Senate

Replacement Explanatory Memorandum

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

Chapter 7 Offshore Banking - Miscellaneous

Registration of a subsidiary of a bank as an OBU

Under the present law the only entities that can be registered as OBUs are savings and trading banks as defined by subsection 5(1) of the Banking Act 1959, State banks and other financial institutions which the Treasurer is satisfied are appropriately authorised to deal in foreign exchange (in effect this last category means entities approved as foreign exchange dealers by the Reserve Australia).

An amendment to subsection 128AE(2) will extend the range of entities which can be registered as an OBU to include a wholly owned subsidiary of a bank which is already registered as an OBU. Sub-sidiaries will also be able to be registered as OBUs as long as all the shares are beneficially owned by an OBU which is a bank. [Clause 16]

Record Keeping where the OBU is not a separate entity

Companies will be required to maintain a separate pool of funds and to keep separate identifiable records in respect of the OB activities. These records have to be maintained as though the OBU were a bank conducting banking activities with another person.

This will require separate books of account and an additional requirement that funds move through separate bank accounts (including nostro/vostro accounts). [Clause 18]

Penalties for Tax Avoidance

Under the present law (section 128NB), an OBU may be liable for special income tax at a penal rate where funds that are subject to the withholding tax exemption are dealt with by the OBU in an unintended manner, eg where lent directly or indirectly to an Australian resident or used for general banking activities or other purposes by the financial institution of which the OBU is a part. The tax is imposed at a rate of 300% of the 'lost withholding amount'.

The level of penalties associated with the new self-assessment provisions will apply where profit shifting has occurred between classes of income with different taxing rates. Under this regime the maximum penalty will be 75% where a taxpayer intentionally excludes income or claims a deduction, rebate or credit, knowing that it is neither assessable or allowable. Should the taxpayer hinder the Tax Office from discovering the tax shortfall a further penalty of 15% may be imposed. Where this level of penalty is reached, the OBU may also lose its registration (see below). [Clause 16(g)]

Instances where loss of registration could occur

The bill will empower the Treasurer, in certain circumstances, to declare by notice published in the Gazette that a person is no longer an OBU. These circumstances are: [Clause 16(g)]

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the maintenance after all objection and appeal rights have been exhausted of the maximum 90% penalty under the self assessment regime for underpayment of tax;

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conviction as a result of a prosecution under the following sections of the Taxation Administration Act 1953:

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section 8L - incorrectly keeping records;

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section 8N - recklessly making false or misleading statements;

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section 8P - knowingly making false or misleading statements;

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section 8Q - recklessly or knowingly keeping incorrect records;

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section 8T - incorrectly keeping records with the intention of deceiving or misleading; or

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section 8U - falsifying or concealing identity with the intention of deceiving or misleading.

The Bill also provides that the Treasurer must declare, by notice published in the Gazette, that a person is no longer an OBU in the event of the loss of a banking or foreign exchange dealer's licence. The loss of licence could occur, for example, as a result of Reserve Bank intervention.

Where an OBU, which has been registered under new paragraph 128AE(2)(ba) solely because it is a wholly owned subsidiary of a bank which is already an OBU, loses its registration because of serious default, the parent OBU which wholly owns the subsidiary will also lose its registration. The loss of registration will extend to any wholly owned subsidiaries interposed between the parent and the subsidiary. [New subsection 128AE(2B)]

If this provision was not present, the subsidiary that lost its registration because of serious default could simply transfer its OBU business to its parent.

Because of the operation of proposed paragraph 128AE(2)(ba) if the parent lost its OBU registration any subsidiaries that were registered OBUs solely because they were subsidiaries would automatically lose their registration. [Clause 16]

Continuation of OBU status

An OBU will continue to enjoy OBU status provided it does not lose its banking or foreign exchange dealer's licence and provided it is not declared by the Treasurer to no longer be an OBU because of serious default. [New subsection 128AE(2D)]

Special tax payable in respect of certain dealings by current and former offshore banking units

Subsection 128NB(1) of the Assessment Act provides that a special income tax imposed by the Income Tax (Offshore Banking Units) (Withholding Tax Recoupment) Act 1988 is payable by a person who is or has been an OBU on the "lost withholding tax amount" in respect of certain transfer of money.

As a consequence of extending the exemption from IWT to OB activities other than offshore borrowing for on-lending offshore subsection 128NB(1) is also being amended to extend its operation to all OB activities [Clause 17]

Review of the Treasurer's decision will be available under the Administrative Decisions (Judicial Review) Act 1977.

Secrecy Provisions

The Bill will enable the Commissioner to transmit necessary information to the Treasurer to enable the Treasurer to exercise the powers granted in relation to the withdrawal of an OBU's registration. [Clause 14]

Exemption of income of OBU offshore investment trusts

Fee income from funds management is included in the range of OB activities that will qualify for concessional tax treatment as long as the investors are non-residents other than Australian branches of non-residents and the investments are made with the same class of non-residents and are not in Australian currency.

The income and capital gains derived through the investment activities of the OBU on behalf of non-residents are specifically exempted from Australian income tax provided that the only persons who can benefit from the trust are non-residents (not being Australian branches of non-residents), the investments are made in non-AUD and all the assets are foreign assets of the types listed in proposed section 121D(6). [New section 121EL]