Access to depreciation deductions

The amount of depreciation deductions allowable on the depreciable assets in a PPP arrangement will generally have a significant impact on the commercial viability of a PPP project. Analysis should determine the availability of depreciation deductions, including the tax cost base of the depreciable asset and the rate of tax depreciation.

The tax benefits of a trust vehicle may be further amplified in an environment where tax depreciation deductions are allowed over the assets of a PPP arrangement, as the discrepancy between tax and accounting depreciation rates may facilitate the payment of a tax-deferred distribution.

Another important issue for consideration in a PPP arrangement is the impact of Division 250. The object of Division 250 is to deny or reduce capital allowance deductions to a taxpayer in relation to an asset that is, at a particular time, put to a tax-preferred use under an arrangement where the taxpayer is not exposed to sufficient economic risk in the asset (refer to Section 9.1.7 below).

The limited-recourse debt provisions (Division 243) may also include an additional amount in the relevant entity's assessable income upon the termination of a limited-recourse debt arrangement where capital allowance deductions that have been obtained for debt-funded expenditure are excessive (having regard to the amount of the debt that was repaid).

Where an asset previously owned by the government (a tax-exempt entity) has been acquired by a taxpayer, consideration should be given to the calculation of depreciation deductions and the tax cost base of the asset in light of the provisions of Division 58 which can have the affect of limiting the taxpayer's tax deductions to those that would have been available to the prior (tax-exempt) owner had the tax exempt party been a taxpayer.