Edited version of private advice

Authorisation Number: 1051827463537

Date of advice: 27 April 2021

Ruling

Subject: Section 128F withholding tax exemption

Question 1

Will the Syndicated Facility Agreement constitute a "syndicated loan facility" for the purpose 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 Syndicated Facility 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 become a lender under the Syndicated Facility Agreement satisfy the public offer test in subsection 128F(3A) of the ITAA 1936?

Answer

Yes

Question 4

Will subsection 128F(1) apply such that interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of the ITAA 1936?

Answer

Yes

Question 5

Will AusCo have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the Tax 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

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Background

AusCo is an Australia resident company for income tax purposes and the head company of an Australian income tax consolidated group.

AusCo is an indirectly wholly owned subsidiary of a foreign enterprise.

AusCo sought debt finance from investors by way of a syndicated loan facility in order to refinance its existing debt and fund the ongoing maintenance and operation of a number of projects.

On 1 July 20xx, a syndicated facility agreement was entered into between:

•         AusCo (the Borrower)

•         Agent and Arranger (collectively)

•         Guarantor

•         Lenders

for a total of $y million (the Syndicated Facility Agreement).

The Syndicated Facility Agreement Process

AusCo's Agent and Arranger sent an Invitation to at least more than 10 financial institutions (including additional invitations to different branches of those financial institutions) via electronic correspondence inviting them to participate in the Syndicated Facility Agreement. The RFB included a summary of the key terms of the Agreement as it was then drafted.

Prior to sending the Invitation and making the invitation to the financial institutions, AusCo's Agent and Arranger provided a list of these potential lenders to AusCo for AusCo to confirm to the best of its knowledge that none were an associate of AusCo and that none of the potential lenders were an associate of any other such potential lender under the Syndicated Facility Agreement. AusCo provided this confirmation prior to the invitations being made.

The financial institutions interested in participating in the Syndicated Facility Agreement were required to submit their committed bid in writing to AusCo. Each bid was required to be made solely on behalf of the financial institution itself and was not to include a commitment or other arrangement on behalf of any other non-affiliated institution.

AusCo received commitment letters from x of the financial institutions. Separately, the Agent and Arranger (in its capacity as a potential lender) committed to provide a portion of the commitment amount under the terms contemplated in the Invitation (the shortlisted financial institutions).

Negotiations were then conducted between AusCo and the shortlisted financial institutions, together with their financial and legal advisors on the terms of the Syndicated Facility Agreement. Comments from the shortlisted financial institutions were received and taken into consideration during the documentation and drafting process.

During this process, none of the shortlisted financial institutions withdrew their previous commitment to the relevant facility.

The Syndicated Facility Agreement was finalised and executed on 1 July 20xx. A total of more than two financial institutions out of the list that were originally invited have become lenders under the Syndicated Facility Agreement.

Key Terms of the Syndicated Facility Agreement

The Syndicated Facility Agreement is guaranteed by Guarantor with a term of x years.

The Lenders chosen are entities that carry on a business of providing finance, or investing or dealing securities, in the course of operating in financial markets.

As per the Syndicated Facility Agreement, AusCo intended that the invitations made were compliant with the requirements of the section 128F public offer test.

As per the Syndicated Facility Agreement, the Borrower, AusCo, confirmed that none of the potential offerees were known or suspected by it to be AusCo's associate or an associate of any such offeree. The Arranger and Lenders will provide all necessary information to make this confirmation. The Lenders made the following representations, warranties and undertakings to AusCo, including that they carry on a business of providing finance, or investing or dealing securities, in the course of operating in financial markets.

The list of prospective lenders was provided by the Agent and Arranger to AusCo prior to the offers being made. AusCo management reviewed this list based on their understanding of the associate definition in section 318 of the ITAA 1936 and consideration was given as to whether any prospective lenders were affiliated with each other. This included a review of publicly available information to determine the ownership structure of the prospective lenders.

AusCo received legal advice about the definition of 'associates' under the ITAA 1936. AusCo reviewed the list in light of the advice in order to identify any persons that it knew or suspected to be an associate of AusCo and confirmed their allocation.

Other information

AusCo will be an Australian resident company at the time of each interest payment in respect of the Bonds.

AusCo as Borrower has access to at least $XXXX (or its equivalent in any other currency or currencies) at the time the first loan is to be provided under the Syndicated Facility Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128B(1)

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)

Taxation Administration Act 1953 Schedule 1 section 12-300

Reasons for decision

Question 1

Will the Syndicated Facility Agreement constitute a "syndicated loan facility" for the purpose of the definition of a "syndicated loan facility" in subsection 128F(9) of the ITAA 1936?

Summary

The Syndicated Facility Agreement will satisfy the definition of a "syndicated loan facility" in subsection 128F(11).

Detailed reasoning

According to subsection 128F(9), the term 'syndicated loan facility' has the meaning given by subsections 128F(11), 128F(12) and 128F(13).

In the present case, as the Syndicated Facility Agreement involves multiple lenders, subsection 128F(11) is the relevant provision.

Subsection 128F(11) states:

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 2 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 $XXXX (or a prescribed amount).

Based on the information provided, the Syndicated Facility Agreement satisfies the requirements of subsection 128F(11) on the basis that:

•         it is a written agreement that describes itself as a syndicated loan facility or a syndicated facility agreement;

•         it is an agreement between AusCo as the only borrower and at least two lenders;

•         each lender has severally, but not jointly, agreed to lend money to AusCo under the Syndicated Facility Agreement; and

•         the amount to which AusCo will have access at the time the loan is provided under the Syndicated Facility Agreement will be at least AUD XXXX.

Therefore, the Syndicated Facility Agreement constitutes a 'syndicated loan facility' as defined in subsection 128F(9) of the ITAA 1936.

Question 2

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

Summary

Each of the loans made pursuant to the Syndicated Facility Agreement will constitute a 'syndicated loan' as defined in subsection 128F(9).

Detailed reasoning

The term 'syndicated loan' is defined in subsection 128F(9) to mean:

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.

The Syndicated Facility Agreement has two or more lenders. As discussed above, it is a 'syndicated loan facility' for the purposes of subsection 128F(9).

Therefore, each of the loans made pursuant to the Syndicated Facility Agreement will constitute a 'syndicated loan' as defined in subsection 128F(9).

Question 3

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

Summary

The invitation to become a lender under the Syndicated Facility Agreement will satisfy the public offer test in subsection 128F(3A).

Detailed reasoning

Subsection 128F(3A) states:

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).

The invitation made by AusCo on 1 July 20xx as outlined in "The Syndicated Facility Agreement Process" satisfies paragraph 128F(3A)(a) on the basis that:

•         a written invitation to potential lenders to become a lender under the Syndicated Facility Agreement was made via electronic correspondence (the Invitation),

•         The Invitation was sent to more than 10 financial institutions, all of which are carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets at the time the invitation was made,

•         To the best of AusCo's knowledge and legal advice that it had obtained, the financial institutions were not associates of one another as defined in section 318.

•         On examination of publicly available information of these more than 10 financial institutions, the invitation was made to at least 10 financial institutions which were not known or suspected by AusCo to be associates of any other invitee or itself at the time of making the invitation.

As paragraph 128F(3A)(a) is satisfied in the present case, it is not necessary to consider paragraphs 128F(3A)(b) or 128F(3A)(c).

Issues and invitations that fail the public offer test

In addition to satisfying subsection 128F(3A), it is also necessary to consider subsection 128F(5AA), which specifies the conditions under which an invitation to become a lender under a syndicated loan facility is taken never to have satisfied the public offer test.

Broadly, the invitation is taken never to have satisfied the public offer test if, at the time the invitation is made, the company knew, or had reasonable grounds to suspect, that an associate of the company is or will become a lender under the facility.

Taxation Determination TD 2001/3 Income tax: Interest Withholding Tax Exemption - for the purposes of subsection 128F(5) of the Income Tax Assessment Act 1936, when will a company be taken to have the requisite knowledge or suspicion that the debenture or an interest in the debenture was being, or would later be, acquired by an associate? (TD 2001/3) examines when a company will be taken to have the requisite knowledge or suspicion that a debenture or an interest in the debenture was being or would later be acquired by an associate for the purposes of subsection 128F(5). Given the similarity in the provisions, the principles in TD 2001/3 equally apply to subsection 128F(5AA) regarding the Lenders under the syndicated loan facility.

As outlined by the Commissioner in paragraph 2 of TD 2001/3:

Suspicion (about whether the Notes are being issued to an associate) needs to be looked at objectively in light of what is reasonable in the individual circumstances of the particular case. When subsection 128F(5) of the ITAA 1936 refers to the knowledge or suspicion of the company, knowledge or suspicion of all company personnel involved with the issue itself, and other personnel who are concerned in or take part in the overall management of the company, would be relevant. Accordingly, issuing officers will need to undertake enquiries to ensure that other officers of the company do not have such knowledge or suspicion, otherwise the subsection may operate.

And in paragraph 4 of TD 2001/3:

A company will not be taken to have the requisite knowledge or suspicion if the company takes reasonable steps to ensure that its associates would not become a lender under the Syndicated Facility Agreement. While every case has to be judged on its merits, one reasonable step would be to write to associates asking them not to become a lender (otherwise than in their capacity of a dealer, manager or underwriter in relation to the placement of the debenture). Another reasonable step would be for the Syndicated Facility Agreement to contain a statement advising that the purchase of the debenture by associates could result in the entire issue failing the public offer test. A further such step could be for the issuer to instruct its manager, dealer or underwriter not to invite lenders to be the issuer's associates. An issuer may, but is not obliged under subsection 128F(5AA) of the ITAA 1936, to obtain undertakings to this effect from its dealers, managers or underwriters.

AusCo undertook the following steps:

(a)       Prior to sending the Invitation and making the invitation to the financial institutions, the Agent and Arranger provided a list of these potential lenders to AusCo for AusCo to confirm to the best of its knowledge that none were an associate of AusCo and that none of the potential lenders were an associate of any other such potential lender under the Syndicated Facility Agreement. AusCo provided this confirmation prior to the invitations being made.

(b)       As per the Syndicated Facility Agreement, AusCo intended that the invitations made were compliant with the requirements of the section 128F public offer test.

(c)       the Borrower, AusCo, confirmed that none of the potential offerees were known or suspected by it to be AusCo's associate or an associate of any such offeree. The Arranger and Lenders will provide all necessary information to make this confirmation. The Lenders made the following representations, warranties and undertakings to AusCo, including that they carry on a business of providing finance, or investing or dealing securities, in the course of operating in financial markets.

(d)       The list of prospective lenders was provided by the Arranger bank to AusCo prior to the offers being made. AusCo management reviewed this list based on their understanding of the associate definition and consideration was given as to whether any prospective lenders were affiliated with each other. It was identified through this process that at least 10 of the prospective lenders were not associates of each other. This included a review of publicly available information to determine the ownership structure of the prospective lenders.

In addition to the above, based on the information available, the Commissioner accepts that SEA does not know or have reasonable grounds to suspect that any of the Lenders are its associates of SEA.

Accordingly, AusCo would not know, or have reasonable grounds to suspect, that Lenders were their associate or associates of each for the purposes of the ITAA 1936. Therefore, subsection 128F(5AA) does not apply and the invitation to the Lenders does satisfy the public offer test in paragraph 128F(3A)(a) of the ITAA 1936.

Question 4

Will subsection 128F(1) of the ITAA 1936 apply such that interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of the ITAA 1936?

Summary

Subsection 128F(1) will apply such that interest paid by SEA on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Detailed reasoning

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

Subsection 128F(1) provides that section 128F applies to interest 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 company is a resident of Australia when the interest is paid; and

(b)       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

(c)       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).

The interest paid by AusCo under the Syndicated Facility Agreement does satisfy the conditions in subsection 128F(1) on the basis that:

•         AusCo was a resident of Australia when it issued the debt interest;

•         AusCo will be a resident of Australia when the interest is paid;

•         the debt interest is a syndicated loan (the Syndicated Facility Agreement is not a debt interest, being a facility that can be drawn down in the form of a syndicated loan); and

•         as a syndicated loan, the invitation to become a lender under the relevant syndicated loan facility does not satisfy the public offer test set out in subsection 128F(3A).

Therefore, subsection 128F(1) will apply such that, under subsection 128F(2), interest paid by SEA on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Question 5

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

Summary

AusCo will not have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the TAA 1953 by virtue of paragraph 12-300(a) of Schedule 1 to the TAA 1953 because section 128F of the ITAA 1936 does not apply to the interest.

Detailed reasoning

Section 12-300 of Schedule 1 to the TAA 1953 limits the amounts that must be withheld under Subdivision 12-F of Schedule 1 to the TAA 1953.

Under paragraph 12-300(a) of Schedule 1 to the TAA 1953, 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 AusCo on each syndicated loan issued under the Syndicated Facility Agreement satisfies the requirements of 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, AusCo will not have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the TAA 1953 by virtue of paragraph 12-300(a) of Schedule 1 to the TAA 1953.

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