More missed opportunities to improve infrastructure

Paul Keating once famously remarked that the resident galah in every pet shop was talking about the budget deficit, painting a typical Keatingesque word picture of the wide ranging public debate going on at the time.

These days, the galahs have turned their attention to the matter of infrastructure. It seems wherever you turn we are confronted by evidence of the lack of investment in our infrastructure and the economic penalties we are paying for that lack of foresight.

However, the recent Federal Budget failed to deliver any progress in the area of infrastructure. Not only is the so-called Future Fund a massive missed opportunity for infrastructure investment, the Government also missed a chance to make some relatively simple changes to the tax law which could have really encouraged infrastructure investment.

Australia’s tax code has failed to keep pace with the massive changes in investment financing that have occurred over the past decade, and parts of the taxation system now provide very significant disincentives to private sector involvement in infrastructure.

Many of the large improvements in infrastructure in recent years have been led by the NSW and Victorian state governments forging partnerships with the private sector to deliver projects like CityLink, the Eastern Distributor and the Cross City Tunnel.

Section 51AD and Division 16D of the Income Tax Act are anachronisms which assume that any private sector involvement in infrastructure investment is a tax dodge.

This was undoubtedly the case when Treasurer Howard introduced S51AD in 1982, but the continued existence of this clause in the age of public private partnerships (PPPs) means our taxation system is hopelessly out of date.

In short, S51AD denies the deductability of expenses that would ordinarily be perfectly claimable, if a non-tax paying body (like a state government) controls the asset.

At best, this section causes unconscionable delays in getting worthwhile infrastructure off the ground. For example the Australian Tax Office (ATO) argued for months that Leighton would not be able to deduct its expenses in building the Eastern Distributor because the road would be under the ultimate control of the NSW Government in terms of traffic control.

The delay and expense to proponents fighting ridiculous arguments such as this is a substantial disincentive to investment.

At worst, S51AD is fatal to worthwhile projects, especially those which require some degree of government contribution.

The Government cannot say it hasn’t been warned about the impact of this tax regime.

The Ralph Review of Business Taxation recommended the abolition of S51AD back in 1999. The Economic Planning and Advisory Committee recommended the same as long ago as 1995. The Government-appointed taskforce report, Revitalising Rail: The Private Sector Solution argued in 2002, “The operation of Section 51AD and Division 16D create an uncertain investment environment for investors. This should be addressed as a matter of urgency.” The Australian Council for Infrastructure Development has argued that these sections are “the most significant hurdle which is constraining increased private investment in public infrastructure”.

In fairness, the Government has at least done something to respond to the unanimous views of industry, state governments and financiers. In 2002 the then Revenue Minister announced the Federal Government would be reforming the guilty sections. Three years later, while we have seen a draft exposure Bill, it has not been introduced into the House of Representatives, let alone put into law.

Before the Commonwealth blames the states for the lack of infrastructure investment, it would pay them to bring the taxation system into the 21st Century.