Access arrangement final decision Envestra Ltd 2013–17 Part 2: Attachments

Revised proposal

889. 
     In its revised proposal, Envestra proposed total corporate income tax allowances for the 2013–17 access arrangement period of:
     

• 
  $33.1 million ($nominal) for Envestra Victoria as set out in Table 9 .70
  
• 
  $1.9 million ($nominal) for Envestra Albury as set out in Table 9 .71.
  

890. 
     In its draft decision, the AER accepted Envestra's approach to using a combination of the Essential Services Commission's (ESC) tax asset base roll forward model and the AER’s PTRM to calculate the corporate income tax allowances for the 2013–17 access arrangement period.⁸¹⁵ In estimating its revised proposed corporate income tax allowances, Envestra used:⁸¹⁶
     

• 
  an opening tax asset base of $382.7 million ($nominal) as at 1 January 2013 for its Victorian distribution business
  
• 
  an opening tax asset base of $7.8 million ($nominal) as at 1 January 2013 for its Albury distribution business
  
• 
  an expected statutory income tax rate of 30 per cent per year
  
• 
  a value for the assumed utilisation of imputation credits (gamma) of 0.25
  
• 
  the standard tax asset lives and tax depreciation approaches set out in the AER's draft decision.
  

Table 9.70 Envestra Victoria's revised proposed corporate income tax allowance ($million, nominal)

	2013	2014	2015	2016	2017	Total
Tax payable	5.1	6.6	9.9	10.6	12.0	44.2
Less: value of imputation credits	1.3	1.6	2.5	2.6	3.0	11.0
Net corporate income tax allowance	3.8	4.9	7.5	7.9	9.0	33.1

Source: Envestra Victoria, Revised proposal PTRM, November 2012.

Note: Total may not add up due to rounding.

Table 9.71 Envestra Albury's revised proposed corporate income tax allowance ($million, nominal)

	2013	2014	2015	2016	2017	Total
Tax payable	0.4	0.5	0.5	0.6	0.6	2.6
Less: value of imputation credits	0.1	0.1	0.1	0.1	0.2	0.6
Net corporate income tax allowance	0.3	0.3	0.4	0.4	0.5	1.9

Source: Envestra Albury, Revised proposal PTRM, November 2012.

Note: Total may not add up due to rounding.

1. Assessment approach

891. 
     The AER's assessment approach for the corporate income tax allowance is set out in its draft decision. See section 8.3, attachment 8 of the draft decision for a detailed explanation of the assessment approach.
     
892. 
     There were no submissions that commented on Envestra's corporate income tax allowance.
     

1. Reasons for decision

893. 
     The AER’s final decision on Envestra's forecast corporate income tax allowances for the 2013–17 access arrangement period is:
     

• 
  $26.4 million ($nominal) for Envestra Victoria. This is a reduction of 6.7 million ($nominal) or 20.3 per cent of the revised proposed allowance for Envestra Victoria
  
• 
  $1.6 million ($nominal) for Envestra Albury. This is a reduction of 0.3 million ($nominal) or 15.1 per cent of the revised proposed allowance for Envestra Albury.
  

894. 
     The AER approves Envestra's revised proposed opening tax asset bases for its Victorian and Albury distribution businesses as at 1 January 2013. The AER also accepts Envestra's revised proposed tax depreciation approaches to groups 1–7 tax assets and the standard tax asset lives for group 7 tax assets.⁸¹⁷ In addition, the AER accepts Envestra's revised proposal to apply a standard tax asset life of 15 years to the 'Meters domestic' asset class, and consequently to combine the 'Meters domestic' and 'Meters industrial & commercial' asset classes into a single asset class of 'Meters'.
     
895. 
     In this final decision, the AER has adjusted other building block components that impact on forecast revenues. These adjustments will consequently affect the forecast corporate income tax allowances.
     

1. Opening tax asset base as at 1 January 2013

896. 
     The AER approves Envestra's revised proposed opening tax asset bases as at 1 January 2013 of:
     

• 
  $382.7 million ($nominal) for Envestra Victoria
  
• 
  $7.8 million ($nominal) for Envestra Albury.
  

897. 
     In its draft decision, the AER accepted Envestra's proposed method for establishing the opening tax asset base as at 1 January 2013.⁸¹⁸ However, the AER's draft decision made a number of adjustments to the opening tax asset bases, including proposed tax additions for 2007–12, and corrected some minor errors. Envestra's revised proposals accepted all of these draft decision adjustments.⁸¹⁹
     
898. 
     The AER’s final decision on Envestra's tax asset base roll forward for its Victorian and Albury distribution businesses over the 2008–12 access arrangement period is set out in Table 9 .72 and
     Table 9 .73.
     

Table 9.72 AER's final decision on Envestra Victoria's tax asset base roll forward for the 2008–12 access arrangement period ($million, nominal)

	2008	2009	2010	2011	2012
Opening tax asset base	245.7	263.9	274.1	294.5	331.5
Tax additions	50.8	43.6	55.1	74.5	95.8
Less: tax depreciation	32.6	33.4	34.6	37.6	44.6
Closing tax asset base	263.9	274.1	294.5	331.5	382.7

Source: AER analysis.

Table 9.73 AER's final decision on Envestra Albury's tax asset base roll forward for the 2008–12 access arrangement period ($million, nominal)

	2008	2009	2010	2011	2012
Opening tax asset base	7.4	7.7	7.8	8.0	8.0
Tax additions	1.3	1.2	1.2	1.0	0.8
Less: tax depreciation	1.1	1.1	1.1	1.0	1.0
Closing tax asset base	7.7	7.8	8.0	8.0	7.8

Source: AER analysis.

1. Tax depreciation approaches

899. 
     The AER accepts Envestra's revised proposed tax depreciation approaches to groups 1–7 tax assets. These revised proposed tax depreciation approaches reflect the revisions proposed by the AER in its draft decision.⁸²⁰
     
900. 
     In the draft decision, the AER accepted Envestra's proposed tax depreciation approaches to groups
     1–6 tax assets.⁸²¹ These approaches are consistent with the ESC's decision for the 2008–12 access arrangement period. For group 7 tax assets for the 2013–17 access arrangement period, Envestra proposed to change the tax depreciation approaches from the declining balance method to a straight-line method. The AER accepted the proposed tax depreciation approaches (except for the proposed 'Land & buildings' asset class). This was because the taxation law allows both the declining balance method and the straight-line method to be used to depreciate new tax additions (capex) for tax purposes.⁸²² Due to land being a non-depreciating asset, the AER split the 'Land & buildings' asset class into separate asset classes.
     
901. 
     Envestra's revised proposal adopted all of these draft decision adjustments.⁸²³
     
902. 
     The AER's final decision on Envestra's tax depreciation approaches to group 7 tax assets is set out in Table 9 .74.
     

Table 9.74 AER's final decision on Envestra’s tax depreciation approaches to group 7 tax assets

Group 7 tax asset class	Tax depreciation approach (2013–17 tax additions)
Mains and services	Straight-line
Meters^a	Straight-line
Land ^b	n/a
Buildings ^c	Straight-line
Other assets	Straight-line
Repairs	Fully deductible

Source: AER analysis.

(a) The AER's final decision is to combine the 'Meters domestic' and the 'Meters industry & commercial' meters assets into a single tax asset class of 'Meters'.

(b) This asset class is for any actual tax additions that may be incurred for 2013–17.

(c) This asset class is for depreciating the residual value from 'Land & buildings' as at 1 January 2013, as well as any actual tax additions that may be incurred for 2013–17.

n/a Not applicable.

1. Standard tax asset lives

903. 
     The AER accepts Envestra's revised proposed standard tax asset lives for group 7 tax assets. In addition, the AER accepts Envestra's revised proposal for a standard tax asset life of 15 years to apply to the 'Meters domestic' asset class, which is the same as that for the 'Meters industrial & commercial' asset class.⁸²⁴ Consequently, the AER accepts Envestra's revised proposal to combine the 'Meters domestic' and the 'Meters industrial & commercial' asset classes into a single asset class of 'Meters'.⁸²⁵
     
904. 
     In the draft decision, the AER accepted most of Envestra’s proposed standard tax asset lives for group 7 tax assets (except for the 'Land & buildings' asset class).⁸²⁶ The AER considered that these lives are consistent with Tax Ruling 2012/2⁸²⁷ and the standard tax asset lives approved by the ESC in earlier access arrangement periods. However, as a result of the AER's draft decision to split the 'Land & buildings' asset class into two separate asset classes to apply from 1 January 2013, the AER assigned a standard tax asset life of 40 years to the 'Buildings' asset class. The AER did not assign a standard tax asset life to the 'Land' asset class.⁸²⁸ Envestra's revised proposals adopted the AER's draft decision on the separation of the 'Land & buildings' asset class.⁸²⁹
     
905. 
     Envestra's revised proposed standard tax asset life for the 'Meters domestic' asset class is 15 years.⁸³⁰ This is the same as that for the 'Meters industrial & commercial' asset class, which the AER accepted in its draft decision.
     
906. 
     For this final decision, the AER accepts that it is appropriate to assign a standard tax asset life of 15 years to the 'Meters domestic' asset class. This is because the AER accepted Envestra's use of the straight-line depreciation method for this asset class (discussed in section 9.2.2). Moreover, a standard tax asset life of 15 years for the 'Meters domestic' asset class is consistent with Tax Ruling 2012/2.⁸³¹ Further, the proposed increase in the standard tax asset life of this asset class does not have a material impact on the total revenue over the 2013–17 access arrangement period. Since the same standard tax asset life applies, the AER also accepts Envestra's revised proposal to combine the 'Meters domestic' and 'Meters industrial & commercial' asset classes into a single asset class of 'Meters' for tax depreciation purposes over the 2013–17 access arrangement period. This allows the 'Meters' asset class to align, for tax purposes, with its equivalent 'Meters' asset class in the capital base for regulatory depreciation purposes.
     
907. 
     The AER's final decision on Envestra's standard tax asset lives for group 7 tax assets is set out in Table 9 .75.
     

Table 9.75 AER's final decision on Envestra's standard tax asset lives for group 7 tax assets (years)

Group 7 tax asset class	Standard tax asset lives
Mains and services	20
Meters ^a	15
Land	n/a
Buildings	40
Other assets	10
Repairs	Fully deductible ^b

Source: AER analysis.

(a) The AER's final decision is to combine the 'Meters domestic' and the 'Meters industry & commercial' meters assets into a single tax asset class of 'Meters'.

(b) 'Repairs' is a deduction under s. 25-10 of the ITAA. For modelling purposes, the tax depreciation rate used to depreciate expenditure associated with repairs is 100 per cent.

n/a Not applicable.

1. Remaining tax asset lives

908. 
     Envestra did not propose any remaining tax asset lives in its original proposal as a result of the approach it took to calculating tax depreciation. The AER in its draft decision accepted that remaining tax asset lives were not necessary for calculating Envestra's tax depreciation.⁸³² The AER noted that Envestra's assets have been depreciated under separate tax groups reflecting the different historical tax depreciation approaches that have been applied.
     

1. Utilisation of imputation credits (gamma)

909. 
     Consistent with its draft decision, the AER accepts Envestra's proposed value for the utilisation of imputation credits (gamma) for this final decision.
     
910. 
     In the draft decision, the AER accepted Envestra's proposals to adopt the value of 0.25 for gamma.⁸³³ As part of the post-tax nominal framework, the value of gamma must be applied to calculate the net corporate income tax allowance.
     

1.