The question arising is whether we have the tax policy settings right to encourage the necessary investment.
The result of the current tax environment in Australia is starting to work against attracting local and foreign investors. A long-term view of policy and administration (much like the investors themselves) needs to be committed to by both the Federal and State Governments. Only then will the ambitions of the G20 be realised.
The current issue is the demand to buy infrastructure in some cases outstrips supply (think Port of Botany and Sydney Desalination Plant). Although, because of the uncertainty set out below, price is being propped up by restricting supply (and slowing investment in new infrastructure), rather than addressing the policy settings increasing risk. In addition, for funding of Greenfield infrastructure, Australia is locking out significant pools of capital with changing policy and administration.
For domestic investors, uncertainty arises from:
- complying superannuation funds cannot hold in excess of 20 percent of most infrastructure trusts
- the Australian Taxation Office (ATO) is considering taxing tax deferred distributions as ordinary income for certain taxpayers
- the absence of a long-term bond market (that could be kick started by Federal/State Governments) precludes a historically common form of investment by superannuation funds
For foreign investors, the constant changes increase volatility and therefore risk:
- the sudden change of managed investment trust (MIT) withholding tax from 7.5 percent to 15 percent surprised the industry and was effectively retrospective
- changes to thin capitalisation affects the way in which secondary infrastructure deals can be priced
- changes in administration (e.g. thin capitalisation exemptions and treating tax deferred distributions as ordinary income) increase uncertainty.