Taxation Ruling
IT 120
Petroleum mining companies : shareholder rebate scheme - short-term investments
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FOI status:
May be releasedFOI number: I 1071718PREAMBLE
The following advice was forwarded to all Branch offices concerning the exercise of the Commissioner's discretion under section 160ACA of the income tax law to approve investments, other than those specifically authorised, as short-term investments for purposes of the shareholder rebate scheme.
FACTS
2. Advice was sought as to whether the Commissioner would be likely to approve as short-term investments the following kinds of investment:
- (i)
- Bank Bills - accepted by a Trading Bank as defined by section 5(1) of the Banking Act 1959;
- (ii)
- Negotiable certificates of deposit issued by a Trading Bank as defined by section 5(1) of the Banking Act 1959;
- (iii)
- Loans to corporations secured by Bank Accepted Bills or Negotiable Certificates of Deposit as defined in (i) and (ii) above;
- (iv)
- Irrevocable letters of credit from major international banks lodged with an Australian bank and payable in Australian dollars;
- (v)
- Loans to the Australian Industry Developmnent Corporation.
3. Where a company lodges a declaration for the purposes of the shareholder rebate scheme, it is required that the moneys specified in the declaration be expended in an appropriate manner before the expiration of the period specified in the declaration. In the interim, if the company invests unexpended declared moneys, they are required by section 160ACA(24) to be held in "short-term investments" which are defined as investments -
- (a)
- by way of deposit with a bank, being a trading bank as defined by sub-section 5(1) of the Banking Act 1959, or with another bank approved by the Commissioner;
- (b)
- by way of loan to, or desposit with, an authorised dealer in the short-term money market;
- (c)
- in securities of the Commonwealth; or
- (d)
- in any other manner approved by the Commissioner.
4. The definition also requires that these must all be investments the terms of which require the moneys invested to be repaid on demand or on the giving of a period of notice not exceeding three months.
5. Where a company invests unexpended declared moneys in other than short-term investments, or does not spend the declared moneys appropriately within the period specified, the rebates to which the company's shareholders became entitled by virtue of the declaration may be reduced or withdrawn.
6. The restrictions on the investment of capital subscriptions specified in the declarations lodged for purposes of that scheme that must be observed to avoid a breach of section 160ACA(24) are designed to ensure that the funds are held readily available in secure investments until they are expended on eligible outgoings. As a general rule, it is expected that the investment of capital subscriptions will take the form specified in paragraphs (a), (b) and (c) of the definition of "short-term investments" in section 160ACA(1).
7. These investments are secured either by way of a Government guarantee or through the borrower having lender of last resort facilities. In brief, they are investments of a kind about which no question arises concerning either security or availability to the lender within the terms of the rebate legislation. A company that invests unexpended declared moneys in those kinds of investments is assured not only of repayment of those moneys but of repayment within the required period, thereby ensuring that the company will be able to comply with the undertaking in its declaration to expend those moneys in an appropriate manner within the period specified in the declaration.
RULING
8. The discretion conferred on the Commissioner of Taxation for the acceptance of other forms of investment for purposes of the shareholder rebate scheme is not seen as facilitating approval of a broad spectrum of investments but rather as providing for the approval of particular investments, adequately secured and readily realizable, on a case by case basis. Moreover, as already mentioned, the Commissioner is specifically precluded from approving as short-term investments, investments of any kind that are not repayable on demand or on the giving of no more than three months notice.
9. In considering whether a particular investment proposal should be approved as a short-term investment for purposes of the rebate scheme, the security offered and the ability of the borrower to make the funds available within a period not exceeding three months of the receipt of notice that repayment is required, are of paramount importance. Security is, of course, a necessity but that must be accompanied by an availability that is at least comparable to that pertaining to investments of the kind specifically authorised as short-term investments.
10. Against this background, it could generally be expected with respect to the particular kinds of investment about which advice was sought, that the Commissioner would approve the proposed investment of declared funds by way of loans to the Australian Industry Development Corporation, bank bills accepted by a trading bank or negotiable certificates of deposit issued by a trading bank, where the date of maturity of the particular investment is no further than three months from the date on which the investment was made. Approval of the latter two forms of investment would, however, be subject to the further condition that, should the investing company wish to dispose of the bill or certificate prior to maturity, the disposal must be for an amount that is not less than the amount for which the particular bill or certificate was acquired or, where appropriate, the amount deposited. Subject to the same conditions, approval could also generally be expected for commercial bills endorsed by a trading bank.
11. Specific approval of proposals to invest in these kinds of investments will continue to be necessary.
12. Details to be supplied when seeking approval for investment in these kinds of investments should include -
- (a)
- in the case of bank accepted or endorsed bills -
- (i)
- the bill number;
- (ii)
- the name of the drawer;
- (iii)
- the name of the trading bank accepting or endorsing the bill;
- (iv)
- in the case of a bank endorsed bill, the name of the acceptor;
- (v)
- the due date;
- (vi)
- the face value of the bill;
- (b)
- in the case of negotiable certificates of deposit-
- (i)
- the name of the bank in which the deposit is held;
- (ii)
- the amount of the deposit;
- (iii)
- the due date;
- (c)
- in the case of a loan to the Australian Industry Development
Corporation -
- (i)
- the amount of the loan;
- (ii)
- the due date.
13. The position with respect to irrevocable letters of credit from major international banks and loans to corporations secured by bank accepted bills or negotiable certificates of deposit, is less clear. It will, in these cases, be necessary for a company to provide written application setting out full details concerning the proposed investment, including information that demonstrates the way in which the relevant security and availability criteria set out in the preceding paragraphs of this letter are satisfied. With respect to loans to corporations secured by bank accepted bills or negotiable certificates of deposit it would, for example, be necessary to demonstrate that there could be no competing claims on the particular security and that, should the borrower default in repayment, the company would be in a position to recover its investment by realizing on that security.
COMMISSIONER OF TAXATION
2 October 1980
References
ATO references:
NO J 43/91/1 P1F144
Date original memo issued:
02.10.80
Related Rulings/Determinations:
IT 111
Subject References:
PETROLEUM MINING COMPANIES
AUSTRALIAN INDUSTRY DEVELOPMENT CORPORATION
SHAREHOLDER REBATE SCHEME - SHORT-TERM INVESTMENTS
BANK BILLS
NEGOTIABLE CERTIFICATES
LOANS TO CORPORATIONS
IRREVOCABLE LETTERS OF CREDIT
Legislative References:
160ACA