Edited version of your written advice

Authorisation Number: 1012990423726

Date of advice: 31 March 2016

Ruling

Subject: Withholding tax ~~ Interest

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 periods:

A number of income years

The scheme commences on:

During the 2016 income year

Relevant facts and circumstances

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 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 each of the Agreements.

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

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

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

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

9. 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

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

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

12. 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;

• at least 10 of the parties to whom the taxpayer made the invitations to were not, to the knowledge of the taxpayer, an associate of any of the other of those 10 or more parties;

• 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 Agreements 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 Agreements.

Company S

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

Transfer of a lender's rights and obligations

14. Whilst a lender, via a put option, may assign any of its rights or transfer by novation any of its rights and obligations under the Agreements to Company S, such transfer can only occur in specified circumstances.

15. Whilst Company S, via a call option, may require a lender to transfer to Company S by novation all of its rights and obligations under the Agreements to Company S, such transfer can only occur in specified circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128A(1AB)

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

All legislative references below are to the ITAA 1936 unless otherwise stated.

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 will constitute 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

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

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

(a) the company was a resident of Australia when it issued the debenture or debt interest; and

(b) the company is a resident of Australia when the interest is paid; and

(c) for a debt interest other than a debenture - the debt interest:

(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

(ii) for a syndicated loan - the invitation to become a lender under the relevant syndicated loan facility satisfies the public offer test set out in subsection (3A).

Syndicated loan facility

18. For the purposes of subparagraph 128F(1)(c)(iii), a 'syndicated loan' is defined in subsection 128F(9) 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.

19. Subsection 128F(9) also provides that a 'syndicated loan facility' has the meaning given by subsections 128F(11), 128F(12) and 128F(13).

20. 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 have already committed to providing finance under Agreement A. Subsection 128F(13) also does not apply as it applies where there are two or more borrowers. In the present case, the taxpayer is the sole borrower under Agreement A.

21. 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.

22. Subsection 128F(11) 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).

23. 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).

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

24. As stated above, 'syndicated loan' is defined in subsection 128F(9) 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.

25. As explained in the detailed reasoning to Question 1, Agreement A constitutes a syndicated loan facility. As such, each of the loans made pursuant to Agreement A will constitute a syndicated loan as defined in subsection 128F(9).

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

26. Paragraph 128F(1)(d) requires that:

(i) the issue of the debenture or debt interest satisfies the public offer test set out in subsection (3) or (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 (3A).

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

28. Subsection 128F(3A)  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).

29. For the purpose of satisfying subparagraph 128F(3A)(a)(i), the taxpayer is not required to make a detailed examination of the offerees when issuing the invitations. With respect to subparagraph 128F(3A)(a)(ii), 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.

30. The public offer test in subsection 128F(3A) is satisfied on the basis that:

the invitation was made to:

• more than 10 financial institutions carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets at the time the invitation was made; and

• at least 10 of those financial institutions were not known or suspected by the taxpayer to be an associate of any of the other of those 10 institutions.

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

32. The application of subsection 128F(5AA) is considered below in the detailed reasoning 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) of the ITAA 1936 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) of the ITAA 1936 due to the application of subsection 128F(5AA) of the ITAA 1936.

Detailed reasoning

33. An invitation to become a lender under a syndicated loan facility is taken by subsection 128F(5AA) 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.

34. Subject to further tests, the invitation is taken never to have satisfied the public offer test 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

35. An associate entity of a company is defined in paragraph 318(2)(d) 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); …

36. 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 the majority voting interest requirement (subparagraph 318(2)(d)(ii)).

Majority voting interest

37. Pursuant to paragraph 318(6)(c), 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.

38. At the time the invitation was made, Company S held a voting interest of more than 50% in the taxpayer which constituted a majority voting interest.

Associate test - conclusion

39. Therefore, it is considered that Company S holds a majority voting interest in the taxpayer pursuant to paragraph 318(6)(c). Consequently, Company S is an associate of the taxpayer for the purpose of applying paragraph 318(2)(d).

40. 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

41. The wording in subsection 128F(5AA) requires that at the time the invitation is made, the taxpayer knew, or had reasonable grounds to suspect that Company S is or will become a lender under Agreement A (emphasis added).

42. Company S was not invited to become a lender under Agreement A and as such, at the time the invitation was made, the taxpayer knew that Company S was not a lender under Agreement A.

43. Whilst a lender, via a put option, may assign any of its rights or transfer by novation any of its rights and obligations under Agreement A to Company S, such transfer can only occur in specified circumstances.

44. Whilst Company S, via a call option, may require a lender to transfer to Company S by novation all of its rights and obligations under Agreement A to Company S, such transfer can only occur in specified circumstances.

45. Accordingly, 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)

46. Subsection 128F(5AA) does not apply on the basis that at the time the invitation was made, the taxpayer did not know or have reasonable grounds to suspect 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 the Agreement A will not be subject to tax imposed under Division 11A of the ITAA 1936.

Detailed reasoning

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

48. The interest paid by the taxpayer under the Agreement A satisfies the conditions under subsection 128F(1) because:

• the interest paid by the taxpayer is paid in respect of a debt interest;

• at the time the taxpayer issues the debt interest, the taxpayer will be a resident of Australia;

• at the time the interest is paid by the taxpayer, it will be a resident of Australia;

• the debt interest is a syndicated loan; and

• the invitation to become a lender under the relevant syndicated loan facility satisfies the public offer test set out in subsection 128F(3A) and subsection 128F(5AA) does not apply.

49. As the requirements of subsection 128F(1) will be satisfied, subsection 128F(2) will apply such that interest paid by the taxpayer on each loan issued under the Agreement A will not be subject to tax imposed under Division 11A.

Question 6

Will the taxpayer have no obligation to withhold an amount from any interest paid under the 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 the 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

50. 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.

51. Under paragraph 12-300(a) of Schedule 1 to the TAA, an entity is not required to withhold an amount from an interest (within the meaning of Division 11A of Part III) if no withholding tax is payable in respect of the interest.

52. As aforementioned, the interest payable by the taxpayer under the Agreement A satisfies the requirements under subsection 128F(1). Therefore, tax is not payable under Division 11A in respect of the interest pursuant to subsection 128F(2).

53. Accordingly, the taxpayer will have no obligation to withhold an amount from any interest paid under the 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 will constitute 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

54. 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

55. 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

56. 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) of the ITAA 1936 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 otherwise fail the public offer test in subsection 128F(3A) of the ITAA 1936 due to the application of subsection 128F(5AA) of the ITAA 1936.

Detailed reasoning

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

58. Subsection 128F(5AA) does not apply on the basis that at the time the invitation was made, the taxpayer did not suspect or know that Company S is or will become a lender under Agreement B.

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 syndicated loan issued under Agreement B will not be subject to tax imposed under Division 11A of the ITAA 1936.

Detailed reasoning

59. 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

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