Australia: Infrastructure early stage tax losses - Welcome reform but issues remain

Last Updated: 17 May 2013
Article by Rhys Jewell

Last month the Federal Government released Exposure Draft (ED) legislation setting out tax loss incentives for "designated infrastructure projects".

The reforms are designed to allay investor concerns about the preservation of tax losses when there is a significant change in the ownership of an infrastructure project.

While the proposals are step in the right direction, the eligibility requirements don't reflect the commercial reality of all projects and will leave some commonly employed structures out in the cold.

The tax loss incentives for infrastructure projects were originally announced in the 2011/12 Federal Budget and, if enacted, they will apply to tax losses incurred in the 2012/2013 tax year onwards.

Additional funding for Infrastructure Australia to implement the measures was allocated in the 2013/14 Budget released on 14 May 2013.

While the ED is largely consistent with Treasury's previous Discussion Paper, there are some notable exceptions, such as consolidated groups (and potentially partnerships) being ineligible for the incentives. Further, some issues remain with the underlying design of the reforms.


The lifecycle of major infrastructure projects generally has two main stages:

  • Construction (greenfield) – characterised by significant capital expenditure and early stage tax losses being quarantined within special purpose entities.
  • Operation (brownfield) – being a mature operational project with established revenue streams and utilisation of the tax losses generated through the construction phase.

The ownership of projects may change between these stages, including as a result of pre-determined sell downs by financiers at the completion of construction, contribution of deferred equity by project partners and, in more extreme circumstances, the sale of underperforming projects.

To encourage investment in projects, impediments to such ownership changes need to be minimised to ensure infrastructure critical to the delivery of services to industry and/or the public is not disrupted. This is particularly important given the main alternative is often a contribution of public funds to the project which may be unpalatable in the current economic and policy environment.

Concern about the preservation of tax losses has been one such impediment to significant changes to the equity of projects and, while the reforms set out in the ED are welcome, some key issues remain.


  • A project must qualify as a "designated infrastructure project" as a precondition to accessing the incentives. A newly established Infrastructure Co-ordinator will be responsible for such designation and will draw from the pool of "ready to proceed" projects (for final designation) on the Infrastructure Priority List published by Infrastructure Australia.
  • Tax losses associated with designated infrastructure projects will be exempted from the current tests for determining the ability to carry forward and utilise early stage tax losses, namely the continuity of ownership test and the same business test (for companies and some listed trusts) or the 50% stake test (for fixed trusts). Significant changes in equity will therefore not result in tax losses being "burnt".
  • The tax losses will be uplifted by the 10 year government bond rate (currently approximately 3.15%). This measure recognises the erosion of the real value of early stage tax losses as a result of the often long lead time before the establishment of the project's income stream.


The issues that remain to be resolved include:

  • Only designated infrastructure projects within the capital expenditure cap for all such projects are eligible. The cap is set at $25 billion and will be assessed on a first-come-first-served basis which is likely to result in early interest from project sponsors.
  • However, it's unclear what will happen to an amount allocated to a project from the cap if that project's designated status is revoked towards the end of the incentive (scheduled for 30 June 2017). The ED does address one of the criticisms of the Treasury Discussion Paper by providing for provisional designation of a project which ought to go some way towards allowing more certain modelling and pricing of projects (taking into account the designation) and therefore encouraging financiers to commit funding.

  • Consolidated groups are not eligible for the incentive. This is a clear departure from the proposals outlined in the Treasury Discussion Paper which would have allowed a project carried on by a head company of a tax consolidated group to be quarantined within a stand alone entity or a separate tax consolidated group (refer to our Corrs in Brief).
  • Further, other commonly employed structures (eg. partnerships) will not easily qualify. It might be concluded that the measure will not reflect the commercial reality of some projects. For projects that do qualify as designated infrastructure projects, greater emphasis will be placed on the ring fencing provisions in project documents.

  • The project entity must satisfy what is being labelled the "sole activity test". That is, it must only engage in activities for the purpose of the designated infrastructure project. On many projects, one of the ways for bidders to enhance value and therefore differentiate themselves from their competitors is to identify commercial opportunities that will ultimately reduce the cost of the project to the public sector. Examples of such opportunities are the utilisation of "air rights", development of land adjacent to the project land, signage rights, retail space etc. Although project entities might be said to only engage in such activities for the purpose of the relevant project, there remains some uncertainty whether they would satisfy the sole activity test as currently drafted.

Legislation to enact the incentives (Tax Laws Amendment (2013 Measures No 3) Bill 2013) is expected to be introduced into Parliament during the winter sittings (scheduled from 14 May 2013 to 27 June 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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