House of Representatives

Tax Laws Amendment (2007 Measures No. 3) Bill 2007

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 7 Clarification of exemption from interest withholding tax

Outline of chapter

7.1 Schedule 7 to this Bill amends sections 128F and 128FA of the Income Tax Assessment Act 1936 (ITAA 1936) to more closely specify those debt interests that are eligible for exemption from interest withholding tax (IWT).

7.2 These amendments ensure this exemption remains consistent with the Government's original policy, which was to ensure that Australian business does not face a restrictively higher cost of capital, or constrained access to capital, as a result of the IWT burden being shifted from the non-resident lender to the Australian borrower.

7.3 These amendments correct an unintended broadening of the exemption that occurred following the New International Tax Arrangements (Managed Fund and Other Measures) Act 2005 (2005 amendments). Closer specification of the range of debt interests eligible for the exemption realigns the exemption to the Government's policy intent and enhances the integrity of the tax system.

7.4 The amendments specify that non-debenture debt interests that are non-equity shares (including those subject to the related scheme rules in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)) and syndicated loans are eligible for exemption from IWT. They also introduce a regulation-making power to prescribe further types of eligible debt interests.

7.5 Unless otherwise stated all legislative references are to the ITAA 1936.

Context of amendments

7.6 IWT was first imposed in 1968 to replace an assessment system of taxing interest payments to non-residents that was open to abuse. The view underlying the IWT system was that since IWT levied by Australia would generate a tax credit in the lender's home country, the burden of the tax would fall on foreign revenue collections. Unfortunately, the response of many foreign lenders was to increase interest margins on loans to Australia, shifting the burden of the tax to Australian borrowers.

7.7 To avoid imposing higher capital costs on Australian business, limited exemptions from IWT were introduced in 1971 for certain types of offshore borrowing. The prime objective of the exemptions was, and has remained, to ensure Australian business does not face a higher cost of capital as a consequence of the imposition of IWT. The limitations also recognised that some forms of money raising have the potential to reduce the integrity of Australia's tax system and, consequently, the exemptions were targeted at arm's length arrangements.

7.8 Subsequent amendments circumscribed eligibility for financial instruments to those expected to fulfil an arm's length capital raising function in circumstances where shifting of the tax burden was most likely to occur. The introduction of concepts such as 'wide distribution test' and the 'public offer test' confirmed the original policy intent of restricting exemption to structured capital raisings for business activities while excluding related party transactions and individually negotiated loans.

7.9 Legislative amendments in 2005 extended the exemption from interest on a debenture to interest on a debenture or a debt interest, in order to reflect changes to Australia's debt/equity rules in 2001. The debt/equity rules characterised financing arrangements as debt or equity interest on the basis of economic substance, rather than legal form.

7.10 The purpose of the 2005 amendments was to enable hybrid instruments now characterised as debt interests (under the debt/equity rules) as eligible for the exemption where they performed a capital raising function similar to debentures and also satisfied other legislative requirements (particularly the public offer test).

7.11 However, the 2005 amendments unintentionally resulted in the exemption being potentially available to all debt interests, which was not consistent with the Government's original policy intent, and represented a threat to the integrity of the tax system.

7.12 These amendments specify that debt interests that are non-equity shares (including where the related scheme rules apply) and syndicated loans are eligible for exemption, subject to satisfying the public offer test.

7.13 The inclusion of syndicated loans reflects evidence that this form of loan is an important and less costly substitute for debenture issues in securing large scale infrastructure capital, acquisition and other major financings.

7.14 In recognition of the evolving nature of financial markets and innovation in financial instruments, a regulation-making power has also been included to enable the prescription of other financial instruments as eligible for exemption. It is anticipated that this power will only be used to prescribe financial instruments that are close substitutes for, and perform a similar role to, debentures. Consideration would also be given to the extent to which there is a detrimental impact on access to capital by Australian borrowers.

Summary of new law

7.15 Schedule 7 specifies that only non-debenture debt interests that are non-equity shares (including those subject to the related scheme rules in section 974-15 of the ITAA 1997), and syndicated loans will be eligible for IWT exemption, unless the non-debenture debt interest is prescribed as eligible for exemption by regulation.

7.16 Non-equity shares are shares in a company that are viewed as equity on a legal form assessment, but characterised as debt interests based on economic substance, pursuant to Division 974 of the ITAA 1997. As a consequence, a dividend paid in respect of such a share is deemed to be interest under subsection 128A(1AB), and potentially liable to IWT. As non-equity shares perform a similar capital raising function to debentures it is appropriate that they be eligible for IWT exemption, subject to satisfying the public offer test.

7.17 Syndicated loans are often used for large debt capital raisings as they are a means by which Australian borrowers can access offshore lending in order to benefit from greater liquidity in some of these markets. Being close substitutes for debentures, it is also appropriate that syndicated loans are eligible for the IWT exemption. The exemption is available in respect of the interest paid on a 'syndicated loan' (as defined) that is a debt interest. The syndicated loan must be provided under a 'syndicated loan facility' (also defined) that has satisfied the public offer test.

7.18 The amendments take effect for debt interests issued on or after 7 December 2006. Although the amendments have limited retrospectivity, they provide certainty to the market (particularly in relation to syndicated loans, which constitute a significant source of capital for Australian businesses), thereby outweighing any potential negative effects that may be associated with retrospective legislation.

7.19 It should also be noted that most of the amendments (apart from those applying to syndicated loan facilities) were previously included in Schedule 2 to the Tax Laws Amendment (2006 Measures No. 7) Bill 2006, which was introduced into the House of Representatives on 7 December 2006 and were due to take effect from that date. Although Schedule 2 was removed from the Bill when it came before the Senate for debate on 27 March 2007, industry had been familiar with the Government's policy intentions with regard to the exemption for a considerable time. At the time of removal, it was also made clear that the Government would seek to reintroduce the amendments.

7.20 Transitional rules ensure that taxpayers who entered into written agreements in reliance on the law as it stood following the March 2005 amendments remain eligible for exemption in respect of debt interest resulting from or issued under these arrangements. An integrity provision has also been included to ensure that where such an agreement is altered to extend its term, the transitional rules will cease to apply to the agreement from the date on which it would otherwise have expired.

Comparison of key features of new law and current law

New law Current law
Interest paid by a company to non-residents on non-debenture debt interests that are non-equity shares, or non-equity shares where the debt interest consists of two or more 'related schemes' and one or more of them is a non-equity share, that satisfy the public offer test and some other conditions, will qualify for exemption from interest withholding tax. Interest paid by a company to non-residents on debt interests that satisfy the public offer test and some other conditions will qualify for exemption from interest withholding tax.
Interest paid by a company to non-residents on non-debenture debt interests that are syndicated loans, where the syndicated loan facility satisfies the public offer test, will qualify for exemption from interest withholding tax. No equivalent provisions in current law.
Interest paid by a company to non-residents on non-debenture debt interests that are prescribed by regulation will qualify for interest withholding tax exemption. No equivalent regulation-making power.
Interest paid by the trustee of an eligible unit trust to non-residents on non-debenture debt interests that are syndicated loans where the syndicated loan facility satisfies the public offer test and some other conditions, will qualify for exemption from interest withholding tax. No equivalent provisions in current law.
Interest paid by the trustee of an eligible unit trust to non-residents on non-debenture debt interests prescribed by regulation will qualify for exemption from interest withholding tax. No equivalent regulation-making power.

Detailed explanation of new law

What is interest withholding tax?

7.21 The taxation of interest paid or credited from Australia to non-residents, and residents operating through offshore permanent establishments, is dealt with in the IWT provisions contained in Division 11A. These provisions provide, in conjunction with the Income Tax (Dividends, Interest and Royalties) Withholding Tax Act 1974 , that the recipient of the interest is subject to withholding tax on the gross amount of interest paid or credited. A rate of 10 per cent of the gross amount is imposed. The obligation for collecting the IWT is placed on the person making the payment (ie, the borrower). The provisions define 'interest' and stipulate when an amount of interest is subject to withholding tax.

Interest withholding tax exemptions

7.22 Currently, Division 11A provides exemptions from IWT. In the context of these amendments, the following exemptions are relevant:

·
Section 128F provides that where an Australian resident company, or a non-resident company carrying on business at or through a permanent establishment in Australia, issues a debenture or a debt interest and the issue satisfies the requirements of the public offer test contained in

subsection 128F(3) or (4), an exemption from IWT will apply. In the absence of the exemption, IWT would be payable on the interest paid to non-resident holders of the debenture or debt interest.

·
In a similar way to section 128F, section 128FA provides for exemption from IWT for the interest paid to a non-resident by the trustee of certain unit trusts on a debenture or debt interest.

What is the public offer test?

7.23 A public offer test must be satisfied for interest to be exempt from IWT under section 128F or 128FA. In order to satisfy the public offer test, the debenture or debt interest must be offered in at least one of the following ways:

·
to at least 10 persons who were each carrying on the business of providing finance, or investing or dealing in securities, as participants in financial markets;
·
to at least 100 investors who have acquired debentures in the past or could reasonably be likely to be interested in acquiring debentures;
·
as a result of being accepted for listing on a stock exchange, where the company or trustee of the unit trust had previously entered into an agreement with a dealer, manager or underwriter, requiring the company or trustee to seek such listing;
·
as a result of negotiations being initiated publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or
·
to a dealer, manager or underwriter for the purpose of placement of the debenture or debt interest if the dealer, manager or underwriter satisfies one of the previous tests where:

-
the placement occurs under an agreement between the company and the dealer, manager or underwriter; and
-
the placement occurs within 30 days of the original issue of the debenture or debt interest to the dealer, manager or underwriter.

7.24 An issue of a debenture or a debt interest will always fail the public offer test (with consequential loss of eligibility for the exemption), if, at the time of issue, the company or trustee was aware or suspected that the debenture or debt interest would be acquired by associates of the issuing company or the unit trust, other than associates acting in the capacity of a dealer, manager or underwriter. The exemption is also denied if the issuing company or trustee is aware or suspects that the interest on the debentures or non-debenture debt interests is being paid to an associate of the company or trust. There are limited exceptions where the debenture or debt interest is acquired by an associate in the capacity of a dealer, manager, underwriter, clearing house, custodian, funds manager or responsible entity of a registered scheme.

What debt interests are now eligible for exemption?

Closer specification of eligible debt interests

7.25 These amendments have the effect, while retaining the public offer test and other conditions to be met, of specifying more closely the debt interests eligible for IWT exemption.

7.26 The exemption is only available in respect of non-debenture debt interests that are non-equity shares (including those subject to the related scheme rules in section 974-15 of the ITAA 1997), syndicated loans, or prescribed as eligible for exemption by regulation. [Schedule 7, item 1]

7.27 The requirement for the issue of the debenture or debt interest to satisfy the public offer test still applies. For a syndicated loan, it is the invitation to become a lender under the relevant syndicated loan facility that must satisfy the public offer test. [Schedule 7, item 1]

7.28 Identical conditions to those in paragraphs 7.26 and 7.27 apply to interest paid to non-residents by non-resident companies that maintain a permanent establishment in Australia. [Schedule 7, item 2]

7.29 Identical conditions to those in paragraphs 7.26 and 7.27 are inserted to ensure that where the purchase price of an eligible debenture or debt interest is composed in part of interest, that embedded interest is only eligible for IWT exemption if it is on an eligible non-debenture debt interest that is a non-equity share, a syndicated loan or is prescribed by regulation. [Schedule 7, item 3]

Non-equity shares

7.30 Division 974 of the ITAA 1997 may characterise interests in a company that are equity on a legal form assessment as debt interests on the basis of economic substance. The shares then become 'non-equity shares' (section 995-1 of the ITAA 1997). Dividends paid on non-equity shares are treated as payments of interest under subsection 128A(1AB), and therefore potentially liable to IWT. As non-equity shares perform a similar capital raising function to debentures (which are currently eligible for the IWT exemption), the IWT exemption applies to non-equity shares, subject to satisfaction of the public offer test. [Schedule 7, item 1]

7.31 These amendments also specify that debt interests that are 'related schemes' (under section 974-15 of the ITAA 1997) that include non-equity shares should remain eligible for exemption, where the public offer test is satisfied. [Schedule 7, item 1]

7.32 'Related schemes' have the meaning in section 974-155 of the ITAA 1997. Two or more schemes are related to one another if they are related to one another 'in any way' other than merely because one refers to the other or they have a common party. Whether two or more related schemes then give rise to a debt or equity interest depends on the related scheme provisions in either section 974-15 (for a debt interest) or section 974-70 (for an equity interest) being met. Consequently, where the IWT exemption is expressed to apply only to interests that are non-equity shares, the non-equity shares that are part of a notional scheme that passes the debt test may be ineligible for exemption from IWT, which is not a desired policy outcome.

7.33 Where one or more of the related schemes is a non-equity share, the exemption will only apply to the dividends paid in respect of the non-equity share, which are treated as interest pursuant to subsection 128A(1AB). An exception to this rule arises if the other related scheme or schemes would have been eligible for the exemption in isolation. [Schedule 7, item 8]

Example 7.1 Bardy Inc issues redeemable preference shares in United States dollars. Bardy Inc also enters into a foreign currency swap with the market that is not solely used to mitigate its foreign currency risk in relation to the issue price of the redeemable preference share.In characterising the redeemable preference shares as debt or equity, it is possible that the two schemes would be viewed as related to one another, and, therefore, upon passing the debt test, it would be the related scheme that would be the debt interest. These amendments ensure that even where this is the case, the redeemable preference shares would remain eligible for exemption. The exemption is limited to the dividends paid on the redeemable preference shares (which are treated as interest under subsection 128A(1AB)).

Syndicated loan facilities

Definitions

7.34 A syndicated loan is defined as a loan or other form of financial accommodation that is provided under a syndicated loan facility where that facility has two or more lenders. [Schedule 7, item 6]

7.35 The reference to 'loan or other financial accommodation provided' recognises that although most syndicated loans take the form of a standard loan, this is not the only form they may take. 'Financial accommodation' refers to other financial benefit or assistance to obtain financial benefit that is commonly provided by the market in lieu of a standard loan where the payments for such facilities would normally be considered amounts in the nature of interest. It can include the issuing, endorsing or otherwise dealing in promissory notes, bills of exchange or securities.

7.36 As an example, it has been market practice in the past for the financial accommodation to be provided in the form of a bill acceptance facility, where the lenders agree to accept bills of exchange issued by the borrowers. As the fees for facilities such as bill acceptance facilities would normally be considered amounts in the nature of interest (and deemed to be interest pursuant to subsection 128A(1AB)) and therefore liable to IWT, it is appropriate that they be eligible for exemption from IWT.

7.37 The requirement that there be at least two lenders that are parties to the agreement stems from the fact that the presence of multiple lenders is a defining feature of a syndicated loan. For this reason, for the period that there is only one lender under the syndicated loan facility, the loan or financial accommodation provided will not qualify as a syndicated loan.

7.38 The syndicated loan, being a loan or financial accommodation provided under a facility, can only arise at the time the loan or financial accommodation is provided. As this may occur after the time the public offer is made, it is not appropriate that the syndicated loan be made the subject of the public offer test. Rather, the public offer test applies to the syndicated loan facility under which the syndicated loan is to be made.

7.39 A written agreement is a 'syndicated loan facility' where the agreement describes itself as a syndicated loan facility or syndicated facility agreement. The purpose of including this requirement in the definition of 'syndicated loan facility' is to take advantage of the fact that financial markets will have certain expectations of an agreement that describes itself as a syndicated loan facility (particularly given the documentation to establish syndicated loan facilities is becoming more standardised through the work of organisations such as the Asia Pacific Loan Market Association). These market expectations can act as a deterrent to parties from describing an agreement as a syndicated loan facility or syndicated facility agreement where it is not truly such an agreement. [Schedule 7, items 7 and 8]

7.40 Where a written agreement does not describe itself as a syndicated loan facility or syndicated facility agreement, it would not satisfy the definition of 'syndicated loan facility'. Such an agreement cannot be made the subject of the public offer test, and therefore any loans or financial accommodation provided under the agreement cannot be eligible for exemption. Where an agreement is altered so that it is described as a syndicated loan facility, it is necessary for the public offer test to be satisfied at the time the agreement is properly described. Any earlier purported satisfaction of the public offer test would be invalid. Additionally, it should be noted that the Commissioner of Taxation (Commissioner) does not have the discretion to treat an agreement improperly described as a syndicated loan facility.

7.41 The remainder of the definition of 'syndicated loan facility' seeks to capture those elements commonly associated with syndicated loan facilities. Therefore, a syndicated loan facility must also be an agreement between one or more borrowers and at least two lenders. Additionally, under the agreement each lender must agree to severally, but not jointly, lend money or otherwise provide financial accommodation to the borrower or borrowers. The result is that each lender has a separate claim on the borrower in relation to either the portion of the money or financial accommodation provided, or the amount of obligation it has assumed (where the lender became party to the agreement following an assignment or novation of another lender's interest in the loan). Finally, under the agreement the amount to which the borrower or borrowers will have access at the time the first loan or other form of financial accommodation is to be provided under the agreement must be at least $100 million (or a prescribed amount). [Schedule 7, item 8]

7.42 A written agreement is also a 'syndicated loan facility' where the agreement is between one or more borrowers and one lender but the agreement provides for the addition of other lenders. This recognises that in many cases a borrower may enter into a written agreement with a single lender who then acts as an arranger on behalf of the borrower and seeks out other lenders to become party to the agreement, or the facility is otherwise syndicated to multiple lenders. This definition of 'syndicated loan facility' will enable such an agreement to be the subject of the public offer test. [Schedule 7, items 7 and 8]

7.43 Where the syndicated loan facility has only one lender, it is also necessary that the agreement describe itself as a syndicated loan agreement or syndicated facility agreement, and provide that upon the addition of other lenders, each lender severally, but not jointly, agrees to lend money to, or otherwise provide financial accommodation to, the borrower or borrowers. Finally, under the agreement the amount to which the borrower or borrowers will have access at the time the first loan or other form of financial accommodation is to be provided under the agreement is at least $100 million (or a prescribed amount). [Schedule 7, item 8]

7.44 Even where the public offer test is satisfied in respect of a syndicated loan facility that has only one lender, any loan or financial accommodation provided will not be a syndicated loan until the facility under which it is provided has at least two or more lenders. Broadly, a facility that has one lender is eligible to be made the subject of a public offer, however, an exemption from IWT will only apply to a debt interest issued under the facility once two or more lenders are party to the agreement because it is only upon satisfying that condition that the debt interest will be a syndicated loan.

7.45 It is appropriate that both definitions of a syndicated loan facility are referenced to size. The purpose of the IWT exemption is to facilitate Australian borrowers' access to overseas markets for the purposes of large capital raising. The $100 million sum is to be interpreted as that amount in Australian dollars or the equivalent amount in a foreign currency where the loan is expressed in foreign currency. [Schedule 7, item 8]

7.46 The reference to 'at the time the first loan or other form of financial accommodation is to be provided under the agreement is at least $100 million' is intended to provide eligibility only for those syndicated loan facilities that allow the borrower or borrowers to draw down at least $100 million at the time the loan or financial accommodation is, or is to be, initially provided. A facility that allows the borrower to access an amount of $200 million at the time of the first draw down is eligible for the exemption even if, for instance, the first drawn actually made is for $50 million. A revolving credit facility that allows a borrower to draw down and repay up to $50 million at a time will not qualify. Even though the borrower may borrow (through several draw downs and repayments) amounts in excess of $100 million in total, at the time the loan or financial accommodation is first offered, the borrower only had the ability to access up to $50 million. Where a borrower draws down a loan of $300 million under a facility and makes repayments so that the amount outstanding and available in later years drops to less than $100 million, the facility will continue to satisfy the $100 million threshold because, at the time where the loan or financial accommodation was first provided, the borrower was able to access at least $100 million.

7.47 A regulation-making power has also been included to enable the prescription of a different threshold, should this be more appropriate. [Schedule 7, item 8]

7.48 The September 2005 Reserve Bank Bulletin document issued by the Reserve Bank of Australia indicated that there were 126 syndicated loan deals undertaken in the Australian syndicated loan market for 2004-05. The average size of the loans was $540 million. However, of the 126 loans, 18 were 'jumbo' deals (greater than $1 billion). On the basis of this data, $100 million would appear to be appropriate to accommodate the vast majority of syndicated loans, whilst still 'ring fencing' the exemption so that it applies to large capital raising (consistent with the original policy intent).

7.49 Where there is evidence to suggest that the threshold is not reflective of the syndicated loan market, the regulation-making power will be utilised to prescribe a greater or lower amount.

7.50 The definition of 'syndicated loan facility' is further qualified by the requirement that where a loan or other form of financial accommodation has two or more borrowers all of the borrowers must be members of the same wholly-owned group, parties to the same joint venture or associates of each other. The intention behind this qualification is to avoid situations where a syndicated loan facility is entered into by unrelated borrowers who have clubbed together their borrowing requirements and entered into a syndicated loan facility of at least $100 million. [Schedule 7, item 8]

7.51 Where there is a change in the lenders (including by novation) under a syndicated loan facility, this will not result in a different agreement. This recognises that it is possible for interests in syndicated loan facilities to be traded in a secondary market. Where trading is achieved by novation, legally, a new agreement arises, and there may, therefore, be a question as to whether the new facility (stemming from the new agreement) needs to re-satisfy the public offer test. This uncertainty has the potential to significantly destabilise secondary trading in syndicated loans. This uncertainty has been overcome by specifying that a change of lenders does not result in a different agreement. [Schedule 7, item 8]

7.52 It should be noted that the reference to 'change of lenders' is intended to encompass both an increase and decrease in the lenders under the syndicated loan facility. Further, where an agreement is treated as a syndicated loan facility pursuant to subsection 128F(12), that is, where the agreement is entered into by only one lender, the subsequent addition of other lenders (by a process of syndication) is intended to be treated as a 'change of lenders'. The result is that a different agreement will not result in such circumstances, irrespective of whether the change in lender occurs by novation, assignment or otherwise. [Schedule 7, item 8]

Public offer test and syndicated loan facilities

7.53 In order for the syndicated loan to be exempt from IWT, the syndicated loan facility must satisfy the public offer test. This is necessary because the debt interest, being the syndicated loan, will generally only come into existence upon there being a draw-down under the facility, which could occur after the time the public offer is made. To overcome this an invitation to become a lender under a syndicated loan facility has been made the subject of the public offer test. [Schedule 7, item 4]

7.54 An invitation, by a company, to become a lender under a syndicated loan facility will satisfy the public offer test if the invitation was made:

·
to at least 10 persons each of whom was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets, and was not known, or suspected by the company to be an associate of any of the other persons to whom an invitation has been made;
·
publicly, whether in electronic or another form, that was used by financial markets for dealing in debentures or debt interests; or
·
to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, made the invitation to become a lender under the facility within 30 days in either of the two preceding ways listed above.

[Schedule 7, item 4]

7.55 Not all of the public offer tests in subsection 128F(3) have been duplicated because not all the tests are relevant to syndicated loan facilities.

7.56 As is currently the case with debentures and debt interests, there will be circumstances where a syndicated loan facility will be taken to have failed the public offer test.

7.57 An invitation to become a lender under a syndicated loan facility will fail the public offer test if at the time the invitation is made, the company knew or had reasonable grounds to suspect that:

·
an associate of the company is, or will become, a lender under the facility and either:

-
the associate is a non-resident and is not, or would not, become a lender under the facility by carrying on a business in Australia at, or through, a permanent establishment of the associate in Australia; or
-
the associate is a resident of Australia and is, or would become, a lender under the facility in carrying on a business in a country outside Australia at or through a permanent establishment of the associate in that country; and

·
the associate is not, or would not, become a lender under the facility in the capacity of either a dealer, manager or underwriter in relation to the invitation, or a clearing house, custodian, funds manager or responsible entity of a registered scheme.

[Schedule 7, item 5]

Regulation-making power to prescribe additional instruments for exemption

7.58 In recognition of the evolving nature of financial markets and innovation in financial instruments, a regulation-making power has also been included to enable the prescription of other financial instruments as eligible for exemption. [Schedule 7, items 1 to 3]

7.59 It is anticipated that this power will only be used to prescribe financial instruments that are close substitutes for, and perform a similar role to, debentures. Consideration would also be given to the extent to which there is a detrimental impact on access to capital by Australian borrowers.

Debt interests issued by eligible unit trusts

7.60 Under the new law, interest on a non-debenture debt interest issued by an eligible unit trust is eligible for the IWT exemption only if the interest is on a non-debenture debt interest that is a syndicated loan or is prescribed as eligible for exemption by regulation. [Schedule 7, item 9]

7.61 Similarly, the insertion of non-equity share in those provisions making reference to a qualifying security should not be interpreted as implying a non-equity share would necessarily constitute a security under income tax law.

7.62 In order to be eligible for exemption, the relevant debenture or debt interest must satisfy the public offer test. Where the non-debenture debt interest is a syndicated loan, it is the invitation to become a lender under the relevant syndicated loan facility that must satisfy the public offer test. [Schedule 7, item 9]

7.63 The definitions of 'syndicated loans' and 'syndicated loan facilities' in relation to eligible unit trusts is consistent with those applying to companies. [Schedule 7, items 14 and 15]

7.64 Amendments ensure that where the purchase price of an eligible debt interest is composed in part of interest, that embedded interest is only eligible for IWT exemption if it is on an eligible non-debenture debt interest that is a syndicated loan or is prescribed by regulation. [Schedule 7, item 10]

7.65 The public offer test applies to the trustee of an eligible unit trust in respect of an invitation to become a lender under a syndicated loan facility in a corresponding way to how it applies to companies in respect of invitations to become a lender under a syndicated loan facility. [Schedule 7, items 11 and 12]

7.66 In order to facilitate secondary trading in syndicated loans, a change in the lenders under a syndicated loan agreement will not result in a different agreement. This section applies to eligible unit trusts in an identical manner to how it applies to companies. [Schedule 7, item 13]

7.67 It should be noted that the amendments do not enable a non-debenture debt interest issued, that is a non-equity share issued by an eligible unit trust, to qualify for the IWT exemption. Although it is unlikely that such an instrument could be issued directly by a trustee, there may be more limited circumstances that could arise in the context of an offshore subsidiary company (subsection 128FA(5)).

7.68 However, subsection 128FA(5) can only have application where the offshore subsidiary company raises finance in a country specified in the regulations (paragraph 128FA(5)(c)). As no regulations have been made, subsection 128FA(5) currently does not have any effect.

7.69 Should a situation arise where an entity of the type specified in subsection 128FA(5) issues non-debenture debt interests that are non-equity shares, consideration will be given to using the regulation-making power to prescribe such instruments as eligible for exemption.

Application and transitional provisions

Application provisions

7.70 The amendments clarifying the scope of the IWT exemption will apply only to interest paid in respect of debt interests issued on or after 7 December 2006. [Schedule 7, item 16]

7.71 For the most part, these amendments were previously part of Schedule 2 to the Tax Laws Amendment (2006 Measures No. 7) Bill 2006, which was introduced into the House of Representatives on 7 December 2006 and due to take effect from that date. The Schedule was subsequently removed from the Bill when it came before the Senate for debate on 27 March 2007.

7.72 It is anticipated that any potential negative effects that may be associated with retrospective legislation will be minimal. Firstly, due to the very limited retrospectivity of the amendments (five months) and secondly, given the fact the financial markets have been familiar with the Government's policy intentions in this area for a considerable period.

7.73 Schedule 7 does differ in one significant effect to the IWT amendments that were introduced on 7 December 2006 in that the current amendments explicitly provide that debt interests that are syndicated loans are eligible for IWT exemption. It should be noted that although syndicated loans were capable of eligibility for IWT exemption from 21 March 2005, there was uncertainty regarding how the public offer test would apply in the case of draw-downs and novations of syndicated loan facilities. As these issues have now been addressed in the primary legislation (minimising the need for private rulings from the Australian Taxation Office), industry would gain additional benefits from increased certainty where the amendments apply sooner (ie, from 7 December 2006) than later.

Transitional provisions

7.74 A debt interest will be treated as having been issued before 7 December 2006 (the 'start day') if it is issued under, or results from, a written agreement entered into on or after 21 March 2005 but prior to the start day. The transitional provisions ensure that parties that enter into written agreements in reliance on the law as it stood following the 2005 amendments to the IWT exemption continue to benefit from the exemption in respect of those debt interests that are issued under, or result from, the agreement. [Schedule 7, item 16]

7.75 The terms 'is issued under' and 'results from' are intended to apply in situations where a new debt interest arises as a consequence of the draw-down of an existing written agreement. Although the draw-down will technically constitute a new debt interest (subject to passing the debt test), where the draw-down is in respect of a written agreement that was entered into after 21 March 2005 but prior to the start day, the modified transitional arrangements will operate to treat the new debt interest as having arisen prior to the start day.

7.76 The terms 'is issued under' and 'results from' are also intended to apply to situations where a new debt interest arises as a consequence of the novation of an existing written agreement. Where the novation arises in respect of a written agreement that was entered into after 21 March 2005 but prior to the start day, the modified transitional arrangements will operate to treat the new debt interest as having arisen prior to the start day.

7.77 An integrity provision has also been included to ensure that where a written agreement entered into between 21 March 2005 and the start day is altered to extend the term of the agreement, that extended term cannot benefit from the transitional arrangements. The IWT exemption will cease at the point when the agreement was originally due to terminate. [Schedule 7, item 16]


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