Edited version of private ruling

Authorisation Number: 1011837940581

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Ruling

Subject: Interest withholding tax exemption

Question 1

Are interest payments made by Company X to a foreign resident lender exempt from interest withholding tax under section 128F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No, interest payments made by Company X to a foreign resident lender are not exempt from interest withholding tax under section 128F of the Income Tax Assessment Act 1936 (ITAA 1936)?

This ruling applies for the following period:

Period ended 30 June 2009

Period ended 30 June 2010

Period ended 30 June 2011

Period ended 30 June 2012

Period ended 30 June 2013

Period ended 30 June 2014

Period ended 30 June 2015

The scheme commences on:

1 July 2008

Relevant facts and circumstances

Company X Group Structure

Company X was incorporated in Australia and is a 100% subsidiary of Company Y.

Company Y is the flagship company of the group and is incorporated in Country A. Apart from Country A, Company Y operates in various countries either directly through subsidiaries or through its representative offices.

Company Y has been able to stay ahead of competition through its brand recognition, innovative product offerings, wide geographical presence and strong relationship with suppliers as well as retailers across the globe.

Company X was incorporated for the acquisition of an Australian resident, Company Z.

The Term Loan Facility

Company Y acquired 100% shareholding in Company Z through Company X.

The acquisition of Company Z by Company X was financed through a term loan facility ('Facility').

Prior to finalising the Facility, Company X authorised and requested A Bank Limited ('the Mandated Lead Arranger'), a foreign resident bank, to distribute an Information Memorandum ('the Memorandum') to eleven selected banks that were invited to participate in the Facility for Company X for an amount under $100 million.

The list of invitees included the P Bank Limited, a foreign resident bank for income tax purposes.

The Memorandum details the Terms and Conditions under the proposed Facility in respect of Repayment Schedules, Interest Periods, Interest Amounts, Payment of Interest, Documentation, Terms of Prepayment and Cancellation of the facility, Pre-disbursement conditions, Events of Default, Assignment and Transfers by Lenders.

Subsequently, the P Bank Limited responded to Company X's invitation to join the Facility committing to a designated amount in the Facility (copy of letter of acceptance provided).

Facility Agreement

Company X has provided a copy of an Agreement which is described as a 'Facility Agreement' in respect of the term loan facility for an amount under $100 million.

The parties to the Agreement and their respective capacities are stated as follows:

(1) Company X ('Borrower')

(2) Company Y ('the Company', defined as the 'Guarantor')

(3) A Bank Limited, Country C ('the Arranger')

(4) A Bank Limited, Country D Branch ('Original Lender')

(5) A Bank Limited, Country D Branch ('Facility Agent')

(6) A Bank Limited, Country C ('Security Agent')

The Facility Agreement provides for only one lender, being the A Bank Limited, Country D Branch (original lender), however, Clause 24 of the Agreement provides for the introduction of new lenders by assignment or transfer of any of its rights by the original lender.

A Bank Limited, Country D Branch, is a foreign resident for income tax purposes.

Company X has provided copies of documents showing the amounts borrowed originally under the Facility Agreement and the current outstanding.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128F

Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(i)

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 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 1936 Paragraph 128F(11)(a)

Income Tax Assessment Act 1936 Paragraph 128F(11)(b)

Income Tax Assessment Act 1936 Paragraph 128F(11)(c)

Income Tax Assessment Act 1936 Paragraph 128F(11)(d)

Income Tax Assessment Act 1936 Subparagraph 128F(1)(c)(iii)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company X.

An interest withholding tax liability will not arise for interest paid by an Australian resident to a non-resident under subparagraph 128B(2)(b)(i) of the ITAA 1936 where subsection 128F(1) of the ITAA 1936 applies to the interest payment.

Subsection 128F(1) of the ITAA 1936 states:

"128F(1) Interest to which this section applies. This section 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

(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:

(iii) is a syndicated loan; or ...

(iv) ……

and

(d) either:

(i) ...........; 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)."

Company X satisfies paragraphs 128F(1)(a) and 128F(1)(b) of the ITAA 1936. The application of the remaining requirements of subsection 128F(1) are considered as follows:

Is the 'Facility' a syndicated loan?

The term 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 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.

Subsection 128F(9) of the ITAA 1936 also defines the term 'syndicated loan facility' to have the meaning given in subsections 128F(11), 128F(12) and 128F(13) of the ITAA 1936. The relevant provision in this case is subsection 128F(11) of the ITAA 1936 which provides:

"128F(11) ITAA 1936 ["syndicated loan facility"] 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 $100,000,000 (or a prescribed amount)."

Paragraph 128F(11)(a) of the ITAA 1936 stipulates that a written agreement is a syndicated loan facility only if the agreement is described as such.

For further explanation in this regard, the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 3) Act 2007 (EM) which relates to the amendments to sections 128F and 128FA of the ITAA 1936, states at paragraph 7.40 that:

"Where a written agreement does not describe itself as a syndicated loan facility or syndicated facility agreement, it would not satisfy the definition of 'syndicated loan facility'. Such an agreement cannot be made the subject of the public offer test, and therefore any loans or financial accommodation provided under the agreement cannot be eligible for exemption. Where an agreement is altered so that it is described as a syndicated loan facility, it is necessary for the public offer test to be satisfied at the time the agreement is properly described. Any earlier purported satisfaction of the public offer test would be invalid. Additionally, it should be noted that the Commissioner of Taxation (Commissioner) does not have the discretion to treat an agreement improperly described as a syndicated loan facility."

In the present case, the Facility describes itself as a 'Facility Agreement' rather than as a 'syndicated loan facility or 'syndicated facility agreement'. As paragraph 128F(11) (a) of the ITAA 1936 is not satisfied, the Facility Agreement is not a syndicated loan facility for the purposes of subsection 128F(11) and in turn subsection 128F(9) and subparagraph128F(1)(c)(iii) of the ITAA 1936.

As stated in paragraph 7.40 of the EM, the Facility Agreement cannot be subject to a public offer test for the purposes of subparagraph128F(1)(d)(iii) of the ITAA 1936 as it is not described as a syndicated facility agreement.

It follows that the interest payments made by Company X on monies borrowed under the Facility Agreement are not exempt from withholding taxes under subsection 128F(1) of the ITAA 1936.

The failure to satisfy any one of the four elements that combine to define the term 'syndicated loan facility' in subsection 128F(11) is sufficient to render the Facility Agreement ineligible from interest withholding. However, for the sake of completeness, the application of the three other elements of subsection 128F(11) have also been considered.

The Facility Agreement is between Company X and one 'lender', that is, the A Bank Limited, Country D. In this regard, paragraph 128F (11) (b) stipulates a minimum of two lenders

In respect of the requirement of a minimum of two lenders stipulated in paragraph 128F(11)(b) of the ITAA 1936 to constitute a syndicated loan facility, the EM clarifies at paragraph 7.42 that:

"A written agreement is also a 'syndicated loan facility' where the agreement is between one or more borrowers and one lender but the agreement provides for the addition of other lenders. This recognises that in many cases a borrower may enter into a written agreement with a single lender who then acts as an arranger on behalf of the borrower and seeks out other lenders to become party to the agreement, or the facility is otherwise syndicated to multiple lenders. This definition of 'syndicated loan facility' will enable such an agreement to be the subject of the public offer test."

In the circumstances of Company X, the Facility Agreement provides for the addition of more lenders (Clause 24). Accordingly, P Bank Limited joined the original lender, the A Bank Limited, Country D (also the Facility agent), by accepting the invitation to join the Facility with a commitment of a specified amount in the Facility.

As a result, the Facility Agreement satisfies the condition in paragraph 128F(11)(b) of the ITAA 1936.

Based on the documentation provided, each of the two lenders has provided financial accommodation to Company X, separately (severally). Therefore, the requirement in paragraph 128F(11)(c) is also satisfied in the circumstances of Company X.

Finally, paragraph 128F(11)(d) requires that the amount to which the borrower or borrowers will have access to, at the time the first loan or other form of financial accommodation is to be provided under the agreement, is at least $100,000,000 (or a prescribed amount).

In this regard, the EM states at paragraph 7.45 that,

"It is appropriate that both definitions of a syndicated loan facility are referenced to size. The purpose of the IWT exemption is to facilitate Australian borrowers' access to overseas markets for the purposes of large capital raising. The $100 million sum is to be interpreted as that amount in Australian dollars or the equivalent amount in a foreign currency where the loan is expressed in foreign currency."

The basis for determining the prescribed amount of $100 million is explained in paragraph 7.48 of the EM. The amount in question was arrived at by calculating the average size of the 126 syndicated loan deals documented in the September 2005 Reserve Bank Bulletin.

The EM, at paragraph 7.47, makes reference to a regulation-making power to lower or raise the threshold of $100 million to an amount that is reflective of the syndicate loan market at a particular time. At the time of making this ruling no such regulation was in place enabling the prescription of a different threshold in lieu of the existing $100 million threshold.

As advised, the amount of Company X's first draw down under the Facility Agreement is for an amount under $100 million and the overall facility is for an amount under $100 million. As this amount is below the prescribed amount, the condition imposed by paragraph 128F(11)(d) is not satisfied.

The Facility Agreement entered into by Company X has failed two of the four elements of the definition of a 'syndicated loan facility' in subsection 128F(11) of the ITAA 1936.

Therefore, the Facility Agreement under which loans were made to Company X is not a 'syndicated loan' for the purposes of subparagraph128F(1)(c)(iii) of the ITAA 1936 so that interest payments made by Company X in respect of those loans are not exempt from withholding taxes under subsection 128F(1) of the ITAA 1936.

Accordingly, an interest withholding tax liability will arise in respect of interest paid by Company X to the non-resident lenders on monies borrowed under the Facility Agreement, pursuant to subparagraph 128B(2)(b)(i) of the ITAA 1936.