Edited version of private ruling

Authorisation Number: 1011478740301

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Ruling

Subject: Interest withholding tax exemption

Issue 1

Are the requirements of paragraph 128F(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) satisfied, to the extent that a debenture is in fact 'issued' when the Loan Note Agreement is transferred by novation to a new borrower?

Answer

Yes, paragraph 128F(1)(a) of the ITAA 1936 will be satisfied such that a debenture will be issued when the Loan Note Agreement is transferred to a new borrower.

Issue 2

Will the issue of a debenture arising through the novation of the borrower of the Loan Note Agreement satisfy the 'public offer test' requirements of subparagraph 128F(1)(d)(i) of the ITAA 1936?

Answer

Yes, the issue of a debenture arising through the novation of the borrower of the Loan Note Agreement will satisfy the 'public offer test' requirements of subparagraph 128F(1)(d)(i) of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Relevant facts and circumstances

The borrower entered into a Loan Note Agreement with non-resident note holders (lenders).

The terms of the Loan Note Agreement provides that the written consent of the Facility Agent (acting with the approval of all lenders) is required before the borrower's rights under the Loan Note Agreement can be novated.

The borrower was a resident of Australia when it issued the loan notes.

The offer of the loan notes was made to more than 10 non-resident financial institutions.

The lenders were not associates of the borrower or each other at the time of the offer and the time of issue of each loan notes under the Loan Note Agreement. The lenders carried on and will continue to carry on the business of providing finance or investing or dealing in securities in the course of operating in financial markets.

The borrower of the Loan Note Agreement will be replaced by a new borrower which is an Australian resident company (new borrower). All the rights and obligations as borrower under the Loan Note Agreement will be novated to the new borrower.

The original offer of the loan notes under the Loan Note Agreement satisfy the public offer test under paragraph 128F(3)(a) of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 128F(1)(a)

Income Tax Assessment Act 1936 Subparagraph 128F(1)(d)(i)

Does Part IVA apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Issue 1

Summary

The new borrower will be regarded as having issued the debenture when the Loan Note Agreement is transferred by novation to a new borrower for the purposes of paragraph 128F(1)(a) of the ITAA 1936.

Detailed reasoning

Section 128F of the ITAA 1936 exempts from withholding tax, interest on certain publicly offered debentures. Subsection 128F of the ITAA 1936 states that withholding tax is not payable on interest paid by a company 'in respect of a debenture' if:

· the company was a resident of Australia when it issued the debenture

· the company is a resident of Australia when the interest is paid, and

· the issue of the debenture satisfies one of the public offer tests set out in subsection 128F(3) or 128F(4) of the ITAA 1936.

Paragraph 128F(1)(a) of the ITAA 1936 requires an Australian resident company to have issued the debenture.

Definition of debenture

Section 128F applies to any debenture as defined in subsection 128F(9) of the ITAA 1936. Under subsection 128F(9) 'debenture' is defined as including a promissory note or a bill of exchange, in addition to the instruments mentioned in the definition of debenture contained in subsection 6(1) of the ITAA 1936.

Subsection 6(1) of the ITAA 1936 defines a debenture to include 'debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not'.

Debenture being 'issued'

The term 'issued' is not defined for the purposes of the withholding tax provisions in Division 11A of the ITAA 1936. The Explanatory Memorandum to Taxation Laws Amendment Act (No 2) 1997 (EM) which introduced amendments to section 128F of the ITAA 1936, discusses the term in the context of repealed paragraph 128F(1)(c) of the ITAA 1936. The EM cites Chitty J in Levy v. Abercorris Slate and Slab Company (1887) 37 Ch D 260, in which he states at 264:

"issued" is not a technical term, it is a mercantile term well understood; "issued" here means the delivery over by the company to the person who has the charge.

Taxation Determination TD 1999/9 refers to this definition and states at paragraph 4:

The ordinary meaning of the word 'issue' according to The Macquarie Dictionary is 'to put out: deliver for use, sale, etc.; put into circulation'. To put out or deliver debentures to subscribers in an offshore market, is to 'issue' the debentures for the purposes of paragraph 128F(1)(c) irrespective of where supporting documentation may have been signed.

In this case, the instruments issued by the borrower under the Loan Note Agreement are loan notes and satisfy the definition of a debenture. Under the proposed novation arrangement, the borrower of the Loan Note Agreement will be replaced by the new borrower, an Australian tax resident company. The loan notes will become notes of the new borrower and satisfy the definition of a debenture for the purposes of section 128F of the ITAA 1936.

When the novation of the rights and obligations under the Loan Note Agreement to the new borrower is completed this will give rise to a new debenture being issued under paragraph 128F(1)(a) of the ITAA 1936.

Issue 2

Summary

The issue of a debenture arising through the novation of the borrower of the Loan Note Agreement will satisfy the 'public offer test' requirements of subparagraph 128F(1)(d)(i) of the ITAA 1936.

Detailed reasoning

Under subparagraph 128(1)(d)(i) of the ITAA 1936 the public offer test requires a debenture to satisfy either subsection 128F(3) or (4) of the ITAA 1936.

Subsection 128F(3) relevantly states:

'The issue of a debenture or debt interest by a company satisfies the public offer test if the issue resulted from the debenture or debt interest being offered for issue:
to at least 10 persons each of whom:

(i) was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets; and

(ii) was not known, or suspected, by the company to be an associate (see subsection (9)) of any of the other persons covered by this paragraph; …

To satisfy the public offer test, it is necessary that the issue of debentures or debt interest must have 'resulted from' the debenture or debt interest being 'offered for issue'.

Tax Determination TD 1999/8 states that subsection 128F(3) of the ITAA 1936 will be administered on the basis that a debenture will be taken to have 'resulted from' being 'offered for issue' if the debenture otherwise satisfies one of the paragraphs set out in subsection 128F(3). TD 1999/8 notes that a strict interpretation would not sit comfortably with actual market practice. To satisfy the public offer test there still needs to be some nexus between the offer and the issue.

Novation according to Windeyer J in Olsson v. Dyson (1969) 120 CLR 365, at p 388 is:

the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person, he, the third person, must be a party to the novated contract. In that sense "novation" means simply a new contract standing in the place of the old.

In this case, while the new borrower will be regarded as having issued the debenture when the Loan Note Agreement is transferred by novation to the new borrower under paragraph 128F(1)(a) of the ITAA 1936, the novation still arises from the original Loan Note Agreement.

The loan notes originally issued under the Loan Note Agreement satisfy the public offer test under paragraph 128F(3)(a) of the ITAA 1936.

As the proposed replacement of the borrower of the Loan Note Agreement is based on the original Loan Note Agreement, the issue of the debentures will be taken to have 'resulted from' the debentures being 'offered for issued'.

As such, the issue of a debenture arising through the novation of the borrower of the Loan Note Agreement will satisfy the public offer test under paragraph 128F(3)(a) of the ITAA 1936 and the requirements of subparagraph 128F(1)(d)(i) of the ITAA 1936 where the existing debenture issued under the Loan Note Agreement satisfy the public offer test.

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