The Commonwealth Government, as part of its 2011-12 Budget, announced its intention to "introduce a new tax incentive designed to remove impediments in the tax system that discourage private investment in infrastructure projects."


Partnerships between the government and the private sector are a well recognised option for infrastructure projects in Australia. However, in some respects the tax treatment of infrastructure projects has become a disincentive to private investment. The proposed changes are intended to eliminate particular concerns regarding the ability of investors to obtain the full benefit of early stage tax deductions.

Infrastructure projects involve significant up-front costs (generally during the construction phase) which give rise to early stage tax deductions and carried forward tax losses. Currently, the value of such tax losses to private investors is limited as:

  • tax deductions (including carried forward tax losses) can only be recouped by applying the tax deductions to reduce assessable income (that is, tax losses do not give rise to tax deductions and cannot generally be "distributed" to investors);
  • tax losses may be carried forward, however, the long lead-time before an infrastructure project starts to produce income means that the real value of tax losses realised at the beginning of an infrastructure project is diminished by inflation and the time value of money;
  • as private investment in infrastructure projects tends to involve the use of special purpose project entities as collective investment vehicles, investors cannot "group" losses to offset income arising on other investments (that is, tax losses are quarantined at the project level).

Consequently, the value of tax losses arising in the initial stages of an infrastructure project can only be recognised once the project starts to produce income and then, only to the extent that the project produces income.

The value of such tax losses may be further reduced by the various integrity measures which can apply to limit the availability of carry forward losses. In particular the continuity of ownership test (COT) and the same business test (SBT). Broadly, tax losses can only be carried forward by a project entity to the extent it maintains the same underlying majority ownership.

Early stage tax losses must be carried forward over an extended period of time and, therefore, it is highly likely that the project entity will not satisfy the COT when it is finally in a position to recoup the tax losses (for example, as a result of the sell down of interests by the initial consortium members).

Project entities which are companies can still carry forward tax losses if they continue to carry on the same business (that is, they satisfy the SBT), however, project entities which are unlisted non-trading trusts are not able to rely on the SBT as a fall-back position. That is, an unlisted non-trading trust will be prevented from carrying forward tax losses if it fails the COT.

Proposed amendments

The proposed tax incentive comprises three main elements.

First, a decision-maker will be given power to give "designated infrastructure project status" to particular projects which will be listed on Infrastructure Australia's national priority list. These decisions will be made against a number of, as yet unspecified, criteria and will be subject to a "global capital expenditure cap of $25 billion" for the period to 30 June 2017.

Secondly, project losses will be "uplifted" at the Government bond rate from the time the losses were incurred to when they are used in order to adjust for the decline in the real value of the losses as a result of inflation and the "time value of money".

Thirdly, project losses will be exempt from the COT and the SBT.

The details of the proposed measures are subject to further consultation and refinement but once enacted will take effect from the date of Royal Asset of the enabling legislation.


As with any proposed tax measures, the devil is in the detail and until legislation is introduced into Parliament the precise scope of this new tax incentive cannot be determined. Currently, there are a number of details fundamental to the operation of the tax incentive which are still unknown. In particular:

  • what criteria will a project need to meet to be awarded designated infrastructure project status?
  • who will be empowered to confer designated infrastructure project status, what process will be followed and will such decisions be reviewable?
  • how will the $25 billion cap apply?
  • will investors be able to access the tax losses or will the tax losses continue to be quarantined at the project level?
  • will there be a blanket exemption from the COT and SBT or will the rules simply have a modified application? what integrity measures will be put in place?

As noted above, one of the reasons tax losses from infrastructure projects have limited value to investors is that those tax losses are generally quarantined at the project level. That is, they cannot be "distributed" to investors or otherwise "grouped" by investors to offset other income.

Consequently, if the proposed tax incentive does not allow investors to directly access tax losses, there may only be some limited circumstances in which the tax incentive actually provides any real benefit. Specifically, where an infrastructure project is carried on through a company, the company can generally expect to satisfy the SBT such that it can carry forward its tax losses notwithstanding changes in its ownership. As such the exemption from the COT and SBT is unlikely to make any difference to investors in these types of project entities but, rather, would only be of benefit to investors in project entities which are unlisted non-trading trusts. In addition, infrastructure projects tend to only become tax positive at the very end of the project, if at all.

Therefore, where tax losses are quarantined at the project level, the fact that they are "uplifted" at the Government bond rate will simply mean that the quantum of the tax losses which will expire unutilised at the end of an infrastructure project will be greater. That is, only infrastructure projects which would otherwise become tax positive early will benefit from the uplift in the tax losses.

Given the above, it may be that the proposed tax incentives will not be effective in achieving their intended goal of encouraging private investment in infrastructure projects.