractual obligations and thereby derive assessable income. As such, based on the contractual characterisation, the expenditure falls within the first limb of section 8–1.

The recurrent payments meet Project trust’s continuous need to access the land. The payments do not enlarge Project trust’s profit-yielding structure or secure any enduring benefit. As a result, the expenditure does not fall within the capital-related negative limb of section 8–1.

Thin capitalisation – Section 820–39

Section 820–39 exempts certain special purpose entities from the application of the thin capitalisation. Consistent with TD 2014/18, this exemption will generally apply to Finance co.

The equalisation swap

The net:

• receipts under the equalisation swap will be assessable to Project trust and Finance co
• payments under the equalisation swap will be deductible to Project trust and Finance co.

We do not consider the payments under the equalisation swap from Finance co to Project trust to represent an application of income derived.

For completeness, we have general concerns with the use of swaps which shift economic returns between entities, and specific guidance should be sought in relation to swaps outside this limited context.

Capital allowances

Project trust will not be entitled to capital allowances under Division 40 because:

• it will not ‘hold’ any depreciating asset under section 40–40
• even if it did, there would be not a ‘cost’ of the asset.

In relation to the ‘hold’ question, the reason:

• item 2 does not apply is because the agreements do not give Project trust a right to remove any of the infrastructure
• item 3 does not apply is because Project trust does not ‘use’ the asset for its own use
• item 6 does not apply is because Project trust will not have a right as against the state to become the holder of the asset
• item 10 does not apply is because Project trust has no legal title to the assets.

Additionally, because none of the payments, either to the subcontractors or the government consists of an amount that is of a capital nature, there will be no cost for Division 40 purposes (section 40–220).

Neither will there be deductions under Division 43, because the payments do not constitute capital expenditure (subsection 43–70(1)).

The fact that there are no capital allowances also means that Division 250 has no application (paragraph 250–15(d)).

Part IVA

We cannot confirm that Part IVA of the Income Tax Assessment Act 1936 (ITAA) will never apply to transactions adopting the above structure. However, Part IVA would generally be expected not to apply, because no aspect of the transaction structure appears to be driven predominantly by tax considerations.

Additionally, the following aspects of the above transaction structure, without more, would generally not concern us from a Part IVA perspective:

• the application of the exemption for special purpose entities in section 820–39 to Finance co
• the fact that Project trust secures greater deductions under section 8–1 than the deductions that would be available under Division 43 under a counterfactual in which Project trust constructs the asset and retains title to it and transfers it to the government at the end of the operations and maintenance period.

However in particular cases, there may be aspects of the pricing, terms and conditions of the transactions, as well as the wider circumstances, that cause us to consider the application of Part IVA. Without limitation, examples of this may include:

• where the tax outcomes as between the Project trust and the Finance co are asymmetric
• where there are material timing differences in the recognition of taxable income
• where there is inconsistent or non-arm’s-length pricing of arrangements between those entities.

Variation involving a progressive securitisation

A variation on the securitised licence model outlined above the progressive securitisation model under which:

• Government pays construction payments to Project trust during the construction period, according to whether certain milestones are achieved.
• These construction payments are financed by the receivables purchase payment paid to the government similarly progressively over the course of the construction period.

All of the other aspects of this model are materially the same to the model outlined above. The availability payments are similarly used by Project trust to finance the licence payments, which in turn are securitised to Finance co, with Finance co using those funds to repay the external financiers.

The result of this approach is that it minimises the extent to which the Project trust incurs deductible capitalised interest expenses without having assessable income to set off against those expenses.

This causes the Project trust’s carry-forward loss balance to be reduced. In the event there is a change of ownership in the D&C phase, it will reduce the adverse consequences if the Project trust were to become disentitled to those carry-forward losses.

Tax treatment of Finance co

Consistent with the previous model, TOFA will apply to the securitisation agreement composed of:

• the receivables purchase payment that is paid in instalments (similar to a loan being gradually drawn-down)
• the securitised licence payments (similar to that loan gradually being repaid with principal and interest).

Note that, consistent with the accounting treatment of the securitisation, it is not necessary for Finance co to start accruing under TOFA the entire gain it will make from the securitisation agreement from the time the first receivables purchase payment is made.

Rather, the gain under TOFA is worked out by applying a rate of return to an outstanding balance. An example of how this is done is provided below.

It can be seen from the example that an accrual only commences to occur once the receivables purchase price is provided – not before. And the accrual is calculated only with reference to an outstanding balance – not the entire gain that is predicted from the arrangement.

Example – TOFA accrual calculation on a 35 year progressive securitisation

Year	Financial model			TOFA accrual calculation
	Receivables purchase payment provided ($)	Securitised licence payments ($)	Net cash-flows ($)	Opening value ($)	TOFA accrual ($)	Closing value ($)
2016	5,000,000	0	-5,000,000	0	0	5,000,000
2017	25,000,000	0	-25,000,000	5,000,000	475,967	30,475,967
2018	50,000,000	0	-50,000,000	30,475,967	2,901,112	83,377,080
2019	20,000,000	0	-20,000,000	83,377,080	7,936,951	111,314,031
2020	0	7,000,000	7,000,000	111,314,031	10,596,366	114,910,397
2021	0	7,500,000	7,500,000	114,910,397	10,938,717	118,349,114
2022	0	8,000,000	8,000,000	118,349,114	11,266,060	121,615,173
2023	0	8,500,000	8,500,000	121,615,173	11,576,967	124,692,141
2024	0	9,000,000	9,000,000	124,692,141	11,869,874	127,562,015
2025	0	9,500,000	9,500,000	127,562,015	12,143,068	130,205,083
2026	0	10,000,000	10,000,000	130,205,083	12,394,670	132,599,753
2027	0	10,500,000	10,500,000	132,599,753	12,622,627	134,722,381
2028	0	11,000,000	11,000,000	134,722,381	12,824,688	136,547,068
2029	0	11,500,000	11,500,000	136,547,068	12,998,386	138,045,454
2030	0	12,000,000	12,000,000	138,045,454	13,141,022	139,186,476
2031	0	12,500,000	12,500,000	139,186,476	13,249,640	139,936,117
2032	0	13,000,000	13,000,000	139,936,117	13,321,001	140,257,118
2033	0	13,500,000	13,500,000	140,257,118	13,351,558	140,108,676
2034	0	14,000,000	14,000,000	140,108,676	13,337,428	139,446,103
2035	0	14,500,000	14,500,000	139,446,103	13,274,355	138,220,458
2036	0	15,000,000	15,000,000	138,220,458	13,157,682	136,378,140
2037	0	15,500,000	15,500,000	136,378,140	12,982,305	133,860,445
2038	0	16,000,000	16,000,000	133,860,445	12,742,637	130,603,082
2039	0	16,500,000	16,500,000	130,603,082	12,432,557	126,535,639
2040	0	17,000,000	17,000,000	126,535,639	12,045,363	121,581,003
2041	0	17,500,000	17,500,000	121,581,003	11,573,714	115,654,717
2042	0	18,000,000	18,000,000	115,654,717	11,009,571	108,664,288
2043	0	18,500,000	18,500,000	108,664,288	10,344,128	100,508,416
2044	0	19,000,000	19,000,000	100,508,416	9,567,742	91,076,158
2045	0	19,500,000	19,500,000	91,076,158	8,669,853	80,246,012
2046	0	20,000,000	20,000,000	80,246,012	7,638,894	67,884,906
2047	0	20,500,000	20,500,000	67,884,906	6,462,198	53,847,104
2048	0	21,000,000	21,000,000	53,847,104	5,125,891	37,972,995
2049	0	21,500,000	21,500,000	37,972,995	3,614,780	20,087,775
2050	0	22,000,000	22,000,000	20,087,775	1,912,225	0
Totals	100,000,000	449,500,000	349,500,000		349,500,000

The above example assumes that the cash-flows occur at the end of each income year. If they occur part way through an income year, there would be a need to apportion the accrual across two income years. It also assumes that Finance co has chosen yearly accrual intervals under TOFA (this is not a formal election – it is something done by Finance co filling out its income tax return in a certain way).

Tax treatment of Project trust

Consistent with the previous model, the construction payments are assessable income of Project trust.

Variations involving government contributions

As part of a social PPP, the government may provide its own contributions. Here we discuss the form these contributions may take, and their tax outcomes.

Cash payment that must be used for certain purposes

The first type of government contribution may be the provision of cash to Project trust on condition that it be used for certain purposes.

Taxation Ruling 2006/3 contains the principles for determining whether a cash payment by the Government to Project trust on condition that it be used for certain purposes will be assessable income under sections 6–5 or 15–10.

While it is difficult to generalise, if the cash-payment is on condition that it be used:

• as part of the design and construction of the asset
• as part of the operations and maintenance of the asset

then the payment is likely to be included in assessable income under sections 6–5 or 15–10. In working out the timing of the recognition of this income, consistent with the ideas and principles set out in IT 2450, a method of accounting which has the effect of allocating, on a reasonable basis, the ultimate profit or loss made by Project trust in relation to the construction over the years taken to complete the construction will be acceptable. However, the conditions and provisos around the reasonability and consistency of the method chosen as set out in IT 2450 would similarly apply in this situation.

There may be capital gains tax implications if the payment is not assessable under sections 6–5 or 15–10.

Payment on completion of design and construction

Another type of contribution involves the government paying for a portion of the design and construction of the asset at the completion of the design and construction phase. These typically commence after either a set amount or set proportion of the progressive construction payments that were financed by the receivables purchase payments have been made.

Consistent with the analysis above in relation to construction payments, these payments would be included in assessable income under sections 6–5 or 15–10.

Early completion payments

In some circumstances the government may agree to pay an amount to which provides an incentive for early completion of the D&C phase. This is an amount that is usually pro-rated depending on the number of days or weeks early the D&C phase was completed.

The early completion payments would be assessable income under section 6–5.

Government lending to enable purchase of securitised licence receivables

The last type of government contribution we see is where the government lends money to Finance co to enable it to finance the receivables purchase payment.

The tax treatment of the government lending to Finance co is the same as the treatment of the D&C and O&M loans.

Buy-back of securitised licence payments

Under some social PPPs, the government and Finance co might agree that, after a few years following the commencement of the O&M phase, the government will purchase a portion of the securitised licence payments, and pay a lump sum to Finance co as consideration for that.

This lump sum payment will in turn be used by Finance co to make an early repayment on the loan to the O&M financiers.

The purchase of the securitised licence payments however will usually be on satisfaction of certain benchmarks for the O&M phase as set out in the project deed.

The price paid for the buy-back may or may not vary depending upon prevailing interest rates, or the need for the government to use the price paid to provide the consortium with an incentive to satisfy certain benchmarks.

As stated above, we will accept that Division 230 will apply to the securitised licence payments and the receivables purchase payments as though they were one financial arrangement.

The presence of the potential right to buy-back the securitised licence payments should generally be disregarded when working out whether the accruals method provided for in Subdivision 230-B applies, and the amount of any accrual. Once there is a buy-back however, there may be additional implications under Division 230.

We will accept that the approach provided for in AASB 139 in relation to partial transfers of financial assets that are a part of a larger financial asset would satisfy the requirements of Division 230, provided this is done consistently.

Broadly, the approach in AASB 139 would firstly compare the carrying amount of the derecognised financial asset with what is received in respect of the buy-back. The extent of any difference would be profit or loss. The effective interest method then continues in relation to the part of the larger financial asset that was not transferred.

Below is a continuation of the example discussed previously, where 20% of the securitised licence receivables were bought-back at end of 2022. $24,323,035 is paid by the government to Finance co – representing the present value of the securitised licence receivables foregone, discounted using the original rate of return of 9.52% that was initially calculated in the financial model.

Year	Original Financial Model				Buy-back gain/loss			Calculating new accrual value		TOFA Accrual Calculation			Comparison of cash-flows to TOFA gain/loss
	Receivables Purchase Payment ($)	Buy-back amount ($)	Securitised License Payments ($)	Net cash-flows ($)	Nominal value of rights disposed ($)	PV of rights disposed using existing discount rate ($)	Gain/loss on disposal ($)	Remaining cash-flows after buy-back ($)	PV of remaining cash-flows ($)	Opening value ($)	TOFA Accrual ($)	Closing value ($)	Net cash-flows ($)	Total TOFA gain/loss ($)
2016	5,000,000		0	-5,000,000						0	0	5,000,000	-5,000,000	0
2017	25,000,000		0	-25,000,000						5,000,000	475,967	30,475,967	-25,000,000	475,967
2018	50,000,000		0	-50,000,000						30,475,967	2,901,112	83,377,080	-50,000,000	2,901,112
2019	20,000,000		0	-20,000,000						83,377,080	7,936,951	111,314,031	-20,000,000	7,936,951
2020	0		7,000,000	7,000,000						111,314,031	10,596,366	114,910,397	7,000,000	10,596,366
2021	0		7,500,000	7,500,000						114,910,397	10,938,717	118,349,114	7,500,000	10,938,717
2022	0	24,323,035	8,000,000	32,323,035	0	0	0			118,349,114	11,266,060	97,292,139	32,323,035	11,266,060
2023	0		6,800,000	6,800,000	1,700,000	1,552,237		6,800,000	6,208,949	97,292,139	9,261,574	99,753,713	6,800,000	9,261,574
2024	0		7,200,000	7,200,000	1,800,000	1,500,689		7,200,000	6,002,758	99,753,713	9,495,900	102,049,612	7,200,000	9,495,900
2025	0		7,600,000	7,600,000	1,900,000	1,446,376		7,600,000	5,785,502	102,049,612	9,714,454	104,164,066	7,600,000	9,714,454
2026	0		8,000,000	8,000,000	2,000,000	1,390,166		8,000,000	5,560,664	104,164,066	9,915,736	106,079,803	8,000,000	9,915,736
2027	0		8,400,000	8,400,000	2,100,000	1,332,800		8,400,000	5,331,202	106,079,803	10,098,102	107,777,905	8,400,000	10,098,102
2028	0		8,800,000	8,800,000	2,200,000	1,274,905		8,800,000	5,099,618	107,777,905	10,259,750	109,237,655	8,800,000	10,259,750
2029	0		9,200,000	9,200,000	2,300,000	1,217,004		9,200,000	4,868,016	109,237,655	10,398,709	110,436,363	9,200,000	10,398,709
2030	0		9,600,000	9,600,000	2,400,000	1,159,537		9,600,000	4,638,147	110,436,363	10,512,818	111,349,181	9,600,000	10,512,818
2031	0		10,000,000	10,000,000	2,500,000	1,102,865		10,000,000	4,411,461	111,349,181	10,599,712	111,948,893	10,000,000	10,599,712
2032	0		10,400,000	10,400,000	2,600,000	1,047,285		10,400,000	4,189,141	111,948,893	10,656,801	112,205,694	10,400,000	10,656,801
2033	0		10,800,000	10,800,000	2,700,000	993,035		10,800,000	3,972,140	112,205,694	10,681,247	112,086,941	10,800,000	10,681,247
2034	0		11,200,000	11,200,000	2,800,000	940,303		11,200,000	3,761,214	112,086,941	10,669,942	111,556,883	11,200,000	10,669,942
2035	0		11,600,000	11,600,000	2,900,000	889,236		11,600,000	3,556,945	111,556,883	10,619,484	110,576,367	11,600,000	10,619,484
2036	0		12,000,000	12,000,000	3,000,000	839,942		12,000,000	3,359,770	110,576,367	10,526,145	109,102,512	12,000,000	10,526,145
2037	0		12,400,000	12,400,000	3,100,000	792,500		12,400,000	3,169,999	109,102,512	10,385,844	107,088,356	12,400,000	10,385,844
2038	0		12,800,000	12,800,000	3,200,000	746,959		12,800,000	2,987,835	107,088,356	10,194,110	104,482,465	12,800,000	10,194,110
2039	0		13,200,000	13,200,000	3,300,000	703,347		13,200,000	2,813,389	104,482,465	9,946,046	101,228,511	13,200,000	9,946,046
2040	0		13,600,000	13,600,000	3,400,000	661,674		13,600,000	2,646,695	101,228,511	9,636,291	97,264,802	13,600,000	9,636,291
2041	0		14,000,000	14,000,000	3,500,000	621,931		14,000,000	2,487,724	97,264,802	9,258,972	92,523,774	14,000,000	9,258,972
2042	0		14,400,000	14,400,000	3,600,000	584,098		14,400,000	2,336,392	92,523,774	8,807,657	86,931,430	14,400,000	8,807,657
2043	0		14,800,000	14,800,000	3,700,000	548,143		14,800,000	2,192,574	86,931,430	8,275,302	80,406,733	14,800,000	8,275,302
2044	0		15,200,000	15,200,000	3,800,000	514,026		15,200,000	2,056,105	80,406,733	7,654,194	72,860,927	15,200,000	7,654,194
2045	0		15,600,000	$15,600,000	3,900,000	481,699		15,600,000	1,926,794	72,860,927	6,935,883	64,196,809	15,600,000	6,935,883
2046	0		16,000,000	$16,000,000	4,000,000	451,107		16,000,000	1,804,430	64,196,809	6,111,115	54,307,925	16,000,000	6,111,115
2047	0		16,400,000	$16,400,000	4,100,000	422,195		16,400,000	1,688,780	54,307,925	5,169,758	43,077,683	16,400,000	5,169,758
2048	0		16,800,000	$16,800,000	4,200,000	394,900		16,800,000	1,579,602	43,077,683	4,100,713	30,378,396	16,800,000	4,100,713
2049	0		17,200,000	$17,200,000	4,300,000	369,161		17,200,000	1,476,644	30,378,396	2,891,824	16,070,220	17,200,000	2,891,824
2050	0		17,600,000	$17,600,000	4,400,000	344,913		17,600,000	1,379,651	16,070,220	1,529,780	0	17,600,000	1,529,780
Totals	100,000,000	24,323,035	364,100,000	$288,423,035	85,400,000	24,323,035	0	341,600,000	97,292,139		288,423,035		288,423,035	288,423,035

In this example, the carrying amount of the financial asset disposed is $24,323,035. Because the amount paid for the buy-back exactly equals the carrying amount, there is no profit or loss, and therefore no assessable income or allowable deductions on the buy-back. The remaining financial asset is subject to an accrual on the remaining cash-flows.

However, there may be scenarios under which the buy-back amount is based on the market value of the rights bought back, and not the carrying amount. An example of where this could happen is where the buy-back amount is $20,000,000 because of changes in market interest rates. In such a situation, there would be a deduction of $4,323,035 in the year of buy-back.

Additionally, there may be incentive payments built into the buy-back price, in order to encourage the consortium to meet certain benchmarks. Say there was an incentive component in the buy-back price of $10,000,000, then this would mean the buy-back amount would be $34,323,035. In such a case, the buy-back amount exceeds the carrying amount of the asset transferred by $10,000,000. This would result in profit, and therefore assessable income of $10,000,000 in the year of the buy-back.

In any case, the remaining financial asset will be subject to an accrual on the remaining cash-flows.

We will accept that the approaches described above in relation to partial transfers of financial assets that are a part of a larger financial asset would satisfy the requirements of Division 230, provided this is done consistently.

GST and PPPs

In determining the particular taxable supplies and creditable acquisitions associated with PPP arrangements, careful consideration needs to be given to the precise terms of the relevant agreement.

General observations about GST and PPPs

The following observations are made concerning GST issues that arise in typical PPP scenarios.

• Where a government agency grants a development lease to allow a developer to undertake development works on the land, the government agency makes a supply of land to the developer by way of lease or licence. The developer also makes a corresponding acquisition of land by way of lease or licence.
• In completing the development works on the land, in accordance with the terms of a development lease arrangement, the developer makes a supply of development services to the government agency. The government agency will make corresponding acquisitions.
• On satisfactory and practical completion of the infrastructure project, the developer may be entitled to the grant of operating rights or a lease over the completed development for a period. The grant of this lease or operating rights will be a supply of rights or real property made by the government. The developer will make a corresponding acquisition.
• The total consideration for the supply of the rights or lease over the land comprises any payment made by the developer for the rights or lease plus a non-monetary component being the development works. Typically, regular rental payments associated with the rights or lease do not form part of the consideration for the supply of the operating rights or grant of lease for a specified period.

Description of PPPs from a GST perspective

Not all arrangements will be the same and the creation of different rights and obligations can result in different GST implications. However, in relation to the infrastructure arrangement outlined in this guide, we note the following:

• it is assumed that the relevant infrastructure project being built or developed by the government is not something that would be an input taxed supply or GST-free supply
• the PPP entities that are party to the arrangements are  
  • registered for GST purposes
  • make supplies in carrying on their enterprises and that those supplies are connected with the indirect tax zone
  • in the case of Finance co, exceeds the financial acquisition threshold.
   

The diagrams identify the cash flows that arise to give effect to a typical arrangement. However in the context of the GST Act it is necessary to identify the relevant supplies being made. To understand the GST consequences of the arrangements entered into the diagrams below are relevant. Note that they represent the same transactions as outlined in the income tax section of this Chapter, but with an emphasis on the elements of the transactions that are pertinent for GST.

The design and construction stage

The steps in the transactions in the design and construction stage pertinent to GST are as follows:

1. The D&C financiers provide a loan to Finance co either entirely up front, or in stages (such as through a facility arrangement).
2. Finance co uses that money to provide a loan to Project trust.
3. Project trust uses that money to fund the design and construction of the infrastructure asset, including payments for the services. These services are provided by the D&C subcontractors to Project trust.
4. Project trust supplies design and construction services of the infrastructure asset to the government.

Operations and maintenance stage

The steps in the transactions in the operations and maintenance stage pertinent to GST are as follows:

5. The government grants a licence to Project trust for the right to access the Crown land the project is to be undertaken on. In consideration the government receives the licence payment.
6. Project trust also supplies ongoing operational and maintenance services to the government.
7. The government assigns their right to receive the licence payment to Finance co.
8. Long term loans or facilities are provided by the O&M financiers to Finance co.
9. Finance co and Project trust are each exchanging rights to make a payment based on Finance co’s financing cost, which is the supply of a derivative.

GST treatment

In summary, the typical GST treatment will be as follows.

• The loans or other financial facilities with the external financiers, or by Finance co to Project trust are input taxed financial supplies by both the relevant lender and borrower.
• The securitisation agreement involving the supply of the right to receive cash payments under an agreement will also be an input taxed financial supply by the government.
• The construction payments are consideration for a taxable supply made by Project trust to the government – being the provision design and construction of the infrastructure. As a result, GST is payable on the consideration for the supply by Project trust, and the government can claim an equal GST credit.
• The supplies by the design and construction subcontractors to Project trust are taxable supplies by those subcontractors. These supplies also constitute a creditable acquisition by Project trust and Project trust is entitled to claim the GST credits.
• The availability payments paid by the government are a consideration for a taxable supply made by Project trust to the government – being the operations and maintenance of the infrastructure. As a result, GST is payable on the consideration for the supply by Project trust, and can be claimed back as a GST credit by the government.
• The licence granted by the government is a taxable supply. Project trust as the recipient makes a creditable acquisition from the government. As a result Project trust will be entitled to claim a GST input tax credit for this acquisition.
• The payment that arises from the equalisation swap represents consideration for an input taxed supply being made by either Finance co or the Project trust.

Funding arrangements between Finance co and the external financiers

When Finance co enters into debt funding arrangements (on either a short or long term basis) with the external financiers, we accept that:

• Finance co is acquiring an interest in a credit arrangement for consideration and is making an input taxed financial supply
• Finance co is not liable to pay GST on this supply and generally has no entitlement to a tax credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).

This means that GST is not payable on the amounts loaned and repaid under these financial supplies (ie the principal), and is not paid on the consideration received for making those loans (ie the interest or charges). As no GST is payable, there are no GST credits to claim in respect of the movements of principal or the interest or charges.

Funding arrangement between Finance co and Project trust

When Finance co enters into the design and construction loan with Project trust, we accept that:

• Finance co is providing an interest in a credit arrangement to Project trust for consideration and is making an input taxed financial supply to Project trust.
• Finance co is not liable to pay GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
• Project trust, in acquiring an interest in a credit arrangement from Finance co for consideration, is also making an input taxed financial supply to Finance co.
• While Project trust is not liable to pay GST on this supply, it may be entitled to a GST credit on things acquired or imported to make the supply. This is due to Project trust being able to enjoy the benefit of either the financial acquisition threshold or ‘borrowings rule’ concessions.
• Where Finance co has a right against Project trust to ‘on-charge’ the costs it incurs (as a principal) in borrowing funds from the external financiers, the payment of this amount by Project trust to Finance co may be a further consideration for financial supplies depending on the documentation (see paragraphs 191–196 of GSTR 2002/2).

Securitisation arrangement between the government and Finance co

When the government enters into the securitisation agreement with Finance co for the securitisation of the licence fee payments that the Project trust is required to make to the government, we accept that:

• The government is not liable to pay GST on this supply and will be entitled to a GST credit for anything acquired or imported to make the supply, where it is able to take advantage of the financial acquisition threshold concession.
• Where the government is not able to access this concession, it will generally not be entitled to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
• Whether the government is entitled to GST credits on the acquisition of the asset being designed and constructed by Project trust depends upon whether the acquisition is found (based on an objective assessment of the facts and surrounding circumstances) to have a sufficient connection to the financial supply that the government makes to Finance co under the terms of the securitisation agreement.
• GSTR 2008/1 provides our views on when an entity acquires or imports anything solely or partly for a creditable purpose. In this case, based on the facts and circumstances described, and the guidance provided by GSTR 2008/1, we consider that the government would be entitled to a GST credit in respect of the asset as the acquisition does not have a sufficient connection to the financial supply that the government makes to Finance co.
• Finance co, in acquiring an interest in a debt from the government for consideration, is also making an input taxed financial supply to the government.
• Finance co is not liable to pay GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
• The assignment of the licence fee income stream does not change the underlying supply that the government is providing to Project trust for these payments. The government retains the obligation to make this supply and remit any GST liability in respect of that supply. So long as the government continues to make the underlying supply, it will be entitled to claim GST credits on its acquisitions to make that supply in much the same manner as before the assignment occurred.

Equalisation swap agreement between Finance co and Project trust

When Finance co and Project trust enter into an equalisation swap under the auspices of the ISDA master agreement the following observations are made:

• Both parties are exchanging rights to make a payment dependent upon the value of Finance co’s financing costs. This constitutes each party making an input taxed financial supply of a derivative to the other for the consideration of the rights exchanged.
• For Finance co, it is not liable for GST on this supply and generally has no entitlement to a GST credit for anything acquired or imported to make the supply (unless the thing acquired or imported qualifies as a reduced credit acquisition).
• For Project trust, it is similarly not liable for GST on this supply, but will be entitled to a GST credit on things acquired or imported to make the supply if it is able to take advantage of the financial acquisition threshold concession.
• No GST consequences arise from either party making a payment to the other in discharge of its equalisation swap obligation.

Attribution rules

The timing of an entity’s GST liabilities and tax credit entitlements is driven by the tax period (either monthly or quarterly) to which that obligation or entitlement is attributed.

In the context of a PPP, where a party to the PPP accounts for GST on a non-cash basis, attribution of a GST liability or a corresponding tax credit entitlement is required in the earliest tax period in which either:

• a monetary payment is received
• some or part of the non-monetary consideration is received
• an invoice is issued.

If the arrangement provides for the payment of rent for lease or the operating rights then the rules in Division 156 of the A New Tax System (Goods and Services Tax) Act 1999 about progressive and periodic supplies will apply to attribute any GST liability on a progressive basis.

Understanding when a GST liability is triggered in these types of arrangements assists the developer to ensure that they have adequate cash flow for the life of the project.

Valuation

PPP arrangements can also raise issues regarding how to determine the appropriate market value of any non-monetary consideration provided.

We accept that parties dealing with each other at arm’s length can use a reasonable valuation method as agreed between them to determine the GST inclusive market value of any non-monetary consideration for supplies arising in the context of a PPP.

Administration matters

We maintain running balance accounts for various taxes. These taxpayer accounts record obligations, payments and credits entitlement under tax laws.

In general where the taxpayer is due a credit entitlement or refund of payment, this amount may be reduced due to ‘offsetting’. Use of the term ‘offsetting’ describes when an amount that we owe to the taxpayer is applied or allocated against another debt owed by the taxpayer, therefore reducing their refund.

See also:

• Reasons for offsetting explained

In circumstances where a taxpayer has no outstanding tax debts or other Commonwealth liabilities to offset, we are required to refund the credit to the taxpayer. However the taxpayer can request that this refund be put against the taxation debt of another taxpayer.

In the context of PPP arrangements circumstances may arise where one party, for example Project trust, following lodgment of an activity statement becomes entitled to a GST refund. In such a scenario Project trust can request that the amount to be refunded be offset against the debt of another taxpayer, such as government.

We are under no obligation to act on the parties’ request. However, such a request may be agreed to, taking into account the following considerations.

• The recipient of the GST credit has no outstanding debt or other Commonwealth liabilities to offset.
• The parties agree to coordinate the lodgment of their respective business activity statements.
• The criteria set out in paragraph 40 of Law Administration Practice Statement PS LA 2011/21 Offsetting of refunds and credits against taxation and other debts, being  
  • the risk associated with granting the request is appropriate and in accordance with the requirements of Law Administration Practice Statement PS LA 2011/6 Risk management in the enforcement of lodgment obligations and other debt collection activities
  • paying the refund in this manner is an efficient, effective, economical and ethical use of public resources (section 15 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act))
  • the offset satisfies our obligation to pay the refund the taxpayer is entitled to under Division 3A of Part IIB to the Taxation Administration Act 1953.
   

In accordance with paragraph 41 of PS LA 2011/21, any such request must:

• be made by the taxpayer or an authorised representative of the entitled taxpayer
• provide a statement by the taxpayer or an authorised representative of the entitled taxpayer that they understand the refundable amount will be offset against a different taxpayer’s tax debt
• state how much of the refundable amount is to be offset against the other taxpayer’s debt
• provide sufficient details to enable identification of the taxpayer and the debt against which the entitled taxpayer wants to have the refundable amount offset.