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Edited version of your private ruling
Authorisation Number: 1012513637073
Ruling
Subject: Interest withholding tax exemption
Question 1
Is the Company required to withhold tax under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 ('TAA') from the interest it pays to its non-resident Note holders?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2014 (2014 year)
Year ended 30 June 2015 (2015 year)
Year ended 30 June 2016 (2016 year)
The scheme commences on:
The scheme has commenced.
Relevant facts and circumstances
The Company is an Australian resident in accordance with the Corporations Act 2001.
The Company has a current prospectus which contains an offer to issue Notes of the company.
The prospectus indicates that:
· The Notes are debt securities of the Company.
· The Company is obliged to repay the moneys deposited with or lent to it by way of the issue of the Notes.
· The repayment of the moneys deposited with or lent to the Company by way of the issue of the Notes is secured by a charge over the assets of the Company.
The Notes are regarded as a category of debenture in accordance with section 283BH of the Corporations Act 2001, as stated in RG69.125 of the ASIC Regulatory Guide 69
The issue of the Notes is being advertised through the prospectus which is on the Company's website.
The Company states that it currently has a large number of debenture holders.
Some of the Notes holders are non-residents of Australia.
The Company advised that it had no reasonable grounds to suspect that any debentures, or interest in any debentures, was being, or would later be, acquired by an "associate" at the time the debentures were issued (or since for that matter). Further, the Company has no "associates" under the definition in section 318 of the ITAA 1936.
Relevant legislative provisions
Taxation Administration Act 1953
section 12-245 Schedule 1
section 12-300 Schedule 1
Income Tax Assessment Act 1936
section 128B
section 128F
subsection 6(1)
Reasons for decision
Section 12-245 of Schedule 1 to the TAA provides that an entity (the payer) must withhold tax from interest it pays to an entity (the recipient) if:
(a) the recipient has an address outside Australia; or
(b) the payer is authorised to pay the interest at a place outside Australia.
However, section 12-300 of Schedule 1 to the TAA provides that an entity is not required to withhold tax from interest if no withholding tax is payable on the interest.
Section 128B of the Income Tax Assessment Act 1936 ('ITAA 1936') sets out the circumstances in which withholding tax is payable in respect of dividend, interest and royalty income derived by non-residents.
Subsection 128B(2) of the ITAA 1936 applies to income derived after 1 January 1968 by a non-resident and consists of interest that is either:
· paid to the non-resident by an Australian resident and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or
· paid to the non-resident by a non-resident and is an outgoing wholly incurred by the non-resident in carrying on business in Australia at or through a permanent establishment in Australia.
Subparagraph 128B(3)(h)(iv) of the ITAA 1936 excludes income from withholding tax that consists of interest to which section 128F of the ITAA 1936 applies.
Subsection 128F(1) is satisfied where interest is paid by a company in respect of a debenture or debt interest in the company if:
(a) the company was a resident of Australia when it issued the debenture or debt interest; and |
(b) the company is a resident of Australia when the interest is paid; and |
(c) for a debt interest other than a debenture - the debt interest: (i) is a non-equity share; or (ii) consists of 2 or more related schemes (within the meaning of the Income Tax Assessment Act 1997) where one or more of them is a non-equity share; or (iii) is a syndicated loan; or (iv) is prescribed by the regulations for the purposes of this section; and |
(d) either: (i) the issue of the debenture or debt interest satisfies the public offer test set out in subsection (3) or (4); or (iii) for a syndicated loan - the invitation to become a lender under the relevant syndicated loan facility satisfies the public offer test set out in subsection (3A). |
Application to your circumstances
Resident of Australia
The Company is an Australian resident for tax purposes when it issues the Notes and pays the interest on the Notes. Accordingly, paragraph 128F(1)(a) is satisfied.
Debenture
Subsection 128F(9) of the ITAA 1936 provides that in section 128F of the ITAA 1936 'debenture' includes a promissory note or a bill of exchange in addition to the things mentioned in the definition of debenture in subsection 6(1) of the ITAA 1936.
Subsection 6(1) of the ITAA 1936 provides that 'debenture', in relation to a company, includes debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not.
The definitions of 'debenture' in subsections 128F(9) and 6(1) of the ITAA 1936 are inclusive. Therefore, the term 'debenture' in section 128F of the ITAA 1936 also bears its ordinary meaning. According to the Macquarie Dictionary, a 'debenture' is 'a note or certificate acknowledging a debt as given by an incorporated company'.
In the present case, it is considered that the Notes can be regarded as debentures for the purposes of section 128F of the ITAA 1936 on the following basis:
· Subsection 6(1) of the ITAA 1936 includes notes of a company within its definition of the term "debenture"
· The Notes are debt securities of the Company. These represent a note acknowledging a debt of the Company to the Note Holders.
· The Company is obliged to repay the moneys deposited with or lent to it by way of the issue of the Notes to note holders.
· The repayment of the moneys deposited with or lent to the Company by way of the issue of the Notes is secured by a charge over the assets of the Company.
· The Notes are regarded as a category of debenture in accordance with section 283BH of the Corporations Act 2001, as stated in RG69.125 of the ASIC Regulatory Guide 69.
Accordingly, paragraph 128F(1)(b) is satisfied. As such, paragraph 128F(1)(c) is not required to be satisfied as the instrument issued is not a debt interest other than a debenture
Public offer test
The public offer test requires a debenture to satisfy either subsection 128F(3) or (4) of the ITAA 1936.
Paragraph 128F(3)(b) provides that the test will be satisfied if the issue resulted from the debenture being offered for issue to at least 100 persons whom it was reasonable for the company to have regarded as either having acquired debentures in the past or being likely to be interested in acquiring debentures in the future.
Taxation Determination TD 1999/24 provides that the term 'offer' in subsection 128F(3) of the ITAA 1936 includes invitations or inducements to potential investors to make offers.
Taxation Determination TD 1999/8 states:
… subsection 128F(3) 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).
The Company is advertising the issue of the debentures through the prospectus which is on its website. The prospectus is an invitation or inducement to potential investors to make offers and hence constitutes an 'offer' for the purposes of subsection 128F(3) of the ITAA 1936. By advertising the issue of the debentures in this manner, the Company is offering the debentures for issue to at least 100 persons whom it may reasonably regard as either having acquired debentures in the past or being likely to be interested in acquiring debentures in the future. The issue of the debentures is taken to have resulted from the debentures being offered for issue. Hence, the issue of the Notes satisfies the public offer test in paragraph 128F(3)(b) of the ITAA 1936.
However, subsection 128F(5) provides that in certain circumstances, the issue of debentures or debt interest to an associate of the issuing company will breach the public offer test and preclude an exemption under section 128F.
Further, subsection 128F(6) provides that the section 128F exemption will not apply to interest paid to associates of the issuing company.
In this regard, the Company has no reasonable grounds to suspect that any debentures, or interest in any debentures, was being, or would later be, acquired by an "associate" at the time the debentures were issued.
Therefore, the Commissioner is satisfied that the issue of the Notes are not excluded from satisfying the public offer test under subsection 128F(3) of the ITAA 1936.
Accordingly, as all the conditions for exemption from withholding tax are met under subsection 128F(1) of the ITAA 1936, the non-resident Note holders are not required to pay withholding tax on the interest.
Consequently, The Company is not required to withhold tax under section 12-245 of Schedule 1 to the TAA from the interest it pays to its non-resident Note holders.
This ruling is based on the facts stated in the description of the scheme that is set out above. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it.
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