AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin
8.2 Withholding Tax/Qualifying Lender Concepts Broadly, interest withholding tax (IWT) at a domestic rate of 10% applies on gross pay- ments of interest (or payments in the nature of or in substitution for interest) made by Austral - ian borrowers to non-resident lenders (except where the lender is lending through an Aus- tralian permanent establishment) or Austral- ian resident lenders lending through a foreign permanent establishment. IWT is a final tax and can be reduced (including to zero) by domestic exemptions such as the “public offer” exemp- tion and/or the operation of Australia’s suite of double tax agreements (DTAs). Each exemption is outlined below. IWT may be exempt under Australian domestic law if the debt satisfies the “public offer” exemp- tion in Section 128F or 128FA of the Income Tax Assessment Act 1936 (Cth). Satisfying this exemption will make the debt more attractive in the market, as incoming lenders generally remain entitled to the benefits of the exemption from IWT if specific criteria are met. In summary, the public offer exemption will apply where an Australian company or an Australian unit trust that meets requirements publicly offers the debt via one of several prescribed methods, including (most commonly): • offering the debt to at least ten persons, each of whom carries on a business of providing finance, or investing or dealing in securities in the course of operating in financial markets, provided each of those persons is not known or suspected by the borrower to be an asso- ciate of any of the other persons; or • offering the debt to the public in an electronic form used by financial markets for dealing in debt interests or debentures, although this
method is under increasing scrutiny by the Australian Taxation Office. The type of debt that may qualify for the public offer exemption consists, broadly, of debentures (which are defined to include notes) and syndi- cated facility agreements. One key point to note in respect of the public offer exemption is that the exemption is not available if it was known or suspected, at the time of the offer or invitation, that a lender would be an offshore associate of the borrower. This will be the case where a lender is an “associate” of the borrower and the associate is: • a non-resident and the debenture or debt interest was not or would not be acquired by the associate in carrying on business through a permanent establishment in Australia; or • a resident, and the debenture or debt interest was or would be acquired by the associate in carrying on business through a permanent establishment in a country outside Australia, and does not become a lender in the capacity of a dealer, manager or underwriter in relation to the placement of debentures or debt interests, clearing house, custodian, funds manager or responsible entity of a registered scheme. Even if a lender is not an offshore associate of the borrower at the time of the issue of deben - ture or when they become a lender under the syndicated facility but later becomes an offshore associate, subsequent payments of interest to such a lender will not be subject to the public offer exemption. It should also be noted that if the debt is in the form of a syndicated facility agreement, it can only benefit from the public offer exemption if
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