Edited version of your written advice

Authorisation Number: 1013068392219

Date of advice: 9 August 2016

Ruling

Subject: Exemption to interest withholding tax to non-residents

Question 1

Will interest paid to non-residents of Australia who do not derive that income in carrying on business in Australia on the Notes issued by the Issuer be exempt from a liability to interest withholding tax (IWT) in accordance with sections 128B(3) and 128F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will section 26-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) apply to deny the Issuer deductions for interest it pays under the Notes?

Answer

No

Question 3

Will the Commissioner make a determination under section 177F(2A) of the ITAA 1936 in relation to interest payable to non-residents of Australia who do not derive that income in carrying on business in Australia under the Notes being exempt from IWT?

Answer

No

This ruling applies for the following periods:

01 July 2016 to 30 June 2020

The scheme commences on:

01 July 2016

Relevant facts and circumstances

The Fund

The Fund is an open-ended unlisted fund.

The Fund is a registered managed investment scheme.

The Fund is a resident of Australia for tax purposes.

The Fund has a broad investor base of wholesale investors, including companies, trusts and superannuation funds.

Over the past years, the Fund has experienced substantial growth. In order to continue to prudently support its capital management strategy by diversifying its debt sources and extending its duration the fund needs to source debt from new debt investors and access debt with longer tenor.

The Fund is therefore proposing to raise additional finance and access further capital from offshore investors, such as the private placement market in the United States of America (USPP) in order to fund further capital expansion in Australia.

The USPP market would provide the Fund with the ability to source debt for tenors between 10-15 years (and longer in some circumstances).

The relevant Arrangements

The Fund is intending to access the USPP market by making a public offer of debt interests.

The USPP market is one that traditionally assumes that the debt is compliant with section 128F of the ITAA 1936 and as such, the investors do not accept withholding tax costs on payments of interest, which would significantly reduce the marketability of the securities.

The Fund’s financial advisors have provided a recommendation that confirms the Fund’s approach to the USPP market is commercially sound. The benefits for Australia Fund in raising offshore funding have been noted as follows:

● Diversification of funding ensuring access to liquidity across market cycles:

○ Preserve bank capacity and diversify funding into a new source of capital in a market that is stable and readily accessible even during periods of high volatility

○ Knowledgeable investor base that is relationship driven and have deep pockets to support future issuance

● Flexibility in Offering Structure:

○ Tenor – private placements have tenors ranging from 3 to 30+ years. Australasian issuers unable to achieve cost-effective tenor in the domestic market have found the longer tenors 10 – 15 years most attractive to lengthen debt maturity profiles

○ Size - The USPP market does not have any minimum or benchmark offering size requirements. However, for cost efficiency and time investment by management, most issuers target at least US$100m for the debt issuance

○ Tranching – The Fund can offer bullet or amortising structures. The most common structure is to offer multiple bullet maturities to achieve a laddered amortisation debt structure. Tranche sizes can be fully customised

○ Delayed Funding – The Fund can delay funding up to 3 months after coupon pricing without any additional premium. Longer delays are available with a small uplift.

○ Direct multi-currency financing – The private placement market offers issuers the flexibility to issue long-term debt in multiple currencies. Recent transactions in the private market have included direct funding in Australian Dollars, Euro and Pounds and there are also market precedents for Canadian Dollars, Yen and Swiss Franc denominated transactions

The Fund will set up a new wholly owned subsidiary company (the Issuer) specifically for the purpose of raising funds and then on lending to the Fund. The Issuer will be a resident of Australia for tax purposes and will be a resident of Australia for tax purposes when the interest is paid.

The Fund is proposing to raise funds through the use of the Issuer as a financing entity within the group.

The Issuer is proposing to issue debt securities (the Notes) to offshore investors in registered form by:

● Seeking the listing of the Notes on the Australian Securities Exchange (ASX) (where the Issuer had previously entered into an agreement with the dealer in relation to the placement of the Notes requiring the Issuer to seek such listing);

● Engage the services of a third party dealer to offer the Notes for issue on its behalf to at least 10 unrelated financiers; or

● Engage the services of a third party dealer to acquire the Notes, and offer the notes the dealer acquires from the Issuer under an agreement with the Issuer within 30 days to at least 10 unrelated financiers or as a result of being accepted for listing on the ASX.

The Issuer will subsequently on-lend the funds it receives from the issue of the Notes to the Fund (Internal Loan). The terms of the Internal Loan will mirror the terms of the underlying notes with a small uplift to ensure the Issuer receives a small margin over its costs.

The Notes

An associate of the Issuer will not ultimately hold the Notes, or an interest in the Notes, issued by the Issuer.

An associate of the Issuer will not derive interest on the Notes.

The Notes will be debt interests (as defined in Sub-division 974-B of the ITAA 1997) and the amounts payable under the Notes will be interest as defined in subsection 128A(1AB) of the ITAA 1936.

The funds raised from the issue of the Notes will be put to an income producing use by the Issuer through the provision of an Internal Loan to the Fund and receipt of interest on that loan by the Issuer.

The Fund is not an eligible unit trust for the purposes of section 128FA of the ITAA 1936.

The Issuer will be an Australian resident for tax purposes, both at the time the Notes are issued and the time the interest is paid under the Notes. It does not carry on a business through a permanent establishment outside Australia.

The Notes to be issued by the Issuer will be offered for issue:

● To at least ten persons each of whom is carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets and who is not known or suspected by the Issuer to be associates of each other;

● As a result of being accepted for listing on a stock exchange, where the Issuer had previously entered into an agreement with a dealer, manager or underwriting, in relation to the placement of debentures or debt interests, requiring the Issuer to seek such listing; or

● To a dealer, manager or underwriter in relation to the placement of debentures or debt interests, who, under an agreement with the Issuer, will offer the Notes for sale within 30 days in a way covered by any the dot points above.

The responsible entity of the Fund is not a company as defined in subsection 128F(9) of the ITAA 1936.

The interest payable by the Issuer to the Noteholders would otherwise be deductible to the Issuer under section 8-1 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 128A(1AB)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(3)

Income Tax Assessment Act 1936 Subparagraph 128B(3)(h)(iv)

Income Tax Assessment Act 1936 Section 128F

Income Tax Assessment Act 1936 Subsection 128F(1)

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

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

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

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

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

Income Tax Assessment Act 1936 Subsection 128F(3)

Income Tax Assessment Act 1936 Paragraph 128F(3)(a)

Income Tax Assessment Act 1936 Paragraph 128F(3)(b)

Income Tax Assessment Act 1936 Paragraph 128F(3)(c)

Income Tax Assessment Act 1936 Paragraph 128F(3)(d)

Income Tax Assessment Act 1936 Paragraph 128F(3)(e)

Income Tax Assessment Act 1936 Paragraph 128F(4)

Income Tax Assessment Act 1936 Subsection 128F(9)

Income Tax Assessment Act 1936 Section 128FA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Paragraph 177D(b)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Subsection 177F(1)

Income Tax Assessment Act 1936 Subsection 177F(2A)

Income Tax Assessment Act 1997 Section 26-25

Income Tax Assessment Act 1997 Sub-division 974-B

Taxation Administration Act 1953 Sub-division 12-F of Schedule 1

Taxation Administration Act 1953 Section 12-245 of Schedule 1

Taxation Administration Act 1953 Section 12-300 of Schedule 1

Taxation Administration Act 1953 Subsection 12-300(a) of Schedule 1

Reasons for decision

All references are to the Income Tax Assessment Act 1936 unless otherwise stated.

Issue 1

Question 1

Summary

As the Issuer issues the Notes in a way that meets either the first, third or fifth Public Offer Tests contained in paragraphs (a), (c) and (e) respectively of subsection 128F(1), section 128F will exempt the interest paid on the Notes from withholding tax under Division 11A. Accordingly, the Issuer will not be required to withhold an amount from interest paid on the Notes under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

Detailed reasoning

Section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the TAA 1953 imposes an obligation on an entity to withhold an amount from interest it pays.

Section 12-245 of the TAA 1953 states:

An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) it pays to an entity, or to entities jointly, if:

(a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer’s possession, or is kept or maintained on the payer’s behalf, about the transaction to which the interest relates; or

(b) the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else).

On this basis, the Issuer may be required to withhold an amount of interest payments made to the relevant recipients.

However, section 12-300 of Schedule 1 to the TAA 1953 provides for limits on the amount to be withheld.

Section 12-300 of the TAA 1953 relevantly states:

This subdivision does not require an entity:

(a) to withhold an amount from a dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) or from a royalty if no withholding tax is payable in respect of the dividend, interest or royalty; or

(b) …

(Emphasis added)

That is, where there is no liability to withholding tax, there is no obligation on the part of the payer to withhold an amount from the interest payments.

Section 128B of Division 11A deals with liability to withholding tax. Subsection 128B(3), however, provides that section 128B does not apply to interest to which section 128F applies (subparagraph 128B(3)(h)(iv)).

Section 128F provides an exemption from withholding tax for interest on certain publicly offered company debentures or debt interests. Interest paid by a company in respect of a debenture or debt interest in the company will satisfy subsection 128F(1) 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 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 satisfied the public offer test set out in subsection (3) or (4); or

(ii) for a syndicated loan – the invitation to become a lender under the relevant syndicated loan facility satisfied the public offer test set out in subsection (3A).

Company resident of Australia when debenture is issued and when the interest is paid

As set out in the Relevant facts and circumstances, conditions (a) and (b) will be satisfied.

Debentures

The term ‘debenture’ is defined in subsection 128F(9) as follows:

without affecting its meaning elsewhere in this Act, includes a promissory note or a bill of exchange (in addition to the things mentioned in the definition of debenture in subsection 6(1)).

Subsection 6(1) defines debentures 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.

In this case:

● the Notes are debt securities of the Issuer issued pursuant to the written agreements which create a debt and acknowledge it

● the Issuer 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 Issuer by way of the issue of the Notes is secured by a charge over the assets of the Fund and the Issuer.

Therefore, the Notes are debentures and as such, paragraph 128F(1)(c) is not required to be satisfied as the Notes are not debt interests other than debentures.

The ‘Public offer’ test

Paragraph 128F(1)(d) provides that the issue of the debenture must satisfy the public offer test set out in subsection (3) or (4). Subsection 128F(4) is not relevant as it applies to global bonds. Therefore the relevant Notes must satisfy the requirements of subsection 128F(3). Subsection 128F(3) contains five public offer tests. One of these tests must be satisfied.

Subsection 128F(3) 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:

(a) 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 a financial market; 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; or

(b) to at least 100 persons whom it was reasonable for the company to have regarded as either:

(i) having acquired debentures or debt interests in the past; or

(ii) being likely to be interested in acquiring debentures or debt interests; or

(c) As a result of being accepted for listing on a stock exchange, where the company had previously entered into an agreement with a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, requiring the company to seek such listing; or

(d) As a result of negotiations being initiated publicly in electronic form, or an another form, that was used by financial markets for dealing in debentures or debt interests; or

(e) To a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, offered the debenture or debt interest for sale within 30 days in a way covered by any of paragraphs (a) to (d).

Offered for issue

In order to satisfy the public offer test, the issue of the debenture or debt interest must have resulted from the debenture or debt interest being ‘offered’ for issue.

The term ‘offered’ is not defined in the legislation. Taxation Determination TD 1999/24: Income Tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 – how may a company satisfy the introductory requirements in paragraphs 128F(3)(a) and 128F(3)(b) that a debenture must be offered on a ‘debenture by debenture’ basis? (TD 1999/24) clarifies when a debenture will be considered to be offered for issue. Paragraphs 3 and 4 of TD 1999/24 relevantly states:

3. For the purposes of the introductory words of paragraphs 128F(3)(a) and 128F(3)(b), ‘offered’ is not limited to meaning ‘offer’ in the context of a contractual offer. Rather, the word includes invitations or inducements to potential investors to make offers. For example, the placement of an advertisement that the company wishes to issue debentures, is an attempt to induce offers from potential investors rather than an offer itself (in other words, it is an ‘invitation to treat’).

4. Therefore, the introductory words are satisfied where the debentures are advertised for issue or other invitations or inducements are made in accordance with their respective public offer test, giving potential investors the opportunity to make an offer to the company for the acquisition of the debenture/s.

The Issuer will:

● Seek the listing of the Notes on a relevant stock exchange where the Issuer had previously entered into an agreement with the dealer in relation to the placement of the Notes requiring the Issuer to seek such listing;

● Engage the services of a third party dealer to offer the Notes for issue on its behalf to at least 10 unrelated financiers.

In this case, the first and third public offer tests contained in paragraphs 128F(3)(a) and (c) respectively will be satisfied and therefore the public offer test will be satisfied.

Alternatively, the Issuer will:

● Engage the services of a third party dealer to acquire the Notes, and offer the Notes that the dealer acquires from the Issuer (under an agreement with the Issuer) within 30 days to at least 10 unrelated financiers or as a result of being accepted for listing on the ASX.

In this case, the fifth public offer test contained in paragraph 128F(3)(e) will be satisfied and therefore the public offer test will be satisfied.

It is noted that the Issuer need only satisfy one of the public offer tests. As the Notes are yet to be offered for issue, for the purposes of this Ruling, it is noted that the Notes will be offered to at least 10 institutional investors that are carrying on a business of providing finance or investing or dealing in securities in the course of operating in a financial market and that are not known by the Issuer to be associates (as defined in subsection 128F(9)) of one another.

As the Issuer will meet the public offer tests under paragraphs 128F(3)(a), (c) or (e), condition (d) of subsection 128F(1) will be satisfied.

Conclusion

As the Issuer issues the Notes in a way that meets either first, third or fifth Public Offer Tests as outlined in this Ruling, section 128F will exempt the interest paid on the Notes from withholding tax under Division 11A. Accordingly, the Issuer will not be required to withhold an amount from interest paid on the Notes under section 12-245 of Schedule 1 to the TAA 1953.

Question 2

Summary

Section 128F will exempt any interest paid by the Issuer on the Notes from withholding tax. As a result, section 26-25 of the ITAA 1997 will not apply to the Issuer.

Detailed reasoning

Section 26-25 of the ITAA 1997 precludes from deduction an amount which might otherwise be allowable, in cases where a taxpayer fails to withhold an amount under Subdivision 12-F of Schedule 1 to the TAA 1953.

In this case, and for the reasons given in question 1, interest paid on the Notes by the Issuer will be exempt from IWT under section 128F. Therefore, section 12-300(a) of Schedule 1 to the TAA 1953 will apply to not require the Issuer to withhold an amount from interest as no withholding tax is payable in respect of that interest.

Conclusion

Section 26-25 of the ITAA 1997 will not apply to the Issuer in relation to the interest it pays under the Notes as section 128F will exempt interest paid on the Notes from withholding tax.

Question 3

Summary

For Part IVA of the ITAA 1936 (Part IVA) to apply, section 177D requires that a taxpayer obtain, or would obtain, but for section 177F, a tax benefit in connection with a scheme entered into for the purpose of enabling the taxpayer to obtain a tax benefit.

An analysis of the available evidence of the facts and circumstances of the scheme against the eight factors do not point to a sole or dominant purpose of the Fund entering into the scheme to enable the Fund to obtain a tax benefit.

The manner, form and substance of the scheme are reasonable in terms of achieving all of the commercial outcomes of the Fund.

Accordingly there is no scheme to which Part IVA applies under section 177D.

No determination will be made by the Commissioner under section 177F.

Detailed reasoning

Part IVA is a general anti-avoidance provision. Under subsection 177F(1), the Commissioner may make a determination to cancel a tax benefit that has been obtained, or would but for section 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Broadly, Part IVA applies to a scheme that has been or is entered into where a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme and, having regard to the factors listed in paragraph 177D(b), it would be concluded that the person who entered into the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

Accordingly, before the Commissioner can exercise the discretion in section 177F, the following requirements must be satisfied:

(i) a scheme, as defined in section 177A, is entered into or carried out;

(ii) a taxpayer obtains a tax benefit, as identified in section 177C, in connection with the scheme; and

(iii) having regard to section 177D, it is reasonable to conclude that the person or persons who entered into or carried out the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme.

The Scheme

A scheme is defined in subsection 177A(1) as:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

It is considered that this definition is sufficiently wide to cover the proposed arrangement as described in the Relevant facts and circumstances of this Ruling.

Therefore there is a scheme within the meaning of section 177A.

Tax Benefit

‘Tax benefit’ is defined in subsection 177C(1) of which the relevant paragraph is:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(bc) the taxpayer not being liable to pay withholding tax on an amount where the taxpayer either would have, or might reasonably be expected to have, been liable to pay withholding tax on the amount if the scheme had not been entered into or carried out.

In order to determine the tax benefit that would be derived by the Fund from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims.

The counterfactual(s) also forms the background against which an objective conclusion as to purpose of a person occurs in accordance with section 177D.

Dominant purpose

Paragraph 177D(b) sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit:

(i) the manner in which the scheme was entered into or carried out

(ii) the form and substance of the scheme

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

Pursuant to subsection 177A(5), ‘purpose’ includes the dominant purpose where there are two or more purposes.

It is possible for Part IVA to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. The key issue is whether the particular scheme, or any part of it, was entered into or carried out by any person for the relevant purpose having regard to the eight matters specified in paragraph 177D(b) (‘the eight factors’).

The consideration of purpose or dominant purpose under paragraph 177D(b) requires an objective conclusion to be drawn. The conclusion required is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors.

While the eight factors will not be equally relevant in every case, each of the eight factors are taken into account and weighed together in arriving at a conclusion as to dominant purpose. Consideration of the factors will involve a comparison of the scheme with the counterfactual(s).

Overall, an analysis of the available evidence of the facts and circumstances of the scheme against the eight factors do not point to a sole or dominant purpose of the Fund entering into the scheme to enable the Fund to obtain a tax benefit. Therefore, the manner, form and substance of the scheme are reasonable in terms of achieving all of the commercial outcomes of the Fund.

Accordingly there is no scheme to which Part IVA applies under section 177D.

No determination will be made by the Commissioner under section 177F.

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