State and territory central borrowing authorities will no longer
need to issue their bonds outside of Australia in order to qualify
for the exemption in section 128F from interest withholding tax,
following the passage last night of the Tax Laws
Amendment (2008 Measures No. 5) Act 2008.
The change is expected to allow State and Territory borrowers to
be able to consolidate their separate programmes for domestic and
global investors and generally improve liquidity and efficiency in
the Australian financial markets.
Why The Change To Section 128F Is Needed And How It
Broadly, Australian interest withholding tax is imposed on the
payment of interest or amounts in the nature of interest from
Australia to non-residents at a rate of 10 percent, unless an
exemption applies. The obligation for collecting (withholding) the
interest withholding tax is on the person making the payment.
Under section 128F of the Income Tax Assessment Act 1936, an
exemption applies in respect of interest paid in respect of certain
"publicly offered" debentures and debt interests, if all
prescribed conditions are met.
Prior to 1999, debentures could only qualify for the section
128F interest withholding tax exemption if they were issued outside
of Australia. Although this requirement was removed for most
borrowers in 1999, this liberalisation was not extended to the
state and territory central borrowing authorities.
State and territory central borrowing authorities seeking the
benefit of the section 128F exemption have therefore been forced to
issue bonds to non-resident investors under offshore programmes,
meaning those bonds have been executed and delivered outside of
Australia, subject to foreign law and have been administered and
maintained in an offshore jurisdiction.
Reflecting their concern that this results in a segmented market
and reduced liquidity and efficiency in the Australian financial
markets, the Federal Government announced in May it would extend eligibility
for the section 128F exemption to domestically issued state and
territory government bonds.
Provided all other requirements of the section 128F interest
withholding tax exemption are satisfied (including the public offer
test), a new section 128F(5B) introduced by the Tax Laws Amendment
(2008 Measures No. 5) Act 2008 makes it clear that bonds (including
debenture stock and notes) issued by a state or territory central
borrowing authority will be eligible for the section 128F
exemption, notwithstanding that the bonds have been issued in
The proposed changes are intended to apply to interest paid on
or after the date of Royal Assent. This means that the section 128F
interest withholding tax exemption may be available from that date
in respect of interest paid on bonds already issued by a state or
territory central government authority in Australia and held by
non-residents, as long as they satisfied the public offer test when
they were made.
The proposed legislation however does not make any provision for
deeming current bond issues to have satisfied the public offer
test, so state and territory government bonds, wherever issued,
will only be eligible for the section 128F exemption, not
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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