Edited version of private ruling

Authorisation Number: 1011857956769

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Ruling

Subject: Interest withholding tax

Question

Will the interest paid under the syndicated loan facility be exempt from the obligation to withhold imposed under section 12-245 of Schedule 1 of the Taxation Administration Act 1953 (the TAA 1953) in light of paragraph 12-300(a) of Schedule 1 of the TAA 1953 and subsection 128F(2) of the Income Tax Assessment Act 1936 (the ITAA 1936)?

Answer

Yes. The interest paid under the syndicated loan facility will be exempt from the obligation to withhold imposed under section 12-245 of Schedule 1 of the TAA 1953.

This ruling applies for the following periods:

Year ended 31 December 2011
Year ended 31 December 2012
Year ended 31 December 2013
Year ended 31 December 2014

Relevant facts and circumstances

Aust Co is a tax resident of Australia.

As part of a share acquisition and corporate restructure, Aust Co acquired certain Australian companies.

Aust Co entered into an agreement with A Bank who would act as the manager of a syndicated loan facility ('SFA').

Pursuant to the agreement, A Bank approached a number of prospective lenders and offered that they participate in a syndicated loan. The approaches detailed the major terms and conditions under the proposed syndicated loan.

Over ten potential lenders were invited to participate in the loan facility and over ten lenders are currently a party to the SFA.

From the commencement of the SFA, Aust Co drew down over $100,000,000 of bank debt to fund the acquisition of the shares.

A Bank carries out 'Know Your Client' procedures on each and every potential lender, as the arranger on behalf of Aust Co, and has taken reasonable steps to ascertain whether lenders are associates of one another.

No information has arisen indicating a knowledge or reasonable grounds to suspect that the loans under the SFA were being acquired directly or indirectly by an associate of Aust Co.

The non residents who are entitled to be paid interest have provided an overseas postal address to Aust Co.

The Lenders under the SFA are the original lenders (being A Bank and B Bank) and any bank, financial institution, trust, fund or other entity which has become a party as a lender in accordance with the terms of the SFA.

The 'Total Commitments' under the SFA exceed $100,000,000.

The SFA explicitly states that it is a syndicated facility agreement.

The SFA provides that a lender may assign any of its rights or transfer by novation any of its rights and obligations under the loan facility.

The SFA contains an undertaking that invitations to become a lender will be made to at least ten parties who are believed to carry on the business of providing finance or investing or dealing in securities in the course of operating in financial markets, or, in an electronic form that is used by financial markets for dealing in debentures.

The SFA contains an undertaking that the parties who will be invited to become a lender are not, to the knowledge of the arranger, associates of any of the others invitees or the arranger.

The SFA contains an undertaking that parties known to be offshore associates of the borrower will not invited to be lenders.

The SFA provides that the borrower will advise if the potential invitees are suspected to be associates.

Each lender has represented and warranted it was carrying on the business of providing finance, or investing or dealing in securities, in the course of operating in financial markets.

The SFA provides for the obligations of each lender to be several (but not joint).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128F.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The syndicated loan facility satisfies the public offer test under subsection 128F(3A) of the ITAA 1936.

The syndicated loan facility is exempt from interest withholding tax pursuant to subsection 128F(2) of the ITAA 1936.

Aust Co does not have an obligation to withhold an amount from the interest payment made to the non-resident lenders.

Detailed reasoning

Section 12-245 of Schedule 1 of the 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. Paragraph 12-300(a) of Schedule 1 of the TAA 1953 exempts the payer from an obligation to withhold if the payee is not liable to non resident interest withholding tax.

Section 128B(2) of the ITAA 1936 imposes a liability to interest withholding tax where the interest is derived by a non-resident that is either:

· Paid to the non-resident by an Australian resident and is not an outgoing wholly incurred by the Australian resident in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or

· Paid to the non-resident by a non-resident and is an outgoing wholly incurred by the non-resident in carrying on business in Australia at or through a permanent establishment in Australia.

However, the liability to interest withholding tax does not arise where section 128F applies: See subparagraph 128B(3)(h)(iv) of the ITAA 1936.

Section 128F Exemption

In order for section 128F to apply, the following must be satisfied in subsection 128F(1):

(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

(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).

Resident

Aust Co is a tax resident of Australia and paragraphs 128F(1)(a) and (b) have been satisfied.

Syndicated loan

A 'syndicated loan' is defined under 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.

Under the SFA, 10 or more lenders have become members of the SFA.

Subsection 12BF(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). The relevant provision for this matter is subsection 128F(11) which provides:

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).

In the SFA, the agreement is described as a 'syndicated facility agreement', as is required under paragraph (a) of the definition.

There were originally at least two lenders and there was provision for the addition of other lenders by assignment or transfer under the SFA.

The SFA provides for the obligations of each lender to be several, but not joint, as required by paragraph (c) of the definition.

Subsection (d) is satisfied as the total financial accommodation provided under the agreement exceeds $100,000,000 as at the date of the execution of the agreement.

Accordingly, the SFA satisfies all of the elements of a 'syndicated loan' and a 'syndicated loan facility' in subsections 128F(9) and (12), respectively, of the ITAA 1936.

Accordingly, the SFA is a 'syndicated loan' for the purposes of subparagraph l28F(1)(c)(iii).

Public offer test

In order to satisfy the public offer test in respect of a syndicated loan, subsection 128F(3A) of the ITAA 1936 must be satisfied (see subparagraph 128F(1)(d)(iii) of the ITAA 1936). The public offer test, as set out in 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).

Public offer test - invitations to 10 persons

A Bank agreed to act as the manager for the Aust Co syndicated loan facility. Pursuant to the agreement, A Bank approached a number of prospective lenders and offered that they participate in a syndicated loan. The approaches detailed the major terms and conditions under the proposed syndicated loan.

It is considered that the approaches from A Bank to the lenders constituted an 'invitation' to become a lender under the SFA in terms of subsection 128F(3A).

The SFA required that A Bank undertake, represent and warrant that invitations be made before the 30^th day of the executed agreement. The clause required the invitations to be made to at least 10 entities engaged in the business of providing finance etc., or, to be made in an electronic form used by the financial markets.

10 or more entities were invited to become lenders. Currently 10 or more lenders are a party to the SFA.

As there were 10 or more lenders in the invitation list, it is clear that the SFA resulted from the invitation being made to at least 10 persons.

Public offer test - Business of Providing Finance

It is required that each of the lenders carry on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets.

In determining whether the lenders carry on a business of providing finance, paragraph Para 5.38 of the Explanatory Memorandum which accompanied the Taxation Laws Amendment Act (No.2) 1997 explained, in the context of the public offer test for subsection 128F(3)(a), that if 'the Australian company offers its debentures to 10 banks or pensions funds operating in an overseas financial market, the public offer test will be satisfied'.

The offer to become lenders was made to 10 or more banks and to some superannuation funds. Further, the SFA requires that each lender represent and warrant that at the time it received the invitation it was carrying on the business of providing finance, or investing or dealing in securities in the course of operating in financial markets.

Aust Co is of the understanding that each of the lenders approached were carrying on a business of providing finance, or investing or dealing in securities, or in the course of operating in financial markets.

Accordingly, subparagraph 128F(3A)(a)(i) has been satisfied.

Public offer test - Not an Associate

It is required that each of the lenders were not known, or suspected, by the company to be an associate of the borrowers under the SFA.

Taxation Determination TD 1999/18, although it deals with a different provision, states:

...[T]he company offering the debentures for sale does not need to undertake a detailed examination of the parties to whom the debentures are offered. Therefore, the company may rely on the expectation the dealer, manager or underwriter has compiled with the conditions set out in paragraph 128F(3)(a). The company cannot however, ignore persons it knows to be an associate and use the defense that it relied on the dealer, manager or underwriter.

Taxation Determination TD 2001/3, although it deals with a different provision, provides guidance on when a company is taken to have the requisite knowledge or suspicion that a debenture would be acquired by an associate:

A company will not be taken to have the requisite knowledge or suspicion if the company takes reasonable steps to ensure that its associates do not acquire its debentures…Another reasonable step would be for the debenture itself, and/or the prospectus, 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 sell debentures to the issuer's associates. An issuer may, but is not obliged to by subsection 128F(5), obtain undertakings to this effect from its dealers, managers or underwriters.

Whilst Aust Co cannot ignore persons it knows to be an associate, Aust Co is not required to undertake a detailed examination of the potential lenders but may rely on the expectation that A Bank has complied with the conditions. Having regard to the fact that it appears that A Bank carries out 'Know Your Client' procedures on potential lenders and that the SFA contains undertakings that the parties are not associates, it is considered that reasonable steps have been taken to identify whether the parties are associates.

Public Offer Test - associates of the borrower

Subsection 128F(5AA) of the ITAA 1936 provides that the withholding tax exemption will be lost, in some circumstances, where an associate is invited to become a lender.

On the basis of the investigations undertaken by Aust Co, no information has arisen indicating a knowledge or reasonable grounds to suspect that the loans under the SFA were acquired directly or indirectly by an associate of Aust Co. This is further supported as the SFA contains an undertaking that no offers or invitations will be made to offshore associates of Aust Co.

Public offer test - electronic invitations

Pursuant to the SFA, each arranger warranted that it would, alternatively, make invitations to potential lenders in an electronic form that is used by financial markets for dealing in debentures or debt interests. This is relevant for the purposes of paragraph 128F(3A)(b) which provides an alternative method of making an invitation to the method in paragraph 128F(3A)(a).

It has been determined, above, that paragraph 128F(3A)(a) has been satisfied. Therefore, it is not necessary to decide whether paragraph 128F(3A)(b) would also, in the alternative, be satisfied.

Conclusion

It is considered that the interest is exempt from interest withholding tax by virtue of section 128F. Because the interest is exempt from interest withholding tax, Aust Co is not required to withhold any amount from the interest payment.