Edited version of your written advice

Authorisation Number: 1051441027231

Date of advice: 12 October 2018

Ruling

Subject: Withholding tax exemption in section 128F

Question

Will AusSub Pty Ltd (AusSub) not be required to withhold an amount under section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) from interest payments made in respect of the loan notes because section 128F of the Income Tax Assessment Act 1936 (ITAA 1936) exempts these interest payments from interest withholding tax payable under section 128B of the ITAA 1936?

Answer

Yes

Relevant facts and circumstances

1. AusSub is a wholly owned subsidiary of AusCo Limited (together referred to as ‘AusCo) both companies Australian resident for Australian income tax purposes.

2. AusCo Limited is the head company of the AusCo Limited income tax consolidated group.

3. AusSub required debt funding to fund a project.

4. AusCo appointed Investor Advisor (Advisor) to assist in the marketing of the loan notes to qualified institutional buyers and/or accredited Investors.

5. AusCo, assisted by Advisor, conducted institutional roadshows to promote its project to worldwide investors and identified a list of potential investors.

6. AusCo conducted offer meetings with more than 10 potential offerees and provided term documentation to invite them to participate in the loan notes issue.

7. Each of the offerees were carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets and were not known or suspected to be related to each other.

8. One of the offerees that participated in the offer Meetings, started negotiations with AusCo. During negotiations two more of the offerees that had participated in the offer meetings also became party to the loan notes negotiations.

9. AusSub executed the subscription agreement based upon the term documentation resulting in issuance of loan notes to the offerees.

10. In the subscription agreement AusSub warrants that it had not made offers to parties which it or its agents knew or suspected at the time of making the offer were associates of the AusSub and that the loan note holders represent and warrant that they are not an associate of the Issuer.

Assumptions

The Commissioner makes this Ruling subject to the following Assumptions:

1. AusSub will be an Australian resident company at the time of each interest payment in respect of the Loan Notes.

2. AusSub at the time of the interest payment does not know or have reasonable grounds to suspect that any of the loan notes holders:

a) is an associate of AusSub; and

b) either:

(i) the associate is a non-resident and the interest payment is not received by the associate in respect of a Loan Note 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 Loan Note 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.

Relevant legislative provisions

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)

Income Tax Assessment Act 1936 subsection 6(1)

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.

Summary

AusCo will not be required to withhold an amount under section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) from interest payments made in respect of the loan notes because section 128F exempts these interest payments from interest withholding tax payable under section 128B.

Detailed reasoning

Section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the TAA 1953

1. Section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the TAA 1953 imposes an obligation on an entity to withhold an amount from interest

2. However, section 12-300 of Schedule 1 to the TAA 1953 provides for limits on the amount to be withheld. Section 12-300 relevantly states:

This Subdivision does not require an entity:

(a) to withhold an amount from a dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) or from a royalty if no withholding tax is payable in respect of the dividend, interest or royalty; or

(b) ...

(emphasis added)

Therefore, AusSub is not obliged to withhold an amount from the interest payments where there is no liability to withholding tax.

Section 128B

3. Section 128B deals with liability to withholding tax for certain income including income that consists of interest paid 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 that section 128B does not apply to interest income to which section 128F applies.

Section 128F

4. Section 128F provides an exemption from withholding tax for interest on certain publicly offered company debentures or debt interests. The exemption applies if the conditions in subsection 128F(1) are satisfied and subsections (5) and (6) do not apply (subsection (5AA) is not relevant in this case).

Subsection 128F(1)

5. Relevantly interest paid by a company in respect of a debenture or debt interest in the company will satisfy subsection 128F(1) 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) …….

(d) either:

(i) the issue of the debenture or debt interest satisfied the public offer test set out in subsection (3) or (4)…

(emphasis added)

Debenture

6. ‘Debenture’ is defined in subsection 128F(9) to include a promissory note or a bill of exchange, in addition to the definition of debenture outlined in subsection 6(1).

7. Relevantly subsection 6(1) defines ‘debenture’, in relation to a company, to include 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.

8. AusSub issued the loan notes that are notes, it follows that the loan notes are considered a debenture pursuant to subsection 6(1).

9. Accordingly, the loan notes are considered a debenture for the purposes of section 128F.

10. On the basis that the loan notes are debentures it is unnecessary to consider whether the loan notes are a debt interest.

Resident of Australia at the time of the issue of debenture or debt interest

11. As set out in paragraph 1 of the Relevant facts and circumstances, AusSub is a resident of Australia for Australian income tax purposes. Therefore paragraph 128F(1)(a) is satisfied.

Resident of Australia when the interest is paid

12. As set out in the Assumptions, AusSub will be an Australian resident company at the time of each interest payment in respect of the loan notes. Therefore paragraph 128F(1)(b) is satisfied.

Public offer test

13. Paragraph 128F(1)(d) provides that the issue of the debenture must satisfy the public offer test set out in subsections (3) or (4). Subsection 128F(4) is not relevant as it applies to global bonds. Therefore the issue of the loan notes must satisfy the requirements of subsection 128F(3). Subsection 128F(3) provides that a debenture issued by a company satisfies the public offer test if the issue resulted from the debenture being offered for issue. There are five public offer tests and one of these tests must be satisfied.

14. The public offer test applicable to AusCo’s circumstances is the first public offer test in paragraph 128F(3)(a). Paragraph 128F(3)(a) states

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 a financial market; 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

…

Issue ‘resulted from’ the debenture ‘being offered’ for issue

15. The introductory words of subsection 128F(3) require the issue of a debenture or debt interest to ‘result from’ the debenture or debt interest being ‘offered for issue’. The Commissioner explains in Taxation Determination TD 1999/8 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - when will an issue of debentures be taken to have 'resulted from' the debentures being 'offered for issue' for the purposes of the public offer test in subsection 128F(3)? (TD 1999/8) that the ‘requirements in subsection 128F(3) are, of course, directed at ensuring an adequate dissemination of the details of the relevant issue to the markets’.

16. The term ‘offered’ is not defined in the legislation. 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 the TD 1999/24 sets out that:

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.

17. It is envisaged by TD 1999/24 that the issue of debentures is to follow on from a process or negotiation between the offeror and the offeree. To satisfy the public offer test there still needs to be a nexus between the offer and the issue.

18. The offer meetings and the subsequent negotiations with the three offerees resulted in the execution of the subscription agreement and the issue of the loan notes.

19. Therefore, the issue of loan notes ‘resulted from’ the loan notes being ‘offered for issue’ as required by the introductory words of subsection 128F(3).

Offered to at least 10 persons

20. Paragraph 128F(3)(a) states that the debenture or debt interest must be offered for issue to at least 10 persons that are carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets, and are not known, or suspected, by the company to be associates of one another.

21. At the offer meetings AusCo made the offer to the key investors. As set out in the Relevant facts and circumstances at paragraph 7, at least 10 of these key investors were carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in a financial market and were not known, or suspected, by AusCo to be associates (as defined in subsection 128F(9)) of one another.

Conclusion on public offer test

22. As the first public offer test in paragraph 128F(3)(a) is satisfied, the public offer test in subsection 128F(3) is satisfied.

Subsection 128F(5)

23. Subsection 128F(5) deals with issues and invitations that always fails the public offer test. For an issue of a debenture or debt interest not to satisfy the public offer test, paragraph 128F(5)(a) requires that at the time of the issue the company knew, or had reasonable grounds to suspect, that the debenture, an interest in the debenture or the debt interest was being, or would be, acquired either directly or indirectly by an associate (as defined in subsection 128F(9)) of the company.

24. As set out in the Relevant facts and circumstances at paragraphs 10, the loan notes were not being, or would not be, acquired either directly or indirectly by an associate of AusSub. Therefore subsection 128F(5) does not apply.

Subsection 128F(6)

25. Subsection 128F(6) excludes the withholding tax exemption under section 128F for interest paid to certain associates of the issuing company.

26. As this is an ongoing test, in order for the test to be satisfied, AusSub must ensure that it meets the requirements in subsection 128F(6) each time it makes an interest payment to the loan notes holders.

27. As set out in the Assumptions, AusSub will neither know nor have reasonable grounds to suspect that any of the loan notes holders is an associate of AusSub as prescribed in subsection 128F(6). Therefore subsection 128F(6) does not apply.

Conclusion

28. As subsection 128F(1) is satisfied and subsections (5) and (6) do not apply, section 128F applies to the interest paid by AusSub in respect of the loan notes. Therefore no tax is payable under Division 11A pursuant to subsection 128F(2). Liability to withholding tax under section 128B does not apply to interest paid by AusSub in respect of the loan notes pursuant to subparagraph 128B(3)(h)(iv). As no withholding tax is payable AusSub will not be required to withhold an amount from interest paid in respect of the loan notes under section 12-245 of Schedule 1 to the TAA 1953 pursuant to section 12-300 of Schedule 1 to the TAA 1953.