Today BRR Media speaks with Charles Armitage, who’s a Partner in the Tax team with Allens Arthur Robinson in Sydney, and joining him also is Martin Fry, also from the Tax team at Allens, but hailing from the Melbourne office.  Thanks for joining us Martin and Charles.

Thank you David.

Martin if I can just start with you and get you to outline the proposed new tax loss rules for major projects.

Thanks David.  The proposal is directed at the carry forward of tax losses for major projects.  The two aspects to it, the first is that the carry forward of tax losses will be exempt from the continuity of ownership and the same business tests eligibility criteria.  And the second is that at the end of each year of the carry forward tax losses will be uplifted by the 10 year Commonwealth Government bond rate, which is currently about 5.7%.  So those two items are clearly beneficial, it will administered by Infrastructure Australia who will maintain a list and the projects on the list will be a list of projects with a total capital expenditure of up to $25 billion for the period to 30 June 2017.  And it’s first in; first serve approach to the list, so project proponents will need to make sure that when we have enough details they get on that list.

Absolutely.  Well just on the managed investment trust side of things, how does the new MIT regime have a role to play in structuring and funding major projects?

Look it certainly has a role to play; the MIT regime is providing the opportunity for foreign investors to be subject to a low final rate of withholding tax on distributions of project income, and that’s an attractive outcome certainly also delivers some certainty for foreign investors.  We’ve seen foreign investors come in through the MIT regime and fund infrastructure projects here in Australia.  It comes with it some very important structural features, the most important one of which is that in order for an entity to qualify for the MIT rules it must not fall foul of the Trading Trust Rules, and those rules require that the trust do only certain limited activities; primarily of relevance here is that the trust do no more than invest in land for rent.

And Charles Armitage I want to bring you in here.  Has the repeal of section 51AD in 2007 now removed, as a constraint, on the flexibility with which projects can be structured and financed?

Section 51AD was introduced way back in 1982 to effectively prevent the tax benefit transfer that was occurring from the public sector that couldn’t use the tax benefit to the private sector.  It disallowed all the depreciation deductions that the private sector, owner of the infrastructure project for example, could claim, it disallowed all of the interest on the funding cost but left the income from the project fully assessable.  So as you can see that made any project financially unviable.  So the repeal in 2007 has meant that new transactions are able to proceed without being effectively distorted by the concern that 51AD might apply.  So yes it has made projects able to be structured in a more flexible and more sensible way, the replacement provision Division 250, is not as draconian in its effect, and transactions can actually operate in a viable way, even if Division 250 applies.  And because of a way in which 250 has been drafted it means that some transactions are actually best structured in a way that doesn’t attract Division 250 in the first place.

And just finally, of course, you know it’s pretty difficult economic times of late over the past few years, are there tax lessons to be learnt from projects which have run into financial difficulty?

Yes.  Look there are tax lessons to be learnt, very simplistically we’ve seen with a number of projects where they’ve gone into financial difficulty and the financiers have stepped in and tried to sell the project and recoup some of their funding, that what worked really well was a structure on the basis of the transaction proceeded happily, wasn’t necessarily an efficient structure when it came to realising the project and trying to recoup the funding.  And in particular it relates back to the first question that Martin dealt with in relation to the tax losses, the tax losses are in many cases trapped in trusts which have been effectively lost whenever enforcement occurs and the receiver tries to sell the project, there’s real value in the tax losses that have been accumulated in that project, and they’ve effectively evaporated when the project has been sold.  And it’s been very difficult to find a structure that works both while the transactions going well and also when it falls over.  So the announcement by the Government in relation to the tax losses recognises that, but it also highlights the fact that those projects which don’t qualify on that list and existing projects that can’t get on that list in the first place are still going to have to grapple with this issue of a structure that works both in good times and bad.

Well Martin and Charles thanks again for your insights today.

Thank you David.

That was Martin Fry and Charles Armitage, from the Tax team at Allens Arthur Robinson.  Listeners if you have any questions for Martin or Charles about this interview please send a message using the panel on screen or otherwise email through to law@brrmedia.com and we’ll pass on your query.