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

enefit. The Commissioner can then impose withholding taxcalculated on the tax benefit together with possible additionaltax of 25 percent or 50 percent depending upon whether thepayer has a reasonably arguable case.A specific anti-avoidance provision deems amounts of interestpaid by an Australian resident through a tax-exempt interposedentity to a non-resident recipient, to have been paid by theresident directly to a non-resident. Payments made in such amanner are therefore be subject to IWT.5.3.7 Commentary on the revised IWT exemptionsWhile the revised IWT exemptions provide a number of positivereforms for the securitisation industry, a number of difficultieshave been encountered with the implementation of theprovisions in practice.Causal connection between the offering and issue of securitiesSection 128F(3) provides that the issue of the relevantdebentures must result from the debentures being offered by oneof the means set out in the section. There must therefore be acausal connection between the method of offering and the actualissue of the debentures. Where debentures are issued which donot satisfy this causal connection, then they will not, strictlyspeaking, be eligible for the IWT exemption.For example, say debentures were offered to 10 sophisticatedinvestors in the manner contemplated by section 128F(3)(a) (seeabove), but those debentures were actually issued to others(because the 10 sophisticated investors did not take up theiroffers). In these circumstances, it is difficult to conclude that thedebentures were issued as a result of being offered to the 10sophisticated investors. They were issued as a result of beingoffered to the others who then accepted their offers. Strictlyspeaking, therefore, even though the debentures were initiallyoffered in a way complying with section 128F(3)(a), the causalconnection requirement was not satisfied and the debentures donot qualify for the IWT exemption.There are also other potential problems posed by the causalconnection requirement. Where debentures are listed for thepurposes of section 128F(3)(c) (eg. on the London or Luxemburgstock exchanges), it may be difficult to conclude that thedebentures were issued as a result of the listing. Listing is part ofthe overall process, and is perhaps a condition precedent to theissue, but usually it is one of many conditions precedent. Also,where debentures are offered for sale on Reuters or Bloombergsfor the purposes of section 128F(3)(d), but are acquired bypersons as a result of direct offers by way of telephone whowere unaware of the electronic offer (eg. because they do notreceive Reuters or Bloombergs), then it may be said that thedebentures were not issued as a result of “negotiations beinginitiated publicly in electronic form”.In response to these difficulties, the Australian Taxation Office(ATO) issued Taxation Determination TD 1999/8. In theDetermination, the ATO held that it would administer section128F(3) on the basis that a debenture will be taken to haveresulted from being offered for issue if the debenture satisfiesone of the paragraphs set out in section 128F(3) (ie. in effect, thestatutory causal connection requirement can be ignored).Dealer compliance with the IWT exemption requirementsIdeally, an issuer will wish its dealer panel to covenant that theywill offer and issue the debentures in a manner that complieswith the IWT exemption requirements. Some dealers areprepared to do this; however others either give covenants thatstop short of full compliance or are not prepared to give anyundertakings as to the manner of offer and issue, arguing thatthey should not be required to change their standard proceduresand that the issuer should satisfy itself that they comply with theIWT exemption requirements. In this regard, there are a numberof provisions that are of regular concern to dealers. If atransaction is relying on section 128F(3)(a) (through section128F(3)(e)), the issuer will want to know that a dealer’s clientsto whom the securities are being offered are “carrying on abusiness of providing finance, or investing or dealing insecurities, in the course of operating in financial markets”.Also an issuer will want an assurance that none of theseinvestors are “associates” of each other for the purposes ofsection 128F(3)(a) or, generally, an associate of the issuer forthe purposes of section 128F(5).While one can be sympathetic to the position of internationaldealers, if issuers do not receive the requisite assurances fromthem, they are placed in a very difficult position.They have no certainty that their securities qualify for the IWTexemption. Under the self assessment system, it may be manyyears before the Commissioner of Taxation concludes that thedebentures did not so qualify, at which point the securitisationvehicle is likely to have accrued a substantial unfunded interestwithholding tax liability.5.3.8 ConclusionWhile there are some issues in relation to the practicalimplementation of the IWT exemptions in section 128F, overallthey have opened up the international capital markets toAustralian securitisers.35