Edited version of your private ruling

Authorisation Number: 1012457325907

Ruling

Subject: Section 128F interest withholding exemption

Question 1

Will Agreement A 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 Agreement A 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 potential lenders to become a lender under Agreement A satisfy the public offer test in subsection 128F(3A) of the ITAA 1936?

Answer

Yes.

Question 4

Will the invitation to potential lenders to become a lender under Agreement A otherwise fail the public offer test in subsection 128F(3A) due to the application of subsection 128F(5AA) of the ITAA 1936?

Answer

No.

Question 5

Will subsection 128F(2) of the ITAA 1936 apply such that interest paid by the taxpayer on each syndicated loan issued under Agreement A will not be subject to tax imposed under Division 11A of the ITAA 1936?

Answer

Yes.

Question 6

Will the taxpayer have no obligation to withhold an amount from any interest paid under Agreement A under section 12-300 of Schedule 1 to the Taxation 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

Yes.

Question 7

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

Answer

Yes.

Question 8

Will each of the loans made pursuant to Agreement B 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 9

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

Answer

Yes.

Question 10

Will the invitation to potential lenders to become a lender under Agreement B otherwise fail the public offer test in subsection 128F(3A) due to the application of subsection 128F(5AA) of the ITAA 1936?

Answer

No.

Question 11

Will subsection 128F(2) of the ITAA 1936 apply such that interest paid by the taxpayer on each syndicated loan issued under Agreement B will not be subject to tax imposed under Division 11A of the ITAA 1936?

Answer

Yes.

Question 12

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

Answer

Yes.

This ruling applies for the following period

A number of income years

The scheme commenced on

During the 2013 income year

Relevant facts and circumstances

Funding of the Project

1. The taxpayer is a company as defined in subsection 995-1(1) of Income Tax Assessment Act 1997 (ITAA 1997).

2. The taxpayer is the sole borrower of debt funding for a project (the Project).

3. The taxpayer will be an Australian resident company at the time of issue of any debt interests under two agreements designed to provide debt funding for the Project (Agreement A and Agreement B, together referred to as the Agreements), and at the time interest is paid in respect of those debt interests.

4. An electronic public invitation to participate in the Agreements was made to potential lenders.

5. The invitation was made to at least 10 persons each of whom was carrying on a business of providing finance and were not known or suspected by the taxpayer to be an associate of any of the other parties invited to become a lender under the Agreements.

6. More than 2 lenders had committed to provide finance under each of the Agreements.

7. There is and will continue to be at least 2 lenders under each of the Agreements at all times.

8. The taxpayer had access to at least AUD$100 million at the time the first loan was provided under each of the Agreements.

9. Each loan made pursuant to the Agreements will constitute a debt interest as defined in Subdivision 974-B of ITAA 1997.

10. Amounts classified as interest under the Agreements will be in the nature of interest for the purpose of paragraph 128A(1AB)(a) of ITAA 1936.

The Agreements

11. Each of the Agreements is nominated as a syndicated facility agreement.

12. In accordance with the terms of each of the Agreements, lenders agree to lend money severally and not jointly.

13. Under each of the Agreements:

· invitations to become a lender are made to at least ten parties, each of whom, as at the date the relevant invitation was made, the taxpayer believed to be carrying on the business of providing finance, or investing or dealing in securities, in the course of operating in financial markets;

· invitations are not made to parties who the taxpayer was aware, or had reasonable grounds to suspect, were associates of the taxpayer;

· each lender confirms that no relevant officers of it involved with the Agreement were aware or suspected that it was an associate of the taxpayer at the time it was invited to participate in or at the time it participated in loans made under the Agreement.

Corporate details

14. There is one common director between the taxpayer and one of its shareholders (Company S), being the director or alternate director appointed by Company S.

15. A director or alternate director appointed by Company S may take into account the interests of Company S and may act on the wishes of Company S in performing any of his or her duties or exercising any power, right or discretion as a director of the taxpayer.

16. At the time the invitation was made, Company S held a voting interest of less than 50% in the taxpayer.

Transfer of a lender's rights and obligations

17. Whilst a lender may assign any of its rights or transfer by novation any of its rights and obligations to Company S, such transfer can only occur in specified circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 128A(1AB)(a)

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(3)

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)

Income Tax Assessment Act 1936 subsection 318(2)

Income Tax Assessment Act 1936 subsection 318(6)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Subdivision 974-B

Taxation Administration Act 1953 schedule 1 paragraph 12-300(a)

Reasons for decision

Question 1

Will Agreement A 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

Agreement A constitutes a syndicated loan facility for the purpose of the definition of a 'syndicated loan facility' in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

Under subsection 128B(2) of the ITAA 1936, withholding tax is payable on interest paid to a non-resident unless an exemption applies.

Subsection 128F(2) of the ITAA 1936 provides that tax is not payable under Division 11A of the ITAA 1936 in respect of interest to which section 128F applies. Subsection 128F(1) of the ITAA 1936 provides that section 128F applies to interest paid by a company in respect of certain publicly offered debentures and debt interests if:

Syndicated loan facility

For the purposes of subparagraph 128F(1)(c)(iii) of the ITAA 1936, a 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 as 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) also provides that a 'syndicated loan facility' has the meaning given by subsections 128F(11), (12) and (13) of the ITAA 1936.

Subsection 128F(12) does not apply to this case as it applies in situations where there is only one lender. In this case, more than 2 lenders had already committed to providing finance under Agreement A. Subsection 128F(13) also does not apply to this case as it applies where there are two or more borrowers. In the present case, the taxpayer is the sole borrower under Agreement A.

Therefore, subsection 128F(11) is the provision relevant to the syndicated facility under the scheme as it applies where there are at least two lenders and one or more borrowers.

Subsection 128F(11) of the ITTA 1936 provides that 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).

Based on the facts in the present case, paragraphs (a) to (d) are satisfied. Therefore Agreement
A will be a syndicated loan facility within the meaning of subsection 128F(11) of the ITAA 1936.

Question 2

Will each of the loans made pursuant to Agreement A 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 Agreement A will constitute a 'syndicated loan' for the purpose of the definition of a 'syndicated loan' in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

As stated above, 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 as 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.

As Agreement A constitutes a syndicated loan facility, each of the loans made pursuant to Agreement A will constitute a syndicated loan as defined in subsection 128F(9) of the ITAA 1936.

Question 3

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

Summary

The invitation to potential lenders to become a lender under Agreement A satisfies the public offer test in subsection 128F(3A) of the ITAA 1936.

Detailed reasoning

As explained above, paragraph 128F(1)(d) of the ITAA 1936 requires that:

(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).

As the present case deals with a syndicated loan, the relevant public offer test is that contained in subsection 128F(3A) of the ITAA 1936.

Subsection 128F(3A) of the ITAA 1936 provides that 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).

For the purpose of satisfying subparagraph 128F(3A)(a)(i) of the ITAA 1936, the taxpayer is not required to make a detailed examination of the offerees when issuing the invitations.¹ With respect to subparagraph 128F(3A)(a)(ii) of the ITAA 1936, the taxpayer will not be regarded as knowing or suspecting the invitees are associates of one another unless, at the time the invitations were issued, it actually knew or had reasonable grounds to suspect otherwise.²

Based on the facts, the public offer test in subsection 128F(3A) of the ITAA 1936 is satisfied.

In addition to satisfying the requirements in subsection 128F(3A) of the ITAA 1936 however, it is also necessary to consider subsection 128F(5AA) of the ITAA 1936, which specifies the conditions under which an invitation to become a lender under a syndicated loan facility will never satisfy the public offer test.

The application of subsection 128F(5AA) is considered in the response to Question 4.

Question 4

Will the invitation to potential lenders to become a lender under Agreement A otherwise fail the public offer test in subsection 128F(3A) due to the application of subsection 128F(5AA) of the ITAA 1936?

Summary

The invitation to potential lenders to become a lender under Agreement A will not fail the public offer test in subsection 128F(3A) as subsection 128F(5AA) of the ITAA 1936 does not apply.

Detailed reasoning

An invitation to become a lender under a syndicated loan facility is taken by subsection 128F(5AA) of the ITAA 1936 to have never satisfied the public offer test if, at the time the invitation is made, the company knew, or had reasonable grounds to suspect, that:

(a) an associate of the company is or will become a lender under the facility; and

(b) either:

(i) the associate is a non-resident and the associate is not or would not become a lender under the facility in carrying on a business in Australia at or through a permanent establishment of the associate in Australia; or

(ii) the associate is a resident of Australia and the associate is or would become a lender under the facility in carrying on a business in a country outside Australia at or through a permanent establishment of the associate in that country; and

(c) the associate is not or would not become a lender under the facility in the capacity of:

(i) a dealer, manager or underwriter in relation to the invitation; or

(ii) a clearing house, custodian, funds manager or responsible entity of a registered scheme.

Broadly, the invitation is taken never to have satisfied the public offer test in the present case if, at the time of the invitation, the taxpayer knew, or had reasonable grounds to suspect, that Company S (if it is an associate of the taxpayer) is or will become a lender under Agreement A.

Associate test

An associate entity of a company is defined in paragraph 318(2)(d) of the ITAA 1936 as follows:

For the purposes of this Part, the following are associates of a company (in this subsection called the 'primary entity')…

(d) another entity (in this paragraph called the ' controlling entity' ) where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3); …

For the purpose of determining whether Company S (a controlling entity) is an associate of the taxpayer (a primary entity) under paragraph 318(2)(d), it is important to consider the meaning of 'sufficiently influenced' (subparagraph 318(2)(d)(i) of the ITAA 1936) and the majority voting interest requirement (subparagraph 318(2)(d)(ii) of the ITAA 1936).

Meaning of 'sufficiently influenced'

Pursuant to paragraph 318(6)(b) of the ITAA 1936, a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).

Draft Taxation Ruling TR 2012/D5 provides the following guidelines in relation to the meaning of 'sufficiently influenced' in paragraph 318(6)(b):

17. Thus (as shown in the following table) there are three ways one entity may act in accordance with the directions, instructions or wishes of another entity and it is possible for one entity to be sufficiently influenced by another entity merely if it might be reasonably expected that the first entity will act in accordance with the wishes of the second entity.

18. The phrase 'might reasonably be expected' involves a prediction that must be sufficiently reliable for it to be regarded as reasonable. Accordingly, it is not necessary for the Commissioner to have evidence that one entity has in fact acted in accordance with the wishes of another entity. Nor does there need to be documented rights and obligations, such that one entity must act in accordance with the directions or instructions of the other. Rather, the relationship between the two parties, the history behind the establishment of the company and the trust, the terms of agreements between the two entities (and any other entity), past behaviour and any other relevant factors may be such that it would be likely that one entity would act in accordance with the wishes of another.

19. It should be emphasised that the threshold for satisfying the test whether an entity might reasonably be expected to act in accordance with the wishes of another entity is considerably lower than the threshold for one entity actually controlling another.

Based on the facts, it is considered that in this case a director or alternate director of the taxpayer appointed by Company S might reasonably be expected to act in accordance with the wishes of Company S.

Accordingly, the taxpayer can be said to be sufficiently influenced by Company S.

Majority voting interest

Pursuant to paragraph 318(6)(c) of the ITAA 1936, an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

Based on the facts, Company S did not hold a majority voting interest in the taxpayer.

Associate test - conclusion

As discussed above, it is considered that the taxpayer is sufficiently influenced by Company S pursuant to paragraph 318(6)(b) of the ITAA 1936. Consequently, the taxpayer is an associate of Company S for the purpose of applying paragraph 318(2)(d) of the ITAA 1936.

As Company S is an associate of the taxpayer, it is relevant to address the issue as to whether, at the time the invitation was made, the taxpayer knew or had reasonable grounds to suspect that Company S is or will become a lender under Agreement A.

Is or will become a lender

The wording in subsection 128F(5AA) requires that at the time the invitation is made, it is known, or there are reasonable grounds to know, by the taxpayer that Company S is or will become a Lender under the Agreements.

Based on the facts, it cannot be said that at the time the invitation was made, the taxpayer knew or had reasonable grounds to suspect that Company S is or will become a lender under Agreement A.

Application of subsection 128F(5AA)

Subsection 128F(5AA) of the ITAA 1936 does not apply on the basis that at the time the invitation was made, the taxpayer did not know or have reasonable grounds that Company S is or will become a Lender under Agreement A.

Question 5

Will subsection 128F(2) of the ITAA 1936 apply such that interest paid by the taxpayer on each syndicated loan issued under Agreement A will not be subject to tax imposed under Division 11A of the ITAA 1936?

Summary

Subsection 128F(2) of the ITAA 1936 will apply such that interest paid by the taxpayer on each loan issued under Agreement A will not be subject to tax imposed under Division 11A of the ITAA 1936.

Detailed reasoning

According to subsection 128F(2) of the ITAA 1936, tax is not payable under Division 11A in respect of interest to which section 128F of the ITAA 1936 applies.

Based on the facts, the interest paid by the taxpayer under Agreement A satisfies the conditions under subsection 128F(1) of the ITAA 1936.

As such, subsection 128F(2) of the ITAA 1936 will apply such that interest paid by the taxpayer on each loan issued under Agreement A will not be subject to tax imposed under Division 11A of the ITAA 1936.

Question 6

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

Summary

The taxpayer will have no obligation to withhold an amount from any interest paid under Agreement A under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest.

Detailed reasoning

Section 12-300 of Schedule 1 to the TAA sets out the limits on amounts withheld under Subdivision 12-F of Schedule 1 to the TAA.

Under paragraph 12-300(a) of Schedule 1 to the TAA, 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 the interest payable by the taxpayer under Agreement A satisfies the requirements under subsection 128F(1) of the ITAA 1936, tax will not be payable in respect of the interest under subsection 128F(2) of the ITAA 1936.

Accordingly, the taxpayer will have no obligation to withhold an amount from any interest paid under Agreement A under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of Schedule 1 to the TAA.

Question 7

Will Agreement B 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

Agreement B constitutes a syndicated loan facility for the purpose of the definition of a 'syndicated loan facility' in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

The detailed reasoning set out in addressing Question 1 applies equally to this Question.

Question 8

Will each of the loans made pursuant to Agreement B 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 Agreement B will constitute a 'syndicated loan' for the purpose of the definition of a 'syndicated loan' in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

The detailed reasoning set out in addressing Question 2 applies equally to this Question.

Question 9

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

Summary

The invitation to potential lenders to become a lender under Agreement B satisfies the public offer test in subsection 128F(3A) of the ITAA 1936.

Detailed reasoning

The detailed reasoning set out in addressing Question 3 applies equally to this Question.

Question 10

Will the invitation to potential lenders to become a lender under Agreement B otherwise fail the public offer test in subsection 128F(3A) due to the application of subsection 128F(5AA) of the ITAA 1936?

Summary

The invitation to potential lenders to become a lender under Agreement B will not fail the public offer test in subsection 128F(3A) as subsection 128F(5AA) of the ITAA 1936 does not apply.

Detailed reasoning

The detailed reasoning set out in addressing Question 4 applies equally to this Question.

Question 11

Will subsection 128F(2) of the ITAA 1936 apply such that interest paid by the taxpayer on each syndicated loan issued under Agreement B will not be subject to tax imposed under Division 11A of the ITAA 1936?

Summary

Subsection 128F(2) of the ITAA 1936 will apply such that interest paid by the taxpayer on each loan issued under Agreement B will not be subject to tax imposed under Division 11A of the ITAA 1936.

Detailed reasoning

The detailed reasoning set out in addressing Question 5 applies equally to this Question.

Question 12

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

Summary

The taxpayer will have no obligation to withhold an amount from any interest paid under Agreement B under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest.

Detailed reasoning

The detailed reasoning set out in addressing Question 6 applies equally to this Question.

¹ Refer to Taxation Determination TD 1999/13.

² Refer to Taxation Determination TD 1999/13.