Second Reading Speechby the Treasurer, The Honourable B.M. Snedden. M.P.
The purpose of this Bill is to amend the provisions of the income tax law relating to interest withholding tax so as to give effect to decisions announced by the former Prime Minister on 13 December last. Two other taxation Bills to be introduced immediately - the Income Tax (Bearer Debentures) Bill 1971 and the Income Tax (Withholding Tax Recoupment) Bill 1971 - are complementary.
The interest withholding tax is a tax, levied at the rate of 10 per cent, on interest received by overseas lenders from Australian borrowers. The borrower is obliged to withhold 10 per cent of the interest and pay it to the Commissioner of Taxation. It is a form of tax commonly used by many countries to tax certain classes of income having a source within their territory.
When the interest withholding tax in its current form was introduced as from the beginning of 1968, it was expected that in most cases, particularly where there were arrangements between Australia and the other country concerned for relief of double taxation, the overseas lender would be able to obtain a taxation credit in his own country for interest withholding tax deducted in Australia. If so, it was to be expected that the burden of the Australian interest withholding tax would not generally fall on the Australian borrower - in other words, that the rate of interest payable by the Australian borrower would not include the cost of interest withholding tax.
However, a review of the effect of the interest withholding tax on Australian borrowers has caused the Government to believe that the tax frequently falls, not on the overseas lender, but on the Australian borrower. This is because the lender adds to the rate of interest he charges as compensation for the interest tax withheld.
The Government has made clear the importance it attaches to flows of capital from abroad for the development of our resources and of the economy generally. It has also made clear that it wishes to see as much Australian equity and managerial participation as possible in developmental and industrial enterprises in this country. In so far as the burden of the interest withholding tax on overseas borrowings is passed on, in whole or in part, to the borrower in Australia, it is thought that its effect could be detrimental to the achievement of these objectives.
As a result of the review to which I have referred, it is proposed under this Bill to exempt interest on two broad categories of overseas borrowings from interest withholding tax. The first broad category is bearer securities issued overseas to the public or on an otherwise widely-spread basis. The second broad category relates to what might be termed overseas borrowings to support whole or partial Australian ownership of ventures in this country.
Where borrowings are made overseas by means of widely-spread bearer securities, the Government is satisfied that the cost of interest withholding tax must be met by the Australian borrower irrespective of whether or not the borrowing company is predominantly overseas-owned or Australian-owned. This is so because, for technical reasons, it is not practicable for overseas tax credits to apply at all under the institutional arrangements that have in practice to be adopted for payment of the interest. These arrangements provide for interest on the securities to be paid over the counter by banks in overseas financial centres when the holder of the security presents his interest coupon, and the bank is reimbursed by the borrower or his agent. It has been found impossible for our withholding tax to be collected from the real lenders in these circumstances.
I mention in this connexion that, as a general measure against tax evasion, the present law - by section 126 of the Assessment Act - imposes a special rate of tax of approximately 42 per cent on interest paid on bearer securities where the borrower does not supply to the Commissioner of Taxation the names and addresses of holders to whom the interest is paid.
The provisions of section 126 apply to overseas issues of bearer securities. Despite these provisions, however, borrowers resident in Australia which wish, and are able, to have access to overseas capital markets through the issue of bearer securities can still make such borrowings by setting up an overseas borrowing subsidiary in a country which does not impose tax on interest on bearer securities. Australian interest withholding tax at the rate of 10 per cent is then paid on interest on the borrowing by the Australian company from its overseas subsidiary. That is a technical solution which enables the Australian borrower to meet both our requirements and those of the overseas capital market. But there can be no crediting of our withholding tax against tax levied by the real lender's country of residence, and so the tax would usually operate to increase the effective rate of interest payable by the Australian borrower.
It is accordingly proposed that interest on bearer debentures that satisfy tests set out in the Bill will be exempt from withholding tax and section 126 tax. Broadly speaking, the exemption will be available for interest paid by Australian-resident companies on overseas borrowings made by them through widely-spread bearer debentures for use in, or in connexion with, a business carried on in Australia by a resident of Australia. It will be immaterial for this purpose whether or not the borrower or user is Australian-owned. The intention is to eliminate scope for companies which are resident overseas to channel their overseas borrowings via Australian-based companies in such a way as to use Australia as a tax haven.
A requirement for exemption is that the debentures be issued outside Australia for the purposes of raising a loan outside Australia in a foreign currency, the interest on which is paid outside Australia in a foreign currency. One objective in defining overseas borrowing in this way is to minimize the risk of evasion of tax by residents of Australia - precautions of this kind have to be stronger with bearer securities than with registered securities.
It will also be a prerequisite for exemption that the Commissioner give a certificate that, having regard to the circumstances surrounding the issue - and statutory guidelines for the Commissioner are provided in the Bill for this purpose - it is reasonable to regard the debentures as having been issued with a view to public subscription or purchase, or other wide distribution among investors. The purpose of this, of course, is to prevent borrowings from simply being "dressed-up" as exempt bearer debenture issues so as to take advantage of the exemption.
Earlier I referred to the issue of bearer securities or debentures via an overseas subsidiary of the Australian borrower. It has been represented to us that some Australian borrowers will find it expedient to continue to borrow in this way because of the preferences of overseas lenders. We see no reason to prevent them from doing so, and accordingly the exemption in respect of bearer debentures will apply, not only where debentures are issued directly by the Australian borrower, but also where debentures are issued through an overseas subsidiary which is wholly owned and controlled by an Australian-resident parent and its only business is to borrow for on-lending at cost to the parent company for use in, or in connexion with, an Australian business.
Unless there is exemption under the plan for borrowings to support Australian ownership, which I describe shortly, bearer debenture interest that does not qualify for the exemption will, as previously, be subject to section 126 tax if the identity of the holders is not disclosed. However, the rate of tax under section 126 will be reduced to 10 per cent for non-exempt interest on completely foreign issues by residents of Australia, i.e., issues in a foreign currency on which interest is payable in a foreign currency by a resident of Australia. In other cases, the rate of tax will be the same as that now imposed. A separate bill, the Income tax (Bearer Debentures) Bill 1971, will declare the rates of tax under section 126.
I come now to the second, and in many respects the more important, broad category of overseas borrowings on which under the Bill interest will be exempt from interest withholding tax - namely, borrowings to support whole or partial Australian ownership of ventures in this country.
Except in the case of widely-spread bearer securities, there is no absolute barrier to prevent the overseas lender from obtaining in his country the benefit of tax credits in respect of interest withholding tax deducted in Australia. However, we have been advised that difficulties frequently arise and that the cost of our interest withholding tax may have to be met by the Australian borrower in the form of an increase in the rate of interest on the loan. Sometimes all that is involved is that the borrower is asked to put the lender in funds temporarily until the latter's tax credit is received, in which event there is no permanent cost to the borrower. We have been advised that in other cases there could be a permanent cost to him because the lender cannot obtain a full credit, or perhaps for other reasons. Where this is so, the Government believes that these problems and costs must affect Australian-owned companies to an extent that need not, and generally does not, apply to overseas companies which can have access to loan funds from abroad through overseas parent or associated companies. Accordingly, the Bill provides for exemption from interest withholding tax, in defined circumstances, of interest on overseas borrowings by Australian-owned borrowers. The purpose is to ensure that the law does not operate to discriminate against Australian-owned enterprises, relative to overseas-owned enterprises, in the matter of the effective cost of interest on overseas borrowings.
For this exemption to be available, tests as to the a extent of Australian ownership and control must be satisfied both by the borrower and the enterprise in which the borrowed moneys are used. In the terms used in the Bill, the exemption will be available only if the borrower is an "Australian entity" and the borrowed funds are used in an enterprise owned by an "Australian entity" or an enterprise in which there is "substantial Australian participation".
The Bill specifies that individuals ordinarily resident in Australia, the Commonwealth, a State and Authorities of the Commonwealth or a State are Australian entities for the purpose. In the case of companies, in broad terms a company will be treated as an Australian entity if, in addition to its being a resident of Australia, at least 60 per cent of the ownership and control is vested in Australian entities (including shareholder companies that are themselves Australian entities) and no one person who is not an Australian entity has rights to more than 20 per cent of the ownership or control. Other types of business organization, such as partnerships and joint ventures, may qualify as Australian entities on satisfying tests as to Australian ownership and control adapted from those applicable to companies.
An enterprise will be deemed to be one in which there is substantial Australian participation if the extent and concentration of participation by Australian entities are such as to represent an effective Australian influence in the carrying on of the enterprise. An enterprise owned by a company will be an enterprise with substantial Australian participation if rights to at least 20 per cent of the ownership and control of the company are held by one Australian entity. Alternatively an enterprise may qualify if at least 30 per cent of the ownership and control of the company is held by not more than five Australian entities, or at least 40 per cent is held by any number of Australian entities. Enterprises owned by bodies other than companies may qualify on satisfying tests as to the extent of Australian ownership and control adapted from those applying for companies.
Interest on loans raised abroad by such enterprises will be exempted from tax if, on an application to him by the borrower, the Commissioner of Taxation certifies that he is satisfied that the borrower is an Australian entity and the loan moneys are for use in an enterprise owned by an Australian entity or an enterprise in which there is substantial Australian participation. If, in the latter case, the money is provided as a loan to the enterprise, the loan must not be excessive in amount when related to the extent of the Australian participation in the enterprise.
Other ancillary tests, dealing with matters such as rights over the appointment of Directors, redeemable shares and options to acquire shares and artificial arrangements designed to obtain exemption that otherwise would not have been available, are also proposed as safeguards against devices to circumvent the main tests I have described.
Where circumstances so change during the currency of a loan that the tests for exemption are not met, the interest will remain exempt from withholding tax but the borrower will be liable to pay a special tax (in effect, a substituted withholding tax) on the interest attributable to the period during which the tests are not met. This tax will be imposed at the rate of 10 per cent by the income tax (withholding tax recoupment) Bill 1971. That Bill also provides for the imposition of additional tax, at the rate of 10 per cent per annum on the amount of the special tax, equivalent to the additional tax for late payment of withholding tax that would have been payable if the interest had not been exempted from that tax.
I turn now to administrative procedures governing the operation of the exemption in its application to both of the broad categories of overseas borrowings I have described. If a particular borrowing meets the precise tests set out in the Bill and the Commissioner of Taxation is satisfied that the case falls within the terms and spirit of other provisions of the Bill including the extensive guidelines contained in it, he will give to the borrower a certificate that he is so satisfied. On the giving of this certificate interest on that borrowing will, while it continues to satisfy the precise tests, 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 will be given by the Commissioner upon the borrower demonstrating how the money borrowed will, in the end, be used. Such certificates will be given only after the overseas loan has been raised and all the relevant facts have been made known to the Commissioner.
However, the Commissioner will follow his usual administrative practice in cases of this kind of indicating beforehand to prospective borrowers who place all the facts before him whether, on those facts, he can be expected to give a certificate once the loan is raised.
Should the Commissioner conclude that a certificate of exemption should not be given he will be obliged to notify the borrower accordingly. The law will treat this notice as if it were a notice of an Income Tax Assessment, with the consequence that the borrower will have usual rights of objection and appeal against the Commissioner's refusal to give a 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.
The new exemptions from interest withholding tax provided for in the Bill will be effective in relation to loans the contracts for which are entered into on or after the date of Royal Assent. It will be immaterial that negotiations for a loan concluded on or after that date were begun before then, or that the loan is in substitution for an earlier loan. In the statement made by the former Prime Minister on 13 December it was foreshadowed that the amendments would be effective as from 1 July 1971. It has been found, however, that no purpose would be served by deferring operation of the new provisions beyond the date of Royal Assent.
Before concluding I should explain the significance of clause 9 of the Bill, which has a different purpose from those I have described. On the face of things it may appear that the clause will operate to withdraw an exemption from withholding tax that is provided by the existing law in respect of interest credited by overseas branches of Australian banks to accounts kept with the branches by foreign customers. However, this is not the case.
I should explain that this category of interest - broadly interest on savings bank or fixed deposit accounts kept by non-residents with overseas branches of Australian banks in the ordinary course of their business - has been and will continue to be exempt from withholding tax under a general provision in section 128B(2.). The latter provision frees from the tax interest paid to a non-resident where it is incurred by a resident in carrying on business through an overseas branch. The specific exempting provision that is to be omitted by clause 9 is, in fact, redundant. While its inclusion in the original interest withholding tax legislation was considered desirable to make it doubly clear that the interest concerned would not bear withholding tax, its withdrawal is now considered necessary since a view has been expressed that it could operate to provide a general exemption for ordinary borrowings by Australian banks on behalf of companies in Australia. Such borrowings which meet the tests for the exemptions proposed in the Bill will, of course, be free of withholding tax but it is not, and never has been, intended that all such borrowings should automatically qualify for exemption under the provision now proposed to be omitted. The amendment to be made by clause 9 will be effective as from tomorrow.
I have arranged for a memorandum giving comprehensive explanations of the technical provisions of the three Bills to be circulated to members before they are debated. The Government believes that the legislation will assist generally in the attraction of overseas investment to Australia, and on a basis under which Australian entities will not be at a disadvantage relative to overseas-owned enterprises in regard to the effective cost of overseas loan capital.
I commend the Bill to the House.