Edited version of your written advice

Authorisation Number: 1051323543965

Date of advice: 16 May 2018

Ruling

Subject: Section 128F withholding tax exemption

Question

Will the bonds satisfy the definition of a ‘debenture’ in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question

Will the issue of the bonds satisfy the ‘Public offer test’ in subsection 128F(3) of Division 11A of the ITAA 1936?

Answer

Yes

Question

Will the interest paid by AusCo in respect of the bonds not be subject to tax pursuant to subparagraph 128B(3)(h)(iv) of Division 11A of the ITAA 1936?

Answer

Yes

Question

Will AusCo not be required to withhold an amount from interest paid in respect of the bonds pursuant to section 12-300 of Schedule 1 to the Taxation Administration Act 1953?

Answer

Yes

Relevant facts and circumstances

Background

1. AusCo is an Australia resident company for income tax purposes and the head company of an Australian income tax consolidated group.

2. AusCo is an indirectly wholly owned subsidiary of a foreign enterprise.

3. AusCo approved for issue bonds in order to refinance its existing debt and fund the ongoing maintenance and operation of a number of projects.

4. AusCo’s managers for the funding was a group of financiers (the Managers)

5. The funding was conducted through AusCo agreeing to issue to the Managers, and the Managers agreeing to purchase from AusCo, the bonds, which the Managers in turn offered for sale to other potential unrelated investors.

The Debt Funding Process

6. AusCo and the Managers conducted road shows and presented to potential investors relevant information in respect of AusCo, the projects and the key terms and conditions of the bonds. During the roadshows AusCo and the Managers alerted investors to the requirements of the associate rules for the purposes of the public offer test in the Income Tax Assessment Act 1936 (ITAA 1936).

7. AusCo issued an offering circular electronically to potential investors to enable them to consider the purchase of the bonds and the potential investors submitted their expression of interests via an electronic trading platform used by the financial markets (Trading Platform).

8. The Managers provided AusCo with an order book which contained all persons to whom allocations of the bonds were proposed to be made. AusCo received legal advice about the definition of ‘associates’ under the ITAA 1936. AusCo reviewed the list in light of the advice in order to identify any persons that it knew or suspected to be an associate of AusCo and confirmed their allocation to all but one investor.

9. The investors included subsidiaries of banks and financial institutions.

10. AusCo issued bonds to successful investors and these were listed on a stock exchange.

The statements addressing the requirements of Public Offer Test

11. The agreement used to subscribe for the bonds provides that AusCo, as the Issuer intends that the bonds are to be offered, issued and sold in a manner that is compliant with the Public Offer Test

12. The offering circular provided that:

● All payments will be made by AusCo without any withholding for Australian taxes and if required AusCo will pay indemnity amounts to the bondholders.

● No Indemnity Amount will be payable in respect of any bond to a bondholder that is an associate (as defined in section 128F of the Income Tax Assessment Act 1936) of the Issuer.

● The exemption available under section 128F will not apply if, at the time of issue or an interest payment in respect of a bond, AusCo knew or had reasonable grounds to suspect that the recipient of the payment was an offshore associate of AusCo (other than one receiving the payment in the capacity of a clearing house, paying agent, custodian, funds manager, or responsible entity of a registered scheme). Accordingly, an investor should not acquire the bonds, if the investor is an offshore associate of AusCo.

Assumptions

The Commissioner makes this Ruling subject to the following Assumptions:

1. AusCo will be an Australian resident company at the time of each interest payment in respect of the bonds.

2. At the time AusCo makes each interest payment on the bonds, AusCo will not know nor have reasonable grounds to suspect that the bondholder:

(a) is an associate of AusCo; and

(b) either:

(i) the associate is a non-resident and the interest payment is not received by the associate in respect of a bond that the associate acquired 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 payment is received by the associate in respect of a bond that the associate acquired 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 does not receive the interest payment in the capacity of a clearing house, paying agent, custodian, funds manager or responsible entity of a registered scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 128B(1)

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(5)

Income Tax Assessment Act 1936 subsection 128F(6)

Income Tax Assessment Act 1936 subsection 128F(9)

Taxation Administration Act 1953 Schedule 1 section 12-245

Taxation Administration Act 1953 Schedule 1 section 12-300

Reasons for Decision

All legislative references are to provisions of the Income Tax Assessment Act 1936 unless indicated otherwise.

Question 1

Will the bonds satisfy the definition of a ‘debenture’ in subsection 6(1)?

Summary

The bonds will satisfy the definition of a ‘debenture’ in subsection 6(1).

Detailed reasoning

1. Subsection 6(1) provides that:

… debenture, in relation to a company, includes debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not.

…

2. For the purposes of section 128F, subsection 128F(9) extends the definition of debenture in subsection 6(1) to include promissory notes and bills of exchange.

3. AusCo issued instruments which are described as bonds in the relevant documents including listing approval on which interest is payable by AusCo as Issuer.

4. The Commissioner accepts the bonds are debentures as defined in subsection 6(1).

Question 2

Will the issue of the bonds satisfy the ‘Public offer test’ in subsection 128F(3) of Division 11A?

Summary

The issue of the bonds will satisfy the ‘Public offer test’ in subsection 128F(3) of Division 11A.

Detailed reasoning

1. Subsection 128F(3) provides that the issue of a debenture by a company satisfies the public offer test if the issue resulted from the debenture 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 any way covered by any of paragraphs (a) to (d).

2. AusCo conducted the bonds offer as follows:

● the bonds were issued to the Managers and each Manager agreed, severally and not jointly, to purchase from the Issuer and in turn offered the bonds for sale to other potential unrelated investors.

● the offering circular was issued to potential investors via Trading Platform

● expressions of interest were submitted by potential investors via Trading Platform and

● the Managers used Trading Platform to confirm the pricing of the bonds.

Therefore, the relevant public offer test is paragraph 128F(3)(e) (the fifth public offer test) read with paragraph 128F(3)(d) (the fourth public offer test).

The Fifth Public Offer Test

3. Meaning of ‘offered the debenture or debt interest for sale within 30 days’

The Commissioner’s view on the fifth public offer test is set out in 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'? (TD 1999/18). Paragraphs 1 and 2 of TD 1999/18 state that the fifth public offer test enables a company to issue debentures to a dealer, manager or underwriter who agrees with the company to offer the debentures for sale, or procure subscription for the debentures, within 30 days in a way covered by any of paragraphs (a) to (d) of subsection 128F(3). The 30 day period specified in paragraph 128F(3)(e) is taken to commence from the day on which the dealer, manager or underwriter has an unconditional obligation to offer the debentures for sale, under the agreement contemplated in that paragraph.

4. Paragraph 4 of TD 1999/18 further clarifies that if dealers, managers or underwriters subscribe for the debentures on their own behalf and not on the basis they are to be on sold in accordance with paragraph 128F(3)(e), the public offer test is satisfied if the debentures are offered for issue by the company in accordance with any of paragraphs (a) to (d) of subsection 128F(3). In such a case, the debentures are not required to be offered for issue in accordance with paragraph 128F(3)(e).

5. The bonds were issued within 30 days from the day when the Managers had an unconditional obligation to offer the debentures for resale in accordance with the paragraph 128F(3)(e).

6. The bonds that were subscribed for by the Managers and their affiliates also satisfy the fourth public offer test in paragraph 128F(3)(d) as discussed below.

The Fourth Public Offer Test

7. Meaning of ‘as a result of negotiations being initiated publicly in electronic form’

The Commissioner’s view on the fourth public offer test is set out in Taxation Determination TD 1999/16 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - does the public offer test in paragraph 128F(3)(d) require a company to demonstrate that negotiations in respect of a particular debenture actually resulted from negotiations being initiated publicly in electronic form? (TD 1999/16). Paragraph 2 of TD 1999/16 sets out that the public offer test in paragraph 128F(3)(d) is satisfied if the offer of debentures for issue is quoted on an electronic financial information source such as Bloomberg. Paragraph 3 of TD 1999/16 further adds that the fourth public offer test is met where negotiations between an investor and the issuing company commenced because the investor became aware of the company’s intention to raise funds as a result of seeing an offering circular on an electronic information source. Paragraph 5 of TD 1999/16 clarifies that it is not necessary for investors to confirm with the issuing company that they acquired the debentures as a result of the electronic information source used by the issuer. The use of the source in itself, in the manner described above, satisfies this aspect of the public offer test.

8. Meaning of ‘ offered for issue’

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? (TD 1999/24) considers the phrase ‘offered for issue’ in subsection 128F(3). Paragraphs 3 and 4 of TD 1999/24 set out that the word ‘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. The introductory words of paragraphs 128F(3)(a) and (b) are satisfied where the debentures are advertised for issue or other invitations and inducements are made in accordance with the respective public offer test. Paragraph 2 of TD 1999/16 applies the same interpretation to ‘offer’ to the fourth public offer test.

9. The bonds satisfy the fourth public offer test in paragraph 128F(3)(d) on the basis that:

(a) all communications to potential investors in respect of the offer were issued via Trading Platform,

(b) the offering circular were issued electronically to potential investors via Trading Platform,

(c) the offering circulars were provided to prospective investors to enable them to consider purchasing the bonds, and

(d) potential investors submitted expressions of interest through Trading Platform.

10. However in satisfying the requirements of subsection 128F(3), it is also necessary to consider subsection 128F(5), which specifies when the issue of debentures or debt interests does not satisfy the public offer test. Broadly, the offer of debentures is taken never to have satisfied the public offer test if, at the time of the offer, the company knew, or had reasonable grounds to suspect, that the debenture was being, or would be, acquired by an associate of the company.

11. The Commissioner’s view in relation to when a company is taken to have the ‘requisite knowledge or suspicion’ for the purposes of subsection 128F(5) is set out in Taxation Determination TD 2001/3 Income tax: Interest Withholding Tax Exemption - for the purposes of subsection 128F(5) of the Income Tax Assessment Act 1936, when will a company be taken to have the requisite knowledge or suspicion that the debenture or an interest in the debenture was being, or would later be, acquired by an associate? (TD 2001/3) Paragraph 4 of TD 2001/3 sets out that a company will not be taken to have the requisite knowledge or suspicion if the company takes reasonable steps to ensure that its associates do not acquire its debentures. While every case has to be judged on its merits, one such reasonable step is for the prospectus to contain a statement advising that the purchase of the debenture by associates could result in the entire issue failing the public offer test. A further step could be for the issuer to instruct its manager, dealer or underwriter not to sell debentures to the issuer's associates.

12. AusCo undertook the steps listed in paragraphs 6,8,11 and 12 of the Relevant facts and circumstances.

13. The Commissioner accepts that AusCo did not know, or have reasonable grounds to suspect, that any of the lenders who subscribed for the bonds are associates of AusCo for the purposes of the ITAA 1936. Therefore, subsection 128F(5) does not apply and the issue of the bonds satisfies the public offer test in paragraph 128F(3)(d).

Question 3

Will the interest paid by AusCo in respect of the bonds not be subject to tax pursuant to subparagraph 128B(3)(h)(iv) of Division 11A?

Summary

The interest paid by AusCo in respect of the bonds will not be subject to tax pursuant to subparagraph 128B(3)(h)(iv) of Division 11A.

Detailed reasoning

1. Section 128B generally imposes withholding tax liability on the payment of interest by Australian residents to non-residents. Subsection 128B(3) lists certain types of income to which liability to withholding tax under section 128B does not apply. Subparagraph 128B(3)(h)(iv) provides an exclusion from withholding tax in Division 11A for interest income to which section 128F applies.

2. Subsection 128F(1) states that section 128F applies to interest paid by a company in respect of a debenture or debt interest in the company if:

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

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

…

(d) …:

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

…

3. The requirements of subsection 128F(1) are satisfied on the basis that:

● AusCo was a resident of Australia at the time when the bonds were issued

● As per the Assumptions on which the Commissioner makes the Private Ruling, AusCo will be an Australian resident company at each time it makes an interest payment in respect of the bonds, and

● as discussed in the Detailed Reasoning for Question 2 above, the issue of the bonds satisfies the public offer test in paragraph 128F(3).

4. In determining whether section 128F applies to interest payments in respect of the bonds, it is also necessary to consider subsection 128F(6). This subsection provides that section 128F does not apply to interest paid by the company to a person in respect of the debenture or debt interest if, at the time of the payment, the company knows, or has reasonable grounds to suspect, that:

(a) the person is an associate of the company; and

(b) either:

(i) the associate is a non-resident and the payment is not received by the associate in respect of a debenture or debt interest that the associate acquired 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 payment is received by the associate in respect of a debenture or debt interest that the associate acquired 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 does not receive the payment in the capacity of a clearing house, paying agent, custodian, funds manager or responsible entity of a registered scheme.

5. Subsection 128F(6) is an ongoing test. In order for the test to be satisfied, AusCo must ensure that it meets the requirements in subsection 128F(6) each time it makes an interest payment to its bondholders.

6. This Ruling is provided on the basis of the Assumptions that at the time of each interest payment, AusCo will neither know nor have reasonable grounds to suspect that any of the bondholders is an associate of AusCo as prescribed in subsection 128F(6).

7. As section 128F applies to interest payable by AusCo in respect of the bonds, there is no tax payable under Division 11A pursuant to subsection 128F(2). Therefore, pursuant to subparagraph 128B(3)(h)(iv), interest payable on the bonds will not be subject to any withholding tax liability.

Question 4

Will AusCo not be required to withhold an amount from interest paid in respect of the bonds pursuant to section 12-300 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Summary

AusCo will not have an obligation to withhold an amount from any interest paid in respect of the bonds under paragraph 12-300(a) of Schedule 1 to the TAA 1953 because section 128F applies to the interest.

Detailed reasoning

1. Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity is required to withhold an amount from certain payments of interest. The section contains a note referring to section 12-300 of Schedule 1 to the TAA 1953 which limits the amount to be withheld in respect of dividend, interest and royalty payments covered by Subdivision 12-F of Schedule 1 to the TAA 1953.

2. Under paragraph 12-300(a) of Schedule 1 to the TAA 1953, an entity is not required to withhold an amount from interest (within the meaning of Division 11A of Part III of Schedule 1 to the TAA 1953) if no withholding tax is payable in respect of the interest.

3. As set out in the Detailed reasoning for Question 3 above, section 128F applies to the interest payable by AusCo in respect of the bonds. Therefore, pursuant to subsection 128F(2) and subparagraph 128B(3)(h)(iv), no withholding tax is payable under section 128B in respect of interest.

4. Accordingly, AusCo will not have an obligation to withhold an amount from any interest paid in respect of the bonds under section 12-300 of Schedule 1 to the TAA 1953 due to the operation of paragraph 12-300(a) of Schedule 1 to the TAA 1953.