ATO Interpretative Decision
ATO ID 2013/39
Income Tax
Offshore banking unit: investment made with an offshore person or a non-resident-
This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an offshore banking unit[1] (OBU) purchases investments on behalf of an offshore person, who is the entity that is referred to in the terms 'making ... with' in subsection 121D(6) of the Income Tax Assessment Act 1936 (ITAA 1936) and 'made with' in paragraph 121D(6A)(c) of the ITAA 1936?
Decision
The entity that is referred to in the terms 'making ... with' in subsection 121D(6) of the ITAA 1936 and 'made with' in paragraph 121D(6A)(c) of the ITAA 1936 is the other party (that is the counterparty) to the transaction.
Facts
An Australian OBU, which is a resident member of a multinational group, provides investment management services to a non-resident member of the group.
That group member is an offshore person as defined in section 121E of the ITAA 1936.
The OBU purchases and manages various types of investments on behalf of the offshore person. This includes purchases of shares, derivatives (including futures and options) and other securities through foreign exchanges.
Reasons for Decision
Subsection 121D(6) of the ITAA 1936 states in part:
For the purposes of paragraph (1)(e), an investment activity is
making ... an investment with
an offshore person ... (emphasis added)
Subsection 121D(6A) of the ITAA 1936 states in part:
For the purposes of paragraph (1)(e), an investment activity is also the managing by an OBU of a portfolio investment ... where:
...
Since subsections 121D(6) and (6A) both apply to investments, this ATO ID applies only where assets are acquired as investments. ATO ID 2004/962 discusses the distinction between assets which are acquired as investments and assets which do not amount to investments because they are acquired for other purposes.
Subsection 121D(6) of the ITAA 1936 refers to making an investment with an offshore person, while paragraph 121D(6A)(c) of the ITAA 1936 refers to an investment made with a non-resident.
This raises the question of whether the terms 'making ... with' and 'made with' refer to an entity being the previous holder of the investment, or to an entity such as the exchange through which the investment was acquired, or to the issuer of the investment, or to some other person.
'Making ... an investment with' and 'an investment made with' are not defined in the legislation. However, we consider that the terms are so similar that they both have the same meaning.
Subsection 126D(6) of the ITAA 1936 was introduced by the Taxation Laws Amendment Bill (No. 4) 1992. The Senate Replacement Explanatory Memorandum for that Bill states in part:
To be an 'OB activity':
...
the other party to the transaction
must be an ''offshore person'' ... (emphasis added)
Subsection 121D(6A) of the ITAA 1936 was introduced by the Taxation Laws Amendment Bill (No. 2) 1996. The House of Representatives Explanatory Memorandum for that Bill says in part:
1.38,Similarly, the restriction that when making an investment on behalf of an offshore person
the other party to the transaction
must be a non-resident who does not have a permanent establishment in Australia is removed in new subsection 121D(6A). OBUs will be able to purchase Australian assets from or make loans to both residents and non-residents (whether or not they have a permanent establishment in Australia). [New paragraph 121D(6A)(c)] (Emphasis added)
Hence the entity that an investment is made with, for the purpose of subsections 121D(6) and 121D(6A) of the ITAA 1936, is the other party (that is, the counterparty) to the transaction.
Real property
In the case of an investment in real property, the other party to the transaction is the vendor of the property. Hence in relation to an investment in real property, the terms 'making ... with' and 'made with' refer to the vendor.
Fixed deposits
For investments such as fixed deposits, the other party to the transaction is the bank or other entity with which the deposit is made, so the terms 'making ... with' and 'made with' refer to that entity.
Loans
In the case of loans made by an OBU, the other party to the transaction is the borrower, and 'making ... with' and 'made with' refer to the borrower.
Securities
In relation to shares or other types of securities which can be traded on an exchange, there are two distinct points at which the securities can be purchased - firstly in the primary market where securities are created and sold by the issuer, and secondly in the secondary market where investors buy and sell securities that were previously issued in the primary market.
We consider that the terms 'making ... with' and 'made with' were intended to refer to the seller of the investments, as the seller is the other party to the transaction.
Securities - primary market
In the primary market (for example, when a company undertakes an Initial Public Offering) the transaction takes place between the issuer (the company) and the investor. In this case, the issuer of the securities is the seller of the investment and the other party to the transaction. Thus, in the case of shares or other securities purchased by an OBU in the primary market, 'made with' and 'making ... with' refer to the issuer of the shares or other securities.
Exchange traded securities - secondary market
Where investments, including shares, debentures, units in unit trusts, futures and options etc., are traded on an exchange, the transactions are made between the buyers and sellers. Other parties may be involved in the transactions, for example, exchange participants, exchanges, and clearing houses. However, these parties act on behalf of, or as intermediaries between, the buyer and the seller.
Whenever an investment is traded on an exchange, the other party to the transaction, for the purpose of subsections 121D(6) and 121D(6A) of the ITAA 1936, is the seller or buyer on the other side of the trade.
However, in practice, a buyer (including an OBU buyer) generally does not know the identity of the seller, and so could not know whether the seller is an offshore person or a non-resident. For this reason, we will accept that when an investment is acquired through a foreign stock exchange or a foreign futures exchange or foreign options exchange, an investment is made with an offshore person for the purpose of subsection 121D(6) of the ITAA 1936 - unless either the OBU or the offshore person for whose benefit the security is purchased, is aware or might reasonably be expected to be aware, that the seller of the security is not an offshore person.
Similarly, we will accept that when an investment is acquired through a foreign exchange, an investment is made with a non-resident for the purpose of subsection 121D(6A) of the ITAA 1936 - unless either the OBU or the non-resident for whose benefit the security is purchased, is aware or might reasonably be expected to be aware, that the seller of the security is not a non-resident.
Over the counter trades
Finally, and in contrast with the exchange trading of investments, 'over-the-counter' (OTC) or 'off-exchange' trading is the negotiation and trading of such investments privately and directly between buyers and sellers, rather than through a centralised institution such an exchange. Here the terms 'making ... with' and 'made with' refer to the other party (the counterparty) to the OTC transaction.
Amendment History
| Date of amendment | Part | Comment |
|---|---|---|
| 12 October 2021 | Reasons for Decision | Insertion of footnote 1, to provide details regarding closure of the OBU regime to new entrants, outstanding applications for the OBU regime, and concessional tax treatment of OBUs.
Date of effect 13 September 2021 |
The OBU regime is closed to new entrants from 14 September 2021. Any outstanding applications made before this date will, from this date, lapse. The government will remove the concessional tax treatment for OBUs in respect of offshore activities effective from the 2023-24 income year.
Year of income: Year ending 30 June 2012
Legislative References:
Income Tax Assessment Act 1936
subsection 121D(6)
subsection 121D(6A)
paragraph 121D(6A)(c)
ATO ID 2004/962
Other References:
Senate Replacement Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1992
House of Representatives Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1996
Keywords
International tax
Offshore banking
Offshore banking units
Offshore banking activities
Date reviewed: 12 October 2021
ISSN: 1445-2782
| Date: | Version: | |
| 20 May 2013 | Original statement | |
| You are here | 12 October 2021 | Updated statement |