Explanatory Memorandum.(Circulated by the Treasurer, the Hon. B.M. Snedden)
GENERAL OUTLINE OF THE PROPOSED EXEMPTIONS
To qualify for exemption a borrowing must, under the proposals, meet certain specific tests set out in the law and the Commissioner of Taxation must certify that he is satisfied that the case falls within other provisions of the proposed law. While the relevant requirements continue to be satisfied, interest on the borrowing will be exempt from withholding tax and, in the case of interest on bearer debentures, from tax under section 126 of the Income Tax Assessment Act. Interest exempted from withholding tax will also be exempted from ordinary income tax levied by assessment.
A certificate of exemption may be given by the Commissioner in response to an application made by a person who has borrowed money overseas. Should the commissioner conclude that a certificate of exemption should not be given he will be obliged to notify the borrower accordingly. Under the Bill, this notice will be treated as if it were a notice of an income tax assessment, with the consequence that the borrower will have usual rights of objection against, and review of, the Commissioner's refusal to give the certificate. A Taxation Board of Review will accordingly have the power to grant a certificate of exemption should it conclude that the particular loan falls within the policy evinced by the legislation.
It will be necessary in each case that the loan be raised outside Australia and that the interest be paid by a person who is a resident of Australia for income tax purposes. Where money is being raised by bearer debentures, the legislation specifies that, for the interest to be exempt from Australian tax,
- the loan covered by the bearer debentures must be raised in a foreign currency;
- the bearer debentures must be issued outside Australia; and
- the interest on the bearer debentures must be paid outside Australia in a foreign currency.
If a borrowing meets these tests, the interest concerned will be exempt from tax if the Commissioner gives to the borrower an appropriate certificate. The legislation will oblige the Commissioner to issue this certificate if he is satisfied that having regard to the arrangements for the offer, issue and initial purchase of the bearer debentures, the ordinary business practices of agents, brokers etc. arranging the loan, and whether or not the circumstances of the issue indicated any pre-arrangements for lending by related persons, it is reasonable to regard the debenture issue as being one for public subscription or other wide distribution among investors. The legislation will make it a pre-condition for the issue of a certificate that the Commissioner be satisfied that the borrowed money will ultimately be used in, or in connection with, a business carried on in Australia by a person who is a resident of Australia.
This exemption for interest on borrowings by means of bearer debentures may also be available where the borrowings are made by a wholly owned overseas resident borrowing subsidiary of an Australian resident company if -
- the only business of the foreign subsidiary is to borrow money for its Australian parent; and
- the subsidiary on-lends to the Australian parent without taking a profit from the transaction.
Interest on a borrowing that meets the abovementioned 'Precise tests to be satisfied by each borrowings' (so far as they are applicable) will be exempt from tax if, broadly, the Commissioner gives a certificate based on the extent of Australian ownership and control of the borrower from overseas and of the ultimate user of the money. The Commissioner will be obliged to give this certificate where he is satisfied that the case falls within principles set out in the legislation.
A certificate will be issued where the borrowing and using entities are "Australian entities".
For this purpose, the Bill contains provisions for determining whether an "entity" (i.e., the Commonwealth, a State, a Commonwealth or State authority, an individual, a company, partners in a partnership, members of a joint venture, trustees of a trust) is an "Australian entity". It is proposed that the Commonwealth, a State, a Commonwealth or State authority, the trustees of a fund established by the Commonwealth, a State or such an authority and an individual ordinarily resident in Australia will always be regarded as Australian entities.
The proposed legislation goes on to lay down a general principle for the Commissioner to follow in other cases in determining whether an entity is an Australian entity. This general principle is along the lines that an entity will be an Australian entity -
- if, in relation to the entity, the beneficial interests of persons who are themselves Australian entities, and the capacity of such persons to participate in the control of the entity, are substantially preponderant; and
- if neither the beneficial interests in relation to the entity nor the capacity to participate in the control of the entity is concentrated to a significant extent in one person who is not an Australian entity (treating "associated persons" as one).
If the entity is a company it will be necessary that it be a resident of Australia.
As an additional statutory guideline the Commissioner will be obliged by a further provision to apply these principles in the case of a company with a share capital on the basis that the company is to be regarded as an Australian entity only if -
- the beneficial interests in capital, in distributions on a liquidation or a reduction of capital and in dividends, and the rights to vote at meetings, are vested to the extent of not less than 60 per cent in Australian entities; and
- no person who is not an Australian entity (treating "associated persons" as one) is beneficially interested in more than 20 per cent of any of the ownership and control factors mentioned in (a).
The legislation will also require the Commissioner to be satisfied that a person who is not an Australian entity does not, otherwise than by virtue of voting rights in respect of shares, have rights over the appointment of directors.
The legislation will require the Commissioner to have regard to the principles mentioned above in determining whether an entity other than a company with a share capital is an Australian entity.
Two measures designed to assist in the application of the proposed general principles to the special circumstances of particular cases will follow. One will say that the Commissioner may, if having regard to the general effect of the provisions outlined above and any special circumstances relating to the entity he considers it reasonable to do so, treat an entity as an Australian entity even though it may not, or does not, fully comply with those provisions, or if there is a difficulty in applying those provisions to the entity. The other provision will authorise the Commissioner to treat an entity that otherwise qualifies as an Australian entity as not so qualifying if, having regard to the general effect of the provisions in the legislation and the special circumstances of the case, he considers it would be unreasonable to regard it as an Australian entity. The special circumstances to be taken into account include options to acquire shares and the existence of abnormal arrangements made for the purpose of securing exemption.
As mentioned earlier, if the Commissioner for any reason considers that a certificate should be refused, the matter may be considered by an independent Taxation Board of Review, which will have power to direct that a certificate be issued.
A certificate of exemption will also be issued where the borrowing entity is an Australian entity and the enterprise by which the money is to be used, while not being owned by an Australian entity, is an enterprise in which there is substantial Australian participation. In this case, however, any borrowed funds on-lent to the enterprise must not be excessive in relation to the Australian participation in the enterprise.
A series of provisions along the lines of those for determining whether an entity is an Australian entity is proposed to enable the Commissioner to establish whether an enterprise is one in which Australian entities substantially participate, that is, whether there is an effective Australian influence in the carrying on of the enterprise. These tests are, broadly, that beneficial interests in ownership, and rights of control, in relation to the enterprise rest -
- to the extent of at least 20 per cent, in one Australian entity;
- to the extent of at least 30 per cent, in no more than 5 Australian entities; or
- to the extent of at least 40 per cent, in any number of Australian entities.
For these purposes 'associated' Australian entities will be treated as one.
The legislation will provide that where the Commissioner is satisfied that a loan was raised by an entity that was an Australian entity during a period shortly proceeding the date of borrowing and he is also satisfied that the loan moneys have been and will be put to a qualifying use, he is to give a certificate of exemption. (Entities interposed between the overseas borrower and the end user of the money must also be Australian entities.). Loan moneys used in the carrying on of an enterprise owned by an Australian entity or in which there is substantial Australian participation will be regarded as being put to a qualifying use. Money will not be regarded as having its qualifying use in a particular enterprise if it is used to provide capital to another enterprise or is used to make loans, but the use to which it is put in that other enterprise, or when it is on-lent, may itself be a qualifying use.
In a case where the loan moneys are on-lent for end use in an enterprise not owned by an Australian entity but in which there is substantial Australian participation it will be a condition for the issue of an exemption certificate that the Commissioner be satisfied that, having regard to the extent of the Australian interest in the enterprise, the amount on-lent out of the overseas funds does not exceed an amount that could reasonably be regarded as an appropriate amount to be contributed by the Australian entity or entities concerned.
The provisions outlined above are supplemented by other proposed measures. These include -
- provisions authorising the Commissioner to treat persons as 'associated persons' for the purposes of determining where the beneficial interests in an entity lie;
- provisions by which redeemable shares held by Australian entities will be disregarded;
- authority for the Commissioner to have regard to arrangements, understandings and practices whether or not they have legal force;
- provisions treating as one enterprise separate, but closely connected, enterprises where attempts are made to exploit the exemption;
- provision to guard against exploitation of the exemption by or through financial institutions;
- provisions authorising the Commissioner to disregard a temporary failure to put moneys to qualifying use.
If exemption is given under the plan for borrowings supporting Australian ownership, it may happen that circumstances so alter that exemption of the interest from tax is no longer warranted. For example, the company that is the end user of the money may cease to be Australian-owned-and-controlled within the terms of the legislation, or the end use may be changed from a qualifying one to an ineligible one. For these cases, imposition of special tax to take the place of the withholding tax that, but for the exemption, would have been payable, is provided. The special tax will not be levied if the loan moneys continue to be put to a qualifying use by an Australian entity, even though the borrower from overseas or an entity interposed between the borrower and the end user ceases to be an Australian entity.
The broad plan of the special tax is to be that if at any time after he has given an exemption certificate the Commissioner considers that the money borrowed overseas is, either in whole or in part, not being employed for a qualifying end use, the interest on so much of the loan as is not so employed is, for the period it is not so employed, subject to special tax, except where the lapse from a qualifying use is of a temporary nature. The Income Tax (Withholding Tax Recoupment) Bill 1971 imposes this tax at the rate of 10 per cent. Special tax will also be levied if loan moneys are on-lent to an entity in which there is substantial participation by Australian participation by Australians, and, because of a reduction in the extent of Australian participation, the loan becomes excessive in relation to the Australian interest in the enterprise.
Where the Commissioner considers that special tax is payable he will be authorised to issue assessments to special tax accordingly. These assessments, which will be against the person borrowing from overseas, will be subject to the usual rights of objection and reference to a Board of Review.
Imposition of a tax at the rate of 10 per cent per annum on the amount of the special tax, computed from the time the withholding tax would have been payable is also provided for by the Income Tax (Withholding Tax Recoupment) Bill 1971. This latter tax (to offset any advantage that might otherwise accrue to an entity through having the use in its business of moneys that, but for the exemption, would have been paid out as withholding tax) will be subject to remission by the Commissioner and to review by a Board of Review.
In association with the proposed exemptions, provision is also made - in the Income Tax (Bearer Debentures) Bill 1971 - for the rate of tax under section 126 on interest paid to bearer debenture holders whose names and addresses are not disclosed to the commissioner to be reduced from its present 41.7 per cent (approximately) to 10 per cent, if the bearer debentures meet the following tests -
- the loan covered by the bearer debentures is raised overseas in a foreign currency;
- the bearer debentures are issued outside Australia; and
- the interest on the bearer debentures is paid outside Australia in a foreign currency.
It is to be provided by the legislation that the above amendments providing exemption from tax be made effective in relation to loans the contracts for which are entered into on or after the date of Assent to the legislation. Where debentures are concerned, the amendments will be effective where the invitation to persons to subscribe for the debentures was made on or after the date of Assent.
More detailed explanations of the provisions of the Bills are provided subsequently in this memorandum. The foregoing general outline should be read subject to those explanations.