Brendon Lamers - KPMG - Understanding Key Tax Implications Faced By a Shifting Regulatory Framework

National PPP Summit

Understanding key tax

implications faced by a shifting

regulatory framework

4 June 2014

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Introduction

■ Exploring the current changes in relation to tax thinking

■ Understanding the impact of legal reform

■ How will these impact directly on Financial Close process?



Recent and planned tax reforms relevant for PPPs

■ The Federal Government has announced / implemented:

– Tax loss incentives for designated infrastructure projects

– Reforms to the MIT regime

– Thin capitalisation

– Reforms to the taxation of trusts (in particular the abolishment of the “20%

exempt entity” rule)

– Potential Federal Government incentives to support State asset sales

– Significant funding for road projects

Tax loss incentives

for DIPs



Tax loss incentives for DIPs

■ On 29 June 2013, the government enacted legislation to provide tax incentives

for entities to carry on nationally significant projects. Benefits of the incentives

are:

– Exemption from the continuity of ownership and same business test for

eligible companies

– Exemption from trust loss and bad debt deduction tests for eligible fixed

trusts

– Uplift of the value of the tax losses at the government long term bond rate

which may result in an increased internal rate of return on the investment

■ A tax incentive for nationally significant infrastructure projects




Why is this important?

State

Finance

SPV

Construction

paymentsPurchase of

future income

stream

Builder

Operator

Lease/Licence

payments

Project

Trust

Banks




■ Eligibility:

– DIP entity: fixed trust or company carrying on a single infrastructure project

– Infrastructure project must be a DIP

■ To get final designation the project must:

– Be nationally significant

– Be on the Infrastructure Priority List as “Ready to Proceed”

– Not have commenced

– Financial Close has occurred or is imminent

■ Total capex limit on projects granted DIP status not to exceed $25 billion




■ Projects are included on Infrastructure Australia’s National Priority List of

projects if they are:

– Above a capital expenditure threshold of $100 million; or

– A Regional Infrastructure Fund project, a flagship project or a project that

demonstrates unique national interest qualities

■ Projects will be ranked (and published) and assessed on a range of criteria as

follows:

– The ratio of economic benefits to economic costs

– The corporate governance arrangements in place

– The availability of the project to multiple users

– The benefit to the community

■ Difficult to bid

MIT regime and

reforms



The MIT regime and reforms

■ MIT concessionary withholding tax rate on fund payments

■ In November 2013, the Treasurer confirmed measures to remove uncertainty.

These include:

– Specific taxation of “regime MITs”

– Introduction of specific attribution rules for regime MITs to determine tax

liabilities

– Clarifying application of MIT rules to pension funds




■ 2014 Federal Budget announcement confirmed the intention to introduce the

new MIT regime, with an Exposure Draft to be released for public consultation

in June 2014. Consultation is currently occurring with key players.

■ However, the introduction of the new regime has been deferred until 1 July

2015 to accommodate this consultation and the need for systems changes by

the ATO and industry.




■ How do and how will these rules actually work?

■ What are the important touchstones?

■ What will be the impact (if any) to infrastructure investors?




Pension funds and the MIT regime

■ Trustees of MITs generally determined withholding tax by address of the non-

resident recipient

■ ATO ruled: foreign pension funds investing via an interposed trust are

prevented from receiving MIT concessionary treatment

■ Feb 2013: Government announced amendments

20% exempt rule



20% exempt rule

■ Purpose of rule

■ Since BoT 2009 report, a series of reports, discussion papers, media releases

and announcements have been made deferring the effective date to 1 July

2014

■ What does this mean for infrastructure projects and investments? Where are

we now?



20% exempt rule

Investors

Construction

FPP Aus super

>20%

Project

Trust

Operations

Thin capitalisation



Thin capitalisation

■ Reforms to the thin capitalisation rules to apply to income years commencing

on or after 1 July 2014:

– Reduction in safe harbour gearing ration from 75% to 60%

– Worldwide gearing ratio reduced from 120% to 100%



Thin capitalisation

■ Lowering of the safe harbour debt amount to 60%

– Impact on infrastructure projects (brownfield mostly)

■ Arm’s length debt test

– Infrastructure projects generally highly geared and often funded by third

party debt

– Review of arm’s length debt test welcomed but difficult

– Expect greater reliance on arm’s length debt test with the tightening of safe

harbour debt test

Other potential /

proposed reforms



Other potential / proposed reforms

■ Reforms to NTER: reimbursements to States for loss of payments under

NTER upon privatisation of State owned assets / businesses

■ Tax implications:

– How will these measures work?

– Based upon historical tax or estimated go forward?

Change of

interpretation by

the ATO



Change of interpretation by the ATO

■ Insolvency remote special purpose entity exemption: section 820-39

■ Part IVA and securitised lease / licence structures



Insolvency remote special purpose entity exemption: s820-39

■ Section 820-39 provides an exemption from thin capitalisation if:

– The entity is established for the purpose of managing economic risk

– Debt interests in the entity > 50% of total assets

– The entity is an insolvency remote special purpose vehicle




Third party debt

State

Finance SPV

Construction

paymentsPurchase of future

income stream

Builder

Operator

Lease/Licence

payments

EquityUnrelated

shareholder

Project

Trust




■ Insolvency remote criteria of internationally recognised ratings agencies do not

require a SPE to be established for the purposes of carrying on only

securitisation activities

■ TD 2012/D11 withdrawn on 8 May 2012. Reissued on 12 March with TD

2014/D8 and is substantially different to TD 2012/D11

■ Impact on securitised lease / licence structures

– More precaution being taken by investors and arrangers

– Application for private rulings to be accompanied by evidence of insolvency

remoteness of an entity (e.g. legal opinions etc)



Part IVA and securitised lease / licence structures

■ Increased ATO scrutiny

■ ATO considered whether there was a tax benefit when compared to a

traditional Division 250 structure

■ ATO confirmation that Part IVA no longer applies to many securitised lease /

licence structures

■ Division 250 structure not commercially (nor often legally) viable

Conclusions



Conclusions

■ Reforms are generally in favour of infrastructure investment

■ Effectiveness of reforms will require consultation with ATO pre-enactment to

allow sensible interpretation

■ Questions?



Thank you

Name Experience

Brendon Lamers

Tax Partner

T: +61 2 9335 7021

E: [email protected]

Brendon has over 15 years experience in providing taxation advice to a

variety of financial institutions, foreign pensions infrastructure and

agriculture funds, and domestic and multinational corporate clients.

■ He has worked on the IPO of Queensland Rail and PPP related

bids, including running the tax workstream of Perth Stadium, North

West Rail, VCCC, LEAP Housing and Brisbane Airport Link.

■ He has worked extensively for various financial and infrastructure

investors. Recent examples including Brookfields, Partners Group,

Citi Infrastructure Partners, Plenary Group, CDPQ and Public Sector

Pension Investment Board.

■ He recently worked on the unsuccessful bids for Queensland

Motorways and Port of Newcastle and the acquisition of Thakral by

Brookfields, the acquisition of Centrebet by Sportingbet and the

acquisition of Charter Hall Office Trust by PSPIB and GIC.

■ His major clients include the Leighton Group, Caisse de depot et

placement du Quebec, Charter Hall, DP World and Plenary Group.

mailto:[email protected]

The KPMG name, logo and “cutting through complexity” are registered

trademarks or trademarks of KPMG International.

© 2014 KPMG, an Australian partnership and a member firm of the KPMG

network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


Brendon Lamers - KPMG - Understanding Key Tax Implications Faced By a Shifting Regulatory Framework

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