Income tax: Interest paid by a company on bearer debentures: for the purposes of paragraph 126(1)(e) of the Income Tax Assessment Act 1936 does the term 'holder of the debenture' mean the person in possession of the debenture?

Yes.

Paragraph 126(1)(e) provides that where a company does not give the Commissioner the name and address of the holder of the debenture, and assuming the other provisions of the subsection are met, the company is liable to pay income tax at the rate of 47%, as imposed by the Income Tax (Bearer Debentures) Act 1971 , on the amount paid or credited.

The term 'holder', for the purposes of section 126, is not defined in the Income Tax Assessment Act 1936 (the Act). Based on the definition of holder in section 4 of the Bills of Exchange Act 1909 , the House of Lords decision in Sutters v Briggs [1922] 1 AC 1 and the Federal Court decision in Smith v. DCT (1997) 97 ATC 4471; 36 ATR 142, it is the Commissioner's view that the reference in paragraph 126(1)(e) to the 'holder of the debenture' is a reference to the person or entity in possession of the debenture. The Commissioner will accept that this is the person to whom the issuing company makes the payment of interest.

Ausco issues debentures in the European market. A European clearinghouse purchases them under instructions from some of its members. The clearinghouse lodges the debentures with a common depositary. The clearinghouse informs Ausco that it holds the debentures. As a consequence Ausco pays the interest on the debenture to the European clearinghouse. For the purposes of section 126 of the ITAA 36 the clearinghouse is the holder of the debenture.