Income tax: Offshore Banking Units - if a loan entered into by a foreign branch of an Australian resident bank is assigned to the Australian OBU head office, does this constitute an OB activity?

Yes, provided the loan contract is traded in accordance with subsection 121D(4) of the Income Tax Assessment Act 1936 (ITAA) and not merely transferred, or is a lending activity within the meaning given in subsection 121D(2).

Subsection 121D(4) defines trading activity to include, amongst other things, trading with offshore persons in securities issued by non-residents and trading with offshore persons in non-resident company shares which are not denominated in Australian currency. The Explanatory Memorandum states that an OBU [1] may trade on its own behalf.

Section 121EB of the ITAA treats the overseas permanent establishment as a separate person from the Australian part of the bank conducting offshore banking. Therefore, a loan contract may be traded in accordance with subsection 121D(4) provided any amounts payable under the loan contract are payable by non-residents and are not payable in Australian currency.

Accordingly, all or part of a portfolio of offshore loans can be transferred provided the transfer takes the form of a sale. The sale could entail an assignment or novation of the loan for tax purposes.

The definition of 'lend' in section 121C includes providing finance by the purchase of a security. It does not matter if it is on the secondary market. However, the person from whom the security was originally issued must have been an offshore person. If that person is a branch of an Australian company, the security must not be in Australian dollars. Therefore, where these criteria are met, the assignment of the loan will be an OB activity. Example An Australian OBU buys a portfolio of loans from its Singapore branch which is an ACU (an Asian Currency Unit which is essentially a Singaporean OBU). The sale entails an assignment for tax purposes of non-resident parties to the loan contracts and any amounts payable are not denominated in Australian dollars. The transaction would be an OB activity in terms of section 121D.