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Ruling

Subject: Interest withholding tax exemption

Question 1

Is paragraph 128F(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) satisfied when the rights and obligations of Company A (as Issuer) of the medium term notes is transferred by way of novation to Company B?

Answer

Yes

Question 2

Will the issue of a debenture arising through the novation of the medium term notes from Company A to Company B satisfy the public offer test requirement of subparagraph 128F(1)(d)(i) of the ITAA 1936?

Answer

Yes

Question 3

Is paragraph 128F(1)(a) of the ITAA 1936 satisfied when the rights and obligations of Company A (as Borrower) under the syndicated facility agreement are transferred by way of novation to Company B?

Answer

Yes

Question 4

Will the novation of the syndicated facility agreement from Company A to Company B satisfy the public offer test requirement of subparagraph 128F(1)(d)(ii) of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013 to Year ended 30 June 2015

The scheme commences in:

Year ended 30 June 2013

Relevant facts and circumstances

Both Company A and Company B are incorporated in Australia and are subsidiary members of the same income tax consolidated group.

The head company of the income tax consolidated group intends to liquidate Company A. To facilitate this, Company A is proposing to transfer its rights and obligations under its medium term notes and syndicated facility agreement, by way of novation, to Company B.

Medium term notes

Company A is the issuer of medium term notes (MTN) under the medium term note program (MTN Program). Company A was a resident of Australia when it entered into the MTN Program and at the time of issue of the MTN.

The MTN issued by Company A is guaranteed by Company B.

The terms and conditions of the MTN Program are contained in the MTN Terms Document.

Interest is payable to MTN holders in accordance with the MTN Terms Document.

Company A (as Issuer), Company B (as Guarantor) and the Dealer entered into the Program Agreement for the issue of MTN under the MTN Program.

Under the terms of the Program Agreement, the Dealer represents to Company A that the MTN will be issued in compliance with section 128F of the Income Tax Assessment Act 1936 (ITAA 1936) (public offer clause).

Interest currently paid by Company A on the MTN is eligible for the exemption from withholding tax under section 128F of the ITAA 1936.

Company A proposes to transfer its rights and obligations under the MTN by way of novation to Company B.

The MTN Terms Document and Program Agreement provide a mechanism for the substitution of the issuer (substitution clause).

In accordance with the substitution clause, Company A will transfer it rights and obligations under the MTN to Company and on completion of that transfer:

· Company B will assume all of the rights and obligations of Company A;

· Company B will be bound by the MTN Agreement as the issuer of the MTN; and

· Company A will be released of its existing obligations under the MTN Program.

The parties to the Program Agreement will enter into a deed under which:

· Company B will become the issuer for all purposes of the Program Agreement and Company A will cease to be the issuer for those purposes;

· Company B undertakes to perform the obligations and assume liabilities to the lenders under the Program Agreement;

· The Dealer accepts in place of Company A, the rights and obligations of Company B under the Program Agreement;

· Company B acknowledges that its obligations under the Program Agreement as guarantor remain unaffected; and

· Company A will be released of its obligations under the Program Agreement.

Syndicated loan facility

Company A is also the borrower under a syndicated loan facility with Company B as guarantor. The syndicated loan facility is arranged by the Arranger.

The terms of the syndicated loan facility are contained in the syndicated facility agreement.

The available loan amount under the syndicated loan facility is greater than A$X.

There are at least Y lenders under the syndicated loan facility.

Under the terms of the syndicated facility agreement, the obligations of each lender are several and no lender is responsible for the obligations of any other lender.

Each drawdown under the syndicated facility agreement constitutes a separate loan and debt interest for the purposes of section 128F of the ITAA 1936.

Interest is payable on each loan in accordance with the terms of the syndicated facility agreement.

Pursuant to the terms of the syndicated facility agreement, the Arranger represents to the borrower that invitations to become a lender under the syndicated loan facility will comply with the public offer requirements in section 128F of the ITAA 1936 (public offer clause).

Interest currently paid by Company A on each drawdown under the syndicated facility agreement is eligible for the exemption from withholding tax under section 128F of the ITAA 1936.

Company A is proposing to transfer its rights and obligations under the syndicated facility agreement by way of novation to Company B.

The parties to the syndicated facility agreement propose to amend the terms of the syndicated facility agreement to allow the transfer of the rights and obligations under the syndicated facility agreement (new substitution clause).

Pursuant to the new substitution clause, Company A will transfer all of its rights and obligations under the syndicated facility agreement and on completion of that transfer:

· Company B will become the borrower for all purposes of the syndicated facility agreement and Company A will cease to be the borrower for those purposes;

· Company B undertakes to perform the obligations and assume liabilities to the lenders under the syndicated facility agreement;

· The Arranger and Lenders accept in place of Company A, the rights and obligations of Company B under the syndicated facility agreement;

· Company B acknowledges that its obligations under the syndicated facility agreement as guarantor remain unaffected; and

· Company A will be released of its obligations under the syndicated facility agreement.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 128F

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)(c)

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

Income Tax Assessment Act 1936 paragraph 128F(1)(d)

Income Tax Assessment Act 1936 subparagraph 128F(1)(d)(i)

Income Tax Assessment Act 1936 subparagraph 128F(1)(d)(ii)

Income Tax Assessment Act 1936 subsection 128F(3)

Income Tax Assessment Act 1936 paragraph 128F(3)(a)

Income Tax Assessment Act 1936 subparagraph 128F(3)(a)(i)

Income Tax Assessment Act 1936 subparagraph 128F(3)(a)(ii)

Income Tax Assessment Act 1936 paragraph 128F(3)(e)

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

Income Tax Assessment Act 1936 paragraph 128F(3A)(a)

Income Tax Assessment Act 1936 subparagraph 128F(3A)(a)(i)

Income Tax Assessment Act 1936 subparagraph 128F(3A)(a)(ii)

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 section 318

Income Tax Assessment Act 1997 Subdivision 974-B

Income Tax Assessment Act 1997 section 974-15

Income Tax Assessment Act 1997 section 974-20

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Section 128F of the ITAA 1936 exempts from withholding tax, interest on certain publicly offered debentures and debt interests.

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

This section applies to interest paid by a company in respect of a debenture … in the company if:

(a) the company was a resident of Australia when it issued the debenture …

Pursuant to subsection 128F(9) of the ITAA 1936, 'debenture', without affecting its meaning elsewhere in the ITAA 1936, 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 defines 'debenture' to include debenture stock, bonds, notes, and any other securities of the company, whether constituting a charge on the assets of the company or not.

Paragraph 128F(1)(a) of the ITAA 1936 requires the resident company to have issued the debentures.

The term 'issued' is not defined for the withholding tax provisions in Division 11A of the ITAA 1936 and therefore its ordinary meaning must be adopted.

Taxation Determination TD 1999/9 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - if a debenture is executed and delivered outside Australia, will it be taken to have been 'issued' outside Australia for the purposes of paragraph 128F(1)(c)?, refers to the decision in Levy v Abercorris Slate and Slab Company (1887) 37 Ch D 260 and states:

4. The ordinary meaning of the word 'issue' according to The Macquarie Dictionary is 'to put out; deliver for use, sale, etc; put into circulation'. To put out or deliver debentures to subscribers in an offshore market, is to 'issue' the debentures for the purposes of paragraph 128F(1)(c) irrespective of where supporting documentation may have been signed.

Novation, according to Windeyer J in Olsson v Dyson (1969) 120 CLR 365 at 388-389 "is the making of a new contract between a creditor and his debtor in consideration of the extinguishment of the obligations of the old contract: if the new contract is to be fully effective to give enforceable rights or obligations to a third person, he, the third person, must be a party to the novated contract … Novation means … that there being a contract in existence, some new contract is substituted for it, either between the same parties or between different parties; the consideration mutually being the discharge of the old contract. In that sense novation means simply a new contract standing in the place of the old".

Taxation Determination TD 2006/11 Income tax: for the purposes of Division 775 of the Income Tax Assessment Act 1997, does forex realisation event 2 and forex realisation event 4 occur when, on novation, a foreign currency-denominated debt is ended and a new party becomes either the creditor or debtor in the substituted debt?, refers to the decision in Olsson v Dyson and states:

14. The effect of a novation is to discharge, by agreement, the existing contractual rights and obligations or part of them and create new obligations and rights in substitution.

15. A novation can effect the substitution of a new debtor for the original debtor, with the intention of releasing the latter. Similarly, a novation can effect the substitution of a new creditor for the original creditor, with the intention of effectively transferring the rights of the latter to the former. In either case, the novation of a debt results in the discharge of the original debt and creation of a new debt.

Each MTN is, on the facts, a debenture for the purposes of section 128F of the ITAA 1936.

On the facts, the substitution of Company B in place of Company A as the issuer of the MTN meets all of the elements of a novation as specified in Olsson v Dyson and TD 2006/11.

Accordingly, Company B, being an Australian resident company at the time of the novation, will have 'issued' the debenture when the rights and obligations under the MTN are transferred by way of novation from Company A to Company B under paragraph 128F(1)(a) of the ITAA 1936.

Question 2

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

This section applies to interest paid by a company in respect of a debenture … in the company if:

…

(d) either:

(i) the issue of the debenture … satisfies the public offer test in subsection (3) or (4).

As established, the MTN issued under the MTN Program is a debenture for the purposes of subsection 128F(3) of the ITAA 1936.

The MTN is not a global bond as defined in subsection 128F(10) of the ITAA 1936 and therefore, subsection 128F(4) of the ITAA 1936 is not applicable.

Subsection 128F(3) of the ITAA 1936 relevantly provides:

The issue of a debenture … by a company satisfies the public offer test if the issue resulted from the debenture … being offered for issue:

…

(e) to a dealer, manager or underwriter, in relation to the placement of debentures … who, under an agreement with the company, offered the debenture … interest for sale within 30 days in a way covered by paragraphs (a) to (d).

To satisfy the public offer test, the issue of the debenture must have 'resulted from' the debenture being 'offered for issue'.

The phrase 'offered for issue' is considered in Taxation Determination TD 1999/24 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - how may a company satisfy the introductory requirements in paragraphs 128F(3)(a) and 128F(3)(b) that a debenture must be offered on a 'debenture by debenture' basis?. The word 'offered' in the introductory words to subsection 128F(3) of the ITAA 1936 is not limited to meaning 'offer' in the context of a contractual offer. The word includes invitations or inducements to potential investors to make offers.

Taxation Determination TD 1999/8 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - when will an issue of debentures be taken to have 'resulted from' the debentures being 'offered for issue' for the purposes of the public offer test in subsection 128F(3)?, states that subsection 128F(3) of the ITAA 1936 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). TD 1999/8 notes that a strict interpretation would not sit comfortably with actual market practice. To satisfy the public offer test there still needs to be some nexus between the offer and the issue. There is, however, no requirement, within subsection 128F(3) that there has to be a separate offer for each issue of debentures.

Specifically, in relation to the public offer test in paragraph 128F(3)(e) of the ITAA 1936 (the 'fifth public offer test'), Taxation Determination TD 1999/18 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - for the purposes of the fifth public offer test in paragraph 128F(3)(e), in what circumstances is a debenture taken to be 'offered for issue', provides guidance on the application of the public offer test in paragraph 128F(3)(e) of the ITAA 1936 and states:

3. In relation to the public offer test in paragraph 128F(3)(a), both the company and the dealer, manager or underwriter have a responsibility for ensuring the debentures are offered for issue to at least 10 persons who are not known or suspected to be associates. As pointed out in the explanatory memorandum to Taxation Laws Amendment Bill (No.2) 1997, the 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 complied 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 defence that it relied on the dealer, manager or underwriter.

A similar approach is discussed at paragraph 6 of Taxation Determination TD 1999/13 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - for the purposes of the public offer test in paragraph 128F(3)(a) (the 'first public offer test'): (a) are pension funds and other 'qualified institutional buyers' considered to be carrying on the business of providing finance, or investing or dealing in securities? (b) what is required of a company to establish that the persons to whom the debentures are offered are carrying on business in the manner required by the legislation? (c) when is a company taken to know or suspect that such a person is an associate?.

Paragraph 5.43 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1997 discusses the public offer test in paragraph 128F(3)(e) of the ITAA 1936.

As established, the substitution of Company B in place of Company A as issuer of the MTN satisfies the elements of novation (see question 1).

While the novation of the MTN constitutes a new issue of a debenture for the purposes of section 128F of the ITAA 1936, the novation still arises out of the original MTN Terms Document and Program Agreement.

On the facts, the original issue of the MTN by Company A satisfied the public offer test in subsection 128F(3) of the ITAA 1936 and accordingly, the new issue of the MTN by Company B (arising through the novation) satisfies the public offer test in subsection 128F(3).

Therefore, the issue of the debenture by Company B by way of novation from Company A will satisfy the requirement in subparagraph 128F(1)(d)(i) of the ITAA 1936.

Question 3

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

This section applies to interest paid by a company in respect of a … debt interest in the company if:

(a) the company was a resident of Australia when it issued the … debt interest

'Debt interest' is not defined in Division 11A of the ITAA 1936; nor is it defined in section 128F of the ITAA 1936.

Subsection 6(1) of the ITAA 1936 provides that 'debt interest' has the same meaning as in the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 995-1(1) of the ITAA 1997 states the 'debt interest' in an entity has the meaning given by Subdivision 974-B of the ITAA 1997.

The meaning of 'debt interest' is given in section 974-15 of the ITAA 1997.

Subsection 974-15(1) of the ITAA 1997 states: a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity.

On the facts, each drawdown made pursuant to the syndicated facility agreement constitutes a separate debt interest for the purposes of section 128F of the ITAA 1936.

Paragraph 128F(1)(a) of the ITAA 1936 requires the resident company to have 'issued' the debt interest.

As discussed in question 1 above, the term 'issued' is not defined for the purposes of the withholding tax provisions in Division 11A of the ITAA 1936 and the ordinary meaning of the word applies.

Based on the guidance given in Taxation Determination TD 1999/9, it is considered that at the time of each drawdown, a new debt interest was 'issued' by Company B for the purposes of section 128F of the ITAA 1936.

Company A (as borrower) proposes to transfer its rights and obligations of the syndicated facility agreement by way of novation to Company B. The issue in question is whether each drawdown under the syndicated facility agreement, being a separate debt interest, is 'issued' by Company B when transferred by way of novation from Company A.

The elements of novation are discussed in question 1 above.

On the facts, the substitution of Company B in place of Company A as borrower under the syndicated facility agreement satisfies the elements of novation.

Accordingly, Company B being an Australian resident company at the time of the novation, will have 'issued' a debt interest under paragraph 128F(1)(a) of the ITAA 1936.

Question 4

Subsection 128F(1) of the ITAA 1936 applies to interest paid by a company in respect of a debt interest in the company if:

… (d) either:

…

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 128F(3A).

A '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.

'Syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 to have the meaning given by subsections 128F(11), 128F(12) and 128F(13) of the ITAA 1936. On the facts, subsection 128F(11) of the ITAA 1936 provides the relevant meaning.

Under subsection 128F(11) of the ITAA 1936, a written agreement is a syndicated loan facility if:

· the agreement describes itself as a syndicated loan facility or syndicated facility agreement;

· the agreement is between one or more borrowers and at least 2 lenders;

· 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

· 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).

On the facts, the syndicated facility agreement satisfies all of the elements of a syndicated loan and a syndicated loan facility in subsections 128F(9) and 128F(11) of the ITAA 1936 respectively.

Accordingly, the public offer test in subsection 128F(3A) of the ITAA 1936 is of relevance.

Subsection 128F(3A) of the ITAA 1936 relevantly provides:

An invitation to become a lender under a syndicated loan facility by a company satisfies the public offer test if the invitation was made:

· to at least 10 persons each of whom:

· was carrying on a business of providing finance or investing or dealing in securities, in the course of operating in financial markets; and

· was not known, or suspected, by the company to be an associate of any of the other persons covered by this paragraph; or …

The term 'invitation' is not defined for the purposes of subsection 128F(3A) of the ITAA 1936, nor is it defined in the general interpretation provision in subsection 6(1) of the ITAA 1936. Therefore, the term 'invitation' should be interpreted according to its ordinary meaning and legislative context (Chaudhri v FC of T (2001) 109 FCR 416 at 418).

The Macquarie Dictionary defines the term 'invitation' as:

1. the act of inviting; 2. the written or spoken form with which a person is invited; 3. attraction or allurement.

The Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 3) Bill 2007 (which introduced syndicated loans and the public offer test in subsection 128F(3A) of the ITAA 1936) does not provide any guidance on the meaning of the term 'invitation'.

In the context of the public offer test in paragraphs 128F(3)(a) and 128F(3)(b) of the ITAA 1936, paragraph 4 of Taxation Determination TD 1999/24 recognises that the introductory words are satisfied where debentures are advertised for issue or other invitations or inducements are made in accordance with their respective public offer test, giving potential investors the opportunity to make an offer to the company for the acquisition of the debenture.

Accordingly, the term 'invitation' in the context of subsection 128F(3A) of the ITAA 1936 means a proposal to a person that aims to attract them to consider that proposal and does not involve any intention to bind the invitee to the exact terms of the proposal.

Paragraph 128F(3A)(a) of the ITAA 1936 requires that the invitation to become a lender under the syndicated loan facility was made to at least X persons each of whom carry on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets, and were not known, or suspected, by the company to be an associate of any of the other persons covered in paragraph 128F(3A).

The term 'associate' is defined in subsection 128F(9) of the ITAA 1936 to have the meaning given by section 318 of the ITAA 1936, with the exclusion of certain paragraphs.

TD 1999/13 provides guidance on the interpretation of the phrases 'carrying on the business of providing finance or investing or dealing in securities' and 'not known, or suspected … to be an associate' in relation to the analogous provision in paragraph 128F(3)(a) of the ITAA 1936 and relevantly states, in effect, that a company may rely on a representation or undertaking by the dealer, manager or underwriter, that it offered, or will offer, the debenture for sale in compliance with subsection 128F(3) of the ITAA 1936 (see paragraphs 6-8 of TD 1999/13).

Company A proposes to transfer by way of novation its rights and obligations under the syndicated facility agreement.

As established, the substitution of Company B in place of Company A as borrower under the syndicated facility agreement satisfies the elements of novation (see question 3).

While the novation of the syndicated loan facility from Company A to Company B will constitute a new syndicated loan facility (and thus each drawdown under the syndicated facility agreement will constitute a new debt interest for the purposes of section 128F of the ITAA 1936), the novation arises from the terms of the original syndicated facility agreement.

Consistent with paragraph 6 of TD 1999/13, the company may rely on representations made by the arranger or manager that the original invitation to become a lender under the syndicated facility agreement complied with the public offer test in paragraph 128F(3A)(a) of the ITAA 1936.

On the facts, the original invitation to become a lender under the syndicated facility agreement satisfied the public offer test in subsection 128F(3A) of the ITAA 1936. Accordingly, the novated syndicated facility agreement from Company A to Company B will also satisfy the public offer test in subsection 128F(3A), as the novation arises from the original terms of the syndicated facility agreement.

Therefore, the proposed novation of the syndicated loan facility under the terms and conditions of syndicated facility agreement will satisfy the requirement in subparagraph 128F(1)(d)(ii) of the ITAA 1936.