Private ruling: Section 128F withholding tax exemption
Date of advice: 27 April 2021
Published: July 2021
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the Bonds issued by AusCo satisfy the definition of a 'debenture' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Will the issue of the Bonds satisfy the 'Public offer test' in subsection 128F(3) of the ITAA 1936? | A2: Yes | Q3: Will the interest paid by AusCo in respect of the Bonds not be subject to tax pursuant to subparagraph 128B(3)(h)(iv) of the ITAA 1936? | A3: Yes | Q4: Will AusCo be required to withhold an amount from interest paid in respect of the Bonds pursuant to section 12-300 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | A4: No

Relevant facts and circumstances: Background AusCo is an Australia resident company for income tax purposes and the head company of an Australian income tax consolidated group. AusCo is an indirectly wholly owned subsidiary of a foreign enterprise. AusCo approved for issue bonds in order to refinance its existing debt and fund the ongoing maintenance and operation of a number of projects. AusCo's managers for the funding was a group of financiers (the Managers) The funding was conducted through AusCo agreeing to issue to the Managers, and the Managers agreeing to purchase from AusCo, the bonds, which the Managers in turn offered for sale to other potential unrelated investors. The Debt Funding Process AusCo and the Managers conducted road shows and presented to potential investors relevant information in respect of AusCo, the projects and the key terms and conditions of the bonds. During the roadshows AusCo and the Managers alerted investors to the requirements of the associate rules for the purposes of the public offer test in the Income Tax Assessment Act 1936 (ITAA 1936). AusCo issued an offering circularelectronically to over 10 potential investors to enable them to consider the purchase of the bonds and the potential investors submitted their expression of interests via an electronic trading platform used by the financial markets (Trading Platform). The Managers provided AusCo with an order book which contained all persons to whom allocations of the bonds were proposed to be made. AusCo received legal advice about the definition of 'associates' under the ITAA 1936. AusCo reviewed the list in light of the advice in order to identify any persons that it knew or suspected to be an associate of AusCo and confirmed their allocation. The investors included subsidiaries of banks and financial institutions. AusCo issued bonds to at least 10 successful investors and these were listed on a stock exchange. The statements addressing the requirements of Public Offer Test The agreement used to subscribe for the bonds provides that AusCo, as the Issuer intends that the bonds are to be offered, issued and sold in a manner that is compliant with the Public Offer Test The offering circular provided that: • All payments will be made by AusCo without any withholding for Australian taxes and if required AusCo will pay indemnity amounts to the bondholders. • The exemption available under section 128F will not apply if, at the time of issue or an interest payment in respect of a bond, AusCo knew or had reasonable grounds to suspect that the recipient of the payment was an offshore associate of AusCo (other than one receiving the payment in the capacity of a clearing house, paying agent, custodian, funds manager, or responsible entity of a registered scheme). Accordingly, an investor should not acquire the bonds, if the investor is an offshore associate of AusCo. Assumptions The Commissioner makes this Ruling subject to the following Assumptions : AusCo will be an Australian resident company at the time of each interest payment in respect of the Bonds.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 128B(1) | Income Tax Assessment Act 1936 subsection 128B(2) | Income Tax Assessment Act 1936 subsection 128F(1) | Income Tax Assessment Act 1936 subsection 128F(2) | Income Tax Assessment Act 1936 subsection 128F(3) | Income Tax Assessment Act 1936 subsection 128F(5) | Income Tax Assessment Act 1936 subsection 128F(6) | Income Tax Assessment Act 1936 subsection 128F(9) | Taxation Administration Act 1953 Schedule 1 section 12-245 | Taxation Administration Act 1953 Schedule 1 section 12-300

Reasons for decision: Summary: The Bonds will satisfy the definition of a 'debenture' in subsection 6(1). | Detailed Reasoning - Detailed reasoning: Subsection 6(1) defines 'debenture', in relation to a company, to include 'debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not'. The definition of 'debenture' is extended in subsection 128F(9) to include a promissory or a bill of exchange in addition to the instruments mentioned in the definition of debenture contained in subsection 6(1). AusCo issued instruments which are described as bonds in the relevant documents including the listing approval of the Stock Exchange and the Bonds. The Commissioner accepts the Bonds are debentures as defined in subsection 6(1). | Detailed Reasoning - Question 2: Will the issue of the Bonds satisfy the 'public offer test' in subsection 128F(3) of the ITAA 1936? | Summary: The issue of the Bonds will satisfy the 'public offer test' in subsection 128F(3). | Detailed Reasoning - Public Offer Test: Paragraph 128F(1)(d) provides that the issue of the debenture must satisfy the public offer test set out in subsections 128F(3) or (4) to be exempt from interest withholding tax on interest paid on that debenture under subsection 128F(2). Subsection 128F(4) is not relevant as it applies to global bonds. Therefore, the Bonds must satisfy the requirements of subsection 128F(3). Subsection 128F(3) provides that the issue of a debenture by a company satisfies the public offer test if the issue resulted from the debenture being offered for issue: (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) to at least 100 persons whom it was reasonable for the company to have regarded as either: (i) having acquired debentures or debt interests in the past; or (ii) being likely to be interested in acquiring debentures or debt interests; or (c) as a result of being accepted for listing on a stock exchange, where the company had previously entered into an agreement with a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, requiring the company to seek such listing; or (d) as a result of negotiations being initiated publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or (e) to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, offered the debenture or debt interest for sale within 30 days in any way covered by any of paragraphs (a) to (d). Subsection 128F(3) contains five alternative tests. One of these tests must be satisfied in order for the Bonds to satisfy the public offer test. | Detailed Reasoning - Meaning of 'offered for issue': In order to satisfy the public offer test, the issue of the debenture or debt interest must have resulted from the debenture or debt interest being 'offered' for issue. 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)explains when a debenture will be considered to be offered for issue. TD 1999/24 relevantly states: 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. The introductory words of paragraphs 128F(3) are satisfied where the debentures are advertised for issue or other invitations and inducements are made in accordance with the respective public offer test. AusCo conducted the Bonds offer as follows: • the Bonds were issued to the Managers and each Manager agreed, severally and not jointly, to purchase from the Issuer a principal amount of Bonds. The Managers in turn offered the Bonds for sale to other potential unrelated investors. • an offering circular were issued to potential investors via Trading Platform • expressions of interest were submitted by potential investors via Trading Platform, and • the Managers used Trading Platform to confirm the pricing of the Bonds. It can therefore be concluded that AusCo have 'offered for issue' the Bonds as they have advertised them for issue. Based on the conduct of the bond issue, the relevant public offer test is paragraph 128F(3)(d) (the fourth public offer test). | Detailed Reasoning - Meaning of 'as a result of negotiations being initiated publicly in electronic form': The Commissioner's view on the fourth public offer test is set out in Taxation Determination TD 1999/16 Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - does the public offer test in paragraph 128F(3)(d) require a company to demonstrate that negotiations in respect of a particular debenture actually resulted from negotiations being initiated publicly in electronic form? (TD 1999/16). Paragraph 2 of TD 1999/16 sets out that the public offer test in paragraph 128F(3)(d) is satisfied if the offer of debentures for issue is quoted on an electronic financial information source such as Bloomberg. Paragraph 3 of TD 1999/16 further adds that the fourth public offer test is met where negotiations between an investor and the issuing company commenced because the investor became aware of the company's intention to raise funds as a result of seeing an offering circular on an electronic information source. Paragraph 5 of TD 1999/16 clarifies that it is not necessary for investors to confirm with the issuing company that they acquired the debentures as a result of the electronic information source used by the issuer. The use of the source in itself, in the manner described above, satisfies this aspect of the public offer test. The Bond issue satisfies the fourth public offer test in paragraph 128F(3)(d) on the basis that: (a) all communications to potential investors in respect of the offer were issued via Trading Platform (b) the offering circular were issued electronically to potential investors via Trading Platform (c) the offering circular was provided to prospective investors to enable them to consider purchasing the Bonds, and (d) potential investors submitted expressions of interest through Trading Platform. | Detailed Reasoning - Issues and invitations that always fail the public offer test: An issue of bonds will fail the public offer test in subsection 128F(3) if subsection 128F(5) applies. Broadly, the offer of debentures is taken never to have satisfied the public offer test if, at the time of the offer, the company knew, or had reasonable grounds to suspect, that the debenture was being, or would be, acquired by an associate of the company. Taxation Determination TD 2001/3 Income tax: Interest Withholding Tax Exemption - for the purposes of subsection 128F(5) of the Income Tax Assessment Act 1936, when will a company be taken to have the requisite knowledge or suspicion that the debenture or an interest in the debenture was being, or would later be, acquired by an associate? (TD 2001/3) examines when a company will be taken to have the requisite knowledge or suspicion that a debenture or an interest in the debenture was being or would later be acquired by an associate for the purposes of subsection 128F(5). As outlined by the Commissioner in paragraph 2 of TD 2001/3: Suspicion [about whether the bonds are being issued to an associate] needs to be looked at objectively in light of what is reasonable in the individual circumstances of the particular case. When subsection 128F(5) of the ITAA 1936 refers to the knowledge or suspicion of the company, knowledge or suspicion of all company personnel involved with the issue itself, and other personnel who are concerned in or take part in the overall management of the company, is relevant. Accordingly, issuing officers will need to undertake enquiries to ensure that other officers of the company do not have such knowledge or suspicion, otherwise the subsection may operate... And at paragraph 4 of TD 2001/3: 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. While every case has to be judged on its merits, one reasonable step would be to write to associates asking them not to acquire debentures (otherwise than in their capacity of a dealer, manager or underwriter in relation to the placement of the debenture). 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 under subsection 128F(5) of the ITAA 1936, to obtain undertakings to this effect from its dealers, managers or underwriters. The Managers provided AusCo with an order book which contained all persons to whom allocations of the bonds were proposed to be made. AusCo received legal advice about the definition of 'associates' under the ITAA 1936. AusCo reviewed the list in light of the advice in order to identify any persons that it knew or suspected to be an associate of AusCo and confirmed their allocation. In addition to the above, based on the information available, the Commissioner accepts that AusCo does not know or have reasonable grounds to suspect that any of the Bondholders are its associates of AusCo. Accordingly, AusCo does not know, or have reasonable grounds to suspect, that the Bondholders were their associates for the purposes of the ITAA 1936. Therefore, subsection 128F(5) does not apply and the issue of the Bonds does satisfy the fourth public offer test in paragraph 128F(3)(d). | Detailed Reasoning - Question 3: Will the interest paid by AusCo in respect of the Bonds not be subject to tax pursuant to subparagraph 128B(3)(h)(iv) of ITAA 1936? | Summary: The interest paid by AusCo in respect of the Bonds will not be subject to tax pursuant to subparagraph 128B(3)(h)(iv). | Detailed Reasoning - Detailed reasoning: Section 128B generally imposes withholding tax liability on the payment of interest by Australian residents to non-residents. Subsection 128B(3) lists certain types of income to which liability to withholding tax under section 128B does not apply. Subparagraph 128B(3)(h)(iv) provides an exclusion from withholding tax in Division 11A for interest income to which section 128F applies. Subsection 128F(1) states that section 128F 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 ... (b) the company is a resident of Australia when the interest is paid; and (c) ... (d) either: (i) the issue of the debenture ... satisfies the public offer test set out in subsection (3) or (4); ... The requirements of subsection 128F(1) are satisfied on the basis that: • AusCo was a resident of Australia at the time when the Bonds were issued • As per the Assumptions on which the Commissioner makes the private ruling, SEA will be an Australian resident company at each time it makes an interest payment in respect of the Bonds, and • the issue of the Bonds satisfies the public offer test in paragraph 128F(3). In determining whether section 128F applies to interest payments in respect of the Bonds, it is also necessary to consider subsection 128F(6). This subsection provides that section 128F does not apply to interest paid by the company to a person in respect of the debenture or debt interest if, at the time of the payment, the company knows, or has reasonable grounds to suspect, that: a. the person is an associate of the company; and b. either (i) the associate is a non-resident and the payment is not received by the associate in respect of a debenture or debt interest that the associate acquired in carrying on a business in Australia at or through a permanent establishment of the associate in Australia; or (ii) the associate is a resident of Australia and the payment is received by the associate in respect of a debenture or debt interest that the associate acquired in carrying on a business in a country outside Australia at or through a permanent establishment of the associate in that country; and c. the associate does not receive the payment in the capacity of a clearing house, paying agent, custodian, funds manager or responsible entity of a registered scheme. Subsection 128F(6) is an ongoing test. In order for the test to be satisfied, AusCo must ensure that it meets the requirements in subsection 128F(6) each time it makes an interest payment to its Bondholders. As stated in Question 2 above, AusCo does not know or have reasonable grounds to suspect that any of the Bondholders are an associate of AusCo. As such, provided the Bondholders and their ownership structures remain the same, section 128F applies to the interest payable by AusCo in respect of the Bonds. There will be no tax payable pursuant to subsection 128F(2). Therefore, pursuant to subparagraph 128B(3)(h)(iv), interest payable on the Bonds will not be subject to interest withholding tax under Division 11A. | Detailed Reasoning - Question 4: Will AusCo not be required to withhold an amount from interest paid in respect of the Bonds pursuant to section 12-300 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | Summary: AusCo will not have an obligation to withhold an amount from any interest paid in respect of the Bonds under paragraph 12-300(a) of Schedule 1 to the TAA 1953 because section 128F of the ITAA 1936 applies to the interest. | Detailed Reasoning - Interest payment to overseas person: Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity is required to withhold an amount from certain payments of interest. The section contains a note referring to section 12-300 of Schedule 1 to the TAA 1953, which limits the amount to be withheld in respect of dividend, interest and royalty payments covered by Subdivision 12-F of Schedule 1 to the TAA 1953. Under paragraph 12-300(a) of Schedule 1 to the TAA 1953, an entity is not required to withhold an amount from interest (within the meaning of Division 11A of Part III of Schedule 1 to the TAA 1953)if no withholding tax is payable in respect of the interest. | Detailed Reasoning - Interest withholding tax liability: The liability to withholding tax is dealt with under section 128B. Subsection 128B(2) imposes a liability to withholding tax where income is derived and consists of interest that: (i) 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; or (ii) is paid to the non-resident by a person who, or by persons each of whom, is not a resident and is, or is in part, an outgoing incurred by that person or those persons in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia. However, the liability to interest withholding tax will not arise for interest paid by an Australian resident to a non-resident under subparagraph 128B(2)(b)(i) where section 128F applies to the interest payment. As previously concluded, section 128F applies to the interest payable by AusCo in respect of the Bonds. Therefore, pursuant to subsection 128F(2) and subparagraph 128B(3)(h)(iv), withholding tax is not payable under section 128B in respect of interest. Accordingly, AusCo will not have an obligation to withhold an amount from any interest paid in respect of the Bonds under section 12-300 of Schedule 1 to the TAA 1953 due to the operation of paragraph 12-300(a) of Schedule 1 to the TAA 1953.

Question 1: Will the Bonds satisfy the definition of a 'debenture' in subsection 6(1) of the ITAA 1936?