Senate

Replacement Explanatory Memorandum

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

Chapter 5 Offshore Banking - OB Activities

Meaning of 'OB activity'

The meaning of 'OB activity' set out in new sections 121D, 121E and 121EA. Broadly, OB activities that will qualify for concessional tax treatment are:

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borrowing or lending money;

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providing certain types of guarantees;

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eligible contract activity;

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trading in certain contracts, securities, non-resident shares or trust units, gold, silver or platinum bullion or rights in respect of such bullion and foreign currency;

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making and managing certain investments;

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providing financial advice; and

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hedging against interest rate and currency exposure risks in respect of borrowing and lending activities. [New subsection 121D(1)]

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 3, 9, and 14])

Each of these activities is described below in more detail.

To be an 'OB activity':

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the OBU must, at the time of the activity, be either:

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a resident and the activity must not be done as part of its business outside Australia at or through a permanent establishment; or

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a non-resident and the activity must be done in carrying on business in Australia at or through a permanent establishment; and

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the other party to the transaction must be an 'offshore person', ie a person who is:

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a non-resident whose involvement in the activity must not occur in carrying on business in Australia at or through its permanent establishment; or

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a resident whose involvement in the activity must occur in carrying on business outside Australia at or through its permanent establishment; or

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another OBU which has received a statement from the first OBU to the effect that any money received by the second OBU is not non-OB money.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 21-22])

If the other party to the transaction is also a 'related person' , then a further condition, that the currency involved cannot be Australian currency, may also apply. A related person, in relation to an OBU means:

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an associate of the OBU; or

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any permanent establishment of the OBU through which activities other than OB activities are carried on.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 7])

The term "related person" and "associate" are defined in new section 121C.

The various OB activities that qualify for concessional tax treatment, together with any conditions that relate to those activities, are discussed in more detail below.

OB activity means the following:

Borrowing Money

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borrowing in any currency from unrelated non-residents (excluding Australian branches of non-residents) and other unrelated OBUs;

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borrowing by a branch in Australia of a non-resident in non-AUD from its overseas head office, other offshore branches of the non-resident head office or related non-resident companies;

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borrowing from related non-residents or offshore branches of the head office of the OBU in non-AUD;

N.B. Borrowing includes raising finance by the issue of securities

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 2-4])

Lending Money

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Lending in any currency to non-residents (excluding Australian branches of non-residents) and other OBUs, and in non-AUD to overseas branches of Australian residents;

N.B. Lending includes providing finance by the purchase of securities.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 2-4])

Hedging

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Hedging with non-residents (excluding Australian branches of non-residents), foreign branches of Australian residents and OBUs of interest rates and currency in order to manage exposure to risk from borrowing and lending activities. However, if the other party is a related person, any money payable under the contract must not be in Australian currency.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 18, 19 and 20])

Guarantee-type Activities

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Activities which involve fee income for:

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the provision of a guarantee or letter of credit to an offshore person;

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syndicating a long for an offshore person (where a single loan is made by a number of lenders to the offshore person);

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underwriting risks for an offshore person where the property is outside Australia or the event being underwritten can only happen outside Australia; or

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issuing a performance bond to an offshore person (bonds which provide financial protection to the offshore person if another party fails to fulfil its obligation to the offshore person under a contract).

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment10])

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If the other party to the transaction is a related person, any money payable under the guarantee-type activity must not be payable in Australian currency.

N.B. Activities which fall within the normal meaning of a guarantee (such as bid bonds) would also constitute "guarantee-type activities".

Eligible Contract Activity

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Entering into a futures contract, a forward contract, an options contract, a swap contract, a cap, collar, floor or similar contract with an offshore person under which any money payable is not Australian currency.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 3, 9, and 14])

Trading Activities

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Trading by an OBU on its own behalf with an offshore person in securities (being bonds, debentures, bills of exchange, promissory notes or similar instruments) issued by non-residents provided the securities are not denominated in Australian currency.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 8])

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Trading by an OBU on its own behalf with an offshore person in futures contracts, forward contracts, options contracts, swap contracts, caps, collars, floors or similar contracts or loan contracts provided that any amounts payable under the contracts are payable by non-residents and are not payable in Australian currency.

N.B. For present purposes, new section 121EA treats permanent establishments as separate persons. Accordingly, all or part of a portfolio of offshore loans entered into by a foreign branch of an Australian resident could be traded to the Australian OBU provided the above requirements on trading are met.

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Trading by an OBU on its own behalf with an offshore person in non-resident company shares or non-resident trust units provided that the shares or units are not denominated in Australian currency.

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Trading by an OBU on its own behalf with an offshore person in options or rights associated with any of the above instruments.

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Trading in futures contracts or options contracts on its own behalf as well as on behalf of an offshore person on the Sydney Futures Exchange provided that any money payable under either type of contract is not Australian currency.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 11])

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Trading on its own behalf in spot or forward foreign currency, or options or rights in respect of foreign currency, with residents or non-residents provided that the currency is not Australian currency.

N.B. Although this activity is outside the concept of "pure" offshore banking, paragraph 121D(4)(e) will not allow an OBU to transact with the domestic part of the bank so as to translate "positions" back to Australian dollars.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 12])

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Trading with an offshore person in gold, silver or platinum bullion, or in options or rights in respect of such bullion, where any money payable or receivable is not Australian currency.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 13])

Investment Activities (Funds Management)

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Fee income from making and/or managing investments (as a broker, an agent or a trustee) for non-residents other than Australian branches of non-residents. If investments are purchased they must be shares in non-resident companies, units in non-resident unit trusts, land and buildings outside Australia or other foreign assets.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendments 15-16])

The investments must be with non-residents other than Australian branches of non-residents. The currency in which investments are made cannot be Australian dollars.

Advisory Activities

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Fee income from advisory services for an offshore person.

Services are restricted to the giving of investment or other financial advice to an offshore person. The advice cannot relate to any property or transactions in Australia, other than advice in relation to an Australian investment where the advice is incidental to a proper comparison of commercially related investments inside and outside Australia to enable a proper assessment of the investment outside Australia.

(Editors Note: **Amended during passage through Parliament**

This text reflects the amendment(s) made by House of Representatives. Refer Summary of amendments [amendment 17])

OB activities that qualify for the concessional tax treatment are summarised in general terms below with relevant currency restrictions:

Type of Activity	Other unrelated OBUs	Non-Resident (Other Than Related Party)	Related Party	Offshore Branch of Resident
Borrowing	any currency	any currency	non-AUD	non-AUD
Lending	any currency	any currency	any currency	non-AUD
Guarantees	any currency	any currency	non-AUD	any currency
Trading	non-AUD	non-AUD	non-AUD	non-AUD
Eligible Contract Activity	non-AUD	non-AUD	non-AUD	non-AUD
Investment	non-AUD	non-AUD	non-AUD	non-AUD
Advising	N/A	N/A	N/A	N/A
Hedging	any currency	any currency	non-AUD	any currency