Edited version of private ruling

Authorisation Number: 1011605068734

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Ruling

Subject: PAYG withholding exemption - Interest paid to non-resident debenture holders

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 debenture holders?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Company is an Australian unlisted public company. The Company carries on its business wholly within Australia. The Company is an Australian resident for tax purposes.

The Company has a current prospectus which contains an offer to issue debentures of the company.

The prospectus indicates that:

The debentures 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 debentures.

The repayment of the moneys deposited with or lent to the Company by way of the issue of the debentures is secured by a charge over the assets of the Company.

The issue of the debentures is being advertised through the prospectus which is on the Company's website.

In accordance with ASIC Regulatory Guide 69 and section 283BH of the Corporations Act 2001 the debentures will be termed unsecured notes rather than debentures.

Some of the debenture holders are non-residents who have addresses outside Australia.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-245.

Taxation Administration Act 1953 Schedule 1 Section 12-300.

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Paragraph 128B(2)(b).

Income Tax Assessment Act 1936 Section 128F.

Income Tax Assessment Act 1936 Subsection 128F(3).

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

Income Tax Assessment Act 1936 Subsection 128F(9).

Reasons for decision

Summary

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 debenture holders.

Detailed reasoning

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:

· the recipient has an address outside Australia; or

· 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.

Paragraph 128B(2)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that withholding tax is payable on interest which is paid to a non-resident by a resident and is not an outgoing wholly incurred by the resident in carrying on a business in a country outside Australia at or through a permanent establishment of that resident in that country.

However, section 128F of the ITAA 1936 provides that no withholding tax is payable on interest paid by a company in respect of a debenture if:

· the company was a resident of Australia when it issued the debenture;

· the company is a resident of Australia when it pays the interest; and

· the issue of the debenture satisfies one of the public offer tests in subsection 128F(3).

The second public offer test is contained in paragraph 128F(3)(b) of the ITAA 1936. The issue of a debenture by a company satisfies this test 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.

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'.

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).

Application to your circumstances

The Company pays interest to its non-resident debenture holders who have addresses outside Australia.

Hence, pursuant to sections 12-245 and 12-300 of Schedule 1 to the TAA, the Company will be required to withhold tax from the interest unless the non-resident debenture holders are not required to pay withholding tax on the interest.

The Company is an Australian resident for tax purposes. The Company does not incur any of the interest in carrying on a business outside Australia.

Hence, pursuant to paragraph 128B(2)(b) of the ITAA 1936, the non-resident debenture holders will be required to pay withholding tax on the interest unless section 128F of the ITAA 1936 applies.

The Company's prospectus for the issue of the debentures indicates that:

· The debentures 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 debentures.

· The repayment of the moneys deposited with or lent to the Company by way of the issue of the debentures is secured by a charge over the assets of the Company.

Hence, the debentures that are issued by the Company satisfy the definitions of 'debenture' in subsections 128(F) and 6(1) of the ITAA 1936 and the Macquarie Dictionary and constitute debentures for the purposes of section 128F of the ITAA 1936.

The Company is an Australian resident for tax purposes when it issues the debentures and pays the interest on the debentures.

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 debentures satisfies the second public offer test in subsection 128F(3) of the ITAA 1936.

Therefore, pursuant to section 128F of the ITAA 1936, the non-resident debenture 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.