During early September the federal government closed off the infrastructure bond concession scheme for the remainder of 1996/97, having already received A$26.5bn worth of applications. The bulk of these applications (around A$20bn) will be rejected due to funding caps on the scheme. The infrastructure bond concession system operates by exempting interest earned on the bonds from income tax. This short-term cost to revenue is partly offset by the fact that the issuer of the bonds cannot subsequently claim a tax deduction for the interest paid. Effectively, therefore, the scheme brings forward tax deductions which could otherwise only have been claimed by the developer once the infrastructure project was earning revenue.
If all A$26.5bn of infrastructure bond applications were granted, the short-term cost to government revenue would be around A$530m. The funding cap for 1996/97 is A$150m, suggesting that only around A$7bn of projects will be approved.
--partly because of additional negative gearing costs
However, the infrastructure bond concession scheme carries an additional cost to revenue. Generally, the bonds are marketed by financial institutions, which permit investors to borrow almost the entire purchase cost of the bond. The investors are then able to claim the cost of the interest paid on these loans against their other income, while receiving the interest on the bonds tax-free. This additional cost to revenue is at least partly responsible for the freeze on infrastructure bond applications. It appears likely that the government may act to limit the tax deductibility of interest on loans used to purchase infrastructure bonds.