Variation 1: Use of a progressive securitisation
Under a progressive securitisation model, the 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 by Finance Co, and similarly, paid progressively over the course of the construction period instead of at the end of the construction period.
All the other aspects of this model are materially the same as the standard form model. In this variation, the construction payments are used by Project Trust to finance the licence payments. These securitised licence payments are used by Finance Co to repay third-party financiers.
The result of this approach is that it minimises the extent to which Project Trust incurs deductible capitalised interest expenses without having assessable income to set off against those expenses. This causes Project Trust’s carry-forward loss balance to be reduced.
Consequently, this reduces the adverse consequences for Project Trust should it become limited in its ability to carry-forward losses in the event there is a change of ownership in the D&C phase and the business continuity test cannot be satisfied.
Finance Co income tax implications
Consistent with the standard form model, the TOFA rules 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), and
- the securitised licence payments (similar to a loan gradually being repaid with principal and interest).
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.
Project Trust income tax implications
Consistent with the standard form model, the construction payments are to be included in the assessable income of Project Trust in the year in which they are derived or otherwise treated consistently with the principles set out in Taxation Ruling TR 2018/3 Income tax: treatment of long-term construction contracts. We would expect once an acceptable method has been adopted for Project Trust, it is to be applied consistently to all income years.
Variation 2: Government contribution
As part of a social infrastructure PPP, the government may provide its own contributions. The form these contributions may take, and their tax outcomes, are outlined below.
Cash payment to Project Trust that must be used for certain purposes
The income tax implications are as follows:
- The cash payment is included in assessable income of Project Trust under section 6-5 of ITAA 1997 if it is paid on condition that it be used either
- as part of the D&C of the asset, or
- as part of the O&M of the asset.
- In working out the timing of the recognition of this income, noting the ideas and principles set out in TR 2018/3, 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 TR 2018/3 would similarly apply in this situation.
- We expect you to engage with us if you consider that one or more payments are not assessable income under section 6-5 of ITAA 1997.
Payment to Project Trust on completion of design and construction
The income tax implications are as follows:
- The government may pay for a portion of the design and construction of the asset at the completion of the D&C 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 should be included in assessable income of Project Trust under section 6-5 of ITAA 1997.
Early completion payments to Project Trust
The income tax implications are as follows:
- The government may agree to pay an amount as 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. Early completion payments should be assessable income of Project Trust under section 6-5 of ITAA 1997.
Lending to Finance Co to enable purchase of securitised licence receivables
The income tax implications are as follows:
- The government may lend 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 Loan and the O&M Loan as detailed above.
Buy-back of securitised licence payments
The income tax implications are as follows:
- 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. 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 repurchase 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.
- We will accept that the TOFA rules will apply to the securitised licence payments and the receivables purchase payments as though they were part of the 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 of ITAA 1997 applies, and the amount of any accrual. Once there is a buy-back, however, there may be additional implications under the TOFA rules.