The decision to pass on Western Power’s “tax” liability costs arising from developer contributions to developers will significantly affect the development industry and housing affordability in Western Australia.
Following a report by the Economic Regulatory Authority (ERA), it was determined that Western Power could no longer feasibly absorb the assessable income tax costs associated with capital contributions.
Under the ERA “user pays approach”, all applicants that are required to provide gifted assets or capital contributions to Western Power will be charged an additional 13.9% of the value of the contribution to cover Western Power’s liability under the National Tax Equivalents Regime (NTER).
This includes work completed by a third party and gifted to Western Power, such as:
- street lighting;
- pole to pillar;
- new revenue projects;
- built strata;
- network extensions;
- substations; and
- transmission lines.
Under the proposal, Western Power will determine the value of each gifted asset.
It should be noted that this is not a tax in the legal sense. The NTER was established as a means to make government owned entities more commercial. Relevant tax laws are applied notionally to NTER entities as if they were subject to those laws. Each NTER entity is assessed annually as to its income tax equivalent liability and is required to pay instalments of the expected liability to the Treasury.
Each State government has the power to nominate which entities will be on the NTER register and has complete discretion to remove them. So whilst Western Power does have to pay certain liabilities for the assets and capital it is “gifted”, it is not under any taxation legislation.
Applicants should therefore view the proposal as a fee or additional cost, not as a tax.
Consequently, industry groups are anticipating significant cost increases per lot, which will potentially delay projects and affect housing affordability.
The new “tax” was scheduled to come into effect on 1 May 2014 and apply to all new applications. After significant industry backlash, Western Power has delayed the introduction until further notice and is now considering alternative recovery options.
We are concerned that other government entities on the NTER register may also follow Western Powers lead and pass on income liability to developers.