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11 March 2003
The federal government has introduced a bill to widen the availability of the 'public offer' exemption from Australian interest withholding tax more than one year after announcing its intention to do so (for more information please see "Overview
(February 2002)"). The changes are primarily aimed at facilitating the onshore
issuance of debt securities which are intended to be traded globally. They will
also enhance secondary trading in discounted securities.
The bill was passed by the House of Representatives on December 13 2002. It
is currently before the Senate. If approved by the Senate, it will take effect
from August 29 2001, the date on which the changes were announced.
The existing interest withholding tax legislation will be amended in two ways
which are relevant to the availability of the 'public offer' exemption. First,
the restrictions applicable to the issuance of securities to certain associates
of the issuer and the payment of interest to them will be relaxed. Second, the
scope of the exemption will be extended to deemed interest derived from sales
of discounted securities by non-residents to Australian residents which otherwise
meet the requirements for the exemption.
The first change is primarily designed to address concerns expressed by major
issuers (principally financial institutions) over the lack of availability of
the exemption where their domestic fund management associates were expected to be significant investors in the securities. The second restores the concessional
treatment afforded in similar circumstances prior to legislative changes in
Generally, interest withholding tax at the rate of 10% is imposed on payments
of interest (and payments in the nature of interest) made by Australian residents
to non-residents. It is also generally payable where interest is paid to a non-resident
by a non-resident carrying on business through a permanent establishment in
Australia. It is not payable if the interest is paid by a resident on borrowing
connected with the carrying on of a business through a permanent establishment
An exemption from the requirement to pay withholding tax is available to Australian
resident issuers (other than governments and government authorities) under Section
128F of the Income Tax Assessment Act 1936. In broad terms, the requirements
for the exemption are as follows:
An exception to the third requirement applies under existing law where the associate is acting in the capacity of a dealer, manager or underwriter in relation to the issuance of the securities. The amended law will extend the exception to cover issuance to any (i) onshore associates, and (ii) offshore associates acquiring the securities in the capacity of a clearing house, custodian, fund manager or responsible entity of a registered managed investment scheme.
In the amended law, 'onshore associate' refers to a resident associate who
does not acquire the securities in carrying on a business through a permanent
establishment outside Australia, as well as a non-resident associate who acquires
the securities in carrying on a business through a permanent establishment in
The term 'offshore associate' refers to a non-resident associate who does not
acquire the securities in carrying on a business through a permanent establishment
in Australia, as well as a resident associate who acquires the securities in
carrying on a business through a permanent establishment outside Australia.
Under the existing law, even if securities are issued in accordance with the
requirements for the exemption, the exemption does not apply where an issuer
makes an interest payment to one of its offshore associates. Under the amended
law, if the exemption would otherwise apply to interest payments it will only
cease to apply if the payment is made to an offshore associate who is not acting
in the capacity of a clearing house, paying agent, custodian, fund manager
or responsible entity of a registered managed investment scheme.
There are two differences between the associate restrictions that apply when
securities are issued and those that apply when interest is paid.
First, issuance to offshore associates of the issuer who are dealers, managers
or underwriters does not result in the exemption being unavailable. However,
the exemption will be unavailable with respect to the securities they hold when
interest is paid. Presumably the rationale for this distinction is that any
holding of securities which are genuinely offered in a manner satisfying the
public offer test by such persons would be short term only (ie, would not extend
across an interest payment date).
Second, the exemption does not apply if securities are issued to an offshore
associate acting as paying agent, even if that entity is subsequently able
to receive interest payments which are not subject to interest withholding tax.
Presumably the rationale for this distinction is that the acquisition of securities
by such an entity is not a necessary incident of its role as paying agent.
Under the existing law, if a security originally issued at a discount is sold by a non-resident to an Australian resident, the transaction gives rise to a deemed payment of interest which is subject to withholding tax. As the deemed interest is not paid by the issuer of the security (rather, it is paid by the resident buyer), the Section 128F exemption is not available. Under the amended law, the deemed interest arising on such sale will be exempt from interest withholding tax provided the other requirements for the exemption are satisfied.
For further information on this topic contact Karen Fairbairn or Anne Harley at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by email (email@example.com or firstname.lastname@example.org).
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