The Government today announced changes to improve the tax treatment of financing arrangements between public private partnerships.
The reforms will simplify the tax treatment of leasing and similar arrangements between taxpayers and the tax exempt sector for financing and providing infrastructure and other assets.
"The Government is amending the law to give greater certainty for parties involved in major infrastructure projects. The changes will make the tax rules clearer, simpler and more relevant to modern financing arrangements," Federal Assistant Treasurer, Mal Brough, said today.
"At the same time, it preserves the integrity rules to ensure tax benefits and costs are not shifted unfairly.
The changes will effectively remove a complex aspect of the current arrangements, and bring two different provisions of the 1936 Tax Act into one consolidated provision in the new law.
Mr Brough said that a 'lease, use or control of use of the asset' test will apply to determine which arrangements will come within the scope of the reforms. The test will be inserted into the Income Tax Assessment Act 1997 using language based on the tests in the existing law (section 51AD and Division 16D of Part III of the Income Tax Assessment Act 1936). A modification will be made to ensure that the concept of a lease is consistent with financial accounting principles.
"Stakeholders are familiar with the operation of the 'lease, use or control of use of the asset' test in the existing law. This is an important consideration in enhancing continued investment in Australia's infrastructure. Stakeholder concerns about the scope of arrangements affected by the reforms being broadened by the use of new risk based tests will be alleviated by this change", Mr Brough said.
All arrangements where the aggregate financial benefits are less than $5 million will be specifically excluded from the scope of the reforms. Certain commercial operating service and property lease arrangements will also be excluded. This exclusion will apply to:
- relevant arrangements that do not exceed 3 years duration
- relevant arrangements where the expected aggregate financial benefits do not exceed $30 million, and
- relevant arrangements where the aggregate value of the assets used does not exceed $5 million.
"These new rules will be beneficial because they will provide better certainty and reduce the need for costs and delay associated with seeking rulings for many arrangements. That means fewer hurdles and roadblocks in the decision making process that developers and financiers have to confront in what are, by their nature often big and complex arrangements."
"These exclusions not only narrow the scope of arrangements affected by the reforms, but provide relief to many arrangements that would otherwise have been captured even by the existing law", Mr Brough said.
In particular the exclusions will ease compliance costs and assist small business taxpayers that enter into arrangements with the tax exempt sector. They will also ensure that many arrangements involving local government councils will be outside the scope of the reforms. The reforms will remove the annihilating effect of section 51AD. Notional loan treatment using a compounding accruals method, as reflected in the exposure draft legislation relating to the reforms, will apply to asset financing arrangements that come within the scope of the reforms.
The reforms will apply to arrangements entered into after the date of Royal Assent of the legislation.
Stakeholders will continue to be consulted on the development of legislation to implement the reforms. Appropriate transitional arrangements will be determined in consultation with stakeholders.