A Guide to the Law of Securitisation in Australia - Clayton Utz

5 Taxation issues relevant to securitisation5.1 IntroductionThis section deals principally with four issues:• section 5.2 describes the general principles ofCommonwealth income taxation and their application tosecuritisation programs;• section 5.3 analyses the interest withholding tax rules andthe requirements that need to be complied with where anAustralian securitisation program seeks to issue securities toforeign investors;• section 5.8 describes the GST regime and highlights some ofthe major areas for concern to securitisation programs; and• section 5.9 provides a summary of changes to the Australiantax regime which have been foreshadowed as at the date ofthis publication.5.2 Income tax issues for securitisation programs5.2.1 OverviewIncome tax in Australia is currently levied under two Acts – theIncome Tax Assessment Act 1936 (the 1936 Tax Act) and theIncome Tax Assessment Act 1997 (the 1997 Tax Act). The 1997Tax Act is being progressively enacted and is essentially a rewriteof the 1936 Tax Act. The intention is that the provisions of the1997 Tax Act express the same law as in the 1936 Tax Act but ina clearer style.One of the key concerns during the structuring phase of asecuritisation program is to ensure the tax neutrality of thesecuritisation vehicle (whether it is a corporation or a trust).5.2.2 Taxation issues relating to corporationsGeneral principlesWhere a special purpose corporation is used as a securitisationvehicle, the corporation is subject to the normal tax rulesapplying to corporations.Deductions for losses and bad debtsAn issue which sometimes needs to be considered is the abilityof a special purpose corporation to claim deductions for priorand/or current year losses and bad debts. This is particularlyimportant where the tax neutrality of the corporation dependsupon the availability of such deductions. Generally, the ability toclaim such deductions depends upon the corporation passing a“continuity of ownership test” or, in certain circumstances, a“continuity of business test”. The “continuity of ownership test”requires the tracing of controlling interests in the corporationthrough interposed entities and the application of the test canbecome a particularly complex task if shares are held (directly orindirectly) in a corporation by discretionary or charitable trusts(which is often the case in securitisations).5.2.3 Taxation issues relating to trustsGeneral principlesTax will only be levied on the trustee of a trust where anAustralian resident beneficiary is not presently entitled to the netincome of the trust for tax purposes or where the trustee is taxedas a company for the purposes of Divisions 6B or 6C of the 1936Tax Act. Securitisation trusts are usually structured so that abeneficiary is entitled to any income derived by the trust, withthe intended effect that the trustee will not be personally liablefor tax in respect of any income derived by the trust.Where a securitised instrument is equity (ie. a unit in a unittrust), the taxation of any payments made will depend onwhether these constitute redemptions of capital (which are notassessable) or distributions of income (which are assessable).Also, in certain circumstances, the trustee can be required todeduct tax from trust distributions to non-resident unit holdersand remit this directly to the Commissioner of Taxation.Taxation of trusteesOrdinarily, the accounting income of a securitisation trust will bethe same as the net income of the trust for taxation purposes.However, in certain circumstances, it is possible that the“netincome” of a trust for taxation purposes for an income year mayexceed its accounting net income, for example, where theaccounting income of a trust includes non-deductibleexpenditure. There are, basically, two conflicting views as to howthe excess over the accounting “net income” is assessed.Under the quantum approach, the beneficiary could only beentitled to such amount of income as he is entitled to receiveand, if the net income of the trust exceeds the amount which heis entitled to receive, that excess is not income to which thebeneficiary is presently entitled and is assessable to the trustee.The proportionate approach regards the beneficiary’s share ofaccounting income as only being relevant to determining thatbeneficiary’s share of the net income of the trust for taxpurposes. The operation of the proportionate method may requireat least some income to have been derived by the trust in theyear of income that is capable of being distributed to abeneficiary.29