Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)Chapter 19 - Offshore banking units.
Overview
19.1 The income from the activities of an offshore banking unit (OBU) is taxed at a concessional rate of 10%. This Bill will amend the concessional regime by extending its scope. It will also make some minor technical corrections.
Summary of proposed amendments
19.2 The Bill proposes to:
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- extend the scope of borrowing or lending activities to include gold borrowings and loans;
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- make it clear that a guarantee, letter of credit or performance bond must be in respect of the activities of offshore parties in their performance outside Australia in order to attract concessional tax treatment; and
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- make two minor technical amendments to correct deficiencies in the law [Clause 110].
19.3 The amendments will apply from the day the Bill receives Royal Assent except for a minor technical amendment to subsection 128GB(4). That amendment will apply from 21 December 1992, which is the date Taxation Laws Amendment Act (No.4) 1992 (which first provided the concessional tax regime) received Royal Assent [Subclause 2(6), Clause 114].
Background to the legislation
19.4 The term offshore banking broadly refers to the intermediation by institutions operating in Australia of financial transactions between non-resident borrowers and non-resident lenders. It also includes the provision of financial services to non-residents in respect of transactions/business occurring outside Australia.
Borrowing or lending activities
19.5 The meaning of an "OB activity", the income from which will qualify for concessional tax treatment, is set out in sections 121D, 121E and 121EA One such activity is borrowing or lending money. Given that there is now an established market for gold loans and gold borrowings as an alternative means of finance and trading, the Government has decided to extend OB borrowing and lending activities to include gold loans and borrowings.
19.6 A simple example of a gold loan might involve a New Zealand (NZ) gold producer that desires to borrow funds to expand its operations. The lender, say an Australian OBU, borrows gold from an institution which holds gold reserves (perhaps a central bank) and lends the gold to the NZ producer.
19.7 The NZ producer sells the gold and uses the proceeds for the intended purpose. The NZ producer pays a gold fee, to the lender, from gold produced by its operation or by purchasing gold in the spot market. This represents a payment in the nature of interest. The loan is also repaid using either gold produced by its operation or by purchasing gold in the spot market.
19.8 Subsection 121D(3) defines the type of guarantee-type activities which make up OB activities for the purposes of paragraph 121D(1)(b). Broadly speaking these are activities which involve fee income for providing a guarantee or letter of credit, syndicating a loan, providing a performance bond or underwriting a risk.
19.9 Subsection 121D(3) is to be amended to make it clear that a guarantee, letter of credit or a performance bond must be in respect of the activities of offshore parties in their performance outside Australia to attract concessional tax treatment. It would not be possible, for example, for an Australian importer to pay a fee to an OBU for providing a guarantee to an offshore exporter of goods into Australia.
19.10 When the OBU concessional tax regime was introduced it was necessary to align, as far as was practical, the exemptions from interest withholding tax which were then provided to OBUs with the transactions in relation to which income tax concessions were to be provided. This Bill will correct two minor technical deficiencies in the withholding tax provisions resulting from those amendments.
Explanation of amendments
Borrowing or lending activities
19.11 The definition of "borrowing or lending activity" in subsection 121D(2) will be expanded by inserting two new paragraphs to include gold borrowings [paragraph 121D(2)(c)] and gold loans [paragraph 121D(2)(d)] in order to provide concessional tax treatment for these activities [Clause 111].
19.12 The definition of "guarantee-type activity" in subsection 121D(3) will be amended to make it clear that a guarantee or letter of credit [paragraph 121D(3)(a)] , or performance bond [paragraph 121D(3)(d)] must be in relation to activities which are or will be conducted wholly outside Australia in order to attract concessional tax treatment [Clause 111].
19.13 The reference to the now repealed subsection 128AE(6) in 128AE(7) will be omitted [Clause 112].
19.14 The previously deleted term "offshore loan" used in 128GB(3) will be redefined by inserting a new definition in subsection 128GB(4). The new definition is consistent with the offshore banking unit legislation contained within Division 9A of Part III [Clause 113].