House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)

Tax-exempt infrastructure borrowings

Overview

4.1 The Bill will allow tax-exempt infrastructure borrowings to be used to construct infrastructure facilities on commercial leases of Crown land and to pay interest costs incurred and paid on infrastructure borrowings during the construction period.

Summary of the amendments

Purpose of the amendments

4.2 The proposed amendments will allow tax-exempt infrastructure borrowings to be spent on:

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constructing infrastructure facilities on land leased from the Crown under a commercial lease (Treasurer's Press Release of 23 June 1993); and

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paying interest that accrues and falls due on direct infrastructure borrowings while the facility is being constructed (1993-94 Budget announcement).

Date of effect

4.3 Construction of facilities on Crown land held on a commercial lease - post 23 June 1993 borrowings [Subclause 18(1)] .

4.4 Payment during the construction phase of interest accrued during that phase - post 17 August 1993 borrowings [Subclause 18(2)] .

Background to the legislation

4.5 Infrastructure borrowings are borrowings which may be raised to finance the construction of specified public infrastructure facilities, viz. roads, railways, seaports and electricity generating facilities. The interest paid on these borrowings is neither assessable to the lender nor deductible to the borrower. Division 16L of the Income Tax Assessment Act 1936 (the Act) establishes what are infrastructure borrowings and provides for their taxation treatment.

Crown leases

4.6 A company constructing an infrastructure facility must intend to own, use and effectively control the use of the facility for a period of 25 years from the time the facility first produces assessable income. A company constructing an infrastructure facility on land that is leased does not own the land. Accordingly, at law, the company is not the owner of any fixture attached or constructed on that land.

4.7 However, if the company is constructing the facility on land that is leased from the Commonwealth, a State or a Territory, and the lease is granted under a statute, the company is treated as being the owner of the facility for the purposes of infrastructure borrowings (subsection 159GZZZZB(2)).

4.8 Amending the definition of "Crown lease" to include commercial leases will enable infrastructure borrowings to be used to finance the construction of a facility on Crown land, and it is appropriate to negotiate a commercial lease of the land, rather than a statutory lease.

Interest on infrastructure borrowings

4.9 Another requirement that must be satisfied by a company intending to raise infrastructure borrowings is that the whole of the monies raised must be spent on the construction of one or more infrastructure facilities, or on the construction or acquisition of one or more facilities that are related to the infrastructure facility (subsection 159GZZZZA(1)). Interest incurred on money borrowed to finance the construction of an infrastructure facility is not considered to be money spent on the construction of a facility. Such interest cannot be paid with infrastructure borrowings.

Explanation of the amendments

Crown lease - new definition

4.10 The present meaning of Crown lease for the purposes of infrastructure borrowings is a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or a Territory. The new definition of "Crown lease" will cover all leases granted by the Commonwealth, a State or Territory. It will include commercial leases granted by an authority of the Commonwealth, a State or a Territory, provided that if any income is derived by the authority at the time the lease was granted, the income is exempt from income tax under one of the provisions listed in section 160K [Clause 15] .

Crown leases - requirements relating to infrastructure facilities on the leased land

4.11 If a company is constructing an infrastructure facility on land that it holds under a lease from a government body, the company will be treated as the owner of a facility if the terms of the lease are such that the company has security of tenure for at least the construction period and a period of 25 years from the time the facility first produces assessable income.

4.12 In the case of a facility being constructed on land that is the subject of a statutory lease, there is no change to the requirements to be satisfied for the company to be treated as owning the facility. These requirements are:

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the lease does not expire for at least 25 years from the day the facility is expected to become income producing; or

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if the lease is due to expire before that time, that the company expects, because of law, custom or otherwise, that the lease will be renewed or extended, and that the renewed or extended lease will not expire for at least 25 years from the day the facility is expected to become income producing [Clause 17 - new paragraph 159GZZZZB(2)(a)] .

4.13 If the company intends to construct a facility on land that is leased under an agreement with the Commonwealth, a State or a Territory, or a tax-exempt authority of the Commonwealth, a State or a Territory, the requirements to be satisfied depend on whether the lease expires before the end of the 25 year assessable use period.

4.14 Where the lease is not due to expire before the end of the expected 25 year assessable use period, the company will be treated as owning the facility if both the lessor and lessee intend that the company (the lessee) will hold the lease for the whole of the construction period and the 25 year assessable use period, on the same terms and conditions under which the lease was held at the time construction of the facility commenced [Clause 17 - new subparagraph 159GZZZZB(2)(b)(i)] .

4.15 Where the lease has an expiry date earlier than the end of the 25 year assessable use period, the company will be treated as owning the facility if:

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the lessee has an option (or successive options) to renew the lease, and both the leasor and the company intend that the lease will be renewed on the same terms and conditions under which the lease was held at the time construction of the facility commenced; and

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both the lessor and lessee intend that the company (the lessee) will continue to hold the lease for the whole of the period of 25 years from the day the facility first becomes income producing, on the same terms and conditions under which the lease was held at the time construction of the facility commenced [Clause 17 - new subparagraph 159GZZZZB(2)(b)(ii)] .

Interest on Infrastructure Borrowings

4.16 Interest incurred on funds borrowed to finance construction is not considered to be money spent on the construction of the facility. Therefore, funds raised by way of infrastructure borrowings which are used to pay interest incurred on construction costs have hitherto been regarded as having been used for an ineligible purpose.

4.17 The eligible purposes for which moneys raised by infrastructure borrowings may be spent will be expanded to include interest paid on direct infrastructure borrowings. Money raised under a direct infrastructure borrowing will be able to be spent on paying interest on an earlier direct infrastructure borrowing where the interest:

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accrues during the construction period; and

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is paid during the construction period [Clause 16] .