Senate

Replacement Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P)

Chapter 2 Offshore Banking - Background to the proposed amendments

What is an offshore banking unit?

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.

An offshore banking unit (OBU) is a licensed bank or foreign exchange dealer approved by the Treasurer by notice in the Gazette as an institution entitled to withholding tax concessions in respect of its borrowing from non-residents where the funds are used to make loans to non-residents. Under existing Australian law, an OBU may also borrow from residents in foreign currencies but its lending is restricted to non-residents and other OBUs.

Following its consideration of the Report of the Commonwealth/State Working Party on Offshore Banking, the Government decided in 1986 to provide an interest withholding tax (IWT) exemption for interest paid to non-residents by OBUs where their deposits/borrowings were on-lent to non-residents. At the same time it decided that no company tax concession would be provided to OBUs.

Why is the Government extending the concession?

Given that the existing IWT concession has not promoted any significant offshore banking activity, the Government has now decided to reduce the company income tax rate on OBUs to 10%. In the One Nation economic statement of 26 February 1992 it was announced that the taxable income derived from pure offshore banking transactions by an authorised OBU would be taxed at the reduced rate from 1 July 1992.

The statement went on to say that the taxable income eligible for the 10% tax rate will be that arising from the borrowing and lending of money in the circumstances necessary to gain the IWT exemption specially provided for OBUs in the existing law.

After extensive consultation with Industry, however, the Government has decided to extend the scope of the activities that will be eligible for the concessional tax rate.

Most of the activities that will attract the concessional tax treatment can be classified as either financial intermediation between non-residents (including foreign branches of Australian residents) or the provision of financial services to non-residents in respect of transactions/business occurring outside Australia.