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

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The “control test “ is a very broad test. It generally applies wherea group (meaning a person and/or his or her associates) eitheralone or together “begins to control “ the trust directly orindirectly.This means that changes in the ownership or control of thetrustees of a non-fixed trust could cause the non-fixed trust tofail the “control test” and hence the underlying fixed trust will beunable to claim deductions for losses and bad debts. This issue isparticularly important where it is intended that a securitisationtrust will have a charitable or discretionary trust as itsbeneficiary. Changes of control of the beneficiary, and the trusteeof the beneficiary, can affect the tax treatment of thesecuritisation trust itself.Taxation of trusts: Ultimate beneficiary non-disclosure taxDivision 6D of Part III of the 1936 Tax Act contains the provisionson ultimate beneficiary non-disclosure tax. The object of theseprovisions is to enable the Commissioner to check whether theassessable income of the ultimate beneficiaries correctly includesany required share of the relevant net trust income, and whetherthe net assets of the ultimate beneficiaries reflect the receipt ofcertain tax-preferred amounts. Where the provisions apply, andthe trustee fails to correctly identify the ultimate beneficiaries,the trustee incurs a tax liability at the rate of 48.5 percent andmay commit an offence under the Taxation Administration Act1953.The Commissioner has released Practice Statement PS 2001/12with effect from 5 September 2001 dealing with therequirements of trustees to provide ultimate beneficiarystatements in specified circumstances. Practice Statements arenot legally binding on the Commissioner, however they aretreated as “administratively binding”.5.2.5 Timing of interest receipts from underlying assetInterest paid to a securitisation vehicle on its underlying assetswill normally be assessable when received. However, if itsactivities can be characterised as akin to that of a “financialinstitution”, then interest income may be recognised on a fullaccruals basis for tax accounting purposes. Taxation Ruling TR93/27 outlines the Commissioner’s views as to what is meant bya financial institution. Broadly, the Commissioner believes that a“financial institution” is “any institution, one of whose principalactivities is to take deposits and borrow, with the object oflending and investing”.The Commissioner accepts that most securitisation vehicles areakin to financial institutions and can recognise interest income ona full accrual basis.5.2.6 Timing of interest expensesThe decision in FC of T v Australian Guarantee Corporation 84ATC 4642 confirms that interest deductions for a taxpayer accruefrom day to day and thus are deductible on that basis, evenwhere interest is not payable until the end of the relevantcalculation period. This rule extends to all payments of interestby business taxpayers, and, therefore, applies generally to allsecuritisation vehicles.5.2.7 Timing of swap transaction payments and receiptsThe tax treatment of any swap transaction entered into by asecuritisation vehicle will be determined in accordance withIncome Tax Ruling IT 2682 (as modified by the Draft TaxationRuling TR 1999/D13). This provides that for bona fide swaps,payments in arrears in respect of defined periods are to beaccounted for on an accruals basis, whilst payments in advanceare to be deducted on a paid basis. A consistent approach is alsoto be adopted for receipts under swaps.5.2.8 Timing of gains and losses in respect of underlyingassetsDifferent types of investments and assets held by a securitisationvehicle may give rise to the recognition of assessable income anddeductions at different times. For example, gains in respect ofsome securities with deferred yields must be recognised on a fullaccruals basis, whereas gains and losses in respect of securitieswhich qualify as traditional securities are not recognised until theyear of income in which such securities are disposed of orredeemed. Accordingly, investments and assets held by asecuritisation vehicle should be selected and managed carefullyin order to ensure that tax symmetry arises where possible.5.2.9 The taxation treatment of management feesIf the management fees payable by a securitisation vehicle havebeen calculated on an arm’s length basis, they should bedeductible according to ordinary principles under section 8-1.However, if they are commercially unrealistic or can be construedas being a payment designed to represent a distribution of profitrather than an expense incurred in deriving income, there is a riskthat the fees will not be deductible. This in turn could affect thetax neutrality of the securitisation vehicle.Of particular interest in this regard is the decision in UnitedEnergy Limited v FC of T 97 ATC 4796. The Full Federal Courtconsidered that franchise fees payable by certain companies thatwere calculated by reference to a reasonable estimation of theamount by which the income of those companies was likely toexceed a particular level were, in reality, akin to payments of a31
32share of the profits of the companies, rather than costs incurredby the companies in the process of deriving assessable incomeand were not, therefore, deductible. The decision is similar in thisrespect to the recent Full Federal Court decision of City LinkMelbourne Limited v Federal Commissioner of Taxation [2004]FCAFC 27; taken together, the decisions highlight the potentialincome tax difficulties where a management fee could beconstrued as being used to remove potential profit (or excessincome) from a securitisation structure.5.2.10 New collection proceduresUnder collection procedures introduced from 1 July 2000, aspecial withholding tax is imposed where a supply is provided bya business (including the lending of money) that fails to quote anAustralian Business Number (ABN). If no ABN is provided, theparty paying for the services is required to withhold 48.5 percentof the payment.5.3 Interest withholding tax and securitisation5.3.1 BackgroundUnder section 128B of the 1936 Tax Act, a non-resident ofAustralia who derives interest from a resident must pay tax onthat interest at a flat rate of 10 percent. This tax must bewithheld by the resident payer of the interest.This means that an Australian securitisation vehicle must, unlessit falls within an exemption under the Tax Act, deduct interestwithholding tax (IWT) from interest payments to non-residentholders of those securities. Since an issue of securities which isliable to interest withholding tax is not commercially feasible, itis important for securitisers who wish to issue offshore to fallwithin one of the exemptions to IWT. Similarly, if a domesticissuer (including an Australian permanent establishment of anon-resident) wishes to widen the pool of potential investors byincluding foreign purchasers, its securities will need to be exemptfrom IWT in their hands.The exemption from IWT is contained in section 128F of the TaxAct and is supplemented by a number of TaxationDeterminations; TD1999/8-26 (inclusive); and TD2001/3.5.3.2 The current exemptions overviewInterest paid by a company on debentures will be exempt fromIWT if all of the following conditions are satisfied (section128F(1)):• the company was a resident of Australia or an Australianpermanent establishment of a non-resident when it issuedthe debentures;• the company is a resident of Australia or an Australianpermanent establishment of a non-resident when the interestis paid;• the issue of the debenture satisfies one of the public offertests set out in sections 128F(3) and (4);• the issue does not fail the public offer test under subsection128F(5), discussed at 5.3.5; and• as provided in section 128F(6) no interest is paid to a knownassociate of the company, discussed at 5.3.3.Definition of interest“Interest” is defined in section 128A(1AB) as follows:“Interest includes an amount, other than as set out in section26C(1):(a) that is in the nature of interest; or(b) to the extent that it could reasonably be regarded ashaving been converted into a form that is in substitutionfor interest; or(c) to the extent that it could reasonably be regarded ashaving been received in exchange for interest inconnection with a washing arrangement; or(d) that is a dividend paid in respect of a non-equity share.but does not include an amount to the extent to which it is areturn on an equity interest in a company.”A “washing arrangement” for the purpose of paragraph (c) isdefined to mean an “arrangement under which the title to asecurity is transferred to a resident shortly before an interestpayment is made where the sole or dominant purpose of thearrangement is to reduce the amount of withholding tax payableby a person”.Sections 128A(1AC)-(1AF) provide clarification of whatconstitutes interest. This includes a discount on a security and alump sum payment made instead of payment on interest. If alender assigns a loan, or the right to interest under a loan, anypayment from the borrower to the assignee that represents anamount that would have been interest had the assignment nottaken place, is to be taken as interest. Also, if a person acquiresa security on a cum-interest basis, any payment by the issuer tothat person that would have been interest if the acquisition hadnot taken place is taken to be a payment of interest.
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31: Despite the absence of an express a
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45 and 46: 7 The regulation of the participati
Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72: have been completed in relation to
Page 73 and 74: Some CMBS transactions allow the is
Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te

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

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