Senate

Taxation Laws Amendment (Infrastructure Borrowings) Bill 1994

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Honourable Ralph Willis, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED.

CHAPTER 1

Summary of Proposed Amendments

1.1 From the date the Bill receives Royal Assent, the Development Allowance Authority (DAA) will be responsible for the approvals, management and monitoring functions relating to "infrastructure borrowings". Under the new administrative arrangements, prospective borrowers will need to apply to the DAA for eligibility to issue "infrastructure borrowings". The application will set out details of the proposed borrowing, expenditure and other relevant details.

When the DAA is satisfied that the applicant has met all eligibility criteria, the DAA will issue a certificate in relation to the borrowing.

The DAA may cancel a certificate if the conditions attached to it are breached.

1.2 "Infrastructure borrowings" will be borrowings by:

companies, limited partnerships and unit trusts that are taxed as companies under the Tax Act, which intend to spend the funds borrowed on financing the construction of specified infrastructure facilities they intend to:

-
own, use and control for a period of 25 years from the time the facility becomes income producing;
-
sell upon completion of construction; or
-
own, use and control for some period less than 25 years from the time the facility becomes income producing and then sell.

companies whose sole purpose is to invest in infrastructure borrowings.

1.3. However, infrastructure borrowings will not include borrowings by companies which are:

borrowing in partnership with another person (except for limited partnerships that are taxed as companies); and
government bodies, unless they are, in accordance with certain criteria, deemed to be bodies that operate on a commercial basis.

1.4. The tax preferred treatment on infrastructure borrowings will be for a maximum period of 15 years.

1.5. There will be three kinds of infrastructure borrowing:

direct infrastructure borrowing - this will be a borrowing by a company, limited partnership (that is taxed as a company) or relevant unit trust to spend on constructing an infrastructure facility that it intends will be operated and controlled by the private sector for the purpose of deriving assessable income for a period of at least 25 years;
indirect infrastructure borrowing - this will be a borrowing by a company to lend to another person for whom the borrowing will be a direct infrastructure borrowing;
refinancing infrastructure borrowing - this will be a borrowing to refinance a direct or indirect infrastructure borrowing or a previous refinancing infrastructure borrowing.

1.6. An infrastructure facility will be a:

land transport;
air transport;
seaport;
electricity generation, transmission or distribution;
gas pipeline;
water supply; or
sewage or wastewater
facility in Australia used by the public at a charge.

1.7 The tax effects of infrastructure borrowings on borrowers and investors will be:

interest derived under infrastructure borrowings will be either non-assessable or rebatable (at 33 per cent) to investors;
interest paid on infrastructure borrowings will not be an allowable deduction to borrowers;
any profit of a trading, revenue or capital nature derived on disposal or redemption of any debt instrument that constitutes an infrastructure borrowing will be tax exempt;
any loss of a trading, revenue or capital nature incurred on the disposal or redemption of any debt instrument that constitutes an infrastructure borrowing will not be tax deductible;
expenditure incurred in borrowing to invest in infrastructure borrowings will be tax deductible.

Background to the Legislation

1.8 Certain infrastructure projects with lengthy construction periods may not produce assessable income for some years. Where taxpayers borrow funds to finance the construction of those projects which accumulate tax losses in the early stages of development, they are often unable to access the interest deductions available to them.

1.9 In order to encourage private investment in the construction of certain publicly accessible infrastructure projects, the Government decided to allow companies borrowing to finance the construction of such infrastructure projects to effectively transfer the interest deductions incurred on those borrowings to the providers of the finance. The introduction of this category of borrowings, known as "infrastructure borrowings", was announced in the "One Nation" Statement on 26 February 1992. The provisions in the Tax Act relating to infrastructure borrowings have been administered by the Commissioner of Taxation.

1.10 Due to limited interest in infrastructure borrowings since their introduction, the Government has decided to extend the range of eligible sectors and modify the administrative and tax treatment of infrastructure borrowings to make them more attractive to investors and to facilitate more private sector provision of publicly accessible infrastructure. From the date the Bill receives Royal Assent, the DAA will be responsible for the approvals, management and monitoring functions relating to infrastructure borrowings.


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