On 30 October 2015, the Australian Taxation Office (ATO) released an Australian tax framework for, potentially amongst other things, Public Private Partnership (PPP) structures commonly used for social infrastructure assets. The ATO has indicated that it wants to work collaboratively with industry and Government to ensure that the tax system is administered in a sensible and pragmatic way, and minimise compliance costs.
The ATO intends for this framework to be a living document which will be updated as new transactions emerge. Specifically, the framework outlines the following:
- the tax implications associated with the construction of social infrastructure using the 'securitised licence' PPP model, and
- how investors in PPPs will themselves be taxed, including what happens when an investor exits.
It is intended that the framework will be expanded in the future to cover the privatisation of Government assets and the treatment of investors who invest into those privatised assets.
While the framework clarifies a number of technical issues and provides useful guidance to taxpayers, it remains to be seen whether this will lead to reduced bid costs.
The ATO is keenly aware of the importance to the Australian economy of building new infrastructure and not inhibiting capital recycling through privatisations. They are also conscious of the costs incurred by bidders bidding for new projects, and want to be seen to be playing an integral role in facilitating the continuation and expansion of the infrastructure sector.
PwC commends the ATO for providing industry with a framework outlining the Australian income tax and goods and services tax (GST) implications of standard form PPPs. The framework is, in large part, based on private binding rulings obtained on earlier PPP transactions.
The framework covers the tax treatment of lump sum and progressive securitisations, including the treatment of Government contributions. The framework also clarifies a number of technical issues, including the application of the taxation of financial arrangements (TOFA) provisions to the securitisation of licence payments, the non-application of the general anti-avoidance rule in Part IVA (although note the disclaimers) and confirmation that “Project Co” should not be ‘land rich’ for non-resident capital gains tax (CGT) purposes. In addition, the framework provides some useful numerical examples.
The framework is only intended as a guide to how the tax law (in its current form) will apply to PPPs and, unlike public rulings or tax determinations, is not expected to bind the ATO to a particular view of the law. However, if the private sector parties have transactions similar to those outlined in the framework, it is stated that the ATO would expect to follow the views outlined in the framework. This would apply both in the context of seeking a private ruling and in a compliance situation. Accordingly, although the framework is intended to reduce bid costs through reducing the requirement for obtaining rulings, investors may find that banks still require the same rulings from the ATO. It will be interesting to see how this develops.
PwC sees this as a positive step forward by the ATO. Following extensive engagement with industry, government and advisors, it is clear that the ATO is motivated to simplify the way the tax system is administered and is showing positive signs to continually work with such stakeholders in the near future. Nevertheless, it remains to be seen whether the framework will ultimately lead to reduced bid costs.
Whilst PwC welcomes these developments, we note that there are still a number of areas where the tax law could be improved to encourage further investment in nation building infrastructure e.g. expanding the definition of "eligible investment business" to include the activities carried on by “Project Co” so that the trust can access the Managed Investment Trust concessions.