Private ruling: Interest Withholding Tax Exemption
Published: July 2014
Ruling period: Company X | Question | Will interest paid by Company X under a syndicated loan facility be exempt from the obligation to withhold imposed under section 12-245 of Schedule 1 of the Taxation Administration Act 1953 (the TAA 1953) in light of paragraph 12-300(a) of Schedule 1 of the TAA 1953 and subsection 128F(2) of the Income Tax Assessment Act 1936 (the ITAA 1936)? | Answer | Yes. Interest paid by Company X under a syndicated loan facility will be exempt from the obligation to withhold imposed under section 12-245 of Schedule 1 of the TAA 1953.


Relevant facts and circumstances: Background Company X is an Australian proprietary company incorporated and registered in Australia. Company X is a member of a global group headed by an overseas parent. Company X and other members of the group ('the Borrowers') have entered into a syndicated loan facility ('the Facility') with overseas lenders ('Lenders') to finance the business of the group. The Facility The Lenders under the Facility include financial institutions and investment funds. The total funds available under the Facility exceed $100 million. Invitation to become a lender Entities serving as Arrangers under the Facility made invitations on behalf of the Borrowers to third party lenders for an expression of interest to become a Lender under the Facility. The invitees were also provided with an overview of various aspects of the business of the Borrowers including the utilisation of the borrowings under the Facility. A number of the invitees, comprising of financial institutions and investment funds, became parties to the Facility. The terms and conditions of the Facility, among others, provided details of: • The categories of loans and the amounts made available to the Borrowers under each category; • The repayment program for each category of loan; • The interest periods and the applicable rates of interest; and • Rules for withholding from interest payment Further, the terms of the Facility provide that: The parties to the Facility agree that it is a 'syndicated loan facility' for the purposes of section 128F(11) of the ITAA 1936. • Each Lender severally agrees to make a loan to the Borrowers • Each Arranger, undertakes, represents and warrants to the Borrowers that: • it has, on behalf of the Borrowers, made invitations to at least 10 persons to become a Lender under the Facility each of whom, as at the date the relevant invitation is made carries on the business of providing finance or investing or dealing in securities in the course of operating in financial markets, for the purposes of section 128 F(3A)(a)(i) of the ITAA 1936 • the invitations referred to have been made to persons, who as at the date the invitations are made, to the knowledge of the of the Arranger, are not Associates of any of the other ten invitees, any of the Arrangers or any Lender • the invitations referred to have been made to persons, who, to the knowledge of the Arrangers are not Associates of Company X. • Additionally, Company X undertakes that it does not know, or have reasonable grounds to suspect, that any of the invitees is an Offshore Associate of it. Assumptions Company X will remain a resident of Australia for income tax purposes during the currency of the Facility.

Relevant legislative provisions: Schedule 1 to Taxation Administration Act 1953 Section 12-245 | Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(i) | Income Tax Assessment Act 1936 Subsection 128F(1) | Income Tax Assessment Act 1936 Paragraph 128F(1)(a) | Income Tax Assessment Act 1936 Paragraph 128F(1)(b) | Income Tax Assessment Act 1936 Paragraph 128F(2) | Income Tax Assessment Act 1936 Paragraph 128F(3)(a) | Income Tax Assessment Act 1936 Paragraph 128F(3)(e) | Income Tax Assessment Act 1936 Paragraph 128F(3A) | Income Tax Assessment Act 1936 Paragraph 128F(3A)(a) | Income Tax Assessment Act 1936 Paragraph 128F(3A)(c) | Income Tax Assessment Act 1936 Subsection 128F(9) | Income Tax Assessment Act 1936 Paragraph 128F(11)(a) | Income Tax Assessment Act 1936 Paragraph 128F(11)(b) | Income Tax Assessment Act 1936 Paragraph 128F(11)(c) | Income Tax Assessment Act 1936 Paragraph 128F(11)(d) | Income Tax Assessment Act 1936 Subsection 128F(13) | Income Tax Assessment Act 1936 Subparagraph 128F(1)(c)(iii)

Reasons for decision: Summary: Subsection 128F(1) of the ITAA 1936 applies to interest payments made by Company X under the Facility as: • Company X is a resident and is assumed to remain a resident at the time of making interest payments under the Facility; and • The Facility describes itself as a syndicated loan facility; and • It is a Facility between one or more borrowers and at least two lenders; and • Each Lender agrees, severally, but not jointly, to lend money to the Borrowers under the Facility; and • The Borrowers under the Facility will have access to more than $100,000,000 at the time the first loan is provided under the Facility; and • The Borrowers under the Facility are members of the same wholly owned group for the purposes of paragraph (a) of subsection 128F(13) of the ITAA 1936; and • The invitation to become a lender under the Facility satisfies the public offer test set out in paragraph 128F(3A)(a) of the ITAA 1936. As subsection 128F(1) of the ITAA 1936 applies to the interest payments in question they are exempt from withholding tax under subsection 128F(2) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 128F Exemption An interest withholding tax liability will not arise under subparagraph 128B(2)(b)(i) of the ITAA 1936 for interest paid by an Australian resident to a non-resident where subsection 128F(1) of the ITAA 1936 applies to an interest payment. Where subsection 128F(1) applies to an interest payment, the payment will be exempt from withholding tax pursuant to section 128F(2). Subsection 128F(1) of the ITAA 1936 states: 128F(1) Interest to which this section applies. This section 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: ...(iii) is a syndicated loan; or ... (iv) …… and (d) either: (i) ...........; or (iii) 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). As a company incorporated and registered in Australia and therefore a resident of Australia under section 6(1) of the ITAA 1936, Company X satisfies paragraph 128F(1)(a) of the ITAA 1936 on the date on which the Facility was executed. Based on the assumption that Company X will continue to be a resident of Australia when making interest payments under the Facility, it is concluded that Company X will satisfy paragraph 128F(1)(b) of the ITAA 1936. The application of the remaining requirements of subsection 128F(1) of the ITAA 1936 are considered as follows: Is the Facility a syndicated loan under subparagraph 128F(1)(c)(iii) of the ITAA 1936? The term 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 to mean: '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'. Subsection 128F(9) of the ITAA 1936 also defines the term 'syndicated loan facility' to have the meaning given in subsections 128F(11), 128F(12) and 128F(13) of the ITAA 1936. The relevant provisions in this case are subsections 128F(11) and 128F(13) of the ITAA 1936 which provide as follows: 128F(11) ITAA 1936 ["syndicated loan facility"] 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)." 128F(13) ITAA 1936.["Further condition: 2 or more borrowers"] However, an agreement under which there are 2 or more borrowers is a syndicated loan facility only if all of them are: (a) members of the same wholly-owned group (within the meaning of the Income Tax Assessment Act 1997 ); or (b) parties to the same joint venture; or (c) associates of each other. The Facility is a syndicated loan facility that has at least two lenders at the time of its execution and therefore satisfies the definition of a syndicated loan in subsection 128F(9) of the ITAA 1936. The Facility also satisfies all the elements of the definition of a syndicated loan facility in subsection 128F(11) of the ITAA 1936, as follows: (a) it describes itself as a syndicated loan facility; and (b) it is an agreement between one or more borrowers and at least two lenders; and (c) each Lender agrees, severally, but not jointly, to lend money to the Borrowers under the Facility; and (d) the Borrowers will have access to more than $100,000,000 at the time the first loan is to be provided, under the Facility. The Facility satisfies the further condition imposed by subsection 128F(13) of the ITAA 1936 in respect of multiple borrowers, so that the 'Borrowers' under the Facility are members of the same wholly owned group for the purposes of paragraph (a) of subsection 128F(13) of the ITAA 1936. Accordingly, the Facility is a syndicated loan facility for the purposes of subparagraph 128F(1)(c)(iii) of the ITAA 1936. Does the Facility satisfy the public offer test? A further requirement under subsection 128F(1) of the ITAA 1936 for entitlement to an exemption from the payment of withholding tax in respect of a syndicated loan is contained in subparagraph 128F(1)(d)(iii) of the ITAA 1936. By virtue of this subparagraph the 'invitation to become a lender under a syndicated loan facility' needs to satisfy the public offer tests in subsection 128F(3A) of the ITAA 1936. The 2007 EM clarifies at paragraph 7.53 that: In order for the syndicated loan to be exempt from IWT, the syndicated loan facility must satisfy the public offer test. This is necessary because the debt interest, being the syndicated loan, will generally only come into existence upon there being a draw-down under the facility, which could occur after the time the public offer is made. To overcome this, an invitation to become a lender under a syndicated loan facility has been made the subject of the public offer test. Meaning of invitation in subsection 128F(3A) of the ITAA 1936 The term 'invitation' is not defined in the tax law, nor are there any court authorities on the meaning of the term 'invitation' as used in subsection 128F(3A) of the ITAA 1936. Therefore, the term 'invitation' should be interpreted according to its ordinary meaning and legislative context. The Macquarie Dictionary defines the term 'invitation' as: 1. the act of inviting; 2. the written or spoken form with which a person is invited; 3. attraction or allurement. The judgments in Lee v. Evans (1964) 112 CLR 276 emphasise that the determination of the true nature of an invitation is a question of fact and degree dependent upon the particular enactment and the circumstances of each case. The 2007 EM does not provide any guidance on the meaning of the term. Accordingly, the term 'invitation' in the context of subsection 128F(3A) of the ITAA 1936 refers to any written or verbal proposal to a person that aims to attract them to consider that proposal. It does not involve any intention to bind the invitee to the exact terms of the proposal. The use of the term invitation in subsection 128F(3A) of the ITAA 1936, therefore, provides for the possibility that some negotiation may occur between the relevant parties on what is proposed for consideration under the invitation. In the present circumstances, the Borrowers authorised the Arrangers to invite third party lenders to participate in the Facility. The Arrangers approached third party entities seeking their expression of interest to become a lender under the Facility. Also, an overview of various aspects of the business of the Borrowers and utilisation of the funds to be borrowed under the Facility was made available to each invitee. It is considered that the approach made by the Arrangers constitutes an 'invitation' to induce offers from potential lenders. Also, it is evident that adequate dissemination of the details of the business of the Borrowers and the utilisation of the funds to be borrowed under the Facility to the prospective lenders is in line with the policy intent of subsection 128F(3A) of the ITAA 1936 (refer Taxation Determination TD 1999/8). Do the invitations satisfy the Public Offer Test? The public offer test in subsection 128F(3A), states: 128F(3A) [Conditions satisfying public offer test] 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). Accordingly, in the first instance, the invitations in question will satisfy the public offer test if they comply with the conditions in subparagraphs (a)(i) and (a)(ii) of subsection 128F(3A) of the ITAA 1936. Public offer test - invitations to 10 persons In the present circumstances, as there were greater than 10 Lenders in the invitation list who received the invitation, it is clear that the Facility resulted from the invitation being made to at least 10 persons. Public offer test - Business of Providing Finance It is a required that each of the Lenders carry on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets. In determining whether the Lenders carry on a business of providing finance, paragraph 5.38 of the Explanatory Memorandum which accompanied the Taxation Laws Amendment Act (No.2) 1997 explained, in the context of the public offer test for subsection 128F(3)(a), that if 'the Australian company offers its debentures to 10 banks or pensions funds operating in an overseas financial market, the public offer test will be satisfied'. In the present circumstances, each Arranger, severally not jointly, undertakes, represents and warrants to the Borrowers that the Arrangers have made invitations to become a Lender under the Facility to at least ten (10) Persons, each of whom, as at the date the relevant invitation is made, they believe carries on the business of providing finance or investing or dealing in securities in the course of operating in financial markets, for the purposes of section 128 F(3A)(a)(i) of the Australian Tax Act. Further, each Lender represents and warrants to the Borrowers that, if it received an invitation, at the time it received the invitation it was carrying on the business of providing finance, or investing or dealing in securities, in the course of operating in financial markets. Accordingly, the Borrowers are of the understanding that each of the Lenders approached were carrying on a business of providing finance, or investing or dealing in securities, or in the course of operating in financial markets. Therefore, subparagraph 128F(3A)(a)(i) of the ITAA 1936 has been satisfied. Public offer test - Not an Associate It is a requirement of subparagraph 128F(3A)(a)(ii) of the ITAA 1936 that each of the Lenders were not known, or suspected, by Company X to be an associate of the Borrowers under the Facility. Taxation Determination TD 1999/18, although it deals with a different provision, relevantly states at paragraph 3: ...[T]he company offering the debentures for sale does not need to undertake a detailed examination of the parties to whom the debentures are offered. Therefore, the company may rely on the expectation the dealer, manager or underwriter has complied with the conditions set out in paragraph 128F(3)(a). The company cannot however, ignore persons it knows to be an associate and use the defense that it relied on the dealer, manager or underwriter. Taxation Determination TD 2001/3, although it deals with a different provision, provides guidance on when a company is taken to have the requisite knowledge or suspicion that a debenture would be acquired by an associate: 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…Another reasonable step would be for the debenture itself, and/or the prospectus, to contain a statement advising that the purchase of the debenture by associates could result in the entire issue failing the public offer test. A further such step could be for the issuer to instruct its manager, dealer or underwriter not to sell debentures to the issuer's associates. An issuer may, but is not obliged to by subsection 128F(5), obtain undertakings to this effect from its dealers, managers or underwriters. Whilst Company X cannot ignore persons it knows to be an associate, it is not required to undertake a detailed examination of the potential lenders but may rely on the expectation that the Arrangers have complied with the conditions. Having regard to the fact that the Facility contains an undertaking by the Arrangers that at least 10 of the Persons to whom invitations were made are not, as at the date of the invitation, to the knowledge of the Arrangers, Associates of any of the others, of those 10 invitees, any of the Arrangers or any Lender, it is considered that reasonable steps have been taken to identify whether the parties are associates. Public Offer Test - associates of the borrower Subsection 128F(5AA) of the ITAA 1936 provides that the withholding tax exemption will be lost, in some circumstances, where an associate is invited to become a lender. The Facility provides for an undertaking by the Arranger that it has not made invitations to any person that is to the knowledge of the Arranger an offshore Associate of Company X. Conclusion It has been determined, above, that all of the conditions of paragraph 128F(3A)(a) of the ITAA 1936 has been satisfied. Consequently, section 128F(1) of the ITAA 1936 applies to interest payments made by company X under the terms of the facility, so that the payments are exempt from withholding tax pursuant to section 128F(2) of the ITAA 1936. Accordingly, Company X will be exempt from the obligation to withhold imposed under section 12-245 of Schedule 1 to the TAA 1953 by virtue of section 12-300 of the TAA 1953.