ATO ID 2006/272: Interest Withholding Tax Exemption: Certificates of Deposit - public offer test
Date of decision: 31 August 2006
Business line: Public Groups and International

Issue
Does the issue of Certificates of Deposits by an Australian resident company to non-resident investors satisfy the public offer test set out in paragraph 128F(3)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. Certificates of Deposits, issued by an Australian resident company to non-resident investors, will satisfy the public offer test set out in paragraph 128F(3)(b) of the ITAA 1936.

Facts
An Australian resident company will offer Certificates of Deposit to non-resident retail customers. The Certificates of Deposit are debt interests for the purposes of section 128F of the ITAA 1936. The Certificates of Deposit will be offered by the Australian resident company through publicly available information services such as product brochures, posters and its website. The Australian resident company will offer Certificates of Deposit to at least 100 persons, being non-resident investors, who have acquired debentures or debt interests from the Australian resident company in the past, or who have acquired debentures or debt interests from a bank, financial institution, broker or other financial intermediary in the past, or who are likely to be interested in acquiring debentures or debt interests. The terms of the Certificate of Deposit may vary due to negotiations between the Australian resident company and the customer, but will be based on the original offer by the Australian resident company. All non-resident retail customers who invest in a Certificate of Deposit will receive a certificate from the Australian resident company showing the original investment amount, the maturity amount and the interest rate. Holders can add to their investment either by acquiring a new Certificate of Deposit or adding to their original investment upon maturity. The Certificates of Deposit will automatically be reinvested at maturity for a further term equal to the previous term, unless the customer notifies the Australian resident company in writing. The Certificates of Deposit can be transferred at any time during the term of the deposit with the prior approval of the Australian resident company. Holders cannot transfer the Certificates of Deposit to the Australian resident company.

Reasons for decision
Summary: Paragraph 128F(3)(b) of the ITAA 1936 provides that the public offer test will be satisfied if the issue of a debenture or debt interest by the company resulted from the debenture or debt interest being offered for issue to at least 100 persons whom it was reasonable for the company to have regarded as either: The introductory words to subsection 128F(3) of the ITAA 1936 state that 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. Taxation Determination TD 1999/24 explains that the term 'offer' in the introductory words of subsection (3) is not limited to meaning 'offer' in the context of a contractual offer, but includes invitations or inducements to potential investors to make offers. It is considered that the provision of the publicly available information by the Australian resident company is an 'invitation to treat' and will constitute an offer for the purposes of subsection 128F(3). Paragraph 5.39 of the Explanatory Memorandum (EM) to the Taxation Laws Amendment Act (No. 2) 1997 , which introduced subsection 128F(3), states the public offer test may be satisfied by an issuer of debentures sending letters to persons who it may reasonably regard as having acquired debentures from time to time. The EM also states that offers made to persons who have not previously purchased debentures from a stock broker, but whom the broker has reason to believe may be interested in acquiring debentures or other securities, will be counted for the purposes of the public offer test. The methods adopted by the Australian resident company to offer the issue of Certificates of Deposit to at least 100 persons, being non-resident investors, include a marketing campaign to existing customers, information on their website and other marketing campaigns. This ensures that the Australian resident company has a reasonable basis to regard the recipients of these offers as either having acquired debentures or debt interests in the past, or being likely to be interested in acquiring debentures or debt interests. By using these approaches it is considered the Australian resident company will satisfy the requirements under subparagraphs 128F(3)(b)(i) and (ii) of the ITAA 1936. To satisfy the public offer test in subsection 128F(3), it is also necessary for the debt interest to have 'resulted from' this offer. Taxation Determination TD 1999/8 states: ......subsection 128F(3) will be administered on the basis that a debenture will be taken to have 'resulted from' being 'offered for issue' if the debenture otherwise satisfies one of the paragraphs in subsection (3). Although TD 1999/8 deals with a debenture, it is equally relevant to debt interest. The debt interest will be taken to have 'resulted from' being 'offered for issue' for the purposes of subsection 128F(3) as it satisfies paragraph 128F(3)(b). Further, it is clear that there is an issue of the Certificates of Deposit. Taxation Determination TD 1999/9 states (in relation to a repealed provision but still relevant in this context): The term 'issue' was discussed in Taxation Ruling IT 2652 in relation to the withholding tax exemption previously available for debentures under the old section 128F, which operated prior to 1 January 1996. That Ruling, which dealt with debentures issued outside Australia by a non-resident agent, pointed out that the term 'issue' was not defined for the purposes of the withholding tax provisions and, therefore, its ordinary meaning must be adopted. This is still the position. In discussing an agreement to issue debentures in Levy v. Abercorris Slate and Slab Company (1887) 37 Ch 260, Chitty J of the Chancery Division stated at 264:' "issued" is not a technical term, it is a mercantile term well understood; "issue" here means the delivery over by the company to the person who has the charge'. These Certificates of Deposit have been put out or delivered for use and hence are issued. The additional investments by the non-resident customers, either through acquiring new certificates or by adding to their original investment upon maturity, could mean that a new debt interest will be issued by the Australian resident company. There is no requirement in subsection 128F(3) that there be a separate offer for each issue of debentures or debt interests to the same non-resident investors in order for any subsequent debt interest to satisfy the public offer test. In such cases any subsequent debt interest which results from the original offer would be regarded as having the necessary connection between that debt interest and the original offer. Any new Certificate of Deposit that is acquired or further funds provided by non-resident investors at maturity has this necessary connection and will result from the original offer. Accordingly, the issue of the Certificates of Deposit satisfies the public offer test set out in paragraph 128F(3)(b) of the ITAA 1936 through the proposed arrangement to offer Certificates of Deposit to non-resident investors.

Legislative references: Income Tax Assessment Act 1936 section 128F subsection 128F(3) paragraph 128F(3)(b) subparagraph 128F(3)(b)(i) subparagraph 128F(3)(b)(ii)
Related public rulings and determinations: Taxation Ruling IT 2652 | Taxation Determination TD 1999/8 | Taxation Determination TD 1999/9 | Taxation Determination TD 1999/24
Related ATO interpretative decisions: ATO ID 2006/273 | ATO ID 2006/274
Other references: Explanatory Memorandum (EM) to the Taxation Laws Amendment Act (No. 2) 1997
Subject references: Debt interest Financial institution deposits International tax