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Date of advice: 19 October 2017

Ruling

Subject: Interest withholding tax exemption

Question 1

Will the Syndicated Facility Agreement (Agreement) constitute a ‘syndicated loan facility’ for the purposes of the definition of a ‘syndicated loan facility’ in subsection 128F(9) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will each of the loans made pursuant to the Agreement constitute a ‘syndicated loan’ for the purpose of the definition of a ‘syndicated loan’ in subsection 128F(9) of the ITAA 1936?

Answer

Yes

Question 3

Does the invitation to potential lenders to become a lender under the Agreement satisfy the ‘public offer test’ in subsection 128F(3A) of the ITAA 1936?

Answer

Yes

Question 4

Does the invitation to potential lenders to become a lender under the Agreement otherwise fail the ‘public offer test’ in subsection 128F(3A) of the ITAA 1936 due to the application of subsection 128F(5AA) of the ITAA 1936?

Answer

No

Question 5

Will subsection 128F(2) of the ITAA 1936 apply such that interest paid by Company X on each syndicated loan issued under the Agreement will not be subject to tax imposed under Division 11A of Part III of the ITAA 1936?

Answer

Yes

Question 6

Will Company X have no obligation to withhold an amount from any interest paid under the Agreement under section 12-300 of Schedule 1 to the Taxation Administration Act 1953 (TAA) by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest?

Answer

Yes

This ruling applies for the following period:

1 July 2016 to 30 June 2022

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Company X was incorporated in Australia and is an Australian resident company at all relevant times.

Company X is in the process of undertaking a project.

In order to finance the project, Company X will be the sole borrower of debt funding.

To facilitate obtaining finance, Company X appointed Y Bank to be the Coordinating Mandated Lead Arranger and Bookrunner (CMLAB) for a Syndicated Facility of more than $XXX,XXX,XXX.

The terms of this engagement are outlined in a Mandate letter between Y Bank and Company X.

Within 30 days of Y Bank’s commitment to be CMLAB under the Mandate letter, an electronic public invitation to participate in the Facility was made to more than 10 financial institutions.

Each of the financial institutions carries on a business of providing finance or investing or dealing in securities, in the course of operating in financial markets.

Company X undertook reasonable research in order to establish the existence of any associate relationship between Company X and potential lenders. At the time of the invitation, at least ten of the offerees were not known or suspected by Company X to be associates of each other or associates of Company X.

At least two of the offerees will become lenders under the Syndicated Facility Agreement (Agreement).

Company X as Borrower will have access to at least AUD$100 million at the time the first loan is to be provided under the Agreement.

Each of the loans made pursuant to the Agreement will constitute a debt interest as defined in Subdivision 974-B of the Income Tax Assessment Act 1997.

Amounts classified as interest under the Agreement will be in the nature of interest for the purpose of paragraph 128A(1AB)(a) of the ITAA 1936.

Company X will be an Australian tax resident company at the time of the issue of the debt interests and at the time interest will be paid in respect of the debt interests.

The Agreement also forms part of the facts of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 11A

Income Tax Assessment Act 1936 paragraph 128A(1AB)(a)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax Assessment Act 1936 subsection 128F(1)

Income Tax Assessment Act 1936 subsection 128F(2)

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

Income Tax Assessment Act 1936 subsection 128F(5AA)

Income Tax Assessment Act 1936 subsection 128F(9)

Income Tax Assessment Act 1936 subsection 128F(11)

Income Tax Assessment Act 1936 subsection 128F(12)

Income Tax Assessment Act 1936 subsection 128F(13)

Income Tax Assessment Act 1997 Subdivision 974-B

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

Taxation Administration Act 1953 Schedule 1 Subdivision 12-F

Reasons for decision

Question 1

Summary

The Syndicated Facility Agreement (Agreement) will constitute a syndicated loan facility for the purposes of the definition of a ‘syndicated loan facility’ in subsection 128F(9) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Under subsection 128B(2) of Division 11A of the ITAA 1936, withholding tax is payable on interest paid to a non-resident unless an exemption applies.

Subsection 128F(2) of the ITAA 1936 provides that tax is not payable under Division 11A in respect of interest to which section 128F applies. Subsection 128F(1) of the ITAA 1936 provides that section 128F applies to interest paid by a company in respect of certain publicly offered debentures or debt interests 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 (ii) 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).

Syndicated loan facility

For the purposes of subparagraph 128F(1)(c)(iii) of the ITAA 1936, a ‘syndicated loan’ is defined in subsection 128F(9) of the ITAA 1936 as a loan or other form of financial accommodation that is provided under a syndicated loan facility, being a facility that has 2 or more lenders.

Subsection 128F(9) of the ITAA 1936 also provides that a ‘syndicated loan facility’ has the meaning given by subsections 128F(11), (12) and (13) of the ITAA 1936.

Subsection 128F(12) of the ITAA 1936 does not apply to this case as it applies in situations where there is only one lender. In this case, at least two lenders have committed to providing finance under the Agreement. Subsection 128F(13) of the ITAA 1936 also does not apply to this case as it applies where there are two or more borrowers under the Agreement. In the present case, Company X is the sole borrower under the Agreement.

Therefore, subsection 128F(11) of the ITAA 1936 is the provision relevant to the syndicated loan facility under the scheme as it applies where there are at least two lenders and one or more borrowers.

Subsection 128F(11) of the ITTA 1936 provides that a written agreement is a syndicated loan facility if:

(a) the agreement describes itself as a syndicated loan facility or syndicated facility agreement; and

(b) the agreement is between one or more borrowers and at least two lenders; and

(c) under the agreement each lender severally, but not jointly, agrees to lend money to, or otherwise provide financial accommodation to, the borrower or borrowers; and

(d) the amount to which the borrower or borrowers will have access at the time the first loan or other form of financial accommodation is to be provided under the agreement is at least $XXX,XXX,XXX (or a prescribed amount).

Based on the facts provided, the Agreement will be a syndicated loan facility within the meaning of subsection 128F(11) of the ITAA 1936 because:

● It will be a written agreement.

● Clause X of the Agreement describes itself as a syndicated loan facility or a syndicated facility agreement

● It will be between Company X as the borrower and at least two lenders.

● Under Clause X of the Agreement, each Lender agrees to lend money severally (but not jointly) to Company X

● The amount to which Company X will have access at the time the first loan is provided will be at least AUD$XXX,XXX,XXX.

As the requirements of subsection 128F(11) of the ITAA 1936 will be met, the Agreement will constitute a ‘syndicated loan facility’ as defined in subsection 128F(9) of the ITAA 1936.

Question 2

Summary

Each of the loans made pursuant to the Agreement will constitute a ‘syndicated loan’ for the purposes of the definition of a ‘syndicated loan’ in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

A ‘syndicated loan’ is defined in subsection 128F(9) of the ITAA 1936 as a loan or other form of financial accommodation that is provided under a syndicated loan facility, being a facility that has two or more lenders.

As explained in the detailed reasoning to Question 1, the Agreement meets the requirements of a ‘syndicated loan facility’. The Agreement will also have two or more lenders. Therefore, each of the loans made pursuant to the Agreement will constitute a ‘syndicated loan’ as defined in subsection 128F(9) of the ITAA 1936.

Question 3

Summary

The invitation to potential lenders to become a lender under the Agreement satisfies the ‘public offer test’ in subsection 128F(3A) of the ITAA 1936.

Detailed reasoning

Paragraph 128F(1)(d) of the ITAA 1936 requires that:

(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).

As the present case deals with a syndicated loan, the relevant public offer test is that contained in subsection 128F(3A) of the ITAA 1936.

Subsection 128F(3A) of the ITAA 1936 provides that an invitation to become a lender under a syndicated loan facility by a company satisfies the ‘public offer test’ if the invitation was made:

(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 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; or

(b) publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or

(c) to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, made the invitation to become a lender under the facility within 30 days in a way covered by paragraph (a) or (b).

In this case, Bank Y, in its role as CMLAB for Company X under the Mandate Letter, made invitations to potential lenders to become a lender under the Facility to more than 10 persons.

Accordingly, to satisfy the ‘public offer test’ in this case, the invitation will need to satisfy the conditions in paragraphs 128F(3A)(a) and (c) of the ITAA 1936.

Paragraph 128F(3A)(a) of the ITAA 1936

The invitation made by Bank Y on behalf of Company X satisfies paragraph 128F(3A)(a) of the ITAA 1936 on the basis that:

● A written invitation to potential lenders to become a lender under the Agreement was made via electronic correspondence.

● It was made to at least 10 financial institutions.

● Each of the potential lenders was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets. Specifically, Clause X of the Agreement provides that Bank Y confirms to Company X that it had made invitations to at least 10 parties, each of whom, as at the date the relevant invitation was made, carries on the business of providing finance or investing or dealing in securities in the course of operating in financial markets.

● Each of the potential lenders were not known or suspected by Company X to be associates of any other offerees at the time of making the invitation. Specifically, Clause X of the Agreement contains confirmation from Company X on this point.

Therefore, it is considered that the invitation made by Bank Y on behalf of Company X satisfies the ‘public offer test’ in paragraph 128F(3A)(a) of the ITAA 1936.

Paragraph 128F(3A)(c) of the ITAA 1936

The invitation made by Bank Y on behalf of Company X also satisfies paragraph 128F(3A)(c) of the ITAA 1936.

The 30 days period specified in paragraph 128F(3A)(c) of the ITAA 1936 is taken to commence from the day on which the dealer, manager or underwriter has an unconditional obligation to offer the debt interests under the agreement contemplated in that paragraph. The invitations were delivered by Bank Y within 30 days of Bank Y’s commitment to be CMLAB under the Mandate Letter. Therefore, the condition in paragraph 128F(3A)(c) of the ITAA 1936 is satisfied.

The invitation to become a lender under the Agreement made by Bank Y on behalf of Company X satisfies all the conditions of the ‘public offer test’ in subsection 128F(3A) of the ITAA 1936, and in turn it also satisfies subparagraph 128F(1)(d)(iii) of the ITAA 1936.

Question 4

Summary

The invitation to potential lenders to become a lender under the Agreement does not fail the ‘public offer test’ in subsection 128F(3A) of the ITAA 1936 due to the application of subsection 128F(5AA) of the ITAA 1936.

Detailed reasoning

An invitation to become a lender under a syndicated loan facility is taken by subsection 128F(5AA) of the ITAA 1936 to have never satisfied the ‘public offer test’ if, at the time the invitation is made, the company knew, or had reasonable grounds to suspect, that:

(a) an associate of the company is or will become a lender under the facility; and

(b) either:

(i) the associate is a non-resident and the associate is not or would not become a lender under the facility in carrying on a business in Australia at or through a permanent establishment of the associate in Australia; or

(ii) the associate is a resident of Australia and the associate is or would become a lender under the facility in carrying on a business in a country outside Australia at or through a permanent establishment of the associate in that country; and

(c) the associate is not or would not become a lender under the facility in the capacity of:

(i) a dealer, manager or underwriter in relation to the invitation; or

(ii) a clearing house, custodian, funds manager or responsible entity of a registered scheme.

Broadly, under subsection 128F(5AA) of the ITAA 1936, the invitation is taken never to have satisfied the public offer test if, at the time of the invitation, Company X knew, or had reasonable grounds to suspect, that any company that is an associate of Company X is or will become a lender under the Agreement.

Company X undertook reasonable research in order to establish the existence of any associate relationship between Company X and potential lenders. As a result of those procedures, no potential associate relationships were identified.

Further, Clause X of the Agreement contains confirmation from Company X that none of the potential offerees whose names were disclosed to it by Bank Y before the date of the Agreement were known or suspected by it to be an Offshore Associate of Company X.

As none of the offerees were known or suspected by Company X to be an associate of Company X, subsection 128F(5AA) of the ITAA 1936 does not apply.

Question 5

Summary

Subsection 128F(2) of the ITAA 1936 will apply such that interest paid by Company X on each syndicated loan issued under the Agreement will not be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Detailed reasoning

Subsection 128F(2) of the ITAA 1936 provides that tax is not payable under Division 11A in respect of interest to which section 128F of the ITAA 1936 applies.

The interest to be paid by Company X under the Agreement satisfies the conditions under subsection 128F(1) of the ITAA 1936 because:

● At the time Company X issues the debt interest, Company X will be a resident of Australia.

● At the time the interest is paid by Company X, it will be a resident of Australia.

● The debt interest is a ‘syndicated loan’.

● The invitation to become a lender under the relevant syndicated loan facility satisfies the ‘public offer test’ set out in subsection 128F(3A) of ITAA 1936 and subsection 128F(5AA) of the ITAA 1936 does not apply.

As the requirements of subsection 128F(1) of the ITAA 1936 will be satisfied, subsection 128F(2) of the ITAA 1936 will apply such that interest paid by Company X on each loan issued under the Agreement will not be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Question 6

Summary

Company X will have no obligation to withhold an amount from any interest paid under the Agreement under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest.

Detailed reasoning

Section 12-300 of Schedule 1 to the TAA sets out the limits on amounts withheld under Subdivision 12-F of Schedule 1 to the TAA. Under paragraph 12-300(a) of Schedule 1 to the TAA, an entity is not required to withhold an amount from (inter alia) interest (within the meaning of Division 11A of Part III of the ITAA 1936) if no withholding tax is payable in respect of the interest.

As discussed above, the interest payable by Company X under the Agreement will satisfy the requirements under subsection 128F(1) of the ITAA 1936. Therefore, tax will not be payable in respect of the interest under subsection 128F(2) of the ITAA 1936.

Accordingly, Company X will have no obligation to withhold an amount from any interest paid under the Agreement under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of Schedule 1 to the TAA.

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