As a net capital importer, cheap and easy access to global debt is important for Australian businesses. Australia makes available a wide array of exemptions from Australia’s 10% interest withholding tax. Ensuring each transaction meets the letter and the spirit of the exemptions has a real 10% cash flow impact on Australian borrowers. This guide describes the most commonly used exemptions in typical scenarios, including the public offer (“Section 128F”) exemption.
This article examines:
- When is interest withholding tax paybale?
- Navigating the public offer exemption
- Treaty exemptions
- Other exemptions
WHEN IS AUSTRALIAN IWHT PAYABLE? Australian IWHT applies to income derived by any taxpayer in row 1 (Lender) and consists of interest paid by any taxpayer in row 2 (Borrower) of the following table: What is interest? Interest is consideration for the use of funds for a period of time. For Australian IWHT purposes, it includes amounts in the nature of or in substitution for interest (for example, discounts on securities or payments of lump sums in place of regular interest), and dividends on shares that are debt for tax purposes. The Australian Taxation Office has expressed the view, which is not commonly shared, that payments made under a guarantee can be interest. Deemed interest The transfer of certain types of securities can result in IWHT. A discounted security transferred for more than its issue price has an embedded interest component, which can be subject to IWHT. Hire purchase and similar arrangements can also be subject to IWHT for the implied interest built into the payments. Special rules can also apply pursuant to the taxation of financial arrangements (TOFA) regime. Only a guide Not surprisingly, the world of international financing is complex, with new and innovative arrangements arising frequently. It may also not be possible to shoe-horn any particular transaction into a static set of provisions. The IWHT provisions contain many nuances, prescriptions and exceptions. This guide is no substitute for considered tax advice that takes into account the particular circumstances of the transaction and arrangements.
NAVIGATING THE PUBLIC OFFER EXEMPTION To facilitate a reduction of Australian IWHT, particularly in large borrowings, the public offer exemption (sometimes referred to as the “128F exemption”) is the most widely used concession. The requirements to satisfy the public offer exemption are summarised below. Debenture Includes debenture stock, bonds, notes, promissory notes, bills of exchange and any other securities of the Borrower company, with no minimum amount. 100 or more persons The debt instrument must be offered to 100 or more persons whom it was reasonable for the Borrower company to have regarded as having acquired similar interests in the past or as likely to be interested in acquiring such interests. The associate rule when the debt instrument is offered or the invitation is made The public offer exemption will fail for all Lenders if, at the time the debt instrument is issued or at the time the invitation is made, the Borrower knew (or had reasonable grounds to suspect) that: 1. The debt instrument (or an interest in the debt instrument) would be acquired either directly or indirectly by an associate of the Borrower company; 2. The associate is either a resident lending through a foreign PE, or a non-resident not lending through an Australian PE; and 3. The associate did, or would, not acquire the debt instrument or interest in the debt instrument in the capacity of either a DMU in relation to the placement of the debt interest, or a clearing house, custodian, funds manager or responsible entity of a registered managed investment scheme. Other debt interests “Non-equity shares” (shares that are treated as debt for Australian tax purposes) issued by the Borrower company or related schemes where one of the schemes is a non-equity share issued by the Borrower company, with no minimum amount. Listed debt The debt instrument must be offered by being accepted for listing on a stock exchange, where the Borrower company had previously entered into an agreement with a dealer, manager or underwriter (DMU) for their placement requiring the company to seek such listing. Global bond The debt instrument is a global bond. SFA methods One of the two methods
Associates Broadly, an associate is an entity that holds majority voting interests in, or “sufficiently influences”, another entity. A company is “sufficiently influenced” by another entity if it (or its directors) are accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the other entity. The associate rules operate by reference to actual knowledge, reasonable suspicion or suspicion. These different thresholds should be considered in practical situations. Sequencing The sequencing of various steps in obtaining financi ng is important to the public offer exemption applying. Debt instrument Offer/Invitation Negotiation Agreement Issue Debentures Make the offer. If you are not using the SFA methods, you will need reasonably well settled terms and the full suite of documents. None or very little. Generally, on acceptance of the offer. Issue debentures. Other debt interests Make the offer. If you are not using the SFA methods, you will need reasonably well settled terms and the full suite of documents. None or very little. Generally, on acceptance of the offer. Issue other debt interests. SFA Make the invitation. You may only need basic but key terms of facilities, such as amounts, duration, interest rates and repayment. On receipt of responses from potential Lenders, detailed terms are negotiated. Agreement is reached following negotiation. Not all interested parties will enter into the SFA. Drawdowns in accordance with the SFA. But I am using a dealer, manager or underwriter There are two possible roles that a DMU can play in relation to the offer or invitation. Firstly, the DMU can act as the agent for the Borrower in making the offer or invitation. In that case, the above sequencing applies. Alternatively, the DMU can take all risk associated with the debt instrument. If so, the sequencing changes as follows (using the SFA to demonstrate). Debt instrument Agreement Issue No later than 30 days of the DMU entering into the SFA Agreement SFA Enter into agreement with a DMU. The agreement must include a term requiring the DMU to invite potential Lenders under the SFA within 30 days. Drawdowns in accordance with the SFA can occur. The DMU must invite Lenders in the manner otherwise applicable to SFAs (for example, to at least 10 unassociated financial institutions). Incoming Lenders accede to the SFA. What about non-corporate Borrowers? The public offer exemption is available to corporate Borrowers and certain unit trusts only. Other types of entities are not able to rely on the exemption.described below for SFAs except, instead of the invitation to become a lender being made in the described way, the debt interest is offered in the described way. Electronic form The invitation to become a lender was made publicly in an electronic or other form that was used by financial markets for dealing in debentures or debt interests (for example, Bloomberg or Reuters). The associate rule when interest is paid Even if the public offer exemption is otherwise satisfied, the exemption will not apply to interest paid by the Borrower company to a Lender that the company knows, or has reasonable grounds to suspect, is an associate to whom paragraphs 2 and 3 above apply. Syndicated facility agreements (SFA) 1. The agreement describes itself as an SFA; 2. It is between one or more borrowers that are members of a wholly owned group and at least two lenders (or one lender provided that the agreement provides for the addition of lenders and there are at least two lenders when interest is paid); 3. Each lender severally, but not jointly, agrees to lend money; and 4. The amount to which the [Australian] borrower(s) will have access to at the time of the first loan is at least A$100 million. 10 or more financiers The invitation to become a lender was made to 10 or more persons each of whom: 1. Was carrying on a business of providing finance, or investing or dealing in securities, in the course of operating in financial markets; and 2. Was not known or suspected by the Borrower to be an associate (see the facing page) of any other invitee. Is the interest paid on an eligible debt instrument described below? Did the issue of the debt instrument result from it being offered publicly in one of the following ways? Are all Lenders and the Borrower(s) un-associated? 1 2 3 Australian Interest Withholding Tax - Reducing the cost of