Private ruling: Exemption under section 128F
Published: November 2013

Ruling: Q1: Will interest paid to non-residents by Company X under the Amended Syndicated Facilities Agreement ('Amended SFA') be exempt from withholding tax pursuant to section 128F(2) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. Interest paid to non-resident lenders by Company X under the Amended SFA is exempt from withholding tax pursuant to section 128F(2) of the ITAA 1936.

Relevant facts and circumstances: Background Company X is the Australian resident member of a multinational group. Company X and other members of the group entered into a Syndicated Facilities Agreement ('the Original SFA') with overseas lenders to borrow funds for a specific business purpose. The Original SFA provides for comprehensive terms and conditions governing, among others: · the utilisation, repayment and prepayment, of the borrowings; · calculation of interest, interest payments at default, revised calculations of interest to allow for · market disruption events in terms of changes to interest rates; · tax gross-up and indemnities in respect of tax obligations of the lenders in the various overseas · jurisdictions (of the borrowers). · the rights and obligations of various overseas guarantors, with reference to the Guarantee · Limitations under the Financial Assistance rules in respect of the overseas countries; and · the representations and undertakings by the borrowers to the lenders, including · events of default. The Commissioner ruled that the subsection 128F(2) of the ITAA 1936 exemption from interest withholding tax applied to the borrowing under the Original SFA. Provisions for future amendments to the Original SFA The Original SFA provided for additional borrowings and the application of some of the borrowed amounts to the prepayment of loans under arrangements other than the Original SFA. Accordingly, provisions were made for future amendments to the Original SFA. Those provisions were detailed and precise in terms of the manner in which the amendments should be effected and the consents required to make the amendments. Consent Request Sometime after the Original SFA was established, the borrowers obtained the necessary consents to make additional borrowings through amendments to the Original SFA. In addition to increasing the borrowing under the Original SFA, the amendments also enabled variations to a few other terms of the Original SFA. A number of entities, in addition to the existing lenders under the Original SFA, agreed to participate as lenders in respect of the additional borrowings. Subsequently, an agreement was entered into between the borrowers under the Original SFA and the existing and new lenders ('the Amended SFA'). The Amended SFA is described as an amendment and restatement of the Original SFA in that it now included the additional borrowings and some variations to the terms of the Original SFA. The Amended SFA expressly conveys that it is no more than a restatement of the Original SFA and that the provisions of the Original SFA, save as amended, continue in full force and effect. The terms and conditions governing the borrowings made under the Original SFA have not been displaced by the Amended SFA.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 128F | Income Tax Assessment Act 1936 Subsection 128F(1) | Income Tax Assessment Act 1936 Paragraph 128F(2)

Reasons for decision: Summary: Under the principles of contract law, an amendment to a contract, in this case the Original SFA, could amount to either: · a variation to the Original SFA; or · the termination of the Original SFA and the creation of a new replacement agreement. Contract law principles, as enunciated in FCT v Sara Lee Household and Body Care (Australia) Pty Ltd (2000) ATC 4378; [2000] HCA 35; (2000) 201 CLR 520;172 ALR 346 ( Sara Lee ) provide that an amendment to an existing contract does not necessarily mean that the old contract is terminated and a new contract exists. In Sara Lee , the majority held: ...When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. Their Honours went on to refer to the judgment of Taylor J in Tallerman & Co Pty Ltd v. Nathan's Merchandise (Victoria) Pty Ltd (1957) HCA 10 [1957]; 98 CLR 93 ('Tallerman') where it was held (at 144): ...It is firmly established by a long line of cases ... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement. The question at issue in Sara Lee was whether for the purposes of the capital gains tax provisions, Sara Lee's ('the taxpayer's') disposal of the relevant business was pursuant to the agreement originally entered into with the nominated buyer ('Original Agreement') or the subsequent agreement which varied the Original Agreement ('Amending Agreement'). The summarised facts of the case are that, the buyer under the Original Agreement, in accordance with the provisions of that agreement, assigned some of its rights and obligations under the agreement to certain subsidiaries and affiliates. In the Amended Agreement executed subsequently, the price allocated to the disposal under the Original Agreement was increased by US$1,000,000, the number of employees of the taxpayer that the buyer was obliged to employ was reduced from 54 to 14 and the buyer was required to reimburse the taxpayer in respect of redundancy payments. The High Court of Australia held that the disposal occurred under the Original Agreement as the Amending Agreement did not operate to rescind the Original Agreement. The intention of the parties in making the Amended Agreement, as clearly conveyed by the recital to the Amending Agreement, was to amend, clarify, and supplement the provisions of the Original Agreement. Further, that intention was carried out whereby almost all of the Original Agreement was left on foot in the Amended Agreement. Additionally, the Amending Agreement affirmed that, except for the variations, the Original Agreement remained in full force and effect. The High Court also took into consideration the extent of the amendments, which in the overall scale of the transaction, however viewed, they considered as not being large. In all cases, it is ultimately a question of degree and intention as to whether there is a variation or rescission. | Detailed Reasoning - Has the Amended SFA resulted from a variation or rescission of the Original SFA?: If it is considered that the amendments amount to a variation to the Original SFA, the additional borrowings would be considered part of the existing contract and there would be no requirement for the additional borrowings to separately satisfy the terms of subsection 128F(1) of the ITAA 1936. The amendments to the Original SFA, in particular, amendments to enable the additional borrowings were envisaged at the time of execution of that Agreement. The additional borrowings are within the purview of the Original SFA and the borrowing is largely for the same purpose as that of the original borrowings. | Detailed Reasoning - Whether the Amended SFA displaced the Original SFA: Generally, variation involves changes that do not go to the root of the contract or alter the substance of the original agreement. The result of such variation is that the original contract remains in force, with only some of its terms being altered. By contrast, in circumstances where the terms of a subsequent contract are entirely inconsistent with a first contract, or go to the very root of the first contract, the first contract may be impliedly discharged by abandonment: British & Beningtons Ltd v. North West Cachar Tea Co Ltd [1923] AC 48 (British & Beningtons Ltd). Tallerman considered the position of a contract concluded in one place and subsequently varied by agreement in another place as follows: ...There is only one contract, and one would think it clear that that contract must, if it ever becomes material to inquire where it was made, be regarded as made at the place where it was originally concluded. The variation affects the content of the obligation but not the obligation itself. The place where the parties assumed that obligation, and became bound to one another, is the place where their contract was really made.''(emphasis added) The Amended SFA is described as an 'Amendment and Restatement' of the Original SFA. Furthermore, the Amended SFA provides that the provisions of the Original SFA, save as amended, continue in full force and effect. It is noted that the terms and conditions of the Original SFA have not been displaced by the Amended SFA. In particular, neither the aggregate borrowing under each facility comprising the Original SFA, nor the term of each of those facilities has been subject to changes. Further, the terms and conditions governing the manner of utilisation of the funds borrowed, repayment of the loans and the payment of interest remain unchanged. In effect, the amendments to the Original SFA, as set out in the Amended SFA, do not go to the root of the terms and conditions of the Original SFA. They change the content of the obligation between the parties but not the obligation itself under the Original SFA. This leads to the conclusion that the parties to the Original SFA did not intend that the Original SFA should be rescinded so that the Amended SFA is a second contract between the same parties. Furthermore, the amendments to the Original SFA, being amendments to increase the sums borrowed, amendments to increase the limits permitted for acquisitions by the Group, and amendments to the ratings required for banks, have not modified the Original SFA to an extent that is consistent with the formation of a separate and distinct agreement. Consequently, it is considered that both in terms of the intention of the parties and the degree of amendments to the Original SFA, the Amended SFA is a variation of the Original SFA and has not displaced the Original SFA. | Detailed Reasoning - Interest withholding exemption: The Commissioner has ruled that the Original SFA satisfies the terms of subsection 128F(1) of the ITAA 1936. Consequently, section 128F(1) of the ITAA 1936 applies to the interest payments made by Company X to non-resident lenders under the terms of the Amended SFA, so that, the interest payments in question are exempt from interest withholding tax under subsection 128F(2) of the ITAA 1936.