Interest withholding tax is an issue that appears on the radar of many non-Australian lenders to Australian borrowers. One of the first questions that is often asked is whether there are any exemptions. In this article, we provide an overview of the exemption that is most often applicable but which invariably raises queries from foreign parties as a result of its unique and prescriptive conditions for eligibility. That is, the “public offer” exemption under section 128F of the Income Tax Assessment Act 1936


The general rate of Australian withholding on interest payments to foreign lenders is 10%, however the rate may be reduced under the terms of a double tax agreement (DTA) between Australia and the lender’s country of residence.

While there are some specific exemptions in a number of DTAs for payments made to foreign “financial institutions”1, the public offer exemption can apply to arrangements involving a broad range of lenders in any foreign country. However, there are a number of strict requirements that must be met, and it is necessary for all parties to focus on these requirements at the time that the loan is established if it is intended that the exemption will be applied in future.

Categories of eligible borrowers

The exemption applies in relation to Australian borrowers that are companies (or Australian branches of foreign companies). Trusts may also be eligible for the public offer exemption if the beneficiary is a company that is not a trustee. Certain widely-held unit trusts are also eligible for a comparable exemption under section 128FA of the Income Tax Assessment Act 1936.

Categories of eligible loans

The purpose of the public offer exemption is to reduce barriers for Australian borrowers raising finance in international markets, rather than providing a concession for bilateral or intra-group financing. In this regard, the public offer exemption can apply in relation to two broad categories of loans, being structures commonly used for raising multi-lender finance:

  1. “debentures” (including debenture stock, bonds, promissory notes and bills of exchange) and non-equity shares; and
  2. “syndicated loan facilities” (a defined concept discussed below).

However, in either case, the parties must satisfy a “public offer test”.

The “public offer test”

For the exemption to apply, it is necessary for the debentures or shares to be offered, or an invitation to participate in the syndicated loan facility to be made, in accordance with one of the following alternatives:

  1. to at least 10 non-associated persons carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets (eg 10 banks);
  2. publicly in an electronic form that is used by financial markets for dealing in such loans (such as a listing on a Bloomberg or Reuters screen);
  3. in relation to debentures or non-equity shares only, to at least 100 persons that have previously acquired such interests or whom it is reasonable for the borrower to assume as being likely to be interested in acquiring such interests;
  4. in relation to debentures or nonequity shares only, as a result of being accepted for listing on a stock exchange, where the company had previously entered into an agreement with a dealer, manager or underwriter, in relation to the placement of debentures or nonequity shares, requiring the company to seek such listing;
  5. to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, offered the debenture or debt interest for sale within 30 days in a way covered by any of the above.

The most common method used is paragraph (a) above, typically involving an offer to 10 separate banks. The offer may be by letter or email, setting out the terms of the proposed loan. It is not necessary that all (or even most) of the banks accept the offer. However, the Australian Taxation Office has emphasised that the relevant offers or invitations must be genuine. In this regard, parties should approach this exemption with caution in circumstances where one or more lenders have already been identified and it is intended that an offer to other lenders will be made purely for the purpose of

“making up numbers” without any real prospect of acceptance. If the exemption is to be sought, the parties must be genuinely open to having the offerees participate in the lending arrangement.

In all cases, the exemption is only available if the borrower has no reasonable grounds to suspect that one of the lenders will be an offshore “associate” of the borrower. An associate would include related entities of the borrower however the “associates” test is broad and should be reviewed prior to making any offers under the proposed arrangement.

Syndicated loan facilities

If the loan is not in the form of a debenture or non-equity share, then it will be necessary for the loan to be structured as a “syndicated loan facility”, being a loan meeting all of the following criteria:

  1. the agreement must describe itself as a “syndicated loan facility” or a “syndicated facility agreement”;
  2. there must be at least two lenders participating in the arrangement at the time that interest is paid (this is a distinct and additional requirement from the “public offer test” described above);
  3. each lender must severally, but not jointly, agree to lend money to the borrower; and
  4. the amount of the loan to which the borrower is entitled at first drawdown must be at least AUD 100,000,000.

Paragraph (d) above is a key limitation. Where the exemption is sought, the only alternative for smaller loans would be to structure the relevant loan as an issue of debentures or non-equity shares.

Navigating the exemption

The extent and specificity of the above requirements will often mean that compliance with the exemption can be an ongoing consideration for parties in structuring cross-border loans. In our experience, the requirements are more prescriptive and extensive than foreign parties may be used to in relation to tax compliance measures for loans and this can occasionally be a source of confusion for foreign clients wishing to lend into Australia.

Loan documentation will frequently contain detailed representations and undertakings regarding compliance with the requirements of the public offer test, and it is not uncommon for lenders to seek a tax gross-up in their favour in circumstances where there has been a failure by the borrower to satisfy the requirements.