Are you ready for shovel-ready?

Tax Alert - August 2021

By Liz Nelson, Troy Andrews & Sam Hornbrook

During last year’s first lockdown, the Government put out a call for shovel-ready projects, being infrastructure projects that were ready (or near ready) for construction and could be deployed as part of a stimulus package.

The focus was on immediate job creation and public confidence that economic activity was underway in the midst of the pandemic. At the time, there were forecasts of an 8% contraction in economic activity and job losses of more than 250,000 in the year to March 2021.

Applicants had 2 weeks to put together a “project information form” to enable a decision to be made about what projects should be eligible for Government funding.

A total of 1,926 projects were submitted, with a total Capex spend of $134 billion. Once these were initially filtered, there were 802 eligible projects with a total Capex spend of $51 billion, seeking $33 billion in funding or financial support. These were shortlisted and on 18 August 2020 it was announced that a total of 147 shovel-ready projects with a total value of $4 billion would be eligible for funding support of $2.3 billion.

While much of the funding went to government agencies such as Waka Kotahi (NZTA) and Kāinga Ora, a significant portion went to the private sector and local government. Crown Infrastructure Partners (CIP), a Crown-owned company, was given responsibility for managing the funding to the private sector and local government.

Now that the dust has settled, and the funding is being delivered, we have a look at some of the tax issues associated with the shovel-ready program.

What was received?

The first point to consider is what support is being received under the shovel-ready program. Support may be financial or non-financial. Financial assistance could be in the way of a grant, a concessionary loan, a commercial loan, equity, or a guarantee. We understand the majority of the financial assistance provided is by way of grants or low / no interest loans, or a combination of the two.


Government grants to businesses can be excluded from income tax, where they relate to an expense that is otherwise deductible or a depreciable asset. In that case, the effective receipt of the grant should be tax neutral (i.e. the receipt is not income, and a deduction cannot be claimed when it is spent).

However, to be excluded from income tax, government grants must come from a local authority or a public authority. There is some complexity around who is delivering the grant and whether they meet this criteria, and this is an area that Inland Revenue has been focusing on.

If the grant does not come from a local authority or public authority, or is otherwise funding expenditure that will not be deductible or depreciable, then the grant may be taxable. It gets more complicated when the grant is funding infrastructure. What is the asset that is being created? Does it relate to expenditure in future years? Is it depreciable? Is the grant a capital receipt? There are complexities here that will need to be worked through on a case-by-case basis.

Concessionary loans

An example of a concessionary loan under the shovel-ready program is an interest-free loan over a term of 10 years.

For accounting purposes, a long-term loan with no interest may be recognised at fair value, being the present value of future cash payments discounted using prevailing interest rates for a similar term and credit rating. For accounting the difference between the fair value of the loan liability and the cash received may be recognised in the Profit & Loss Statement (“P&L”). After initial recognition, the loan may be measured at amortised cost (with an interest/financing expense in the P&L each year).

However, the outcome is quite different for tax purposes. As there is no interest under the loan, there should be no deduction for interest expense. Under the relevant financial arrangement spreading method, interest free loans typically do not allow a deduction for interest expense or recognise income for other amounts allocated to equity, other comprehensive income (“OCI”) or the P&L when the loan is entered into.

There may potentially be other spreading methods available (particularly for taxpayers that do not follow IFRS), however over the term of the loan the outcome should be the same: there should be no interest expense for tax purposes.

If you have received an interest free loan under the shovel-ready program you should be aware that the accounting and tax treatment may be quite different, and will likely give rise to deferred tax implications and complexity in your tax calculation.

Loan forgiveness

In some cases it may be contemplated that the concessionary loans will be forgiven. Again, it will be important to navigate how this loan forgiveness is treated for tax purposes. When a debt is forgiven it typically gives rise to taxable income for the borrower.

However, certain government loans in which the terms include a provision that the debt may be wholly or partially remitted (described as “grant-related suspensory loans”) should not give rise to taxable income for the borrower, and are instead treated like a government grant (described above).

The treatment depends on the terms of the loan, and who is administering the loan, so it will be important to work through the detail.

What entity to use?

In the past, there might have been a preference towards using Limited Partnerships for new infrastructure projects, as the tax attributes flow through to the relevant partners, meaning that any losses incurred by the partners wouldn’t be jeopardized by new partners joining the project. The new business continuity test could make this structure less compelling, as it allows losses to be carried forward by a company provided there is no “major change” in business.

If the shovel-ready funding does include an equity component, you should consider what structure works best for all parties, bearing in mind the new rules that make shareholder continuity less vital.

What about GST?

This can also be complex as the GST treatment can vary considerably depending on the type of funding being delivered, the GST status of the project owner / recipient of the funding, and also the nature of the project being funded. The project owner is responsible for determining the GST treatment, therefore it is important to work through these issues and seek advice.

GST should generally apply to grants received by GST-registered project owners that are not public authorities (provided the grant is received in relation to the project owner’s taxable activity) on the basis that a deemed supply is created for GST purposes. There can also be situations where grants paid to public authorities may also be subject to GST if the grant is for the benefit/on behalf of another person. Where a deemed supply occurs for GST purposes, the recipient should return output tax on the grant.

There should not be any GST charged on loan amounts, so loan recipients should not need to return output tax on funding amounts received in the form of a loan.

Inland Revenue has noted that there is often confusion around applying the correct GST treatment, therefore, care should be taken.

It is possible that financial assistance may be terminated, for example if the recipient does not meet the terms of the agreement (for example timing and delivery). In this case, if a grant is to be returned, there are added GST complexities and timing/tax invoice documentation issues to work through.

There may be interesting considerations in terms of the GST time of supply, particularly if the grant is payable in instalments. Again, the specific terms of the agreement will need to be worked through.

As you can see, there are a number of things to think about when receiving support under the shovel-ready program (or any other grant, for that matter). There will also be non-tax considerations, like the accounting treatment, or financial modelling of the project and funding. If you would like to discuss the receipt of financial assistance under the shovel-ready program, or for more information, please contact your usual Deloitte tax advisor.

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