ACCC Termination Fee Report 111208 Report—PWC ACCC... · 2. Executive Summary In relation to the...
Transcript of ACCC Termination Fee Report 111208 Report—PWC ACCC... · 2. Executive Summary In relation to the...
ACCCTermination Fee ReportSeptember 2008 (updated December 2008)
ACCCPricewaterhouseCoopers
2
The report which follows is intended only for use by the Australian Competition and Consumer
Commission as it may contain confidential and/or privileged material. Any unauthorised
review, retransmission, dissemination or other use of, or taking any action in reliance on, this
position paper by persons or entities other than the Australian Competition and Consumer
Commission is prohibited.
ACCCPricewaterhouseCoopers
3
Contents
Definitions 5
1. Scope 7
2. Executive Summary 9
3. Background Facts 15
3.1 Water Charges 15
3.2 Alternative tax status of the Operators 18
4. Technical Analysis 20
4.1 Are there any factors that are now present that would
significantly alter the advice from PwC in 2006 on the
likelihood for the tax timing disadvantage?
20
4.1.1 Application of the Principle of Mutuality 20
4.1.2 Treatment of expenses incurred by Operators 24
4.2 Specific examples of how a significant tax timing
disadvantage could arise upon receipt of a Termination
Fee by irrigation and water service infrastructure
businesses
25
4.2.1 Tax continually paid over the life of the assets - Timing 27
4.2.2 Operator with carry forward losses - Timing 28
4.2.3 No tax paid over the life of the assets - Permanent 30
4.2.4 Operator with carry forward tax losses – Permanent 31
4.2.5 Termination Fee not treated as mutual receipt - Permanent 33
4.3 How a rule might be drafted to give effect to any
necessary tax adjustments in Termination Fee receipts
35
4.3.1 Blanket gross up of Termination Fees to offset tax
disadvantages
35
ACCCPricewaterhouseCoopers
4
Contents (continued)
4.3.2 Specific gross up of Termination Fees to offset tax
disadvantages
36
4.3.3 Other options to offset tax disadvantages resulting from
the receipt of Termination Fees
37
4.3.4 Gross Up Calculation 39
Appendix A - Submissions on Taxation in response to Issues Paper 40
Appendix B - Submissions on Taxation in response to Position Paper 46
Appendix C – Submissions in response to Draft Termination Fee Rules 49
Appendix D – Case Study comparison of an operator that benefits from
the principle of mutuality (eg CICL and CIMCL) and a fully
taxable Operator
51
ACCCPricewaterhouseCoopers
5
Definitions
The following abbreviations are used throughout this document:
ACCC Australian Competition and Consumer Commission.
Access Fee A fee charged to the holder of a delivery entitlement for the
right to ongoing access to water delivery services.
ATO Australian Taxation Office.
CICL Coleambally Irrigation Co-operative Limited.
CIMCL Coleambally Irrigation Mutual Co-operative Limited.
Ex Ante Before the fact – ex ante is contrasted with ex post.
Ex Post
Federal Taxpayer
After the fact – ex post is contrasted with ex ante.
An entity subject to income tax by virtue of the operation of the
Income Tax Assessment Act 1936/1997.
G-MW Goulburn-Murray Water.
Issues Paper ACCC Issues Paper – Water charge rules for charges payable
to irrigation infrastructure Operators (May 2008).
ITAA Income Tax Assessment Act 1997.
MDB Murray Darling Basin.
MIL Murray Irrigation Limited.
Murrumbidgee Murrumbidgee Irrigation Ltd.
ACCCPricewaterhouseCoopers
6
Definitions (continued)
MRFF Macquarie River Food and Fibre.
NANE Non-Assessable Non-Exempt .
NTER
Operator
National Tax Equivalent Regime.
Irrigation and Water Service Infrastructure Operator.
Position Paper ACCC Position Paper – Water charge rules for Termination
Fees (August 2008).
PwC PricewaterhouseCoopers.
Termination Fee A fee levied by an infrastructure Operator when a delivery
entitlement is surrendered to the infrastructure Operator to
terminate any rights or obligations associated with that delivery
entitlement (including any requirement to pay an Access Fee).
The Act The Water Act 2007.
WMI Western Murray Irrigation Limited.
Unless otherwise noted, all section and division references contained herein are
references to the Income Tax Assessment Act 1997.
* * *
ACCCPricewaterhouseCoopers
7
1. Scope
The scope of this engagement is to provide advice on the merits of allowing irrigation and
water service infrastructure businesses to load Termination Fees with tax liabilities in any
circumstances with particular reference to:
Whether there are any factors now present that would significantly alter the advice
from PwC in 2006 on the likelihood for the tax timing disadvantage.
Specific examples of how a significant tax timing disadvantage could arise upon
receipt of a Termination Fee by irrigation and water service infrastructure businesses
(“Operators”). We have been asked to consider the potential net tax disadvantages
taking account not only of the impact of the potential upfront assessability of the
Termination Fees, but the offsetting impact of reduced Access Fees (if any) and
potential altered tax treatment of loss or outgoings incurred over the life of the
infrastructure assets.
How a rule might be drafted to give effect to any necessary tax adjustments in
Termination Fee receipts.
Two further matters have been considered in addition to those covered in the September
2008 draft of this report:
Further consideration of the application of the mutuality principle to the Termination
Fees that may come to be derived by CICL and CIMCL - taking account of the dual
cooperative structure.
Preparation of a case study appendix illustrating the materiality of taxation liabilities
that accrue against the termination of delivery rights and examining the taxation
implications on CICL and CIMCL resulting from a 6, 15 and 30 per cent termination of
delivery rights. In addition the impact of termination on a hypothetical entity identical
to CICL and CIMCL except for its dual cooperative structure has been considered.
Additional commentary on these two aspects has been included in Section 4.1.1,
(Mutuality) and Section 4.2.5 and Appendix D (Case Study).
In undertaking the review, we have had regard to the following information:
The ACCC’s May 2008 Issues Paper on the Water Charge Rules (including
Termination Fees) (“Issues Paper”);
The ACCC’s August 2008 Preliminary Position Paper on Water Charge Rules for
Termination Fees (“Position Paper”);
The ACCC’s Draft advice, draft water charge (termination fees) rules.
The ACCC’s Draft water charge (termination fees) rules for termination fees.
The ACCC’s Explanatory statement, draft rules water charge (termination fees) rules.
ACCCPricewaterhouseCoopers
8
Submissions/input received from Operators in response to the Issues Paper, Position
Paper, or through general consultation. Due to number of submissions we performed
a limited review as set out below:
1) The submissions/inputs received which specifically relate to Question 7 and
25 (taxation related questions) of the Issues Paper (summary analysis
included as Appendix A);
2) Submissions/inputs received by the ACCC in relation to the Position Paper
from CICL/WMI (in a joint submission) and G-MW (summary analysis
included at Appendix B);
3) CICL and CIMCL’s Public Submission to Water Charge Termination Fee
Rules draft advice dated 17 November 2008.
4) MIL’s Public submission to the ACCC draft water market and water charge
rules (termination fees) dated 28 November 2008.
5) The Water Act 2007 (particularly the water charging objectives and
principles).
Various meetings and discussions with members of the ACCC’s Water Charge Rules
team.
Financial statements, calculations and projections made available by the
management of CICL and CIMCL as well as telephone discussions and email
correspondence thereon.
We note that the comments in this paper are limited to income tax and do not extend to
other tax imposts that may apply to the payments (e.g. GST).
ACCCPricewaterhouseCoopers
9
2. Executive Summary
In relation to the specific questions within the scope of this Report, our conclusions are
summarised below:
Whether there are any factors now present that would significantly alter the advice
from PwC in 2006 on the likelihood for the tax timing disadvantage.
There are no additional factors now present that would significantly alter our 2006
advice on the likelihood for a tax timing disadvantage being suffered by the Operators
as a consequence of the receipt of Termination Fees (in place of Access Fees that
would otherwise be received by the Operators).
Specific examples of how a significant tax timing disadvantage could arise upon
receipt of a Termination Fee by irrigation and water service infrastructure
businesses.
Our review of the 28 submissions to the Issues Paper and the 2 submissions to the
Position Paper has identified limited circumstances where a significant tax timing
disadvantage may arise, and/or where a permanent tax disadvantage would occur
(i.e. a cash outflow that would never be recouped). This is supported by the following
facts:
1) Any tax exempt Operators will not suffer any tax timing or other
disadvantages.
2) A number of the Operators operate at a loss, and carry forward significant
pools of tax losses, and are expected to incur future tax losses, such that the
receipt of Termination Fees results in no actual additional tax cost.
3) There are circumstances where an Operator is, and will remain, taxable, such
that the upfront receipt of the Termination Fees may bring forward tax cash
outflows, but this will be offset by a reduction in future year net tax cash
outflows.
4) While there is a risk of potential disadvantage, Operators who currently
benefit from Access Fees being treated as NANE income (e.g. CICL and
CIMCL), may be able to obtain a level of comfort that the replacement
Termination Fees also qualify as NANE income thereby avoiding any tax
timing or permanent disadvantage.
5) In the case of NTER taxpayers obligated to pay their operating profit amount
as either NTER tax payment or dividend to the State Government, any
increase in income tax equivalent that is required to be paid to the State
Government due to the receipt of assessable Termination Fees will decrease
the dividend required to be paid to the State Government. Therefore resulting
in no overall timing disadvantage. NTER taxpayers may only suffer a tax
timing disadvantage where the dividend payout policy entitles the NTER
ACCCPricewaterhouseCoopers
10
entity to retain a percentage of operating profit (e.g. we are aware of
situations where the NTER entity is obligated to pay 65% of operating profit
as either NTER entity or dividend).
Importantly, albeit in limited circumstances, as set out in the following illustrative
example a permanent tax disadvantage may be suffered by the Operator over the life
of the subject assets. In the year of receipt of a Termination Fee, the Operator will
bring a comparatively larger amount into its tax assessable income (assuming the
amount is not treated as NANE income by virtue of the principle of mutuality, or is
otherwise not exempt from tax) but in that year will only be able to claim the same tax
deductions in respect of the underlying infrastructure. However, the Operator will
continue to claim tax depreciation and other costs associated with the maintenance of
the water infrastructure over the life of the Access Fee arrangements. To the extent
that the Termination Fee is calculated by reference to foregone Access Fees over the
life of the subject assets, in most instances the after tax position for the Operator over
the life of the subject infrastructure assets should be approximately the same. The
circumstances where this may not be the case include:
1) Where the Operator is in a current taxpaying position and the receipt of the
Termination Fee results in a higher current year tax liability, and in future
years the reduced Operator income is more than offset by depreciation
deductions giving rise to future year tax losses which are not able to be
recouped against assessable income (under the current tax law, future year
losses cannot be clawed back and offset against prior year taxable income);
and
2) Where the Operator is in a current tax loss position and the dollar value of the
assessable Termination Fee received in a particular year offsets more than
the carry forward tax losses resulting in a tax liability in that year, and the
reduced Operator income in future years gives rise to higher future tax losses
which cannot be clawed back (refer above).
ACCCPricewaterhouseCoopers
11
Base Case – No tax paid over the life of the asset
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees 100 100 100 100 100 500
Total Income 200 200 200 200 200 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
(20) (20) (20) (20) (20) (100)
Cash Outlay(30% Tax Rate)
Nil Nil Nil Nil Nil Nil
Termination Fee received in Year 1 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Termination Fee 500 500
Total Income 600 100 100 100 100 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
380 (120) (120) (120) (120) (480)
Cash Outlay(30% Tax Rate)
114 Nil Nil Nil Nil 114
Furthermore, for completeness we note some Operators operating as co-operatives
have asserted in their submissions that the receipt of Termination Fees (in place of
Access Fees which benefit from the principle of mutuality and are treated as NANE
income) will be a taxable receipt as the Irrigator paying the Termination Fee will
cease to be a member of the co-operative. While the position is uncertain, we
consider that it may be arguable that the principle of mutuality could apply to the
Termination Fee in spite of the departure of the Irrigator (i.e. to the extent that the
water entitlement or delivery income of the Operator currently benefits from the
principle of mutuality, to exclude Access Fee income as NANE income, the
ACCCPricewaterhouseCoopers
12
replacement Termination Fees may also qualify as NANE income). A Private Ruling
could be sought from the Australian Taxation Office (“ATO”) in order the settle this
position1.
Even in the situation where the Termination Fee is assessable, the case study
included at Appendix D supports the conclusion that while a comparative permanent
disadvantage may be suffered by an Operator who otherwise benefits from the
principle of mutuality (eg CICL and CIMCL) as a consequence of the receipt of
Termination Fee amounts in lieu of Access Fee amounts, it is not until the level of
terminations reaches approximately 40% that the position of the mutual Operator
(eg CICL and CIMCL) is comparable to the after tax position of the fully taxable
Operator. This is principally attributable to the fact that the mutual Operator is at a
commercial advantage against a fully taxable Operator, as a consequence of the
mutual Operator excluding from its assessable income a certain level of its Access
Fee income.
How a rule might be drafted to give effect to any necessary tax adjustments in
Termination Fee receipts.
Based on the foregoing, there are limited scenarios where a permanent tax
disadvantage will result from the receipt of Termination Fees by the Operators.
If a rule was introduced which allowed for a gross up of Termination Fees in all
circumstances, Operators who are tax exempt or suffer no disadvantage on receipt of
Termination Fees will, prima facie, enjoy a competitive advantage as compared with
those limited number of Operators subject and liable to income tax who do suffer
some disadvantage from the upfront receipt of Termination Fees. In addition, the
blanket grossing up the Termination Fees transfers a problem, which affects a very
limited number of Operators (based on submissions), to all Irrigators. Therefore a
blanket gross up of all Termination Fees for tax, at the company tax rate of 30%, is
regarded as inappropriate as it is not in line with the overall aim of the Water Charge
Rules (which we understand is to ensure competitive neutrality in the MDB).
As mentioned above, a gross up of Termination Fees for tax may only be warranted
in the limited circumstances where an Operator suffers a permanent tax
disadvantage the size of which cannot be reasonably absorbed by the Operator
(e.g. where an Operator is paying tax at the time a Termination Fee is received, but
anticipates generating net tax losses in future). This being the case, a
commercial/policy issue exists regarding the competitive neutrality of requiring an
Irrigator to pay a higher Termination Fee dependent on the tax profile of the Operator
they have contracted with. This issue is complicated by the fact that a distortion in
trade already exists as a consequence of certain Operators being subject to tax, and
other Operators being exempt from tax. Providing for a ruling that allows adjustments
based on individual business structures may create further incentives to migrate
1 CICL / CIMCL have represented to us that they are in the process of preparing a Private Ruling Requestdealing with this issue.
ACCCPricewaterhouseCoopers
13
towards those type of structures which is not the understood role of the water charge
rules. Arguably any exception to the general rule that Termination Fees should not
be grossed up for tax should focus on nullifying the risk that inappropriate investment
and infrastructure maintenance decisions will be made by Operators.
If an ex ante gross up rule was to be considered, the ACCC could consider the
following rule aimed at compensating Operators for any permanent additional cash
tax outflow:
“The general rule is that there shall be no gross up of the Termination Fee for tax,
except for the circumstances where the Operator can demonstrate to the customer
that it has suffered a permanent additional tax cashflow disadvantage because:
the Termination Fee is assessable for income tax (i.e. principle of mutuality does
not apply to exclude the income as NANE income, or is not otherwise exempt
from tax ); and
the upfront assessability of the Termination Fee is expected to result in a higher
current year tax outgoing, which is not offset by reductions in future tax
outgoings;
and even in these circumstances the gross up will be limited to the additional
permanent cash tax outflow estimated, on a reasonable basis, to be suffered by the
Operator, and only where the additional permanent cash tax outflow is of sufficient
materiality not to be able to be absorbed by the Operator (i.e. will compromise the
viability of the Operator, or the service standards of the Operator or future investment
by the Operator)2.
In reaching an estimate of the additional permanent cash tax outflow disadvantage
suffered, Operators must have regard to the following:
The Operator should forecast the differential in the forecast taxable profit
or loss over the period reflected in the multiple used to calculate the
Termination Fee; and
The differential in estimated taxable income and associated permanent
additional tax outflow disadvantage is calculated by reference to:
The forecasted net taxable income result, including tax liability paid,
on the basis that the Operator continued to receive Access Fees
instead of an assessable Termination Fee; compared with,
The forecasted net taxable income results, including tax liability
paid, on the basis that the Operator receives an assessable
Termination Fee instead of Access Fees.”
We acknowledge that the above approach involves a degree of compliance
administration for those Operators seeking to gross up the Termination Fee to reflect
the expected tax impact. However, it is considered that this approach will at least
2As a general statement, the gross up of the Termination Fee for tax, even if permitted in qualifying limitedcircumstances, should not always equate to 30% of the Termination Fee.
ACCCPricewaterhouseCoopers
14
maintain the current equity and competitive neutrality between the Operators (given
their respective tax status (taxable or exempt) and profile (taxable or tax loss)).
WMI and CICL have also raised a question as to whether it would be possible to
effect an amendment to tax laws to make the “Termination Fee specifically non-
taxable”3. Presumably given the commentary that precedes these remarks WMI and
CICL are referring to a concession which would apply only to the receipt of
Termination Fees by Operators which benefit from the principle of mutuality. In this
regard we note that the Commonwealth Government has recently adopted a tax
reform agenda and the majority of the available Government resources are likely to
be focussed on this broad tax reform agenda. This raises an open question over the
likelihood of successfully lobbying the Government for legislative change to expressly
exclude Termination Fees from assessable income (even in the absence of a
significant tax reform agenda, we would question the appetite of the Federal
Government to exclude Termination Fees from assessable income where the annual
Access Fees are subject to tax).
3WMI and Coleambally have identified this issue in their submission to the August Position Paper.
ACCCPricewaterhouseCoopers
15
3. Background Facts
3.1 Water Charges
In 2007 the Minister for Climate Change and Water asked the ACCC for advice on water
charge rules, resulting in the ACCC publishing Issues Papers and a Position Paper on
the matter. Water charges aim to ensure Operators have full cost recovery for water
services provided to allow an economically efficient and sustainable use of water
resources and water infrastructure assets in the future.
The Water Act 2007 (“the Act”) came into effect on 3 March 2008. It builds on previous
reform initiatives and brings with it a range of new functions for the ACCC. The Act
creates new institutional and governance arrangements to address the sustainability and
management of water resources in the MDB, one of Australia’s most important
agricultural regions.
The ACCC has issued papers relating to the following matters:
An Issues Paper on water market rules, released in April 2008, which dealt with the
transformation and/or subsequent trade of a transformed water access entitlement;
An Issues Paper regarding water charge rules for charges payable to irrigation
infrastructure Operators, released in May 2008; and
A Preliminary Position paper on water charge rules for Termination Fees, released in
August 2008.
Draft Advice on water charge rules for Termination Fees, released in October 2008.
The ACCC’s process in developing its advice is to consult with stakeholders by seeking
submissions from interested parties to each of the above papers.
Stakeholders in the MDB have different governance frameworks which presents a
different set of issues for the development of water charge rules that contribute to the
objectives and principles of the Act. The Operators in the MDB have varying corporate
governance arrangements within each jurisdiction:
Victorian Operators are statutory authorities owned by the Victorian government
which must submit their corporate plans to ensure compatibility with government
policy.
New South Wales Operators are all privately owned with the majority of the larger
Operators being non-listed, not-for-profit companies in that member/Irrigators are in
effect the shareholders in the entity that owns the infrastructure.
South Australian Operators are all typically private trusts, where the Irrigators are the
members; and
ACCCPricewaterhouseCoopers
16
Queensland has one main Operator which has recently changed its structure from a
statutory government-owned corporation to a company government-owned
corporation.
Each of the above Operators have substantive government and/or independent
regulatory oversight in respect of operations that are privately owned and constituted as
corporations, irrigation districts or trusts.
In giving advice to the Minister regarding the proposed water charge rules in relation to
regulated water charges payable to Operators, the ACCC must have regard to:
the governance arrangements of those Operators;
the current charging arrangements of those Operators; and
the history of the charging arrangements of those Operators
This report will be an input in the development of draft rules relating to Termination Fees
received by Operators. The draft rules, which follow the earlier release of the Issues
Papers and the Position Paper, will lead into the final drafting of the Water Charge Rules
for Termination Fees and the accompanying advice to the Minister.
The ACCC’s final advice on water charge rules for Termination Fees will be provided to
the Minister in December 2008. Prior to the release of this final advice, the ACCC also
released:
a draft decision incorporating draft rules and a supporting statement of reasons; and
held public forums with interested stakeholders to discuss the ACCC’s draft advice.
ACCC’s proposed method to determine Termination Fees
The Act aims to promote the efficient use of, and investment in, irrigation infrastructure,
on-farm infrastructure and facilitate the efficient functioning of water markets in the MDB.
The ACCC has outlined in its papers to date that Termination Fees are necessary to
meet these objectives. In the August Position Paper, the ACCC defines a number of
possible options to determine the level of a Termination Fee and the adoption of a
Termination Fee cap designed to promote efficiency. It concludes that if Termination
Fees are set too low they can deter Operator and Irrigator investment while if they are set
too high they can act as a barrier to rationalisation of infrastructure and on-farm
operations.
Ultimately, if Irrigators terminate access without paying Termination Fees, then Operators
may not be able to recover their committed fixed costs. Over time this may compromise
the viability of Operators, service standards and level of future investment. The prospect
of Irrigators leaving without paying Termination Fees creates revenue uncertainty for
Operators which may undermine investment.
ACCCPricewaterhouseCoopers
17
In addition, if the Operator is in a tax paying position, then its future infrastructure funding
will need prima facie to take account of any associated income tax imposed on its
revenues.
The approach proposed in the position paper was to adopt a multiple of 12 times the
fixed Access Fee in 2006, falling to 8 times in 2015. There is no clear level to set the
multiple at, however the ACCC considers this method is the most appropriate to provide
a reasonable balance between facilitating the efficient functioning of the water market,
whilst also providing efficient investment incentives for both the Operators and Irrigators
involved.
Consistent with the ACCC’s preliminary position, the analysis presented in Appendix D
assumes a termination fee multiple of 8 times fixed Access Fees.
Draft advice position: level of Termination Fees
The maximum Termination Fee that an Operator may impose upon the termination of
access (in whole or in part) is to be the sum of the annual amounts of all fixed Access
Fees associated with the access services provided for the year in which the access is
terminated, multiplied by 10 for the period in which the access is terminated.
This method has been proposed because it delivers an extended period of revenue
stability for Operators, and fee stability for Irrigators. This should be sufficient to give
Operators time to assess the impact of water trading on demand, and to adjust their
operations if necessary.
ACCCPricewaterhouseCoopers
18
3.2 Alternative tax status of the Operators
The Operator could be either a:
Federal income taxpayer under the Income Tax Assessment Act (“ITAA”)
A Federal Income Taxpayer may be able to rely on the mutuality principle to treat
certain receipts as NANE income, and/or rely on other tax exemptions allowed for in
the ITAA to exclude certain amounts of income from assessable income.
National Tax Equivalent taxpayer under the National Tax Equivalent Regime
(“NTER”)
The NTER is a notional federal income tax that applies to certain government
business enterprises (“GBE’s”) which are exempt from Federal income tax (e.g. as
either a public authority pursuant to section 23(d) of the ITAA or as a State and
Territory Body under Division 1AB of the ITAA).
The NTER is administered by the ATO but all NTER payments are made to the State.
There is usually a relationship between the amount of NTER tax paid to the State and
the amount of dividend paid to the State. For example, a defined percentage of pre-
tax operating income may be required to be paid by the GBE to the State as NTER
payments or dividend such that any NTER payments will reduce the dollar value of
the dividend payments that need to be made by the GBE to the State.
Tax Exempt Entity
Certain entities such as community service entities, municipal corporations and
societies established for the purpose of promoting the development of Australia’s
resources, whilst prima facie subject to tax as Federal income taxpayers, are
exempted from tax and not subject to the NTER.
Specifically the information reviewed as part of the preparation of this report identifies the
following Operators as having the following tax status:
MIL submits it is “subject to Federal Income Tax, and has paid tax consistently
since privatisation.”4
G-MW submits it is “still incurring large tax losses” and any effect of Termination
Fees has been immaterial as the carry forward losses have been able to offset any
Termination Fee received.
SunWater submits in its submission that taxation “has nil effect on the Termination
Fees” as SunWater are not assessed on them.
CICL is a federal taxpayer “not-for-profit co-operative, [whose] long term aim is to
not make profit and therefore pay no tax.” CICL asserts that receipt of a
Termination Fee brings larger revenues into assessable income in a particular year
4We note that at the time of our previous advice, MIL, whilst listed as a Federal taxpayer, did not representitself to be in a tax paying position.
ACCCPricewaterhouseCoopers
19
which leads cash flow issues, in circumstances that it will not recoup the additional
depreciation charge because its aim is to not make profit.
CIMCL states that it is a mutual set up to collect levies from members for the
renewal or assets as they reach the end of their usable life and that by virtue of the
principle of mutuality, the levies collected are not taxable as they are for the benefit
of the contributing members.
Murrumbidgee submits they are “subject to the federal income tax regime” however
they “have not experienced any real tax timing disadvantage due to receipt of
Termination Fees.” Murrumbidgee also explains that it has “not experienced any
real tax timing disadvantage due to receipt of termination fees – although
[Murrumbidgee] acknowledges that such circumstances can occur.”
MRFF’s “understanding is that the Operators would have no tax implications [on
receipt of Termination Fees] as they are a not for profit organisations”.
ACCCPricewaterhouseCoopers
20
4. Technical Analysis
As outlined above, the ACCC has engaged PwC to advise on the merits of allowing
Operators to load Termination Fees with tax liabilities in any circumstances. In the
section below we have addressed in detail the specific questions raised.
4.1 Are there any factors that are now present that wouldsignificantly alter the advice from PwC in 2006 on the likelihood forthe tax timing disadvantage?
In October 2006 PwC was engaged by the ACCC to advise on any income tax
implications that may arise on the payment of water access, exit and Termination Fee
charges paid to Operators.
The previous advice focused on the income tax status of Operators listed in the paper -
being either exempt, NTER or Federal income taxpayers. On review of our previous
advice, there have not been any changes that will significantly alter the previous advice.
We note that during the period from October 2006 to date there have been several
changes to the NTER manual, however prima facie the amendments to the NTER
manual are not applicable to Operators subject to the NTER in the scenarios presented.
4.1.1 Application of the Principle of Mutuality
The other significant issue raised in our previous advice, which was reiterated in our
follow up memorandum dated 16 October 2006, was the principle of mutuality. In its
submission in response to the Position Paper, CIMCL have stated that receipt of a
Termination Fee in circumstances where the Irrigator leaves the co-operative will render
the Termination Fee taxable on the basis that the Termination Fee (as compared with the
Access Fees) is not a contribution that the leaving Irrigator will be entitled to participate in
the associated benefits of5.
The concept of mutuality is based on the simple idea that taxpayers cannot make a profit
from dealing with themselves. This concept extends to a group of people whose dealings
together are in pursuit of a common purpose, and not for profit.
In Coleambally Irrigation Mutual Co-Operative Ltd v FC of T (2004 ATC 4835),
Beaumont, Merkel and Hely JJ commented further on the mutuality principle, saying:
5WMI and Coleambally submitted that “Termination Fees would be taxable as the member is terminating
and therefore will not benefit from collection of the levy.”
ACCCPricewaterhouseCoopers
21
“…all that is required is a reasonable relationship between what a member
contributes, and the member’s expected participation in the common fund.”
In the case, the Federal Court held that the mutuality principle does not apply where
members of an entity are prevented from obtaining the value of the entity’s assets. The
effect of this decision was to exclude the application of the mutuality principle to not-for-
profit entities (because to qualify as a not-for-profit entity under State and Territory
legislation, an entity’s constituent documents must prohibit the distribution of surplus
funds to members).
The Coleambally decision went against longstanding principles adopted by the ATO in its
application of the principle of mutuality, particularly with respect to not-for-profits.
Consequently, in response to this decision, there has been a subsequent change in the
law to reinstate the previous principles and section 59-35 ITAA 1997 was inserted:
“59-35 An amount of ordinary income of an entity is not assessable income and
not exempt income if :
(a) the amount would be a mutual receipt, but for the entity’s constituent
documents preventing the entity from making any distribution, whether in
money, property or otherwise, to its members; and
(b) apart from this section, the amount would be assessable income only
because of section 6-5.”
The effect of this amendment was to make it clear that if the only thing preventing an
amount of ordinary income from being a mutual receipt is the fact that the constituent
documents of that entity prevented the entity from making a distribution, whether in
money, property or otherwise to its members, then the amount will be treated as non
assessable, non exempt income for income tax purposes.
Hill J in Coleambally made the following comments which support the fact that the
principle reasoning for his decision in denying the principle of mutuality was the issue of
distribution clauses within the constitutent documents of Coleambally, and therefore if
they had not existed, the principle most likely would have been applied:
“…it suffices here to say that I would be inclined to the view that but for Rules 71
and 75 (distribution and cessation clauses) the principles of mutuality would apply
in the present circumstances such that contributions to CIMCL would not be
income in the ordinary concepts.”
Hill J applied the law correctly as it was then stated, however the law clearly provided for
inconsistencies in relation to not-for-profits who were required by law to include such
distribution and cessation clauses in order to obtain income tax exemption. This
subsequent change to the law, and insertion on s.59-35, effectively re-opens the ability of
not-for-profits to utilise the principle of mutuality. On the basis that the change in the law
ACCCPricewaterhouseCoopers
22
had the effect of removing the restriction to the application of the principle of mutuality to
the Access Fees received by CIMCL, CIMCL became entitled to treat its Access Fees as
NANE income.
The characterisation of income derived from members as mutual in nature is contingent
on the existence of a strong relationship between a member’s contribution and
participation in the benefits of membership. The Explanatory Memorandum to the Tax
laws Amendment (2005 Measures No 6) Bill 2005 offers some further clarification on the
broad principles:
“Mutuality is a legal principle based on the proposition that a taxpayer cannot
derive income from itself. Under the mutuality principle, if members contribute to
a common fund created and controlled by them for a common purpose, and those
contributing members are essentially the same as those who participate in the
fund, then the member contributions and receipts from member dealings are not
taxable income. Under the principle of mutuality, all or essentially all, the
contributors to a common fund must be entitled to participate in any surplus of the
common fund.”
However, it is not the relationship alone which determines the mutuality of income. Lord
MacMilan, in IRC v Ayrshire Employers Mutual Insurance Association Ltd (1946) 1 All ER
637 reinforces the fact that the mutuality of income is found in the character of the
transaction rather than purely the fact that it is a dealing between members:
“It is not membership or non-membership which determines immunity from or
liability to tax; it is the nature of the transactions. If the transactions are of the
nature of (in this case) mutual insurance, the resultant surplus is not taxable
whether the transactions are with members or non-members… There is nothing
to prevent a mutual insurance company entering into a contract of mutual
insurance with a person who is not a member of the company.”
This clearly illustrates that the Courts consider it the nature of the transactions
undertaken, and not whether it is a transaction with a member, that should determine the
mutuality of the income derived from that transaction.
Furthermore, for mutuality to exist there is precedent to support the notion that it matters
not that the class had been diminished by persons going out of the scheme or that others
may come in their place in the future provided that there is identity between the
contributors and the participators, at least as a class. Upjohn J in Faulconbridge
(Inspector of Taxes) v National Employers Mutual General Association Ltd (1951- 1952)
33 TC 103 said:
“…at any given moment of time the persons who are contributing must be
identical with the persons who are entitled to participate; whereas it follows, in my
judgement, that it matters not that the class had been diminished by persons
going out of the scheme or that others may come in their place in the future.”
ACCCPricewaterhouseCoopers
23
On the basis of the foregoing, what matters is that the contributions will contribute to
promote the economically efficient and sustainable use of water resources and water
infrastructure for remaining members and not that the class had been diminished by
persons going out of the scheme or that others may come in their place in the future.
This being the case, it would seem arguable that if the arrangements are such that the
Access Fees are exempt from tax by virtue of the principle of mutuality that the
replacement Termination Fees received by the Operators from Irrigators could similarly
be excluded from assessable income even in scenarios where an Irrigator leaves the
collective.
The rules of CIMCL state the objective of the co-operative is to replace, refurbish and
provide future funding for the timely replacement and refurbishment of Coleambally
irrigation infrastructure for the benefit of its members. The primary activities of CIMCL
include repairs, refurbishment, maintenance and infrastructure construction and
establishing reserves sufficient to meet anticipated expenses and liabilities of CIMCL in
the future. To cover these costs, expenses and overheads of CIMCL carrying out its
primary activities, Irrigators are required to pay, Access Fees (ie Sink Fund Levy (“SFL”)
contributions) in addition to the water supply levies paid to CICL.
The crux of the issue is how critical to the conclusion as to the assessability of the
Termination Fee income is the fact that the Irrigator who pays the Termination Fee will
not be a member of the cooperative and therefore will not benefit from the contribution,
and does this fact alter the nature of the Termination Fee (as a prepayment of otherwise
payable Access Fees). The argument in support of the consistent treatment of Access
Fees and replacement Termination Fees could run along the following lines:
The Access Fees received by CIMCL are accepted as NANE income.
The objective of CIMCL is to fund long term irrigation infrastructure requirements
of its members. That is, the Access Fees received by CIMCL are used to fund
the long term sustainability of the irrigation network well into the future -
potentially when many of the current contributing members of the cooperative will
no longer be members, and therefore will not “participate” in the benefits of the
fund.
The Termination Fees are a prepayment of otherwise payable Access Fees by a
Terminating Irrigator.
The members of CIMCL will benefit from the receipt of the Termination Fees in
much the same way as the members of CIMCL will benefit from the receipt of the
Access Fees.
The conclusion as to the correct tax treatment of the Termination Fees is uncertain. We
understand that CIMCL is proposing to make an application for private ruling dealing with
this issue. We recommend that there may be some benefit in CIMCL engaging informally
ACCCPricewaterhouseCoopers
24
with the ATO prior to finalising its ruling application in order to gauge the degree of
sensitivity around the issue and assess the merits of lodging a ruling request.
Subsequent to this, we recommend that the Operator (eg CICL and CIMCL) review their
position and seek to obtain a Private Ruling from the ATO in relation to the tax treatment
applying to the Termination Fees and the effect of the receipt of Termination Fees on
their otherwise mutual status.
For completeness we note that if a not-for-profit Operator receives both mutual receipts
and other income (e.g. service charges from third party non-members, interest on
investments, or government grants) these other income receipts remain, prima facie,
taxable.
4.1.2 Treatment of expenses incurred by Operators
If a not-for-profit Operator has incurred expenses in earning both assessable income and
non-assessable, non-exempt (mutual receipt) amounts, the tax deduction the Operator
will be able to claim will be limited to the extent that the expenditure is incurred in deriving
the Operator’s assessable income. This means there may be a need to apportion
expenses between those incurred to produce assessable income and those incurred to
produce NANE income.
Broadly speaking expenses incurred can be categorised for income tax purposes as
follows:
Allowable deductions – expenses relating specifically to assessable non-mutual
income, expenses relating to wholly assessable income (e.g. investment expenses),
and non-apportionable deductions including contributions to staff superannuation,
and donations to approved funds, where the Act provides for claims to be deductible
in full;
Non-allowable deductions – expenses relating specifically to the derivation of mutual
income (ie NANE income); and
Partly allowable deductions – expenses incurred in the derivation of mutual and
assessable income (e.g. depreciation, maintenance, printing, postage, stationary,
telephone, electricity, bank charges, rent and insurance). These expenses will need
to be apportioned.
Where the identification and separation of mutual and non-mutual expenses is not
possible, it will be necessary to use a practical and suitable method for apportioning the
expenses. The ATO will accept various methods of apportionment provided:
there is a reason for apportioning the expenditure;
the method chosen is suitable for that type of expenditure;
the method chosen is reasonable and is not arbitrary; and
it gives a correct reflection of the expenditure incurred.
ACCCPricewaterhouseCoopers
25
4.2 Specific examples of how a significant tax timing disadvantagecould arise upon receipt of a Termination Fee by irrigation andwater service infrastructure businesses.
In the absence of any tax exemptions or other non assessable income determinations
(e.g. as a result of the principle of mutuality) the receipt of income from Access and
Termination Fees will prima facie constitute assessable income under either the federal
income tax or NTER. In the normal course of business Operators receive Access Fees,
which are prima facie assessable for income tax purposes, and claim tax deductions in
the form of depreciation, funding and maintenance costs relating to their infrastructure.
Our review of the 28 submissions to the Issues Paper and the 2 submissions to the
Position Paper has identified limited circumstances where a significant tax timing
disadvantage may arise, and/or where a permanent tax disadvantage would occur (i.e. a
cash outflow that would never be recouped).
We note the following:
Any tax exempt Operators will not suffer any tax timing or other disadvantages.
A number of the Operators operate at a loss, and carry forward significant pools of
tax losses, and are expected to incur future tax losses, such that the receipt of
Termination Fees results in no actual additional tax cost.
There are circumstances where an Operator is, and will remain, taxable, such that
the upfront receipt of the Termination Fees may bring forward tax cash outflows, but
this will be offset by a reduction in future year net tax cash outflows (resulting in no
real disadvantage).
While there is a risk of potential disadvantage, Operators who currently benefit from
Access Fees being treated as NANE income (e.g. CICL and CIMCL), may be able to
obtain a level of comfort that the replacement Termination Fees also qualify as NANE
income thereby avoiding any tax timing or permanent disadvantage.
In the case of NTER taxpayers obligated to pay their operating profit amount as either
NTER tax payment or dividend to the State Government, any increase in income tax
equivalent that is required to be paid to the State Government due to the receipt of
assessable Termination Fees will decrease the dividend required to be paid to the
State Government. Therefore resulting in no overall timing disadvantage. NTER
taxpayers may only suffer a tax timing disadvantage where the dividend payout policy
entitled the NTER entity to retain a percentage of operating profit (e.g. we are aware
of situations where the NTER entity is obligated to pay 65% of operating profit as
either NTER entity or dividend).
However, tax timing disadvantages and permanent tax disadvantages could potentially
arise upon receipt of assessable Termination Fees by Operators in circumstances where
ACCCPricewaterhouseCoopers
26
the Operator is subject to federal income tax or NTER tax equivalent6 (subject to the
additional comments below) and is tax paying. In the year of receipt of a Termination
Fee, the Operator will bring a comparatively larger amount into its tax assessable income
(assuming the amount is not treated as NANE income by virtue of the principle of
mutuality, or some other exemption) but in that year will only be able to claim the same
tax deductions in respect of the underlying infrastructure. However, the Operator will
continue to claim tax depreciation and other costs associated with the maintenance of the
water infrastructure over the life of the Access Fee arrangements. To the extent that the
Termination Fee is calculated by reference to foregone Access Fees over the life of the
subject assets, in most instances the after tax position for the Operator over the life of the
subject infrastructure assets should be approximately the same. The circumstances
where this may not be the case include:
Where the Operator is in a current taxpaying position and the receipt of the
Termination Fee results in a higher tax liability, and in future years the reduced
Operator income is more than offset by depreciation deductions giving rise to future
year tax losses which are not able to be recouped against assessable income (under
the current tax law, future year losses cannot be clawed back and offset against prior
year taxable income); and
Where the Operator is in a current tax loss position and the dollar value of the
assessable Termination Fee received in a particular year offsets more than the carry
forward tax losses resulting in a tax liability in that year, and the reduced Operator
income in future years gives rise to higher future tax losses which cannot be clawed
back (refer above).
Furthermore, for completeness we note some Operators operating as co-operatives have
asserted in their submissions that the receipt of Termination Fees (in place of Access
Fees which benefit from the principle of mutuality to be treated as NANE income) will be
a taxable receipt as the Irrigator paying the Termination Fee will cease to be a member of
the co-operative. Whilst the position is uncertain, we consider that it may be arguable
subject to the comments made at item 4.1.1 that the principle of mutuality could apply to
the Termination Fee in spite of the departure of the Irrigator (i.e. to the extent that the
water entitlement or delivery income of the Operator currently benefits from the principle
of mutuality, to exclude Access Fee income as NANE income, the replacement
Termination Fees may also qualify for as NANE income). A Private Ruling could be
sought from the Australian Taxation Office (“ATO”) in order the settle this position.
The examples below outline a variety of different scenarios which result in either a tax
timing disadvantage or a permanent tax disadvantage.
6Where the NTER entity is not obligated to distribute its operating profit as either NTER payment(s) ordividend.
ACCCPricewaterhouseCoopers
27
4.2.1 Tax continually paid over the life of the assets - Timing
A tax timing disadvantage can arise where the Operator is a Federal income tax payer, or
is subject to the NTER7, who is consistently in a tax payable position. WMI and
Coleambally have addressed this point in their submission stating that after removing the
two abnormal income producing events that have existed during the last 7 years, CICL’s
average yearly profit since privatisation is $0.782M. “This figure is an accurate
representation of the long-term profit expectations of CICL and is consistent with a
principle of minimising profits without losing money in the long term. Based on CICL’s tax
rate of 30%, this produces an average yearly tax bill of $0.235M.”
The example below is based on facts similar to the scenario CICL has identified above.
Upon receipt of a Termination Fee, the Operator will bring comparatively larger revenues
into its assessable income in that year. However they will only be able to claim the same
tax deductions for the underlying infrastructure as in previous years. We emphasise that
this is only a tax timing disadvantage and the permanent tax disadvantage is nil (i.e. in
the long term, disregarding the time value of money).
Base Case – Tax continually paid over the life of the asset
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees 100 100 100 100 100 500
Total Income 200 200 200 200 200 1000
Depreciationdeductions
(80) (80) (80) (80) (80) (400)
Taxable Income(Loss)
120 120 120 120 120 600
Cash Outlay(30% Tax Rate)
36 36 36 36 36 180
7Where the NTER entity is not obligated to distribute its operating profit as either NTER payment(s) ordividend.
ACCCPricewaterhouseCoopers
28
Termination Fee received in Year 1 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Termination Fee 500 500
Total Income 600 100 100 100 100 1000
Depreciationdeductions
(80) (80) (80) (80) (80) (400)
Taxable Income(Loss)
520 20 20 20 20 600
Cash Outlay(30% Tax Rate)
156 6 6 6 6 180
As demonstrated above, the initial tax liability paid of $156M in year one will be recouped
through a reduction in the tax payable in future assessable income years as Access Fee
revenue will decrease resulting in a tax timing disadvantage. Effectively the only
difference is that the tax outlaid is brought forward to year one instead of being spread
over the 5 years and therefore results in no permanent difference (i.e. total tax cash
outlaid is $180M in both scenarios).
4.2.2 Operator with carry forward losses - Timing
A tax timing disadvantage can also arise in the scenario where an Operator has brought
forward losses. The receipt of a Termination fee may bring forward the point at which the
Operator begins to pay tax. Several submissions were received addressing this point.
WMI and Coleambally submitted that “no disadvantage occurs if the Termination Fee
collected is smaller than the tax losses” being carried forward. However “if the fee is
greater [than the carry forward tax losses], a tax timing disadvantage will occur.”8 In their
submission, G-MW state that “the receipt of Termination Fees will erode [carry forward]
tax loss[es] at a faster rate than would otherwise have occurred, bringing forward the
timing of when an operator will enter a tax paying position.9”
In the illustrative examples below, the Operator has accumulated brought forward losses
at the outset of $600M.
8 WMI and Coleambally have identified this issue in their submission to the August Position Paper9 G-MW has identified this issue in their submission to the August Position Paper.
ACCCPricewaterhouseCoopers
29
Base Case – Carry forward losses utilised by Year 5
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees 100 100 100 100 100 500
Total Income 200 200 200 200 200 1000
Depreciationdeductions
(50) (50) (50) (50) (50) (250)
Losses utilised (150) (150) (150) (150) - (600)
Taxable Income(Loss)
Nil Nil Nil Nil 150 150
Carried forwardloss
(450) (300) (150) Nil Nil Nil
Cash Outlay(30% Tax Rate)
Nil Nil Nil Nil 45 45
Termination Fee received in Year 1 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Termination fee 500 Nil Nil Nil Nil 500
Total Income 600 100 100 100 100 1000
Depreciationdeductions
(50) (50) (50) (50) (50) (250)
Losses utilised (550) (50) Nil Nil Nil (600)
Taxable Income(Loss)
Nil Nil 50 50 50 150
Carried forwardloss
(50) Nil Nil Nil Nil Nil
Cash Outlay(30% Tax Rate)
Nil Nil 15 15 15 45
ACCCPricewaterhouseCoopers
30
Again in this example the overall tax liability is the same in both scenarios. A tax timing
disadvantage results to bring forward a part of the total tax liability from year 5 to
years 3 and 4.
4.2.3 No tax paid over the life of the assets - Permanent
An alternative scenario which could arise is where an Operator is a Federal income tax
payer or is subject to the NTER10 and is consistently making income tax losses. When a
Termination Fee is received by such an Operator and it results in the Operator being in a
tax payable position at year end, a permanent tax disadvantage may arise if they
continue to make income tax losses in future years. This is illustrated in the numerical
example below:
Base Case – No tax paid over the life of the asset
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees 100 100 100 100 100 500
Total Income 200 200 200 200 200 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
(20) (20) (20) (20) (20) (100)
Cash Outlay(30% Tax Rate)
Nil Nil Nil Nil Nil Nil
10Where the NTER entity is not obligated to distribute its operating profit as either NTER payment(s) or
dividend.
ACCCPricewaterhouseCoopers
31
Termination Fee received in Year 1 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Termination Fee 500 500
Total Income 600 100 100 100 100 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
380 (120) (120) (120) (120) (480)
Cash Outlay(30% Tax Rate)
114 Nil Nil Nil Nil 114
As demonstrated above, a permanent tax disadvantage occurs when the initial tax liability
paid on the Termination Fee, of $114, will not be recouped in future years due to the
Operator continuing to make income tax losses.
4.2.4 Operator with carry forward tax losses - Permanent
In addition, a permanent tax disadvantage can arise in the situation where an Operator,
which is a Federal income tax payer or is subject to the NTER, is not in a tax payable
position and has carry forward losses. If on receipt of Termination Fee the carry forward
losses are not sufficient to offset the increase in assessable income received, the
Operator may become liable to pay income tax during the period in which it would have
otherwise received Access Fees that would have been offset by carry forward losses.
A numerical example is included below:
ACCCPricewaterhouseCoopers
32
Base Case – Operator with Carry Forward Tax loss
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees 100 100 100 100 100 500
Total Income 200 200 200 200 200 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
(20) (20) (20) (20) (20) (100)
Carry forward taxloss
(20) (40) (60) (80) (100) (100)
Cash Outlay (30%Tax Rate)
Nil Nil Nil Nil Nil Nil
Termination Fee received in Yr 3 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access/TerminationFees
100 100 300 Nil Nil 500
Total Income 200 200 400 100 100 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
(20) (20) 140 (120) (120) (260)
Carry forward taxloss
(20) (40) Nil (120) (240) (240)
Cash Outlay (30%Tax Rate)
Nil Nil 42 Nil Nil 42
The net cash outlay of $42 in the example above is a permanent tax disadvantage if the
Operator continues to make tax losses in future years.
ACCCPricewaterhouseCoopers
33
However, no permanent tax disadvantage will arise where the Operator has carry forward
losses that are sufficient to absorb the assessable Termination Fee received in the
relevant period (and the Operator continues to generate tax losses in future years).
4.2.5 Termination Fee not treated as mutual receipt - Permanent
The worst case scenario would result where a Federal taxpayer who benefited from the
principle of mutuality in relation to their Access Fees entitlements received a Termination
Fee which was treated as taxable. Not only would there be an upfront tax liability, but any
losses carried forward would also be reduced. WMI and CICL draw attention to this
possibility in their joint submission in response to the Position Paper, stating: “CIMCL
collects levies on behalf of the members for the future replacement of assets. As a
mutual the levies are not taxable because they are collected from the members for the
benefit of the members. Interest and other income are taxable. The advice that has
been received is that termination fees would be taxable as the member is terminating and
therefore will not benefit from collection of the levy.” The example below illustrates the
result in this scenario.
Base Case – No tax paid over the life of the asset
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Access Fees(non taxablemutual income)
100 100 100 100 100 500
Total taxableincome
100 100 100 100 100 500
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
(120) (120) (120) (120) (120) (600)
Cash Outlay(30% Tax Rate)
Nil Nil Nil Nil Nil Nil
ACCCPricewaterhouseCoopers
34
Termination Fee received in Year 1 [at nominal value]
2008
$M
2009
$M
2010
$M
2011
$M
2012
$M
Total
Other Income 100 100 100 100 100 500
Termination Fee(taxable)
500 500
Total taxableincome
600 100 100 100 100 1000
Depreciationdeductions
(220) (220) (220) (220) (220) (1100)
Taxable Income(Loss)
380 (120) (120) (120) (120) (480)
Cash Outlay(30% Tax Rate)
114 Nil Nil Nil Nil 114
In this scenario, not only does a tax liability of $114M result on receipt of the Termination
Fee, but at the end of the period carried forward losses are $600M in the Base Case but
only $480M in the Termination Fee example.
Although this is the case where you are comparing the relative position of a particular
Operator who benefits from the mutuality principle (ie mutual Operator), when a
comparison is made with the after tax position of a fully taxable Operator, the taxation of
the Access Fees in a mutual structure retains its advantage against a fully taxable
Operator until the level of terminations approximate 40%11.
This is primarily attributable to the fact that compared with a fully taxable Operator a
mutual Operator does not pay tax on its mutual Access Fees (and may incur very little
expenditure in the derivation of the mutual income). The effective swapping of mutual
Access Fees for taxable Termination Fees in a mutual Operator erodes the relative
advantage of the mutual Operator as compared with a fully taxable Operator.
Furthermore a material permanent disadvantage is not likely to be suffered by the mutual
Operator until the 30% level of terminations [refer to the case study attached at
11The case study at Appendix D supports that at a termination of delivery rights of 40% the net present value
of tax liabilities in the CICL and CIMCL group and its counterfactual fully taxable business become
comparable.
ACCCPricewaterhouseCoopers
35
Appendix D12 which supports the potential disadvantage at 30% terminations to be in the
region of 20% of the after tax position].
This disadvantage could be offset by investment of the Termination Fees not required to
meet the current needs of CICL / CIMCL - such that the extent of the disadvantage could
be reduced well below the 20% of the after tax position - determined in the absence of
investment returns.
When factoring in investment returns, the results at Appendix D reflect a potential
disadvantage in the region of 7.9%.
Finally we understand that even these implications can be further mitigated as at these
levels of termination of delivery rights (ie when terminations exceed 30% or more), some
rationalisation may be possible and cost savings may be generated. Any impact of
terminations above that level may therefore be offset to an extent by such savings.
4.3 How a rule might be drafted to give effect to any necessary taxadjustments in Termination Fee receipts
Based on our review of the submissions, and as explored in the section above, there are
only limited circumstances where a material permanent tax disadvantage may arise from
the receipt of Termination Fees.
In many circumstances the advance receipt of Access Fees in the form of Termination
Fees, would either be non-assessable, offset by the Operators carry forward tax losses or
would merely cause a tax timing disadvantage that would be recouped in future years
(e.g. SunWater, MI and G-MW). In these circumstances it is arguable that no gross up is
appropriate.
4.3.1 Blanket gross up of Termination Fees to offset tax disadvantages
If a rule was introduced which allowed for a gross up of Termination Fees in all
circumstances, Operators who are exempt from income tax or suffer no real tax
disadvantage as a consequence of the receipt of a Termination Fee(s) will, prima facie,
have a competitive advantage against those Operators subject and liable to income tax.
12The case study reflected at Appendix D compares the relative position of a mutual Operator with a fully
taxable Operator taking account of the taxation liabilities that accrue from a 6, 15 and 30 per cent
termination of delivery rights. The case study assumes, consistent with the proposition presented by
CIMCL, that CIMCL’s access fee income is non-assessable by virtue of the mutuality principle, but
termination fees are treated as taxable. The hypothetical or counterfactual business operates as a single
entity whose income (access fees and termination fees) are assessable (this represents the more typical
tax treatment for an operator which is subject to tax). The assumptions used in and the results emanating
from the case study are included at Appendix D.
ACCCPricewaterhouseCoopers
36
In addition by allowing the gross up the Termination Fees, the result will be to transfer a
problem, which only affects a very limited number of Operators (based on submissions),
to all Irrigators. Therefore a blanket gross up of all Termination Fees for tax, at the
company tax rate of 30%, is regarded as inappropriate as it is not in line with the overall
aim of the Water Charge Rules (which we understand is to ensure competitive neutrality
in the MDB13).
4.3.2 Specific gross up of Termination Fees to offset permanent taxdisadvantages
As mentioned above, a gross up of Termination Fees for tax may only be warranted in
the limited circumstances where an Operator suffers a permanent tax disadvantage the
size of which cannot be reasonably absorbed by the Operator (e.g. where an Operator is
paying tax at the time a Termination Fee is received, but anticipates generating net tax
losses in future). This being the case, a commercial/policy issue exists regarding the
competitive neutrality of requiring an Irrigator to pay a higher Termination Fee dependent
on the tax profile of the Operator they have contracted with. This issue is complicated by
the fact that a distortion in trade already exists as a consequence of certain Operators
being subject to tax, and other Operators being exempt from tax. Arguably any exception
to the general rule that Termination Fees should not be grossed up for tax should focus
on nullifying the risk that inappropriate investment and infrastructure maintenance
decisions will be made by Operators.
If an ex ante gross up rule was to be considered, the ACCC could consider the following
rule aimed at compensating Operators for any permanent additional cash tax outflow:
“The general rule is that there shall be no gross up of the Termination Fee for tax,
except for the circumstances where the Operator can demonstrate to the customer
that it has suffered a permanent additional tax cashflow disadvantage because:
the Termination Fee is assessable for income tax (i.e. principle of mutuality does
not apply to exclude the income as NANE income, or is not otherwise exempt
from tax ); and
the upfront assessability of the Termination Fee is expected to result in a higher
current year tax outgoing, which is not offset by reductions in future tax
outgoings;
and even in these circumstances the gross up will be limited to the additional
permanent cash tax outflow estimated, on a reasonable basis, to be suffered by the
Operator, and only where the additional permanent cash tax outflow is of sufficient
materiality not to be able to be absorbed by the Operator (i.e. will compromise the
viability of the Operator, or the service standards of the Operator or future investment
by the Operator)14.
13To the extent that competitive neutrality can be achieved given the distortion in trade which exists by virtueof the different tax status of the Operators (fie federal taxpayer, NTER entity or tax exempt).
14As a general statement, the gross up of the Termination Fee for tax, even if permitted in qualifying limitedcircumstances, should not always equate to 30% of the Termination Fee.
ACCCPricewaterhouseCoopers
37
In reaching an estimate of the additional permanent cash tax outflow disadvantage
suffered, Operators must have regard to the following:
The Operator should forecast the differential in the forecast taxable profit
or loss over the period reflected in the multiple used to calculate the
Termination Fee; and
The differential in estimated taxable income and associated permanent
additional tax outflow disadvantage is calculated by reference to:
The forecasted net taxable income result, including tax liability paid,
on the basis that the Operator continued to receive Access Fees
instead of an assessable Termination Fee; compared with,
The forecasted net taxable income results, including tax liability
paid, on the basis that the Operator receives an assessable
Termination Fee instead of Access Fees.”
We acknowledge that the above approach involves a degree of compliance
administration for those Operators seeking to gross up the Termination Fee to reflect the
expected tax impact. However, it is considered that this approach will maintain equity and
competitive neutrality between the Operators (irrespective of their tax status (taxable or
exempt) and profile (taxable or tax loss)).
The Operator would need to demonstrate and support to the Irrigator in question that it
will incur a permanent additional cash tax outgoing due to receipt of Termination Fees
which will not be offset by the reduction of tax paid in future years. This would be based
on an estimated/reasonable expectation of the additional permanent tax disadvantage
and the Operator would have to provide sufficient details regarding the additional tax
outgoing suffered and be able to quantify and substantiate the loss that is being
estimated based on a mandatory set of criteria, benchmarks, formats and information as
set by the ACCC (refer above for an example). It will be necessary for the Operators to
forecast results, similar to the scenarios outlined in 4.2.1 to 4.2.5, with regard to the
period reflected in the multiple used to calculate the Termination Fee (e.g. If Access Fees
are multiplied over 11 years then the Operator will need to provide the Irrigator with an 11
year forecast).
Where Operators and Irrigators are unable to reach agreement, the ACCC may be
required to resolve the issue by enforcing the rule and compliance with the overall
process.
4.3.3 Other Options to offset tax disadvantages resulting from receipt ofTermination Fees
Based on the comments above, grossing up Termination Fees may not be the most
equitable or practicable method to offset even the permanent tax disadvantages that may
arise on receipt of Termination Fees for a select few Operators that may be affected.
ACCCPricewaterhouseCoopers
38
We note that WMI and CICL have raised a question as to whether it would be possible to
effect an amendment to tax laws to make the “Termination Fee specifically non-
taxable”15. Presumably given the commentary that precedes these remarks WMI and
CICL are referring to a concession which would apply only to the receipt of Termination
Fees by Operators which benefit from the principle of mutuality. In this regard we note
that the Commonwealth Government has recently adopted a tax reform agenda and the
majority of the available Government resources are likely to be focussed on this broad
tax reform agenda. This raises a question over the likelihood of successfully lobbying the
Government for legislative change to expressly exclude Termination Fees from
assessable income (even in the absence of a significant tax reform agenda, we would
question the appetite of the Federal Government to exclude Termination Fees from
assessable income where the annual Access Fees are subject to tax).
15 WMI and Coleambally have identified this issue in their submission to the August Position Paper.
ACCCPricewaterhouseCoopers
39
4.3.4 Gross Up Calculation
For completeness, to the extent to which the Operators are permitted to gross up the
Termination fees for income tax, the gross up should prima facie be calculated by
reference to the level of permanent cash tax disadvantage suffered by the Operator.
CICL and CIMCL submit that the gross up of the Termination Fee should be calculated
as set out in the following example:
$M
Pre tax Termination Fee 100
Gross up 42
Grossed up Termination Fee 142
Prima facie income tax @ 30% 42
Net of tax Termination Fee 100
While this is prima facie correct, this formula fails to take account of the potential for the
actual additional tax liability suffered by the Operator to be less than 30% of the
Termination Fee received (refer to the worked examples at Item 4.2.3 and Item 4.2.5
where the permanent tax disadvantage suffered was limited to $114M which was less
than 30% of the $500M (ie $150M), and example at item 4.2.4 where the permanent tax
disadvantage suffered was limited to $42M which was less than 30% of the $300M (ie
$90M).
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
40
Submission Question 7 Question 25
The Allen Consulting
Group
Question not addressed Question not addressed
The Bondi Group Question not addressed Question not addressed
The Bourke Shire
Council
Question not addressed Question not addressed
Callandoon Water
Board
Question not addressed Question not addressed
Central Irrigation
Trust
Question not addressed Question not addressed
Coleambally Irrigation
Co-operative Ltd
Question 7(b):
“As a not-for-profit co-operative, our long
term aim is to make no profit and therefore
pay no tax. Consequently, there should be
little difference to other entities (non taxed)
across the basin.”
Question 25:
“CICL has a fixed tax uplift to account for
the worst case scenario (30%) and applied
it to all. Note that the 30% real tax timing
disadvantage results in an uplift of 42.8%
because the tax is applied on the uplifted
amount. See response to Question 7e for
details and basis”
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
41
Submission Question 7 Question 25
Question 7(e):
“One customer currently holds more than
20,000ML of entitlement within CICL.
They wish to take that out. This equates
to a termination fee of over $6 million
(CICL + CIMCL) pre tax uplift. Our annual
operating budget is in the order of $9-10
million and our aim is no profit. We have
to bring that termination fee into our
income and it will therefore attract 30%
income tax as it is too large to offset
against our typical expenditure. The
entitlement is about 4% of our total
entitlement. Where only small amounts
(less than 250 ML) are traded out the
impact is negligible and the real tax timing
disadvantage can be absorbed. But, with
large amounts like this (and they may be
higher if COAG lifts the 4% limit) the real
tax timing disadvantage is very close to
the 30%. Our options are:
(i) Have varying degrees of tax uplift
depending on the quantity traded out
(administrative nightmare);
(ii) Have a fixed tax uplift to account for
the worst case scenario (30%) and
apply it to all (CICL’s approach).
Note that the 30% real tax timing
disadvantage results in an uplift of
42.8% because the tax is applied on
the uplifted amount.
D Ferguson & P Leslie Question not addressed Question not addressed
Trangie-Nevertire
Irrigation Scheme
(TNIS)
Question not addressed Question not addressed
Dept of Natural
Resource and Water
(Qld)
Question not addressed Question 25:
“Taxation has nil effect on the termination
fees”
D W Sehestedt Question not addressed Question not addressed
E O Whittle Question not addressed Question not addressed
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
42
Submission Question 7 Question 25
Goulburn-Murray
Water (G-MW)
Question 7:
“G-MW is subject to the National Tax
Equivalents Regime”
Question 25:
“G-MW has not yet made taxation
adjustments to termination fees. G-MW
believes that adjustments are warranted in
situations where post-tax revenue stream
would not otherwise be sufficient to
provide the intended price stability for
remaining delivery system customers.
“For G-MW, any Government grants for
capital purposes will be treated as an
equity contribution direct to the balance
sheet and not included as revenue for
taxation purposes. Other treatments are
similar to those outlined in the Issues
Paper.”
“G-MW is still incurring large tax losses as
tax depreciation is still calculated using
accelerated depreciation rates, and
therefore tax issues have not materialized
yet. As the tax losses reverse in the future
other tax treatments will gain importance.”
“Termination fee receipts to date have
been immaterial. However the taxation
implications will need to be modelled and
they will need to incorporate a tax impact
or there will be real revenue leakage.”
M Brady Question not addressed Question not addressed
Macquarie River Food
& Fibre
Questions 7:
“MRFF’s understanding is that the
operators would have no tax implications
as they are not for profit organizations and
although they may accumulate funds over
a period these are only for reserve
purposes for time of need. With respect to
irrigators, they should not be taxed on
transforming a Water License into a Water
Access License as this is a government
process not a sale. Any tax liability would
only occur at a trade and not
transformation.”
Question not addressed
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
43
Submission Question 7 Question 25
Minerals Council of
Australia
Question not addressed Question not addressed
Murray Irrigation
Limited
Question 7
“Murray Irrigation is subject to Federal
Income Tax, and has paid tax consistently
since privatisation.”
Question 25:
“Termination fees treated as taxable
income and incurs company tax liability.”
“Competitive neutrality does not (occur)
where company tax is paid by some
irrigation operators and as a result of
institutional arrangements and
arrangements with Government and not
others.”
“…a distortion to trade exists where
company tax is paid by some irrigation
operators and not others due to prior
arrangements with Government or their
institutional structure.”
“In response to the ACCC’s question on
whether taxation adjustments are made to
termination fees; and on what basis are
they made, Murray Irrigation advises that
termination fees are treated as taxable
income under current tax laws. This
means that the taxed paid on termination
fee income is an unavoidable and
legitimate “cost of business” and should
be added to the termination fee. This
ensures that the irrigation operator is able
to pay the relevant tax ensuring the
remaining customers are no worse off.”
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
44
Submission Question 7 Question 25
“In respect of the ACCC’s question
examples of where a significant,
inexorable, real tax timing disadvantage
has been experienced from the receipt of
termination fees, Murray Irrigation advises
that this matter has not arisen as a tax
issue. However, termination fees are
treated as taxable income and tax will be
payable upon their receipt.”
Murrumbidgee
Irrigation Ltd
Question 7
“MI is subject to the federal income tax
regime.”
Question 25:
“MI currently makes no adjustment for tax
in the calculation of its termination fees.”
“Water delivery prices may vary across the
basin due to varying tax obligations.
However, the effect is likely to be small.
Taxation should be given much lower
priority than other more important issues
in the water charge rules.”
“MI… has not experienced any real tax
timing disadvantage due to receipt of
termination fees – although we
acknowledge that such circumstances can
occur.”
Narromine Irrigation
Board of Management
Question not addressed Question not addressed
National Farmers’
Federation
Question not addressed Question not addressed
National Water
Commission
Question not addressed Question not addressed
NSW Farmers
Association
Question not addressed Question not addressed
NSW Irrigators
Council
Question not addressed Question not addressed
NSW Murray Wetlands
Working Group
Question not addressed Question not addressed
Appendix A – Summary of Tax Elements in Issues Paper Submissions
ACCCPricewaterhouseCoopers
45
Submission Question 7 Question 25
South Australia
Murray Irrigators
Question not addressed Question not addressed
Southern Riverina
Irrigators & Rice
Growers Association
Question not addressed Question not addressed
SunWater Question 7
“SunWater is a Queensland Owned
Corporation which is subject to the
National Tax Equivalents Regime.”
Question 25
“SunWater advise that taxation has nil
effect on the termination fees. The payout
is based on lower bound costs and no tax
liabilities or tax credits arise.”
T Lofler Question not addressed Question not addressed
Victorian Farmer’s
Federation
Question not addressed Question not addressed
Western Murray
Irrigation Limited
Question not addressed Questions 15:
“WMI applies GST but makes no taxation
adjustments”
Appendix B – Summary of Tax Elements in Position Paper Submissions
ACCCPricewaterhouseCoopers
46
Submission Income Tax Related Comments
Goulburn-Murray Water (G-MW) “This position appears to assume that all operators do not face any tax
timing impacts from termination fees, and all are in the same tax loss
position. This general assumption will inappropriately disadvantage
those operators who are in a tax paying position, or are likely to enter a
tax paying position in the near future.
More significantly, the ACCC has dismissed the legitimate costs to
operators from the tax timing effects. Even where businesses are in tax
loss positions, the receipt of termination fees will erode that tax loss at a
faster rate than would otherwise have occurred, bringing forward the
timing of when an operator will enter a tax paying position.
G-MW submits that termination fees include the timing impacts on tax
costs to the business, namely the bringing forward of tax costs including
the bringing forward of the expected date where tax is likely to be
payable for operators currently in tax loss positions.
To do otherwise would undermine the objective of revenue adequacy,
failing to consider what is typically recognised as a legitimate cost to
infrastructure owners.”
Appendix B – Summary of Tax Elements in Position Paper Submissions
ACCCPricewaterhouseCoopers
47
Submission Income Tax Related Comments
Joint submission by Western Murray
Irrigation Limited and Coleambally
Irrigation Co-operative Limited
“A significant issue for both co-operatives in Coleambally is the taxation
recommendations sitting on pages 29-30 of the main body of the
position paper. No reference is made to this in the summary section
and could easily be missed. CI strongly objects to the ACCC’s position
“not to allow adjustments to termination fees to account for taxation
liabilities”.
As stated earlier, CIMCL collects levies on behalf of the members for the
future replacement of assets. As a mutual the levies are not taxable
because they are collected from the members for the benefit of the
members. Interest and other income are taxable. The advice that has
been received is that termination fees would be taxable as the member
is terminating and therefore will not benefit from collection of the levy.
With CIMCL being in an accumulation phase and the next major
expenditures due in 2020-2025, tax on the termination fee does result in
a real tax timing disadvantage of the full 30%. That is, the tax goes form
zero to 30% with no costs being able to be offset against it.
For CICL, the effect is nearly the same. In the seven full years that
CICL has been in existence the average yearly profit has been
$1.784M. This figure has been distorted by two abnormal events in the
past two years. In 2006-07, CICL sold 3,500ML of conveyance licence
to Water for Rivers for $4.9M. In 2007-08, $2.113M was received from
Water Smart Australia (NWC program) for the first year’s works of the 4
year Coleambally Water Smart Program ($12.53M in return for 4,400ML
of conveyance licence). Once the Water Smart program is finished it is
expected that CICL would seek no further funding (or give up more
water). Revenue streams such as this are not sustainable in the long
term as CICL would eventually run out of water entitlement to sell –
running the capital down to pay expenses is not sustainable. With these
abnormals removed the average yearly profit since privatisation is
$0.782M. This figure is an accurate representation of the long-term
profit expectations of CICL and is consistent with a principle of
minimising profits without losing money in the long term. Based on
CICL’s tax rate of 30% this produces an average yearly tax bill of
$0.235M.”
Appendix B – Summary of Tax Elements in Position Paper Submissions
ACCCPricewaterhouseCoopers
48
Submission Income Tax Related Comments
“In the same period, the average yearly income from members (access
fees) was $5.907M. Therefore CICL tax as a percentage of the access
fee revenue is 3.97%. The effective tax rate on any termination fees will
be 30%, as all deductions will have already been offset against the
normal revenue. Therefore the tax timing disadvantage to CICL is
greater than 26%. Given that irrigation is facing a tougher future and
the profits may be less in the future, uplifting the termination fee by 30%
is not unreasonable.
The example in the position paper on page 30 regarding a tax loss
position has a couple of problems. The first problem is that no
disadvantage only occurs if the termination fee collected is smaller than
the tax loss. If the fee is greater, a tax timing disadvantage will occur.
The second problem is that an organisation, which is in a tax loss
position for an extended period, is either losing money or running down
their infrastructure. Neither position is sustainable. Neither position is
position an option for CICL when the expectation is that the
infrastructure and system will be available in perpetuity.
The alternative option is for the termination fee to be non-taxable.
Although this is not the domain of the ACCC it could still be a
recommendation to the Minister for reference to the ATO. Alternatively,
the government could pass legislation to that effect – are they serious
about water reform or not?”
Appendix C – Summary of Tax Elements in Submissions in response toDraft Termination Fee Rules
ACCCPricewaterhouseCoopers
49
Submission Income Tax Related Comments
Coleambally Irrigation
17 November 2008
Tax Impacts
The tax timing disadvantages noted as exceptions in the PwC report
apply to the two CI cooperatives. The first exception applies to CIMCL,
the second to CICL. Therefore the after tax receipts of the termination
fees would be 25-30% lower than the actual fees. This turns the 10x
multiple into a 7 or 8x multiple and less than 10 years of access fees.
It should be noted that these are real impacts. The draft advice suggests
that they can be offset by actions such as avoiding fixed cost in the
future and changing the pricing structure. It also states that there would
be limited impact before the review is conducted in 2012-13.
The costs cannot be avoided. That is why they are called unavoidable
costs. Efficiency gains have been made. The “low hanging fruit” is
already gone. Any remaining gains will be expensive and produce
minimal gains. If gains can be made, they will reduce the access fees
and therefore the termination fees, anyway.
Changing from postage stamp pricing cannot produce significant gains. If
it does it would have to mean that an individual farm’s charges would rise
dramatically as irrigators on the same channel exited. It would also
skyrocket that irrigators termination fee to such an extent that they could
never afford to leave. These surely fall under the “perverse or unintended
pricing outcome.” noted in Schedule 2 of the Water Act. As another point
to note, the costs of running various channels in the CIA (and probably
most systems) do not vary greatly unless irrigators have exited from that
channel. Otherwise, they will not produce the kind of gains needed to
offset the tax impacts.
As to the limited impact before the review in 2012-13, CI has more than
30,000ML (>%6%) sitting on its books waiting to leave the area. If this is
repeated in the years until the review is conducted, the difference
between tax uplift and no tax uplift could be huge.
Appendix C – Summary of Tax Elements in Submissions in response toDraft Termination Fee Rules
ACCCPricewaterhouseCoopers
50
Submission Income Tax Related Comments
Murray Irrigation Limited
28 November 2008
Murray Irrigation welcomes the ACCC’s support for the legitimacy of a
termination charge. Murray Irrigation also welcomes the ACCC
proposing a termination charge which is not diminishing. However, the
combined impact of the ACCC’s termination charge on Murray Irrigation
and its members is significant and will be much greater than for any
other infrastructure operator.
There are three compounding issues;
1) Multiple of 10 times rather than the 15 included in
Schedule E of the Murray Darling Basin Agreement;
2) No increase for Company Tax; and
3) The termination charge being based on the actual access charge.
The ACCC’s PricewaterhouseCoopers’ report identifies that where an
operator is in a current tax paying position, receipt of termination fees
may result in a permanent tax disadvantage. This is the case for Murray
Irrigation and the draft advice should explicitly state that where an
infrastructure operator is in a current tax paying position, there may be a
permanent tax disadvantage to the operator. The discussion around
taxation highlights the significant differences between operators’
corporate structures and tax status, which make it very difficult to
establish a competitively neutral market in water delivery. Trying to
impose identical rules for all simply will not work fairly.
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
51
Assumptions
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
52
No Terminations
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
53
6% Terminations
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
54
15% Terminations
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
55
30% Terminations, No Investment Return
Appendix D – Case Study Assumptions and Results
ACCCPricewaterhouseCoopers
56
30% Terminations, 4% Investment Return