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1 Is the interest income derived from the Facility assessable income to the Taxpayer under the Taxation of Financial Arrangements (TOFA) regime on a realisation basis per subsection 230-100(5) of the ITAA 1997?

1 Yes. Question 2 Where interest income is subsequently distributed to a non-resident, does the liability to interest withholding tax under subparagraph 128B(2)(b)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) arise when the Taxpayer is entitled to receive the interest amounts under the Facility (and not before this time)? Answer 2 Yes. Question 3 Is the interest income derived from the Facility by the Taxpayer subject to 10% interest withholding tax if it is subsequently distributed to a non-resident? Answer 3 Yes. This ruling applies for the following periods : X/XX/20XX to XX/XX/20XX The scheme commenced on: X/XX/20XX

1.                The units in the Borrower are wholly owned by Trust A, which forms part of the Property Group, a property developer. 2.                The Borrower, an Australian unit trust wholly owns the units in Trust B another Australian unit trust. 3.                Trust B holds the property located in Australia (having recently acquired the property from Trust A). The property is intended to be developed into a build-to-rent asset. 4.                The Taxpayer which lends money to the Borrower, is wholly owned by a newly created Trust X and is managed by Company X (an Australian based property group that develops and invests in build to rent assets). 5.                The units in the Taxpayer are ultimately held by a range of institutional investors via a number of interposed Australian resident unit trusts. 6.                There is no overlap between the ultimate investors in the Taxpayer, and the investors in the Borrower.

7.                The Taxpayer entered the Facility with the Borrower on X/XX/20XX for the purpose of funding the development and repaying existing debt owing on the property. The Taxpayer's commitment under the Facility is to provide $XXX plus a Stamp Duty Amount. 8.                The Facility has a term of X years, subject to an extension for up to X years that may be granted. 9.                The total funds made available to the Borrower are to be repaid to the Taxpayer on the maturity date (subject to any voluntary or mandatory repayments made prior to this date). 10.             Under Clause 4 of the Facility, the interest mechanics are as follows: (a)             interest accrues on a daily basis under the Facility at an interest rate of X% per annum. (b)             the Borrower's obligation to make payment of interest is conditional upon the trust having sufficient cash to do so. The obligation to make a cash payment of interest does not arise until such time as sufficient funds are available.

(c)             to the extent there is insufficient free cash available for the Borrower to fund scheduled payments of interest, such amounts will be capitalised and accrued to an Unpaid Amounts Reserve and form part of the amount owing under the facility. Amounts capitalised into the Unpaid Amounts Reserve will not be payable until the Borrower has cash to make payment of the interest (or upon maturity or default). (d)             upon Maturity or an Exit and Repayment Event occurring and after Utilisations have been repaid in full, where the Borrower has applied all available free cash to pay any amounts accrued to the 'Unpaid Amounts Reserve' (including proceeds received from a sale of the property) and some or all of the reserve remains outstanding, the Borrower's obligation to pay the outstanding amounts is released and those amounts are forgiven.

11.             Under Clause XX of the Facility, in the event of default, the Taxpayer may declare by notice that any of the Amount Owing (which includes any amounts carried to the Unpaid Amounts Reserve) is payable on demand (as noted above where the Borrower does not have sufficient cash to make payment of the amounts capitalised to the Unpaid Amounts Reserve, the obligation to pay such unpaid interest amounts is released). 12.             The amounts owing by the Borrower under the facility are guaranteed by Trust C and Trust A (together, the Guarantors). Under Clause XX of the Facility, the Guarantors unconditionally and irrevocably guarantee payment of the secured money (which includes any amounts accrued to the Unpaid Amounts Reserve).

Income Tax Assessment Act 1936 Division 11A Income Tax Assessment Act 1936 section 128A Income Tax Assessment Act 1936 subsection 128A(2) Income Tax Assessment Act 1936 subsection 128A(3) Income Tax Assessment Act 1936 section 128B Income Tax Assessment Act 1936 subsection 128B(1A) Income Tax Assessment Act 1936 subsection 128B(2) Income Tax Assessment Act 1936 subparagraph 128B(2)(b)(i) Income Tax Assessment Act 1936 subsection 128B(5) Income Tax Assessment Act 1997 Division 230 Income Tax Assessment Act 1997 section 230-15 Income Tax Assessment Act 1997 section 230-45 Income Tax Assessment Act 1997 paragraph 230-45(1)(a) Income Tax Assessment Act 1997 subsection 230-45(2) Income Tax Assessment Act 1997 subsection 230-100(2) Income Tax Assessment Act 1997 subsection 230-100(5) Income Tax

All legislative references are to the ITAA 1997 unless otherwise stated. Question 1 Is the interest income derived from the Facility assessable income to the Taxpayer under the Taxation of Financial Arrangements (TOFA) regime on a realisation basis per subsection 230-100(5)? Summary As the Taxpayer has elected to be subject to TOFA, and the gain or loss is not sufficiently certain, the interest income derived from the Facility will be assessable income to the Taxpayer on a realisation basis pursuant to the operation of subsection 230-100(5). Detailed reasoning 1.                The TOFA provisions in Division 230 operate to govern the timing and quantum at which gains or losses on financial arrangements are recognised for income tax purposes. Where the TOFA regime applies, under section 230-15, any gains an entity makes from a financial arrangement are included in the entity's assessable income and any losses are deductible. 2.                Pursuant to section 230-455, an entity and its financial arrangements will be mandatorily subject to the TOFA regime where any of the following are satisfied:

•                 it is an authorised deposit-taking institution, securitisation vehicle or an entity required to be registered under the Financial Sector (Collection of Data) Act 2001 with aggregated turnover of at least $20 million; or •                 it is an entity that has any of the following: o       aggregated turnover of at least $100 million; o       assets of at least $300 million; or o       financial assets of at least $100 million. 3.                The definition of aggregated turnover in section 328-115 includes ordinary income of the entity, entities connected with the entity and affiliate entities, derived in the ordinary course of carrying on a business. 4.                Alternatively, an entity that is not mandatorily subject to TOFA can make an election to have TOFA apply to its financial arrangements at any time during an income tax year under subsection 230-455(7). 5.                An entity is considered to have a financial arrangement if, pursuant to paragraph 230-45(1)(a), the entity has a cash settlable legal or equitable right to receive, a financial benefit.

6.                Under section 974-160, a 'financial benefit' is defined to mean anything of economic value and includes the provision of property and services. 7.                Under subsection 230-45(2), a right to receive, or an obligation to provide, a financial benefit is cash settlable if, amongst other things: (a)             the benefit is money or a money equivalent; (b)             in the case of a right, there is an intention to satisfy or settle it by receiving money or a money equivalent; or (c)             in the case of an obligation, there is an intention to satisfy or settle it by providing money or a money equivalent. 8.                Subsection 230-100(5) states that gains and losses from an arrangement will be determined under the realisation method, unless the accruals method is applicable. The choice of method determines to which periods the resulting gains and losses will be allocated. 9.                Subsection 230-100(2) states: The accruals method provided for in this Subdivision applies to a gain or loss you make from a financial arrangement if: (a) the gain or loss is an overall gain or loss from the arrangement; and

(b) the gain or loss is sufficiently certain at the time when you start to have the arrangement . Note: Subsection 230-105(1) tells you when you have a sufficiently certain overall gain or loss. 10.             Subsection 230-105(1) states: You have a sufficiently certain overall gain or loss from a financial arrangement at the time when you start to have the arrangement only if it is sufficiently certain at that time that you will make an overall gain or loss from the arrangement of: (a) a particular amount; or (b) at least a particular amount. 11.             The amount of the gain or loss is the amount referred to in paragraphs 230-105(1)(a) or (b). 12.             Paragraph 4.21 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2009 (the TOFA EM) (which introduced these provisions) provides useful context, noting that the setting of the borderline between the realisation and accruals regimes takes into account the need to avoid the early and premature taxation of significant, unsystematic gains and losses that may not be realised.

13.             In addition, subsection 230-115(2) notes that a financial benefit will be treated as being sufficiently certain only if both of the following requirements are met: (a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the *financial arrangement for the rest of its life); and (b) at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy. 14.             In applying subsection 230-115(2), subsection 230-115(3) requires that: (a) you must have regard to: (i) the terms and conditions of the *financial arrangement; and (ii) accepted pricing and valuation techniques; and (iii) the economic or commercial substance and effect of the arrangement; and (iv) the contingencies that attach to the other financial benefits that are to be provided or received under the arrangement; and (b) you must treat the financial benefit as if it were not contingent if it is appropriate to do so having regard to the contingencies that attach to the other financial benefits that are to be received or provided under the arrangement. Application to your circumstances

15.             The Facility will be a 'financial arrangement' under section 230-45 on the basis that the Borrower has a cash settlable obligation to provide financial benefits to the taxpayer of principal and interest payments. Further, there are no obligations to provide financial benefits under the Facility that are not cash settlable. 16.             As the Taxpayer will make an election to be subject to the TOFA provisions under subsection 230-455(7) that all of the financial arrangements of the entity should be subject to the TOFA provisions, the Facility will be subject to the TOFA regime. 17.             Considering the requirements of paragraph 230-115(2)(a) in the context of the Facility, it is noted that the interest is to be determined by reference to a fixed interest rate, and therefore it should be considered that the financial benefit is fixed or determinable with reasonable accuracy.

18.             Furthermore, consideration of the requirements of paragraph 230-115(2)(b) must be given as to whether it is reasonably expected that the Taxpayer will receive the financial benefit. In this regard, paragraph 4.104 of the TOFA EM provides that there must be quite a firm expectation that the benefit will be provided or received. In support of this conclusion, the TOFA EM references the comments of the High Court in FC of T v. Peabody (1994) 181 CLR 359: A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. 19.             For the purposes of subsection 230-115, it is relevant that while the entitlement to interest under the Facility accrues on a compounding basis, actual payment of the cash is conditional upon the Borrower having sufficient cash available to make the payments.

20.             Where sufficient cash is not available, which is likely to be the case throughout the development period, the Borrower may not be able to pay some or all of the accrued interest amounts (e.g. where the underlying development held by Trust C cannot be completed or does not yield the cash flows currently anticipated). 21.             Further, where the Borrower has applied all available free cash to pay any amounts accrued to the 'Unpaid Amounts Reserve' (including proceeds received from a sale of the property) and some or all of the reserve remains outstanding, Trust A's obligation to pay the outstanding amounts is released and the amounts are forgiven. 22.             Accordingly, there is genuine commercial uncertainty in relation to the quantum of interest payments (if any) that will in fact be received. 23.             Due to this contingency, and the uncertainty it creates that the Taxpayer will in fact receive a particular amount, there cannot be a reasonable expectation the trust will receive the financial benefit until such time as the interest payments are actually received in cash.

24.             Accordingly, the gain or loss is not sufficiently certain which means the accruals method cannot apply. Consequently, the realisation method must be used. Conclusion 25.             The interest income derived by the Taxpayer under the Facility will be assessable income under the TOFA regime on a realisation basis pursuant to the operation of subsection 230-100(5). Question 2 Where interest income is subsequently distributed to a non-resident, does the liability to interest withholding tax under subparagraph 128B(2)(b)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) arise when the Taxpayer is entitled to receive the interest amounts under the Facility (and not before this time)? Summary The liability for interest withholding tax arises at the time the Taxpayer is entitled to receive the interest amounts under the Facility (and not before this time). Detailed reasoning

26.             Persons who are not residents of Australia for income tax purposes, broadly speaking, are subject to withholding tax on the interest income they derive from Australia (Division 11A of Part III of the ITAA 1936). Withholding tax, which is deducted at the time a payment is made to a non-resident, represents the non-resident's final liability to Australian income tax. 27.             Section 128B of the ITAA 1936 imposes the liability to withholding tax. Broadly speaking, withholding tax is imposed on interest derived by a non-resident to the extent that the interest has an Australian source. 28.             As noted at paragraph 3 of Taxation Ruling IT 2680 Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts (IT 2680) , subsection 128A(3) of the ITAA 1936 treats a non-resident beneficiary who is presently entitled to a dividend or to interest included in the income of a trust estate as deriving the dividend or interest when the present entitlement arises. 29.             Subsection 128B(2) of the ITAA 1936 states: Subject to subsection (3), this section also applies to income that:

(a) is derived, on or after 1 January 1968, by a non - resident; and (b) consists of interest that: (i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or .. 30.             Under subsection 128B(1A) of the ITAA 1936, a reference to a person to whom section 128B applies is a reference to the Commonwealth, a State, an authority of the Commonwealth or of a State or a person who is, or persons at least 1 of whom is, a resident. 31.             Under subsection 128B(2) of the ITAA 1936, interest withholding tax applies where interest amounts have been both 'derived' by a non-resident and 'paid' to the non-resident. 32.             With respect to the meaning of 'derived' in this context, subsection 128A(3) of the ITAA 1936 provides that a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of the amount when he or she became so entitled.

33.             Further, subsection 128A(2) of the ITAA 1936 provides as follows with respect to the meaning of 'paid' for withholding tax purposes: For the purposes of this Division, interest or a royalty shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the other person or as the other person directs. 34.             As noted at paragraph 5 to 10 of IT 2680: 5. A non-resident beneficiary is liable for withholding tax when the beneficiary derives a dividend or interest included in the income of an Australian trust estate . The time at which the beneficiary derives the dividend or interest income is when the beneficiary becomes presently entitled to it. The terms of a trust may dictate that a beneficiary becomes presently entitled to certain income before the end of an income year. 6. Present entitlement to a share of the income of a trust estate can be conferred on a beneficiary even though the trustee does not actually distribute the relevant income

to the beneficiary (for example, if distribution is delayed until a minor comes of age and in the meantime a trustee accumulates trust income to which the minor is presently entitled, and see also Taxation Rulings IT 328 and IT 329). 7. Subsection 128A(3) applies (and, as a result, the beneficiary is liable for withholding tax) even if the trust estate has no net income or has incurred a loss, for income tax purposes, for the year of income. 8. A trustee, or any other person who is liable to pay money to a non-resident , who is paid dividend or interest income to which the non-resident is presently entitled is obliged by section 221YL or sections 128C, 254 and 255 to deduct withholding tax and pay the tax to the Commissioner. 9. Withholding tax must be deducted forthwith, and paid to the Commissioner within 21 days after the end of the month in which the income was derived or, in special circumstances, such further period as the Commissioner allows.

10. The basis on which withholding tax payable by a non-resident beneficiary is calculated is determined by the present entitlement of the beneficiary to income of the trust estate. The income to which a beneficiary is presently entitled is in turn determined by the terms of the trust. [emphasis added] 35.             Further, IT 2680 relevantly states: 16. By subsection 128A(3), a non-resident beneficiary who is presently entitled to a dividend or to interest included in the income of a trust estate is deemed to have derived the dividend or interest when the beneficiary became presently entitled to that income. 17. It is implicit in the wording of subsection 128A(3) that dividend income and interest income derived by a trustee of a trust estate retain their character as income of those types when a beneficiary becomes presently entitled to a share of the income of the trust estate . ... Unit trust distributions 27. Unitholders in a unit trust generally have a beneficial interest in the entirety of trust property which is managed on their behalf by the trustee and manager in accordance with the terms of the trust deed ( Smith v. Anderson

(1880) 15 Ch D 247). The nature of their beneficial interests, including their entitlement to trust income, is also determined by the terms of the trust deed. 28. Trust deeds governing public unit trusts generally provide for the periodic distribution of income, e.g. quarterly or half-yearly. Income distributable to unitholders is calculated after charging expenses against trust income derived in the relevant period. Unitholders generally become presently entitled to the distributable income at the end of the relevant period even though actual payment is made several days or weeks later 29. Although a non-resident unitholder becomes liable to pay withholding tax from the time of present entitlement, the obligation on the trustee , or trust manager, to deduct withholding tax arises at the time the distribution payment is made (section 221YL), or is deemed to have been made, for example, when income is reinvested (paragraph 221YK(3)(a)). Obligation to deduct withholding tax 30. A trustee in Australia is obliged to deduct withholding tax from interest or unfranked dividend income derived

by a non-resident beneficiary if the beneficiary is recorded as having an address outside Australia. Withholding tax must be deducted at, or before, the time the income is paid, credited, accumulated or otherwise dealt with on behalf of, or as directed by, the non-resident . The tax must be paid to the Commissioner within 21 days from the end of the month in which the tax is deducted. A person in Australia, e.g., a person acting in a fiduciary capacity, who receives interest or dividend income on behalf of a non-resident must deduct withholding tax at the time the income is received. [emphasis added]... Application to your circumstances 36.             The Taxpayer being an Australian resident unit trust is consequently a person to whom Division 11A of the ITAA 1936 (including sections 128A and 128B of the ITAA 1936) apply.

37.             As noted at paragraph 17 of IT 2680 and subsection 128A(3) of the ITAA 1936, a non-resident beneficiary can only derive an amount of interest once the relevant trust has also derived that interest amount. The characterisation of income derived by the non-beneficiary as interest adopts the characterisation by the relevant trust as interest, once received by the trust estate. It follows, that a trust may not be considered to have paid the interest amounts to a foreign resident prior to this time. 38.             In your case, while amounts will be capitalised into the Unpaid Amounts Reserve under the Facility, they will not be payable to the Taxpayer until cash is available or maturity or default occurs. 39.             Further, where the Borrower has applied all available free cash to pay any amounts accrued to the Unpaid Amounts Reserve (including proceeds received from a sale of the property) and a portion of the reserve remains outstanding, the Borrower's obligation to pay the outstanding amounts is released and the amounts are forgiven, such that some or all of the interest amounts may never be received in cash by the Taxpayer.

40.             Given the Taxpayer has no entitlement to the interest unless and until the Borrower has sufficient cash to make payment of the interest and cannot in any way direct the Borrower to deal with the interest amounts on behalf of the trust, along with uncertainty in relation to the quantum of the interest payments the trust will ultimately be entitled to receive. 41.             Consequently, for the purposes of subparagraph 128B(2)(b)(i) of the ITAA 1936, a non-resident beneficiary of the Taxpayer could not become presently entitled to (and consequently derive) any interest income, which the Taxpayer itself has not derived. 42.             The Taxpayer can only derive the amounts it has received and has the associated ability to deal with these amounts on behalf of its beneficiaries. The foreign resident non-beneficiary could not become presently entitled to the interest income derived by the trust at a minimum until this time. 43.             In this regard, we note that the deferral of the interest withholding tax liability until cash payments are received aligns with the timing of the Taxpayer's entitlement to receive the interest payments from the Borrower.

Question 3 Is the interest income derived from the Facility by the Taxpayer subject to 10% interest withholding tax if it is subsequently distributed to a non-resident? Summary The interest income derived from the Facility by the Taxpayer will be subject to a 10% interest withholding tax if it is subsequently distributed to a non-resident. Detailed reasoning 44.             Subject to certain exceptions, subsection 128B(2) of the ITAA 1936 provides that interest withholding tax applies on payments of interest made by Australian resident borrowers to non-residents. 45.             Subsection 128B(5) of the ITAA 1936 states: A person who derives income to which this section applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies. 46.            Subsection 7(b) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 specifies a withholding rate of 10% for interest.

47.             Accordingly, where interest amounts received by the Taxpayer are subsequently distributed to foreign residents, interest withholding tax should apply at a rate of 10% as prescribed in subsection 7(b) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 .