S58
Issued
03 Apr 2018

Application of the financial arrangement rules to a public-private partnership

This determination relates to an arrangement involving the finance, design, construction and on-going provision of asset management and facilities maintenance services in respect of a Facility by a limited partnership under a public-private partnership agreement with the Crown.

This Determination may be cited as Special Determination S58: Application of the financial arrangement rules to a public-private partnership.

1. Explanation (which does not form part of the determination)

  1. This determination relates to an arrangement (the Project) involving the finance, design, construction and on-going provision of asset management and facilities maintenance services in respect of a Facility by a limited partnership (the Partnership) under a public-private partnership agreement (the Project Agreement) with the Crown. The sole limited partner in the Partnership will be Holdings LP.
  2. The limited partners in Holdings LP are:
    • a limited partnership (Limited Partner A), with two limited partners, one of which is a limited liability company (Limited Partner A1) and the other of which is itself a limited partnership (Limited Partner A2) with multiple limited partners, some of whom are exempt from income tax;
    • a limited partnership (Limited Partner B), with multiple limited partners, some of whom are exempt from income tax; and
    • a limited liability company (Limited Partner C).
  3. Limited Partner C, Limited Partner A1, and each limited partner of Limited Partner A2 and Limited Partner B that is not exempt from income tax, are together referred to as the Taxable Limited Partners. This determination only applies to the Taxable Limited Partners and does not apply to those limited partners that are exempt from income tax.
  4. The Project Agreement comprises three basic components:
    • A design and construction phase (the D&C Phase) under which the Partnership agrees to design and construct the Facility for the Crown in consideration for a fixed lump-sum payment (the D&C Payment), payable on completion of the D&C Phase;
    • A Facility Lease which the Partnership and the Crown enter and under which the Partnership pays an amount representing the rental under the Facility Lease to the Crown (the Rental Prepayment); and
    • An asset management and facilities maintenance phase (the AM/FM Phase) under which the Partnership will provide asset management and facilities maintenance services to the Crown over a 25 year term in consideration for monthly payments (the Unitary Charge).
  5. The Partnership will enter into:
    • A Design and Construction Contract with the D&C Contractor, under which the D&C Contractor will design and construct the Facility (the D&C Subcontract); and
    • An Asset Management and Facilities Maintenance Contract with the AM/FM Contractor, under which the AM/FM Contractor will provide the on-going asset management and facilities maintenance services (the AM/FM Subcontract).
  6. The Partnership will raise external debt from a range of third party financiers (the Senior Debt).
  7. Limited Partner C will provide investment support (Sponsor Support) during the D&C Phase in the form of a letter of credit (Letter of Credit).
  8. Holdings LP will receive funding from Limited Partner A and Limited Partner B during the D&C Phase in the form of Equity Subordinated Notes (ESNs). The application of the financial arrangements rules to the ESNs is set out in Determination S59: Equity Subordinated Notes in respect of a Limited Partnership in a Public-Private Partnership.
  9. The Partnership will enter into Interest Rate Swaps in respect of the Senior Debt.
  10. The Facility Lease, AM/FM Phase of the Project Agreement, D&C Subcontract and AM/FM Subcontract are all excepted financial arrangements. The D&C Phase of the Project Agreement, Senior Debt, Letter of Credit, and Interest Rate Swaps are financial arrangements to which the Partnership is a party. The Project, including all of these agreements and the ESNs, is a wider financial arrangement.
  11. The Project is subject to, and described more fully in, the Private Rulings.
  12. This determination prescribes:
    • the amount of consideration that is solely attributable to the Facility Lease;
    • how the financial arrangements rules apply to the AM/FM Phase of the Project Agreement, the D&C Subcontract and the AM/FM Subcontract; and
    • the method for spreading the payments made under the Senior Debt, Interest Rate Swaps and the Letter of Credit.

2. Reference

This determination is made under ss 90AC(1)(bb), 90AC(1)(d) and 90AC(1)(h) of the Tax Administration Act 1994.

3. Scope of determination

  1. This determination applies to the Partnership in respect of the Project, including the following arrangements:
    • The D&C Phase of the Project Agreement, under which the Partnership agrees to design and construct the Facility for the Crown and will receive a fixed lump-sum payment (the D&C Payment) for the Facility once the Facility is ready for operation.
    • The AM/FM Phase of the Project Agreement, under which the Partnership will provide on-going asset management and facilities maintenance services to the Crown in consideration for quarterly payments for the period following completion of the Facility for 25 years until 2044.
    • The Facility Lease, under which the Partnership will lease the Facility from the Crown for a period following completion of the Facility until 2044 and will make the Rental Prepayment to the Crown. The Rental Prepayment will be equal to and will offset the D&C Payment.
    • A D&C Subcontract, under which the D&C Subcontractor will design and construct the Facility in consideration for payments.
    • An AM/FM Contract with the AM/FM Subcontractor following completion of the Facility, under which the AM/FM Subcontractor will provide the on-going asset management and facilities maintenance services in consideration for payments under the AM/FM Contract.
    • Senior Debt, under which the Partnership will borrow an agreed sum from external lenders for a term of approximately five years from financial close of the Project (Financial Close). The Senior Debt will include a capitalising, interest only senior debt facility that converts to an amortising senior tranche on the Conversion Date. It is expected that the Senior Debt will be refinanced within 5 years of Financial Close and every 5 years thereafter over the term of the Project. Under IFRS (as the standards apply at the date of this Determination), the Senior Debt (and any subsequent re-financings) will initially be recognised at fair value less directly attributable transaction costs, and subsequently measured at amortised cost using the effective interest method (regardless of whether hedge accounting is applied). Broadly, from a practical perspective, this means the principal, integral fees and interest payments will be spread over the term of the Facility in line with accounting. The Senior Debt (and any subsequent re-financings) will not be treated as a hedge of another financial arrangement.
    • Interest Rate Swaps, under which the Partnership will pay a fixed rate of interest to the swap counterparties, and receive a floating rate in return.
    • ESNs under which Limited Partner A and Limited Partner B provide funding to Holdings LP. The application of the financial arrangements rules to the ESNs is set out in Determination S59: Equity Subordinated Notes in respect of a Limited Partnership in a Public-Private Partnership issued on 3 April 2018.
    • A Letter of Credit under which Limited Partner C will provide investment support in consideration of a Sponsor Support Fee of 2.5% per annum of the current amount of Sponsor Support. The Sponsor Support Fee will be calculated daily and payable monthly in arrears.
  2. Limited Partner A, Limited Partner A2, Limited Partner B and Limited Partner C use IFRSs to prepare financial statements and to report for financial arrangements. Any Taxable Limited Partner that does not use IFRSs to prepare financial statements and to report for financial arrangements will use the same spreading method as Limited Partner A or Limited Partner B, as relevant.
  3. The Taxable Limited Partners will recognise income derived from the Crown and will deduct expenditure incurred, under the relevant provisions of the Act to the extent that the financial arrangement rules do not apply to those amounts.
  4. This determination is made subject to the continued application of the Private Rulings.

4. Principle

  1. The Facility Lease is an excepted financial arrangement under s EW 5(9). Any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(2) to (16) is not an amount that is taken into account under the financial arrangements rules (s EW 6(2)). This determination specifies the amounts that are solely attributable to the Facility Lease that are not taken into account under the financial arrangements rules.
  2. The AM/FM Phase, the D&C Subcontract and the AM/FM Subcontract are “short-term agreements for sale and purchase” as defined in section YA 1, and are excepted financial arrangements under s EW 5(22). Any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(17) to (25) that is part of a financial arrangement is an amount that is taken into account under the financial arrangements rules (s EW 6(3)). This determination specifies that no amounts payable to or by the Partnership in respect of these excepted financial arrangements are required to be spread under the financial arrangements rules.
  3. The D&C Phase, Senior Debt, Interest Rate Swaps and the Letter of Credit are “financial arrangements” under s EW 3. This determination specifies that the payments made to or by the Taxable Limited Partners, in proportion to their share in Holdings LP, under the Senior Debt, Letter of Credit, and Interest Rate Swaps must be spread under the financial arrangements rules in accordance with this determination.

5. Interpretation

In this determination, unless the context otherwise requires:

  • All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
  • Capitalised terms have the same meaning as set out in the Project Agreement.
  • ESNsmeans the unsecured equity subordinated notes, in a denomination of $1.00 issued by the Holdings LP to the Subscriber.
  • IFRS means International Financial Reporting Standards as defined in s YA 1.
  • Private Rulings means Private Rulings BR Prv 18/45 and BR Prv 18/46, issued on 3 April 2018, and includes any Rulings issued to replace those Rulings, provided that the change to the relevant Ruling does not affect the application of this determination.
  • Project Agreement is a public-private partnership agreement between the Partnership and the Crown.
  • Taxable Limited Partners has the same meaning as in the Private Rulings.

6. Method

  1. The amounts that are solely attributable to the Facilities Lease and not taken into account under the financial arrangement rules are:
    • The Rental Prepayment; and
    • The property interest granted to the Partnership under the Facility Lease.
  2. The Taxable Limited Partners do not have any amounts to spread under the financial arrangements rules in respect of the:
    • AM/FM Phase of the Project Agreement;
    • D&C Subcontract;
    • AM/FM Subcontract.
  3. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than “non-integral fees” as defined in s YA 1) over the term of the Senior Debt (including any refinancing) and none of the restrictions for application of the IFRS financial reporting method contained in s EW 15D(2B) apply.
  4. None of the mandatory spreading methods in ss EW 15H or EW 15I apply to the Interest Rate Swaps. Over the term of the Interest Rate Swaps, income or expenditure may be allocated using either:
    • the expected value method in s EW 15F (other than for “non-contingent fees” as defined in s YA 1) provided that the swaps are not treated as a hedge of other financial arrangements for which the “fair value method” is used; or
    • the IFRS financial reporting method in s EW 15D (other than for “non-integral fees” as defined in s YA 1) provided that the swaps are not treated as a hedge of other financial arrangements for which a method other than the IFRS financial reporting method is used;
    provided that each Taxable Limited Partner uses the same method for the entire term of the Interest Rate Swaps.
  5. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than "non-integral fees" as defined in s YA 1) over the term of the Letter of Credit, provided the Letter of Credit is not treated as a hedge of another financial arrangement. None of the restrictions for the application of this reporting method in s EW 15D(2B) apply.
  6. This determination does not affect each Taxable Limited Partner’s obligation to perform base price adjustments under s EW 31 in respect of the Interest Rate Swaps and Senior Debt.

7. Example

This example illustrates the application of the method set out in this determination.

This example is based on the following parameters:

Commencement of D&C Phase 7 April 2018
Completion of D&C Phase 1 February 2020
Completion of AM/FM Phase 9 December 2044
D&C Payment from the Crown $1,000
Aggregate payments to the D&C Subcontractor ($850)
Facility Lease prepayment ($1,000)
Monthly payments from the Crown during the AM/FM Phase $30
Monthly payments to the AM/FM Subcontractor ($15)
Annual interest on the Senior Debt ($85)
Annual Sponsor Support Fee during the D&C Phase ($15)
Annual net payments in respect of the Interest Rate Swaps ($7)

The Taxable Limited Partners are not required to spread any amounts under the financial arrangements rules in respect of the Facility Lease, AM/FM Phase of the Project Agreement, D&C Subcontract and AM/FM Subcontract.

The amounts that must be spread under the financial arrangement rules are:

  • Interest on the Senior Debt (including any subsequent re-financings) calculated in accordance with the IFRS financial reporting method in s EW 15D;
  • Payments in respect of the Interest Rate Swaps calculated in accordance with the expected value method in s EW 15F or the IFRS financial reporting method in s EW 15D (as relevant); and
  • Payments made and amounts received in respect of the Letter of Credit (including the Sponsor Support Fee) calculated in accordance with the IFRS financial reporting method in s EW 15D.

This Determination is signed by me on the 3rd day of April 2018.

Howard Davis
Manager (Taxpayer Rulings)