1051239741006 | Legal database

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Edited version of your written advice

Authorisation Number: 1051239741006

Date of advice: 20 September 2017

Ruling

Subject: withholding tax

Question 1

Is the taxpayer required under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953) to withhold an amount from interest paid to non-resident lenders on the specified loans?

Answer

This ruling applies for the following periods:

Year ending 31 December 2015

Year ending 31 December 2016

Year ending 31 December 2017

Year ending 31 December 2018

Year ending 31 December 2019

Year ending 31 December 2020

The scheme commences on:

X November 2016

Relevant facts and circumstances

1. The taxpayer is an Australian incorporated company and a resident of Australia for tax purposes.

2. The taxpayer is a wholly-owned subsidiary in an international group.

3. In 201X financial institutions were engaged to arrange a syndicated loan facility.

4. Invitations were made to several entities to become a lender under the syndicated loan facility.

5. Each of the invitation letters stated that its purpose was to arrange a syndicated loan facility on behalf of the taxpayer. The letter also stated that it:

constitutes an invitation letter to become a lender under a syndicated loan facility in accordance with the “public offer test” in section 128F(3A) of the Income Tax Assessment 1936 of Australia. It is intended that this invitation to become a lender under the syndicated loan facility will satisfy the public offer test and other requirements of section 128F of the Income Tax Assessment Act 1936 of Australia for exemption from Australian withholding tax for interest payments by the taxpayer under the syndicated loan facility.

6. During 201X, the taxpayer entered into the syndication agreement.

7. Certain financial institutions with an address outside Australia are listed as the lenders under the syndication agreement.

8. Pursuant to the syndication agreement the funds borrowed were used for specified purposes.

9. The syndication agreement provided, amongst other things:

● that the parties agree that the syndication agreement is a ‘syndicated facility agreement’ for the purposes of section 128F(11)(a) of the Australian Tax Act;

● the obligations of each lender under the syndication agreement are several and not joint;

● each borrower represents and warrants to each lender that all of the borrowers are members of the same wholly-owned group (within the meaning of the Income Tax Assessment Act 1997), parties to the same joint venture, or associates of each other; and

● accrued interest on each loan is payable on the last day of each interest period at the rate of interest set out in the syndication agreement.

10. During 201X certain financial institutions became lenders under the syndication agreement.

11. During 201Y and 201Z the taxpayer sought written consents from the lenders to amend certain of the provisions of the loans.

12. The syndication agreement provided for the amendment of the syndication agreement if certain conditions were satisfied. All of the amendments to the syndication agreement are consistent with the conditions which contemplated and permitted amendment to the syndication agreement.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 section 12-245

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

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 section 128F

Income Tax Assessment Act 1936 subsection 128F(2)

Income Tax Assessment Act 1936 subsection 128F(3A)

Income Tax Assessment Act 1936 subparagraph 128F(3A)(a)(i)

Income Tax Assessment Act 1936 subsection 128F(11)(a)

Income Tax Assessment Act 1936 subsection 128F(14)

Reasons for decision

Obligation to withhold

Section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) imposes an obligation to withhold on entities that pay interest to an entity which provides a postal address outside Australia or if the interest is to be paid outside Australia.

However, paragraph 12-300(a) of Schedule 1 to the TAA 1953 provides that an entity is not required to withhold an amount from an interest payment if no withholding tax is payable in respect of the interest.

The taxpayer will therefore be required to withhold an amount from any interest paid to non-resident lenders unless no withholding tax is payable in respect of those interest payments.

Interest withholding tax liability

Withholding tax liability is dealt with under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936).

The interest on the loans was determined to be exempt from withholding tax pursuant to subsection 128F(2) of the ITAA 1936.

Consequently, the taxpayer was not required to withhold any amount from interest it pays on the loans to non-resident lenders under the syndication agreement (see Notice of Decision issued to the taxpayer during 201X).

Amendments

Amendments were made to the terms of the syndication agreement during 201Y and 201Z.

Contract law principles, as enunciated in FCT v Sara Lee Household and Body Care (Australia) Pty Ltd (2000) ATC 4378, provide that an amendment to an existing contract does not necessarily mean that the old contract is terminated and a new contract exists.

Generally, variation of a contract involves changes that do not go to the root of the contract or alter the substance of the original agreement. The result of such variation is that the original contract remains in force, with only some of its terms being altered.

By contrast, in circumstances where the terms of a subsequent contract are entirely inconsistent with a first contract, or go to the very root of the first contract, the first contract may be impliedly discharged by abandonment: British & Beningtons Ltd v. North West Cachar Tea Co Ltd [1923] AC 48.

The syndication agreement provided for the amendment of the syndication agreement if certain conditions were satisfied. All of the lenders to the syndication agreement consented to the amendments.

The amendments relating to the extension of maturity and the mix of the commitments, do not alter the substance of the syndication agreement. These amendments amount to only a variation with the result that the loans would not be considered to be loans made under a new contract.

For completeness, there have been changes to the identity of the Lenders under the scheme facts. However, a change in the identity of Lenders (including by novation) does not result in a different agreement for tax purposes (subsection 128F(14) of the ITAA 1936).

As the loans are not considered to be new loans under a new agreement, interest on the loans will continue to be exempt from withholding tax pursuant to subsection 128F(2) of the ITAA 1936.

The taxpayer will not be required under section 12-245 of Schedule 1 to the TAA 1953 to withhold any amount from interest it pays on the Loans to non-resident lenders under the syndication agreement as amended.

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