Explanatory Memorandum(Circulated by the authority of the Treasurer,the Hon Peter Costello, MP)
Chapter 4 - Repeal of section 261
4.1 Part 4 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to repeal section 261.
4.2 The proposed amendments will repeal section 261 in order to decrease the costs involved in negotiating secured offshore lending agreements and further promote Australia as a major financial centre in the Asia Pacific region.
4.3 Date of introduction of the Bill into the Parliament. The section will cease to apply to mortgages entered into after the date of introduction, but will continue to apply to mortgages entered into on or prior to that date.
4.4 Section 261 operates to make void any covenant or stipulation in a mortgage which has or purports to have the purpose or effect of imposing on a mortgagor the obligation of paying income tax on the interest to be paid under that mortgage.
4.5 The section was originally enacted to prevent mortgagees from passing on to mortgagors a tax imposed on income from land. The rationale was that the tax was intended to be paid by the mortgagee and was not a liability which should properly be passed on by the mortgagee to another person. The land tax has long since been repealed and the only area where section 261 still operates today is in relation to offshore loan agreements.
4.6 Most offshore loan agreements provide for the complete protection of lenders against withholding tax and other taxes which affect the return to the lender. These agreements typically provide that if taxes are required to be deducted, the borrower is obliged to pay additional amounts so that the lender receives the full amount due to it (this provision is generally referred to as a 'grossing-up' provision).
4.7 Section 261 has been found by the High Court to apply to make void a typical gross-up clause in an offshore loan agreement. This increases the costs involved in negotiating secured offshore lending agreements and hinders the development of Australia as a major financial centre in the Asia Pacific region.
4.8 Item 36 repeals section 261.
4.9 The repeal applies to mortgages entered into after the date of introduction of the Bill into the Parliament. [Item 37]