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Taxation Laws Amendment (Infrastructure Borrowings) Amendment Bill 1994

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House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent



. extend the range of projects eligible under the infrastructure bond scheme;

. extend the period for which concessional tax treatment is available for infrastructure bond revenue;

. transfer the administration of the infrastructure bond scheme to the Development Allowance Authority;

. provide for the approval of infrastructure projects prior to the borrowing of funds for their construction; and

. provide an alternative concessional tax treatment for entities that receive interest payments from infrastructure bonds.


Infrastructure provides for the more efficient use of resources, both economic and social. Infrastructure may provide both economic and social benefits, with, for example, the provision of clean water being a benefit for production and society. A countries infrastructure may be seen as the accumulated physical savings of the society. The distinction between economic and social infrastructure largely depends on the return available from the provision of the infrastructure.

Historically, infrastructure in Australia has been provided by governments. Major reasons for this include:

. the large amounts of funds needed for the construction of most infrastructure products;

. the lack of return when infrastructure is provided free to all users;

. the lack of accumulated savings in the Australian economy;

. costs of maintenance exceeding returns when users are charged for infrastructure usage;

. views that infrastructure is a public asset and so should be provided by governments; and

. the lengthy time lag between investment and return where the project is profitable.

Increased involvement by the private sector in the construction and operation of infrastructure projects has been encouraged in recent years and can be characterised by the building and operation of tollways, power stations and communications facilities. In addition to the provision of new infrastructure, the private sector is becoming increasingly involved in the ownership and/or operation

Taxation Laws Amendment (Infrastructure Borrowings) Bill 1994of what was previously government owned and/or operated infrastructure. A desire by governments to encourage competition with government monopolies; to reduce deficits from the sale of government assets; and to remove government from the operation of 'inappropriate' business activities are some of the reasons for the withdrawal of governments from the provision of virtually all major infrastructure projects. An explanation for the growing private sector interest in infrastructure is the increased availability of long term investors, such as superannuation funds, where a delay on the return is not critical as the funds are seeking secure long term investments as well as short term profitability.

Taxation Treatment

In the absence of special provisions, which will be discussed below, ordinary tax rules would apply, with the result that a deduction would be allowed for interest payments on borrowed capital by the owner of the infrastructure. The result is that a deduction may not be available while the project is under development unless they have other income to offset the interest payments against. Interest payments received by the lender of the funds would be assessable income in the year it is received. If no deduction was available to the borrower before the project commenced earning, this has the effect of increasing the borrowing costs to the taxpayer constructing the project relative to a project where income is produced soon after the costs are incurred.

In the One Nation statement of February 1992 a category of infrastructure bonds was announced to encourage greater private participation in the provision of infrastructure. Put simply, infrastructure bonds provide that interest payments are not deductible to the lender of the funds and not assessable to the borrower where the expenditure is for one of the eligible classes of infrastructure borrowing; the borrower is an eligible borrower; and the project is an eligible facility. The altered tax treatment is designed to reduce interest costs to borrowers as lenders are not assessed on interest income. The arrangement may last for a maximum of 10 years. Eligible classes of infrastructure borrowing are:

. direct infrastructure borrowing - borrowing by a company or unit trust for direct expenditure on an eligible facility and/or related facilities where the entity intends to own, use and control the facility for 25 years;

. indirect infrastructure borrowing - borrowing by a company to lend to another for whom the funds will be direct infrastructure borrowing; and

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

An eligible borrower will be a company, or a unit trust taxed as a company, that intends to retain that entity for at least 25 years after the project first produces assessable income. Eligible borrowers are not be members of a partnership, although they may be part of a joint venture.

Eligible infrastructure facilities are:

. a road transport facility in Australia that is to be used for the transport of the public or goods at a charge;

. a seaport facility that is to be used for the transfer of the public or goods from ships for a charge; and

. an electrical generation facility where electricity is generated principally for supply to a power grid.

Proposals for Change

The performance of infrastructure bonds was examined by the Taskforce on Regional Development in its December 1993 report, Developing Australia, A regional Perspective (the Kelty Report). The report concluded that the evidence suggests that the bonds are not working and identified four major problems with the scheme:

. limits on the projects that may be covered by the bonds (i.e. road transport, seaport facilities and electrical generation). The report recommended that the range of projects that may be covered by the bonds be expanded to include any asset normally provided for a public purpose by public investment, including social infrastructure;

. the nature of the concession available - the Taskforce was particularly concerned about the benefit of the current concession to superannuation funds. Such funds pay a maximum tax rate of 15%, so that the exemption from tax is worth 15% to the fund. If the fund invested in fully franked company shares the deduction available from the fully franked shares would be 33%, the maximum company tax rate.The Report suggested that ways of changing this impact be examined, including the provision of a deemed deduction of 33% for super funds;

. the 10 year limit on the concession - the Taskforce thought that this period should be extended, but that an extension may not be necessary depending on other changes; and

. the 25 year own and operate rule - the Taskforce considered this period to be too long and recommended that it be abolished where the project is sold to another private operator. It considered that this rule prevented the development of a market for infrastructure in Australia.

The government was also encouraged to facilitate the development of a private infrastructure bond market in Australia.

Announcement of Changes

Changes to the operation of infrastructure bonds was announced by the government in its May 1994 statement, Working Nation, Policies and Programs. The changes were announced to make it easier to attract private infrastructure, particularly investment from superannuation funds. The reforms are:

. lenders will have the option of a 33% tax rebate (equivalent to a fully franked dividend);

. the facilities that may be the subject of infrastructure bonds will be expanded to include aviation facilities, electricity transmission and distribution, gas transmission facilities, water and sewage treatment projects and other water infrastructure;

. infrastructure projects may be sold during the 25 year use period where the buyer is sufficiently commercially sound; and

. extend the period for which the concession is available to 15 years.


The treatment of infrastructure bonds is currently administered by the Australian Taxation Office, which administers the Income Tax Act 1936 which contains provisions relating to eligibility for concessional tax treatment. The Bill will transfer the administration of the infrastructure bond scheme to the Development Allowance Authority (DAA), which currently administers the development allowance. Infrastructure bonds will be administered in the same way as the development allowance, with proposals being put to the DAA which is to issue a certificate if the proposal satisfies the eligibility criteria. Concessional tax treatment will be available if a certificate is issued. The new administrative arrangements have the advantage of enabling investors to ascertain whether their proposal satisfies the eligibility criteria prior to the issue of the infrastructure bonds. Currently, concessional treatment must be sought after the bonds have been issued.

The explanatory memorandum to the Bill estimates the cost to revenue of these measures to be:

1994 - 5 $nil

1995 - 6 $9 million

1996 - 7 $18 million

1997 - 8 $34 million

Main Provisions

Amendment of the Development Allowance Authority Act 1992 (DAA Act)

Clause 7 will insert a new Chapter 3 into this Act which deals with infrastructure borrowings. Proposed section 98B contains an outline of the scheme contained in the proposed Chapter, which involves an application to the DAA, the DAA determining if the eligibility criteria has been satisfied and issuing a certificate if this is the case, and the availability of the tax concession when the infrastructure bonds are issued.

To be eligible a project must be owned for 25 years after the investment was made (the Bill provides for the transfer of the asset). Difficulties arose in relation to projects on Crown leases as the land on which the project was built could not be owned by the operator of the project. This was rectified by amendments to the Income Tax Assessment Act 1936 in 1992 which provide that the scheme would apply to investments on Crown leases if it could reasonably be expected that the lease would run, be renewed or extended to run, for at least 25 years. Proposed subsection 93D(3) of the DAA Act contains a similar provision so that the ownership qualification will be deemed to have been met in respect of projects on Crown leases if the same criteria are met.

There are three types of infrastructure borrowing:

. direct infrastructure borrowing:

- the borrowed money must be intended to be used for construction of one or more infrastructure facilities (as defined - see below);

- the money must be intended to be spent on the acquisition or construction of a related facility - in which case the borrower must intend to spend part of the money on the infrastructure facility to which the related facility relates; or already own an infrastructure facility that satisfies the intended use qualifications (i.e. they intend to:

: own and control the facility for the production of assessable income; or

: own the facility and after its construction sell it to a person who has a certificate under proposed section 93V);

- the borrower must intend to acquire or construct the related facility within 10 years of constructing the infrastructure facility;

- the money borrowed may be used for the payment of interest only during the construction of the facility; and

- the borrowing will not qualify if it is used to enter into or acquire a lease, acquiring land on which there is a structure that forms part of the infrastructure facility, or on refinancing a loan (proposed section 93F).

. indirect infrastructure borrowing:

- the borrower intends only to use the money to lend to another for expenditure on an infrastructure project for which a certificate is in force (proposed section 93G).

. refinancing infrastructure borrowing:

- the borrower must intend to use the money to repay a direct infrastructure borrowing, an indirect infrastructure borrowing or another infrastructure refinancing borrowing where there is a certificate in force in respect of the project (proposed section 93H).

In all cases, the borrowers must satisfy the borrower requirements (see below) and if the money is not to be used immediately, it is to be invested in a prescribed investment.

Borrower requirements are dealt with in proposed section 93I. The borrower must be incorporated or a corporate limited partnership during the year of the borrowing and not be a trustee; or, where the borrowing relates to direct infrastructure borrowing or the refinancing of direct infrastructure financing, a corporate unit trust or a public trading trust. The entity must also intend to retain this status during the period for which the facility is to be retained. There are restrictions on the alienation of interests where a person, alone or with their associates, controls more than half of the voting rights in the borrowing entity.

There are 7 types of infrastructure facility eligible under the scheme:

. land transport facility - a road, tunnel, bridge or railway line that is to be used to transport the public or their goods at a charge in Australia;

. air transport facility - a runway, associated taxiway or apron that is to be used by aircraft transporting the public or their goods at a charge in Australia;

. seaport facility - a wharf or dock to be used to embark or disembark the public or their goods from seagoing ships at a charge in Australia;

. electricity generation, transmission or distribution facility - a generation facility, transmission facility or distribution facility used principally for the direct or indirect sale to the public. The facility must be constructed on land in Australia;

. gas pipeline facility - a facility for the transport of gas from a processing plant on land in Australia principally for sale to the public;

. water supply facility - a facility consisting of one or more of dams, weirs, reservoirs or tanks relating to public usage where the public is charged; channels or pipelines used to supply water to the public at a charge or to connect storage facilities used to supply the public at a charge or pumps associated with the pipes or channels; or treatment facilities for making water that will be supplied to the public for a charge fit for human consumption;

. sewage or stormwater facility - equipment, excavations or structures used to treat, at a charge to the public, sewage or other waste water to reduce the harm it would cause on disposal or making it suitable for reuse; and/or channels, drains or pipes connected with the above.

A related facility will be one which is reasonably necessary for the infrastructure facility to operate. A number of items are specifically excluded from the category of 'related facility':

. a road, bridge, tunnel or railway built to provide access to an infrastructure facility;

. a dry dock or ship;

. in relation to electrical facilities, a dam or coal mine or facilities for transporting water or fuel to the facility;

. in relation to air transport facilities, hangers and aircraft; or

. in relation to a gas pipeline facility, a gas processing plant or drilling or extraction equipment (proposed section 93M).


Proposed sections 93N to 93ZB deals with the issue, variation, transfer and cancellation of certificates. Applications for certificates must specify the dates by which the applicant intends to borrow the money, spend the money for the appropriate purpose and, for indirect infrastructure borrowings or refinancing borrowings, a copy of the certificate for the facility to be financed (proposed section 93N).

Subject to the exception mentioned below, the DAA must issue a certificate if satisfied that the borrowing is infrastructure borrowing, the dates in the application are reasonable and, for indirect infrastructure borrowing where there is not a certificate in force for the facility, the DAA issues a certificate for the facility at the same time as it issues a certificate for the indirect infrastructure borrowing. A certificate is not to be issued if the borrowing is a direct infrastructure borrowing and the DAA is satisfied that there is a law in force that would restrict other facilities from competing with the infrastructure facility.

A certificate will be issued subject to certain conditions and the applicant must give an undertaking to comply with the conditions (proposed section 93P). The conditions relate to the applicant retaining its eligible structure and the applicant, or person to whom the certificate is transferred, continuing to do the matters listed in the application (proposed section 93R).

The holder of a certificate may apply for the conditions to be varied and the DAA is to approve the changes if satisfied that it would have issued a certificate if the original application had included those conditions (proposed sections 93S and 93T).

Proposed section 93U provides that the holder of a certificate and a person to whom the project is proposed to be transferred may apply to the DAA for the transfer of the certificate. Subject to the proposed transferee agreeing to the conditions attached to the certificate, the DAA is to approve the transfer if satisfied that all of the certificates interests in the facility will be transferred or, if this is not applicable as the facility has not been constructed, all rights and interests in the certificate will pass; and the proposed transferee satisfies the borrower requirements (proposed section 93V).

Limit on revenue loss

Proposed section 93Y provides for regulations to be made fixing the maximum cost to revenue of the issue of certificates in a financial year. Once the limit is reached, no more certificates are to be issued in that year.

A certificate may be cancelled on a number of grounds:

. a failure to provide information;

. providing false or misleading information;

. a breach of a certificate's conditions;

. where the certificate is for indirect infrastructure borrowing or refinancing borrowing, where the certificate for the facility is cancelled; or

. where the certificate is for the refinancing of an indirect infrastructure borrowing, the certificate for the indirect infrastructure borrowing is cancelled (proposed section 93ZB).

Proposed sections 93ZC to 93ZF deal with the provision of information. The DAA may require applicants or certificate holders to provide information or documents; holders of certificates are to provide annual returns to the DAA; and the DAA is to advise the Commissioner of Taxation of the issue, transfer and cancellation of certificates.

Amendments to the Income Tax Assessment Act 1936

Clauses 19 to 26 will amend this Act to remove provisions relating to the approval of infrastructure bonds and to extend the concessional tax treatment available to certificate holders. Proposed section 159GZZZZD will insert a number of definitions into the Act. The exemption period will be 15 years from the beginning of the time of the borrowings or, if the certificate is a refinancing certificate, the period remaining to 15 years from the original borrowing.

Entities that receive interest from an infrastructure bond will be provided with an alternative from not including the income in their assessable income by proposed section 159GZZZZG. Under the alternative, the entity will be able to include the interest payments in their assessable income and claim a rebate of 33% of this amount. This will allow entities with a tax rate of less than 33% (principally superannuation funds) to take full advantage of the benefits available from investing in infrastructure bonds.


1. Taskforce on Regional Development, Developing Australia, A Regional Perspective, Volume 1, pp. 19 20.

Chris Field (06) 2772439

Bills Digest Service 10 August 1994

Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine .the subsequent official status of the Bill.

Commonwealth of Australia 1994

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Published by the Department of the Parliamentary Library, 1994.