Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Honourable Ralph Willis, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED.CHAPTER 5
Unchanged Provisions in the Income Tax Assessment Act 1936
Tax effects of Infrastructure Borrowings
5.1 Where the infrastructure borrowing is in the form of a security, any gains or losses arising on the disposal of the security, whether the gain or loss is of a capital, trading or revenue nature, are exempt from tax (gains) and not tax deductible (losses). Similarly, any profit (or loss) on the redemption of a security (by the issuer) while it is an infrastructure borrowing is exempt from tax (and not deductible).
5.2 If the infrastructure borrowing is a security that has not been redeemed during the exemption period, it is deemed to be disposed of for its market value immediately before the exemption period expires, and to be acquired for the same price immediately after the exemption period expires. (The exemption period will be extended from 10 years to 15 years under the proposed amendment to the definition of that term in new subsection 159GZZZZD of the Tax Act.) [Subsection 159GZZZZE(3) of the Tax Act]
5.3 Generally, companies paying interest on bearer debentures are required to deduct tax before making the interest payment (Division 11 of Part III). However, companies paying interest on infrastructure borrowings that are in the form of bearer bonds are exempt from tax on that interest (section 125).
5.4 Non-residents deriving interest from Australian investments may be liable for withholding tax on that interest (section 128B). However, interest paid to non-residents on infrastructure borrowings is exempt from withholding tax (paragraph 128B(3)(bb)).
5.5 Where exempt income is generated by a unit trust and is distributed to investors, the cost base of the units is normally reduced for capital gains tax purposes. However, the exempt income in respect of infrastructure borrowings does not reduce the cost base of the units in the unit trust. [Paragraph 160ZM(3A)(d) of the Tax Act]
5.6 Under the existing law expenditure incurred in deriving exempt income is not tax deductible (section 51(1)). However, expenditure incurred by investors in investing in infrastructure borrowings is allowable as a deduction as if the investment was income producing. [Section 159GZZZZF of the Tax Act]
5.7 This concession is limited to deductions allowable under subsection 51(1) (for example, borrowing costs). Thus, deductions are not allowable for the cost of infrastructure borrowings acquired as trading stock or on revenue account or for interest or borrowings written-off as bad debts. [Paragraph 159GZZZZE(1)(d) of the Tax Act]