10.1.7 Anti-avoidance provisions

After years of debate and consultation, new laws now govern the availability of capital allowance deductibility in relation to a PPP infrastructure project. On 25 September 2007, Tax Laws Amendment (2007 Measures No. 5) Bill, 2007 received Royal Assent. While there are complex transitional arrangements, essentially the old law (Section 51AD and Division 16D) was replaced by new law (Division 250). Division 250 has an element of "backcasting" - it regulates infrastructure projects post 1 July 2007 i.e. both the signing of a binding agreement and first tax preferred asset use starts after 1 July 2007.

Division 250 essentially continues the policy intent of the old provisions i.e. it aims to discourage arrangements being entered into for tax advantage. The main target is arrangements that seek to transfer asset/infrastructure tax deductions from entities that cannot use them to those that can, when the underlying assets are committed to a tax-preferred use.

If a project (asset) was captured by "old" Division 16D, the arrangement was treated as a loan with only the deemed interest component of any revenue derived from the project assets being assessable to the private owner/lessor, and capital allowance deductions connected with ownership, such as amortisation of buildings, depreciation and other capital allowances, being denied. Similar to the application of Division 16D, where Division 250 applies there is also a timing difference, with capital allowances denied, but financial benefits provided under the arrangement by the tax exempt party to the taxpayer for tax-preferred asset use are to be assessed on a compounding accruals basis (rather than assessing just the interest component of the arrangement payments on a cash flow basis as they are made).

Also similar to Division 16D, Division 250 will not apply where its application would result in a lower present value income tax obligation than the amount otherwise assessable.

The net impact of the infrastructure capital allowances reforms is that the application of Division 250 could give rise to a more favourable tax timing result to the Commonwealth than under the former Division 16D. However, Division 250 will not have the severe consequences of the former Section 51AD.

On balance, the new law is an improvement on the old law, and in particular, the effective switching off of Section 51AD is most welcome and long overdue, having being recommended by the RBT (refer to page 392 of "A Tax System Redesigned", July 1999).

While complexity and uncertainty exist in relation to the practical application of Division 250, at the very least, Division 250 reduces the potential draconian outcomes of the former Section 51AD. Division 250 will cast a similar net to the old law, and thus all forms of infrastructure provision (above threshold limits) will need to be considered/tested for tax compliance - hospitals, prisons, transport infrastructure, water treatment plants etc. (refer to Appendix F for more details on Division 250).