Alert

Who does this affect?

Purchasers of bonds, notes and other debentures and debt interests issued by the Commonwealth, States, Territories and authorities of the Commonwealth, States and Territories and the issuers of those debt instruments.

What do you need to do?

Consider the impact of the proposed changes and whether you would like to be involved in the Treasury consultation process.

Author
David Anderson  
Solicitor

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Ken Lord  
Partner
T +61 2 9296 2149

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Sydney
Ken Astridge  
Greg Hammond  

Melbourne
Ian Paterson  

Beijing
David Olsson  (沈文)

London
Rowan Russell  

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The Treasurer and Assistant Treasurer have announced that the Federal Government intends to change the Australian interest withholding tax (IWT) treatment for certain bonds, notes and other debentures and debt interests (debt instruments) issued by the Commonwealth, States and Territories and their authorities. The Federal Treasury also released an exposure draft of amending legislation and explanatory material to implement these changes.

The proposed changes will make Commonwealth Government Securities (CGS) eligible for the IWT exemption for publicly offered debt in section 128F of the Income Tax Assessment Act 1936. This will improve the attractiveness of CGS in the global financial markets. The measures will also extend to debt instruments issued by the States and Territories and authorities of the Commonwealth, States and Territories. Commonwealth Government debt, State/Territory debt and corporate debt will have the same IWT treatment.

The announcement is a welcome change and long overdue.

Key elements of the proposed measures

The key elements are:

• section 128F amended - the exemption from Australian IWT under section 128F of the Income Tax Assessment Act 1936 will be amended

• applicable to all eligible debt instruments - the changes will apply in respect of all bonds, notes, debentures and other debt instruments that are eligible to qualify for the section 128F exemption. Although the new measures are directed to CGS, the proposed changes will also assist the Commonwealth, States, Territories and their authorities in raising finance in other ways, such as by entering into a syndicated loan facility

• public offer test - the public offer test in section 128F must still be satisfied for the IWT exemption to apply, and

• existing debt and date of effect - the measures will apply to interest paid on or after the day on which the legislation receives Royal Assent, irrespective of whether the relevant debt instrument was issued before that date, provided the other requirements of the section 128F exemption are satisfied.

Context of the reform

The section 128F exemption is not currently available if the relevant debt instrument is issued in Australia by:

• an authority of the Commonwealth, or

• a State or Territory, or

• an authority of a State or Territory (other than a central borrowing authority).

Therefore, to be eligible for the section 128F exemption, these entities are currently required to issue the relevant debt instrument outside Australia. Until recently, this was also the case for State and Territory central borrowing authorities (as listed in section 128F(5A), including NSW Treasury Corporation, Treasury Corporation of Victoria and their equivalents in other States and Territories). However, amendments to the section 128F exemption in December 2008 removed this impairment for the issue of “bonds” (including notes and debenture stock) by such central borrowing authorities: see section 128F(5B).

Further, the wording of the current section 128F(7) leaves it unclear as to whether debt issued by the Commonwealth in its own right could qualify for the IWT exemption at all.

That has resulted in issues of CGS being on terms that IWT would generally apply to interest paid to offshore holders of the CGS - even though the tender process for CGS involves a wide offer to financial market participants.

The announced changes will remove these anomalies in the operation of section 128F. The changes will also remove current uncertainties as to whether certain government-owned business enterprises are “authorities” for the purposes of section 128F and, as a result, whether debt instruments issued by them were, or were not, eligible for the section 128F exemption.

The exposure draft legislation proposes to repeal sections 128F(5A) and (5B) and to replace section 128F(7). The new section 128F(7) will deem the Commonwealth and States and Territories, and their authorities, to be Australian resident companies in relation to the issue of debt instruments for the purposes of section 128F. Effectively, this means that the section 128F exemption will apply in the same manner for both Commonwealth and State/Territory government issuers as for Australian corporate issuers.

The principal object of these measures is to remove IWT from CGS, so removing a competitive disadvantage for CGS in global financial markets.

The changes will have other beneficial effects. In particular, Commonwealth and State/Territory authorities (that in many cases have separate business activities and financing requirements) will find it simpler to raise funds from the financial markets. For example, once the new measures are in effect a Commonwealth authority could issue notes or enter into a syndicated loan facility in Australia that qualifies for the section 128F exemption, in the same manner as an Australian resident corporate.

To whom will the changes apply?

The new section 128F(7) will apply to certain debt instruments issued by:

• the Commonwealth

• a State or Territory, or

• an authority of the Commonwealth, of a State or Territory,

and will affect onshore and offshore purchasers of those debt instruments by providing for the section 128F exemption to be available, removing uncertainty and increasing liquidity.

What is the timing?

The media release indicates the Federal Government will introduce the legislation during the current Spring sittings of Parliament, with a view to receiving Royal Assent before the end of the year.

Further information

The joint media release by the Treasurer and Assistant Treasurer can be found here and the exposure draft legislation and explanatory material are available here. Treasury will also undertake a short consultation process on the proposed measures, which closes on Friday, 28 August 2009. Visit the Treasury website at www.treasury.gov.au for more information.