Private ruling: Offshore banking activity
Published: April 2013
Ruling period: Year ended 31 December 2012 | Year ended 31 December 2013 | Year ended 31 December 2014 | Year ended 31 December 2015 | Year ended 31 December 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Do the trading activities conducted by Company A on behalf of Company B constitute investment activity under subsection 121D(6A)? | A1: Yes.

Relevant facts and circumstances: An Australian resident Offshore Banking Unit, Company A, provides investment management services to an offshore entity Company B. These investment management services are supplied under an Investment Management Agreement. This agreement enables Company A to manage as agent portfolio investments on behalf of Company B. The portfolio investments undertaken by Company A consist of the purchase and sale of securities and derivatives undertaken on an offshore exchange denominated in offshore currency. The investment management services carried out by Company A on behalf of Company B are not carried out at or through a permanent establishment of Company A.

Relevant legislative provisions: Section 121A of the Income Tax Assessment Act 1936 | Section 121D of the Income Tax Assessment Act 1936 | Subsection 121D(6A) of the Income Tax Assessment Act 1936 | Section 121EA of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Section 121A of the Income Tax Assessment Act 1936 (ITAA 1936) states that the object of Division 9A of the ITAA 1936 is to provide concessional taxing at the rate of 10% of the offshore banking (OB) income of an offshore banking unit (OBU). Activities carried out by an OBU that can be considered OB activities, provided that the requirements in section 121EA of the ITAA 1936 are met, are listed at section 121D of the ITAA 1936. Therefore before looking at section 121D section 121EA must be considered. Section 121EA of the ITAA 1936 states that: For a thing done by an OBU to be an OB activity, it is necessary that, when the thing is done: (a) the OBU is a resident and the thing is not done in carrying on business in a country outside Australia at or through a permanent establishment of the OBU; or (b) the OBU is a non-resident and the thing is done in carrying on business in Australia at or through a permanent establishment of the OBU. Based on the facts provided for this case section 121EA(a) is satisfied. When considering activities carried out by an OBU that can be considered OB activities pursuant to section 121D of the ITAA 1936, based on the facts provided, the relevant paragraph is 121D(1)(e). Paragraph 121D(1)(e) provides that an OB activity can include an investment activity described in subsections 121D (6), (6A) or (6B) of the ITAA 1936. In this case subsection 121D (6) and (6B) are not applicable and the relevant provision to be considered is subsection 121D (6A). Subsection 121D(6A) of the ITAA 1936 states that: For the purposes of paragraph (1)(e), an investment activity is also the managing by an OBU of a portfolio investment (see subsection 121DA(1)) for the whole or part (the investment management period ) of a year of income, where : a. the portfolio investment is managed as broker, agent or custodian for, or trustee for the benefit of, a non-resident; and b. the portfolio investment was made by the OBU or the non-resident; and c. the portfolio investment was made with a non-resident (except to the extent that making the investment consisted of making a loan or purchasing an Australian thing); and d. the currency in which the portfolio investments was made was not Australian currency; and e. if the portfolio investment consists of only a single thing - the thing is not an Australian thing (see subsection 121DA(5)); and f. if paragraph (e) does not apply-the average Australian asset percentage of the portfolio investment is not more than 10%. All the above requirements of subsection 121D(6A ) of the ITAA 1936 have been met by Company A. Therefore the trading activities conducted by Company A on behalf of Company B constitutes investment activity under subsection 121D(6A) of the ITAA 1936.