Edited version of your written advice

Authorisation Number: 1051435865681

Date of advice: 3 October 2018

Ruling

Subject: Application of OBU provisions to the full or partial transfer of rights and obligations as lender under an undrawn or partially drawn-down loan facility

Question 1

Was each prior transfer fee paid by the Bank an ‘exclusive OB deduction’ of the Bank as defined in subsection 121EF(3) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will any assessable income realised by the Bank under a future transfer, calculated taking into account the transfer proceeds and any future transfer fee paid or received, constitute ‘assessable OB income’ of the Bank as defined in subsection 121EE(2) of the ITAA 1936?

Answer

Yes

Question 3

Will any deductible amount realised by the Bank under a future transfer, calculated taking into account the transfer proceeds and any future transfer fee paid or received, constitute an ‘exclusive OB deduction’ of the Bank as defined in subsection 121EF(3) of the ITAA 1936?

Answer

Yes

Question 4

Will the transfer proceeds received by the Bank from a New Lender under a future transfer constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936?

Answer

No

Question 5

Will a future transfer fee received by the Bank from a New Lender under a future transfer constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936?

Answer

No

This ruling applies for the following period:

The beginning of the xx income year to the end of the xx income year

The scheme commences on:

xx/xx/xxxx

Relevant facts and circumstances

1. The Bank is an Australian financial institution that has been declared to be an OBU.

2. The Bank entered into a Facility Agreement and has made a commitment to lend up to US$y (original commitment) to offshore persons, Foreign Co 1 and Foreign Co 2 (the Borrowers).

3. The Bank has booked its rights/obligations under the facility in the OBU as an eligible lending activity under paragraph 121D(2)(b) of the ITAA 1936.

4. The Borrowers are not related to the Bank.

5. The Borrowers are required to pay:

a) accrued interest on advances made under the Facility Agreement on the last day of each interest period, and

b) a commitment fee of z% per annum of a lender’s available commitment periodically from the date of the Facility Agreement.

Managing credit risk exposure

6. The Bank actively manages its credit exposure, market and liquidity risks as part of operating its lending business. In managing the credit exposure risks of its business, the Bank sets and monitors its credit exposure limits and, where required, it will reduce its credit exposure by transferring existing loans and lending commitments to third parties.

7. The Facility Agreement enables an existing lender to assign any of its rights, or transfer by novation any of its rights or obligations, to another party.

8. The Facility Agreement does not stipulate the payment of any fee to/from the New Lender from/to the existing lender in the event of a transfer.

Prior transfers

9. The Bank has made partial transfers of its (undrawn) original commitment under the Facility Agreement (the prior transfers) to offshore persons, Foreign Bank 1 and Foreign Bank 2.

10. The Bank paid one-off transfer fees (the prior transfer fees) to each of the transferees.

11. The prior transfers were undertaken in order to free up credit exposure limits in relation to the Bank’s overall exposure to the Borrowers and thereby facilitate future lending to the Borrowers.

Possible future transfers

12. The Bank expects that its exposure limits will require a further partial or full transfer of its (undrawn and drawn) original commitment under the Facility Agreement (each a future transfer) to one or more offshore persons (each a New Lender).

13. The future transfer(s) are expected to occur in order to free up credit exposure limits in relation to the Bank’s overall exposure to the Borrowers and thereby allow future deals with the Borrowers to be originated. Both drawn and any undrawn components would be transferred to a New Lender.

14. Where future transfers occur after draw-downs on the facility, the Bank would be expected to receive a payment from a New Lender for the transfer (transfer proceeds). Transfer proceeds relate to the Bank’s share of the drawn-down amount and, potentially, accrued interest (subject to the respective parties’ rights to accrued interest on a transfer under the Facility Agreement).

15. A one-off transfer fee (future transfer fee) may also be payable either by the Bank to a New Lender, or by a New Lender to the Bank, in connection with a future transfer.

16. The Bank expects that the only possible material gain on a future transfer will be a gain under the balancing adjustment rules in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997). Whether a gain will arise will depend on the quanta of the transfer proceeds (and any future transfer fee payable/receivable), as well as foreign currency exchange rate movements, given that the facility is USD-denominated and will have already been partially drawn down.

17. Alternatively, it is possible that the Bank will realise a loss in respect of a future transfer under the balancing adjustment rules in Division 230 of the ITAA 1997. Whether a loss will arise will depend on the quanta of the transfer proceeds (and any future transfer fee payable/receivable) and foreign exchange movements.

Assumptions

18. The Bank’s activities with respect to the facility, including providing the original commitment, activities in connection with prior transfers and any future transfers, and making loans under the facility, satisfy the ‘OBU requirement’ in paragraph 121EA(a) of the ITAA 1936.

19. None of the money used or to be used by the Bank (i.e. money used to fund the provision of advances to the Borrowers and the prior/future transfer fees paid by the Bank) is or will be ‘non-OB money’ of the Bank as defined in section 121C of the ITAA 1936.

20. The interest income and commitment fees earned by the Bank under the Facility Agreement constitute ‘assessable OB income’ of the Bank as defined in subsection 121EE(2) of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 121C

Income Tax Assessment Act 1936 paragraph 121D(2)(b)

Income Tax Assessment Act 1936 subsection 121E

Income Tax Assessment Act 1936 subsection 121EA

Income Tax Assessment Act 1936 subsection 121EDA

Income Tax Assessment Act 1936 subsection 121EE(2)

Income Tax Assessment Act 1936 subsection 121EF(3)

Income Tax Assessment Act 1936 subsection 121EF(7)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 subsection 230-15(2)

Income Tax Assessment Act 1997 subsection 230-20(4)

Income Tax Assessment Act 1997 subsection 230-30(3)

Income Tax Assessment Act 1997 section 230-35

Income Tax Assessment Act 1997 Subdivision 230-G

Income Tax Assessment Act 1997 subparagraph 230-435(1)(c)(i)

Income Tax Assessment Act 1997 section 230-445.

Does Part IVA apply to this ruling?

We have not considered the application of Part IVA of the ITAA 1936 to the scheme that is the subject of this ruling, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decision

Question 1

Was each Prior Transfer Fee paid by the Bank an ‘exclusive OB deduction’ of the Bank as defined in subsection 121EF(3) of the ITAA 1936?

Answer

Yes.

Detailed reasoning

21. Subsection 121EF(3) of the ITAA 1936 defines ‘exclusive OB deduction’ as follows:

An exclusive OB deduction is any deduction (other than a loss deduction) allowable from the OBU's assessable income of the year of income that relates exclusively to assessable OB income.

22. A ‘loss deduction’ is defined in subsection 121EF(7) of the ITAA 1936 as any allowable deduction under Division 36 of the ITAA 1997, which deals with tax losses of earlier income years. The prior transfer fees incurred by the Bank will not be 'loss deductions' as defined in subsection 121EF(7).

23. Accordingly, the prior transfer fees paid will be 'exclusive OB deductions' if they:

a) are deductible from the OBU's assessable income, and

b) relate exclusively to assessable OB income.

Are the prior transfer fees deductible from the OBU's assessable income?

24. Subparagraph 230-435(1)(c)(i) of the ITAA 1997 provides that a balancing adjustment is made under Subdivision 230-G of the ITAA 1997 if a proportionate share of all of an entity’s rights and/or obligations under a financial arrangement are transferred to another entity. As the Bank made partial transfers of its (undrawn) original commitment under the Facility Agreement, the requirements of subparagraph 230-435(1)(c)(i) were satisfied.

25. In the present case, the prior transfer fees were the only relevant component for the purposes of the balancing adjustment calculation under subsections 230-445(1) and (2) of the ITAA 1997. As such, each of the prior transfer fees was taken, as a balancing adjustment, to be a loss that NAB made from the financial arrangement.

26. Under subsection 230-15(2) of the ITAA 1997, the prior transfer fees will be deductible to the extent that they are (a) made in gaining or producing the Bank’s assessable income; or (b) necessarily made in carrying on a business for the purpose of gaining or producing the Bank’s assessable income. In assessing whether these conditions are met, it is necessary to have regard to the interpretation of section 8-1 of the ITAA 1997, on which subsection 230-15(2) is based.

27. Taxation Ruling TR 2006/2 sets out some general principles relating to the application of section 8-1 of the ITAA 1997. Generally, it provides that the characterisation of particular expenditure is by its nature a question of fact involving an enquiry about what the expenditure was for and what it was intended to achieve in relation to the taxpayer's income earning activities or business from a practical and business point of view. The expenditure must be incurred in circumstances where it is conducive to the gaining or producing of assessable income or to the carrying on of a business by the taxpayer. In other words, the expenditure mist be 'incidental and relevant' to the gaining of the income or reasonably capable of being seen as 'desirable or appropriate' in the pursuit of the business ends of the business.

Paragraph 230-15(2)(a) of the ITAA 1997

28. The interpretation of paragraph 230-15(2)(a) of the ITAA 1997 is informed by the interpretation of paragraph 8-1(1)(a) of the ITAA 1997, which allows a loss or outgoing to be deducted to the extent that it is ‘incurred in gaining or producing’ assessable income.

29. The High Court stated in Ronpibon Tin No Liability v. Federal Commissioner of Taxation; Tongkah Compound No Liability v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; 8 ATD 431 (Ronpibon) that for expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end. The words ‘incurred in gaining or producing the assessable income’ mean in the course of gaining or producing such income. It is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.

30. In Federal Commissioner of Taxation v. Day (2008) 236 CLR 163; [2008] HCA 53; 70 ATR 14; 2008 ATC 20-064, the majority of the High Court noted that the words ‘in the course of’ do not require a direct connection between the expenditure in question and an activity itself productive of income. Relevantly, the majority reiterated that it is not appropriate to take a narrow view of the activities that are productive of a taxpayer’s income.

31. Subsequently, it was held by the majority of the High Court in Federal Commissioner of Taxation v. Anstis (2010) 241 CLR 443; [2010] HCA 40; 76 ATR 735; 2010 ATC 20-221 that the notion of ‘gaining or producing’ income within the meaning of paragraph 8-1(1)(a) of the ITAA 1997 is wider than those activities which may be said to earn income.

32. In the present case, the Bank produces assessable income in the form of:

● interest payments on the funds advanced to the Borrowers under the Facility Agreement, and

● commitment fees in relation to the commitments to lend under the Facility Agreement.

33. As part of these activities, the Bank continuously manages credit risk by adhering to lending exposure limits.

34. The Bank’s income producing activities of lending money and making commitments to lend under the Facility Agreement occasioned the prior transfers and the outgoings that were the prior transfer fees.

35. From a practical and business point of view, the partial transfers of the original commitment were undertaken as part of the Bank’s lending business to free up credit exposure limits in relation to its overall exposure to the Borrowers and to facilitate future lending activities to the Borrowers. Notably, the prior transfers were undertaken in accordance with the terms of the Facility Agreement.

36. Though the prior transfers (and associated costs) were not, of themselves, productive of interest income or commitment fees under the Facility Agreement, they could facilitate the production of such income from future lending activities to the Borrowers. The prior transfer fees are therefore conducive to the production of that (expected) assessable income in the sense that they are incidental and relevant to the gaining of that income.

37. Accordingly, losses in the form of the prior transfer fees were made in gaining or producing the Bank’s assessable income in the form of interest income and commitment fees, and are deductions allowable from the Bank’s assessable income under paragraph 230-15(2)(a) of the ITAA 1997.

Paragraph 230-15(2)(b) of the ITAA 1997

38. As the prior transfer fees are deductible under paragraph 230-15(2)(a) of the ITAA 1997, it is not necessary to address paragraph 230-15(2)(b) of the ITAA 1997. For completeness, however, this provision was briefly considered.

39. The interpretation of paragraph 230-15(2)(b) of the ITAA 1997 is informed by the interpretation of paragraph 8-1(1)(b) of the ITAA 1997. Taxation Ruling TR 2004/2 provides that for an outgoing to be deductible under paragraph 8-1(1)(b), it must have the ‘character of a working or operating expense of the entity's business or be an essential part of the cost of its business operations’.

40. In Ronpibon, the High Court considered that the word ‘necessarily’ means no more than ‘clearly appropriate or adapted for’. This was later confirmed in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation [1980] FCA 150; (1980) 11 ATR 276; 80 ATC 4542, which provided that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income.

41. As part of its lending business, the Bank manages credit risk by adhering to lending exposure limits. In the course of this lending business, the prior transfers were executed in accordance with the terms of the Facility Agreement for the purpose of freeing up credit exposure limits relating to the Bank’s overall exposure to the Borrowers, thereby facilitating future lending to the Borrowers.

42. In this sense, the prior transfer fees were an essential part of the cost of the Bank’s lending business operations and were desirable, clearly appropriate and adapted for the pursuit of the business ends, which includes earning interest and commitment fees from lending and making commitments to lend.

43. Accordingly, losses in the form of the prior transfer fees were necessarily made in carrying on a business for the purpose of gaining or producing the Bank’s assessable income. As such, the prior transfer fees are deductible from the Bank’s assessable income under paragraph 230-15(2)(b) of the ITAA 1997.

Exceptions to deductibility - subsection 230-30(3) and section 230-35 of the ITAA 1997

44. By virtue of subsection 230-30(3) and section 230-35 of the ITAA 1997, a loss from a financial arrangement will not be deductible if it is made in gaining or producing exempt income or non-assessable non-exempt income, or if it is a loss from certain financial arrangements that have a private or domestic purpose. Neither provision is applicable in this case.

Do the prior transfer fees relate exclusively to assessable OB income?

45. Assuming that the interest income and commitment fees earned by the Bank under the Facility Agreement constitute ‘assessable OB income’ of the Bank, the deductions for the prior transfer fees relate exclusively to assessable OB income.

46. As such, each prior transfer fee paid by the Bank was an exclusive OB deduction of the Bank as defined in subsection 121EF(3) of the ITAA 1936.

Question 2

Will any assessable income realised by the Bank under a future transfer, calculated taking into account the transfer proceeds and any future transfer fee paid or received, constitute ‘assessable OB income’ of the Bank as defined in subsection 121EE(2) of the ITAA 1936?

Answer

Yes.

Detailed reasoning

47. ‘Assessable OB income’ is defined in subsection 121EE(2) of the ITAA 1936 as ‘so much of the OBU’s OB income of the year of income as is assessable income’.

48. The meaning of ‘OB income’ is set out in section 121EDA of the ITAA 1936, the relevant parts of which are reproduced below:

OB income

(1) Subject to subsections (2) to (5), the OB income of an OBU of a year of income is so much of the OBU’s ordinary income and statutory income of the year of income as is:

(a) derived from OB activities of the OBU or the part of the OBU to which paragraph 121EB(1)(c) applies; or

(b) included in the statutory income because of such activities.

(2) Subsection (1) does not apply to amounts included under Part 3-1 of the Income Tax Assessment Act 1997 (about capital gains).

(3) Subsection (1) does not apply to the extent that the money lent, invested or otherwise used in carrying on the OB activities is non-OB money of the OBU.

(4) A typical example of an amount covered by the exception in subsection (3) is interest derived from the OB activity of lending money to an offshore person, where the money lent is non-OB money.

49. In determining whether or not an amount is ‘OB income’ it is first necessary to identify whether the amount is ordinary income or statutory income of the OBU. It is then necessary to consider whether that amount has been ‘derived from’ OB activities or whether it is included in statutory income ‘because of’ such activities.

50. In the present case, the only possible material gain expected on a future transfer will be a gain under the balancing adjustment rules in Division 230 of the ITAA 1997. The gain would be attributable to foreign exchange movements in relation to the drawn-down USD-denominated loan.

51. Per section 6-10 of the ITAA 1997, ‘statutory income’ is income that is not ordinary income but is included in assessable income by provisions about assessable income. Any gain made on a future transfer would be statutory income as it would be included in the Bank’s assessable income under the provisions in Division 230 of the ITAA 1997.

52. In accordance with paragraphs 121EDA(1)(a) and (b) of the ITAA 1936, for statutory income to be ‘OB income’, it must either be ‘derived from’ the Bank’s OB activities or included in statutory income ‘because of’ the Bank’s OB activities.

Is the statutory income ‘derived from’ the Bank’s OB activities?

53. In Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246, [1927] HCA 49, 1 ALJ 287 Isaacs ACJ at CLR 261 made the following statements in relation to ‘derived’:

‘Derived’ only means ‘obtained’ or ‘got’ or ‘acquired.’ All income is derived from something and by someone.

54. In determining whether income has been derived from a particular activity, it is helpful to have regard to the decision in Kidston Goldmines Ltd v. FC of T (1991) 30 FCR 77; (1991) 22 ATR 168; (1991) 91 ATC 4538, where Hill J determined the issue of derivation based on whether there was a ‘sufficiently proximate relationship’ between the income and the relevant business activity. His Honour noted that the establishment of the necessary proximity is a question of ‘fact and degree’ and noted that the income producing activity must be sufficiently proximate to the relevant business activity so that it can be said that the activity is an incident of the relevant business activity.

55. Inherent in the ordinary meaning of the word ‘derived’, and its use in tax legislation, is the obtainment of a thing, or receipt of a thing, by a person. The phrase ‘derived from OB activities’ used in paragraph 121EDA(1)(a) of the ITAA 1936 can therefore be read as requiring that a thing (i.e. ordinary or statutory income) has been obtained from an OB activity. Another way of phrasing this principle is that, for the statutory income in question to be ‘derived from’ OB activities, it must be sourced from OB activities.

56. While statutory income may include receipts that are capable of being derived (obtained or sourced) from the relevant OB activities, various other amounts included in assessable income as statutory income will be a result of the mechanics of the tax law. This category of amounts may be described as mere constructs of the tax law. Arguably, such a notional amount either has no source, or if an examination must be made to identify a source, it will ultimately be found in the operative provisions of the legislation itself.

57. Any future transfer of rights and obligations in respect of the facility may result in a balancing adjustment under section 230-445 of the ITAA 1997. A deemed gain arising under Step 3 of the method statement in subsection 230-445(1) is a notional amount with a source that is found in the operative provisions of the legislation. While this amount is included in statutory income, and therefore assessable to a taxpayer, it is not an amount that has been obtained from, or sourced in, the OB activities, within the ordinary meaning and usage of the phrase ‘derived from’.

58. A deemed gain included in assessable income as a result of section 230-445 of the ITAA 1997 is therefore not OB income under paragraph 121EDA(1)(a) of the ITAA 1936.

Is the statutory income included in statutory income ‘because of’ the Bank’s OB activities?

59. The term ‘because of’ is not defined for the purpose of section 121EDA of the ITAA 1936 or for any other purpose in the ITAA 1936 or ITAA 1997. It will therefore take its ordinary meaning in the context in which it occurs.

60. The Oxford Dictionary defines the phrase ‘because of’ to mean ‘on account of; by reason of’. The ordinary meaning of the phrase indicates that it is concerned with a causal relation between things, in contrast to the phrase ‘derived from’, which is directed at the source of a thing.

61. The meaning of the phrase ‘because of’, and the causal relation required by that phrase, has been considered in other legislative contexts. In Human Rights and Equal Opportunity Commission v. Mount Isa Mines Ltd and Others (1993) 46 FCR 301; (1993) 118 ALR 80; (1993) 51 IR 364, Lockhart J at FCR 321-322 considered that the phrase ‘by reason of’:

…should be interpreted as meaning “because of’’, “due to’’, “based on’’ or words of similar import which bring something about or cause it to occur. The phrase implies a relationship of cause and effect…[Emphasis added]

62. Lockhart J went on to say at FCR 326:

I am not attracted by the proposition…that the correct test involves simply asking the question what would the position have been but for the sex (or marital status) of the complainant. The “but for’’ test may be a useful practical guide in many cases; but…[i]t is a test to be handled with care as its beguiling simplicity masks the real inquiry that must be conducted.

63. Hence the case law supports the view that the phrase ‘because of’ requires a causal connection between the subject matter, but that it is not sufficient that this connection be established by undertaking a simple ‘but for’ inquiry.

64. In the statutory context under consideration, the preposition ‘because of’ requires a causal relation between the subject matters of an amount of statutory income and an OB activity. Arguably, this relation will be satisfied where the thing undertaken that is the immediate cause of the statutory income is itself an OB activity, including an activity that appertains, or is incidental and sufficiently proximate to, the undertaking of the OB activity.

65. The transfer of Bank’s rights and obligations in respect of the facility is provided for under the Facility Agreement. Furthermore, the future transfer will be carried out in order to free up credit exposure limits in relation to the Bank’s overall exposure to the Borrowers and to facilitate future lending to the Borrowers. In these circumstances, the future transfer would not constitute a separate activity for the Bank. The future partial or full transfer of undrawn and drawn-down loans under the Facility Agreement can be said to be an incident of lending money to the offshore persons, and making commitments to lend to those persons, under the Facility Agreement, in that it is a thing that happens as a result of those activities.

66. The transfer of the Bank’s rights and obligations in respect of the facility would be the immediate cause of the balancing adjustment under Division 230 of the ITAA 1997. There is a direct causal connection between the transfer, and hence the OB activity of which it is an incident, and the relevant statutory income. As such, any gain resulting from the balancing adjustment can be said to have been included in the Bank’s statutory income ‘because of’ an OB activity for the purposes of paragraph 121EDA(1)(b) of the ITAA 1936.

Do subsections 121EDA(2) or 121EDA(3) of the ITAA 1936 apply?

67. Subsection 121EDA(2) of the ITAA 1936 provides that income of an OBU that would otherwise qualify as ‘OB income’ under 121EDA(1) of the ITAA 1936 is specifically excluded from so qualifying if it is included in the OBU's assessable income under the capital gains tax provisions.

68. Subsection 230-20(4) of the ITAA 1997 is an anti-overlap provision which provides that a gain or loss that is included in assessable income or allowable as a deduction under Division 230 of the ITAA 1997 is not to be included in assessable income or allowable as a deduction under any other provision of the ITAA 1936 or ITAA 1997 outside of Division 230. As the gain in question is a gain under the balancing adjustment rules in Division 230, it is not included in the Bank’s assessable income under Part 3-1 of the ITAA 1997. As such, subsection 121EDA(2) of the ITAA 1936 does not apply.

69. Subsection 121EDA(3) of the ITAA 1936 provides that income of an OBU that would otherwise qualify as ‘OB income’ under subsection 121EDA(1) of the ITAA 1936 is specifically excluded from so qualifying to the extent that the money lent, invested or otherwise used in carrying on the OB activities is non-OB money of the OBU.

70. As this ruling is made on the basis that none of the money used or to be used by the Bank in relation to the facility (i.e. money used to fund the provision of advances to the Borrowers and the prior/future transfer fees paid by the Bank) is or will be ‘non-OB money’ of the Bank as defined in section 121C of the ITAA 1936, subsection 121EDA(3) of the ITAA 1936 does not apply.

Is the OB income ‘assessable OB income’?

71. Per subsection 121EE(2) of the ITAA 1936, ‘assessable OB income’ is so much of the OBU’s OB income of the year of income as is assessable income.

72. As concluded above, any gain made on a future transfer would be statutory income, being income that is included in the Bank’s assessable income under the provisions in Division 230 of the ITAA 1997. Statutory income is one type of assessable income per section 6-10 of the ITAA 1997. Accordingly, such a gain constitutes ‘assessable OB income’ of the Bank under subsection 121EE(2) of the ITAA 1936.

Question 3

Will any deductible amount realised by the Bank under a future transfer, calculated taking into account the transfer proceeds and any future transfer fee paid or received, constitute an ‘exclusive OB deduction’ of the Bank as defined in subsection 121EF(3) of the ITAA 1936?

Answer

Yes.

Detailed reasoning

73. As stated at question 1 of this ruling, subsection 121EF(3) of the ITAA 1936 defines an ‘exclusive OB deduction’ as any deduction (other than a loss deduction) allowable from the OBU's assessable income that relates exclusively to assessable OB income.

74. In the present case, it is possible that the Bank will realise a loss in respect of a future transfer under the balancing adjustment rules in Division 230 of the ITAA 1997. Whether a loss will arise will depend on the quanta of the transfer proceeds (and any future transfer fee payable/receivable) and foreign exchange movements.

75. As the amount in question is a balancing adjustment under Division 230 of the ITAA 1997, it is deductible from the Bank’s assessable income under subsection 230-15(2) of the ITAA 1997 to the extent that the loss is (a) made in gaining or producing the Bank’s assessable income; or (b) necessarily made in carrying on a business for the purpose of gaining or producing the Bank’s assessable income.

76. As per the reasoning discussed above, any loss realised on a future transfer would be made in gaining or producing the Bank’s assessable income in the form of interest income and commitment fees. As such, the loss is deductible from the Bank’s assessable income under paragraph 230-15(2)(a) of the ITAA 1997.

77. As per the reasoning discussed above, such a loss will also be necessarily made in carrying on a business for the purpose of gaining or producing the Bank’s assessable income and will be deductible from the Bank’s assessable income under paragraph 230-15(2)(b) of the ITAA 1997.

78. The deductible loss is not a prior year tax loss, therefore is not a ‘loss deduction’ under subsection 121EF(7) of the ITAA 1936.

79. Based on the assumption that the interest income and commitment fees earned by the Bank under the Facility Agreement constitute ‘assessable OB income’ of the Bank, the deductible loss in respect of a future transfer will relate exclusively to the Bank’s assessable OB income.

80. Accordingly, any deductible amount realised by the Bank under a future transfer will constitute an ‘exclusive OB deduction’ of the Bank as defined in subsection 121EF(3) of the ITAA 1936.

Question 4

Will the transfer proceeds received by the Bank from a New Lender under a future transfer constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936?

Answer

No.

Detailed reasoning

81. ‘Non-OB money’ is defined in section 121C of the ITAA 1936 as:

…money of the OBU other than:

(a) money received by the OBU in carrying on an OB activity; or

(b) OBU resident-owner money of the OBU; or

(c) money paid to the OBU by a non-resident (other than in carrying on business in Australia at or through a permanent establishment of the non-resident) by way of subscription for, or a call on, shares in the OBU.

(an example of non-OB money being money borrowed from a resident whose lending of the money does not occur in carrying on business in a country outside Australia at or through a permanent establishment of the resident).

82. When considering the first exclusion contained in paragraph (a) of the definition of non-OB money, it is necessary to determine whether the transfer proceeds from a future transfer are received by the Bank ‘in carrying on’ an OB activity. The words ‘in carrying on’ indicate that the receipt of the transfer proceeds and the OB activity must be sufficiently connected and concurrent.

83. As per the reasoning in question 2 of this ruling, a future transfer can be said to be an incident of lending money to the offshore persons, and making commitments to lend to those persons, under the Facility Agreement. Accordingly, the receipt of the transfer proceeds as a result of a future transfer occurring can be seen to be sufficiently connected to, and concurrent with, the OB activities of lending money and making commitments to lend under the Facility Agreement.

84. As such, the transfer proceeds constitute money received by the Bank ‘in carrying on’ those OB activities. The transfer proceeds received by the Bank from an offshore New Lender under a future transfer therefore fall within the first exclusion in paragraph (a) of the definition of ‘non-OB money’ and will not constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936.

Question 5

Will a future transfer fee received by the Bank from a New Lender under a future transfer constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936?

Answer

No.

Detailed reasoning

85. Similar to the reasoning above, any future transfer fee will constitute money received by the Bank ‘in carrying on’ the OB activities of lending money and making commitments to lend. A future transfer fee received by the Bank from an offshore New Lender under a future transfer therefore falls within the first exclusion in paragraph (a) of the definition of ‘non-OB money’ and will not constitute ‘non-OB money’ as defined in section 121C of the ITAA 1936.