ATO ID 2008/8: Offshore Banking Units: Application of paragraph 128AE(2)(ba) to wholly owned non-bank subsidiaries of non-bank OBUs
Date of decision: 1 November 2007
Year of income: Year ended 30 June 2008
Business line: Public Groups and International

Issue
Is a taxpayer, in which all of the equity interests are beneficially owned by an offshore banking unit [1] (OBU) that is not an authorised deposit-taking institution (ADI) for the purposes of the Banking Act 1959, eligible to be declared to be an OBU under paragraph 128AE(2)(ba) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. A taxpayer, in which all of the equity interests are beneficially owned by an OBU that is not an ADI for the purposes of the Banking Act, is eligible to be declared to be an OBU under paragraph 128AE(2)(ba) of the ITAA 1936.

Facts
The taxpayer is a company that is a resident of Australia for tax purposes. The taxpayer has made an application for declaration as an OBU under paragraph 128AE(2)(ba) of the ITAA 1936. The taxpayer's main business is obtaining financing on a commercial basis from third parties and providing financing on a commercial basis to third parties, including offshore related parties. All of the equity interests in the taxpayer are beneficially owned by an Australian resident company that, under paragraph 128AE(2)(f) of the ITAA 1936, the Treasurer had previously determined, in writing, to be an OBU under subsection 128AE(2AA) of the ITAA 1936. The taxpayer and its parent company are not ADIs for the purposes of the Banking Act. The Australian parent company is not appropriately authorised to carry on business as a dealer in foreign exchange.

Reasons for decision
Summary: Paragraph (ba) of subsection 128AE(2) of the ITAA 1936 provides that: The Treasurer may, by notice published in the Gazette, declare a person being: a company in which all of the equity interests are beneficially owned by an offshore banking unit (other than one to which paragraph (c) applies); ... to be an offshore banking unit for the purposes of this Division. Taxation Laws Amendment Act (No.4) 1992 inserted paragraph 128AE(2)(ba) in subsection 128AE(2) of the ITAA 1936 effective from 21 December 1992. The Replacement Explanatory Memorandum to Taxation Laws Amendment Bill (No.4) 1992 stated: Under the previous law the only entities that can be registered as OBUs are savings and trading banks as defined by subsection 5(1) of the Banking Act 1959, State Banks and other financial institutions which the Treasurer is satisfied are appropriately authorised to deal in foreign exchange... An amendment to subsection 128AE(2) will extend the range of entities which can be registered as an OBU to include a wholly owned subsidiary of a bank which is already registered as an OBU. Subsidiaries will also be able to be registered as OBU as long as all the shares are beneficially owned by an OBU which is a bank. Subsequently , Taxation Laws Amendment Act (No.2) 1999 inserted paragraphs (d), (e) and (f) in subsection 128AE(2) of the ITAA 1936, effective from 2 July 1998, which extended the categories of persons eligible to apply for OBU status to certain persons that were not ADIs. This was done in order to facilitate greater non-bank competition for offshore business. In particular, paragraph 128AE(2)(f) provides that the Treasurer may determine, in writing, a company to be an OBU under subsection 128AE(2AA) of the ITAA 1936. Accordingly, from 2 July 1998, paragraph 128AE(2)(ba) of the ITAA 1936 can apply to a company in which all of the equity interests are beneficially owned by an OBU that is not an ADI. The following three conditions must be satisfied in order for a person to be declared to be an OBU under paragraph 128AE(2)(ba) of the ITAA 1936: The three conditions set out above are satisfied in this case for the following reasons: As all the conditions set out in paragraph (ba) of subsection 128AE(2) of the ITAA 1936 are satisfied in this case, the taxpayer is eligible to be declared to be an OBU under that paragraph.

Legislative references: Income Tax Assessment Act 1936 subsection 128AE(2) paragraph 128AE(2)(ba) paragraph 128AE(2)(c) paragraph 128AE(2)(f) subsection 128AE(2AA)
Related public rulings and determinations: Taxation Determination TD 93/134
Other references: Explanatory Memorandum to Taxation Laws Amendment Bill (No.4) 1992
Subject references: Offshore banking Offshore banking activities Offshore banking units Banks Financial institutions International tax