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Ruling

Subject: Interest withholding tax exemption

Question

Will the interest paid to non-resident lenders by Company X under the Syndicated Facilities

Agreement (SFA) be exempt from withholding tax pursuant to subsection 128F(2) of the Income

Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes. The interest paid to non-resident lenders by Company X under the SFA will be exempt from

withholding tax pursuant to subsection 128F(2) of the ITAA 1936.

Relevant facts and circumstances:

Company X is an Australian proprietary company limited by shares. Company X is a member of an international group of companies wholly owned by Company Y, a resident of Country Z.

Syndicated Facilities Agreement

Company X along with Company Y and some members of the group ('Borrowers') entered into a Syndicated Facilities Agreement ('the SFA') with more than two overseas banks ('Lenders') in their role as 'Mandated Lead Arrangers' ('MLAs').

The total borrowing under the SFA is for an amount of over $X00,000,000.

Prior to it being finalised, the SFA was uploaded in draft form on a secure data sharing website, so that, those accessing information uploaded to the website must be registered and invited to do so.

The SFA is described as a syndicated loan facility for the purposes of paragraph 128F(11)(a) of the

ITAA 1936.

The SFA provides that:

. the obligations of each lender under the Agreement are several;

. the Borrower to which a Loan has been made shall pay accrued interest on that Loan on the

dates falling at particular intervals;

. all of the Borrowers are members of the same wholly-owned group;

. the MLAs warrant to the Borrowers that they have made invitations to become a lender under

the SFA to at least 10 parties each of whom, is believed to carry on the business of providing

finance or investing or dealing in securities in the course of operating in financial markets;

. each Borrower confirms that none of the potential offerees were known or suspected by it to be

an Offshore Associate of that Borrower or an Associate of any other such offeree; and

. remedies are in place to deal with situations where the actions of the MLAs, lenders or Borrowers may cause the exemption under section 128F of the ITAA 1936 to be lost
Borrowers may cause the exemption under section 128F of the ITAA 1936 to be lost

Invitation to become a lender

In furtherance of the terms of the SFA, the MLAs as made invitations to more than ten entities to become a lender under the SFA. The invitation to each of the entities was made by email which conveyed that the Borrowers have requested the MLAs to arrange on their behalf a loan facility for an amount of over $X00,000,000 and that the MLAs are pleased to invite the entity concerned to participate in the facility. The email also stated the website address where the relevant documentation for the facility has been posted. The email contained instructions to the recipient on the manner in which to respond to the invitation.

Subsequently third party financiers became lenders under the SFA.

Assumption

Company X will remain a resident for Australian income tax purposes during the currency of the SFA.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128F

Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(i)

Income Tax Assessment Act 1936 Subsection 128F(1)

Income Tax Assessment Act 1936 Paragraph 128F(1)(a)

Income Tax Assessment Act 1936 Paragraph 128F(1)(b)

Income Tax Assessment Act 1936 Paragraph 128F(2)

Income Tax Assessment Act 1936 Paragraph 128F(3)(a)

Income Tax Assessment Act 1936 Paragraph 128F(3)(e)

Income Tax Assessment Act 1936 Paragraph 128F(3A)

Income Tax Assessment Act 1936 Paragraph 128F(3A)(a)

Income Tax Assessment Act 1936 Paragraph 128F(3A)(c)

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)

Income Tax Assessment Act 1936 Paragraph 128F(11)(a)

Income Tax Assessment Act 1936 Paragraph 128F(11)(b)

Income Tax Assessment Act 1936 Paragraph 128F(11)(c)

Income Tax Assessment Act 1936 Paragraph 128F(11)(d)

Income Tax Assessment Act 1936 Subparagraph 128F(1)(c)(iii)

Income Tax Assessment Act 1936 Subsection 128F(13)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies pursuant to section 177CA of the ITAA 1936, then the tax benefit obtained can be cancelled.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for Decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

An interest withholding tax liability will not arise for interest paid by an Australian resident to a non-resident under subparagraph 128B(2)(b)(i) of the ITAA 1936 where subsection 128F(1) of the ITAA 1936 applies to the interest payment.

Subsection 128F(1) of the ITAA 1936 states:

"128F(1) Interest to which this section applies. This section 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 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:

...(iii) is a syndicated loan; or ...

(iv) …… and

(d) either:

(i) ...........; 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)."

As a company incorporated in Australia, Company X is a resident of Australia under section 6(1) of the ITAA 1936 and satisfies paragraph 128F(1)(a) of the ITAA 1936 when the SFA was executed.

Based on the assumption that Company X will continue to be a resident of Australia at the time it makes interest payments to its non-resident lenders under the SFA, it is concluded that Company X will satisfy paragraph 128F(1)(b) of the ITAA 1936. The application of the remaining requirements of subsection 128F(1) of the ITAA 1936 are considered as follows:

Is the SFA a syndicated loan under subparagraph 128F(1)(c)(iii) of the ITAA 1936?

The term 'syndicated loan' is defined in subsection 128F(9) of the ITAA 1936 to mean:

a loan or other form of financial accommodation that is provided under a syndicated loan facility, being a facility that has 2 or more lenders.

Subsection 128F(9) of the ITAA 1936 also defines the term 'syndicated loan facility' to have the meaning given in subsections 128F(11), 128F(12) and 128F(13) of the ITAA 1936. The relevant provisions in this case are subsections 128F(11) and 128F(13) of the ITAA 1936 which provide as follows:

"128F(11) ITAA 1936 ["syndicated loan facility"] A written agreement is a syndicated loan facility if:

(a) the agreement describes itself as a syndicated loan facility or syndicated facility agreement; and

(b) the agreement is between one or more borrowers and at least 2 lenders; and

(c) under the agreement each lender severally, but not jointly, agrees to lend money to, or otherwise provide financial accommodation to, the borrower or borrowers; and

(d) the amount to which the borrower or borrowers will have access at the time the first loan or other form of financial accommodation is to be provided under the agreement is at least $100,000,000 (or a prescribed amount)."

"128F(13) ITAA 1936.["Further condition: 2 or more borrowers"] However, an agreement under which there are 2 or more borrowers is a syndicated loan facility only if all of them are:

(a) members of the same wholly-owned group (within the meaning of the Income Tax

Assessment Act 1997); or

(b) parties to the same joint venture; or

(c) associates of each other.

In the present circumstances, the SFA between the Borrowers and the MLAs satisfies the definition of a syndicated loan in subsection 128F(9) of the ITAA 1936, i.e. the SFA is a syndicated loan facility that has more than two lenders at the time of its execution.

The SFA also satisfies all the elements of the definition of a syndicated loan facility in subsection 128F(11), as:

(a) it describes itself as a Syndicated Facilities Agreement; and

(b) it is an agreement between one or more borrowers and more than two lenders; and

(c) each lender agrees, severally, to lend money to the borrowers under the Agreement ; and

(d) the borrowers will have access to at least $100,000,000 at the time the first loan is to be provided under the Agreement.

Finally, the SFA satisfies the further condition imposed by subsection 128F(13) of the ITAA 1936 in respect of multiple borrowers, as the Borrowers under the agreement are members of the same wholly owned group for the purposes of paragraph (a) of subsection 128F(13) of the ITAA 1936.

Accordingly, the SFA is a syndicated loan facility for the purposes of subparagraph 128F(1)(c)(iii) of the ITAA 1936.

Does the SFA satisfy the public offer test?

A further requirement under subsection 128F(1) of the ITAA 1936 for entitlement to an exemption from the payment of withholding tax in respect of a syndicated loan is contained in subparagraph 128F(1)(d)(iii) of the ITAA 1936. By virtue of this subparagraph the 'invitation to become a lender under a syndicated loan facility' needs to satisfy the public offer tests in subsection 128F(3A) of the ITAA 1936.

The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 3) Act 2007 (2007 EM) in respect of the amendments to sections 128F and 128FA of the ITAA 1936 clarifies at paragraph 7.53 that:

In order for the syndicated loan to be exempt from IWT, the syndicated loan facility must satisfy the public offer test. This is necessary because the debt interest, being the syndicated loan, will generally only come into existence upon there being a draw-down under the facility, which could occur after the time the public offer is made. To overcome this, an invitation to become a lender under a syndicated loan facility has been made the subject of the public offer test.

Meaning of invitation in subsection 128F(3A) of the ITAA 1936

The term 'invitation' is not defined in the tax law, nor are there any court authorities on the meaning of the term 'invitation' as used in subsection 128F(3A) of the ITAA 1936. Therefore, the term 'invitation' should be interpreted according to its ordinary meaning and legislative context. This is consistent with the judgment of Wilson J in the High Court case of Australian Software Forests Pty Ltd v. Attorney -General (NSW) (Ex Rel Corporate Affairs Commission) which stated:

'In Lee v. Evans (1964) 112CLR276, this Court had occasion to consider the meaning of the phrase "invitation to the public" in a South Australian statute. The judgments in that case emphasise that the determination of the true nature of an invitation is a question of fact and degree dependent upon the particular enactment and the circumstances of each case.'

The Macquarie Dictionary defines the term 'invitation' as:

1. the act of inviting; 2. the written or spoken form with which a person is invited; 3. attraction or allurement.

The 2007 EM does not provide any guidance on the meaning of the term. Accordingly, the term 'invitation' in the context of subsection 128F(3A) of the ITAA 1936 refers to any written or verbal proposal to a person that aims to attract them to consider that proposal. It does not involve any intention to bind the invitee to the exact terms of the proposal. The use of the term invitation in subsection 128F(3A) of the ITAA 1936, therefore, provides for the possibility that some negotiation may occur between the relevant parties on what is proposed for consideration under the invitation.

In the present circumstances, the MLAs, in furtherance of the terms of the SFA and on behalf of the borrowers, approached third party entities by email seeking their expression of interest to become a lender under the SFA.

The email conveyed that the MLAs have been requested to arrange on behalf of the borrowers a loan facility for over $X00,000,000 and that, the MLAs are pleased to invite the entity concerned to participate in the facility. The email also stated the website address where a copy of the SFA documentation was posted and provided instructions to the recipient on the manner in which to respond to the email.

It is considered that the emails constitute an 'invitation' to induce offers from potential lenders.

Do the invitations satisfy the Public Offer Test?

The public offer test in subsection 128F(3A), states:

128F(3A) [Conditions satisfying public offer test] An invitation to become a lender under a syndicated loan facility by a company satisfies the public offer test if the invitation was made:

(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) publicly in electronic form, or in another form, that was used by financial markets for dealing in debentures or debt interests; or

(c) to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, made the invitation to become a lender under the facility within 30 days in a way covered by paragraph (a) or (b).

In the present circumstances, the MLAs in their role made invitations to become a lender under the SFA, under an agreement with the Borrowers.

Accordingly, to satisfy the public offer test, the invitations in question will need to satisfy the conditions in subparagraphs (a)(i) and (a)(ii) and paragraph (c) of subsection 128F(3A) of the ITAA 1936.

The 2007 EM does not contain explanations in terms of the operation of paragraphs (a) and (c) of subsection 128F(3A) of the ITAA 1936 in respect of syndicated loans. Paragraphs (a) and (c) of subsection 128F(3A) of the ITAA 1936 restate the public offer tests contained in paragraphs (a) and (e) of subsection 128F(3) of the ITAA 1936 in respect of debentures and debt interests. Consequently, in determining whether the relevant public offer tests have been satisfied in the present circumstances, it will be necessary to consider guidance available in respect of the application of paragraphs (a), and (e) of subsection 128F(3) of the ITAA 1936.

Paragraphs 128F(3)(a) of the ITAA 1936

In respect of the conditions in subparagraphs 128F(3)(a)(i) and 128F(3)(a)(ii) of the

ITAA 1936, the EM to the Taxation Laws Amendment Act (No 2) 1997 (1997 EM) provides at paragraph 5.38 that, if the issuing company offers its debentures to ten banks or pensions funds operating in an overseas financial market, the public offer test will be satisfied, provided that the persons approached must not be known or suspected by the issuing company to be associates of each other. The company offering the debentures for sale does not need to undertake a detailed examination of the parties to whom the debentures are offered. It cannot, however, ignore companies that are generally known to be associates.

In regard to the above, Taxation Determination TD 1999/13 provides further explanation at paragraphs 6 to 8 to the effect that, where a dealer, manager or underwriter offers the debentures on behalf of the company under paragraph 128F(3)(e), a company may also rely on a representation or undertaking by the dealer, manager or underwriter, that it offered, or it will offer, the debenture for sale in compliance with paragraph 128F(3)(a). A company will not be regarded as knowing or suspecting persons are associates unless it is established that officers of the company knew or had reasonable grounds to suspect otherwise i.e., as clarified at paragraph 3 of Taxation Determination TD 1999/18, the company cannot ignore persons it knows to be an associate and use the defence that it relied on the dealer, manager or underwriter.

Paragraph 128F(3)(e) of the ITAA 1936

At paragraph 5.43, the 1997 EM provides that, the condition in paragraph 128F(3)(e) of the ITAA 1936 will be satisfied where a debenture is sold to a dealer, manager or underwriter on the basis that it will place the debenture in an overseas market, and:

· the dealer, manager or underwriter offers the debenture for sale within 30 days;.

· the offer for sale satisfies one of the other public offer tests covered by any of paragraphs (a) to (d) of subsection 128F(3);and

· the dealer, manager or underwriter which undertakes to satisfy the public offer test provides written advice to the company stating the public offer test which has been satisfied.

As further explained in TD 1999/18, the 30 day period specified in paragraph 128F(3)(e) of the ITAA 1936 is taken to commence from the day on which the dealer, manager or underwriter has an unconditional obligation to offer the debentures for sale, under the agreement contemplated in that paragraph.

In the present circumstances invitations were made by the MLAs, in their capacity , to third party financiers to become a lender under the SFA. In this regard, under the SFA, the MLAs represent and warrant to the Borrowers that each of the invitees, as at the date of the relevant invitation, was believed by the MLAs to be carrying on the business of providing finance or investing or dealing in securities in the course of operating in financial markets.

Further, each of the Borrowers confirm that none of the potential offerees were known or suspected by the Borrowers to be an offshore associate of that Borrower or an associate of any other such offeree.

Remedies in situations where actions of the MLAs, Lenders or Borrowers may cause the exemption to be lost is also covered under the SFA

It is considered that the invitations to become a lender under the SFA by the MLAs satisfy the public offer test in paragraph 128F(3A)(a) of the ITAA 1936.

The invitations in the present circumstances were made by the MLAs who, pursuant to an agreement with the Borrowers assumed an obligation to invite third party financiers to become a lender under the SFA. Additionally, those invitations were made 'within' 30 days from the date of execution of the SFA, the date on which the MLAs assumed an unconditional obligation to invite financiers to become lenders under the SFA.

It is considered that the invitations to become a lender under the SFA by the MLAs satisfy the public offer test in paragraph 128F(3A)(c) of the ITAA 1936.

Consequently, the invitations made by the MLAs to become a lender under the SFA entered into by the Borrowers and the MLAs, satisfy the public offer tests for the purposes of subsection 128F(3A) of the ITAA 1936 and in turn subparagraph 128F(1)(d)(iii) of the ITAA 1936.

In conclusion, section 128F(1) of the ITAA 1936 applies to the interest payments made by Company X to the non-resident lenders in respect of the funds allocated under the terms of the SFA, so that, the interest payments in question are exempt from interest withholding tax under subsection 128F(2) of the ITAA 1936.

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