Private ruling: Issue of Subordinated Notes
Date of advice: 25 August 2025
Published: 27 October 2025
Ruling period: Year ending 30 June 20XX to 30 June 20XY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Notes satisfy the debt test in section 974-20 of the Income Tax Assessment Act 1997 and therefore be a debt interest within the meaning of subsection 974-15(1) of the Income Tax Assessment Act 1997 ? | A1: Yes. | Q2: Will the Notes satisfy the equity test in subsection 974-70(1) of the Income Tax Assessment Act 1997 and therefore be equity interests pursuant to subsection 974-70(1)? | A2: No. | Q3: Will the Notes be a financial arrangement pursuant to section 230-45 of the Income Tax Assessment Act 1997 ? | A3: Yes. | Q4: Will XYZ be entitled to deductions pursuant to subsection 230-15(2) of the Income Tax Assessment Act 1997 for the loss in respect of interest payable on the Notes? | A4: Yes. | Q5: Will deductions in respect of the Notes be recognised on an accruals basis pursuant to subsection 230-100(3) of the Income Tax Assessment Act 1997 ? | A5: Yes, to the extent that such a loss is not taken into account under the balancing adjustment in Subdivision 230-G of the Income Tax Assessment Act 1997 . | Q6: Will subsection 230-15(5) of the Income Tax Assessment Act 1997 or subsection 230-15(6) of the Income Tax Assessment Act 1997 apply to limit the deductions in respect of the Notes under subsection 230-15(2) of the Income Tax Assessment Act 1997 ? | A6: No. | Q7: Will XYZ be required to withhold an amount under section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 from interest payments made in respect of the Notes? | A7: No.

Relevant facts and circumstances: 1. XYZ is an Australian tax resident company. 2. XYZ raised capital by issuing X million fully-paid unsecured subordinated notes (the Notes). 3. The Notes were issued in order to repay other similar past debt issues and fund the working capital of XYZ. The proceeds raised by the Notes will be used for the following: • To repay existing notes. The proceeds from the existing notes were used to support XYZ's general corporate purposes, to fund capital expenditure and to refinance existing debt. The proceeds from the existing debt refinanced by the existing notes were used to replace earlier sources of funding used for XYZ's general corporate purposes in carrying on business activities directed to the production of assessable income, or to fund capital expenditure. • To support XYZ's general corporate purposes in carrying on its business. 4. The following Terms apply to the Notes: i. The Notes will have a term of more than 10 years. ii. During the term of the Notes, XYZ will make interest payments quarterly in arrears. The interest amount payable on any interest payment date shall be calculated by applying the applicable interest rate to the principal amount of the Notes. iii. The interest rate will increase at a prescribed rate on the relevant dates set out under the Terms. iv. Interest may be deferred at the sole discretion of XYZ. Additional interest will accrue on the deferred interest at the same interest rate as the principal amount of the Notes and will be added to the deferred interest (and thereafter accumulate additional interest accordingly) on each interest payment date. Deferred interest will become due and payable subject to the Terms. v. The Notes will be redeemed by XYZ on the maturity date at their principal amount plus any interest accrued up to the maturity date, and any outstanding deferred interest payments (unless redeemed earlier). vi. XYZ has the option to redeem the Notes early, subject to various requirements being satisfied. vii. The Notes will be subordinated to all senior debt obligations of XYZ and rank ahead of ordinary shares in XYZ in a winding-up of XYZ. viii. The Notes will rank pari passu without any preference among themselves and pari passu with any Parity Obligations of the Issuer. 'Parity Obligations' include • any series of preference shares issued by XYZ ranking equally with the Notes • any security or obligation issued by a subsidiary of XYZ which benefits from a guarantee or other contractual support undertaking of XYZ which guarantee or contractual support undertaking ranks or is expressed to rank equally with the Notes, and • any other security, obligation, instrument or preferred security issued by XYZ ranking with the Notes. ix. On the occurrence of particular specified events, instead of redeeming the Notes, XYZ may substitute all of the Notes for other securities issued by XYZ, or vary the Terms, provided that (among other requirements) such other securities or amended Notes have terms not materially less favourable to holders and have a rating ascribed to them which is equal to or higher than that ascribed to the Notes immediately prior to such substitution or variation. x. The Notes are not convertible into shares or carry any rights to acquire shares or any other securities in XYZ, or any rights to vote at general meetings of XYZ. 5. XYZ made an institutional offer of the Notes to investors in accordance with the offering circular. 6. XYZ advertised the issue of the Notes through the offering circular to the market, which outlined the detailed terms of the Notes and was published and made available to the potential investors. Once published, XYZ (or its dealers) undertook marketing activities worldwide in respect of the Notes. 7. The Notes were offered to more than 10 unrelated institutional investors that carry on a business of providing finance or investing or dealing in securities in the course of operating in a financial market and who were not associates (as defined in subsection 128F(9) of the Income Tax Assessment Act 1936 (ITAA 1936)) of one another. 8. The Notes were not acquired either directly or indirectly by an associate (as defined in subsection 128F(9) of the ITAA 1936) of XYZ. 9. The Notes were not acquired by a connected entity (as defined in subsection 995-1(1) of the ITAA 1997) of XYZ. 10. XYZ is subject to the Taxation of Financial Arrangement (TOFA) rules contained in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997). 11. XYZ has not made any tax timing election for the purposes of the TOFA rules in Division 230 of the ITAA 1997. 12. XYZ has not made a choice under paragraph 230-100(2)(c) of the ITAA 1997 in respect of the gain or loss arising from the Notes. 13. There was no issuance of an ordinary debt interest with similar features to the Notes issued by XYZ immediately before the Notes. 14. Based on calculations provided by XYZ, for the purposes of determining the present value of the financial benefits provided under the Notes, the annually compounded internal rate of return and the benchmark rate of return is the same. Based on the benchmark rate of return, the subsequent value in present value terms of the accrued interest (on the basis it is paid on the interest payment dates) and the principal amount (on the basis it is paid on the maturity date) of the Notes is greater than the principal amount of the Notes. 15. XYZ has a history of paying distributions and amounts in respect of their Parity Obligations, and there is no indication that this will not continue with uninterrupted continuity. Assumptions 16. XYZ will continue to be a resident of Australia when XYZ pays the interest on the Notes. 17. XYZ will apply the proceeds from the proposed issue of the Notes in a business that is carried on wholly for a taxable purpose. 18. The increase in the interest rate at the prescribed rate on the relevant dates set under the Terms will not impose an effectively non-contingent obligation on XYZ to redeem the Notes at that time or any other time prior to the maturity date. 19. XYZ will not make any TOFA tax timing election under Division 230 of the ITAA 1997. 20. XYZ, if eligible, will not make a choice under paragraph 230-100(2)(c) of the ITAA 1997 in respect of the gain or loss arising from the Notes. 21. The interest in respect of the Notes will not be paid to an associate (as defined in subsection 128F(9) of the ITAA 1936) of XYZ. 22. The Notes will not be acquired or held by a connected entity (as defined in subsection 995-1(1) of the ITAA 1997) of XYZ.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 subsection 991(1) | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 Division 11A | Taxation Administration Act 1953 section 12-245 | Taxation Administration Act 1953 section 12-300

Reasons for decision: Summary: The Notes satisfy the debt test in section 974-20 and therefore are debt interests within the meaning of subsection 974-15(1). | Detailed Reasoning - Detailed reasoning: 1. The object of Division 974 is to provide rules to determine whether various instruments are equity or debt for income tax purposes, irrespective of their legal form. The tests in Division 974 are intended to test the economic substance of the transaction or instrument in making this determination. The tax effects that generally flow from such a finding are that distributions on debt instruments will be deductible but unfrankable, and distributions on equity instruments will not be deductible but frankable. 2. Whether the Notes are debt interests within the meaning of subsection 974-15(1) is determined generally in accordance with the tests contained in Subdivision 974-B. 3. Pursuant to subsection 974-15(1), a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity. 4. 'Scheme' is defined at subsection 995-1(1) as meaning any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. 5. An 'arrangement' is defined in subsection 995-1(1) as meaning any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. 6. This is a broad definition covering a broad range of possible circumstances. As such, the Notes will constitute a scheme as defined in subsection 995-1(1). 7. The debt test at subsection 974-20(1) provides: (1) A *scheme satisfies the debt test in this subsection in relation to an entity if: (a) the scheme is a financing arrangement for the entity; and (b) the entity, or a connected entity of the entity, receives, or will receive, a financial benefit or benefits under the scheme; and (c) the entity has, or the entity and a connected entity of the entity each has, an effectively non- contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when: (i) the financial benefit referred to in paragraph (b) is received if there is only one; or (ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and (e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil. | Detailed Reasoning - Are the Notes financing arrangements for the purposes of paragraph 974-20(1)(a)?: 8. Subsection 974-130(1) provides that a scheme is a financing arrangement if it is entered into or undertaken to raise finance for the entity (or a connected entity of the entity), to fund another scheme, or a part of another scheme, that is a financing arrangement, or to fund a return, or a part of a return, payable under or provided by or under another scheme, or a part of another scheme, that is a financing arrangement. 9. The Notes are financing arrangements within the meaning given by section 974-130, as the issue of the Notes raised X million for XYZ, which will be used to support XYZ's general corporate purposes in carrying on a business. As such, the condition in paragraph 974-20(1)(a) is satisfied. Did the entity receive a financial benefit under the Notes for the purposes of paragraph 974-20(1)(b)? 10. Subsection 974-160(1) defines financial benefit as (among other things) meaning anything of economic value. 11. Under the transaction, XYZ will receive a cash amount of X from holders for each Note issued to them. Pursuant to paragraph 974-160(1)(a), this is something of economic value. As such, the condition in paragraph 974-20(1)(b) is satisfied. Does the entity have an effectively non-contingent obligation under the Notes to provide a financial benefit for the purposes of paragraph 974-20(1)(c)? 12. The term effectively non-contingent obligation (ENCO) is defined in subsections 974-135(1) to (3). Subsection 974-135(1) provides that there is an ENCO to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action. Subsection 974-135(3) provides that an obligation is 'non-contingent' if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation. 13. In accordance with the Terms, XYZ has obligations under the scheme to provide the following financial benefits to the holders: • the principal amount of the Notes, and • interest calculated on the principal amount of the Notes at the prevailing interest rate, payable quarterly in arrears (subject to optional deferral). 14. Under the Terms, the principal amount of the Notes must be paid (at the latest) on maturity date. Accordingly, there is an ENCO to provide the principal amount. 15. In determining whether the obligation to provide the interest is in substance or effect an ENCO, regard is to be had to the terms, conditions and pricing of the Notes including the following matters: • the optional deferral of interest • the change in Interest Rate • the subordination of the Notes • the optional early redemption, and • the substitution of the Notes. Optional deferral of Interest 16. Though XYZ has the ability to defer interest payments under the Terms, this only goes to the timing of satisfying its obligation to pay such interest. There is no discretion for XYZ to legally avoid paying the interest altogether. Under the Terms it is a requirement that any outstanding deferred interest payments must be paid, at the latest, on maturity date together with the principal amount plus any interest accrued up to (but excluding) the maturity date. Any deferred interest is cumulative and will be compounded at the same interest rate as the principal amount of the Notes bears from time to time. 17. Support for this position is expressed in ATO Interpretative Decision ATO ID 2006/125 Income tax: Term subordinated notes issue: deferred interest and the existence of an effectively non-contingent obligation (ATO ID 2006/125). In ATO ID 2006/125, a loan agreement allowed the borrower the option to defer payment of the interest falling due quarterly to the end of each 5 year period. Whether the borrower had an ENCO was not affected if the deferral of payment of interest was chosen. It was a real amount which the borrower was required to pay or settle with the lender by the end of every fifth year. Change in interest rate 18. Certain instruments that give the issuer an unfettered discretion to reset the interest rate to any rate (including zero) will not constitute debt interests for income tax purposes because the payment of interest is contingent upon the issuer choosing to reset the interest rate (Taxation Determination TD 2006/1 Income tax: for the purposes of Division 974 of the Income Tax Assessment Act 1997, if the issuer of an interest bearing instrument can change the rate of interest that will become payable to any rate (including zero) that it chooses at its sole discretion, does the issuer have an 'effectively non-contingent obligation' to provide 'financial benefits' as interest payments from the time that a change in the interest rate could take effect? ). 19. Under the Terms, the interest on the Notes is calculated according to a prescribed rate. At certain set times the interest will increase by a prescribed amount. Accordingly, under the Terms, XYZ does not have an unfettered discretion to reset the interest rate at any rate. Subordination 20. The Terms provide that in the event of a winding-up, the holders' rights will be subordinate to the claims of the holders of senior obligations of XYZ. 21. The subordination provisions of the Notes do not affect XYZ's obligations to pay the principal amount and accrued interest on the Notes (including any deferred interest payments). The principal and interest amounts will ultimately become due and payable. The subordination of the Notes relates to the priority of payment on winding-up and merely operates to postpone enforcement of the obligation to pay until a time that the senior obligations have been paid. Optional early redemption 22. Pursuant to the Terms, XYZ may redeem the Notes prior to maturity date, upon certain events occurring. 23. The Terms do not impose an obligation on XYZ to redeem early, and the only consequence under the Terms of not redeeming at those times is that interest continues to be paid on the Notes. Accordingly, the optional early redemption does not make the obligation to pay interest on the Notes contingent. 24. Further, it is assumed that the increase in the interest rate at the prescribed rate on the relevant dates set out under the Terms will not impose an ENCO to redeem the Notes at those dates or any other time prior to the maturity date. Substitution 25. In certain circumstances, the Terms provide that XYZ may substitute all of the Notes for other securities issued directly or indirectly by XYZ. However, the option to substitute is contingent on a particular event occurring. In addition, the substituted securities must have terms which are not materially less favourable to Holders than the Terms of the Notes immediately prior to such substitution or variation. 26. Accordingly, the option to substitute the Notes does not make the obligation to pay interest on the Notes contingent. Conclusion in respect of ENCO 27. On consideration of the above matters, in accordance with the Terms, the condition in paragraph 974- 20(1)(c) is satisfied as there is an ENCO under the scheme to provide: • the principal amount of the Notes, which must be paid (at the latest) on maturity date to holders, and • interest calculated on the principal amount of the Notes at the prevailing interest rate, payable quarterly in arrears (subject to optional deferral) to holders. Will the value of the financial benefits provided at least equal the value received by the entity for the purposes of paragraph 974-20(1)(d)? 28. Subsection 974-20(2) provides that the value provided is the value of the financial benefits to be provided under the scheme by the entity or a connected entity if there is only one, or the sum of the values of all the financial benefits provided or to be provided under the scheme by the entity or a connected entity of the entity if there are 2 or more. 29. In respect of the value of the financial benefits received, paragraph 974-20(3)(a) provides that the value received is the value of the financial benefit received under the scheme by the entity. 30. Subsection 974-20(4) provides that a financial benefit to be provided under the scheme by the entity is taken into account only if it is one that the entity has an ENCO to provide, and a financial benefit to be received under the scheme by the entity is taken into account only if it is one that another entity has an ENCO to provide. 31. The value of the financial benefits is determined pursuant to subsection 974-35(1). Relevantly, the value of financial benefits provided or received under a scheme is to be calculated in present value terms if the performance period ends more than 10 years after the interest arising from the scheme is issued (subparagraph 974-35(1)(a)(ii)). 32. Subsections 974-35(3) and (4) define the meaning of 'performance period'. 33. Under the Terms, the Notes have a maturity date that is more than 10 years from the issue date of the Notes. Given the performance period of the Notes will be more than 10 years, pursuant to subparagraph 974-35(1)(a)(ii) the financial benefits provided or received under the Notes must be valued in present value terms. 34. Pursuant to subsection 974-35(2), the value of financial benefits provided or received under the Notes is calculated assuming that the interest arising from the scheme will continue to be held for the rest of its life. Subsection 974-40(2) furtherprovides that the existence a right or option to terminate the interest early is disregarded in working out the length of the life of the interest, if a party has an ENCO to exercise the right or option to terminate the interest early. 35. As there is no ENCO to exercise the option to redeem the Notes early, for the purposes of the Notes, it is assumed they will be held until the maturity date. 36. Subsection 974-50(1) provides that the value of a financial benefit in present value terms is calculated using the formula at subsection 974-50(4) for each financial benefit separately. 37. Subsection 974-50(3) provides that for the purpose of the formula at subsection 974-50(4), it is assumed that all amounts paid by an entity in respect of the interest are paid at the earliest time when the entity becomes liable to pay them. Accordingly, for the purpose of the Notes, it must be assumed interest will be paid at the interest payment dates and the principal amount will be paid at the maturity date. 38. As set out in the Relevant facts and circumstances , there was no issuance of an ordinary debt interest with similar features to the Notes issued by XYZ immediately before the Notes. Based on calculations provided by XYZ, for the purposes of determining the present value of the financial benefits provided under the Notes, the subsequent value in present value terms of the interest (on the basis it is paid on the interest payment dates) and the principal amount (on the basis it is paid on the maturity date) of the Notes is greater than the principal amount received on the Notes. 39. As the present value of the financial benefits provided by XYZ under the Notes is greater than the principal amount received on the Notes, it is considered the present value of the financial benefits to be provided by XYZ in respect of the Notes (being the interest and principal amount) will exceed the value of the financial benefits received in respect of the Notes (being the issue price). Accordingly, the condition in paragraph 974-20(1)(d) is satisfied. Will both the value of the financial benefits provided and the value received not be nil for the purposes of paragraph 974-20(1)(e)? 40. Both the value of the financial benefits to be provided by XYZ (being the interest and principal amount) and the value of the financial benefits to be received by XYZ (being the issue price) will be greater than nil. Accordingly, the condition in paragraph 974-20(1)(e) is satisfied. Conclusion on the application of the debt test in subsection 974-20(1) 41. As each of the requirements of the debt test under subsection 974-20(1) are satisfied, the Notes will be debt interests pursuant to subsection 974-15(1). Question 2 Will the Notes satisfy the equity test in subsection 974-70(1) of the Income Tax Assessment Act 1997 and therefore be equity interests pursuant to subsection 974-70(1)? Summary The Notes will not satisfy the equity test in subsection 974-70(1) and therefore the Notes will not be equity interests pursuant to subsection 974-70(1). Detailed reasoning 1. The test for an equity interest in a company is contained in section 974-70 of Subdivision 974-C. Are the Notes equity interests pursuant to subsection 974-70(1)? 2. Pursuant to subsection 974-70(1), a scheme gives rise to an equity interest in a company if: • the scheme satisfies the equity test in subsection 974-75(1), and • the interest is not characterised as a debt interest under Subdivision 974-B. 3. As set out in the Detailed reasoning for Question 1, the Notes are characterised as debt interests under Subdivision 974-B. As such, they will not be equity interests in XYZ pursuant to subsection 974-70(1). Are the Notes equity interests pursuant to subsection 974-70(2)? 4. The debt and equity test provisions include the concept of related schemes. An equity interest can also arise under subsection 974-70(2) if two or more related schemes give rise to a notional scheme with a combined effect of an equity interest. 5. Having regard to the Relevant facts and circumstances , it is considered that there are no schemes related to the Notes that taken together give rise to an equity interest in XYZ. Accordingly, subsection 974-70(2) will not apply to characterise the Notes as equity interests. Are the Notes equity interests pursuant to section 974-80? 6. An equity interest may also arise under section 974-80. 7. Relevantly, section 974-80 requires that the interest is held by a connected entity of the company. 8. A 'connected entity' is defined in section 995-1 to mean an associate of the entity or another member of the same wholly owned group if the entity is a company and is a member of such a group. An 'associate' is defined in section 318 of the ITAA 1936 and 'wholly owned group' has the meaning given by section 975- 500. 9. The Notes were not and will not be acquired by a connected entity (as defined in subsection 995-1(1)). As a result, the Notes will not satisfy the requirement at paragraph 974-80(1)(b), meaning the requirements of paragraphs 974-80(1)(a) to (d) will not all be present. 10. Accordingly, section 974-80 will not apply to treat the Notes as equity interests in XYZ. Question 3 Will the Notes be financial arrangements pursuant to section 230-45 of the Income Tax Assessment Act 1997 ? Summary The Notes will be financial arrangements pursuant to section 230-45. Detailed reasoning 1. Division 230 deals with the tax treatment of gains and losses from financial arrangements. The Division provides for the recognition of gains and losses, as appropriate, over the life of a financial arrangement. 2. For Division 230 to apply to the Notes, the Notes must be arrangements that satisfy the definition of financial arrangement. Section 230-45 is the general test to determine whether you have a financial arrangement. Will the Notes constitute arrangements for the purposes of Division 230? 3. To determine whether the Notes are financial arrangements for the purposes of Division 230, it is first necessary to identify the relevant arrangement under section 230-55. 4. Subsection 230-55(4) sets out factors that need to be considered when determining whether rights and/or obligations form a single arrangement or two or more separate arrangements for the purposes of Division 230. Whether a number of rights and/or obligations constitute one or more arrangements is a question of fact and degree. 5. Having regard to the factors in subsection 230-55(4), on balance it is considered that each Note will constitute an arrangement for the purposes of Division 230. Will the Notes constitute financial arrangements under section 230-45? 6. Pursuant to subsection 230-45(1), you have a financial arrangement if, broadly, you have, under an arrangement identified pursuant to section 230-55, a cash settlable right to receive or obligation to provide a financial benefit, or a combination of such rights and/or obligations, unless you have not insignificant other rights to receive or obligations to provide something which is not a financial benefit, or the other rights or obligations that are not cash settlable. Are there cash-settlable legal or equitable rights to receive or obligations to provide financial benefits under the Notes? 7. Subsection 230-45(2) specifies the circumstances in which a right to receive or obligation to provide a financial benefit that you have, is cash settlable. 8. Under the Notes, the relevant rights and obligations that XYZ will have are: • the right to receive the principal amount • an obligation to repay the principal amount, and • an obligation to pay the interest amounts at the relevant interest rate. 9. As set out in the Detailed reasoning for Question 1, paragraph 974-160(1)(a) provides that a 'financial benefit' means anything of economic value. 10. Subsection 230-45(2) provides that a right you have to receive, or an obligation you have to provide, a financial benefit is cash settlable if, and only if, the benefit is money or a money equivalent. 11. As each of the relevant rights and obligations that arise under the Notes are in respect of monetary amounts, the rights and obligations under the Notes constitute cash-settlable rights to receive or obligations to provide financial benefits. 12. Paragraphs 230-45(1)(d), (e) and (f) will not apply to the Notes, as there are no non-insignificant non-cash settlable rights or obligations under the Notes. 13. As the rights and obligations that arise under the Notes are all cash-settlable rights or obligations to receive or provide financial benefits, the Notes are financial arrangements under section 230-45. Will the Notes constitute financial arrangements under section 230-50? 14. Section 230-50 provides two further tests for determining a financial arrangement, at subsection 230-50(1) and subsection 230-50(2). 15. Subsection 230-50(1) provides that you also have a financial arrangement if you have an equity interest. 16. Subsection 230-50(2) provides that you also have a financial arrangement if you have, under an arrangement, a legal or equitable right to receive, or obligation to provide (or a combination of one or more such rights and/or obligations) something that is a financial arrangement under section 230-50, and the right, obligation or combination does not constitute, or form part of, a financial arrangement under subsection 230-45(1). Will the Notes constitute financial arrangements under subsection 230-50(1)? 17. An equity interest, as defined in Subdivision 974-C, is also a financial arrangement under subsection 230- 50(1). 18. Where an equity interest is also cash settlable, it may satisfy both subsection 230-50(1) and subsection 230-45(1). 19. Taxation Determination TD 2011/12 Income tax: where an equity interest is a financial arrangement which satisfies both subsections 230-45(1) and 230-50(1) of the Income Tax Assessment Act 1997, which provision applies? (TD 2011/12) provides the Commissioner's view on which provision takes precedence where an equity interest is a financial arrangement which satisfies both subsections 230-45(1) and 230-50(1). TD 2011/12 provides (at paragraph 10) that subsection 230-50(1) applies in preference to subsection 230-45(1). 20. As such, in order to work out whether the Notes are financial arrangements under section 230-45, it is also necessary to determine whether the Notes satisfy subsection 230-50(1). 21. Subsection 230-50(1) provides that the equity interest constitutes the financial arrangement. As set out in the Detailed reasoning for Question 2, the test for an equity interest in a company is contained in section 974-70 of Subdivision 974-C. 22. As set out in the Detailed reasoning for Question 2, the Notes do not constitute equity interests under section 974-70 nor section 974-80. As such, they will not be financial arrangements under subsection 230- 50(1). Will the Notes constitute financial arrangements under subsection 230-50(2)? 23. As set out above, the Notes constitute a financial arrangement under subsection 230-45(1). Hence, pursuant to paragraph 230-50(2)(b) they are not financial arrangements under section 230-50. Subdivision 230-H (Exceptions) 24. Division 230 does not apply to gains and losses from certain financial arrangements that are subject to exceptions under Subdivision 230-H. 25. Having regard to the Relevant facts and circumstances , it is considered that none of these exceptions will apply to the Notes. Question 4 Will XYZ be entitled to deductions pursuant to subsection 230-15(2) of the Income Tax Assessment Act 1997 for the loss in respect of interest payable on the Notes? Summary XYZ will be entitled to deductions pursuant to subsection 230-15(2) for the loss in respect of interest payable on the Notes, subject to any limit that may be imposed under subsection 230-15(5). Detailed reasoning 1. To determine whether a loss made from the Notes is deductible under Division 230, the loss must satisfy the requirements of subsection 230-15(2). Subsection 230-15(2) provides that you can deduct a loss you make from a *financial arrangement, but only to the extent that: • you make it in gaining or producing your assessable income; or • you necessarily make it in carrying on a business for the purpose of gaining or producing your assessable income. 2. The Explanatory Memorandum to the Taxation Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (TOFA EM) states (at paragraph 3.71) that subsection 230-15(2) reflects the general deduction rule in section 8-1, with the exception that it generally does not deny deductions for a loss of a capital nature. In particular, the TOFA EM states (at paragraph 3.72) that subsection 230-15(2) reflects the nexus aspects, which means the case law in respect of the nexus aspects of section 8-1 is also relevant when determining whether losses made from a financial arrangement satisfy subsection 230-15(2). Nexus requirements 3. Whether a loss has a sufficient nexus to the gaining or producing of income or carrying on a business for that purpose is a question of fact and circumstances. However, ATO Interpretative Decision ATO ID 2012/19 Income tax: Taxation of financial arrangements: application of subsection 230-15(5) of the Income Tax Assessment Act 1997 to a dividend on a debt interest (ATO ID 2012/19) notes that a loss may not have the requisite nexus to gaining or producing of assessable income or carrying on a business for that purpose where it is made to secure a permanent or enduring benefit. 4. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts: FC of T v. Smith (TR 95/25) provides the Commissioner's view on the implications flowing from the decision of the Full Federal Court on demonstrating that a loss comprising interest satisfies the requirements of section 8-1 for deductibility. TR 95/25 provides (at paragraph 3(a)) that the test is one of characterisation and the essential character of an expense is a question of fact to be determined by reference to all the circumstances. 5. In relation to refinancing loans, TR 95/25 provides (at paragraph 3(b)) that "The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower. However, regard must be had to all the circumstances, including the character of the taxpayer's undertaking or business, the objective purpose of the borrowing, and the nature of the transaction or series of transactions of which the borrowing of funds is an element. In some cases, the taxpayer's subjective purpose, intention or motive may be relevant in deciding the deductibility of interest." 6. ATO ID 2012/19 provides that "...The deductibility of an amount of interest is typically determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put ( Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153; Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613)..." 7. In Macquarie Finance Ltd v FCT (2005) 61 ATR 1 it was held that interest payments paid to raise permanent additional capital were not incurred for the purpose of gaining or producing assessable income. Gyles J held (at 251) the transaction could be viewed as an affair of capital from start to finish, whereas French J held (at 104) "The basis of the conclusion that the interest payments were not made for the purpose of gaining or producing assessable income is their relationship to the raising of additional permanent capital. The overlap is not merely an artifact of the facts of this case. Section 8-1(2) does not so much define an exception to the deductibility under s 8-1(1) as distinguish certain classes of payment which are not deductible under s 8-1(1)." 8. Expenditure will be considered to be capital expenditure if it produces some asset or advantage of a lasting character for the benefit of the business. Per Latham J (at 355) in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 (1938) 5 ATD 23; (1938) 1 AITR 403 ( Sun Newspapers ), an enduring benefit does not require that the taxpayer obtain an actual asset, it may be a benefit which endures, in the way that fixed capital endures. Latham J stated "When the words "permanent" or "enduring" are used in this connection it is not meant that the advantage which will be obtained will last forever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole..." 9. Dixon J further stated (at 359-361) in Sun Newspapers that "...The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will endure for the benefit of the organization or system or "profit-earning subject". It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital." | Detailed Reasoning - Subsection 230-15(4): 10. While a loss may not have the requisite nexus to gaining or producing of assessable income or carrying on a business for that purpose where it is made to secure a permanent or enduring benefit or is in substance a distribution of profit, subsection 230-15(4) modifies the operation of subsection 230-15(2), by stating that these characteristics (on their own) will not prevent a loss from being deductible under subsection 230-15(2). 11. The loss must still otherwise satisfy the requirements of subsection 230-15(2) to be deductible under this provision. 12. Subsection 230-15(4) provides that if the financial arrangement is a debt interest, the loss is not prevented from being deductible for an income year under subsection 230-15(2) merely because of either or both of the following: • one or more of the financial benefits that are taken into account in working out the amount of the loss are contingent on aspects of the economic performance (whether past, current or future) of you or a part of your activities (or a connected entity of yours or a part of the activities of a connected entity of yours) • one or more of the financial benefits that are taken into account in working out the amount of the loss secure a permanent or enduring benefit for you or a connected entity of yours. | Detailed Reasoning - Will the interest payable under the Notes be deductible under subsection 230-15(2)?: 13. As set out in the Detailed reasoning for Question 3, the Notes will be financial arrangements under section 230-45. 14. In determining whether interest on the Notes will be a loss or outgoing that has been made in the course of gaining or producing assessable income or in the carrying on of a business for that purpose, facts considered relevant to the characterisation of the losses included: • Part of the proceeds raised by the Notes will go towards repaying existing notes, which were used to refinance existing debt and to fund capital expenditure, and supported XYZ's general corporate purposes in carrying on its business for the purpose of gaining or producing assessable income. The Notes effectively replace those existing notes as a source of funding. • The proceeds from the debt refinanced by the existing notes were used for XYZ's general corporate purposes in carrying on business activities directed to the production of assessable income, or to fund capital expenditure. • The remainder of the proceeds raised by the Notes will be used for XYZ's general corporate purposes in carrying on its business for the purpose of gaining or producing assessable income. • The Notes have a term of more than 10 years. Under the Terms, XYZ has the discretion to defer payment of interest until (at the latest) the maturity date. Any deferred interest is cumulative and will be compounded at the same interest rate as the principal amount of the Notes bears from time to time. 15. On the basis of the above, it is the Commissioner's view that at least part of the interest payable under the Notes will be losses made to secure a permanent or enduring benefit for XYZ. 16. However, the modification in subsection 230-15(4) will apply such that the losses will not be prevented from being deductible for an income year under subsection 230-15(2). Accordingly, XYZ will be entitled to a deduction pursuant to subsection 230-15(2) for any loss arising from the interest paid on the Notes, subject to any limit that may be imposed under subsection 230-15(5). Question 5 Will deductions in respect of the Notes be recognised on an accruals basis pursuant to subsection 230-100(3) of the Income Tax Assessment Act 1997 ? Summary To the extent that such a loss is not taken into account under the balancing adjustment in Subdivision 230-G, deductions in respect of the Notes will be recognised on an accruals basis pursuant to subsection 230-100(3). Detailed reasoning 1. Pursuant to section 230-40, the accruals and the realisation methods under Subdivision 230-B are the default methods which apply to financial arrangements that are not subject to any of the elective tax timing methods of Division 230. 2. As set out in the Relevant facts and circumstances , XYZ has not made, and it is assumed will not make, any tax timing method elections under Subdivisions 230-C, 230-D, 230-E or 230-F. As a result, the default methods in Subdivision 230-B will apply to the Notes. 3. The accruals method under subsection 230-100(2) (the overall gain or loss approach) or subsection 230-100(3) (the particular gain or loss approach) will apply where there is a sufficiently certain gain or loss from the financial arrangement. Where gains or losses are not sufficiently certain, the realisation method under subsection 230-100(5) will apply. 4. To the extent that the balancing adjustment in Subdivision 230-G applies, neither the accruals method nor the realisation method will apply. 5. The particular gain or loss approach (subsection 230-100(3)) is the default approach when applying the accruals method unless the taxpayer, if eligible, makes a choice to apply the accruals method to the overall gain or loss pursuant to paragraph 230-100(2)(c). As set out in the Relevant facts and circumstances , XYZ has not made, and it is assumed, if eligible, will not make, the choice under paragraph 230-100(2)(c), meaning the overall gain or loss approach will not apply to the Notes. To determine whether the particular gain or loss approach applies to the deductions arising under the Notes, it must be determined whether the loss arising from the interest paid on the Notes is a sufficiently certain particular loss. 6. In deciding whether XYZ's gain or loss is sufficiently certain for the purposes of section 230-110, XYZ can only have regard to those financial benefits under the Notes that are sufficiently certain financial benefits. Are there sufficiently certain financial benefits under the Note? 7. Whether a financial benefit is sufficiently certain is determined pursuant to section 230-115. 8. Subsection 230-115(1) relevantly provides that in deciding whether it is sufficiently certain at a particular time that you make, or will make, a gain or loss from a financial arrangement, you: • have regard only to financial benefits that you are sufficiently certain to receive and provide, and • have regard to those financial benefits only to the extent that the amount or value of the benefits is, at that time, fixed or determinable with reasonable accuracy. 9. Subsection 230-115(2) relevantly provides that a financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if: • it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the financial arrangement for the rest of its life), and • at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy. 10. Where a calculation of a financial benefit relies on a certain type of variable, the taxpayer is required to assume that the variable will remain constant at the value it had at the particular time at which the 'sufficiently certain' test in subsection 230-115(2) is applied (subsection 230-115(4)). 11. Under the Terms, the interest amount payable on any interest payment date shall be calculated by applying the applicable interest rate to the principal amount of each Note. Though the payment of the interest amounts may be deferred, they must be paid (at the latest) on the maturity date, and any deferred interest is cumulative and will be compounded at the same interest rate as the principal amount of the Notes bears from time to time. As such, the interest amounts are financial benefits that XYZ is sufficiently certain to provide and the amount or value is fixed and determinable with reasonable accuracy at the start of the financial arrangement. The interest amounts are therefore sufficiently certain financial benefits pursuant to section 230-115. 12. Under the Terms, XYZ must redeem the Notes (at the latest) on the maturity date and provide the principal amount. The principal amount is a financial benefit that XYZ is sufficiently certain to provide, and the amount or value is fixed and determinable with reasonable accuracy at the start of the financial arrangement. The principal amount is therefore a sufficiently certain financial benefit pursuant to section 230-115. Does XYZ have a sufficiently certain particular gain or loss under section 230-110? 13. Section 230-110 identifies when a gain or loss is a sufficiently certain particular gain or loss from a particular event. Subsection 230-110(1) relevantly provides that you have a sufficiently certain particular gain or loss from a financial arrangement at a particular time if it is sufficiently certain at that time that a gain or loss, of at least a particular amount, will be made upon the receipt or provision of a financial benefit, or upon the cessation of a right or obligation, under the arrangement. 14. Assuming the Notes are redeemed at the maturity date, XYZ will not make a sufficiently certain particular gain or loss in respect of the principal amount as the net amount will be zero. 15. At the time the interest amounts are provided, it is sufficiently certain that XYZ will make a sufficiently certain particular loss of a particular amount. 16. As such, pursuant to section 230-110, XYZ will make a particular loss of a particular amount in respect of each interest amount. Balancing adjustment under Subdivision 230-G 17. The balancing adjustment under Subdivision 230-G applies to any gains or losses that arise when the taxpayer either transfers some or all of the rights and obligations under the arrangement to another person, or all of the taxpayer's rights or obligations under the arrangement otherwise cease. 18. Pursuant to subsection 230-40(2), where the balancing adjustment under Subdivision 230-G is applied to take into account a gain or loss, that gain or loss cannot be taken into account under the methods set out in Subdivision 230-B. 19. As a result, where any of the circumstances in subsection 230-435(1) occur (including when the Notes are redeemed), a balancing adjustment under Subdivision 230-G will occur, and neither the accruals method nor the realisation method will apply. Will XYZ be permitted to apply the particular gain or loss approach under subsection 230-100(3)? 20. The particular gain or loss approach at subsection 230-100(3) is the default approach when applying the accruals method. 21. Pursuant to section 230-110, XYZ will make a particular loss of a particular amount in respect of each interest amount. Accordingly, the accruals method will apply to any loss made from the interest paid on the Notes pursuant to subsection 230-100(3) to the extent that such a loss is not taken into account under the balancing adjustment in Subdivision 230-G. Question 6 Will subsection 230-15(5) or subsection 230-15(6) of the Income Tax Assessment Act 1997 apply to limit the deductions in respect of the Notes under subsection 230-15(2) of the Income Tax Assessment Act 1997 ? Summary Neither subsection 230-15(5) nor subsection 230-15(6) will apply to limit the deductions in respect of the Notes under subsection 230-15(2). Detailed reasoning 1. As set out in in the Detailed Reasoning for Question 4, in certain circumstances, the general test for deductibility under subsection 230-15(2) is modified by subsections 230-15(4) to 230-15(6). 2. Where the circumstances in subsection 230-15(4) apply, subsection 230-15(5) provides that, subject to subsection 230-15(6), subsection 230-15(4) will not apply to the loss to the extent to which the annually compounded internal rate of return on the debt interest exceeds the benchmark rate of return for the debt interest increased by 150 basis points. 3. Subsection 230-15(6) provides that if regulations made for the purposes of subsection 25-85(6) provide that a specified number of basis points is to apply for the purposes of applying subsection 25-85(5) in particular circumstances, and those circumstances exist in relation to the debt interest, subsection 230-15(5) applies as if the reference in that subsection to 150 basis points were a reference to the number of basis points specified in the regulations. 4. ATO ID 2012/19 explains that the operation of subsection 230-15(4) means that a loss will not be prevented from being deductible solely because the financial benefit is contingent on the economic performance of the taxpayer or a connected entity of the taxpayer, or secures a permanent or enduring benefit for the taxpayer. However, the loss must still satisfy the requirements of subsection 230-15(2), and the amount of the deduction is subject to the cap at subsection 230-15(5). Subsection 230-15(5) imposes a 'cap' on deductions for a loss on a debt interest to the extent that the compounded internal rate of return exceeds the benchmark rate of return for the debt interest increased by 150 basis points. This is done by 'turning off' subsection 230-15(4), and its effect of removing obstacles to deductibility under subsection 230-15(2). 5. As set out in in the Detailed Reasoning for Question 4, XYZ is entitled to a deduction under subsection 230-15(2) for any loss made from the interest paid on the Notes, due to the modification in subsection 230-15(4). As such, subsection 230-15(5) would apply to impose a 'cap' on any loss arising from the interest paid on the Notes to the extent that the compounded internal rate of return exceeds the benchmark rate of return for the debt interest increased by 150 basis points. 6. As set out in Relevant facts and circumstances, XYZ, for the purposes of determining the present value of the financial benefits provided under the Notes, calculated that the benchmark rate of return is the same as the annually compounded internal rate. 7. Accordingly, as the annually compounded internal rate of return does not exceed the benchmark rate of return by more than 150 basis points, subsections 230-15(5) and (6) will not apply to limit the deductions under subsection 230-15(2) in respect any loss arising from the interest paid on the Notes. Question 7 Will XYZ be required to withhold an amount under section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 from interest payments made in respect of the Notes? Summary XYZ will not be required to withhold an amount under section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) from interest payments made in respect of the Notes. Detailed reasoning 1. Section 12-245 of Subdivision 12-F of Part 2-5 of Schedule 1 to the TAA 1953 provides that an entity is required to withhold an amount from certain payments of interest if: • the recipient or any of the recipients has an address outside Australia, or • the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else). 2. 'Interest' is defined for the purposes of Division 11A of Part III of the ITAA 1936 at subsection 128A(1AB) of the ITAA 1936 as including an amount that is in the nature of interest. 3. As under the Notes XYZ will pay interest amounts that are interest within the meaning of Division 11A of Part III of the ITAA 1936, pursuant to section 12-245 of the TAA 1953, XYZ may be required to withhold an amount from interest payments it makes to certain holders of the Notes. 4. Section 12-300 of Schedule 1 to the TAA 1953 provides for limits on the amount to be withheld. Relevantly, paragraph 12-300(a) provides Subdivision 12-F of Schedule 1 of the TAA 1953 does not require an entity to withhold an amount from a dividend, from interest (within the meaning of Division 11A of Part III of the ITAA 1936) or from a royalty, if no withholding tax is payable in respect of the dividend, interest or royalty. 5. Accordingly, XYZ will not be required to withhold an amount from the interest payments it makes to certain holders of the Notes if no withholding tax is payable in respect of the interest payments. Payments exempt from withholding tax 6. Section 128B of Division 11A of Part III of the ITAA 1936 deals with liability to withholding tax. 7. Broadly, a non-resident is liable to pay withholding tax under subsection 128B(5) of the ITAA 1936 where a non-resident derives income that consists of interest and the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income. 8. Subsection 128B(2) of the ITAA 1936 will be satisfied where (subject to exemptions at subsection 128B(3) of the ITAA 1936) income: • is derived, on or after 1 January 1968, by a non-resident, and • consists of interest that is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country. 9. Of the exemptions at subsection 128B(3) of the ITAA 1936, relevantly subparagraph 128B(3)(h)(iv) of the ITAA 1936 provides that section 128B of the ITAA 1936 does not apply to income that consists of interest to which sections 128F, 128FA or 128GB of the ITAA 1936 apply. 10. Subsection 128F(1) of the ITAA 1936 provides an exemption from withholding tax for 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: (i) is a non-equity share; or (ii) consists of 2 or more related schemes (within the meaning of the Income Tax Assessment Act 1997 ) where one or more of them is a non-equity share; or (iii) is a syndicated loan; or (iv) is prescribed by the regulations for the purposes of this section; and (d) either: (i) the issue of the debenture or debt interest satisfies the public offer test set out in subsection (3) or (4); or (ii) 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). Debt interest or debenture 11. Section 128F of the ITAA 1936 applies to interest paid by a company in respect of a debenture or debt interest in the company. As set out in the Detailed reasoning for Question 1 , the Notes will be debt interests pursuant to the debt test in section 974-20. The Notes may also be debentures. 12. 'Debenture' is defined in subsection 128F(9) of the ITAA 1936 as including a promissory note or a bill of exchange (in addition to the things mentioned in the definition of debenture in subsection 6(1) of the ITAA 1936). 13. Subsection 6(1) of the ITAA 1936 defines 'debenture' as, in relation to a company, including debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not. 14. XYZ issued the Notes in the form of fully-paid unsecured subordinated notes. As they are notes, it follows that the Notes will also be considered debentures pursuant to subsection 6(1) of the ITAA 1936. Company resident of Australia when debenture or debt interest is issued and when the interest is paid 15. As set out in the Relevant facts and circumstances , XYZ was a resident for Australian income tax purposes when the Notes were issued and it is assumed that it will remain a resident when interest is paid on the Notes. As such, paragraphs 128F(1)(a) and (b) of the ITAA 1936 will be satisfied. Debt interest other than a debenture 16. Paragraph 128F(1)(c) of the ITAA 1936 will apply where the debt interest is not a debenture. 17. As provided above, the Notes will be debt interests that are also debentures. Accordingly, paragraph 128F(1)(c) of the ITAA 1936 will not apply to the Notes. Public offer test 18. Paragraph 128F(1)(d) of the ITAA 1936 provides that the issue of the debenture must satisfy the public offer test set out in subsections 128F(3) or 128F(4). 19. Subsection 128F(4) of the ITAA 1936 is not relevant as it applies to global bonds. Accordingly, the Notes must satisfy the requirements of subsection 128F(3) of the ITAA 1936. 20. Subsection 128F(3) of the ITAA 1936 contains five public offer tests. One of these tests must be satisfied. 21. The first public offer test at paragraph 128F(3)(a) of the ITAA 1936 states 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 to at least 10 persons each of whom: • was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating a financial market, and • 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. Were the Notes offered for issue? 22. In order to satisfy the first public offer test, the issue of the debenture or debt interest must have resulted from the debenture or debt interest being 'offered' for issue. 23. The term 'offered' is not defined in the legislation. Taxation Determination TD 1999/24 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - how may a company satisfy the introductory requirements in paragraphs 128F(3)(a) and 128F(3)(b) that a debenture must be offered on a 'debenture by debenture' basis? (TD 1999/24) considers the phrase 'offered for issue' in subsection 128F(3) of the ITAA 1936 for the purposes of the first and second public offer test in paragraphs 128F(3)(a) and 128F(3)(b) of the ITAA 1936. 24. Paragraphs 3 and 4 of TD 1999/24 provide: 3. For the purposes of the introductory words of paragraphs 128F(3)(a) and 128F(3)(b), 'offered' is not limited to meaning 'offer' in the context of a contractual offer. Rather, the word includes invitations or inducements to potential investors to make offers. For example, the placement of an advertisement that the company wishes to issue debentures, is an attempt to induce offers from potential investors rather than an offer itself (in other words, it is an 'invitation to treat'). 4. Therefore, the introductory words are satisfied where the debentures are advertised for issue or other invitations or inducements are made in accordance with their respective public offer test, giving potential investors the opportunity to make an offer to the company for the acquisition of the debenture/s. 25. XYZ advertised the issue of the Notes through issuing the offering circular to the market. The issuing of the offering circular constitutes an invitation or inducement to potential investors and therefore constitutes an offer for the purposes of subsection 128F(3) of the ITAA 1936. Were the Notes offered to at least 10 persons? 26. Paragraph 128F(3)(a) of the ITAA 1936 requires that the debenture or debt interest must be offered for issue to at least 10 persons that are carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets, and are not known by the company to be associates of one another. 27. As set out in the Relevant facts and circumstances, the Notes were offered to more than 10 institutional investors that are carrying on a business of providing finance or investing or dealing in securities in the course of operating in a financial market and that are not known by XYZ to be associates (as defined in subsection 128F(9) of the ITAA 1936) of one another. 28. Therefore, the first public offer test contained in paragraph 128F(3)(a) of the ITAA 1936 will be satisfied. Will the exemptions to the public offer test apply? 29. For the purpose of determining whether public offer test in subsection 128F(3) of the ITAA 1936 is satisfied, it is also necessary to consider subsection 128F(5) of the ITAA 1936, which specifies when the issue of debentures or debt interests does not satisfy the public offer test. 30. Subsection 128F(5) of the ITAA 1936 provides, broadly, that the issue of a debenture or debt interest by a company does not satisfy the public offer test if, at the time of the issue, the company knew, or had reasonable grounds to suspect, that: • the debenture, an interest in the debenture or the debt interest was being, or would be, acquired either directly or indirectly by an associate of the company, and • either: - the associate is a non-resident and the debenture or interest, or the debt interest, was not being, or would not be, acquired by the associate in carrying on a business in Australia at or through a permanent establishment of the associate in Australia, or - the associate is a resident of Australia and the debenture or interest, or the debt interest, was being, or would be, acquired by the associate in carrying on a business in a country outside Australia at or through a permanent establishment of the associate in that country. 31. As set out in the Relevant facts and circumstances , the Notes were not acquired either directly or indirectly by an associate (as defined in subsection 128F(9) of the ITAA 1936) of XYZ. 32. Accordingly, subsection 128F(5) of the ITAA 1936 will not apply, and the public offer test at subsection 128F(3) of the ITAA 1936 is satisfied. No exemption for interest paid to certain associates of the issuing company 33. Subsection 128F(6) of the ITAA 1936 provides that there is no exemption from liability to interest withholding tax where amounts are paid to associates of the issuing company. 34. Subsection 128F(6) of the ITAA 1936 is an ongoing test. In order for the test to be satisfied, the entity must ensure that it meets the requirements in subsection 128F(6) each time it makes an interest payment. 35. As set out in the Relevant facts and circumstances , it is assumed the interest paid in respect of the Notes will not be paid to an associate (as defined in subsection 128F(9) of the ITAA 1936) of XYZ. 36. Accordingly, subsection 128F(6) of the ITAA 1936 will not apply to exclude the interest paid on the Notes from the exemption from withholding tax. Conclusion 37. Based on the above, section 128F of the ITAA 1936 will exempt the interest paid on the Notes from withholding tax under Division 11A of the ITAA 1936. Accordingly, XYZ will not be required to withhold an amount from interest paid on the Notes under section 12-245 of Schedule 1 to the TAA 1953.

Reasons for decision: All references are to the ITAA 1997 unless otherwise indicated. | Will the Notes satisfy the debt test in section 974-20 of the Income Tax Assessment Act 1997 and therefore be debt interests within the meaning of subsection 974-15(1) of the Income Tax Assessment Act 1997 ?