Private ruling: Interest withholding tax ('IWT') exemption
Published: December 2013
Ruling period: A number of income years
Date scheme commenced: During the 2014 income year

Ruling: Q1: Will the global notes satisfy the definition of a 'debenture' in subsection 6(1) of Income tax Assessment Act 1936 ('ITAA 1936')? | A1: Yes. | Q2: Will the issue of the global notes satisfy the public offer test in subsection 128F(3) of ITAA 1936? | A2: Yes. | Q3: Will subsection 128F(1) of ITAA 1936 apply such that interest paid by the taxpayer in respect of the global notes will not be subject to tax imposed under Division 11A of ITAA 1936? | A3: Yes. | Q4: Will the taxpayer have no obligation to withhold an amount from any interest paid in respect of the global notes under section 12-300 of the Schedule 1 to the Taxation Administration Act 1953 ('TAA') by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest? | A4: Yes.

Relevant facts and circumstances: 1. The taxpayer was incorporated in Australia as a proprietary company with limited liability. It is part of an Australia Group, which also forms part of a foreign group. 2. To assist with the financing of the acquisition of the increased equity stakes in a project, conducted by the Australia Group, the taxpayer issued the global notes in two foreign currencies. 3. The purchase agreements were entered into between the taxpayer and a number of financial institutions who will be the initial purchasers in relation to the global notes. 4. The taxpayer is the sole issuer of the global notes under the purchase agreements. The taxpayer will on-lend the money raised to other entities in the Australia Group. 5. Under each purchase agreement, the taxpayer agrees to sell to each initial purchaser, and each initial purchaser agrees, severally and not jointly, to purchase from the taxpayer, a principal amount of the global notes as set out in each purchase agreement. 6. Under relevant clauses of purchase agreements, the initial purchasers purchase all of the global notes in their capacity as dealer, manager or underwriter and they will make (in writing), within 30 days from the date of the purchase agreements, genuine offers for sale of the global notes in one of the following two ways: (a) to at least ten parties, each of whom the initial purchasers' relevant officers involved in the offering of the notes believe is a party who carries on a business of providing finance or investing or dealing in securities in the course of operating in financial markets, and are not, as at the date offers are made, to the knowledge or suspicion of the relevant officers involved in the offering of the notes, associates of any of the other offerees; or (b) as a result of negotiations being initiated publicly, in an electronic form, or in another form, that is used by financial markets for dealing in debentures or debt interests. 7. The purchase agreements require that the initial purchasers will not offer or sell any of the global notes to any person if at the time of such offer or sale, employees or officers of the initial purchaser directly involved in the offer or sale know or have reasonable grounds to suspect that those global notes (or an interest in or right in respect of them) are being (or would be) acquired either directly or indirectly by an offshore associate of the taxpayer (other than an offshore associate acting in the capacity of a dealer, manager or underwriter in relation to the placement of those participations or a clearing house, custodian, funds manager or responsible entity of a registered scheme within the meaning of the Corporations Act as permitted by section 128F(5) of the ITAA 1936). 8. Under relevant terms of the purchase agreements, the initial purchasers are required to provide the taxpayer with the list of allocations of the global notes which shall be reviewed by the taxpayer prior to the signing of the purchase agreements. If the taxpayer notifies the initial purchasers in writing (which may include email communications), before the signing of the purchase agreements, that a person on the list of allocation is an offshore associate of the taxpayer, any allocation of the global notes to the offshore associate identified will be cancelled and no global notes will be transferred to this offshore associate. 9. The taxpayer was an Australian tax resident company at the time of issue of the global notes and will still be an Australian tax resident at the time interest is paid in respect of the global notes. 10. Neither the taxpayer nor the initial purchasers have offered or sold the global notes to any persons that were known or suspected to be offshore associates of the taxpayer.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 paragraph 128A (1AB) (a) | Income Tax Assessment Act 1936 subsection 128B | 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(9) | Income Tax Assessment Act 1936 subsection 128F(11) | Income Tax Assessment Act 1936 subsection 128F(12) | Income Tax Assessment Act 1936 subsection 128F(13) | Taxation Administration Act 1953 schedule 1 paragraph 12-300(a)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Under section 128B of the ITAA 1936, IWT is payable on interest paid by an Australian resident to a non-resident unless an exemption applies. Subsection 128F of the ITAA 1936 provides that where an Australian resident company issues a debenture or a debt interest and the issue satisfies the requirements of the public offer test contained in subsection 128F(3) or (4) and does not fail the public offer test under subsection 128F(5), an exemption from IWT will apply. A debenture is defined in subsection 6(1) of ITAA 1936 as following: Debenture , in relation to a company, includes debenture stock, bonds, notes and any other securities of the company, whether constituting a charge on the assets of the company or not. In the present case, the taxpayer issued the global notes under the purchase agreements. The global notes are notes issued by the taxpayer and constitute a debenture as defined in subsection 6(1) of the ITAA 1936. The global notes are therefore debentures for the purposes of section 128F of the ITAA 1936. | Detailed Reasoning - Question 2: Will the issue of the global notes satisfy the public offer test in subsection 128F(3) of ITAA 1936? | Detailed Reasoning - Detailed reasoning: For section 128F to apply to an interest paid by a company in respect of a debenture or debt interest in the company, paragraph 128F(1)(d) of the ITAA 1936 requires that: (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). As the present case deals with debentures, the relevant public offer test is that contained in subsection 128F(3) of the ITAA 1936. Subsection 128F(3) of the ITAA 1936 provides that 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: (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 interest 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 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 a way covered by paragraph (a) to (d). The taxpayer issued the global notes to the initial purchasers who purchased the notes in their capacity as a dealer, manager or underwriter. Also the initial purchasers were required under the purchase agreements to offer the global notes for sale within 30 days from the Agreements signed in one of the following ways: (a) to at least ten parties, each of whom the initial purchasers' relevant officers involved in the offering of the notes believe is a party who carries on a business of providing finance or investing or dealing in securities in the course of operating in financial markets, and are not, as at the date offers are made, to the knowledge or suspicion of the relevant officers involved in the offering of the notes, associates of any of the other offerees; or (b) as a result of negotiations being initiated publicly, in an electronic form, or in another form, that is used by financial markets for dealing in debentures or debt interests. For the purpose of satisfying subparagraph 128F(3)(a), the taxpayer is not required to make a detailed examination of the offerees when the global notes are subsequently offered for sale by the initial purchasers.( Refer to Taxation Determination TD 1999/13) In this case, the taxpayer reasonably relied on the representations or undertakings by the initial purchasers that they will offer the global notes for sale in compliance with paragraph 128F(3)(a) of the ITAA 1936. Accordingly, the taxpayer meets the requirements of paragraph 128F(3)(e) of the ITAA 1936 and therefore the global notes satisfy the public offer test under subsection 128F(3) of the ITAA 1936. In addition to satisfying the requirements in subsection 128F(3) of the ITAA 1936, it is also necessary to consider subsection 128F(5) of the ITAA 1936, which specifies the conditions under which an issue of a debenture or debt interest by a company will never satisfy the public offer test. Broadly, the issue of a debenture or debt interest is taken never to have satisfied the public offer test if, at the time of the issue, the company knew, or had reasonable grounds to suspect, that an offshore associate of the company will acquire the debenture or debt interest, other than offshore associate acting in the capacity of a dealer, manager or underwriter in relation to the placement of the debenture or debt interest or a clearing house, custodian, funds manager or responsible entity of a registered scheme as permitted by section 128F(5) of the ITAA 1936. In this case, relevant clauses of the purchase agreements provide that in connection with the primary distribution of the global notes, the initial purchaser will not offer or sell any of the notes to any person if at the time of such offer or sale, employees or officers of the initial purchaser directly involved in the offer or sale know or have reasonable grounds to suspect that those notes (or an interest in or right in respect of them) are being (or would be) acquired either directly or indirectly by an offshore associate of the taxpayer, other than an offshore associate acting in the capacity of a dealer, manager or underwriter in relation to the placement of those participations or a clearing house, custodian, funds manager or responsible entity of a registered scheme within the meaning of the Corporations Act. The purchase agreements also require the initial purchasers to provide the taxpayer with the list of allocations of the global notes which shall be reviewed by the taxpayer prior to the signing of the purchase agreements. If the taxpayer notifies the initial purchasers in writing, before the signing of the purchase agreements, that a person on the List of Allocation is an offshore associate of the taxpayer, any allocation of global notes to the offshore associate identified will be cancelled and no notes will be transferred to this offshore associate. Therefore, subsection 128F(5) should not apply on the basis that the taxpayer and the initial purchasers acknowledged that the global notes would not be offered or sold to any persons that were known or suspected to be offshore associates of the taxpayer, under the purchase agreements. Based on the facts provided and the above analysis, the issue of the global notes satisfy the public offer test in subsection 128F(3) of ITAA 1936. | Detailed Reasoning - Question 3: Will subsection 128F(1) of ITAA 1936 apply such that interest paid by the taxpayer in respect of the global notes will not be subject to tax imposed under Division 11A of ITAA 1936? | Detailed Reasoning - Detailed reasoning: Subsection 128F(2) of the ITAA 1936 provides that tax is not payable under Division 11A in respect of interest to which section 128F of the ITAA 1936 applies. Subsection 128F(1) of the ITAA 1936 provides that section 128F applies to interest paid by a company in respect of certain publicly offered debentures and debt interests 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 (iii) for a syndicated loan - the invitation to become a lender under the relevant syndicated loan facility satisfies the public offer test set out in subsection (3A). The interest paid by the taxpayer in respect of the global notes satisfies the conditions under subsection 128F(1) of the ITAA 1936 because: (a) The global notes constitute a debenture as defined in subsection 6(1) of the ITAA 1936; (b) The interest paid by the taxpayer is paid in respect of a debenture; (c) The taxpayer was a resident of Australia at the time it issued the debenture; (d) The taxpayer will be a resident of Australia at the time the interest is paid; and (e) The issue of the debenture satisfies the public offer test set out in subsection 128F(3) of the ITAA 1936. As the requirements of paragraphs 128F(1) (a) to (d) of the ITAA 1936 are satisfied, subsection 128F(1) of the ITAA 1936 will apply such that interest paid by the taxpayer in respect of the global notes will not be subject to tax imposed under Division 11A of the ITAA 1936. | Detailed Reasoning - Question 4: Will the taxpayer have no obligation to withhold an amount from any interest paid in respect of the global notes under section 12-300 of the Schedule 1 to the Taxation Administration Act 1953 ('TAA') by virtue of paragraph 12-300(a) of the TAA because section 128F of the ITAA 1936 applies to the interest? | Detailed Reasoning - Detailed reasoning: Section 12-300 of Schedule 1 to the TAA sets out the limits on amounts withheld under Subdivision 12-F of Schedule 1 to the TAA. Under paragraph 12-300(a) of Schedule 1 to the TAA, an entity is not required to withhold an amount from (inter alia) interest (within the meaning of Division 11A of Part III of the ITAA 1936) if no withholding tax is payable in respect of the interest. As aforementioned, the interest payable by the taxpayer in respect of the global notes satisfies the requirements under subsection 128F(1) of the ITAA 1936. Therefore, tax will not be payable in respect of the interest under subsection 128F(2) of the ITAA 1936. Accordingly, the taxpayer will have no obligation to withhold an amount from any interest paid in respect of the global notes under section 12-300 of Schedule 1 to the TAA by virtue of paragraph 12-300(a) of Schedule 1 to the TAA.

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