Interest Withholding Tax Exemption: revolving credit facility - public offer test

Will the issue of a debt interest arising under a revolving credit facility satisfy the public offer test under paragraph 128F(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The issue of a debt interest arising under a revolving credit facility will satisfy the public offer test under paragraph 128F(3)(a) of the ITAA 1936.

A borrower company (borrower) intends to enter into a 'revolving credit facility' (the facility). The borrower will approach more than ten independent banks (lenders) to request them to form a syndicate to lend funds to the borrower.

The lenders will commit to advance funds up to their agreed limit.

The terms of the agreement will provide for a three year revolving credit facility, involving: • staged draw downs, as the amount of the facility may not be initially fully drawn down • allowance for redraws whereby the borrower can repay amounts and make further draw downs, and • allowance for a revolving facility where a stated amount is borrowed, repaid and then borrowed again.

The borrower will be a resident of Australia both at the time it issues the debt interests under the facility and at the time interest is paid under the facility.

The lenders are non-residents of Australia for the purposes of sub-section 6(1) ITAA of the 1936.

It is not 'known nor suspected' by the borrower (subparagraph 128F(3)(a)(ii)) that there is any direct or indirect association between the borrower and the lenders, and between the lenders themselves at the time of the offer and the time of issue of each debt interest under the facility agreement.

Paragraph 128F(3)(a) of the ITAA 1936 provides that the public offer test will be satisfied if the issue by the company resulted from the debenture or debt interest being offered for issue to at least 10 persons, each of whom: • was carrying on a business of providing finance, or investing or dealing in securities in the course of operating in financial markets; and • was not known, or suspected, by the company to be an associate of any of those other persons.

To satisfy the public offer test, it is necessary that the issue of debentures or debt interest must have 'resulted from' the debenture or debt interest being 'offered for issue'.

In relation to the requirement of debentures being offered for issue, Taxation Determination TD 1999/24 explains that the term 'offer' in the introductory words of subsection 128F(3) of the ITAA 1936 is not limited to meaning 'offer' in the context of a contractual offer, but includes invitations or inducements to potential investors to make offers. The proposed offer to participate in the facility agreement made by the borrower to the lenders will therefore constitute an offer.

The second requirement is that issue of the debt interest must have resulted from this offer. The creation of the revolving credit facility means that a debt interest will be issued by the borrower each time the borrower makes an advance. The question then is, whether the debt interests that are issued over a period of time under this facility result from the initial offer.

Taxation Determination TD 1999/8 states that subsection 128F(3) of the ITAA 1936 will be administered on the basis that a debenture will be taken to have 'resulted from' being 'offered for issue' if the debenture otherwise satisfies one of the paragraphs set out in subsection 128F(3) of the ITAA 1936. This tax determination notes that a strict interpretation would not sit comfortably with actual market practice. Therefore the subsection was to be administered on the basis that where debentures were issued to investors who may not have been aware of the debenture announcement, or debentures were issued as a result of a reverse enquiry made to the borrower by the investor, these debentures could still meet the public offer test. To satisfy the public offer test, there still needs to be some nexus between the offer and the issue. There is, however, no requirement, within subsection 128F(3) of the ITAA 1936, that there has to be a separate offer for each issue of debentures or debt interests.

As the offer of the facility agreement will commit the lenders to advance funds in accordance with the terms of the agreement, the debt interests that are subsequently issued will be connected with the initial offer. Accordingly, the issue of the debt interests will result from the offer for the purposes of paragraph 128F(3)(a) of the ITAA 1936.

Since the borrower will offer the facility to at least ten financial institutions that will be in the business of providing finance, and the financial institutions will not be known nor suspected by the borrower to be associates of the borrower nor associates of each other, and the lenders have subsequently entered into this agreement, the issue of the debt interests arising out of the credit facility to these financial institutions will satisfy the public offer test under paragraph 128F(3)(a) of the ITAA 1936.