Tax treatment of water infrastructure improvement payments

The Assistant Treasurer has released draft legislation and explanatory material for the tax treatment of water infrastructure improvement payments.

On 18 February 2011, the Minister for Sustainability, Environment, Water, Population and Communities, the Hon Tony Burke MP and the Minister for Regional Australia, Regional Development and Local Government and Minister for the Arts, the Hon Simon Crean MP announced that the Government would eliminate the timing difference between when payments are taxed and when deductions are available for water efficiency investment grants under the Sustainable Rural Water Use and Infrastructure Program (SRWUIP).

• Under normal taxation rules, payments to undertake such infrastructure works would generally be taxable in the year that the funds are received, either as ordinary income or as a subsidy or as capital gains (to the extent that the payment is deemed consideration for the surrender of the water rights), with the expenditure deductible over three years as water facilities used in primary production.

Following detailed consideration of the appropriate scope of the measure and the best means of giving effect to it, the Government has prepared an exposure draft of legislation and a draft explanatory memorandum for public consultation.

Key features of the proposed arrangements are:

• Qualifying water infrastructure improvement payments will be free from income tax (as ‘non-assessable non-exempt income‘) and exempt from capital gains tax.
• Expenditures will be denied deductions to the extent that they are funded by such payments.
• A payment received by a taxpayer will be a qualifying payment to the extent that:
  • it is received as a participant in an eligible SRWUIP program;
  • it originates from the Commonwealth; and
  • it was made by the Commonwealth within the eligible period for that SRWUIP program and no earlier than 1 April 2010.
• Eligible SRWUIP programs will:
  • generate efficiencies in water use through infrastructure improvements; and
  • be in a list published by the Department of Sustainability, Environment, Water, Population and Communities.
• The decision to list a SRWUIP program that generates efficiencies in water use through infrastructure improvements will be made jointly by the Minister for Sustainability, Environment, Water, Population and Communities and the Treasurer, having regard to the policies and budgetary priorities of the Government.

Further detail is provided in the attached draft explanatory memorandum to the exposure draft legislation.

SRWUIP programs that will be included in the initial list of eligible SRWUIP programs are set out in an attachment. Another attachment lists SRWUIP programs that are under consideration for approval as eligible programs. SRWUIP payment recipients should consult their project documentation to determine whether their payment was received as a participant in a project under one of those SRWUIP programs.  In respect of SRWUIP payments already received, taxpayers will have four years from the publication of the initial list to amend their income tax assessments accordingly.