This is a diagram showing the proper installation of a halogen down light. There must be 200mm between the light bulb and the insulation, timber or any other potentially combustible fuel source, to prevent fires from happening. Additionally, transformers must be placed 50mm away from the bulb, and above insulation unless otherwise specified.
Downlights, although stylish, heat up very quickly, and if measures like this are not taken, fires can happen.
Here's a great article from build.com.au, about how the Australian Government introduced the above standardization for down light installations, in response to public concern about the safety of these lights.
It also explains the importance of having roof cavity work performed by qualified professionals, as there are potential electrical hazards up there that could be caused by an inexperienced installation.
Read the full article here (source: http://www.build.com.au/are-downlights-fire-hazard)