Senate

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 2

Explanation of Proposed Amendments to the Development Allowance Authority Act 1992

Part 1 - Infrastructure Borrowings Criteria

2.1 The proposed amendments to the DAA Act relating to infrastructure borrowings will:

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set out the conditions a borrowing must satisfy to qualify as a tax exempt or rebatable infrastructure borrowing; [Clause 7] and

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provide for the arrangements relating to the DAA administration of infrastructure borrowings. [Clauses 7 to 17]

Infrastructure Borrowings

2.2 An infrastructure borrowing will be a borrowing by a borrower (see later notes) to finance:

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the construction of one or more specified publicly accessible infrastructure facilities in Australia which the company intends will be owned, operated and controlled by the borrower or another qualifying private sector operator for the purpose of deriving assessable income for a period of at least 25 years; or

•

the construction or acquisition of one or more related facilities (see later notes).

2.3 The term "borrowing" is defined broadly and includes bonds, debentures, discounted securities and any other form of indebtedness. A borrowing may be secured or unsecured. [New section 93D]

2.4 There will be three kinds of infrastructure borrowing: [New section 93E]

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direct infrastructure borrowing - a borrowing raised by a company, limited partnership or unit trust that is taxed as a company to spend on constructing infrastructure facilities or on constructing or acquiring related facilities;

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indirect infrastructure borrowing - a borrowing raised by a company to lend under a direct infrastructure borrowing;

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refinancing infrastructure borrowing - a borrowing to refinance a direct or indirect infrastructure borrowing or a previous refinancing infrastructure borrowing.

Borrowers

2.5 A company, limited partnership that is taxed as a company or a corporate unit trust or a public unit trust that is taxed as a company (under Division 6B or 6C of the Tax Act, respectively) will be able to be a borrower under a direct infrastructure borrowing or a refinancing infrastructure borrowing that is related to a direct infrastructure borrowing. [New subparagraph 93I(2)(a)(i)]

2.6 However, only a company will be able to be a borrower of an indirect infrastructure borrowing or a refinancing infrastructure borrowing that is related to an indirect infrastructure borrowing. [New subparagraph 93I(2)(a)(ii)]

2.7 A borrower must intend to retain the same structure (that is, company, limited partnership or unit trust, as the case may be) for the period from the borrowing until 25 years after the infrastructure facility commences to produce assessable income where the borrower intends to own, operate and effectively control the facility for 25 years as in subsection 93K(2). Where the borrower intends to sell the facilities upon completion of construction or sell some time before the end of the 25 year assessable income period, that borrower must intend to retain the same structure for the period from the borrowing until the time the borrower sells the facility to a qualifying purchaser. [New paragraphs 93I(2)(b) and (c)]

2.8 A borrower must also intend that there be no change in the majority ownership of the company, limited partnership or unit trust from the time of the borrowing until:

•

25 years after the infrastructure facility commences to produce assessable income; or

•

the time, that may be less than 25 years, when the borrower sells the facility.

Majority Ownership

2.9 If the borrower is a company listed on a stock exchange and one person controls more than 50 per cent of the voting power in the company, that person must intend not to dispose of his, her or its majority interest in the company until: [New subsection 93I(5)]

•

the 25 year assessable period has expired; or

•

the time, that may be less than 25 years, when the borrower sells the facility.

2.10 If the borrower is an unlisted company, the person, or a group of persons, holding more than 50 per cent of the voting power in the company must intend not to dispose of the majority ownership until: [New subsection 93I(6)]

•

the 25 year assessable period has expired; or

•

the time, that may be less than 25 years, when the borrower sells the facility.

Partnerships

2.11 Companies borrowing in partnership with another person will not be able to use infrastructure borrowings. This provision does not preclude a limited partnership that is taxed as a company or a joint venture that is not a partnership from raising funds under an infrastructure borrowing. (Partnership has its general law meaning.) [New paragraph 93I(2)(d)]

Government Owned Bodies

2.12 Bodies that are government owned will be excluded from raising funds under infrastructure borrowings unless they are deemed to be, in accordance with criteria published in the Gazette by the Minister, operating on a commercial basis. That is, the body is effectively operating as if it were a private sector body. [New paragraph 93I(2)(e) and new subsection 93I(4)]

2.13 A company will be government owned if a government body, defined as the Commonwealth, a State, a Territory or a public authority that is exempt from tax under paragraph 23(d) of the Tax Act, is beneficially entitled to more than 50 per cent of the dividend, voting or return of capital rights. Similarly, a trust is government owned if a government has more than a 50 per cent interest in the income or corpus of the trust. [New subsection 93I(3)]

Direct Infrastructure Borrowing

2.14 To qualify as a direct infrastructure borrowing, the borrowed funds must, at the time of borrowing, be intended to be spent on:

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the construction of facilities for land transport, air transport, seaport, electricity generation, transmission or distribution, gas pipelines, water supply or sewage and wastewater facilities (principal facilities);

•

the construction or acquisition of facilities without which the principal facility could not operate effectively (related facilities); or

•

paying interest on an earlier direct infrastructure borrowing.

If the funds raised by infrastructure borrowings are unable to be spent immediately, those funds may be invested in a "prescribed investment" (see later notes) until they are able to be spent. [New section 93J]

Facility Use or Sale Requirement

2.15 The borrower must also intend that the facility will be owned, operated and effectively controlled by the private sector from the time of the borrowing to at least 25 years from the time the facility starts producing assessable income. In intending this, the borrower must do one of the following: [New section 93K]

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Own, operate and effectively control the use of the facility financed by these borrowings for at least 25 years from the time the facility starts to produce assessable income. [New subsection 93K(2)]

•

Sell all rights, interests and obligations in respect of the facility financed by these borrowings upon completion of construction of the facility or upon the acquisition or construction of related facilities. In this case the purchaser of the facility must operate in a commercial manner and satisfy all criteria relating to the borrower and the operation of the facility. [New subsection 93K(3)]

•

Sell all rights, interests and obligations in respect of the facility financed by these borrowings after that facility has been owned, operated and effectively controlled for some period less than 25 years from the time the facility starts to produce assessable income. In this case the purchaser of the facility must operate in a commercial manner and satisfy all criteria relating to the borrower and the operation of the facility [New subsection 93K(4)]

In any of these cases, if section 51AD or Division 16D of the Tax Act will apply to any property in either the main or related facility, infrastructure borrowings will not be able to be used. Persons who must have an intention not to do anything that will cause section 51AD or Division 16D of the Tax Act to apply to any of the facilities are:

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the person who intends to own, use and effectively control the use of the facility for a period of 25 years from the time the facility becomes income producing [subsection 93K(2) and paragraph 93R(b)];

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the person who intends to own, use and effectively control the use of the facility for a period of less than 25 years from the time the facility becomes income producing [subsection 94K(4) and paragraph 93R(b)];

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the person to whom a certificate is transferred before the facility was used by the person who constructed it, that is, the facility was constructed with the intention of selling to someone else before using it [subsection 93K(3), section 93V and paragraph 93R(c)]; and

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the person to whom a certificate is transferred after the facility was used by the person who constructed it before the period of 25 years from the time the facility became income producing has expired [subsection 93K(4), section 93V and paragraph 93R(c)].

Section 51AD and Division 16D of the Tax Act

2.16 Section 51AD and Division 16D of the Tax Act prevent taxable financiers from obtaining tax benefits related to costs associated with property that is controlled, or the use of which is controlled, by tax exempt bodies. In the absence of section 51AD and Division 16D, financing arrangements could be structured so as to allow the tax exempt controller of the property to transfer these benefits to taxable financiers in return for cheaper finance.

2.17 The infrastructure borrowings measure is intended to encourage genuine private investment in publicly accessible infrastructure, not to facilitate public sector involvement in the construction and financing of infrastructure projects. Section 51AD and Division 16D of the Tax Act ensure that the tax benefits provided through infrastructure borrowings will only be available where property is controlled by, and the benefits and burdens of control belong to, private investors.

Owning the Facility

2.18 To be eligible, a company must own the principal facility (and any related facility) that is to be constructed using infrastructure borrowings. If the land on which a company is constructing a facility is the subject of a Crown lease (see later notes), the company will be treated as owning the facility provided that:

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the lease will not expire for at least 25 years from the day the facility is expected to become income producing; or

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if the lease is due to expire before that time, the company expects, because of law, custom or otherwise, that the lease will be renewed or extended, and that the renewed or extended lease will not expire until a time at least 25 years from the day the facility is expected to become income producing. [New subsection 93D(3)]

2.19 Where an infrastructure facility will be sold upon completion of construction or it will be owned, operated and controlled for some period less than 25 years from the time the facility becomes income producing and then sold, the qualifying purchaser must:

•

where the lease will not expire for at least 25 years from the day the facility first becomes income producing, continue to hold the lease for the whole period on the same terms and conditions as the borrower; or

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where the term of the lease is less than 25 years from the day the facility first becomes income producing, renew or extend the lease and continue to hold the lease throughout the whole of the 25 year period on the same terms and conditions as the borrower. [New subsection 93D(3)]

Crown Lease

2.20 A "Crown lease" is defined to mean a lease granted by the Commonwealth, a State or a Territory or a lease granted by a tax exempt authority of the Commonwealth, a State or a Territory. The term includes leases granted by municipal corporations and other local governing bodies as such bodies have been held to be an emanation or an authority of the relevant State or Territory government: The Municipal Council of Sydney v the Commonwealth (1904) 1 CLR 208 [New section 93D].

2.21 "Crown lease" is defined for the purposes of subsection 93D(3). That subsection treats the holder of a Crown lease of land as the owner of the facilities that are, or are intended to be, a fixture on the land. Thus, a borrower who intends to construct an infrastructure facility on a Crown lease is able to satisfy the requirement that it must intend to own the facilities for a borrowing to be an infrastructure borrowing (new subsections 93K(2), (3) and (4) of the DAA Act).

2.22 This definition of "Crown lease" will extend beyond leases and include easements and other rights, powers or privileges over or in connection with land (such as licences and "rights of way") that are granted, whether by statute or under a contract, by the Commonwealth, a State or a Territory or by a tax exempt authority of the Commonwealth, a State or a Territory.

2.23 The term will also include "sub-interests" in land such as sub-leases and licences in relation to easements. For example, a Commonwealth authority may hold a lease of land granted by a State and a sub-lease of that land granted by the authority would constitute a Crown lease.

2.24 Similarly, a State authority may hold an easement over private lands, for example for the purposes of installing water or gas pipes. A licence or other right in relation to that easement granted by the authority will again constitute a Crown lease.

Using and Controlling the Facility

2.25 In addition to the intention that the borrower or another qualifying private sector operator will own, operate and derive assessable income from public use of the facility for at least 25 years in total, the company must also intend, in the course of deriving the assessable income, to effectively control the use of the facility. A company that intends to derive assessable income by leasing the facility cannot use infrastructure borrowings to finance the facility.

Owner to have Effective Control

2.26 It is not enough that the company constructing the facility intends to own and use the facility. It must also effectively control use of the facility. A company will be considered to effectively control a facility if it either operates the facility on a day-to-day basis through its employees or agents, or has such an immediate supervisory role that enables it to direct others in that day-to-day operation.

Spending on Related Facilities

2.27 Borrowings will be able to be spent on a related facility if the borrower:

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will be spending some of the money on an infrastructure facility;

•

intends to either:

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own, operate, effectively control and derive assessable income from the principal facility for 25 years,

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sell the principal facility to a qualifying purchaser upon completion of construction of that facility, or

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own, operate, effectively control and derive assessable income from the principal facility for a period less than 25 years and then sell to a qualifying borrower; and intends to begin constructing or acquiring the related facility no later than 15 years after:

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construction commenced on the principal facility; or

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the principal facility was acquired.

[New subsection 93J(2)]

Interest During Construction

2.28 Interest incurred on funds raised by infrastructure borrowings to finance construction is considered to be money spent on the construction of the facility. Money raised under direct infrastructure borrowings will be able to be spent on paying interest on an earlier direct infrastructure borrowing where the interest:

•

accrues during the construction period; and

•

is paid during the construction period. [New subsection 93J(3)]

Prescribed Investments

2.29 Infrastructure borrowings not immediately spent must be invested in a "prescribed investment". A "prescribed investment" means an investment of a kind prescribed by regulations as determined by the Minister. Prescribed investments will only cover the short-term 'parking' of money and, therefore, more liquid investments rather than longer term investments. [New section 93D and paragraph 93J(1)(b)]

Exclusions

2.30 An infrastructure borrowing will not be able to be spent on:

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leasing;

•

acquiring a partly constructed facility; or

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refinancing a loan that is not an infrastructure borrowing.

[New subsection 93J(4)]

2.31 However, the funds raised through infrastructure borrowings will be able to be spent on acquiring the land on which the facility is to be constructed, except where there is an existing building or structure that will form part of the infrastructure facility or the related facility concerned.

Indirect Infrastructure Borrowing

2.32 A company that is established for the special purpose of acquiring infrastructure borrowing securities will be able to undertake infrastructure borrowings to finance the acquisition of such securities. These special purpose companies will be able to pool funds for investing in infrastructure borrowings in eligible facilities being constructed by different bodies. [New section 93G]

2.33 The whole of the monies raised by a borrower in an indirect infrastructure borrowing must be invested in direct or refinancing infrastructure borrowings.

Refinancing Infrastructure Borrowing

2.34 Infrastructure borrowings will not be able to be used to repay existing debt other than as specifically permitted. The funds are to be used to finance new work on constructing the facility. However, a borrowing to repay the debt due under an existing infrastructure borrowing, that is, a direct, indirect or refinancing borrowing, within 15 years of the initial borrowings will qualify as an infrastructure borrowing. [New section 93H]

Infrastructure Facilities

2.35 An infrastructure facility is a land transport, air transport, seaport, electricity generation, transmission or distribution, gas pipeline, water supply, sewage or waste water facility in Australia that the public will be charged a fee to use. Facilities that are functionally related to these facilities will be treated as being part of the facility. [New subsection 93L]

2.36 There are seven basic kinds of infrastructure facilities. These are:

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land transport;

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air transport;

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seaport;

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electricity generation, transmission or distribution;

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gas pipeline;

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water supply; and

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sewage or wastewater.

2.37 A further kind of facility is a related facility. This is a facility in Australia which is reasonably necessary for the infrastructure facility to be able to operate in the intended manner. (See earlier notes on "related facilities".) [New section 93M]

Land Transport Facilities

2.38 Land transport facilities will be roads, railways, tunnels and bridges in Australia that are used by the public for a fee for the transport of persons or goods. [New subsection 93L(2)]

2.39 Facilities related to a land transport facility will include plant, buildings and other equipment needed to operate and maintain the road or railway, such as rolling stock, buildings from which staff carry out their duties, storage facilities and railway stations.

2.40. A land transport facility that services a specific project, such as a mine, is not used for the public carriage of goods and passengers and will not be able to be financed by infrastructure borrowings. This will be the case whether the taxpayer operates the specific project or provides the land transport facility to another person for a fee.

2.41 Expenditure on upgrading an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

Air Transport Facilities

2.42 An air transport facility will be a runway and any associated taxiway or runway apron area in Australia used by the public to facilitate the carriage or transfer of air cargo or passengers for a fee. Recreational and specific use air transport facilities (for example, flight training schools, heliports or helipads used for joy flights) will not be eligible facilities. [New subsection 93L(3)]

2.43 Related facilities would be buildings and plant necessary for the operation of an airport; including terminal buildings, buildings from which staff carry out their duties, storage facilities and other supporting infrastructure (such as aviation fuel pipelines and water and sprinkler facilities relating to normal airport safety requirements). Specific purpose equipment used for unloading cargo or passengers at the airport (such as mobile airstairs) will also be related facilities. However, general purpose motor vehicles for unloading cargo or passengers will not be related facilities.

2.44 An aviation facility that services a specific project (that is, not for public carriage) will not be able to be financed through infrastructure borrowings. This will be the case whether the borrower operates the specific project or provides the aviation facilities to another person for a fee.

2.45 Expenditure on upgrading an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

2.46 Aeroplanes, gliders and similar aircraft or facilities designed for the storage, repair or maintenance of aircraft (such as hangars) will not be related facilities. [New subsection 93M(6)]

Seaport Facilities

2.47 A seaport facility will be a wharf or dock in Australia used by the public to facilitate the carriage or transfer of sea cargo or passengers for a fee. Recreational and specific use seaport facilities (such as boat ramps and marinas) will not be eligible facilities. Related facilities will include cranes and passenger terminals. [New subsection 93L(4)]

2.48 A seaport that services a specific project, such as a mine, is not used for the public carriage of sea cargo and passengers and will not be able to be financed by infrastructure borrowings. This will be the case whether the borrower operates the specific project or provides the seaport facilities to another person for a fee.

2.49 Expenditure on the upgrading of a facility, including a facility that is not new, such as to increase its capacity, and on the upgrading of any of the above items will be eligible. Maintenance and repair costs will not be eligible.

2.50 Ships, barges, tugs and similar vessels or facilities designed for their construction or repair and maintenance (such as dry docks) will not be related facilities. [New subsection 93M(4)]

Electricity Generation, Transmission or Distribution Facilities

2.51 An electricity generation, transmission or distribution facility will be a facility that generates, transmits or distributes electricity principally for sale to the public. An eligible electricity facility will be any one, or combination of two or more, of these types of facilities. The electricity supplied must be sold to the public either directly by the operator of the facility or indirectly through other persons or operators. [New subsection 93L(5)]

2.52 The construction costs of the power station, transmission lines, transformers, substations and those buildings directly related and essential to the operation of a generation, transmission or distribution facility will be eligible.

2. 53 To be eligible an electricity generation, transmission or distribution facility must not operate in an environment where competition from third parties is restricted or prevented (see later notes). [New subsection 93O(2)]

2.54 A facility is not eligible where it generates or supplies electricity primarily for a specific project and merely sells excess production (that is, less than 50 per cent) to the public. In this case, the majority of the electricity is not supplied to the public. Electricity generation, transmission or distribution facilities which sell, over the life of the facility, at least 50 per cent of the electricity generated or supplied to the public will be eligible electricity facilities (refer paragraph 2.77).

2.55 Expenditure on the upgrading of an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

2.56 The energy source of the power station, such as a dam or coal mine, and the cost of transporting the fuel or water for generating the electricity will not be a related facility. [New subsection 93M(5)]

Gas Pipeline Facilities

2.57 A gas pipeline facility will be a pipeline that is used to transport gas from a processing plant on land in Australia principally for sale to the public in Australia. Only gas pipeline facilities that transport gases which liquefy under pressure (including natural gas, ethane and LPG) will be eligible. The supply of gas to the public for a fee can be either directly by the operator of the gas pipeline facility or indirectly through other persons. [New subsection 93L(6)]

2.58 The cost of constructing the pipeline and assets directly related and essential to the provision of transmission services (such as compressor station assets) will be eligible.

2.59 To be eligible a gas pipeline facility must not operate in an environment where competition from third parties is restricted or prevented (see later notes). [New subsection 93O(2)]

2.60 A facility is not eligible where it transports gas primarily for a specific project and merely sells excess production (that is, less than 50 per cent) to the public. In this case, the majority of the gas is not supplied to the public. A gas pipeline facility which sells, over the life of the facility, at least 50 per cent of the gas supplied to the public will be an eligible gas pipeline facility (refer paragraph 2.77).

2.61 Expenditure on the upgrading of an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

2.62 A gas processing plant and any drilling, extraction, processing or other plant and equipment used in obtaining gas, processing it or transporting it to the processing plant will not be a related facility. [New subsection 93M(7)]

Water Supply Facilities

2.63 A water supply facility will be any one, or combination of two or more, of the following: [New subsection 93L(7)]

•

dams, weirs, reservoirs, tanks and related headworks which serve the purpose of storing water and regulating water flows for public use (that is, which supply a public water distribution or irrigation system);

•

water distribution and drainage systems, either open channels or closed pipelines, which:

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convey water to the point of use by the public (this includes general water supply, irrigation and reticulation), or

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transport water from one storage to another storage facility from which it will be supplied to the public;

•

pumps and pumping stations which assist in the movement of water between storages and through channels and pipelines;

•

water treatment facilities (equipment and structures) used for processing water and upgrading its quality such that it is fit for human consumption (that is, potable) as defined by the relevant authorities (such as the National Health and Medical Research Council of Australia); and

•

bores drilled for the purpose of providing water for public consumption, or other use by the public, at a charge to them, including the pumping equipment and associated structures used to extract bore water and for pumping the water along channels or pipelines.

All eligible water supply facilities must be used directly or indirectly by the public for a fee.

2.64 Related facilities will include plant, buildings and other equipment needed to operate and maintain the water facilities, buildings from which staff carry out their duties and storage facilities.

2.65 Those water supply facilities used for a specific project will not be eligible. This will be the case whether the borrower operates the specific project or provides the service to the operator of the specific project for a fee.

2.66 Expenditure on the upgrading of an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

2.67 Pools, ponds, fountains and bottled drink manufacturing and supply will not be water supply facilities or related facilities.

Sewage and Wastewater Facilities

2.68 A sewage or waste water facility will be a facility that has the purpose of treating used water (including sewage water) to improve its quality to allow its safe disposal to the natural environment or recycling for use for some other purpose. [New subsection 93L(8)]

2.69 The construction costs of the equipment, excavations and structures used for treating sewage and waste water in this way are eligible. Water drainage systems, either drains, channels or pipelines, which carry bulk waste water (that is, sewage water) produced by the public to or from these equipment or structures for disposal and appropriate treatment are also eligible.

2.70 Related facilities will include plant, buildings and other equipment needed to operate and maintain the water or sewerage treatment facilities, buildings from which staff carry out their duties and storage facilities.

2.71 A water, sewage or waste water facility that services a specific project (that is, is not for public use) will not be able to be financed through infrastructure borrowings. This will be the case whether the taxpayer operates the specific project or provides the treatment facilities to another person for a fee.

2.72 Expenditure on upgrading an eligible facility, including a facility that is not new, so as to increase its capacity, will be eligible. Maintenance and repair costs will not be eligible.

2.73 Private use septic tanks will not be sewage and waste water facilities or related facilities.

Related Facilities

2.74 If other facilities are necessary for an infrastructure facility to function properly (for example, a railway station or a crane to unload cargo at a seaport) the borrowings will also be able to be used to finance the construction or acquisition of these related facilities. The test is whether the facility is related to the principal facility. Facilities that are related to the "related facility" will not be able to be financed by the infrastructure borrowing. [New subsections 93M(1) and (2)]

2.75 In the case of "stations or passenger or freight terminals" in paragraph 93M(2)(d), those terminals or stations servicing one or more eligible facilities (that is, mixed modal terminals) will be related facilities.

2.76 An access road will not be a land transport or related facility. However, a road that is part of a facility will not be an access road. For example, if a road is part of a port facility it will not be an access road. [New subsection 93M(3)]

Public to Pay to use the Facility

2.77 The owner is to derive income from the public being charged a fee to use the facility. In the case of a water supply, or sewage or waste water facility, the public may be charged indirectly through a third party provided that the charge is directly related to usage.

2.78 If an arrangement is entered into between the owner of a facility and a person who is to be the sole or major user, or purchaser of the output, of a facility, under which the user (or purchaser) pays a fixed amount that is not based on actual usage or output of the facility, the facility will not be a public infrastructure facility.

2.79 If it is likely that the public will be a minor user of the facility (that is, less than 50 per cent), it will not be an infrastructure facility.

Laws Restricting Competition

2.80 If at the time the DAA considers issuing a certificate, there is a law in force which will prohibit or restrict the sale or use of a product or service in competition with the product or service provided by the infrastructure facility, that infrastructure facility will not be allowed to be financed through infrastructure borrowings (see later notes). [New subsection 93O(2)]

Principal Use of a Facility

2.81 The electricity or gas generated and/or transported by an electricity generation, transmission or distribution facility, or a gas pipeline facility must be principally for the sale to the public in Australia. To be "principally" sold to the public, an infrastructure facility must sell 50 per cent or more of its product or service to the public over the life of that infrastructure facility. The onus will be on the borrower to demonstrate clearly that the facility or its product is principally for public use.

Where a facility is "principally" used by the public from the outset it will be eligible.

However, if the facility is not used "principally" by the public from its first use, the borrower will need to demonstrate a compelling case that, over the life of the facility, at least 50 per cent of the product or service will be sold to the public.

Tax Effects of Infrastructure Borrowings

2.82 A borrowing will only qualify as an infrastructure borrowing for a period of 15 years from the day the first tranche of the borrowing is drawn down or debt instruments, such as bonds, are issued. This 15 year period is referred to as the "exemption period". [New section 159GZZZZD of the Tax Act]

2.83 If the loan is for a period in excess of 15 years, it will only be an infrastructure borrowing (and qualify for the concessional treatment) until the fifteenth anniversary of the borrowing. After that it will be taxed on the same basis as an ordinary fund raising.

Interest

2.84 Interest and amounts in the nature of interest received by investors derived from infrastructure borrowings will be either:

•

exempt from income tax; or

•

rebatable at a rate of 33 per cent of the amount received by the investor. (see later notes)

Part 2 - DAA Administrative Arrangements

Issue, Variation and Transfer of Certificates

2.85 The requirements for applications to issue infrastructure borrowings are as follows: [New section 93N]

•

A person who proposes to borrow money, where the person considers the borrowing to be an infrastructure borrowing, must apply to the DAA for a certificate in relation to the borrowing.

•

An application must contain sufficient details to enable the DAA to decide whether the borrowing is an infrastructure borrowing.

•

The application must specify dates by which a person intends to borrow the money.

-

In the case of a direct infrastructure borrowing, the application must specify the date by which the person intends to spend the money in constructing or acquiring the facility concerned, and dates by which specified stages in the construction of the proposed facility will be completed. [New paragraph 93N(3)(b)]

-

In the case of an indirect infrastructure borrowing, the application must specify the date by which the person intends to lend the borrowed money. [New paragraph 93N(3)(c)]

-

In the case of a refinancing infrastructure borrowing, the application must specify the date by which the person intends to use the borrowed money to repay the other infrastructure borrowing. [New paragraph 93N(3)(d)]

•

There is an additional requirement in relation to indirect infrastructure borrowings. The application for an indirect infrastructure borrowing must be accompanied by a copy of the certificate in relation to the other borrowing, or an application for such a certificate in relation to the other borrowing. [New subsection 93N(4)]

•

There is also an additional requirement for refinancing infrastructure borrowings, that the application must be accompanied by a copy of the certificate in relation to the other borrowing. [New subsection 93N(5)]

Criteria for Issuing a Certificate

2.86 Before issuing a certificate, the DAA must be satisfied that:

•

the proposed borrowing is an infrastructure borrowing; and

•

the dates specified in the application are reasonable.

In the case of an indirect infrastructure borrowing where a certificate is not in force in relation to the other borrowing, the DAA must issue a certificate for that borrowing at the same time as it issues the certificate in relation to the indirect infrastructure borrowing. [New section 93O]

Laws Restricting Competition

2.87 In the case of a direct infrastructure borrowing, the DAA must not issue a certificate if at that time there is a law in force which the DAA considers will prohibit or restrict the sale or use of the product or service in competition with the product or service provided by the infrastructure facility. [New subsection 93O(2)]

Undertaking by the Applicant

2.88 When the DAA is satisfied that the applicant has met all the criteria for the issue of a certificate, the DAA must request the applicant to give an undertaking that, if the certificate is issued, the applicant will comply with all conditions applying to the certificate. [New section 93P]

•

The undertaking must be on an approved form and be signed by the applicant where the applicant is a natural person. In any other case, the undertaking must be signed by the Chairperson of the Board of a company, or for non-companies, another suitable natural person. [New subsection 93P(2)]

•

The DAA will not issue a certificate until the undertaking is received. [New subsection 93P(3)]

Form of Certificate

2.89 If the DAA grants an application for a certificate, the certificate must be in the approved form and must be in the name of the applicant. The certificate must also contain details of the borrowing of money to which it relates and state the type of infrastructure borrowing (that is, direct infrastructure borrowing, indirect infrastructure borrowing or refinancing infrastructure borrowing). [New section 93Q(1)]

Cancellation of Certificate

2.90 The certificate may not be varied or revoked, but may be cancelled in accordance with Part 3 of Chapter 3 of the DAA Act (see later notes). The certificate will remain in force at all times until it is cancelled. [New subsection 93Q(2)]

Conditions Applying to the Certificate

2.91 Certain conditions apply to a certificate once it has been issued. The applicant must agree to those conditions before a certificate will be issued. The conditions are that: [New section 93R]

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the holder of the certificate will continue to be an incorporated body or trust throughout the 25 year assessable use, or lesser, period as mentioned in paragraphs 93I(2)(b) or (c).

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the holder will do, by the dates specified (if any) in the application, all the things that were specified in the application as things the applicant intended to do in relation to:

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the borrowing;

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the spending or lending of the borrowed money;

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the construction or acquisition of any facility;

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the use of any facility;

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any transfer of the certificate holder's rights, interests and obligations in respect of any facility; and

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any other matter.

the certificate holder will only invest the borrowed money, until it is spent or used as specified in the application, in a manner prescribed by the regulations;

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the certificate holder will not do anything that would cause section 51AD or Division 16D of the Tax Act to apply to any facility;

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the certificate holder will keep proper records detailing all its dealings with the borrowed moneys and the doing of all other things specified in the application, such as the things done in constructing the facility.

Application and Criteria for Variation of Conditions Applying to a Certificate

2.92 A certificate holder may apply to the DAA for variation of the conditions applying to the certificate. [New section 93S]

2.93 Following receipt of an application to vary the conditions applying to a certificate, the DAA must, in writing, vary the conditions if, and only if, the DAA is satisfied that: [New section 93T]

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it would still have issued a certificate if the things specified in the application for issue of the certificate had originally been as proposed to be varied; and

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it is reasonable to vary the conditions.

Transfer of a Certificate

2.94 If the holder of a certificate proposes to transfer the certificate to another person, the holder and the other person may apply to the DAA for the transfer of the certificate on a specified date. [New section 93U]

2.95 Provided that certain criteria are met, the DAA may transfer a certificate: [New section 93V]

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if there is a requirement in a condition applying to a certificate, for the holder to transfer to another person all of the holder's rights, interests and obligations in relation to facilities, as a result of subsections 93K(3) and (4), those facilities will be transferred to the transferee by the specified date; or

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if there is no such requirement, the rights, interests and obligations of the certificate holder in relation to the spending or other allowable use of the borrowed money, and in relation to the acquisition, construction and use of the facilities covered by the conditions applying to the certificate will be transferred to the transferee by the specified date.

The other criteria which must be met before the DAA may transfer the certificate are as follows: the rights, interests and obligations will not be transferred to the transferee in partnership with anyone else; and the borrower requirements (section 93I) would be satisfied by the transferee if the transferee had been the person who proposed to borrow the money, and the transferee will satisfy so much of the 25 year assessable use period that occurs after the specified date; and the transferee intends to comply with the conditions applying to the certificate, if the transfer is approved. Provisions Relating to Applications for the Issue, Variation or Transfer of a Certificate

2.96 An application for issue, variation or transfer of a certificate must be made in writing to the DAA in the approved form and include such information as required by the DAA. The application must also be accompanied by any report or other document required by the form. An application, accompanying report or related document is to be signed by the Chairperson of the Board of a company, or for non-companies, as specified in the form. [New section 93X]

Ability to Refuse to Consider an Application

2.97 The DAA may refuse to consider an application unless an applicant complies with a request for information. [New subsection 93X(5)]

The DAA's Decision on an Application

2.98 The DAA, after considering the application, must either grant or refuse the application. The DAA is required to advise the applicant in writing of the outcome. If an application is refused, the DAA must set out the reasons for refusal in the written notice. [New subsections 93X(7), (8) and (9)]

Limits on the Costs of Borrowings to the Government

2.99 Details of the cap on the cost to Commonwealth revenue of infrastructure borrowings will be set out in regulations. A regulation will specify an amount as the intended maximum cost to the Commonwealth for the financial year of the taxation consequences of the issue of certificates. A regulation may be made either before or during a financial year to which it will apply. To ensure this amount is not exceeded, the Minister may direct the DAA in writing not to accept applications during a specified period. The DAA must not accept an application if to do so would contravene such a direction. [New section 93Y]

Cancellation of Certificates

Cancellation or Termination: Failure to Comply with a Request to Give Information or Provide a Report

2.100 The DAA may cancel or terminate a certificate if a certificate holder fails to comply with a request for information made under Part 4 of Chapter 3 of the DAA Act. [New section 93Z]

Cancellation: False or Misleading Statements

2.101 The DAA may cancel in writing a certificate if a certificate holder provides the DAA or a Department officer with false or misleading information or knowingly provides a false or misleading document. [New subsections 93ZA(1) to (4)]

2.102 In providing the DAA with a document: an incorporated body is taken to know anything known by any of its directors or employees; a corporate limited partnership is taken to know anything known by a partner (if the partner is a natural person) or by any of the directors or employees of the partner, if the partner is an incorporated body; and a natural person is taken to know anything known by an employee of the natural person. [New subsection 93ZA(5)]

Cancellation: Contravention of Conditions Applying to Certificate

2.103 If the DAA is satisfied that the certificate holder has not complied with conditions applying to a certificate, it must cancel the certificate in writing. If the DAA cancels a certificate for a direct infrastructure borrowing, it must also cancel (at the same time) any certificate issued for an indirect or refinancing infrastructure borrowing that relates to that direct infrastructure borrowing. [New section 93ZB]

Provision of Information to the DAA

Request to Provide Information or Produce Documents

2.104 A person who is an applicant for a certificate or a certificate holder must provide the DAA with information and/or documentation at the DAA's written request. The information and/or documents must be supplied within the time and in the manner specified in the request. [New section 93ZC]

Dealing with Documents and Information Produced

2.105 In handling documents provided at its written request, the DAA, or an authorised officer of the Department, may inspect, take extracts from or retain copies of those documents. [New section 93ZD]

Certificate Holder to Provide Annual Progress Reports

2.106 A certificate holder must provide the DAA with written annual progress reports. The first report is required within one month after the end of the first 12 month period after the issue of the certificate. Subsequent reports are required annually, within one month after the end of each 12 month period after the first reporting year. The reports must provide information on the progress during the reporting year concerned in doing the things specified in the conditions applying to the certificate (such as spending the borrowed money and constructing the facility). [New section 93ZE] The reports by the certificate holder may simply specify that the conditions applying to the certificate have been satisfied and/or there has been no variation from the details specified in the certificate holder's application.

2.107 The DAA's commercial-in-confidence arrangements will be extended to cover information relating to infrastructure borrowings supplied to the DAA. Prospective infrastructure borrowers will be able to apply for protection of commercial-in-confidence information.

Provision of Information by the DAA to the Commissioner of Taxation

2.108 The DAA must advise the Commissioner of Taxation in writing of any action taken under this Act which impacts on the operation of Division 16L of Part III of the Tax Act which sets out the relevant tax provisions for the operation of infrastructure borrowings. For example, the DAA must advise the Commissioner of Taxation of the issuing of certificates. [New section 93ZF]

The DAA's Power to Facilitate Issue of a Certificate

2.109 The DAA, with an applicant's consent, may notify a third party that its action or inaction is preventing the DAA from issuing a certificate to the applicant. This provision allows the Authority to undertake a project facilitation role. [New section 93ZG]

Reporting Requirements of the DAA

Quarterly Reports by DAA

2.110 Section 115 of the DAA Act has provided for the DAA to provide the Minister with Quarterly Reports. This section will be amended to broaden its scope to include the requirement that the DAA report on the number and type of certificates granted for infrastructure borrowings in each quarter.

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Under Chapter 2 of the DAA Act, which relates to the development allowance, the DAA will be required to report on the number and type of registrations for the development allowance granted in a quarter.

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The DAA will be required to report on the number and type of certificates granted for infrastructure borrowings in a quarter under Chapter 3 of the DAA Act.