Edited version of private advice

Authorisation Number: 1012660225601

Ruling

Subject: Debt/Equity and Interest Withholding Tax

Issue 1

Question 1

Are the Notes in the Tranche to be issued by XYZ debt interests under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the Notes in the Tranche equity interests under Division 974 of the ITAA 1997?

Answer

No

Issue 2

Question 1

Does section 128F of the Income Tax Assessment Act 1936 apply to the Notes in the Tranche?

Answer

Yes

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20XX

The scheme commences on:

Income year ending 30 June 20XX

Relevant facts and circumstances

1. XYZ is an entity regulated by Australian Prudential Regulation Authority (APRA).

2. XYZ is an Australian resident company and the head company of a tax consolidated group.

Proposed arrangement

3. XYZ intends to issue subordinated notes that comply with Basel III Tier 2 capital instrument requirements in Australian Prudential Standard 111 Capital Adequacy: Measurement of Capital (APS 111).

4. The subordinated notes are to be issued under the Subordinated Note Program (the Program) under which XYZ may issue subordinated notes from time to time in tranches.

5. The subordinated notes in the first tranche are expected to be issued in 20XX (The Tranche). Two unrelated entities will be appointed as joint Managers and Dealers for the Tranche (the Dealers). The aggregate principal amount of the Tranche will be up to $X million.

6. The features of the Notes are set out in the draft Information Memorandum including the Subordinated Note Terms (Draft Terms) and the draft Pricing Supplements for the Tranche (Pricing Supplement).

7. Issue Price: Each Note will have the Face Value of $X. The Notes must be fully paid and will not be issued unless the minimum aggregate amount payable to XYZ is at least $X.

8. The maximum term of the Notes will be 10 years from the Issue Date on DDMMYYYY to the Maturity Date on DDMMYYYY.

9. Status: The Notes constitute direct and unsecured subordinated obligations of XYZ and unless otherwise specified in the Pricing Supplement, rank:

a) equally among themselves;

b) behind all claims of other senior creditors;

c) equally with creditors whose claims against XYZ rank or are expressed to rank equally with Note Holder's claims for amount owing by XYZ in connection with the Notes; and

d) prior to, and senior in right of payment to, the obligations of the holders of ordinary shares and other junior ranking capital instruments.

10. The obligation of XYZ prior to the commencement of a winding up of XYZ to make payment of principal (other than principal due on the Maturity Date) or interest and other amounts due in respect of a Note is conditional upon XYZ being solvent immediately before and after that payment by XYZ.

11. Interest: Notes will bear interest on the Face Value from the Issue Date at the interest rate specified in the Pricing Supplement for the Tranche:

a) Interest on the Notes in the Tranche will be paid quarterly.

b) Provided that the Notes have not been converted or redeemed, interest will continue to accrue on any principal not paid and any interest not paid accumulates with compounding. An unpaid amount remains a debt owing by XYZ until it is paid.

c) Holders of the Notes will be paid accrued interest under the Notes on early redemption.

12. Redemption:

a) Redemption on maturity: Unless previously redeemed or purchased and cancelled by XYZ, each Note must be redeemed on its Maturity Date at its Redemption Amount. Redemption Amount is the Face Value of the Note.

b) Early Redemptions: XYZ may redeem the Notes at the Face Value of the Note in the following circumstances:

• redemption for non-deductibility: redemption if interest payable in respect of the Notes is not or may not be deductible by XYZ other than as a result of a change in law XYZ expected as at the Issue Date;

• redemption for non-qualification as Tier 2 capital if XYZ receives notification from APRA that those Notes have ceased to qualify as Tier 2 capital; and

• early termination at the option of XYZ.

c) XYZ or its related entities may at any time purchase the Notes in the open market and at any time by tender to all or some Holders or by private agreement in accordance with the Draft Terms. All Notes purchased must be cancelled immediately by XYZ.

d) Any right to redeem or repurchase Notes is subject to the Draft Terms and XYZ obtaining prior written approval of APRA for the redemption or repurchase.

13. Non-viability Trigger Event:

a) It is a requirement under APRA's prudential standards, which came into effect on 1 January 2013, that any term subordinated debt, in order to be eligible for inclusion as regulatory capital, contains provision for conversion or write-off in the event of non-viability.

b) Non-viability Trigger Event will occur if APRA has provided a written determination to XYZ that the conversion of or write-off of the relevant capital instruments (which may include some or all of the Notes) in XYZ would be necessary.

c) If a Non-viability Trigger Event occurs, the Notes will be converted into ordinary shares.

14. Event of Default occurs if XYZ fails to pay:

d) any amount of principal due with respect to the Notes on the Maturity Date; or

e) any amount of principal or interest in relation to the Notes within 10 business days of its due date unless XYZ is not solvent or would no longer be solvent if it were to make the payment.

15. If an Event of Default occurs in relation to the Notes, the Holder may institute proceedings in a court of competent jurisdiction against XYZ to recover any outstanding principal, interest or any other amount in respect of the Notes or institute proceedings for a winding up of XYZ.

The Offer of the Notes

16. The Notes will be offered to wholesale investors. All transactions will be at arm's length for market value considerations.

17. XYZ will initially offer the Notes to the Dealers in the capacity of Managers and Subscribers. Consistent with paragraph 128F(3)(e) of the Income Tax Assessment Act 1936 (ITAA 1936), The Dealers have agreed that within 30 days of the issue of the Notes in the Tranche to the Dealers, the Dealers will offer those Notes in a way that will comply with paragraphs 128F(3)(a) to 128F(3)(d) of the ITAA 1936.

18. The Dealers will undertake the following activities:

f) publish the Terms of the Notes in the Tranche on news media sources;

g) direct email and telephone communication of the offer to investors that do not use such news media sources; and

h) organise and host roadshows to wholesale investors who may be interested in the offer.

19. The Dealers will keep a register of known potential investors to whom the Notes in the Tranche will be offered and the way in which the offer is made to ensure that the offer is made to at least ten eligible investors who are not known or suspected to be associates of XYZ.

20. The Applicant advised that XYZ does not have any non-resident associates or any Australian associates outside its tax consolidated group and no entity in its tax group has a permanent establishment outside Australia.

21. The net proceeds realised from the issue of the Notes will be used for the general corporate purposes of XYZ and its group.

22. XYZ has submitted to APRA its proposed documentation for the issue of the Program for APRA's approval.

Assumptions

1. The Notes have been approved by APRA as being compliant with Basel III Tier 2 capital instrument requirements in Australian Prudential Standard 111 Capital Adequacy: Measurement of Capital (APS 111).

2. XYZ will be a resident of Australia during the term of the Notes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 974

Income Tax Assessment Act 1997 Subsection 974-15(1)

Income Tax Assessment Act 1997 Subsection 974-20(1)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(a)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(b)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(c)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(d)

Income Tax Assessment Act 1997 Paragraph 974-20(1)(e)

Income Tax Assessment Act 1997 Subsection 974-35(1)

Income Tax Assessment Act 1997 Subsection 974-50(4)

Income Tax Assessment Act 1997 Subsection 974-70(1)

Income Tax Assessment Act 1997 Subsection 974-75(1)

Income Tax Assessment Act 1997 Section 974-80

Income Tax Assessment Act 1997 Subsection 974-80(1)

Income Tax Assessment Act 1997 Paragraph 974-80(1)(b)

Income Tax Assessment Act 1997 Paragraph 974-80(1)(d)

Income Tax Assessment Act 1997 subsection 974-130(1)

Income Tax Assessment Act 1997 Subsection 974-135(1)

Income Tax Assessment Act 1997 Subsection 974-135(3)

Income Tax Assessment Act 1997 Paragraph 974-135(8)(a)

Income Tax Assessment Act 1997 Paragraph 974-135(8)(b)

Income Tax Assessment Act 1997 Subsection 974-160(1)

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

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 128B(2)

Income Tax Assessment Act 1936 Section 128F

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 Paragraph 128F(3)(a)

Income Tax Assessment Act 1936 Paragraph 128F(3)(d)

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

Income Tax Assessment Regulations 1997 Regulation 974-135D

Income Tax Assessment Regulations 1997 Subregulation 974-135D(2)

Income Tax Assessment Regulations 1997 Subregulation 974-135D(3)

Income Tax Assessment Regulations 1997 Subregulation 974-135D(4)

Income Tax Assessment Regulations 1997 Regulation 974-135F

Income Tax Assessment Regulations 1997 Subregulation 974-135F(2)

Income Tax Assessment Regulations 1997 Subregulation 974-135F(3)

Income Tax Assessment Regulations 1997 Subregulation 974-135F(4)

Reasons for decision

Issue 1

Question 1

Summary

The Notes are debt interests in XYZ.

Detailed reasoning

Subsection 974-15(1) of the ITAA 1997 provides that 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) of the ITAA 1997 in relation to the entity.

A *scheme satisfies the debt test in this subsection in relation to an entity if:

(a) the scheme is a *financing arrangement for the entity; and

(b) the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and

(c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

(i) the financial benefit referred to in paragraph (b) is received if there is only one; or

(ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and

(d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and

(e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.

The above requirements of the debt test in relation to the issue of the Notes are considered below:

(a) The scheme is a financing arrangement for XYZ

Scheme is defined in subsection 995-1(1) of the ITAA 1997 as:

a) any arrangement; or

b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Pursuant to subsection 974-130(1) of the ITAA 1997, a scheme is a financing arrangement for an entity if it is entered into or undertaken to raise finance for the entity or its connected entity.

The issue of the Notes in the Tranche is a scheme as defined and a financing arrangement for XYZ, as the proceeds realised from the issue of the Notes will be used for the general corporate purposes of XYZ and its group. The requirement under paragraph 974-20(1)(a) of the ITAA 1997 is met.

(b) XYZ receives, or will receive, a financial benefit or benefits under the scheme

The term 'financial benefit' is defined broadly in subsection 974-160(1) of the ITAA 1997 to mean anything of economic value, including property and services.

Under the proposed scheme, XYZ will receive a financial benefit being the Face Value of the Note upon the issue of each Note. Therefore, paragraph 974-20(1)(b) of the ITAA 1997 is satisfied.

(c) XYZ has an effectively non-contingent obligation under the scheme to provide a financial benefit

Subsection 974-135(1) of the ITAA 1997 provides that there is an effectively non-contingent obligation to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action.

An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation (subsection 974-135(3) of the ITAA 1997).

In determining whether there is in substance or effect a non-contingent obligation to take the action, it is necessary to consider the contingency that the non-viability and insolvency conditions impose on XYZ's obligation to pay the principal and interest.

Paragraphs 974-135(8)(a) and (b) of the ITAA 1997 provide that regulations may make further provisions in relation to what constitute or does not constitute a non-contingent obligation.

Non-viability condition -- Regulation 974-135F

Paragraphs 974-135(8)(a) and (b) of the ITAA 1997 provide that the regulation may make further provision in relation to what constitute or does not constitute a non-contingent obligation.

Subregulation 974-135F(2) of the Income Tax Assessment Regulations 1997 (ITAR 1997) that applies to obligations to pay the principal or interest on a relevant term subordinated note, provides that the fact that an obligation to pay the principal or interest is subject to a non-viability condition does not in itself prevent the obligation from being a non-contingent obligation.

Subregulation 974-135F(3) of the ITAR 1997 outlines the criteria for a relevant term subordinated note. It states:

974-135F(3) In this regulation, a term subordinated note is relevant if:

(a) it is issued by an entity regulated for prudential purposes by APRA or a subsidiary of an entity that is regulated for prudential purposes by APRA; and

(b) when it is issued:

(i) it does not constitute or meet the requirements of a Tier 1 capital instrument; and

(ii) it does not form part of the Tier 1 capital of the issuer of the note, and the reason for it not doing so is not that the instrument is in excess of the Tier 1 capital required for the purposes of prudential standards that deal with capital adequacy; and

(c) it has a term of no more than 30 years, and it does not include an unconditional right to extend the term of the note beyond a total term of 30 years; and

(d) it is subject to a condition that, unless a non-viability trigger event occurs, any payment of the principal or interest beyond the date on which it would otherwise be payable must accumulate (with or without compounding); and

(e) it does not give the issuer of the note an unconditional right to decline to provide a financial benefit that is equal in nominal value to the issue price of the note to settle the obligations under the note.

The Notes in the Tranche will satisfy the requirements of subregulation 974-135F(3) of the ITAR 1997 for the following reasons:

• the Notes will be issued by XYZ, an entity regulated by APRA;

• at the time of issue, the Notes will meet the requirements of a Tier 2 capital instrument and will not constitute or meet the requirements of a Tier 1 capital instrument of XYZ;

• the Notes will have a maximum term of 10 years and there is no unconditional right to extend the term beyond 10 years;

• under the Draft Terms, interest will continue to accrue on any outstanding interest and principal; and

• XYZ does not have an unconditional right to decline to pay the Face value of each Note to settle its obligations.

Further, subregulation 974-135F(4) of the ITAR 1997 clarifies that a condition applying to the obligation is a 'non-viability condition' only if the condition has the effect that the note must be written-off or converted into ordinary shares of the issuer.

In this scheme, the Draft Terms specifies that if a Non-viability Triggered Event occurs, the Notes will be converted into ordinary shares. Therefore, the requirement in subregulation 974-135F(4) is met.

Accordingly, for the purposes of determining whether XYZ has an effectively non-contingent obligation to provide a financial benefit under the Notes, regulation 974-135F of the ITAR 1997 would apply to disregard the non-viability condition applying to XYZ's obligations as outlined in the Draft Terms

Insolvency condition - Regulation 974-135D

Subregulation 974-135D(2) of the ITAR 1997 that applies to obligations to pay the principal or interest on a relevant term subordinated note provides that, for the purposes of paragraphs 974-135(8)(a) and (b) of the ITAA 1997, the fact that the obligation is subject to insolvency or capital adequacy conditions does not in itself prevent it from being a non-contingent obligation.

The Notes will constitute relevant term subordinated notes under subregulation 974-135D(3) for the same reasons as those discussed under subregulation 974-135F(3).

Subregulation 974-135D(4) of the ITAR 1997 sets out what constitutes insolvency or capital adequacy conditions. It states:

974-135D(4)   In this regulation, conditions applying to the obligation are insolvency or capital adequacy conditions if they have the effect that the issuer of the note is obliged or able to defer the payment of the principal or interest beyond the date on which it would otherwise be payable if, on that date:

(a) the issuer of the note is insolvent, or would become insolvent if the payment were made; or

(b) if the issuer of the note is an entity that is regulated by the APRA or a comparable foreign regulator - the issuer is in breach of its capital adequacy ratio or would be in breach if the payment were made.

The Draft Terms provides that the obligation to make a payment of principal or interest is conditional upon XYZ being solvent immediately before and after that payment. The non-payment of principal or interest shall not constitute an event of default and will remain a debt owing to the Holder by XYZ until it is paid.

The requirements of regulation 974-135D are satisfied. Accordingly, for the purposes of determining whether XYZ has an effectively non-contingent obligation to provide a financial benefit under the Notes, regulation 974-135D will operate to disregard the insolvency condition outlined in the Draft Terms.

As a result, paragraph 974-20(1)(c) of the ITAA 1997 is satisfied.

(d) It is substantially more likely than not that the value provided will be at least equal to the value received

Under subsection 974-35(1) of the ITAA 1997, the value of a financial benefit received or provided under the scheme is its value calculated in nominal term if the performance period must end no later than 10 years after the interest arising from the scheme is issued.

Under the scheme, XYZ will receive the Face Value for each Note issued by XYZ. XYZ will have an obligation to provide the financial benefits to the Note Holders. As the term of the Notes must end no later than 10 years after the Issue Date, the nominal value of the financial benefits provided by XYZ will be the sum of interest payments and the Face Value of the Notes.

Therefore, it is substantially more likely than not that the value provided by XYZ will be at least equal to the value received. Accordingly, paragraph 974-20(1)(d) of the ITAA 1997 is satisfied.

(e) the value provided and the value received are not both nil.

The value provided and the value received by XYZ under the scheme are not nil because:

• the value of the financial benefit received will be the Face Value of the Notes; and

• the value of the financial benefits to be provided will be the Face Value of the Notes and the applicable interest on the Notes.

Paragraph 974-20(1)(e) of the ITAA 1997 is satisfied.

Conclusion

As all the elements of the debt test under subsection 974-20(1) of the ITAA 1997 are satisfied, the Notes in the Tranche will constitute debt interests in XYZ under subsection 974-15(1) of the ITAA 1997.

Issue 1

Question 2

Summary

The Notes in the Tranche are not equity interests in XYZ

Detailed reasoning

Under subsection 974-70(1) of the ITAA 1997, a scheme gives rise to an equity interest in a company if, when the scheme comes into existence, the scheme satisfies the equity test in subsection 974-75(1) of the ITAA 1997 and the interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity.

Subsection 974-75(1) of the ITAA 1997 contains a table that sets out the items that will give rise to an equity interest in a company.

In this case, the Notes will not satisfy the equity test in the table of subsection 974-75(1) for the following reasons:

• the Notes are not shares in XYZ and will not constitute an interest in the company as a member or stockholder in XYZ (item 1);

• the rights to a return in respect of the Notes is not contingent on XYZ's economic performance (item 2);

• the rights to a return is not at the discretion of the company or its connected entity (item 3); and

• except on the occurrence of a Non-viability Trigger Event, the Notes carry no rights to be issued with an equity interest in XYZ or its connected entity.

Having regard to the abovementioned elements of the equity test, the Notes do not give rise to an equity interest at the time of issue.

Will section 974-80 apply to reclassify the Notes as equity interests?

974-80(1) This section deals with the situation in which:

(a) an interest carries a right to a variable or fixed return from a company; and

(b) the interest is held by a *connected entity of the company; and

(c) apart from this section, the interest would not be an *equity interest in the company; and

(ca) the *scheme that gives rise to the interest is a *financing arrangement for the company; and

(d) there is a scheme, or a series of schemes, designed to operate so that the return to the connected entity is to be used to fund (directly or indirectly) a return to another person (the ultimate recipient).

Section 974-80 of the ITAA 1997 will not apply as paragraphs 974-80(1)(b) and 974-80(1)(d) of the ITAA 1997 are not satisfied.

Issue 2

Question 1

Summary

Section 128F of the ITAA 1936 will apply to the Notes in the Tranche

Detailed reasoning

Pursuant to 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 exempts from withholding tax interest on certain publicly offered debentures or debt interests.

Under subsection 128F(1) of the ITAA 1936 the exemption applies to interest paid by a company in respect of a debenture or debt interest if:

(a) the company was 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 is either a non-equity share, or consist of two or more related schemes where one or more of them is a non-equity share, or a syndicated loan, or 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 128F(3) or 128F(4); 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 128F(3A).

The requirements of subsection 128F(1) are considered below:

Debenture or debt interest

Debenture is defined in subsection 128F(9) of the ITAA 1936 to include a promissory note or a bill of exchange. 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.

The Notes being offered by XYZ constitute debentures for the purposes of section 128F of the ITAA 1936.

Residency status of the Issuer

XYZ, the Issuer of the debentures is a resident of Australia and will be a resident when the interest is paid. Hence, the conditions in paragraphs 128F(1)(a) and (b) of the ITAA 1936 are satisfied.

The public offer test

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

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

(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) to at least 100 persons whom it was reasonable for the company to have regarded as either:

(i) having acquired debentures or debt interests in the past; or

(ii) being likely to be interested in acquiring debentures or debt interests; or

c) as a result of being accepted for listing on a stock exchange, where the company had previously entered into an agreement with a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, requiring the company to seek such listing; or

(d) as a result of negotiations being initiated publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or

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

To satisfy the public offer test, the issue must have resulted from the debenture or debt interest being 'offered' for issue. TD 1999/24 clarifies that the word 'offered' is not limited to meaning 'offer' in the contractual context, but also includes invitations or inducements to potential investors to make offers. It states:

3. For the purposes of the introductory words of paragraphs 128F(3)(a) and 128F(3)(b), 'offered' is not limited to meaning 'offer' in the context of a contractual offer. Rather, the word includes invitations or inducements to potential investors to make offers. For example, the placement of an advertisement that the company wishes to issue debentures, is an attempt to induce offers from potential investors rather than an offer itself (in other words, it is an 'invitation to treat').

4. Therefore, the introductory words are satisfied where the 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/s.

Paragraph 128F(3)(e) of the ITAA 1936 states that the public offer test will be satisfied if the debenture being offered for issue to a dealer, manager or underwriter, who agrees with the company to offer the debenture for sale within 30 days in a way covered by any of paragraph 128F(3)(a) to 128F(3)(d) of the ITAA 1936.

Taxation Determination TD 1999/18 provides that:

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 eligible persons who are not known or suspected to be associates. As pointed out in the explanatory memorandum to Taxation Laws Amendment Act (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.

The Applicant states that the Dealers for the Tranche have agreed that it would offer the Notes for sale within 30 days of the issue of the Notes to at least 10 persons each of whom:

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

b) was not known or suspected, by the company to be an associate of any of the other persons covered by this paragraph.

Accordingly, XYZ can rely on the expectation that the Dealers will have complied with the conditions set out in paragraph 128F(3)(a) of the ITAA 1936. Therefore, the public test in paragraph 128F(3)(a) is satisfied.

Further, under paragraph 128F(3)(d) of the ITAA 1936, the public test is also satisfied if the issue resulted from the debenture being offered for issue as a result of negotiations being initiated publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures.

Relevantly, TD 1999/16 provides that the public offer test in paragraph 128F(3)(d) will be satisfied if the Australian company's offer of debentures or debt interests for issue is quoted on an electronic financial information source such as Reuters financial services or Bloomberg. It further states that the test is met where the negotiation between an investor and the issuing company commenced because the investor became aware of the offer through seeing the marketing documents such as circular, brochure, prospectus, information memorandum or other similar documents prepared in respect of the debenture. The marketing documents must be available for inspection in an electronic information source. It is not necessary for investors to confirm with the issuing company that they acquired the debentures as a result of having seen the publicity initiated by the issuer. The publicity itself, in the manner described above, constitutes satisfaction of this aspect of the public offer test.

It is considered that the public offer test in paragraph 128F(3)(d) of the ITAA 1936 is satisfied as the Dealers will offer the Notes by:

• publishing the Terms of the Notes;

• direct email and telephone communication of the offer to investors who do not use such news media sources; and

• organising and hosting roadshows to potential wholesale investors.

Therefore, the offer of the Notes in the Tranche will satisfy the public offer test outlined in subsection 128F(3) of the ITAA 1936.

Accordingly, the withholding tax exemption under section 128F of the ITAA 1936 will apply to the Notes in the Tranche.