Edited version of private advice

Authorisation Number: 1051877319368

Date of advice: 30 July 2021

Ruling

Subject: Interest withholding tax - public offer test

Question1

Will the Syndicated Facility Agreement 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.

Question2

Will each of the loans made pursuant to the Syndicated Facility Agreement constitute a "syndicated loan" for the purpose of the definition of a "syndicated loan" in subsection 128F(9) of the ITAA1936?

Answer

Yes.

Question3

Does the invitation issued by AusCo to become a lender under the Syndicated Facility Agreement satisfy the public offer test in subsection 128F(3A) of the ITAA 1936?

Answer

No.

Question4

Will subsection 128F(1) of the ITAA1936 apply such that interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of the ITAA 1936?

Answer

No.

Question5

Will AusCo have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the Tax Administration Act 1953 (TAA) by virtue of paragraph 12-300(a) of the TAA because section 128B of the ITAA1936 applies to the interest?

Answer

Yes.

This ruling applies for the following periods:

Years ending 30 June 20XX

The scheme commences on:

1 July 20

Relevant facts and circumstances

AusCo and ParentCo

AusCo is an Australian resident company ultimately wholly owned by Foreign State via a chain of companies including ParentCo.

ParentCo is a non-resident company incorporated in Foreign State.

Syndicated Facility Agreement

On XX/XX/20XX, a syndicated facility agreement was entered into between:

(a)       various financial institutions as lenders (Lenders);

(b)       ForeignBankCo as the agent for the Lenders;

(c)       ParentCo as the Guarantor; and

(d)       AusCo as the Borrower

for a total of $X (the Syndicated Facility Agreement).

The purpose of the Syndicated Facility Agreement is to refinance a previous syndicated facility agreement that AusCo entered into.

Syndicated Facility Agreement process

AusCo sent a Request for Bidding letter to more than 10 financial institutions (the Invitees) on XX/XX/20XX via electronic correspondence inviting them to consider participating in the Syndicated Facility Agreement. The Request for Bidding letter included a summary of the key terms of the Syndicated Facility Agreement as it was then drafted.

The financial institutions interested in participating in the Syndicated Facility Agreement were required to submit their committed bid in writing to AusCo.

Each bid was required to be submitted on an individual basis, and AusCo reserved the right to disqualify any common or joint bids received from a group of financial institutions or any bid that appeared to AusCo to be made after mutual consultation or collusion among the financial institutions.

AusCo received commitments from a total of X financial institutions. AusCo then notified all X shortlisted financial institutions on XX/XX/20XX of their selection to participate and requested their comments in relation to a draft of the Syndicated Facility Agreement before XX/XX/20XX.

Negotiations were then conducted between AusCo and the shortlisted financial institutions, together with their financial and legal advisers on the terms of the Syndicated Facility Agreement. Comments from the shortlisted financial institutions were received and taken into consideration during the documentation and drafting process. The parties concluded their negotiation on XX/XX/20XX.

During the negotiation process, none of the shortlisted financial institutions withdrew their previous commitment to the relevant facility.

The Syndicated Facility Agreement was finalised and executed on XX/XX/20XX. A total of X financial institutions, of the more than 10 that were invited, became lenders under the Syndicated Facility Agreement (the Lenders).

Key terms of the Syndicated Facility Agreement

Pursuant to the Syndicated Facility Agreement, the parties to the Syndicated Facility Agreement agree that the Syndicated Facility Agreement is a 'syndicated facility agreement' for the purposes of subsection 128F(11) of the ITAA 1936.

ForeignBankCo is acting as the Agent for the Lenders under the Syndicated Facility Agreement.

Pursuant to the Syndicated Facility Agreement, the Syndicated Facility Agreement is guaranteed by ParentCo.

Pursuant to the Syndicated Facility Agreement, the term of the agreement is XX months.

Pursuant to the Syndicated Facility Agreement, interest will be payable by AusCo on loans made under the Syndicated Facility Agreement at the defined rate for each relevant interest period, with payment of accrued interest required at the end of each relevant interest period. Higher rates of interest will be charged for amounts in arrears.

The obligations of the Lenders under the agreement are several.

Under the Syndicated Facility Agreement, the Borrower AusCo represented that

(a)  it made the invitation to participate in the Syndicated Facility Agreement in such a way as to satisfy subparagraph 128F(3A)(a)(i) of the ITAA 1936, and

(b)  to its actual knowledge or belief, none of the persons to whom it made an invitation to become a Lender under the Syndicated Facility Agreement was known or suspected to be an offshore associate of AusCo as defined in section 318 of the ITAA 1936.

Under the Syndicated Facility Agreement, the Lenders represented that

(a)  They were in the business of providing finance, or investing or dealing in securities in the course of operating in financial markets, and

(b)  To their actual knowledge or belief, they were not offshore associates of AusCo

Other matters

Each of the loans made pursuant to the Syndicated Facility Agreement will constitute a debt interest as defined in Subdivision 974-B of the ITAA 1997.

Amounts classified as interest under the Syndicated Facility Agreement are 'interest' for the purposes of section 128A of the ITAA 1936.

AusCo will be an Australian tax resident company at the time of issue of the debt interests and at the time interest is paid in respect of the debt interests.

AusCo as Borrower has access to at least AUD $100,000,000 (or its equivalent in any other currency or currencies) at the time the first loan is to be provided under the Syndicated Facility Agreement.

Of the financial institutions who agreed to participate as Lenders under the Syndicated Facility Agreement, a number are ultimately majority owned by Foreign State.

AusCo knows that it is a state-owned enterprise ultimately wholly owned by the Foreign State. AusCo also knows that Foreign State ultimately has a majority voting interest in AusCo as that term is defined in subsection 318(6) of the ITAA 1936. AusCo was aware of this before making the invitation to lenders to participate in the Syndicated Facility Agreement.

AusCo knew, prior to making the invitation to lenders to participate in the Syndicated Facility Agreement, that a number of the Lenders who chose to participate in the Syndicated Facility Agreement were ultimately majority owned by, and therefore had their majority voting interest held by, Foreign State.

AusCo, in determining whether any of the lenders were its associates, undertook the following steps:

(e)  Engaged a tax adviser to advise on section 128F of the ITAA 1936, including the application of the associates test in section 318 of the ITAA 1936 as referred to in subsection 128F(3A) and 128F(5A) of the ITAA 1936.

(f)    In acting on the advice provided by the tax advisor, sought confirmation from Parent Co that Parent Co management had no reasonable grounds to suspect any of the lenders were an associate of AusCo.

(g)  Advised in the Request for Bidding document provided to participating financial institutions that the facility was intended to comply with section 128F of the ITAA 1936, and

(h)  In the Syndicated Facility Agreement, introduced

                                  i.    clauses where AusCo represented that to the best of its knowledge, it had not invited any Lender that it knew or suspected to be its associate, and

                                 ii.    clauses, where the Lenders were required to warrant that to their actual knowledge or belief, they did not believe, at the time of receiving the invitation to participate in the Facility that they were an associate of AusCo, nor associates of each other.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128F

Income Tax Assessment Act 1936 subsection 128F(1)

Income Tax Assessment Act 1936 subsection 128F(2)

Income Tax Assessment Act 1936 subsection 128F(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 section 318

Taxation Administration Act 1953 Schedule 1 section 12-300

Taxation Administration Act 1953 Schedule 1 paragraph 12-300(a)

Reasons for decision

Question 1

Will the Syndicated Facility Agreement 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)?

Summary

The Syndicated Facility Agreement constitutes a 'syndicated loan facility' as defined in subsection 128F(9) of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

According to subsection 128F(9) of the ITAA 1936, the term 'syndicated loan facility' has the meaning given by subsections 128F(11), 128F(12) and 128F(13) of the ITAA 1936.

In the present case, as the Syndicated Facility Agreement involves multiple lenders and a single borrower, subsection 128F(11) of the ITAA 1936 is the relevant provision.

Subsection 128F(11) of the ITAA 1936 states:

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).

Based on the information provided, the Syndicated Facility Agreement constitutes a syndicated loan facility under subsection 128F(11) on the basis that:

•                     it is a written agreement which describes itself as a syndicated facility agreement;

•                     the agreement is between one borrower, being AusCo, and at least two lenders;

•                     each Lender has severally, but not jointly, agreed to lend money to AusCo; and

•                     AusCo will have access to at least AUD $100 million at the time the first loan is to be provided.

Therefore, the Syndicated Facility Agreement constitutes a 'syndicated loan facility' as defined in subsection 128F(9) of the ITAA 1936.

Question 2

Will each of the loans made pursuant to the Syndicated Facility Agreement constitute a "syndicated loan" for the purpose of the definition of a "syndicated loan" in subsection 128F(9) of the ITAA1936?

Summary

Each of the loans made pursuant to the Syndicated Facility Agreement will constitute a 'syndicated loan' as defined in subsection 128F(9) of the ITAA 1936.

Detailed reasoning

The term 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 to mean:

"syndicated loan" means 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.

As discussed above, the Syndicated Facility Agreement has two or more lenders and is a 'syndicated loan facility' for the purposes of subsection 128F(9) of the ITAA1936.

Therefore, each of the loans made pursuant to the Syndicated Facility Agreement will constitute a 'syndicated loan' as defined in subsection 128F(9) of the ITAA 1936.

Question 3

Does the invitation to become a lender under the Syndicated Facility Agreement satisfy the public offer test in subsection 128F(3A) of the ITAA 1936?

Summary

The invitation to become a lender under the Syndicated Facility Agreement will not satisfy the public offer test in subsection 128F(3A) of the ITAA 1936. The invitation will be taken to have never satisfied the public offer test under subsection 128F(5AA) of the ITAA 1936 as at the time of the public offer, AusCo knew or reasonably suspected that one of the Lenders was its associate as defined in section 318 of the ITAA 1936.

Detailed reasoning

Subsection 128F(3A) of the ITAA 1936 prescribes three alternative public offer tests relevant to a syndicated loan facility, only one of which must be satisfied for a company to meet the public offer test requirement.

Subsection 128F(3A) states:

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).

In subsection 128F(5AA) of the ITAA 1936, it states the conditions where the public offer test is taken never to have been satisfied:

An invitation to become a lender under a syndicated loan facility is taken never to have 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.

The wording used by subsection 128F(3A) of the ITAA 1936 uses the same wording as subsection 128F(3) of the ITAA 1936. As such, guidance relevant to subsection 128F(3) of the ITAA 1936 is useful in understanding subsection 128F(3A) of the ITAA 1936. Similarly, guidance provided in respect of subsection 128F(5) of the ITAA 1936 is useful in understanding subsection 128F(5AA) of the ITAA 1936.

Invitation

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) provides that for the purposes of section 128F of ITAA 1936, 'offer' is not limited to the context of a contractual offer but can be an invitation or inducement to potential investors to make offers. It is therefore not necessary to establish whether the public offer is accepted by all offerees, only that the offer was actually made to the requisite number of entities.

AusCo's written invitation, consisting of the 'Request for Bidding' letter, sent to potential lenders to become a Lender under the Syndicated Facility Agreement and for them to make their offers, constitutes an invitation to potential lenders for the purposes of the public offer test.

Paragraph 128F(3A)(a) of the ITAA 1936 - the first public offer test

Under the first public offer test, the relevant invitation must be made to at least 10 persons carrying on a business of providing finance that are not associates of one another.

Taxation Determination TD 1999/13 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - for the purposes of the public offer test in paragraph 128F(3)(a) (the 'first public offer test'): (a) are pension funds and other 'qualified institutional buyers' considered to be carrying on the business of providing finance, or investing or dealing in securities? (b) what is required of a company to establish that the persons to whom the debentures are offered are carrying on business in the manner required by the legislation? (c) when is a company taken to know or suspect that such a person is an associate (TD 1999/13) provides that in relation to subparagraph 128F(3A)(a)(i) of the ITAA 1936, a company is able to rely on a representation by a person to whom the loan is offered that it is carrying on a business as required by the legislation.

TD 1999/13 also states, with respect to subparagraph 128F(3A)(a)(ii) of the ITAA 1936, that the company must offer the loan to at least 10 persons each of whom was not known, or suspected by the company to be associates of one another. This tests the knowledge or suspicion of the company as to whether any entities to whom it made an offer are associates of one another.

Knowledge in this sense requires actual knowledge, and suspicion needs to be looked at objectively. A company is not regarded as knowing or suspecting persons are associates unless it is established that officers of the company knew or had reasonably grounds to suspect otherwise. It is looked at objectively in the light of what is reasonable in the individual circumstances of a particular case. TD 1999/13 also states that a company offering loans is not required to undertake a detailed examination into the relationships between persons it offers debentures to, however it cannot ignore companies that are generally known to be associates.

AusCo's written invitation to potential lenders to become a lender under the Syndicated Facility Agreement, which resulted in X of X offerees becoming Lenders, will therefore constitute an invitation to 10 persons for the purposes of section 128F(3A)(a)(i) of the ITAA 1936.

Each of the Lenders warranted that they were a financial institution and therefore were persons that satisfied subparagraph 128F(3A)(a)(i) of the ITAA 1936. AusCo is entitled to rely upon the Lenders' representation that they were carrying on the relevant business required by the legislation for the purposes of subsection 128F(3A) of the ITAA 1936.

AusCo represented in the Syndicated Facility Agreement that it does know or suspect that at least ten persons to whom an offer was made to participate in the loan was its associate.

Although AusCo was aware that a number of the financial institutions to whom the offer has been made are majority owned by the Foreign State, there are still well over ten persons to whom an offer is made that would appear to clearly be unrelated to one another.

As such, this is sufficient to satisfy subparagraph 128F(3A)(a)(ii) of the ITAA 1936, which does not require a company offering loans to undertake a detailed examination of the relationships between the offerees. As such, it is accepted by the Commissioner that the invitation was made to at least 10 persons, of whom AusCo did not know or suspect are associates of one another.

Based on the above, the invitation made by AusCo therefore satisfies the first public offer test in paragraph 128F(3A)(a) of the ITAA 1936 on the basis that:

•                     a written invitation was sent via electronic correspondence to more than 10 financial institutions inviting them to become lenders under the Syndicated Facility Agreement;

•                     the invitation was made to at least 10 financial institutions which:

o        were 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

o        were not known or suspected by AusCo to be associates of any other invitee at the time of making the invitation.

Subsection 128F(5AA) of the ITAA 1936

In addition to satisfying subsection 128F(3A) of the ITAA 1936, it is also necessary to consider subsection 128F(5AA) of the ITAA 1936, which specifies the conditions under which an invitation to become a lender under a syndicated loan facility is taken never to have satisfied the public offer test.

Relevantly, the invitation is taken never to have satisfied the public offer test if, at the time the invitation is made, the company knew, or had reasonable grounds to suspect, that an associate of the company is or will become a lender under the facility. An exception to this test is if the relevant lender that is known or suspected of being an associate is lending through its Australian permanent establishment.

Where this test is failed, the entire invitation fails the public offer test, and withholding tax becomes payable on the interest paid under the loans pursuant to the facility.

As such, there are two things that must be determined; whether any of the Lenders that are owned by Foreign State are associates of AusCo, and whether AusCo had knowledge or reasonable suspicion that such entities were its associates.

Associates

The test to determine a company's associates can be found in subsection 318(2) of the ITAA 1936.

For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(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);

(e) another company (in this paragraph called the controlled company) where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

Paragraph 318(6)(c) of the ITAA 1936 states that for the purposes of applying the associate test,

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.

The relevant provisions in this subsection are paragraphs 318(2)(d) and 318(2)(e) of the ITAA 1936, which broadly makes one company an associate of another where the first company is majority owned by, or sufficiently influenced by, the second company. The paragraphs also make clear that if companies share associates, they themselves are also associates

Based on this, applying the associates definition to the circumstances, AusCo's associates include ParentCo and Foreign State. This is because Foreign State, through its ownership of ParentCo, has a majority voting interest in AusCo.

Under sub-subparagraph 318(2)(e)(ii)(B) of the ITAA 1936, this also means that any entity in which Foreign State holds a majority voting interest is also an associate of AusCo.

A number of the Lenders are ultimately majority owned by Foreign State. Foreign State ultimately has a majority of voting interests in a number of the Lenders. As such, each of these Lenders are associates of the Foreign State.

As such, in applying sub-subparagraph 318(2)(e)(ii)(B) of the ITAA 1936, ParentCo, and all of its wholly owned subsidiaries, which relevantly includes AusCo, are associates of the Lenders as AusCo is ultimately has the majority of its voting interest held by Foreign State, which is an associate of each of the relevant Lenders.

The question then turns to whether AusCo satisfies the knowledge or reasonable suspicion requirement.

Knowledge or suspicion

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) provides that knowledge in this sense refers to actual knowledge of the company at the time the loan was issued; suspicion is to be assessed objectively in light of what is reasonable in the individual circumstances of the particular case.

TD 2001/3 further provides 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 is judged on its merits, reasonable steps may include writing to associates asking them not to acquire debentures, including statements or warranties in the prospectus warning of the risk associated with associates purchasing debentures regarding the public offer test, and instructions to the dealer.

Finally, TD 2001/3 notes that a company cannot ignore persons it knows or has reasonable grounds to suspect are associates, and then use a defence that it relied on the bona fide representations of the relevant entity, dealer, manager or underwriter.

AusCo took the following steps when arranging the Syndicated Facility to ensure that its associates did not participate in the Facility;

(a)  Engaged an advisor to advise on section 128F of the ITAA 1936, including the application of the associates definition in section 318 of the ITAA 1936 as referred to in subsection 128F(3A) and 128F(5A) of the ITAA 1936.

(b)  In acting on the advice provided by the advisor, sought confirmation from ParentCo that ParentCo management had no reasonable grounds to suspect any of the participating financial institutions were an associate of AusCo or ParentCo.

(c)   Advised in the Request for Bidding document provided to Invitees that the facility was intended to comply with section 128F of the ITAA 1936, and

(d)  Included representations in the Syndicated Facility Agreement which stated that to the best of AusCo's knowledge, it had not invited any Lender that it knew or suspected to be its associate. In the Syndicated Facility Agreement, the Lenders were also required to warrant that to their actual knowledge or belief, they did not believe, at the time of receiving the invitation to participate in the Facility that they were an associate of AusCo.

As outlined above, AusCo is an associate of the relevant financial institutions as they share a common owner. AusCo was aware that it was ultimately owned by Foreign State and was also aware that some of the Lenders participating in the Syndicated Facility Agreement were ultimately majority owned by Foreign State.

The knowledge or suspicion requirement, and whether a company has taken reasonable steps to satisfy itself that associates are not participating in their publicly offered syndicated loan, is looked at objectively in light of what is reasonable in the individual circumstances of the particular case. It is an enquiry based on the individual facts and circumstances of the case. The knowledge or suspicion requirement regarding whether an entity knew, or had reasonable suspicion, that an entity was an associate does not necessarily require an intimate knowledge of the tax law relating to associates. If this were the case, companies could rely on their ignorance of the tax law, and specifically the 'associates' definition in section 318 of the ITAA 1936. A reasonable suspicion may arise, or even actual knowledge, where the company is aware of clear facts that would likely lead to a conclusion or identification of it being an associate of one of the syndicated facility participants.

The various provisions in section 128F of the ITAA 1936 are aimed at ensuring that the relevant debt facilities which qualify for an interest withholding tax exemption are genuine publicly offered debt. A part of this is ensuring that related parties do not participate in such facilities. The concept that was chosen by the legislature to implement such a policy was the 'associates' test in section 318 of the ITAA 1936. As such, it is not a general notion of related parties that determines the range and effect of the public offer test, but the associates test. That said, it could be suggested that, with respect to a knowledge or reasonable suspicion requirement, the more distant or difficult it is to identify the associate relationship, the more likely that the company did not know or reasonably suspect an associate relationship, although this would always be highly dependent on each company's individual facts and circumstances.

In this case, AusCo had actual knowledge of its own ownership structure, and that it was ultimately majority owned by Foreign State. AusCo was also clearly aware, or at least had reasonable grounds to suspect, that a number of Lenders participating in its Syndicated Facility Agreement were majority or wholly owned by the Foreign State. As such, despite the steps taken by AusCo through the inclusion of borrower and lender warranties in the Syndicated Facility Agreement, and the obtaining of some tax advice, it is difficult to see how these steps, given the specific facts and circumstances of AusCo, could be said to have alleviated AusCo's actual knowledge of its likely relationship with the Lenders, or its suspicion of such. In addition, publicly available information would have revealed and confirmed that the Lenders were all majority or wholly owned by Foreign State.

As such, it is rejected that AusCo did not have the actual knowledge, or suspicion that it was dealing with its associates.

Conclusion

For the reasons noted above, the invitation to become a lender under the Syndicated Facility Agreement will not satisfy the public offer test in subsection 128F(3A) of the ITAA 1936 due to the operation of subsection 128F(5AA) of the ITAA 1936. AusCo is an associate of at least one of the financial institutions participating in the Syndicated Facility Agreement, and knew, or reasonably suspected, that it was its associate.

Question 4

Will subsection 128F(1) of the ITAA1936 apply such that interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will not be subject to tax imposed under Division 11A of the ITAA 1936?

Summary

As the public offer test has not been satisfied, subsection 128F(1) of the ITAA 1936 will not apply. Interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Detailed reasoning

Subsection 128F(2) of the ITAA 1936 provides that tax is not payable under Division 11A in respect of interest to which section 128F of the ITAA 1936 applies.

Subsection 128F(1) of the ITAA 1936 provides 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 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).

The interest paid by AusCo under the Syndicated Facility Agreement does not satisfy the conditions in subsection 128F(1) of the ITAA 1936 on the basis that:

•                     AusCo was a resident of Australia when it issued the debt interest;

•                     AusCo will be a resident of Australian when the interest is paid;

•                     as discussed above, the Syndicated Facility Agreement constitutes a 'syndicated loan facility' as defined in subsection 128F(9) of the ITAA 1936, such that the loans made pursuant to the Syndicated Facility Agreement will constitute a 'syndicated loan' as defined in subsection 128F(9) of the ITAA 1936; and

•                     the invitation to become a lender under the Syndicated Facility Agreement does not satisfy the public offer test set out in subsection 128F(3A) of the ITAA 1936 due to the operation of subsection 128F(5AA) of the ITAA 1936.

Therefore, subsection 128F(1) of the ITAA 1936 will apply such that, under subsection 128F(2) of the ITAA 1936, interest paid by AusCo on each syndicated loan issued under the Syndicated Facility Agreement will be subject to tax imposed under Division 11A of Part III of the ITAA 1936.

Question 5

Will AusCo have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 of the TAA by virtue of paragraph 12-300(a) of the TAA because section 128B of the ITAA1936 applies to the interest?

Summary

AusCo will have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of Schedule 1 to the TAA.

Detailed reasoning

Section 12-300 of Schedule 1 to the TAA limits the amounts that must be withheld under Subdivision 12-F of Schedule 1 to the TAA.

Under paragraph 12-300(a) of Schedule 1 to the TAA, an entity is not required to withhold an amount from (inter alia) interest (within the meaning of Division 11A of Part III of the ITAA 1936) if no withholding tax is payable in respect of the interest.

As discussed above, the interest payable by AusCo on each syndicated loan issued under the Syndicated Facility Agreement does not satisfy the requirements of subsection 128F(1) of the ITAA 1936. As such, tax will be payable in respect of the interest under subsection 128B(1) of the ITAA 1936.

Accordingly, AusCo will have an obligation to withhold an amount from any interest paid under the Syndicated Facility Agreement under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of Schedule 1 to the TAA.