Infrastructure and stapled structures

What is infrastructure?

Infrastructure assets provide essential services to the community and play a critical role in Australia’s economy. These assets include transport, energy, communications and water infrastructure.

Our priority is to ensure the right amount of tax is paid on these investments. We work closely with infrastructure investors, industry advisors and associated bodies to provide guidance, manage risks and maintain confidence in the tax system.

The infrastructure sector has changed significantly in recent years. While traditional assets like roads, ports and utilities remain important, we're seeing strong growth in:

• digital infrastructure, for example data centres, connectivity and cloud services
• renewable energy projects, such as wind and solar generation, and battery storage systems
• social infrastructure, such as social and affordable housing.

About our program of work

The Private capital program is responsible for investments in infrastructure. It's also responsible for investments where a business is split up or fragmented between an asset entity and an operating entity (stapled structures).

A transitional relief election could be made by 30 June 2019 in respect of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Stapled Structures Act). This transitional period ends on 30 June 2026, except for:

• economic infrastructure facilities that made a transitional election or are eligible for the approved economic infrastructure facility exception
• non-economic infrastructure facilities that made a transitional election and their transitional period commenced later, generally because the eligible facility was sufficiently committed to on 27 March 2018 but did not yet exist on 27 March 2018.

Our work seeks to give the community confidence that investments in infrastructure and stapled structures are paying the right amount of tax, particularly once any applicable transitional period has ended.

Our work is aligned with the public and multinational business three-tier model, which helps us understand the tax system in operation and guide our areas of focus for compliance. Our work is primarily centred on the following focus areas:

• domestic tax positions and structures
• characterisation of business activities
• business fragmentation.

Our engagements with you may not be limited to the above focus areas and can cover any focus areas within the three-tier model where applicable.

Whilst the three-tier model covers key drivers of tax performance, there may be instances where potential non-compliance is detected but is not covered by the model. We may choose to investigate these cases even though the matter isn't reflected in the model.

Stapled structures

We're aware that many infrastructure investments use stapled structures. Stapled structures and business fragmentation can also be called cross staple arrangements.

In 2019, as part of the Stapled Structures Act, several measures were introduced to address risks posed by stapled structures and business fragmentation, and to limit access to concessions previously available to foreign investors for passive income. These measures aim to prevent tax avoidance, including through the:

• classification of certain income as non-concessional MIT income, thereby increasing the withholding tax rate to 30%
• modification of the thin capitalisation rules to prevent double gearing structures
• codification and limitation of the sovereign immunity tax exemption
• limitation of the foreign pension fund withholding tax exemptions.

Our approach to infrastructure investments and stapled structures

The private capital program's approach comprises various risk-based reviews that focus on key stages of the investment lifecycle.

Pre-acquisition

When Australian investments require foreign investment approval from the Treasurer, (the decision maker), we support the Treasurer by:

• having a dedicated team that is consulted on foreign investment proposals
• considering the relevant tax risks including the infrastructure and stapled structure/business fragmentation tax risks associated with the proposed transaction
• recommending conditions or requesting further information to mitigate these risks.

For further information, see guidance, note 12 on foreigninvestment.gov.auExternal Link.

Through this approach, we assist the Treasurer in deciding whether an action is contrary to the national interest.

Holding period

During this period, we focus on:

• acting on risks identified in the pre-acquisition lifecycle stage, including the use of offshore interposed entities to avoid interest withholding tax
• monitoring infrastructure assets and investments, including those in the secondary market, their tax compliance and adherence to the integrity rules, including the Non-concessional MIT income rule and concessional cross-staple rent caps
• monitoring excessive shareholder debt and offshore related-party financing for arrangements that may inappropriately avoid withholding tax
• reviewing transitional elections made under the Stapled Structures Act and preparing for the end of transitional relief period (generally ending on 30 June 2026 for 7-year elections where the facility to which the cross staple arrangement relates isn't an economic infrastructure facility)
• monitoring gearing and financing arrangements, especially as some investors may restructure to maintain concessional outcomes
• tailored engagements through early engagement for advice and private rulings, providing public guidance, and supporting the delivery of combined assurance reviews or next actions under the Top 1000 program.

Pre-exit and exit

If we've identified exit-related risks during one of our reviews, we:

• may request to engage with you prior to divestment
• may seek security guarantees to protect Australian tax revenues, if required
• remind acquirers of their obligations under the foreign resident capital gains withholding rules.

You can contact us about your infrastructure investments, email PGPrivateEquity@ato.gov.au.

Published advice and guidance

The following public advice and guidance products may be relevant for you:

• Guidance on the ATO’s position on the taxation of social infrastructure Public Private Partnerships (PPPs)
• Decision impact statement: Victoria Power Networks Pty Ltd v Commissioner of Taxation (published 15 July 2021)
• Thin capitalisation
• Amendments to the Thin Capitalisation rules – ATO's PAG consultation topics and prioritisation
• An overview of the new measure dealing with stapled structures
• Law Companion Ruling LCR 2015/15 Managed Investment Trusts: the non-arm's length income rule in sections 275-605, 275-610 and 275-615 of the Income Tax Assessment Act 1997
• Law Companion Ruling LCR 2020/2 Non-concessional MIT income
• Taxpayer Alert TA 2017/1 Re-characterisation of income from trading businesses
• Taxpayer Alert TA 2020/3 Arrangements involving interposed offshore entities to avoid interest withholding tax.