Taxation Determination

TD 1999/13

Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - for the purposes of the public offer test in paragraph 128F(3)(a) (the 'first public offer test'): (a) are pension funds and other 'qualified institutional buyers' considered to be carrying on the business of providing finance, or investing or dealing in securities? (b) what is required of a company to establish that the persons to whom the debentures are offered are carrying on business in the manner required by the legislation? (c) when is a company taken to know or suspect that such a person is an associate?

  • Please note that the PDF version is the authorised version of this ruling.

FOI status:

may be releasedFOI number: I 1018609

This Taxation Determination is a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and is legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Determination is a public ruling and how it is legally binding.
Date of Effect
This determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

1. The public offer test in paragraph 128F(3)(a) requires debentures to be offered for issue to at least 10 persons, each of whom satisfies the criteria set out in subparagraphs 128F(3)(a)(i) and (ii).

2. Subparagraph 128F(3)(a)(i) requires the persons to whom the debentures are offered, to be either:

carrying on the business of providing finance; or
investing or dealing in securities;

in the course of operating in financial markets.

3. 'Persons' may include a dealer, manager or underwriter, provided they are carrying on a business of the kind required by the section, and are not associates of one another.

4. The explanatory memorandum accompanying the legislation clearly indicates that pension funds operating in overseas financial markets are to be treated as carrying on a business in compliance with the paragraph.

5. 'Qualified institutional buyer' (QIB) is a term used in the United States of America and defined in Rule 144A (United States Securities Act 1933) to mean, among other things, 'certain entities acting for their own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least one hundred million (US dollars) in securities of issuers that are not affiliated with the relevant entity'. It appears that a QIB invests in securities while operating in a financial market. It is accepted QIBs satisfy the carrying on business requirement of the legislation.

6. It would be unreasonable to expect a company to be aware whether or not persons to whom it offers debentures are carrying on the business of providing finance, or investing or dealing in securities. A company is able to rely on a representation by a person to whom the debenture is offered that it is carrying on business as required by the legislation. Where a dealer, manager or underwriter offers the debentures on behalf of the company under paragraph 128F(3)(e), a company may also rely on a representation or undertaking by the dealer, manager or underwriter, that it offered, or it will offer, the debenture for sale in compliance with paragraph 128F(3)(a). A company may also rely on an undertaking to offer debentures to QIBs if given by a dealer, underwriter or manager in respect of any offer of a debenture in the United States of America.

7. Therefore, a detailed examination of offerees is not required by the company offering debentures for issue.

8. Subparagraph 128F(3)(a)(ii) further requires the persons to whom the debentures are offered are not known or suspected by the company offering the debentures, to be associates of one another. 'Knowledge' in this sense refers to the actual knowledge of the company, assessed at the time the debentures are offered for issue. Suspicion needs to be looked at objectively in the light of what is reasonable in the individual circumstances of a particular case. A company will not be regarded as knowing or suspecting persons are associates unless it is established that officers of the company knew or had reasonable grounds to suspect otherwise.

9. 'Associate' is defined in subsection 128F(9) to have the meaning given in Division 16F (disregarding subparagraphs 159GZC(1)(a)(ii), (1)(b)(i) and (1)(d)(i)). Division 16F defines associate widely.

10. As pointed out in the explanatory memorandum that accompanied the legislation, a company offering debentures for issue is not required to undertake a detailed examination into the relationship between persons it offers debentures to. However, it cannot ignore companies that are generally known to be associates.

Commissioner of Taxation
12 May 1999