Banking Newsletter - September 2012

Traditional underpinnings of Australian banking are under rapid change. We are in a transformative period. This issue explores some of these changes.

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Banking Newsletter - September 2012

Aligning tax regimes to support vital infrastructure investment 

Bankers know better than most that funding long-term infrastructure investment is a huge challenge. They also appreciate how tax is often the sticking point in getting an infrastructure deal off the ground.

Many factors influence the viability (or otherwise) of an infrastructure investment proposal. Yet whether domestic or offshore investors commit to the deal often depends in part on the tax treatment of the proposal.


While governments and their tax collecting authorities have an understandable concern with maximising tax collections and closing off avoidance loopholes, globally mobile capital naturally seeks to maximise after-tax returns.


To complicate the picture, infrastructure investment decisions are not only influenced by tax considerations in the jurisdiction in which the investment is taking place, but also by tax regimes elsewhere. Unsurprisingly, this situation often leads to inconsistencies and ambiguities in the tax treatment of infrastructure investments.


Australia’s infrastructure investment challenge is daunting.


  • Citigroup has estimated the national infrastructure investment task through to 2018 exceeds $770 billion, of which at least $360 million will have to come from the private sector.


  • Infrastructure Australia’s priority list contains project worth about $86 billion.


  • To meet its current renewable energy target, Australia will need to increase its renewable output from the equivalent of 17,763 GWh to about 40,000 GWh, involving many hundreds of millions of new investment.


Failure to reduce Australia’s growing infrastructure deficit will have negative consequences for the national economy. Yet government funding of infrastructure is likely to be limited by the need to avoid the ‘European disease’ of excessive government borrowing and to constrain the tax burden on households and businesses.


However, there are large pools of private capital that can be potentially tapped for infrastructure purposes. More than $1.3 trillion is currently held in Australian superannuation funds, and this figure is expected to grow by a further $3 trillion over the coming decade. Significantly larger sums are held in offshore pension funds, sovereign wealth funds and other pools of investable savings. These funds will not flow into Australian infrastructure of their own accord. Inappropriate policy can inhibit the process.


For example, the government has recently doubled the managed investment trust rate on infrastructure investments for foreign investors from 7.5 to 15 percent. It is unclear what this might mean for future foreign investment in Australian infrastructure, but the response is unlikely to be favourable.  


The change in the MIT tax rate will influence infrastructure investment decisions for the following reasons.


  • Non-resident institutional investors are generally exempt from income tax in their original domiciles, meaning that any tax paid in Australia will not be creditable at home, therefore the increase in tax rate will decrease net after-tax returns on their Australian investments.


  • Non-resident pension funds investing in Australia have their main liabilities denominated in currencies other the AUD, giving rise to significant exchange rate risk. It is impractical to hedge this risk over a 20 or 30-year period. Policies that add another layer of risk (e.g. tax changes) to the investment will deter investors. In part the 7.5 percent tax rate was seen as a compensating factor in taking AUD long term risk.


  • As returns on infrastructure investment are in the low double digits (and in some cases under 10 percent per annum) for regulated assets frequent, ad hoc changes in tax rates and laws are likely to be a big turn-off for many potential long-term infrastructure investors.


Consistency of tax and other regulatory policies, measures designed to improve the liquidity of infrastructure investments and attention to the interaction of domestic and foreign tax regimes as they apply to infrastructure investment will be key elements in a cogent approach to infrastructure investment in Australia.

Steven Economides

Steven Economides
Partner, International Corporate Tax

+61 2 9335 8876

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Economic and social infrastructure
KPMG helps clients understand the business, investment and public policy opportunities arising from increased investment in infrastructure.